MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL Tax Kuala Lumpur The Multilateral Competent Authority Agreement for the Automatic Exchange of Country-by-Country Reporting On 27 January 2016, Malaysia signed the Multilateral Competent Authority Agreement (“MCAA”) for the automatic exchange of country-by-country reporting. In this alert, we seek to address the implications of Malaysia being a signatory to the MCAA. Background Last year, the Organisation for Economic Co-operation and Development (“OECD”) released its final reports on the Base Erosion and Profit Shifting Project (“BEPS Report”) which was developed to address the existing gaps in the international framework resulting in tax avoidance strategies by multinational entities (“MNEs”), to avoid taxation in their home countries by shifting profits abroad to low or no tax jurisdictions. Under the BEPS Report, 15 specific action items were identified to address the issues undermining the global tax system. One of the 15 action items was Action 13: Transfer Pricing Documentation and Country-by-Country Reporting. Action 13 gives recognition to the importance of transparency through the use of a specific set of documentation requiring adequate information to be furnished to tax authorities. The OECD has recommended for revised standards for transfer pricing documentation to be adopted through country-by-country (“CbC”) reporting of income, taxes paid and measures of economic activities in the relevant jurisdiction which the MNEs operate in. Malaysia is not an OECD member, but is a keen observer of OECD policies. On 19 November 2015, the Malaysian Inland Revenue Board (“IRB”) released a media release entitled “Togetherness in Resolving BEPS” which acknowledged the IRB’s keen participation in implementing the action plans proposed by the OECD under the BEPS Project. Outline of the MCAA Malaysia being a signatory to the MCAA is clear indication of its support of the BEPS initiative. The MCAA aims to increase international tax transparency and improve tax authorities’ access to specific information through the automatic exchange of annual CbC reports. Some of the specific information include the global allocation of the MNE’s income, the taxes paid and economic activity of the MNEs in various jurisdictions. Access to such information will allow tax authorities to be in the position to form assessments regarding transfer pricing risks and other base erosion and profit shifting risks. The Client Alert June 2016 For further information, please contact: Adeline Wong +603 2298 7880 firstname.lastname@example.org Krystal Ng +603 2298 7937 email@example.com Ivy Tan +603 2299 6505 firstname.lastname@example.org tax authorities will also be in a better position to identify tax avoidance strategies adopted by the MNEs. From a Malaysian perspective, the reporting requirements under the MCAA will only come into force upon Malaysia’s signing of the Convention on Mutual Administrative Assistance in Tax Matters (“Convention”). While Malaysia has not signed the Convention to date, it is expected to do so fairly soon in view of the OECD timeline for the implementation of the first CbC report exchange in 2018. Malaysia has indicated that it will be looking to adopt OECD templates for CbC reporting and comply with the OECD timeline for implementation. This means that the current local transfer pricing documentation requirements will be updated to reflect Action 13 requirements. These requirements are expected to be effective in Malaysia from 1 January 2017 with the first filing by 31 December 2018. Affected Parties Under the BEPS Report, the CbC reporting requirement will only be applicable to MNEs which have annual consolidated group revenue of or exceeding €750 million (approximately RM 3.28 billion) during the fiscal year immediately preceding the reporting fiscal year. Given that the current Malaysian transfer pricing requirements has a much lower threshold, it remains to be seen whether the CbC reporting requirement will be applicable to MNEs which falls within the current threshold or whether a separate threshold (consistent with the OECD threshold) would be applicable to the CbC reporting requirement in view of the onerous reporting obligation under the CbC reporting regime. Transfer Pricing Documents Action 13 of the BEPS Report features CbC report templates which introduce a three-tiered approach to transfer pricing documentation as illustrated below: ©2016 Wong & Partners. All rights reserved. Wong & Partners is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. www.wongpartners.com Wong & Partners Level 21, Suite 21.01 The Gardens South Tower Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur To further facilitate the exchange of CbC reports in an effective manner, the OECD has on 22 March 2016 released its standardised electronic format for the exchange of CbC reports between jurisdictions. Implementation The MCAA requires that the signatory countries pass necessary legislation to require the reporting entities within its jurisdiction to file the CbC report based on the three-tiered structure discussed above. As such, we expect that the IRB will introduce domestic laws to implement the new changes. The new or amended domestic laws are expected to be announced by July 2016. Key Impact on MNEs The implementation of CbC reporting regime will result in greater transparency and provide tax authorities of the signatory countries with information on MNEs’ global tax arrangement with a complete understanding of how their operations are structured. As such, it is crucial for MNEs to start identifying potential areas of risks in its global tax arrangements and gaps in its compliance with tax laws at a global level. In view of the aggressive measures that the tax authorities are seeking to adopt, preparation is key and with proper tax planning, an MNE can create a defensible position in an audit situation.