The US Treasury Department has announced plans to implement a country-by-country (CbC) reporting requirement starting for fiscal years beginning in 2016 as set out in the guidance issued by the Organisation for Economic Cooperation and Development on February 6, 2015.
The OECD guidance follows its September 2014 report on transfer pricing documentation. The guidance proposes a three-tiered documentation approach consisting of (1) a master file providing high-level information on the global business operations of a multinational enterprise (MNE); (2) a local file providing entity-level information on intercompany transactions of the MNE; and (3) a country-by-country report providing information on revenues, profits, taxes accrued and paid, capital, headcount, and other indicators.
This action is one of 15 actions comprising the OECD Base Erosion and Profit Shifting (BEPS) initiative in response to tax administrations’ concerns regarding corporate tax planning strategies that artificially shift profits to low-tax jurisdictions. Action 13 transfer documentation requirements assist in furthering the OECD BEPS project by providing transparency into the worldwide operations of MNEs so that tax administrations can perform meaningful transfer pricing risk assessments while encouraging MNEs to carefully consider transfer pricing requirements in establishing intercompany pricing policies.
The February OECD guidance delivers specific recommendations relating to the implementation of the CbC reporting requirement, some of them addressing contentious issues:
- Timing: Suggests that the initial CbC reports be filed for fiscal years beginning on or after January 1, 2016, indicating that the CbC reports for MNEs with fiscal years ending December 31, 2016 are due by December 31, 2017.
- Exemption for smaller MNEs: Groups with less than €750 million (approximately $840 million) annual consolidated group revenue would not be required to file a CbC report.
- Confidentiality: Jurisdictions should enforce legal protections to preserve the confidentiality of CbC reports. Some commentators have questioned if sufficient protections are offered by current treaties to protect sensitive information.
- Consistency: Jurisdictions should use the standard OECD CbC reporting template, with no requirements for additional information.
- Appropriate use: Jurisdictions may use the CbC report for assessing transfer pricing and other BEPS-related risks, but jurisdictions should not propose adjustments based solely on the data provided in the report.
- CbC implementation and government exchange of information: Jurisdictions should require ultimate parent entities to file CbC reports in a timely manner and exchange this information with jurisdictions in which the MNE operates. In cases where a jurisdiction fails to collect and share the information, a secondary mechanism will be accepted (e.g., moving requirement to next tier parent country or local filing).
- Implementation package: A comprehensive package establishing protocols for the governmental exchange of CbC reports will be issued by the OECD by April 2015.
The Treasury announcement, issued by its representative Brian Jenn, indicated that the US plans to meet, or will try to meet, all of the OECD’s recommendations for implementation of CbC reporting. While the US has not yet issued its own CbC reporting template, Mr. Jenn stated that the US will develop a form consistent with the OECD CbC template. The US will exchange CbC information with other tax authorities under bilateral tax treaties and tax information exchange agreements.
What do US MNE taxpayers need for CbC compliance?
Most of the compulsory information in the OECD CbC template is currently reported by United States entities that are required to file Forms 5471/5472. However, the CbC template expands on the information reported in Forms 5471/5472 by requiring annual data on entities that are not controlled foreign corporations (CFCs) − for example, entities under the check-the-box rules.
Other information required in the OECD CbC template that is not covered in Forms 5471/5472 include:
- The entity’s tax residence
- Constituent entities resident in the entity’s jurisdiction of tax residence
- Number of employees, by jurisdiction and
- Table 3: Additional information necessary to facilitate understanding of information in the CbC report.
While the OECD has indicated flexibility in the best source of data (such as consolidated or local GAAP), providing the required data may present a challenge to taxpayers depending on their information systems and complexity of their group holding structures.
Implications for US MNE taxpayers
CbC reporting provides tax authorities with increased visibility into the financial and operating nature of MNEs. In line with the overall purpose of the OECD BEPS initiative, tax administrators are concerned that profits of MNEs may be misaligned with the economic activities generating the profits. For example, one risk assessment factor generated from CbC reporting that tax authorities will inevitably examine are companies located in low-tax jurisdictions with low numbers of employees and high profits. In addition, as discussed above, US MNEs are now required to share data of their non-CFC entities used in their tax planning strategies. As the CbC reporting requirement has moved from a future possibility to a definitive requirement in 2017, MNEs may want to consider the appropriateness of their tax footprint with their business activities.
CbC reporting is the initial tool for tax administrators to consider the appropriateness of intercompany pricing arrangements. As additional Action Items are released over 2015, a clearer picture of the OECD recommendations for addressing perceived transfer pricing abuses will emerge.