The Organisation for Economic Co-operation and Development (OECD) has issued a memorandum in connection with the planned overhaul of transfer pricing documentation rules under its action plan to address base erosion and profit-shifting.1 The memorandum follows the OECD’s July 30 “White Paper on Transfer Pricing Documentation” and the related comment period that ended on October 1.  The memorandum appears to reflect business sector comments on the white paper, including those submitted by the Tax Executives Institute, Inc. and the U.S. Council for International Business.  Those commenters asked that any new reporting requirements be flexible and operate to decrease, not increase, compliance burdens, and that adequate measures be taken to protect sensitive information from disclosure to competitors.  At a meeting during the summer, Treasury officials agreed with concerned attendees that tax information should be disclosed only to tax authorities, and it appears that the OECD at this time is not contemplating requiring public disclosure of this information.2

Specifically, the October 3 memorandum summarizes key questions related to the development of a country-by-country information reporting system, in advance of a public consultation on transfer pricing rules to be held November 12-13, 2013, in Paris, France.  Questions discussed in the memorandum include what information should be required, how it should be reported and shared, and whether any indicators of economic activity other than income and taxes should be reported. 

Although further written comments on these questions are not being solicited at this time, the OECD encourages businesses and governments to come to the November consultation prepared to discuss the questions raised in the memorandum and the July 30 white paper.

What Information to Include

Income Earned in a Country

Recognizing the need to balance the usefulness of country-by-country reporting against the burdens of compliance, the memorandum identifies several possible approaches to reporting income, and the pros and cons of each approach.  Among the approaches listed are reporting net income based on statutory financial statements; reporting taxable income based on tax returns filed in that country; segregating consolidated group income by reference to accounting segment reporting rules; and reporting income based on a company’s internal consolidating income statements.  The memorandum identifies the challenges of each approach and notes that other approaches are possible.  The memorandum specifically requests that the business sector be prepared to discuss those approaches to income reporting that will be most useful and most readily available from existing corporate records.

Taxes Paid by Country

The memorandum raises several questions regarding the reporting of taxes paid, including whether these taxes should be reported on a cash or accrual basis; whether only national/federal taxes or all taxes, including sub-national/state-level taxes should be reported; whether non-income taxes such as property taxes, employment taxes, and value-added taxes should be reported; and whether reporting of gross basis withholding taxes could be a substitute for reporting income tax.

Other Measures of Economic Activity

The memorandum identifies several alternative measures of economic activity that might be reported, as a means to identify discrepancies between where economic activity happens and where income is reported.  Possible measures include revenues by customer location; tangible assets by location; employment (total employees and/or total payroll); research and marketing expenditures by country; location of intangibles by country; and location of senior management.  Recognizing the challenges of collecting this data, and that the use of these measures could encourage excess reliance on “formula-based income allocation,” the memorandum also raises the question of whether this type of reporting would even provide meaningful guidance to tax authorities. 

Mechanisms for Reporting and Sharing Information

The memorandum includes ideas on how the template could be structured and shared.  One possibility is that reporting be done by the parent company in its home country and shared with other countries under existing treaty mechanisms.  Another suggestion is that the template be part of a “global master file,” or package of information provided to each country in which a multinational enterprise has a taxable affiliate.  (The idea of a global master file is discussed further in the July 30 white paper.)  Privacy concerns are raised as well; the memorandum notes that information might not be shared with countries lacking adequate measures to protect sensitive data.  The memorandum also notes that implementing a common template will require individual countries to modify their domestic documentation and reporting rules.