Canada has implemented the country-by-country reporting requirement for large multinational enterprises (MNEs) contained in the 2015 Final Report on Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. Canada’s legislation is found in s. 233.8 of the Income Tax Act (Canada), and is supported by the Canada Revenue Agency’s (CRA) Guidance on Country-By-Country Reporting in Canada 2017 (RC4651-17e). These county-by-country reports (CbC Reports) will furnish the CRA with data on an MNE’s global allocation of income earned, taxes paid, and other indicators of economic activity. In this context, the OECD recently issued additional guidance concerning the basic principle that CbC Reports must be used for only three purposes: (1) high-level-transfer-pricing-risk assessment; (2) assessment of other BEPS-related risks; and (3) economic and statistical analysis. Here are some interesting points from this latest guidance (see http://www.oecd.org/tax/beps/guidance-on-country-by-country-reporting-beps-action-13.htm):
- A tax authority (the CRA) can use the CbC Reports to issue additional audit queries, and these queries need not relate to potential risks identified from the CbC Reports (see paragraph 6).
- The term “assessment of other BEPS-related risks” in purpose (2) above means a high-level assessment of any tax risks that may result in the erosion of a country's tax base (see paragraph 11).
- A CbC Report is not sufficient – by itself – for the CRA to draw reliable audit conclusions, because the CbC Report will not contain the following vital details: (1) information on a particular entity's income and expenditures; (2) transactions a particular entity has entered into with third parties or related parties; (3) information on risk allocations between entities within the group; and (4) information on the functions performed and assets employed by group entities (see paragraph 20).
- Incorrect tax assessments could therefore arise if the CRA proposes tax adjustments based solely on a CbC Report (see paragraphs 13 and 20).
- One method to ensure the appropriate use of a CbC Report may be for the CRA establish a final review procedure conducted by qualified senior staff – independent of the compliance team that proposes the audit adjustments (see paragraph 38). This final review would establish: (1) that the adjustments properly apply the Canada’s domestic tax law and tax treaties to the available documentary evidence; (2) that the data contained in the CbC Report has not been used as conclusive evidence to support the adjustments; and (3) that the adjustments are not based on global formulary apportionment of income using the CbC Report.