BEPS country-by-country reporting: the practical impact for corporate tax departments.

• Author: Brennan, Bill
• Position: Base erosion and profit shifting

EXECUTIVE SUMMARY

* The Organisation for Economic Co-operation and Development's Action Plan on Base Erosion and Profit Shifting (BEPS) includes a new requirement that multinational companies report their business activities using a template on a country-by-country basis.

* The final version of the recommended template will require businesses to report revenue, profit before income tax, income taxes paid and accrued, total employment, capital, retained earnings, and tangible assets in each tax jurisdiction. Individual countries can, however, modify the template to require additional information.

* The result of the new requirements will be to impose significant new burdens on multinational corporations' tax departments because of practical difficulties involved in preparing the templates and dealing with audit activity initiated by countries due to information reported on them.

* Multinationals will also face the practical requirement of reconciling public financial statements, legal entity books, local tax returns, and the templates.

* An additional significant concern with country-by-country reporting is confidentiality; many corporations and practitioners believe that at least some taxing jurisdictions will make the information reported publicly available or that information will be leaked to the public.

PREVIEW

* The Organisation for Economic Co-operation and Development (OECD) released the final version of its recommended Action 13 country-by-country reporting template in September 2014 as part of its Action Plan on Base Erosion and Profit Shifting (BEPS).

* Planning for and complying with BEPS country-by-country reporting and dealing with the additional audit activity it is likely to cause will place significant resource demands on multinational corporations' tax departments.

* The reporting requirements also represent a real risk that confidential information provided in the template will eventually be disclosed to the public through information leaks or formal disclosure requirements by individual countries.

On Sept. 16, 2014, the Organisation for Economic Co-operation and Development (OECD) released its first set of deliverables regarding its Action Plan on Base Erosion and Profit Shifting (BEPS). Included was the highly anticipated final version of its recommended Action 13 country-by-country template, which multinational companies will use to report their income, taxes paid, and other indicators of economic activity. The template requires multinational companies to report annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax, and income taxes paid and accrued. It also requires them to report their total employment, capital, retained earnings, and tangible assets in each tax jurisdiction. Finally, multinational companies must identify each entity within the group doing business in a particular tax jurisdiction and describe the business activities of each.

For the first time, taxing authorities throughout the world will be able to ascertain how multinational companies allocate their income and tax payments to a specific country, and other countries as well. The template will also serve as an essential tool for taxing authorities to identify and select companies to be audited.

On Feb. 6, the OECD followed up with implementation guidance on country-by-country reporting. It recommended that multinational companies file the initial template for fiscal years beginning on or after Jan. I, 2016. A multinational company is required to file the template within one year after the close of its fiscal year. For example, a calendar-year company would be required to file its initial template for 2016 by Dec. 31, 2017. The guidance explains that the fiscal year means the multinational company's consolidated financial reporting period, and not the tax year or financial reporting period of individual entities. As a result, both the template and tax returns for local jurisdictions will be due at approximately the same time.

The intent is to improve the risk-assessment capabilities of taxing authorities by providing them the country-by-country information of multinational companies at an early stage. All multinational companies will be required to file the annual template, unless the group has less than 750 million [euro] (approximately $840 million) of consolidated financial revenue for any given year. The guidance also provides no exceptions for special industries, investment funds, and noncorporate entities or nonpublic corporate entities. Before countries are permitted to receive the template, they must satisfy certain conditions and safeguards.

Specifically, countries must have in place (1) legal protections to preserve the confidentiality of the country-by-country reporting; (2) a legal requirement that the multinational group's ultimate parent resident in their jurisdiction file the template, as required; and (3) a restriction to use the template only in assessing high-level transfer-pricing risks or other BEPS-related risks. However, how these underlying conditions and safeguards will be enforced remains an open question. It was also agreed that the country-by-country report be filed with the tax administrator in the multinational's ultimate parent's tax jurisdiction; thereafter the parent's tax jurisdiction is responsible for submitting the template to other tax jurisdictions in which the group operates.

If the first taxing authority does not provide the template as required, the OECD guidance calls for a "secondary mechanism," which could include either local filings or moving the obligation to exchange the template to the next entity in the chain of ownership. The primary method for automatically exchanging the template between tax administrators will be using government-to-government mechanisms, such as bilateral tax treaties, tax information exchange agreements, and The Multilateral Convention on Mutual Administrative Assistance in Tax Matters. (1) The OECD stated that further guidance will be forthcoming regarding draft legislation and the "secondary mechanism."

Based upon the above guidance, tax administrators will begin exchanging the first templates in 2017.

The template clearly constitutes one of the most critical elements of the overall BEPS initiative, and there is a consensus within the tax community that it is not an overstatement to say that country-by-country reporting is a game changer for multinational companies. According to Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, in his Sept. 16 briefing,

44 countries, which are participating in all BEPS projects on an equal footing with OECD countries, account for 90% of the global economy. They include the OECD's 34 members, among them the world's advanced economies, and eight non-OECD G-20 members. The nonmembers are the five BRICS countries--Brazil, Russia, India, China, and South Africa--as well as Argentina, Indonesia, and Saudi Arabia, and also Colombia and Latvia; two OECD accession countries, which also are participating. (2) Furthermore, Saint-Amans indicated that the United States, India, South Africa, Brazil, and the European countries have all agreed to adopt the country-by-country reporting template. (3)

Country-by-country reporting is also inevitable, global leaders say: "Government officials from the United States, the U.K., Australia, and Canada, participating in a round table on the OECD's base erosion and profit-shifting project November 30 2014, at the 66th annual conference of the Canadian Taxation Foundation, agree that the implementation of the country-by-country reporting is inevitable." (4)

As is discussed in this article, country-by-country reporting will severely test how corporate tax departments manage their financial data in complying with these new reporting requirements. This article also outlines the more important practical and implementation...