23 June 2015 OECD issues implementation package for country-by-country reporting under BEPS Action 13 On June 8, 2015, the Organization for Economic Co-operation and Development (OECD) issued additional guidance on country-by-country (CbC) reporting under Action 13 (transfer pricing documentation) of its Action Plan on Base Erosion and Profit Shifting (BEPS). The document Action 13: Country-by-Country Reporting Implementation Package (the Implementation Package) includes model legislation that countries can use to implement CbC reporting requirements and model competent authority agreements that countries can adopt to facilitate implementation of information exchange between tax authorities with respect to the CbC reports. The Implementation Package also indicates that the OECD intends to develop further guidance to accommodate the electronic exchange of CbC reports between tax authorities. On September 16, 2014, the OECD issued its report on Action 13 (the Action 13 Report), which is in the form of a chapter to be incorporated in the OECD Transfer Pricing Guidelines, containing new standards for transfer pricing documentation.1 The Action 13 Report provides a framework for a three-tier approach to transfer pricing documentation: (1) the master file with global information about a multinational corporation (MNC) group, (2) the local file with information about the particular group entity, and (3) the template CbC report with high-level information about the group's global footprint. On February 6, 2015, the OECD released guidance (the February Guidance) focused in particular on the CbC reporting requirement under Action 13.2 The February Guidance provides for the first CbC reports to cover the 2016 fiscal year and to be filed no later than 12 months after the end of such fiscal year. It further provides for CbC reports generally to be filed in the home country of a MNC group's parent company and shared with other relevant countries under government information exchange mechanisms. The February Guidance also addresses other implementation matters related to the CbC report, including provision of a de minimis exception from such reporting. In addition, it includes some high-level information regarding implementation of the master file and local file elements of the three-tier transfer pricing documentation. The Implementation Package issued on June 8, 2015 includes a brief narrative introduction and contains model legislation related to CbC reporting and three versions of model competent authority agreements on the exchange of CbC reports. The introduction notes that an intended next step is development of an Extensible Markup Language (XML) schema and a related user guide to accommodate the electronic exchange of CbC reports. The model legislation is organized into eight articles: (1) Definitions, (2) Filing Obligation, (3) Notification, (4) CbC Report, (5) Time for Filing, (6) Use and Confidentiality of CbC Report Information (7) Penalties, and (8) Effective Date. The introduction to the Implementation Package notes that the model legislation does not take into account the constitutional law, legal system, or structure and wording of the tax legislation of any particular jurisdiction, indicating that jurisdictions where changes to current legislation are required will be able to adapt the model to their own legal systems. Article 1 provides definitions for terms used in the model legislation. These definitions reflect some elaboration of the definitional information in the template CbC report that was included in the September Action 13 Report. The definitions are as follows: — The term "Group" means a collection of enterprises related through ownership or control such that the group is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange. — The term "MNE Group" means any Group that includes two or more enterprises with their tax residence in different jurisdictions, or that includes an enterprise that is tax resident in one jurisdiction and has a permanent establishment taxed in another jurisdiction, and that is not an Excluded MNE Group. — The term "Excluded MNE Group" means, with respect to any Fiscal Year of the Group, a Group having total consolidated group revenue of less than 750 million Euro (or an amount in local currency approximately equivalent to 750 million Euro as of January 2015) during the immediately preceding Fiscal Year as reflected in its Consolidated Financial Statements. — The term "Constituent Entity" means (i) any separate business unit of an MNE Group that is included in the Consolidated Financial Statements of the MNE Group for financial reporting purposes or would be so included if equity interests in such business unit were traded on a public securities exchange; (ii) any such business unit that is excluded from the MNE Group's Consolidated Financial Statements solely on size or materiality grounds; and (iii) any permanent establishment of any separate business unit of the MNE Group that is included in (i) or (ii) above, provided the business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting, or internal management control purposes. — The term "Reporting Entity" means the Constituent Entity that is required to file a CbC report in its tax residence jurisdiction on behalf of the MNE Group. The Reporting Entity may be the Ultimate Parent Entity, the Surrogate Parent Entity, or any entity that is required to file a CbC report under Article 2. — The term "Ultimate Parent Entity" means a Constituent Entity of an MNE Group that owns directly or indirectly a sufficient interest in one or more other Constituent Entities of such MNE Group such that it is required to prepare Consolidated Financial Statements under accounting principles generally applied in its tax residence jurisdiction, or would be so required if its equity interests were traded on a public securities exchange in its tax residence jurisdiction, where there is no other Constituent Entity of such MNE Group that owns directly or indirectly such an interest in the first Constituent Entity. — The term "Surrogate Parent Entity" means one Constituent Entity of the MNE Group that is appointed by such group, as a sole substitute for the Ultimate Parent Entity, to file the CbC report in its jurisdiction of tax residence on behalf of such MNE Group. — The term "Fiscal Year" means an annual accounting period with respect to which the Ultimate Parent Entity of the MNE Group prepares its financial statements. - The term "Reporting Fiscal Year" means that Fiscal Year the financial and operational results of which are reflected in the CbC report defined in Article 4. — The term "International Agreement" means the Multilateral Convention for Mutual Administrative Assistance in Tax Matters, any bilateral or multilateral tax treaty, or any tax information exchange agreement that by its terms provides legal authority for the exchange of tax information between jurisdictions, including automatic exchange of such information. — The term "Qualifying Competent Authority Agreement" means an agreement between authorized representatives of jurisdictions that are parties to an International Agreement that requires the automatic exchange of CbC reports between such jurisdictions. — The term "Consolidated Financial Statements" means the financial statements of an MNE Group in which the assets, liabilities, income, expenses and cash flows of the Ultimate Parent Entity and the Constituent Entities are presented as those of a single economic entity. — The term "Systemic Failure" means, with respect to a jurisdiction, that the jurisdiction has a Qualifying Competent Authority Agreement in effect with a particular country, but has suspended automatic exchange (for reasons other than in accordance with the terms of such agreement) or otherwise persistently failed to automatically provide to such country CbC reports in its possession of MNE Groups that have Constituent Entities in such country. Article 2 of the model legislation sets forth the filing obligation with respect to the CbC report. The primary obligation is for the Ultimate Parent Entity of an MNE Group to file a CbC report with the tax administration in its country of tax residence. However, a Constituent Entity would have an obligation to file a CbC report with the tax administration in its country of tax residence if one of three conditions are present: (1) the Ultimate Parent Entity of the MNE Group is not obligated to file a CbC report in its tax residence jurisdiction, (2) the Ultimate Parent Entity's tax residence jurisdiction has a current International Agreement to which the Constituent Entity's country of tax residence is a party but does not have a Qualifying Competent Authority Agreement in effect to which such is party by the time the CbC report is required to be filed, or (3) there has been a Systemic Failure of the Ultimate Parent Entity's tax residence jurisdiction that has been notified to the Constituent Entity by the tax administration in its country of tax residence. If there is more than one Constituent Entity of an MNE Group tax resident in a particular country to which this filing obligation would apply, the MNE Group may designate one of such entities to file the CbC report in such country. Alternatively, a Constituent Entity would not be subject to a filing obligation in its country of tax residence if the MNE Group has made available a CbC report through a Surrogate Parent Entity that files such report with the tax administration in its tax residence jurisdiction and the following conditions are satisfied: (1) the tax residence jurisdiction of the Surrogate Parent Entity requires filing of CbC reports, (2) the tax residence jurisdiction of the Surrogate Parent Entity has a Qualifying Competent Authority Agreement in effect to which the Constituent Entity's country is a party by the filing deadline of the CbC report, (3) the tax residence jurisdiction of the Surrogate Parent Entity has not notified the tax administration of the Constituent Entity's country of a Systemic Failure, (4) the tax residence jurisdiction of the Surrogate Parent Entity has been notified by such entity that it is the Surrogate Parent Entity, and (5) the Constituent Entity has notified the tax administration of its country of the identity and jurisdiction of the tax residence of the Surrogate Parent Entity. Article 3 of the model legislation provides notification requirements. A Constituent Entity of a MNE Group must notify the tax administration in its country of tax residence whether it is the Ultimate Parent Entity or the Surrogate Parent Entity no later than the last day of the Reporting Fiscal Year. Alternatively, the Constituent Entity must notify the tax administration in its country of tax residence of the identity and tax residence of the Ultimate Parent Entity or the Surrogate Parent Entity. Article 4 of the model legislation provides a summary description of the required content of the CbC report, which is consistent with the template included in the Action 13 Report. It further states that the CbC report is to be filed in a form identical to such template and applying the definitions and instructions contained in such template. Article 5 of the model legislation provides that the CbC report is to be filed no later than 12 months after the last day of the Reporting Fiscal Year of the MNE Group. Article 6 of the model legislation addresses the use and confidentiality of CbC report information. Tax administrations are to use the CbC report for purposes of assessing high-level transfer pricing and other BEPS-related risks, including assessing the risk of non-compliance with transfer pricing rules and, where appropriate, for economic and statistical analysis. Transfer pricing adjustments by tax administrations are not to be based on the CbC report. In addition, tax administrations are to preserve the confidentiality of the information in the CbC report at least to the same extent that would apply if such information were provided to the tax administration under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Article 7 of the model legislation is labelled "penalties." However, no penalty provisions with respect to failure to comply with the CbC report requirements are specified. Rather, this article includes a note that it is assumed that jurisdictions would wish to extend their existing transfer pricing documentation penalty regimes to the CbC report filing requirements. Article 8 of the model legislation provides in brackets an effective date of Reporting Fiscal Years of MNE Groups beginning on or after January 1, 2016. The Implementation Package includes three forms of competent authority agreements with respect to the exchange of CbC reports. The first of these is a multilateral competent authority agreement to be used in connection with the Convention on Mutual Administrative Assistance in Tax Matters. This agreement is described as having been based on and inspired by the competent authority agreement that was developed in connection with the Common Reporting Standard related to the automatic exchange of financial information. The other two competent authority agreements are to be used in connection with tax treaties and tax information exchange agreements. The introduction to the Implementation Package indicates that countries "are encouraged to expand the coverage of their international agreements for the exchange of information, which will be an integral part of the ongoing monitoring process." The introduction further indicates that the model competent authority agreements are intended to provide a framework for making the CbC report information available to concerned tax authorities, stating that such information is "foreseeably relevant for the administration and enforcement of their tax laws." The model competent authority agreements contain a series of introductory clauses that include stipulations that will be satisfied by the time the first exchange of CbC reports takes place: (i) the appropriate safeguards to ensure that the information received pursuant to the agreement remains confidential and is used for the purposes of assessing high-level transfer pricing risks and other BEPS-related risks, as well as for economic and statistical analysis where appropriate, (ii) the infrastructure for an effective exchange relationship (including processes for ensuring timely, accurate and confidential information exchanges, effective and reliable communications, and capabilities to promptly resolve questions and concerns about exchanges), and (iii) the necessary legislation to require the filing of the CbC report. Section 1 contains definitions of terms used in the agreement, which are coordinated with the defined terms in the model legislation. Section 2 sets forth the exchange of information obligation. Under this provision, each Competent Authority is to annually exchange on an automatic basis the CbC reports received from Reporting Entities that are tax resident in its jurisdiction for MNE Groups that include Constituent Entities that are tax resident, or that have taxable permanent establishments, in the jurisdiction of the other Competent Authority. The multilateral version of the competent authority agreement provides that the Competent Authority of a jurisdiction that has listed itself as a non-reciprocal jurisdiction is to send the CbC reports, but is not to receive such reports. Section 3 provides for the time and manner of exchange of CbC reports. A CbC report is to be exchanged for the first time no later than 18 months after the last day of the fiscal year of the MNE Group. Thereafter, CbC reports are to be exchanged no later than 15 months after the last day of the fiscal year of the MNE Group. This section also provides that Competent Authority is to automatically exchange the CbC report through a common schema in XML and work toward agreement on methods for electronic data transmission. Section 4 provides that a Competent Authority is to notify the other Competent Authority when there is reason to believe, with respect to a Reporting Entity that is tax resident in the jurisdiction of such other Competent Authority, that an error may have led to incorrect or incomplete information reporting or there is non-compliance with respect to the obligation to file a CbC report. Section 5 addresses confidentiality, data safeguards and appropriate use. It states that all information exchanged is subject to the confidentiality rules and other safeguards provided in the underlying agreement between the parties. It further states that jurisdictions are to use the CbC report information to assess high-level transfer pricing and BEPS related risks and, where appropriate, for economic and statistical analysis. Moreover, jurisdictions agree not to use the information as a substitute for a detailed transfer pricing analysis and acknowledge that information in the CbC report on its own does not constitute conclusive evidence that transfer prices are or are not appropriate. It further states that inappropriate adjustments in contravention of this paragraph made by local tax administrations are to be conceded in any competent authority proceedings. However, jurisdictions are not prevented from using data contained in the CbC report as the basis for making additional inquiries into the MNE Group's transfer pricing arrangements or other tax matters as part of a tax audit, and as a result may make appropriate adjustments to the Constituent Entity's taxable income. To the extent permitted under applicable law, a Competent Authority will immediately notify the other Competent Authority, or with respect to the multilateral version of the agreement, the Co-ordinating Body Secretariat, of any non-compliance, any remedial actions and any measures taken with respect to the non-compliance. The multilateral version of the agreement also specifies that the Co-ordinating Body Secretariat will notify all Competent Authorities that are parties to the multilateral agreement with the Competent Authority in question. Section 6 provides that if an adjustment of taxable income of a Constituent Entity, as a result of the further inquiries based on the data in the CbC report, leads to undesirable economic outcomes, the Competent Authorities of the tax residence jurisdictions of the affected Constituent Entities are to consult each other with the aim of resolving the case. If any difficulties arise in the implementation or interpretation of the agreement, a Competent Authority may request consultation with the other Competent Authority to develop the appropriate measures to satisfy the agreement. In the multilateral version of the agreement, the Competent Authorities also should ensure that the Co-ordinating Body Secretariat is notified of any conclusions reached. Section 7 provides that amendments may be made by written consent of all of the Competent Authorities that have the agreement in effect. Section 8 contains the terms of agreement. The terms, include, among others, that a Competent Authority can suspend the exchange of information by giving notice in writing to the other Competent Authority if it has determined there has been significant non-compliance. For this purpose, significant non-compliance includes non-compliance with the provisions in Section 5 regarding confidentiality, data safeguards, and appropriate use and the provisions in Section 6 regarding consultation in the event of undesirable economic outcomes, as well as a failure by the Competent Authority to provide timely or adequate information as required under this Agreement. A suspension will have immediate effect and will last until the non-compliant Competent Authority establishes in a manner acceptable to both Competent Authorities that there has been no significant non-compliance or that the non-compliant Competent Authority has adopted relevant measures that address the significant non-compliance. A Competent Authority may terminate its participation in this Agreement by giving a written notice. The termination will become effective on the first day of the month after the expiration of a 12-month waiting period that begins after the date of the notice. Information that was previously received under the agreement will remain confidential in the event of its termination. A Confidentiality and Data Safeguards Questionnaire is included as an annex to the multilateral competent authority agreement. It provides a checklist with respect to: (1) legal framework, (2) information security management, and (3) monitoring and enforcement sections. The two components of the legal framework checklist are the terms of the applicable treaty or other bilateral agreements for the exchange of information and a jurisdiction's domestic legislation. The checklist areas for information security management include standards that must be used by each jurisdiction's tax administration to ensure protection of confidential data. The monitoring and enforcement checklist provides that domestic law must impose penalties or sanctions for the proper disclosure or use of taxpayer information. The model legislation and model competent authority agreements included in the Implementation Package are intended to facilitate implementation of the CbC reporting requirement and establishment of the information exchange mechanism for sharing that information between tax administrations. The Implementation Package provides language countries could use in their legislation and agreements that could accelerate the process for such implementation. Companies should closely monitor developments with respect to the new requirement to file the CbC report, and the new transfer pricing documentation requirements more generally, in their parent company's home jurisdiction and also in the jurisdictions in which they operate. In addition, companies should focus on the necessary steps to ensure their ability to produce the required information, including preparing protocols for gathering the information and developing internal processes with regard to the new reporting.
1 See Tax Alert 2014-1685. 2 See Tax Alert 2015-280. Document ID: 2015-1191 | |||||||||||||
