21 October 2015 OECD releases final report on transfer pricing documentation and country-by-country reporting under Action 13 On October 5, 2015, the Organization for Economic Co-operation and Development (OECD) released its final report on Action 13, Transfer Pricing Documentation and Country-by-Country Reporting (the Final Report), under its Action Plan on Base Erosion and Profit Shifting (BEPS). This Final Report was released in a package that included final reports on all 15 BEPS Actions. The Final Report largely follows the prior documents issued on this topic (i.e., the draft report Transfer Pricing Documentation and Country-by-Country Reporting released on 16 September 2014,1 the report Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting released on 6 February 20152 and the report Country-by-Country Reporting Implementation Package released on 8 June 2015),3 consolidating the three prior reports into one. The Final Report contains revised standards for transfer pricing documentation and a template for country-by-country (CbC) reporting of income, taxes paid and certain measures of economic activity, both of which will be included in the OECD transfer pricing guidelines. The revised standards entail a three-tiered approach to transfer pricing documentation and CbC reporting, which consists of: — A "master file" that provides tax administrations with high-level information regarding a multinational enterprise's (MNE's) global business operations and transfer-pricing policies — A specific "local file" that provides a local tax administration with information on material, related-party transactions, the amounts involved, and the company's analysis of the transfer pricing determinations they have made with regard to those transactions — A CbC reporting template that includes information on revenue (related and unrelated party), profits, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets for each tax jurisdiction in which the MNE does business. In addition, the template includes information identifying each entity within the MNE group doing business in a particular tax jurisdiction and the business activities each entity conducts. The new CbC reporting requirements are to be implemented for fiscal years beginning on or after January 1, 2016, and apply to MNEs with annual consolidated group revenue equal to or exceeding €750 million. The OECD mandates that countries participating in the BEPS project carefully monitor the implementation of these new standards and reassess no later than the end of 2020 whether modifications should be made to the content of these reports to require reporting of additional data. The Final Report contains revised guidance on documentation and reporting that will be included in the OECD Transfer Pricing Guidelines as a replacement for the current content of Chapter V. The report sets out a three-tiered standardized approach to transfer pricing documentation and CbC reporting, which consists of a "master file," a specific "local file" and a "CbC reporting template." According to the OECD, taken together, these three documents will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit inquiries. The Final Report further indicates that this information should make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments. Finally, the OECD states that the countries participating in the BEPS project agree that these new reporting provisions, and the transparency they will encourage, will contribute to the objective of understanding, controlling and tackling BEPS behaviors. In order to achieve these objectives, countries should adopt a standardized approach to transfer pricing documentation, to be implemented in their domestic law. The three-tiered structure consisting of a master file, a local file and a CbC report, is described below. The master file should provide an overview of the MNE group business, its overall transfer pricing policies, and its global allocation of income and economic activity in order to place the MNE group's transfer pricing practices in their global economic, legal, financial and tax context. The Final Report states that there is no intention to require exhaustive listings of minutiae, as this would be both unnecessarily burdensome and inconsistent with the objectives of the master file. In producing the master file, taxpayers should use prudent business judgment in determining the appropriate level of detail for the information supplied, keeping in mind the objective of the master file is to provide tax administrations with a high-level overview of the MNE's global operations and policies. The use of cross-references to other existing documents, together with copies of the relevant documents, should be deemed to satisfy the relevant requirement. The Final Report indicates that information is considered important if its omission would affect the reliability of the transfer pricing outcomes. It does not provide more detailed guidance, such as materiality thresholds, on what is considered important. The information required in the master file can be grouped in five categories: (i) the MNE group's organizational structure; (ii) a description of the MNE's business or businesses; (iii) the MNE's intangibles; (iv) the MNE's intercompany financial activities; and (v) the MNE's financial and tax positions. Taxpayers generally should present the information in the master file for the MNE as a whole but organization of the information by line of business is permitted when well justified by the facts. The Final Report states that, when line-of-business presentation is used, care should be taken to ensure that centralized group functions and transactions between business lines are properly described in the master file. The master file differs from typical current documentation standards. It has a global scope and should provide a global overview. A description of the supply chain for the group's largest products and service offerings will have to be included. Important transactions regarding intangibles, financial transactions and business restructurings must be listed. Finally, the master file should contain a list and brief description of the MNE group's existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries. These differences will require companies to review their existing documentation and their process for preparing the documentation. While the master file provides a high-level overview, the local file should provide more detailed information on specific material intercompany transactions. The information required in the local file should supplement the master file and help in assessing whether the taxpayer has complied with the arm's length principle in its material transfer pricing positions affecting a specific jurisdiction. Individual country transfer pricing documentation requirements should include specific materiality thresholds that take into account the size and the nature of the local economy, the importance of the MNE group in that economy, and the size and nature of local operating entities, in addition to the overall size and nature of the MNE group. It is recommended that small and medium-sized enterprises (SMEs) not be required to produce the amount of documentation that might be expected from larger enterprises. SMEs should, however, be required to provide information and documents about their material cross-border transactions upon a specific request of the tax administration in the course of a tax examination or for transfer pricing risk assessment purposes. Like the new rules for the master file, the guidance for the local file contains some specific deviations from typical current documentation standards. First, it is clear that a specific local file will have to be prepared, including financial information and allocation schedules to show how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. This suggests that generic documentation describing the transfer pricing policy for the group as a whole could be used. Furthermore, the local file should contain a description of the reasons for concluding that relevant transactions were priced on an arm's length basis based on the application of the selected transfer pricing method. A company will need to be able to support that both the transfer pricing policy and the actual results are at arm's length. The local file requires that the reported amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e., payments and receipts for products, services, royalties, interest, etc.) be broken down by tax jurisdiction of the foreign payor or recipient. It should be noted that the Final Report refers to payments and receipts and not to consideration charged. The Final Report indicates that various types of agreements will have to be reported, including all material intercompany agreements concluded by the local entity and copies of existing unilateral and bilateral or multilateral APAs and other tax rulings: (1) that are related to controlled transactions described earlier; and (2) to which the local tax jurisdiction is not a party. As for the master file, the local file requirements and the differences from typical current documentation approaches will require companies to review their existing documentation and the process for preparing that documentation. The Final Report contains specific guidance on certain "compliance issues," such as timing and penalties, among others. It states that taxpayers should try to determine transfer prices based upon information reasonably available at the time of the transaction and should confirm the arm's length nature of their transactions at the time of filing their tax returns. Among the compliance issues listed, several are of particular practical importance for taxpayers. The Final Report recommends reviewing transfer pricing documentation periodically to determine whether functional and economic analyses are still accurate and relevant, as well as to confirm the validity of the applied transfer pricing methodology. In general, the master file, the local file and the CbC report should be reviewed and updated annually. For database searches for comparables, the Final Report indicates that these should be updated every three years. The financial data for the comparables, however, should be updated every year. The Final Report further expresses a strong preference for the use of local comparables over the use of regional comparables. The language in which transfer pricing documentation should be submitted should be established under local laws. Countries are encouraged to allow for the filing of transfer pricing documentation in commonly used languages where the usefulness of the documents will not be compromised. Where tax administrations believe that translation of documents is necessary, they should make specific requests for translation and should provide sufficient time. The master file and local file elements of the transfer pricing documentation standard will have to be implemented through local country legislation or administrative procedures. The master file and local file will be filed directly with the tax administrations in each relevant jurisdiction as required by those administrations. The Final Report provides for CbC reporting to be done separately from the master file and the local file. The CbC reporting template is divided into three tables: — Table II. List of all Constituent Entities of the MNE group included in each aggregation by tax jurisdiction, including designation of Main Business Activity The Final Report states that "the country-by-country report will be helpful for high-level transfer pricing risk assessment purposes." It further emphasizes that such information "should not be used as a substitute for a detailed transfer pricing analysis of individual transactions and prices based on a full functional analysis and a full comparability analysis" and such information "does not constitute conclusive evidence that transfer prices are or are not appropriate." Finally, the Final Report states that the information should not be used "to propose transfer pricing adjustments based on a global formulary apportionment of income." The Final Report describes a framework under which jurisdictions should require, in a timely manner, the filing of CbC reports by the ultimate parent entities of MNE groups resident there and exchange this information on an automatic basis with the jurisdictions in which the MNE groups operate. The report indicates that, if a jurisdiction fails to provide information to another jurisdiction, a secondary mechanism would be accepted as appropriate, through local filing or by moving the obligation for requiring the filing of CbC reports and automatically exchanging such information to the next-tier parent country. The ultimate parent of an MNE group (the Reporting MNE) is required to complete a template reporting the allocation of the group's income, taxes and business activities on a tax jurisdiction by tax jurisdiction basis. The Reporting MNE may choose to use data from consolidation reporting packages, separate entity statutory financial statements, regulatory financial statements, or internal management accounts, but should be consistent from year to year. The Final Report states that a reconciliation of the CbC report to the consolidated financial statements is not required. Table I of the CbC reporting template requires the Reporting MNE to provide the following information annually: — Tax jurisdiction: The required information is to be reported on a tax-jurisdiction-by-tax-jurisdiction basis. A separate line should be included for all Constituent Entities deemed by the Reporting MNE not to be resident in any jurisdiction for tax purposes. — Revenues: Separate columns are provided for revenues generated from unrelated-party transactions, revenues from transactions with related parties, and the sum. For this purpose, revenues should include revenues from sales of inventory and properties, services, royalties, interest, premiums and any other amounts derived from transactions with related or unrelated persons. Revenues from payments received from other Constituent Entities that are treated as dividends in the payor's tax jurisdiction are excluded. — Profit (Loss) before income tax: This is the sum of the profit (loss) before income tax for all Constituent Entities resident for tax purposes in the particular jurisdiction. This should include all extraordinary income and expense items. — Income tax paid (on cash basis): This is the total amount of income tax actually paid during the relevant fiscal year by all Constituent Entities resident for tax purposes in the particular jurisdiction to the residence tax jurisdiction and to all other tax jurisdictions. Taxes paid should include withholding taxes paid by other entities (both related and unrelated) with respect to payments to a Constituent Entity. — Income tax accrued (current year): This is the sum of the accrued current tax expense recorded on taxable profits or losses of the year of reporting of all Constituent Entities resident for tax purposes in the particular jurisdiction. The current tax expense should reflect only operations in the current year and should not include deferred taxes or provisions for uncertain tax liabilities. Table II of the CbC reporting template would require the Reporting MNE to annually provide a list, by legal entity name, of all the Constituent Entities that are resident for tax purposes in each tax jurisdiction. For each Constituent Entity, identification of the main business activity(ies) also is required. Table III of the template provides room for the Reporting MNE to include any information or explanation that it considers necessary or that would facilitate the understanding of the required information provided in the template. An implementation package has been developed for government-to-government exchange of CbC Reports. More specifically it includes: (i) Model legislation that jurisdictions will be able to adapt to their own legal systems, where changes to current legislation are required. Further, key elements of secondary mechanisms for reporting have been developed. (ii) Implementing arrangements for the automatic exchange of the CbC reports under international agreements have been developed. The Final Report indicates that consistent and effective implementation of the transfer pricing documentation standards and the CbC report in particular is essential. Therefore, countries participating in the OECD/G20 BEPS Project agreed on the core elements of implementing transfer pricing documentation and CbC reporting. This agreement calls for the master file and the local file to be delivered by MNEs directly to local tax administrations. CbC reports should be filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, under government-to-government mechanisms such as the multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties or tax information exchange agreements. In limited circumstances, secondary mechanisms, including local filing, may be used by countries as a backup. The guidance provided in the Final Report on the master file and local file differs from current documentation requirements. These differences will require companies to review their existing documentation and the process used to produce it. The CbC template introduced in the Final Report is an entirely new reporting requirement. Companies will have to review the requirements carefully in order to understand the most appropriate application of the guidelines to their particular operating structure. For annual compliance, companies need to plan the necessary steps to ensure their ability to collect the required information as efficiently as possible, including developing sustainable processes and responsibilities around the new reporting. As the guidance provided by the OECD regarding the new reporting requirements now is final, companies should monitor developments around the adoption of these new reporting requirements in the countries in which they operate. EY is hosting a series of eight tax webcasts that will provide a comprehensive review of the final BEPS reports and the outlook for country action: — OECD BEPS Project Outcomes: Highlights and Next Steps — October 15, 10 AM, EDT For more information and to register for the webcast series, click here.
1 See EY Global Tax Alert, OECD releases report under BEPS Action 13 on Transfer Pricing Documentation and Country-by-Country Reporting, dated 23 September 2014. 2 See EY Global Tax Alert, OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13, dated 9 February 2015. 3 See EY Global Tax Alert, OECD issues implementation package for country-by-country reporting under BEPS Action 13, dated 23 June 2015. Document ID: 2015-1998 | |||||||||||||||||||||
