On October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) issued the final Base Erosion and Profit Shifting (BEPS) reports that are expected to fundamentally change the course of international taxation and transfer pricing for all multinational enterprises (MNEs). As countries implement some or all of the OECD BEPS recommendations into their domestic legislation, there will inevitably be shifts in tax policy, in addition to the transfer of resources and operations.
The OECD BEPS project aims to prevent base erosion and profit shifting by having taxes paid in the jurisdiction where profits are generated and value is created (i.e., substance). It is envisioned that these changes will lead to an increase in interstate disputes as authorities vie over taxing rights. There is a risk of double taxation in cases where countries are unable to come to an agreement. As a result of the BEPS project, companies will begin transferring people and operations to specific jurisdictions to enhance substance.
Country-by-Country Reporting (CbCR)
One of the cornerstones of the OECD BEPS project is Country-by-Country Reporting, which is addressed in the Action 13 recommendations and is one of the four minimum standards in the final OECD BEPS reports. The remaining minimum standards are OECD recommendations on harmful tax practices (BEPS Action 5), treaty abuse (BEPS Action 6), and treaty dispute resolution mechanisms (BEPS Action 14). As a minimum standard, all OECD and G20 member countries have committed to implementing CbCR into their domestic legislation.
In general, CbCR is required in the country where the ultimate parent company has its tax residence. If this jurisdiction has not implemented CbCR, MNEs may be required to file in the jurisdictions where they conduct business. Specifically, the BEPS Action 13 recommendations would require MNEs with global turnover of €750 million or more in the preceding fiscal year to submit a CbC report each year in every jurisdiction in which they conduct business. Reporting would apply for accounting periods beginning on or after Jan. 1, 2016, and the reports would contain financial information with regard to each country where the group operates, including types of activities conducted, local turnover, taxes paid, assets and number of employees.
The primary goal of the OECD BEPS Action 13 recommendations is to align profits with value creation and substance. Several countries have already implemented CbCR, or indicated their intent to implement it. Because countries may deviate from the Action 13 recommendations when implementing CbCR (e.g., filing threshold, effective date, or both), there most likely will be an increase in cross-border tax disputes between tax authorities and taxpayers.
MNEs should gauge their readiness to collect and aggregate the data required under CbCR and will need to determine the technology used to compile this data. On March 22, 2016, the OECD released a CbC XML Schema and User Guide, detailing the information that should be included for each CbC data element.
European Commission anti-tax avoidance package
MNEs should be cognizant of the amended EU Directive on Mandatory Automatic Exchange of Tax Information (2016/881/EU) released on June 3, 2016, which expedites CbCR implementation across the 28 EU member states. The CbC Directive was issued as part of the EC Anti Tax Avoidance Package to prevent aggressive tax planning, increase tax transparency and create a level playing field for businesses in the EU.
Under the Directive, EU MNEs will not be obligated to submit the information to each EU member state where they operate, but only to the tax authorities of their country of residence. The Directive requires EU member states, on receipt of the report, to share the information with other member states where companies are either resident for tax purposes or are subject to tax, with respect to the business carried out through a Permanent Establishment (PE). The Directive provides for the automatic exchange of information to build on the existing rules in EU Council Directive 2011/16/EU, including the use of standard forms.
On April 12, 2016, the EC issued its proposal to amend the Accounting Directive (Directive 2013/34/EU) that would require MNEs with consolidated annual revenues of €750 million or more to publish CbC information on their websites for MNE operations in EU member states and identified tax havens. CbCR information for other jurisdictions would be aggregated as one jurisdiction. Several members of the European Parliament have begun to put pressure on the EC to lower the CbCR threshold from €750 million to €40 million.
During a Feb. 12, 2016 meeting to discuss the EC Anti Tax Avoidance Package, several EU finance ministers said that the EC proposals should not go beyond the OECD BEPS project recommendations. However, lawmakers and activists have criticized the EC proposals for not being ambitious enough. The British Finance Minister called for increased disclosure of MNEs’ tax and financial data, so that not only administrations, but also the general public, could access this information: “I think we should be moving to more public country-by-country reporting. This is something which the UK will seek to promote internationally.”
OECD CbC Reporting Multilateral Competent Authority Agreement
As part of continuing efforts to boost transparency by MNEs, 44 countries signed the OECD Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbC reports, as of June 30, 2016. The US was not among the signatories. Instead, a senior US Treasury official said that the US plans to implement CbCR through bilateral agreements rather than the OECD MCAA, to ensure that countries have appropriate safeguards and infrastructure in place.
Under the MCAA, signatories may exchange reports with other signatories if they have CbC Reporting requirements in place and are a party to the OECD Convention on Mutual Administrative Assistance in Tax Matters.
US CbC reporting developments
On June 29, 2016, the US Internal Revenue Service (IRS) and Treasury issued final country-by-country (CbC) regulations (T.D. 9773, Reg. 1.6038-4) that will apply to US persons that are the ultimate parent entities of a multinational enterprise (MNE) group that has annual revenue for the preceding annual accounting period of $850,000,000 or more. The regulations apply to reporting periods that begin on or after the first day of a taxable year that begins on or after June 30, 2016.
The regulations are effective as of June 30, 2016, the date they were published in the Federal Register. US MNE groups whose ultimate parent entity’s taxable year begins before this date will not have a CbC filing requirement for their tax year beginning in 2016. Taxpayers will include CbC reporting information in a new form, Form 8975, Country-by-Country Report, to be filed with their income tax return for the taxable year on or before the due date (including extensions) for filing the return.
Form 8975, Country-by-Country Report
Par. 2. Section 1.6038-4 is added to read as follows:
“§ 1.6038-4 Information returns required of certain United States persons with respect to such person’s US multinational enterprise group.”
This new section provides the information requirements that ultimate parent entities of US MNEs must include annually on Form 8975. Form 8975 must contain the following information with respect to each constituent entity of the US MNE group:
- The complete legal name of the constituent entity.
- The tax jurisdiction, if any, in which the constituent entity is resident for tax purposes.
- The tax jurisdiction in which the constituent entity is organized or incorporated (if different from the tax jurisdiction of residence).
- The tax identification number, if any, used for the constituent entity by the tax administration of the constituent entity’s tax jurisdiction of residence.
- The main business activity or activities of the constituent entity.
Form 8975 must include the following information, in aggregate, with respect to each tax jurisdiction in which one or more constituent entities of a US MNE group is resident.
- Revenues generated from transactions with other constituent entities.
- Revenues not generated from transactions with other constituent entities.
- Profit or loss before income tax.
- Total income tax paid on a cash basis to all tax jurisdictions, and any taxes withheld on payments received by the constituent entities.
- Total accrued tax expense recorded on taxable profits or losses, reﬂecting only operations in the relevant annual period and excluding deferred taxes or provisions for uncertain tax liabilities.
- Stated capital, except that the stated capital of a permanent establishment (PE) must be reported in the tax jurisdiction of residence of the legal entity, unless there is a defined capital requirement in the PE tax jurisdiction for regulatory purposes.
- Total accumulated earnings, except that accumulated earnings of a PE must be reported by the legal entity.
- Total number of employees on a full-time equivalent basis.
- Net book value of tangible assets, which does not include cash or cash equivalents, intangibles, or financial assets.
All amounts on Form 8975 must be in US dollars. All amounts should be based on applicable financial statements, books and records maintained with respect to the constituent entity, regulatory financial statements, or records used for tax reporting or internal management control purposes for an annual period of each constituent entity ending with or within the reporting period.
Ultimate parent entity of a US MNE group
An ultimate parent entity of a US MNE group is a US business entity that satisfies each of the following:
- Owns directly or indirectly a sufficient interest in one or more other business entities, at least one of which is organized or tax resident in a tax jurisdiction other than the US, and the US business entity is required to consolidate the accounts of the other business entities with its own accounts under US generally accepted accounting principles, or would be so required if equity interests in the US business entity were publicly traded on a US securities exchange.
- Is not owned directly or indirectly by another business entity that consolidates the accounts of such US business entity with its own accounts under generally accepted accounting principles in the other business entity’s tax jurisdiction of residence, or would be so required if equity interests in the other business entity were traded on a public securities exchange in its tax jurisdiction of residence.
US territories and possessions
A tax jurisdiction is a country or a jurisdiction that is not a country but that has fiscal autonomy. The final regulations say that a US territory or possession is considered to have fiscal autonomy, and includes American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the US Virgin Islands.
A US territory ultimate parent entity is a business entity organized in a US territory or possession that controls a US business entity and that is not owned directly or indirectly by another business entity that consolidates the accounts of the US territory ultimate parent entity with its accounts under generally accepted accounting principles in the other business entity’s tax jurisdiction of residence, or would be so required if equity interests in the other business entity were traded on a public securities exchange in its tax jurisdiction of residence. A US territory ultimate parent entity may designate a US business entity that it controls to file Form 8975 on the US territory ultimate parent entity’s behalf.
The reporting period covered by Form 8975 is the period of the ultimate parent entity’s applicable financial statement prepared for the 12-month period or a 52-53 week period that ends with or within the ultimate parent entity’s taxable year. If the ultimate parent entity does not prepare an annual applicable financial statement, then the reporting period covered by Form 8975 is the 12-month period or a 52-53 week period described that ends on the last day of the ultimate parent entity’s taxable year. (An applicable financial statement is a certified audited financial statement that is accompanied by a report of an independent certified public accountant or similarly qualified independent professional that is used for purposes of reporting to shareholders, partners, or similar persons; for purposes of reporting to creditors in connection with securing or maintaining financing; or for any other substantial non-tax purpose.)
The US person filing Form 8975 is not required to create and maintain records that reconcile the amounts provided on the form with the tax returns of any tax jurisdiction or applicable financial statements. The final regulations do not provide a specific waiver of penalties for US MNE groups whose ultimate parent entity’s taxable year begins on or after the applicability date. The penalty rules under section 6038 generally apply, including reasonable cause relief for failure to file.
The Treasury Department and the IRS have determined that the information provided on the CbC report is return information subject to the confidentiality protections of section 6103. The Treasury Department and the IRS are collecting the information in the report under the authority of sections 6001, 6011, 6012, 6031, and 6038 to assist in the better enforcement of income tax laws.
The US intends to enter into competent authority arrangements for the automatic exchange of CbC reports with jurisdictions with which it has an income tax treaty or tax information exchange agreement.
CbCR filing thresholds
The OECD BEPS Action 13 recommendations exempt MNEs from CbCR requirements unless they have annual group consolidated revenue of €750 million or more in the preceding fiscal year. While EU member states that have adopted (or proposed to adopt) CbCR have set the filing threshold at the OECD-recommended €750 million amount, some jurisdictions in other regions have set the threshold at other amounts, in local currency.
EU member states that have adopted or proposed CbCR include: Denmark, Finland, France, Ireland, Italy, the Netherlands, Poland, Spain, Sweden and the U.K. The proposed U.K. CbCR regulations issued on Oct. 5, 2015 had set the threshold at £586 million or more, but the final regulations issued on Feb. 26, 2016, implemented a €750 million-or-more CbCR threshold.
The CbCR thresholds in the chart below differ – if only slightly in certain instances – from the OECD recommended €750 million or more amount.
United States: US$ 850 million or more
(approximately €779 million)
Australia: Over AU$ 1 billion
(approximately €669 million)
China: Over RMB 5 billion
(approximately €706 million)
India: INR 52.79 billion or more
(approximately €750 million, based on Feb. 2015 exchange rate)*
Japan: Over JPY 100 billion
(approximately €762 million)
Mexico: Over MXN 12 billion
(approximately €634 million)
Norway: At least NOK 6.5 billion
(approximately €676 million)
Russia: At least RUB 50 billion
(approximately €625 million)
South Africa: At least ZAR 10 billion
(approximately €590 million)**
Unless otherwise noted, currency exchange rates are based on those set on January 1, 2016, when the OECD recommended that CbCR should enter into force where jurisdictions were implementing these recommendations into their domestic legislation.
*While India’s Budget Bill 2016 proposals do not provide a CbCR threshold, on December 7, 2015, a senior official from the Indian Ministry of Finance said that the threshold would be €750 million or more, as converted into Indian rupees using a conversion rate from February 2015 (about INR 52.79 billion).
**However, MNEs doing business in South Africa whose “ultimate parent entity” is not located in South Africa would be subject to the OECD- recommended €750 million or more CbC consolidated group revenue.
CbCR reporting template
Annex III of the final OECD BEPS Action 13 report contains the CbCR template that requires MNEs to annually report the amount of revenue (from related and unrelated parties), profits, income tax paid and taxes accrued, number of employees, stated capital and retained earnings, and tangible assets for each tax jurisdiction where they conduct business. The template also requires MNEs to disclose each entity within the group that conducts business in each tax jurisdiction, along with basic information about the type of business activities each entity conducts.
As stated above, all OECD and G20 member countries have agreed to implement CbCR as one of the four minimum standards of the OECD BEPS project. In addition, the following countries have enacted CbCR, requiring additional disclosures not included in Annex III of the final BEPS Action 13 report:
- Denmark: “Revenue” includes interest, dividends and royalties.
- Mexico: Royalties paid and received, interest paid and received, and management fees paid and received.
The Preamble to the US CbC Proposed Regulations says that Treasury and IRS “have sought to minimize deviations from the model template that was developed by G20 and OECD member countries based on extensive consultations with stakeholders,” but understand that some areas may warrant further clarification or refinement to “collect relevant information for high-level risk assessment while minimizing the burdens imposed.” Meanwhile, China, France and India have not yet announced the format of their CbCR template.
OECD CbC reporting penalties
One area where the final OECD BEPS Action 13 recommendations provide ﬂexibility for implementing CbCR is penalties for noncompliance by taxpayers. The penalties vary in the jurisdictions that have implemented CbCR, or issued proposed rules, but are generally civil, except for the Dutch CbCR rules, which allow the tax authorities to issue criminal penalties.
The UK tax authorities can issue fixed penalties (£300) if the ultimate parent fails to file the CbC report (or if the reporting entity fails to provide timely information), and if the failure continues after fixed penalties are assessed, daily penalties not exceeding £60 a day will accrue automatically. In contrast, the French tax authorities can issue penalties of up to €100,000, and the Mexican tax authorities can disqualify Mexican taxpayers from entering into contracts with the Mexican government (in addition to civil penalties). Spain currently does not have any penalties for failure to comply with CbCR.
The OECD BEPS project has put transfer pricing in the spotlight, with active involvement by governments, tax authorities and businesses around the globe. More and more governments are implementing some form of the BEPS Action 13 recommendations into their domestic legislation. Going forward, jurisdictions will need to continue to balance the need for transparency against compliance burdens and confidentiality concerns for businesses. There will likely be an increase in cross- border disputes, which will require timely and efficient dispute resolution. MNEs should begin collecting and compiling data to populate CbC reports to ensure that they meet individual country deadlines.
MNEs risk reputational damage and tax adjustments that can affect their future earnings if they do not begin to prepare the information required under the CbCR rules in the relevant jurisdiction. Accordingly, companies should actively consider tax risk when navigating through this evolving tax landscape.