OECD releases model documents for implementing country-by-country reporting

Tax Policy Bulletin
OECD releases model documents for
implementing country-by-country
reporting
12 June 2015
In brief
On 8 June 2015, the OECD released a “Country-by-Country Reporting Implementation Package.” The
package includes model legislation the OECD suggests could be used by countries to mandate filing of
country-by-country reports (CbCRs). The model legislation does not attempt to address the filing of the
so-called master file or local file reports. The implementation package also includes three model
competent authority agreements that could be used by each country, depending on whether it intends to
effect exchange of CbCRs through the “Multilateral Convention on Mutual Administrative Assistance in
Tax Matters,” the exchange of information article of a bilateral tax convention, or a bilateral tax
information exchange agreement.
Neither the model legislation nor any of the model competent authority agreements contains additional
guidance regarding the particular data that multinational enterprises (MNEs) need to provide in the
CbCRs. Rather, the model legislation merely sets forth a general description of that data and provides
that it should be provided in a form identical to, and applying the definitions and instructions contained
in, the “standard template” set out either in the OECD Transfer Pricing Guidelines, the final report on
BEPS Action 13, or an appendix to the legislation, once adopted. Presumably, the “standard template”
referred to can be expected to look like the CbCR template set forth in the OECD’s first report on Action
13 released on 16 September 2014. In this regard, however, the introduction to the implementation
package indicates that, as a next step, an “XML Schema” and “related User Guide” will be developed with
a view to accommodating the electronic exchange of the CbCRs. Additional guidance on the CbCR data
requirements may emerge once this schema and user guide are issued.
Helpfully, the model legislation and model competent authority agreements also reveal the OECD
members’ current thinking on, among other things, (1) how a MNE group is to be comprised for purposes
of the filing requirements, (2) which small MNE groups would be excluded from the requirements, (3)
which entity in the MNE group would be expected to file the CbCR, and (4) the intended government use
and confidentiality of the CbCR information.
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In detail
Exclusion of small MNE groups
Background
The model legislation also clarifies
that small MNE groups should be
exempt from CbCR requirements if
the group has less than 750 million
Euro (or the equivalent of 750 million
Euro in another currency) in
consolidated revenue during the fiscal
year immediately preceding the fiscal
year for which reporting would be
required. The exchange rate to be
applied in determining whether the
threshold is met in a currency other
than the Euro is the applicable
exchange rate as of 1 January 2015, so
the relevant exchange rate does not
float over time.
On 16 September 2014, the OECD
released its first report on Action 13,
proposing two new transfer pricing
reporting requirements for MNEs –
the new CbCR and master file report –
and proposing various changes to the
so-called local file reporting
requirements. On 6 February 2015,
the OECD supplemented the first
report with additional proposals
which, among other things, would (1)
require master file reports to be filed
directly with each jurisdiction in
which the MNE group conducts
business, (2) require CbCRs to be filed
with the jurisdiction in which the
ultimate parent entity in the MNE
group is tax resident and then be
automatically transmitted by that
jurisdiction to each jurisdiction in
which the MNE group conducts
business through applicable exchange
of information provisions, (3) subject
MNE groups to CbCR requirements
regardless of legal structure or form of
doing business, and (4) exempt from
CbCR filing requirements MNE
groups with less than 750 million
Euros in group revenue.
The model legislation
Composition of the MNE Group
The model legislation in the new
implementation package provides that
the MNE group from which the CbCR
would be required is “a collection of
enterprises related through ownership
or control such that it 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.” Thus, the
model legislation makes clear that
purely private MNEs would be
required to file a CbCR.
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Which entity would have to file?
Under the model legislation each
jurisdiction would require a CbCR
from the “Ultimate Parent” of an MNE
group if that ultimate parent is tax
resident in that jurisdiction. In
addition, each jurisdiction would
require a CbCR from any “Constituent
Entity” of a MNE group that is tax
resident in that jurisdiction if (1) the
ultimate parent of the group is not
obligated to file a CbCR in its
jurisdiction of tax residence, (2) the
ultimate parent’s jurisdiction of tax
residence has an exchange of
information relationship (through
treaty, tax information exchange
agreement, or the Multilateral
Convention on Administrative
Assistance in Tax Matters) with the
constituent entity’s jurisdiction of tax
residence but does not have a
competent authority agreement in
place to effect CbCR exchange with
that jurisdiction, or (3) there has been
a “systemic failure” by the ultimate
parent’s jurisdiction to carry out CbCR
exchange. In these circumstances the
model legislation also provides that, if
there is more than one constituent
entity that is tax resident in a
particular jurisdiction, the MNE
group can designate one of those
entities to file the CbCR with that
jurisdiction.
Thus, the model legislation makes
clear that the OECD members believe
that the CbCR can be collected
“locally” if the jurisdiction in which
the ultimate parent is headquartered
is not engaged in collecting and
exchanging the reports. Interestingly
in this regard, the introduction to the
implementation package states that
the model legislation “takes into
account neither the constitutional law
and legal system, nor the structure
and wording of the tax legislation of
any particular jurisdiction” and that
“[j]urisdictions will be able to adapt
this model legislation to their own
legal systems, where changes to
current legislation are required.” It
will be interesting to see if
jurisdictions in which constituent
entities are tax resident will find the
collection of global information of the
entire MNE to be within their
constitutional and legal framework.
The model legislation also contains a
provision that would allow MNEs to
avoid the filing of CbCRs locally in
situations in which reporting and
exchange is not carried out in the
ultimate parent’s jurisdiction and
instead to satisfy the CbCR
requirements by designating a
“Surrogate Parent Entity” that is tax
resident in a jurisdiction that does so
collect and exchange CbCRs.
Interestingly, the model legislation
provides for an apparently
burdensome system of “notifications”
under which each constituent entity of
the MNE is to notify its jurisdiction of
tax residence whether it will act as the
ultimate parent entity or surrogate
parent entity and, if not, which entity
in the group will act as the ultimate
parent of surrogate parent or, where
the CbCR will be filed locally and
there is more than one constituent
entity in the local jurisdiction, which
entity will be designated as the filing
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Tax Policy Bulletin
entity. These notices are to be
delivered to the tax administrations in
each jurisdiction in which the MNE
has constituent entities by the end of
the fiscal year for which the CbCR
would be made. Receiving and
processing these notices will also
place a further difficult administrative
burden on the tax administrations,
but presumably they are considered
necessary for the tax administrations
to know where the CbCR for each
MNE group will be filed each year and
from which country they will be
exchanged.
Intended use and confidentiality
The introduction to the
implementation package, the model
legislation, and the model competent
authority agreements all make clear
that the OECD members have reached
at least initial consensus on the use
and confidentiality of the CbCRs.
The model legislation provides that
the tax administration collecting the
CbCR “shall use the country-bycountry report for purposes of
assessing high-level transfer pricing
risks and other base erosion and profit
shifting related risks in [Country],
including assessing risk of noncompliance by members of the MNE
Group with applicable transfer pricing
rules, and where appropriate for
economic and statistical analysis.”
The legislation further provides that
“[t]ransfer pricing adjustments by the
[Country Tax Administration] will not
be based on the CbC Report.”
The model legislation also provides
that “[t]he [Country Tax
Administration] shall preserve the
confidentiality of the information
contained in the country-by-country
report at least to the same extent that
would apply if such information were
provided to it under the provisions of
the Multilateral Convention on
Mutual Administrative Assistance in
Tax Matters.” Whether and how
countries can actually implement and
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police these use and confidentiality
restrictions, of course, necessarily
remains to be seen.
Importantly, the model competent
authority agreements reflect these
same restrictions on use and
confidentiality, as the special riskassessment-only use restriction in the
model legislation would not otherwise
apply to a jurisdiction receiving a
CbCR through a treaty-based
exchange. The competent authority
agreements, however, further provide
that “Jurisdictions are not prevented
from using the CbC Report data as a
basis for making further enquiries into
the MNE Group’s transfer pricing
arrangements or into other tax
matters in the course of a tax audit
and, as a result, may make
appropriate adjustments to the
taxable income of a Constituent
Entity.” Presumably, this caveat was
not considered necessary in the model
legislation because it can be assumed
that a jurisdiction actually collecting
the CbCRs directly will consider itself
free to use the information in this way.
Of course, this caveat reflecting the
intended use of the CbCRs to make
“further enquiries into the MNE
Group’s transfer pricing arrangements
or into other tax matters in the course
of a tax audit” presents one of the
main concerns that MNE groups will
have once the CbCRs are filed and
exchanged.
Annexed to the model competent
authority agreements is a
“Confidentiality and Data Safeguards
Questionnaire” which presents a
series of questions to be answered by
tax administrations in working out
competent authority agreements to
automatically exchange information
electronically. This type of
questionnaire was initially developed
in connection with efforts to
implement US FATCA requirements
and the so-called Common Reporting
Standard. Presumably, the
questionnaire was included in the
CbCR implementation package to
convey to both governments and
private sector stakeholders that
governments seeking to participate in
CbCR exchange intend to take
seriously their obligations to keep the
reports confidential.
Penalties
The model legislation contains a note
that the legislation “does not include
provisions regarding penalties to be
imposed in the event a Reporting
Entity fails to comply with the
reporting requirements for the
country-by-country report.” The note
further states that “[i]t is assumed
that jurisdictions would wish to
extend their existing transfer pricing
documentation penalty regime to the
requirements to file the country-bycountry report.” Thus, it is
contemplated that application of
penalties for failure to file CbCRs will
be left to legislative and regulatory
changes in each jurisdiction seeking to
receive these reports and
consequently penalties for failure to
report will vary widely.
Time for filing and effective date
Consistent with the OECD guidance
issued on 6 February 2015, the model
legislation provides that the CbCR
should be filed “no later than 12
months after the last day of the
Reporting Fiscal Year of the MNE
Group”. Also consistent with that
earlier guidance, the model legislation
provides that the effective date of
legislation would be for reporting
fiscal years of MNE groups beginning
on or after 1 January 2016. The 1
January 2016 effective date, however,
is presented in brackets, presumably
to acknowledge that some countries
will deviate from that date.
The takeaway
Key takeaways are that the CbC
reporting obligation will fall on the
ultimate parent entity. If, however,
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the ultimate parent is not obligated to
file, or the jurisdiction of the ultimate
parent does not have an exchange of
information agreement in place, or
there has been a systematic failure
under that agreement, then the MNE
group may appoint a Surrogate Parent
Entity to do the filing in its country of
tax residence. Furthermore, if in the
above scenarios the MNE group does
not appoint a surrogate, then each
Constituent Entity will have to file the
CbCR locally.
The Implementation package contains
measures meant to address concerns
of MNE groups regarding the lack of
rigorous safeguards for the
commercially sensitive information to
be shared among tax authorities
under the proposed CbC reporting
requirements. Specifically, a Country
Tax Administration shall preserve the
confidentiality of the information
contained in the country-by-country
report at least to the same extent that
would apply if such information were
provided to it under the provisions of
the Multilateral Convention on
Mutual Administrative Assistance in
Tax Matters. Whether and how
countries can actually implement and
police these use and confidentiality
restrictions, of course, necessarily
remains to be seen.
legislation and the next step is now at
the local country level, MNEs should
evaluate, if they have not done so
already, whether they can timely
comply with the CbC reporting
proposal. Issues to consider include:
1) determining whether MNEs can
gather the data (noting that the data
points required require significant
modification from ledger entries); 2)
performing various analytics on the
CbC data to assess risks; and 3)
evaluating what, if any, issues must be
addressed (including quality of data
concerns and process and control
issues).
As the OECD has now finalized
implementation through the model
Let’s talk
For a deeper discussion, please call your local contact. If you don’t have one or are not sure who to speak to on a global level,
the people below listed by BEPS Action Plan area will be pleased to help you:
Country-by-Country Reporting
Isabel Verlinden, Brussels
+32 2 7104422
[email protected]
Adam Katz, New York
+1 646 471 3215
[email protected]
Kathryn Horton-O’Brien, Washington
(202) 414-4402
[email protected]
Richard Collier, London
+44 (0) 20 7212 3395
[email protected]
Stef van Weeghel, Amsterdam
+31 (0) 88 7926 763
[email protected]
Phil Greenfield, London
+44 (0) 20 7212 6047
[email protected]
Pam Olson, Washington
+1 (202) 414 1401
[email protected]
David Ernick, Washington
+1 202.414.1491
[email protected]
Tax Policy
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