Introduction

On 3 October 2013, the Organisation for Economic Cooperation and Development (OECD) published a memorandum seeking input on the development of an approach for country-by-country reporting of income, taxes paid, and economic activity (the memorandum). Action 13 of the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS)¹, issued on 19 July 2013, sets forth plans to develop rules regarding transfer pricing documentation to enhance transparency for tax authorities. Action 13 further indicates that the rules to be developed "will include a requirement that MNEs (multinational enterprises) provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template."

Related to Action 13, the OECD on 30 July 2013 issued a White Paper on Transfer Pricing Documentation² providing a review of current transfer pricing documentation practices and setting forth a proposed two-tier approach for reporting both global and local information. The White Paper includes a discussion of the development of a country-by-country reporting approach to be used for risk assessment purposes.

Detailed discussion

The memorandum issued by the OECD on 3 October focuses on country-by-country reporting, which it indicates "will be an essential element" of the transfer pricing documentation proposals that are under development, and identifies various implementation issues that will need to be addressed. The main purpose of the memorandum is to facilitate the public consultation the OECD will hold on 12 and 13 November 2013 in Paris relating to transfer pricing issues. The OECD requests that representatives of the business community be prepared to provide input on the implementation issues set forth in the memorandum during the consultation. In addition to country-by-country reporting and the White Paper's broader transfer pricing documentation proposal, the November consultation also will address the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles.³

The OECD acknowledges in the memorandum that a balance needs to be sought between the need of tax administrations for useful data for risk assessment and other purposes on the one hand, and the compliance burden placed on taxpayers on the other hand. In this regard, the memorandum notes that the burden would be mitigated if the required information were limited to data that is readily available to companies.

The two main questions raised in the memorandum are what information should be required from taxpayers in the country-by-country reporting and what mechanisms should be developed to make this information available to tax authorities in relevant countries.

Information to be required from taxpayers

The first set of questions raised is what information should be required in the country-by-country reporting template (template).

This section addresses three categories of data that may be required to be reported in the template: income earned in a country, taxes paid in a country, and various other data on measures of economic activity in a country other than income and taxes. The memorandum poses questions and identifies considerations with respect to each of these categories and requests further input from the business community. These questions and considerations are noted briefly below.

Income earned in a country

The memorandum identifies several different approaches to reporting data on income earned in a country and notes some pros and cons with respect to each:

• Reporting of net income before tax for each legal entity, to be derived from individual entity statutory financial statements.
• Reporting of taxable income as reflected on tax returns filed in a jurisdiction.
• Reporting of consolidated group income as segregated among countries by reference to accounting segment reporting rules.
• Reporting of data from the company's internal consolidating income statements relating to each entity's contribution.

Taxes paid in a country

The memorandum also identifies various questions with regard to the reporting of taxes paid:

• Should taxes be reported on a cash or accrual basis?
• Should only national level income taxes be required to be reported or should reporting of income taxes levied by other levels of government also be required?
• Is there any reason to require reporting of taxes other than income taxes, such as property taxes, employment taxes and VAT collections?

Various other data

The memorandum indicates that consideration will have to be given to whether other data on measures of economic activity should be included in the reporting template. Examples given in the memorandum include

• Revenues by location of customers,
• Tangible assets by location,
• Employment in each country,
• Research and marketing expenditures,
• Location of intangible assets, and
• Location of senior management.

Mechanisms to report and share information

The memorandum also raises questions relating to how the information reported in the country-by-country template should be made available to relevant countries:

• The template could be required to be completed in the home jurisdiction of the parent company, with such information subsequently shared with other countries under treaty exchange information mechanisms.
• Consideration should be given to how to protect the confidentiality of the information provided.
• Consideration should be given to the approach of making the country-by-country template a part of the transfer pricing documentation global file to be provided to any country in which the MNE has an affiliate subject to tax.

Implications

While the precise scope and format has not yet been determined, taxpayers need to expect that a country-by-country reporting of key financial metrics will be introduced and advocated by the OECD by the September 2014 due date set by the OECD with respect to Action 13. Moreover, the concept of high-level country-by-country reporting has been endorsed by the G8 and the G20 and therefore it is expected that many countries will act on the OECD recommendations in this area.

Companies should begin to consider how to prepare for this kind of reporting. Moreover, interested companies have an opportunity to engage with tax policy makers on the details of such a reporting requirement, including through participation in the OECD's business consultation on 12 and 13 November 2013. EY also is actively engaging with the OECD on these matters with a view toward the importance of achieving balance between the interests of tax administrations in obtaining adequate and focused information for risk assessment purposes and the interests of companies in preventing excessive additional administrative burdens.

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ENDNOTES

¹ See EY Global Tax Alert OECD issues Action Plan on Base Erosion and Profit Shifting (BEPS), dated 22 July 2013, and OECD releases report on base erosion and profit shifting, dated 15 February 2013.

² See EY Global Tax Alert OECD invites public comments on the White Paper on Transfer Pricing Documentation, dated 1 August 2013.

³ See EY Global Tax Alert OECD issues Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles, dated 31 August 2013.

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ATTACHMENT

Memorandum on Transfer Pricing Documentation and CbC Reporting

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