Executive summary

On February 6, 2015, the Organization for Economic Co-operation and Development (OECD) released a trio of papers that address three of the focus areas in its Action Plan on Base Erosion and Profit Shifting (BEPS). The OECD will present these developments during the G20 Finance Ministers' meeting on February 9-10, 2015.

One of the documents, Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting (the Guidance), provides much-anticipated guidance on implementation of the country-by-country report (CbC Report) that is part of the three-tier transfer pricing documentation approach developed under BEPS Action 13. The Guidance provides for the first CbC Reports to be filed covering 2016 fiscal years. The Guidance further provides for CbC Reports generally to be filed in the home country of a multinational corporation (MNC) group's parent company and shared with other relevant countries under government information exchange mechanisms. The Guidance also addresses other implementation matters related to the CbC Report. In addition, the Guidance includes some high-level information regarding implementation of the master file and local file elements of the transfer-pricing documentation.

Detailed discussion

Background

The OECD report on Action 13, dated 16 September 2014 (the Action 13 Report), is in the form of a revised chapter of the OECD Transfer Pricing Guidelines, which sets forth a three-tier approach for transfer-pricing documentation that includes a framework for the master file and local file and a template for CbC Report. (See Tax Alert 2014-1685.) The Action 13 Report also indicated that the OECD would undertake additional work on implementation and the approach for filing of the CbC Report and the master file.

Overview

The Guidance focuses primarily on implementation issue related to the CbC Report. It addresses the following matters: (i) the timing of preparation and filing of CbC Reports, (ii) the MNC groups required to file CbC Reports, (iii) the conditions for obtaining and use of the CbC Reports by jurisdictions, and (iv) the framework for government-to-government mechanism to exchange the CbC Reports.

While the Guidance relates primarily to the CbC Report, it includes the recommendation to implement the master file and local file requirements through local country legislation or administrative procedures and for MNC groups to file the master file and local file directly with the tax administration in each relevant jurisdiction under the requirements of those administrations. The Guidance further states that countries participating in the BEPS project agree that both confidentiality and consistent use of the framework for the content to be included in the master file and local file, as specified in the Action 13 Report, should be taken into account when incorporating these requirements under local law and procedures.

The OECD specifically acknowledges that the need for more effective dispute resolution may increase following adoption and implementation of the CbC reporting requirement and states that the work under Action 14 on improving dispute resolution should take that into account.

Timing of preparation and filing of the CbC Report

The Guidance recommends requiring the first CbC Report to be filed for, and contain information on, a MNC group's first fiscal year beginning on or after January 1, 2016. For MNC groups with fiscal years ending on December 31, the first CbC Report would be required to be filed by December 31, 2017. For MNC groups with other fiscal years, the first CbC Report would be required to be filed in 2018, 12 months after the close of the first fiscal year beginning after January 1, 2016. The Guidance provides that the term "fiscal year" refers to the consolidated reporting period for financial statement purposes (and not to tax years or to the financial reporting periods of subsidiaries).

The Guidance indicates that countries participating in the OECD BEPS project agree that they will not require filing of CbC Reports based on the new template for fiscal years beginning before January 1, 2016.

The Guidance acknowledges that some jurisdictions may need time for domestic legislative changes and indicates that, to assist in the legislative process, the OECD will develop language for key elements of statutory provisions that require ultimate parents of MNC groups to file the CbC Report in their jurisdiction of residence.

MNC groups required to file the CbC Report

The Guidance recommends requiring all MNC groups to file the CbC Report each year, subject to one exemption. The exemption from the CbC Report filing requirement would apply to MNC groups with annual consolidated group revenue in the immediately preceding fiscal year of less than €750 million (or a near equivalent amount in domestic currency). The Guidance states that the OECD believes this exemption will exclude approximately 85-90% of MNC groups from the CbC reporting requirement, but will require CbC Reports from MNC groups controlling approximately 90% of corporate revenues.

The Guidance indicates that it is the intention of the countries participating in the BEPS project to reconsider the appropriateness of this revenue threshold in connection with the planned 2020 review of implementation of the CbC reporting standard, which review also will include whether additional or different data should be required to be reported.

The Guidance indicates that it is considered that no other exemption from filing the CbC Report should be adopted. The Guidance states that, in particular, there should be no special industry exemptions, no general exemption for investment funds, and no exemption for non-corporate entities or non-public corporate entities.

The Guidance notes that the countries participating in the BEPS project agree that MNC groups with income derived from international transportation or transportation in inland waterways that is covered by treaty provisions that are specific to such income and under which taxing rights on such income are allocated exclusively to one jurisdiction should include the information required by the CbC template with respect to such income only with respect to the jurisdiction to which such taxing rights are allocated.

Necessary conditions for obtaining and use of the CbC Report

The Guidance states that countries participating in the BEPS project agree to the following conditions related to confidentiality, consistency and appropriate use.

With respect to confidentiality, jurisdictions should provide and enforce legal protections of the confidentiality of the reported information. Such protection would preserve confidentiality to an extent at least equivalent to the protections that would apply if such information were delivered to the jurisdiction under the provisions of the OECD multilateral convention on mutual administrative assistance in tax matters, a tax information exchange agreement, or a tax treaty that meets the internationally agreed standard of information upon request. These protections include limitation on the use of information and rules on persons to whom the information may be disclosed.

With respect to consistency, jurisdictions should use their "best efforts" to adopt a legal requirement that the ultimate parent entities of MNC groups that are resident there prepare and file the CbC Report (unless exempted under the revenue threshold). In addition, jurisdictions should use the standard template as set forth in the OECD Transfer Pricing Guidelines (and included in the Action 13 Report).

With respect to appropriate use, jurisdictions should use the information in the CbC Report only as specified in the Action 13 Report. In particular, jurisdictions will commit to use the CbC Report for assessing high-level transfer pricing risk and may also use it for assessing other BEPS related risks. Jurisdictions should not propose adjustments on the basis of an income allocation formula using data in the CbC Report. Jurisdictions further commit that, if such adjustments are made by the local tax administration, the jurisdiction's competent authority will be required to promptly concede the adjustment in any relevant competent authority proceeding. Jurisdictions would not, however, be prevented from using the CbC Report data as a basis for making further inquiries into the MNC's transfer pricing arrangements and other tax matters during a tax audit.

In this regard, the Guidance notes that the mutual agreement procedure (MAP) will be available when government exchange of the CbC Reports is based on tax treaties. When the government exchange is under an agreement that does not contain MAP provisions, countries commit to developing a mechanism for competent authority procedures for discussions aimed at resolving cases of "undesirable economic outcomes."

Framework for government- to-government mechanisms to exchange CbC Reports

The Guidance describes a framework under which jurisdictions should require, in a timely manner, the filing of CbC Reports by the ultimate parent entities of MNC groups resident there and exchange this information on an automatic basis with the jurisdictions in which the MNC groups operate and which fulfill the conditions discussed above. The Guidance 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 Guidance further indicates that countries participating in the BEPS project have agreed to develop an implementation package for the government-to-government exchange of CbC Reports. This will involve the development of the key elements of domestic legislation requiring the ultimate parent entity of an MNC group to file the CbC Report in its jurisdiction of residence. Key elements of the secondary mechanisms noted above also will be developed. Jurisdictions then will adapt this language to their own legal systems where necessary.

In addition, implementing arrangements for automatic exchange of CbC Reports under international agreements will be developed. This will include developing competent authority agreements based on existing international agreements, with both bilateral and multilateral approaches explored and using the model of the OECD standard for automatic exchange of financial account information.

The Guidance states that this implementation package will be available by April 2015.

The Guidance indicates that participating countries will endeavor to introduce any necessary legislation in a timely manner and are encouraged to expand the coverage of their information exchange agreements. The implementation of the package will be monitored and taken into consideration in the 2020 review.

Implications

The agreement on these implementation matters with respect to the CbC Report is an important development. It reaffirms the expectation that many countries will move forward with such requirements consistent with the OECD recommendations. MNC groups should closely monitor developments with respect to the CbC Report, and transfer pricing documentation requirements more generally, in their parent company's home jurisdiction and also in the home jurisdictions of other group members.

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 and responsibilities with regard to the new reporting. With this new Guidance indicating that the first required CbC Report is to cover the 2016 fiscal year, it is important that companies begin to prepare.

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