Our three-part blog series will offer insights on BEPS compliance and understanding where to start when it comes to country-by-country reporting.
For some time, the OECD’s Base Erosion and Profit Shifting (BEPS) guidelines have been a major topic of conversation for multinational enterprises (MNEs) and taxing authorities around the world. With numerous countries moving forward with BEPS related legislation—including the UK, Australia, Spain, Mexico and most recently, the Netherlands and China —BEPS is becoming less of a future happening and more of a here-and-now reality. For MNEs, this means understanding the more tangible aspects of BEPS and how to address them operationally, particularly when it comes to what sources of data should be used when providing information to taxing authorities and how data should be collected.
While it’s been well-covered that BEPS Action 13 is aimed at standardizing transfer pricing documentation through master file, local file, and country-by-country (CbC) reporting, many MNEs have lingering questions around what exactly the CbC report consists of and what sources of data should be used to complete it. After all, master and local file reporting have existed in many countries for some time, while CbC reporting is an entirely new concept.
As an overview, the CbC report is a series of three tables to be submitted to the tax administration in the jurisdiction of the reporting entity of the MNE listing, on a county-by-country basis, certain financial and operational data. It includes intercompany and third party revenues; profits; taxes paid and accrued; stated capital and retained earnings; headcounts; tangible assets for fiscal years beginning in 2016; functions performed by the entities in each jurisdiction; listings of constituent entities in each jurisdiction; and of course, relevant support information.
Given the amount of information required, where do MNEs begin when determining the source of this data? The starting point is defining the legal entities to be included in your MNE group and identifying the jurisdiction of the reporting entity. The logic below provided by the OECD is your first step in BEPS reporting readiness.
- Identify the entire Group
- Ascertain that Group is an MNE Group
- Ascertain that Group is not an Excluded MNE Group
- Determine the Reporting Entity which will have the ultimate Filing Obligation, and consider whether a Surrogate Parent Entity for CbC Reporting will be necessary
- Consider Notification Requirements if Surrogate Parent Entity is identified as the Reporting Entity
- List Constituent Entities which will be included in the CbC Report
When taking this first step, there are a variety of best practices that can help streamline the process. Make sure your legal entity organization charts are maintained in easy to update electronic formats and that they include specifics required for CbC reporting, as well as other key legal entity facts like registered legal address, registration numbers and tax ID numbers. It’s also important to group legal entities within the tax and transfer pricing structure by functional profile to ensure consistent treatment under the transfer pricing policy. In addition, make sure to engage in ongoing internal dialogue with your legal department to keep legal entity org charts updated as new entities are acquired or formed, older or dormant entities are dissolved, and entities change functional profiles.
Once you’ve defined legal entities, it’s time to turn your attention to determining the basis on which you will report your financial data. According to the newly revised OECD Guidelines, an MNE group may choose a particular basis for reporting the financial data in the CbC report, but that choice should be consistent among all the constituent entities of the MNE group. If a change is made in the source of data used from year to year, an explanation with the reasons for the change should be included within the template.
Don’t miss our next blog post in this BEPS Data blog series were we will compare and contrast the three primary sources of data for CbC reporting—GAAP records, statutory records and management accounts—to help you determine which source works best for your company. Stay tuned!