Tax & Accounting Blog

BEPS Blog Series Part 2: Determining the best data source for BEPS compliance

BEPS, Blog, Global Tax Compliance, ONESOURCE, Transfer Pricing October 29, 2015

Intelligence to help MNEs choose

Our three-part blog series will offer insights on BEPS compliance and country-by-country reporting for transfer pricing professionals. If you missed part 1, you can read it here.

When it comes to choosing a reporting basis for Country by Country (CbC) Reporting, the OECD has stated that multinational enterprises (MNEs) should use the same sources of data from year to year in completing the required templates and that the data source selected should be consistent from year to year among all the constituent entities of the MNE group.

MNEs must select a reporting basis for their CbC Reports, which inevitably leads to the question, which source of data is best? To address this, let’s compare and contrast the three primary sources of data that can be used for CbC reporting—GAAP records, statutory records and management accounts.

GAAP Records
GAAP records, or those records used typically for external financial reporting typically include the main general ledger and chart of accounts for capturing financial information for external reporting, such as in a public company’s SEC Form 10-K or 10Q, or its published annual and quarterly financial reports.

GAAP records are convenient to use for CbC reporting as it is easy to leverage existing internal processes for quarterly close and earnings releases. The entity level trial balances used in those workflows typically will contain all of the financial data needed to populate the CbC Reports — provided account balances prior to consolidation are used, otherwise, entity level intercompany transactions will most likely have been eliminated in the consolidation process.

Other benefits of for using GAAP data include its ready availability from the ERP system – there are likely well established processes for running trial balances and other reports, so little investment of time or resources is required for quick access to financial data for all entities within an MNE group at any point during the year. Additionally, there is comfort in relying on existing review processes, and knowing that the financial data in the GAAP general ledger accounts has been vetted, and is reliable and accurate. Also, entity level GAAP trial balances used for quarterly consolidation and external reporting may have already been converted into the functional currency of the parent entity, as required for external financial reporting. Plus, the numbers and general ledger chart of accounts may be somewhat consistent between entities, and will likely be familiar to the tax professional responsible for preparing the CbC Reports, so mapping general ledger accounts to the appropriate spot in the CbC Reports is less troublesome.

The downside to using GAAP records is that some differences may appear when attempting to reconcile the financial data in CbC Table 1 with the intercompany payment and receipts table that will now be a required element of most country’s local files. GAAP records are usually accrual based, while the intercompany payments and receipts tables may be cash basis – showing actual cash payments and receipts, and there may be other differences if local GAAP for an entity is used for the local file intercompany payments and receipts table, while US GAAP is used for the CbC Report, because the parent entity, the Reporting Entity for CbC purposes, is a US headquartered company.

Statutory Records
Because MNEs exist in many different tax jurisdictions, there will most likely be differences in local accounting practices and tax reporting requirements across different countries and regions. Statutory records typically include the general ledger accounts used by all entities within the MNE group, plus they may also include a separate set of general ledger accounts for local country controllers to book statutory adjustments or customize the way transactions are recorded on their statutory books to meet local financial reporting and tax reporting requirements.

Statutory accounts are typically used to support reporting for local tax returns, and they may provide better detail for CbC Table 1, and for the individual intercompany payment and receipt tables in the local files. And, from a CbC and local file reporting perspective, statutory records are probably the easiest to reconcile. However – consistency among entities may be an issue, since local statutory reporting standards will differ among entities. In addition, the timing of getting entity level statutory financial data may be problematic, if you want to be able to do advance runs of your CbC and local file reports. Many MNEs do not have a view into statutory trial balances until well after year end, when the tax returns are filed – which is typically well after GAAP financials have been produced, and may lag year end by three to nine months. For this reason, the ability to utilize software for advance scenario analytics probably isn’t possible. In fact, from a timing perspective, an MNE relying on statutory (tax) based financials may find that it is producing its CbC Reports, and local file intercompany payment and receipt tables, at the exact same time it is producing its annual tax return – leaving little, if any time, for adjustments or thoughtful analysis.

Management Accounts
MNEs manage their business by allocating revenues and expenses among internal organizations. This type of data falls under the management accounts category. This data is not GAAP compliant and is used specifically for internal management organizations to track and report on what is important to them.

Tax administrations typically have an interest in management reports, as profitability or efficiency of operations at various stages of the supply chain, can be important drivers of value creation. With the new focus on aligning global income allocation with value creation, transfer pricing examiners will likely take a view that management accounts will provide them with the insights they are looking for. However, that is not always the case. In most organizations, management groupings are frequently regional and cross country borders. As such, it is hard to break down management reporting data by country and therefore may not have much relevance for CbC reporting purposes. In addition, management accounts frequently cover only operational financial metrics, and may not include intercompany transactions, nor items that fall below the operating profit line – such as interest or taxes. Management accounts may or may not be on any recognized accounting basis, and quite frequently are set up to gather metrics that have relevance only within the organization, and not externally.

Intelligence to help MNEs choose
When it comes to determining the best source of data for CbC reporting, MNEs that utilize comprehensive transfer pricing technology are at an advantage. Sophisticated software solutions allow multinational tax departments to run scenarios with various data sources. By analyzing these results, MNEs can proactively address issues and choose the source that presents their data in the best light.

For more information on how tax technology enables a sustainable and repeatable data collection process, eliminating manual manipulation and risk of error, don’t miss the third and final installment in our BEPS Data blog series.

For more insight and analysis on the OECD’s BEPS Action Plan, visit tax.thomsonreuters.com/BEPS.