Country-by-Country reporting goes the Full Monty: not good news for international businesses

Volume No. 14-01

The Organisation for Economic Cooperation and Development (OECD) published adiscussion draft of Chapter V of its Transfer Pricing Guidelines[1] and Country-by-Country reporting on January 30 2014.  This proposed revision is an action point from the G20-OECD project on Base Erosion and Profit Shifting (BEPS).
 
One of the aims of the BEPS project is the collection of more detailed information from companies in a multinational group. More information is suggested by the OECD to result in a clearer picture of where ‘value creation’ takes place in a multinational group. Country-by-Country reporting has been anticipated for some time, but the recent Chapter V draft and its commentary demonstrate clearly that international businesses are about to be required go for “the Full Monty” by disclosing to each tax authority with jurisdiction to tax the group’s business profits a long list of information. Some examples of the expanded requirement include:

  • Title and country of each of the 25 most highly compensated employees (names withheld)
  • Consolidated financial statement
  • List of all relevant tax rulings, APAs, advance rulings, pending and resolved treaty Mutual Agreement Procedure (i.e. double tax) issues
  • Group debt structure
  • Tax paid by jurisdiction or line of business
  • ‘Economic activity’ by jurisdiction (defined as tangible assets, number of employees and total employee expense)
  • Capital and accumulated earnings by jurisdiction

Though the arm’s length principle is expected to be maintained by the OECD Transfer Pricing Guidelines as the most reliable way to determine profit allocation between jurisdictions, much of the new information is mostly irrelevant to the application of the arm’s length principle used today to determine transfer prices.
 
Concern over the misuse of this information by tax authorities is developing amongst taxpayers. Unilateral application of a formulary allocation of profit by tax authorities (as is done between Canadian provinces) may be too tempting to resist in a time of increasingly complex global business fact patterns, performance targets and reduced operating budgets. Used irresponsibly, this broadened information could cause double taxation and costly controversy for many taxpayers who make good-faith efforts to compute and pay tax on the basis of current tax law.
 
While the discussion draft suggests that transfer pricing documentation requirements will likely increase for all multinational companies, it proposes some relief for smaller multinational businesses. We are watching this development closely and will report in a future issue on areas of relief proposed. Considerable commentary and debate is expected.  These revised rules are far from becoming law (a final version is scheduled for September 2014, and country implementation will follow), but it is certain that change is coming and international businesses should start to think ahead. We would be glad to discuss our practical view of this future state with you.


[1]Chapter V deals with documentation of non-arm’s length non-resident transactions, the materials taxpayers are required to submit to tax authorities as an explanation of the facts and pricing of non-arm’s length transactions.
 

THE NON-ARM’S LENGTH NEWS is provided as a free service to clients and friends of Cadesky and Associates LLP. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing position. Cadesky and Associates LLP cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.