On Sept. 13, 2018, the Organisation for Economic Co-operation and Development (OECD) released additional guidance to give greater certainty to tax administrations and multinational enterprise (MNE) groups on the implementation and operation of Base Erosion and Profit Shifting (BEPS) Action 13 Country-by-Country (CbC) Reporting (CbCR). Accordingly, the existing guidance on the implementation of CbCR has been updated to address the following issues: (1) the treatment of dividends for purposes of "Profit (loss) before Income Tax," "Income Tax accrued (current year)," and "Income Tax paid (on cash basis)"; (2) the use of shortened amounts in Table 1 of CbC reports; and (3) the number of employees to be reported when the financial data of a constituent entity is reported on a pro rata basis. The updated guidance also includes a summary table of the existing interpretative guidance on cases of mergers, demergers, and acquisitions.
Moreover, the OECD also published additional exchange relationships that have been activated under the Multilateral Competent Authority Agreement on the exchange of CbC reports (CbC MCAA) for Bermuda, Curaçao, Hong Kong, and Liechtenstein.
On Oct. 5, 2015, the OECD released its final report on Action 13 (the final report), Transfer Pricing Documentation and Country-by-Country Reporting, under its BEPS Action Plan (OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 — 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, available at doi.org. The report introduced a standardized three-tiered approach to transfer-pricing documentation for MNEs consisting of a master file, a local file, and a CbC report.
To give greater certainty to tax administrations and MNE groups on the implementation and operation of CbCR rules, the OECD has been issuing additional guidance since June 2016 (see OECD announcement, "New Steps to Strengthen Transparency in International Tax Matters: OECD Releases Guidance on the Implementation of Country-by-Country Reporting," June 29, 2016).
The OECD updated the guidance in December 2016 (see OECD announcement, "OECD Updates Guidance on Country-By-Country Reporting and Launches New Site on Country-Specific Implementation" (Dec. 5, 2016)); April 2017 (see OECD announcement, "OECD Releases Further Guidance for Tax Administrations and MNE Groups on Country-by-Country Reporting (BEPS Action 13)" (April 6, 2017)); July 2017 (see OECD announcement, "OECD Releases Further Guidance for Tax Administrations and MNE Groups on Country-by-Country Reporting (BEPS Action 13)" (July 18, 2017)); September 2017 (see OECD announcement, "OECD Releases Further Guidance on Country-by-Country Reporting (BEPS Action 13)" (Sept. 6, 2017)); November 2017 (see November 2017 citations in "Guidance on the Implementation of Country-by-Country Reporting BEPS Action 13"); and February 2018 (see OECD announcement, "OECD Announces Further Developments in BEPS Implementation" (Feb. 8, 2018)).
The OECD has also released other materials to support countries introducing CbCR. For example, in September 2017 the OECD issued two handbooks (one on the effective implementation of CbC reporting and another on effective tax risk assessment) (see OECD, Country-by-Country Reporting: Handbook on Effective Implementation and Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment, both dated Sept. 29, 2017), and a report on the appropriate use of information contained in CbC reports (see OECD announcement, "OECD Releases Further Guidance on Country-by-Country Reporting (BEPS Action 13)" (Sept. 6, 2017)).
On Sept. 13, 2018, the OECD released a new update to the guidance and published additional exchange relationships that have been activated under the CbC MCAA for Bermuda, Curaçao, Hong Kong, and Liechtenstein.
Treatment of dividends from other constituent entities
The BEPS Action 13 final report explains that the column of Revenues in Table 1 of the CbC report should exclude payments received from other constituent entities (CEs) that are treated as dividends in the payer's tax jurisdiction. However, the final report did not address whether the same approach should apply to the column on "Profit (loss) before Income Tax."
As the Action 13 final report did not provide specific instructions on this issue and jurisdictions may have taken different approaches, the guidance takes a flexible approach allowing jurisdictions to maintain their own approach. However, the guidance encourages the Inclusive Framework members to require their taxpayers to indicate in Table 3 whether dividends received from other CEs are included in "Profit (loss) before Income Tax" in Table 1 and, if so, for which jurisdictions.
Additionally, for consistency, where dividends from other CEs are included in "Profit (loss) before Income Tax" in Table 1, any income tax accrued or income tax paid on these dividends should be reported in the relevant column(s).
Use of round amounts in Table 1
The guidance clarifies that amounts in Table 1 should be reported in full whole units and, therefore, any rounding to shorten amounts is not permitted. By way of example, the guidance explains that an amount of 123,456,789 should not be reported in thousands and accordingly shortened, for example, to 123,457.
Number of employees
Where the financial data of a CE is reported on a pro rata basis (for example, when accounting rules require proportional consolidation in the presence of minority interests), the number of employees of the CE should also be reported on a pro rata basis.
The guidance encourages members of the Inclusive Framework on BEPS to require as soon as possible their taxpayers to include the following statement in Table 3 of the CbC report when using proportional consolidation: "The number of employees of the Constituent Entity A (specified) in Jurisdiction X (specified) is reported on a pro rata basis in accordance with the pro rata reporting of the financial data of A."
Table summarizing the guidance on merger/demergers/acquisitions
The guidance includes a summary table on the existing interpretative guidance on the approach to be applied in cases of mergers, demergers, and acquisitions.
Activated exchange relationships for country-by-country reporting
The OECD also published additional exchange relationships that have been activated under the CbC MCAA. Currently, together with the exchange relationships under the European Union Council Directive 2016/881/EU and the bilateral competent authority agreements for exchanges under Double Tax Conventions or Tax Information Exchange Agreements, there are over 1,800 automatic exchange relationships established among jurisdictions committed to exchanging CbC reports. With this update, a set of newly established bilateral exchange relationships under the CbC MCAA were published for Bermuda, Curaçao, Hong Kong, and Liechtenstein.
The full list of automatic exchange relationships that are in place and an update on the implementation of the domestic legal framework for CbCR in jurisdictions are available on the OECD website (available at www.oecd.org.
Since the OECD released the Action 13 final report, there has been ongoing and increasing activity around CbCR requirements. The guidance marks the eighth release by the OECD addressing practical questions that have arisen concerning the implementation and operation of CbCR.
Although some of the new guidance should be implemented by jurisdictions before it applies to taxpayers, it is important to anticipate these changes and understand their impact in the preparation of the CbC reports for reporting fiscal year 2017.
The guidance will continue to be updated with any further guidance that may be agreed by the Inclusive Framework on BEPS. Taxpayers should continue to closely monitor new or amended reporting requirements and how countries implement or react to the new guidance.
The additional exchange relationships under the CbC MCAA are a positive development as they will reduce the need for local filing for MNE groups located in Bermuda, Curaçao, Hong Kong, and Liechtenstein.
Michael Dell is a partner at Ernst & Young LLP in Washington.
For additional information about these items, contact Mr. Dell at 202-327-8788 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP. Ernst & Young previously published versions of these items as Tax Alerts.