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published on 7 June 2018
On 24 May 2018, the OECD has released the first peer reviews on the implementation of Country-by-Country reporting in 95 countries. BEPS Action 13 has introduced an extended three-layered transfer pricing documentation consisting of a Master File, a Local File and a Country-by-Country (CbC) report. As CbC reporting in BEPS Action 13 is one of the four BEPS minimum standards, its implementation is subject to a peer review process that shall ensure timely and accurate implementation and thus safeguard the level playing field.
The framework for CbC reporting in BEPS Action 13 requires MNE groups with an annual consolidated group revenue equal to or exceeding EUR 750 million to annually file a CbC report. The information included in CbC reports about the global allocation of income, taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates should provide a high-level overview for purposes of the assessment of transfer pricing risks. CbC reporting requires MNEs to provide a standardized set of data which makes it easier for tax authorities to differentiate between relevant and irrelevant information. The data exchanged under CbC reporting could be screened on an automatic basis to identify high-risk cases which are subsequently audited. The CbC report includes a list of all tax jurisdictions where the MNE does business and – separately for each jurisdiction – the revenues from intra-group transactions and from transactions with independent parties as well as the sum thereof, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and the value of all tangible assets other than cash. Furthermore, a list of all entities, permanent establishments, and their place of organization or incorporation if it is different from their residence as well as their main business activities have to be drawn up. CbC reporting should help tax administrations obtain a better understanding of the way in which MNEs structure their operations.
The reporting obligation is primarily addressed to the “ultimate parent entities” of MNE groups. The ultimate parent has to prepare and file a CbC report with the tax administration of the jurisdiction where it is a tax resident. The tax administration of this country should subsequently provide the CbC report to all of the jurisdictions where the MNE group has a subsidiary or a permanent establishment.
The implementation of CbC reporting involves both domestic legislation requiring the ultimate parent of a MNE to file a CbC report and agreements providing for automatic exchange of CbC reports between different jurisdictions. BEPS Action 13 offers templates both for domestic legislation and for bi- and multilateral competent authority agreements. BEPS Action 13 recommends - as one of the four BEPS minimum standards - an implementation for fiscal years beginning on or after 1 January 2016; it is however acknowledged that some jurisdictions may need more time to make necessary adjustments to their law.
69 jurisdictions have already signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Country-by-Country Reports (MCAA CbC). With the MCAA CbC, CbC reporting is implemented on the basis of article 6 of the CoE/OECD Multilateral Convention. The MCAA CbC is not a real multilateral agreement. Instead, it provides for bilateral automatic exchange of CbC reports between those jurisdictions who have agreed to do so. Accordingly, when signing the MCAA CbC, every jurisdiction must specify with which other jurisdictions it wishes to exchange CbC reports. According to the MCAA CbC, two states will start to automatically exchange CbC reports after the CoE/OECD Multilateral Convention has entered into force in both states, both states have signed the MCAA CbC, both states have confirmed the necessary domestic implementation, and both states have notified the Co-ordinating OECD Secretariat that they want to exchange information automatically with the other state.
Furthermore, within the European Union automatic exchange of CbC reports has been implemented by an amendment of the Administrative Cooperation Directive (Council Directive (EU) 2016/881 of 25 May 2016).
The peer reviews evalutate the Inclusive Framework member's implementation of CbC reporting as this is one of the minimum standards of the BEPS package. The Inclusive Framework on BEPS already has more than 100 member jurisdictions and shall allow interested countries and jurisdictions to work with OECD and G20 members on developing standards on BEPS related issues and on reviewing and monitoring the implementation of the whole BEPS package. The peer review of BEPS Action 13 follows a staged approach with annual reviews taking place in 2017, 2018 and 2019. The reports on the outcome of the peer reviews shall provide information for the discussion in 2020 of the effectiveness of the design of the CbC reporting standard. The first peer reviews started in 2017, leading to the first peer review report ("phase one") having been published on 24 May 2018. The peer review process focuses on three key elements of the minimum standard: (i) the domestic legal and administrative framework, (ii) the exchange of information framework and (iii) the confidentiality and appropriate use of CbC reports. The first peer review reports deal with the implementation of BEPS Action 13 in 95 jurisdictions and focus on the domestic legal and administrative framework, as well as on certain aspects of the exchange of information network, and on appropriate use of CbC reports.
The evaluation of the domestic legal and administrative framework takes into account legislation, regulations and other guidance and the administrative and regulatory framework. The peer reviews focus on (i) whether a parent entity filing obligation is introduced, (ii) the scope and timing of parent entity filing, (iii) the limitations on local filing obligations, (iv) the limitations on local filing in case of surrogate filing, and (v) whether CbC reporting has been effectively implemented. 60 jurisdictions have already introduced an obligation for relevant MNE groups to file a CbC report in their domestic legal framework. The peer reviews show that practically all countries that serve as headquarters to large MNEs have introduced reporting obligations compliant with BEPS Action 13. A few jurisdictions have final legislation awaiting official publication and some other jurisdictions have primary law in place which needs to be completed with secondary law or guidance. Where legislation is in place, the implementation of CbC reporting has been found largely consistent with BEPS Action 13. Nevertheless, 28 jurisdictions that have provided either draft or final legislation received one or more recommendations for improvement on specific areas of their framework. 33 jurisdictions received a general recommendation to put in place or finalise their domestic legal and administrative framework. However, these jurisdictions mainly do not apply CbC reporting requirements for the fiscal year 2016, but for later fiscal years.
The peer reviews also consider the exchange of information framework of the 95 jurisdictions that have been evaluated. In this part, it is relevant whether and to what extent exchange of information agreements allowing an automatic exchange of CbC reports are in place. The first peer reviews focus on the existence of multilateral or bilateral competent authority agreements: The OECD report points out that 58 out of the 95 jurisdictions subject to the first peer reviews have such agreements in place that are effective for taxable periods starting on or after 1 January 2016, or on or after 1 January 2017. In total, for automatic exchange of CbC reports, more than 1400 bilateral relationships are already in place, and more are expected to come throughout the year.
The third part of each peer review deals with confidentiality and appropriate use of CbC reports. Information contained in CbC reports shall remain confidential and shall only be used to assess high-level transfer pricing risks and other BEPS-related risks but shall not serve as a conclusive evidence that transfer prices are not appropriate. The first peer reviews included an initial review of certain aspects of confidentialtiy and appropriate use. 39 jurisdictions already have measures in place to ensure the appropriate use of CbC reports.
The next annual peer review (“phase two”) starts this year and aims at reviewing all jurisdictions of the Inclusive Framework. It will focus on the exchange of information framework and on confidentiality and appropriate use as well as on progress made by jurisdictions where relevant.
Dr. Viktoria Wöhrer
Senior Associate
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