“By Raymond Wynman, Director International Tax
The quest for transparency in the global tax environment has been a catalyst for new regulations and guidelines. In the spirit of that pursuit, The Organization for Economic Co-operation and Development (OECD) created the Base Erosion and Profit Shifting (BEPS) Action Plan #13 as one of fifteen actions that need to be taken to implement BEPS measures. The goal is to increase transparency regarding international tax structures and tax attributes that authorities believe may lead to base erosion. This blog will address how to implement Action #13: Country-by -Country (CbC) Reporting and Notifications in a practical manner.
Once Talk, Now Action
Once all talk, BEPS is now a reality, and corporate tax departments need to act.
CbC Reporting will be a complex and time consuming process because of the need to assess varying deadlines (depending on your year-end date) and varying requirements from country to country. No matter what the filing deadline, tax departments must notify tax authorities by Dec 31, 2016 on how they plan to file their CbC report for the fiscal year 2016. These notifications are only part of the overall process.
In order to prepare notifications, here’s a suggested step-by-step action plan to execute before December 31, 2016:
Step 1: Determine the CbC Reporting filing requirements for each entity within your company’s corporate structure under local country tax requirements. Review of such requirements would include the need to file a CbC notification for 2016 OR if the country does not require 2016 filings, then look at other options, such as, does the country allow for early adoption.
Step 2: Select the ultimate parent entity or an alternate “surrogate parent” for CbC Reporting purposes in a way that allows minimization of the amount of CbC reporting. There is some criteria that will govern this selection:
- Each constituent entity must notify its tax authority whether it is the ultimate parent entity or the surrogate parent entity by December 31, 2016.
- If the constituent entity is not the ultimate parent entity or the surrogate parent entity, it shall notify its tax authority of the identity and tax residence of the ultimate parent entity or the surrogate parent entity.
- Verify that the country of the ultimate/surrogate parent has entered into a competent authority exchange information agreement between its country and the local jurisdiction of the local subsidiary; and
- Confirm that there is no “systemic failure” with the competent authority exchange of information agreement between the ultimate parent or surrogate parent and the local jurisdiction Systemic failure is the suspension of information exchange between two countries’ tax authorities due to the parent jurisdiction’s tax authority’s repeated failure to provide CbC reports in its possession.
Note: (For Step 2, it would be especially prudent to have a project manager who can focus on this complex task. See the example below of how to assess the criteria of your corporate structure to identify the most appropriate country filing candidate).
Step 3: File the parent/surrogate entity’s notification with the parent country’s tax authority. For calendar year end companies, this notification must occur by December 31, 2016. The notification is to let the tax authority know that a CbC report will be filed with its tax return or whatever timing designated by the local tax authorities.
Step 4: Determine whether there is a notification requirement in the local country to designate an ultimate/surrogate parent. If this is case, file the local country notification with country’s tax authorities. For calendar year end companies, this notification must occur by December 31, 2016. The notification is to let the local tax authority know that a CbC report will be filed with the tax authorities where the ultimate/surrogate parent is resident.
After completion of Steps 1-4, start gathering, testing, and analyzing reporting data. How would the tax authorities respond to the data? There are many considerations that will require data gathering, analysis, and output, adding to the overall scope of the process.
Next, steps 5 and 6 need to be executed before filing your CbC report (see Step 7) by December 31, 2017 or the country’s filing date, if earlier or later:
Step 5: Perform a “dry run” of the CbC reports with available data and analyze the data for potential controversy with local tax authorities.
Step 6: Review each country’s transfer pricing requirements. Identify areas of risk that require further analysis. Review analytics to identify gaps in existing transfer pricing information for master and local files.
Step 7: File the CbC reports with the relevant tax authorities based on the prior steps by December 31, 2017 or the country’s filing date, if earlier or later.
Here is an example of the practical approach in action:
Figure 1: Country by Country Notification Determination
Facts and Assumptions:
1 – Singapore is not a signatory of the Multilateral Competent Authority Agreement (“MCAA”)
2 – As of the time of this writing, Russia has not adopted the BEPS Action Plan
For purposes of this example, assume all other CbC requirements were met.
Example: CbC Reporting Filing Requirements by Country
Example: Selection of Ultimate Parent or Surrogate Parent for CbC Reporting based on whether a competent authority exchange of information is available (indicated as Y = Yes or N = No)
Note: The OECD competent authority exchange of information agreement allows for automatic exchange of FY 2016 CbC reports (after notification filings) in 2017. There are two types of agreements: multi-lateral and bilateral. To date, 44 countries have together signed an exchange of information agreement (multi-lateral), while the USA has decided to negotiate with counties on a one-to one basis to make the agreement (bilateral).* In this example, Luxembourg and the U.K. were selected as potential surrogate parent entities because of their generous tax treaty networks and potential favorable provisions regarding exchanges of information.
Based on the example provided above, the Company could designate Luxembourg or United Kingdom as the surrogate parent. However, this analysis could change if the US early adopts the regulations for filing CbC and addresses the required competent authority exchange of information agreement.
In summary, it important to note that although there is still some time before actually filing the CbC reports, the filing notifications are due before year end for calendar year companies. This will require advance planning to determine how the Company intends to file its CbC reports.
Remember, this is just 1 of 15 BEPS Actions
As you prioritize your tax department’s initiatives, remember that Action #13 is just one of fifteen actions that need to be taken to implement BEPS measures. For each Action, there is data to be extracted, research to be performed, calculations to be made, and deadlines to meet. For more information about Action #13, read the OECD’s Action Plan for Base Erosion and Profit Shifting.
Learn more about how GTM can help manage, support, or outsource your international tax planning and compliance needs.
This blog contains general information and does not constitute written tax advice under Treasury Department Circular 230. You should consult with you tax advisor for applicability to your specific facts and circumstances. “
