Transfer Pricing Times: Volume XIII, Issue 1
In this Edition: Country-by-Country Reporting is Formally Introduced in France.
France and Australia Provide Country-by-Country Reporting Updates
Country-by-Country Reporting is Formally Introduced in France
Enacted on December 29, 2015, the Finance Act for 2016 introduces country-by-country (CbC) reporting for fiscal years commencing on or after January 1, 2016, for multinational groups which meet the following four conditions:
Prepare consolidated financial statements;
Hold or control, directly or indirectly, one or more legal entities or branches outside France;
Realize a consolidated annual turnover of not less than €750 million; and
Are not held by one or more legal entities situated in France or overseas which are themselves required under foreign rules to comply with CbC reporting.
The legislation further provides that:
The specific CbC content will be provided in a detailed implementation decree but will cover the country-by-country split of a group’s profits, accounting and tax data, as well as location and activities of the group’s members;
The CbC report is to be filed electronically within 12 months following the end of the group’s financial period;
Late filing penalties of up to €100,000 will apply;
A formal list will be drawn up of jurisdictions which:
Have established mandatory filing requirements for CbC similar to those required under French legislation;
have concluded automatic exchange of information agreements with France; and
comply with their automatic exchange obligations.
An overseas entity or branch not covered by the list above must file a CbC report in France, assuming:
It would be required to file CbC information if located in France;
it holds or controls, directly or indirectly, a French entity or branch; and
it is not associated with another group member, situated in France or in another jurisdiction on the list at above, which has been designated to file CbC in France and the French tax administration has been informed accordingly.
Subject to a reciprocity pre-condition, CbC reports filed in France may be exchanged automatically with the jurisdictions with which France has mutual exchange of information agreements, as noted on the list above.
It should be noted that a proposal to make certain elements of CBC information publicly available was abandoned by the government late in the legislative process.
At the time of this publication, the detailed implementation decree for this measure has not been issued but, based on the legislation, the specific requirements in France for CbC are likely to be a direct reflection of the OECD BEPS Action Item 13. More information will be provided as it becomes available.
Effective, January 1, 2016, Form 2257-SD is a complement to CbC reporting and requires certain disclosures at the time returns are filed (See Transfer Pricing Times Vol.11 Issue 8). Duff & Phelps’ English-language translation of Form 2257-SD, and accompanying commentaries, can be accessed here.
Additional Clarity on Australian Country-by-Country Reporting
On December 17, 2015, the Australian Taxation Office (ATO) released guidance (Law Companion Guidelines 2015/3) on the newly enacted Subdivision 815-E of the Income Tax Assessment Act 1997, with specific guidance on CbC reporting and the corresponding transfer pricing Master File and Local File documentation. Multinational groups with annual global income exceeding AUD 1 billion are required to comply unless exempted by written notice or legislative provisions.
The new rules apply to income years commencing on or after January 1, 2016. Qualifying companies in Australia must file all statements (i.e., Master File, Local File, CbC report, collectively, the "required statements") for each fiscal period. An Australian subsidiary or permanent establishment may apply for an exemption to file one or more of the required statements. Factors considered by the ATO on whether or not to grant an exemption will be the entity’s risk profile, the compliance burden on the entity, and whether the ATO may receive the information through alternate means.
Further guidance will be issued by the ATO on specific classes of entities that may receive exemptions from certain of these provisions and requirements. Taxpayers should not expect exemptions in regards to CbC provisions solely because the taxpayer has an Advanced Pricing Arrangement or Annual Compliance Arrangement covering some or all of its cross border controlled transactions within Australia. Where more than one entity within a consolidated group is subject to the Australian CbC regime, only one entity may be required by the ATO to submit the required statements, as nominated by the taxpayer. It is estimated that over 1,000 multinational entities may be affected by these rules.
The ATO has signalled a potential difference of approach in respect of the Local File “approved form” as compared to Annex 2 to the OECD’s BEPS Action 13 report (Chapter V of the OECD Guidelines). Specifically, the ATO has identified that different entities may be permitted to submit differentiated Local Files:
Full Local File: This would reflect the OECD's Annex 2 to the OECD's BEPS Action 13 report;
Simplified Local File: This would reflect the OECD's Annex 2 to the OECD's BEPS Action 13 report, except require LESS information than under a full local file; and
Short Form Local File: This would only require that the taxpayer submit a report covering Section 1 of the OECD's Annex 2 to the OECD's BEPS Action 13 report, providing a short descriptive report of the local entity's operating structure, with limited information provided on controlled transactions.
The ATO has noted that an entity’s risk profile, turnover, and controlled transactions and arrangements will be key considerations in determining the type of Local File required to be prepared and submitted. The different types of Local File appear to reflect the ATO’s attempt to develop a practical application of the OECD’s guidance on materiality of transactions. Further guidance is expected in the next year.
The ATO Categorises Multinationals’ Avoidance Risk Profiles – Where Will You Fit?
On January 12, 2016, the ATO also released a 'Client Experience Roadmap' designed to assist taxpayers in the initial period of the new Multinational Anti-Avoidance Legislation (MAAL), with a view towards resolving related taxation issues. Principally, the ATO has proposed the creation of five categories of taxpayers in regards to this transitional period, in order to address legacy and forward looking transfer pricing areas of risk:
Category A (Under current review): The taxpayer comes within the scope of the MAAL and is under an existing review/audit;
Category B (Responsive taxpayer): The taxpayer is contacted by the ATO by March 31, 2016, as being potentially subject to the MAAL, and has 28 days to respond;
Category C (Voluntary disclosure taxpayer): The taxpayer contacts the ATO by March 31, 2016, seeking to engage, with a view to restructuring their transaction(s);
Category D (Subsequently identified): The taxpayer does not approach the ATO, and is subsequently identified as potentially subject to the MAAL. Category B taxpayers can become category D taxpayers; and
Category E (Out of scope): The taxpayer is outside the scope of MAAL.
The above categories of taxpayers correspond to the compliance required. The ATO expects taxpayers and advisors to engage early to discuss how and if the MAAL applies to a taxpayer’s existing situation. Further, we would strongly recommend that companies under ATO review or audit consider this roadmap closely.
Overall, the ATO's recent guidance in regards to CbC reporting and the MAAL appears to have clarified some of the questions and concerns of taxpayers, and acknowledges the potential duplication of documentation and reporting requirements that have been imposed on multinationals, with a view towards considering this further in future guidance.
Update from Hong Kong
On December 4, 2015 a bill was introduced to the Hong Kong Legislative Council that would amend the Inland Revenue Ordinance and, if enacted, would:
Enhance the existing interest deduction rules for the intragroup financing activities of multinational corporations. Interest expense would be deductible for a Hong Kong-based borrower as long as the corresponding interest income received by the foreign related party lender is subject to a tax similar to the Hong Kong profits tax and the main purpose of the intragroup financing arrangement is not to exploit the fungibility of money to induce a loss;
Introduce a concessionary profits tax rate of 8.25 percent (a 50 percent reduction to the prevailing profits tax rate for corporations) for qualifying corporate treasury centres (as defined within the bill), with an aim to enhance Hong Kong’s attractiveness as a corporate treasury hub; and
Clarify the profits and stamp duty treatments in respect to regulatory capital securities.
Details of the bill are still being ironed out; the changes may be effective from April 1, 2016. For more information, a copy of the bill (Inland Revenue (Amendment) (No. 4) Bill 2015) is available here.
FASB Proposes Draft on Accounting for Government Assistance
On November 12, 2015, the Financial Accounting Standards Board (FASB) proposed an update regarding Topic 832, Government Assistance, intending to increase the transparency of government assistance arrangements. The existing generally accepted accounting principles (GAAP) do not provide guidelines for the recognition, measurement, and disclosure of such assistance. The amendments proposed by FASB are consistent with and expand upon International Financial Reporting Standards (IFRS) International Accounting Standard 20 (IAS 20), Accounting for Government Grants and Disclosure of Government Assistance, which provides guidance on recognition and measurement of government grants only, and not other forms of government assistance.
The proposed FASB amendments would require disclosures about government assistance in the notes to the financial statements. All entities, excluding not-for-profit, that enter into a legally enforceable agreement with a government to receive value must disclose:
The nature of the assistance (e.g. grants, loans, or tax incentives) and the form in which the assistance is received (e.g. reduction of expense, tax refund, or cash grant);
The accounting policy used to account for government assistance;
The line items on the balance sheet and income statement affected by government assistance;
The amount of government assistance received but not directly recognized in the financial statements, unless impractical; and
Significant terms and conditions including, but not limited to, duration or period of the agreement, provisions for government recapture of assistance, and other contingencies.
The scope of the proposed amendments does not apply if the government is either legally required to provide a nondiscretionary level of assistance or is solely a customer of the business entity.
The Board is soliciting public comment on the proposed update until February 10, 2016.