Transfer Pricing Review Spring 2016: Cbc Reporting Announcements – Exchange of Information Mechanism
This article was first published on 22 April 2016 in Tax Journal.
The major change of interest relates to the XML Schema mechanism released by the OECD for the exchange of country by country information between tax administrations. This exchange of information (and how it will be deployed) has continued to be one of the main concerns multinational groups have about post-BEPS transfer pricing compliance obligations.
On 12 April, the European Commission (EC) set out a proposal to obligate companies in the EU with consolidated turnover of 750m to report country by country (CbC) information on their own company websites and on a public business registry.
On 22 March 2016, the OECD published a standardized electronic template for the automatic exchange of CbC reports, referred to as the CbC XML Schema. This presents competent authorities and tax administrations with an electronic format for coding and standardizing information in the CbC report.
The CbC XML Schema closely follows the format of previous publications from the OECD on CbC implementation (see the January 2016 transfer pricing update), with some additional items:
Groups that are aware of their filing requirements should consider discussions with the tax administrations to explore electronic filing mechanisms that may reduce compliance burdens.
Groups that are unsure of their filing requirements should ascertain whether, when and where they need to file; and if there are obligations in more than one location, and/or obligations created by a lag in the ultimate parent location introducing the regulations when compared to surrogate parent locations. For example, the IRS regulations to implement CbC reporting are expected to be finalized by 30 June 2016, making the regulations effective for all tax years beginning after that date. There will therefore be a gap period between the US effective date on CbC reporting (30 June 2016) and the OECD proposed effective date (1 January 2016). As many foreign jurisdictions have already implemented CbC reporting using the OECD’s recommended effective date, US based multinational groups face the reality that foreign jurisdictions may request their CbC report during the gap period, despite there being no formal requirement to file the US (at least in the interim period). A similar lag exists for Japan, where the regulations are relevant from April 2016.
Budget day in the UK
On 16 March 2016, the UK’s Budget day occurred with announcements (in addition to dropping the corporation tax rate to 17% by April 2020) for the adoption of the OECD’s revised, post-BEPS Transfer Pricing Guidelines into UK legislation. (Note that Actions 8, 9 and 10 have been referred to, but not Action 13.)
UK guidance must be construed in a manner that ensures consistency with the OECD guidance. As such, this is merely a formal announcement to confirm what multinationals groups are already aware of through their ongoing compliance efforts.
Public CbC Filings in the EU
On 12 April, the EC set out a proposal to obligate companies in the EU with consolidated turnover of 750m to report CbC information on their own company websites and on a public business registry. The public information would be restricted to company operations within EU member states with aggregate reporting for activities outside of the EU (as well as for locations identified as havens through a ‘blacklist’). It is also proposed that, where a non-EU headquartered multinational has EU operations, this reporting obligation will fall on the subsidiaries or branches in the EU unless the non-EU parent chooses to report this information for the group as a whole.The changes have been proposed under a separate legal framework from tax legislation (these changes would require majority approval of 28 EU member states in the Council of Ministers, instead of unanimous consent, which is required of all EU tax legislation). Some member states (e.g. Germany) have insisted that they would not back the legislation, as it may endanger the competitiveness of EU companies and could raise legal issues with other countries. The EC press release confirms that ‘this proposal for a directive is now submitted to the European Parliament and the Council of the EU and the Commission hopes that this will be swiftly adopted in the co-decision process. Once adopted, the new directive would have to be transposed into national legislation by all EU member states, within one year after the entry in force’.
Any multinational group above the 750m turnover threshold with European operations may need to disclose sensitive information relating to taxes paid in key operating locations. A review of the 2015 footprint will be important in assessing risk areas with the opportunity to commercially restructure, downsize non-essential entities and/or update policies where required. Minimizing detection risk (i.e. the risk that a transaction is selected for transfer pricing audit) with a measured policy can be as important, if not more important, than minimizing adjustment risk (i.e. the risk that a transaction is not arm’s length).
What to look out for in the next few months
Consultation on profit split methods
As announced on 15 March, an OECD working party will commence looking at the profit split method for pricing related party transactions and, in particular, at:
This is at the early stages but there is an opportunity for interested parties to help to frame this important review.
Other items to watch
In addition, look out for more local country budget statements adopting (and departing) from international transfer pricing guidance.