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:

• If the reporting group has a tax identification number (TIN) that is used by the tax administration in its jurisdiction, the TIN is to be mandatorily provided
• The inclusion of the reporting group’s postal address remains optional, although the OECD strongly recommends that this information is provided
• Terms such as ‘stated capital’ remain undefined. In the absence of further clarity, such terms should be interpreted in a manner that is sensible and consistent (e.g. with regard to accounting treatment).
• The additional information element (table 3) permits a brief explanation necessary for the understanding of the compulsory information in tables 1 and 2
• Extensive guidance is provided on the ability and process

for making corrections

• The CbC XML Schema is designed for the automatic exchange of reports between competent authorities.

(It is expected that tax administrations will be required to translate CbC reports into the electronic CbC XML

Schema.) However, the OECD guidance also states: ‘The CbC Schema can also be relied upon by reporting

entities for transmitting the CbC report to their tax administrations, provided the use of the CbC XML Schema is mandated domestically.’ HMRC is planning to introduce a portal where groups can register to file the CbC report

Recommended Actions

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.)

Recommended Actions

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 a