We consider here action 13 of the OECD's BEPS Action Plan, aimed at re-examining transfer pricing documentation requirements — and in particular providing for more information from taxpayers. Such information will offer useful indicators for risk assessment and allow tax administrations to better focus their limited resources.
5 October 2015
The work on TP documentation and country-by-country (CbC) Reporting was started early on in the project and has been the subject of intense - and sometimes controversial – discussion, so…
not surprisingly there are no material additional issues emerging in the finalised package.
However, this is not to understate the significant obligations that are contained within these BEPS transparency requirements - and which will inevitably fall on taxpayers.
Further, given the required timescales involved (the CbC reporting requirements go live from 1 January 2016), this will be one of the earliest tasks that taxpayers will necessarily face in getting to grips with the BEPS package.
The relevant obligations will require a three-tiered approach to documentation, comprising:
The OECD has an agreed template for the CbC report and has introduced a new master file requirement and new standards for the local file.
Early experience has suggested that most taxpayers seeking to ensure they will comply with the rules on a timely basis are finding the systems tasks required to knit the relevant information together somewhat daunting. There have also been concerns about ensuring the continued confidentiality of commercially-sensitive information.
12 June 2015
The OECD has released a “Country-by-Country Reporting Implementation Package” which includes...
model legislation the OECD suggests could be used by countries to mandate filing of country-by-country reports (CbCRs). The model legislation does not attempt to address the filing of the so-called master file or local file reports.
The implementation package also includes three model competent authority agreements that could be used by each country, depending on whether it intends to effect exchange of CbCRs through the “Multilateral Convention on Mutual Administrative Assistance in Tax Matters,” the exchange of information article of a bilateral tax convention, or a bilateral tax information exchange agreement.
Neither the model legislation nor any of the model competent authority agreements contains additional guidance regarding the particular data that multinational enterprises (MNEs) need to provide in the CbCRs.
Rather, the model legislation merely sets forth a general description of that data and provides that it should be provided in a form identical to, and applying the definitions and instructions contained in, the “standard template” set out either in the OECD Transfer Pricing Guidelines, the final report on BEPS Action 13, or an appendix to the legislation, once adopted. Presumably, the “standard template” referred to can be expected to look like the CbCR template set forth in the OECD’s first report on Action 13 released on 16 September 2014. In this regard, however, the introduction to the implementation package indicates that, as a next step, an “XML Schema” and “related User Guide” will be developed with a view to accommodating the electronic exchange of the CbCRs. Additional guidance on the CbCR data requirements may emerge once this schema and user guide are issued.
Helpfully, the model legislation and model competent authority agreements also reveal the OECD members’ current thinking on, among other things:
6 February 2015
A country-by-country implementation package published by the OECD will require...
multinationals with a turnover above EUR 750 million in their countries of residence to start using the reporting template for fiscal years beginning on or after 1 January 2016 so that tax administrations will begin exchanging the first country-by-country reports in 2017.
Countries have agreed and emphasised the need to protect tax information confidentiality.
Jurisdictions should require CbC reporting from ultimate parent entities of MNE groups resident in their country and exchange this information on an automatic basis with the relevant jurisdictions in which the MNE group operates but there is a secondary mechanism through local filing or by moving the obligation for requiring the filing of the CbC Reports and automatically exchanging these reports to the next tier parent country.
24 September 2014
The proposals now agreed by the G20 on the transfer pricing documentation master file and local file are broadly in line with what has already been announced while on country-by-country reporting...
The report now confirms that the data points that will be required to be reported for each country will be the following:
The clear implication is that the template is designed to highlight those low-tax jurisdictions where a significant amount of income is allocated without some “proportionate” presence of employees. What this means in practice is that, there will be pressure to assure that profit allocations to a particular jurisdiction are supported by the location in that State of sufficient appropriately qualified employees who are able to make a “substantial contribution” to the creation and development of intangibles. Concerns regarding confidentiality of this data and the potential for adjustments by tax administrations based on a formulary apportionment approach leading to many more transfer pricing controversies, have already been noted.
The OECD has also noted that some countries (for example Brazil, China, India, and other emerging economies) would like to add further data points to the template regarding interest, royalty and related party service fees. Those data points will not be included in the template in this report, but the compromise is that the OECD has agreed that they will review the implementation of this new reporting and, before 2020 at the latest, decide whether there should be reporting of additional or different data.
The OECD does not yet have absolute consensus on the arrangements for the sharing of master file and CbC information although they are seeking to finalise those arrangements by January 2015, including confidentiality issues with indications that information will only be exchanged pursuant to treaty or tax information exchange agreement provisions.
26 May 2014
The OECD’s webcast today suggested that Working Party WP6 was keen to provide a strong reminder that...
country-by-country (CbC) information is to be reported to tax authorities at a very high level and for risk assessment only. This is a quantitative exercise and not a qualitative one- so, for example, information on intangibles - which often not valued – would be required only in the master and local files as it was too much of a burden to require it compared to the benefit for risk assessment purposes.
The three-tier approach would need structured and careful implementation. The WP expects to deliver an implementation 'tool' in January 2015, setting out how sharing of the master file and CbC template would take place.
There would be a need too for an ongoing monitoring mechanism to assess implementation.
19 May 2014
The OECD public consultation on the discussion draft on transfer pricing documentation and country-by-country reporting...
added very little to the analysis of the responses and the interim announcement of changes that would be made.
It was confirmed that there were ongoing difficulties in agreeing the methodology for sharing the information and that this would be held over from the September 2014 deliverable.
2 April 2014
The second OECD BEPS update webcast provided confirmation of some of the changes to the country-by-country (CbC) and transfer pricing documentation proposals...
although the methodology for filing/sharing and the language for the master file and local file remain outstanding issues. In particular though:
24 February 2014
In our response to the 30 January 2014 Discussion Draft, as a general matter, PwC supports the OECD’s work on simplification of transfer pricing documentation and the goal of increased transparency but...
PwC does not consider that the approach proposed achieves the stated goals of balancing “the usefulness of the data to tax administrators for risk assessment and other purposes with any increased compliance burdens placed on taxpayers” nor of increased transparency of information relevant to transfer pricing risk assessment. We consulted widely with clients on this and you’ll perhaps have heard more or contributed to our live webcast on this on 13 February for which a recorded archive version is now available.
We recognise the legitimate desire of tax authorities in jurisdictions around the world to have access to relevant tax reporting information. Further, we support the simplification of reporting and recognise that the use of tailored standard forms and questionnaires across jurisdictions enables information to be gathered more efficiently.
We’re concerned though with the speed with which these proposals are being developed. We commend the OECD’s efforts to engage business input, but we are concerned that the timing of this proposal will not permit sufficient opportunity for input from, and consultation with, the business community to ensure that the guidance ultimately adopted can be successfully implemented in practice. The OECD has, itself, acknowledged that the compressed time frame has allowed for limited consideration of the issues to date. Perhaps, then, given the significant impact this guidance will have on all parties, the OECD could consider issuing another draft and holding another consultation or comment period.
Aside from the speed with which the project is progressing, we have two additional specific concerns in relation to the proposals. First, we are concerned that the proposed two-tiered approach to transfer pricing documentation will result in a significant implementation and compliance burden on taxpayers which is out of proportion to any benefits that may be secured from the process. Second, we have concerns relating to the treatment of what may often be proprietary and sensitive information.
For the above reasons, PwC requests the OECD to seek:
31 January 2014
Multinational enterprises (MNEs) would face materially increased compliance burdens as a result of the OECD’s proposals if they remain in their current form ...
after the brief consultation period allocated. A discussion draft released on 30 January 2014 poses a number of difficult questions, to be answered by 23 February 2014. We recommend in our initial Insights bulletin full and active participation by all interested stakeholders.
The discussion draft requires a mandated list of documents to be included in a transfer pricing documentation package. Overall, this could result in a very short period for business to adjust to life with increased reporting obligations, including country-by-country information. The OECD will need to carefully consider whether the reporting of tangible property, number of employees and payroll expense in practice might lead to adjustments more in line with a formulary apportionment type of transfer pricing system, along with all the potential for increased disputes and double taxation that entails.
The OECD’s strategic objectives of making transfer pricing documentation more efficient and better targeted should be supported. The approach, as originally developed, sought to streamline and rationalise information requirements to benefit both tax administrations (i.e. with better information) and tax payers (i.e. by delivering a more efficient process). However, based on the proposals in the current discussion draft, it’s not clear that these goals have been achieved as, overall, the package seems somewhat one-sided with little clear benefit to business.
It will, in particular, be important to ensure that the consultation process is pursued to deliver as much flexibility as possible. Securing the confidentiality of information will also need to be a major priority.
The OECD statement in the draft that it will be giving further consideration to whether information relevant to other (non-transfer pricing) aspects of tax administration and the BEPS Action Plan should also be included in the common template means that the documentation requirements may be expanded well beyond transfer pricing risk assessment purposes.
You can hear more about these issues in our webcast of 13 February.
17 January 2014
A draft of the OECD’s recommendations on Action 13 is expected in February 2014 though there had been thoughts that it may be published to coincide with...
its first webcast to discuss BEPS progress on 23 January. The tentative timing of February was included in the OECD’s published calendar showing BEPS consultation stages taking place toward the end of 2013 and early in 2014. The date for the webcast was announced by the OECD on 13 January.
We expect the next public draft will be released in the first two weeks of February with three weeks for public comment prior to the Working Party 6 meeting in late March at which there is expected to be further opportunity for business to comment in person.
14 November 2013
At the public consultation on transfer pricing at the OECD on 11/12 November, Working Party 6 (WP6) sought to address the country-by-country reporting issues as well as wider issues surrounding the master/local file proposals...
The framework proposed by the OECD in the White Paper on transfer pricing documentation is a “two-tiered approach” which included the preparation of a detailed global master file, as well as country specific files. It is part of a risk assessment process but is increasingly becoming for multinationals a tool for avoiding penalties.
The primary objective of BEPS in requiring reporting information on a country-by-country basis is to enhance transparency for tax administrations alone.
Balancing the compliance costs for business is critical in both cases.
Business generally wants a standardised approach, with better rather than just more information. So, the template information should focus on the “bigger picture” (using information which is readily available), the master file requirements should not be so onerous and materiality should be taken into account.
A modulated approach, where less information is provided to enable quick implementation of the BEPS-related element may need to be adopted in meeting the September 2014 deadline.
4 October 2013
The OECD’s memorandum of 3 October 2013 on transfer pricing documentation and country-by-country reporting as part of Action 13 forms...
another key part of the risk assessment process. The key themes of substance, transparency and risk are consistent with other recent OECD publications and areas of the BEPS Action Plan. Interestingly, the memorandum acknowledges that including information on other measures of economic activity may encourage “unwarranted reliance on formula-based income allocations”.
It may also result in taxing authorities asserting arguments based on abstract notions of comparability (consider gross marketing expenditures without an understanding of the industry or the expenditures relative to sales).
It also acknowledges, perhaps in response to comments received on the earlier OECD White Paper on Transfer Pricing Document that a key question yet to be answered is whether the required reporting of all these items of information will actually provide any relevant guidance for transfer pricing risk assessment.
Overall the Memorandum provides a clear indication of the type of information that is likely to be required in the coutry-by-country reporting template and raises key topics for discussion through the consultation process that should be considered as part of the broader BEPS landscape.
26 September 2013
In our response to the OECD’s consultation on its Draft Handbook on Transfer Pricing Risk Assessment, we noted the need for it to be...
consistent with conclusions resulting from the BEPS Action Plan. In particular, we related this to Section 2.2 of the Draft Handbook which is largely concerned with identifying related party payments that have the potential to shift income and erode the local tax base.
As currently drafted, paragraphs 147 and 148 of the Draft Handbook also state that businesses would welcome sharing risk assessment reports but stop short of recommending systematic sharing of reports in all circumstances. We strongly encourage a more definitive recommendation within the Draft Handbook for tax administrations to share risk assessment reports with taxpayers to encourage a principled, transparent process and ensure potential issues are addressed and resolved efficiently.
10 September 2013
It seems likely that the information to be stipulated by the OECD for these purposes will be somewhat rudimentary, involving the provision of...
data broken down by country on global income and taxes paid, according to a common template. For transfer pricing purposes, we believe it may be more useful if any requirements in that template were more narrowly focused on particular risks — particularly if it otherwise becomes an overly complex exercise to compile the data required.
We’re concerned that there is a great potential for this kind of information to be used inappropriately by tax authorities and/or become accessible by the public, where it could be misinterpreted or used anti-competitively.
We also believe that a surfeit of this type of basic information may not assist the process of resolving disputes. If any requirements are clearly targeted as a risk assessment tool rather than as an adjustment tool for field auditors, that should help address potential issues with the effective use of limited resources, a matter also clearly raised in the EU Joint TP Forum’s June 2013 Report on transfer pricing risk management.
19 July 2013
The Plan notes that asymmetries in information on TP between taxpayers and the tax administrations potentially enhance the opportunities for BEPS...
especially as a ‘big-picture’ view of the taxpayer’s global value chain is often not available. It is also noted the differences between countries and the requirements on TP documentation lead to significant costs for business. It is therefore proposed to re-examine TP documentation to ensure transparency for the tax administration, bearing in mind the costs for business. It is specifically noted that the rules to be developed will include a requirement that MNCs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. The work is to be completed within one year.