Now that the deadline for filing your Country-by-Country Report (“CbCR”) is approaching rapidly for many jurisdictions, a CbCR health check before filing is a must. Therefore, take the following five steps into account prior to the submission of your CbCR:
1. Synchronize your Master file, Local file & CbCR storyboard
Through your CbCR any gaps that may be existing in the information presented via your CbCR, Transfer Pricing (“TP”) Master file and Local country file, corporate tax returns and corporate governance policies become visible and should be filled in to align the disclosure of your information towards tax authorities, so that all these different filings landing on the tax inspector’s desk tell the same story. Please see attached visual to illustrate the potential mismatches that could pop up at the different layers of disclosing TP information. (See Appendix 1)
2. Pre-run tax data analytics which tax authorities will also run in next 12-24 months
No other Action of the OECD’s 15 BEPS Action Plan Project will have wider consequences than BEPS Action 13 on CbCR in terms of the data ammunition provided to tax authorities to perform tax risk assessment. In November 2017 the OECD published another additional guidance on BEPS Action 13 in its “Handbook on effective tax risk assessment”. This publication will assist tax authorities in carrying out tax risk assessment before embarking on a full-blown tax audit of the taxpayer. Since, by now, you, most likely, must have already produced first drafts of Tables 1, 2, and 3 of your CBCR, you should be analyzing them as a part of your own assessment of BEPS related risks. Apart from analyzing various financial ratios of the data in Table 1, and the information in Table 2 & 3, you will have to consider the “dotted lines” that might be connecting the CbCR with other sources of information that will land on the tax inspector’s desk, such as Master file, Local files, TP forms and tax returns. Attached you will find ‘annex 3 - example use of a CbC Report for tax risk assessment’ from page 77 of the “Handbook on effective tax risk assessment” of the OECD for your reference. (See Appendix 2)
3. Address outliers in table 3 as well as in a separate risk assessment document
In Table 1 of the CbCR, the allocation of income, taxes and business activities by tax jurisdiction has to be reported. In Table 2 a ‘list of all the Constituent Entities of the MNE group included in each aggregation per tax jurisdiction’ has to be reported. In order to capture any major inconsistencies of these data points and/ or potential TP risk areas, it is crucial to conduct a relevant outlier analysis of the data points generated in Table 1 and 2 of the draft CbCR. The review and analysis of the draft CbCR would help to identify areas which potentially may be challenged by tax authorities. The outlier’s analysis covers several financial ratio analyses by undertaking various “what-if” financial simulations under key tax/ TP scenarios with respect to the major type of intercompany transactions. The definitions used as a basis for the analysis can then be further explained in table 3. To the extent outliers are not disclosed in Table 3, it is highly recommended to maintain a separate internal risk assessment paper for these figures and share this paper with the management board for ‘in control of CbCR’ purposes. Please see attached sample disclosure of Table 3 for internal illustrative purposes only. (See Appendix 3)
4. Send a 1-pager CbCR cover letter when filing your CbCR
When filing your CbCR, multinationals should - by way of a separate letter - request their tax authorities where they file their CbCR, to not disclose their CbCR to governments who are not compliant with the ISO/IEC 27000-series standards. Although the OECD has made clear statements on 'security of data' in its handbooks and other publications, it is not always clear who has been given the authority to validate the ISO compliance status of other governments with whom the CbCR is exchanged. Take this into account when you file your CbCR.
Please feel free to download our template of the 'separate letter' by clicking on the following link:
5. Arrange a proper communication to and back up from the management board
The growing reputational risk attached to strategies that incur a notably low tax bite and the ensuing BEPS project has forced boards to focus on their taxes as much as they do other areas of corporate governance. With the focus of the OECD/G-20 on identifying and attacking tax evasion as well as tax avoidance, entities are forced to take a more proactive role in ensuring transparency in their conduct in order to prevent them from being caught in the web of regulations adopted in the wake of the BEPS project. Therefore, a structural communication and involvement of the board in tax and transfer pricing matters is essential.
CbCR filing checking points
|Synchronize your Master file, Local file & CbCR storyboard
Pre-run tax data analytics which tax authorities will also run in next 12-24 months
Address outliers in table 3 as well as in a separate risk assessment document
Send a 1-pager CbCR cover letter when filing your CbCR
Arrange a proper communication to and back up from the management board
This health check should be communicated with & provided to & confirmed for receipt by Management Board.
Only when the above five points can be ticked in cumulation, the entity is “in control” for CbCR filing purposes.
Transfer Pricing Associates introduces TPA BEPS Desk. If you have any questions, or need more detailed advice on any aspects of BEPS related issues, please get in touch with us. The TPA Global network has alliance partners throughout the world, and the network can provide multi-disciplinary approach on today's critical transfer pricing challenges faced by multinational enterprises.