Asia-Pacific countries are enthusiastically adopting CbCR

ASPAC countries are enthusiastically adopting CbCR

Tony Gorgas, KPMG’s Asia Pacific regional leader and Damian Preshaw, a KPMG consultant, look at the adoption of Country-by-Country Reporting (CbCR) in the Asia Pacific region.

Partner, Tax

KPMG Australia

Contact

Related content

Night skyline in Singapore

A key outcome of the OECD’s final comprehensive BEPS package of 13 reports issued in October 2015 (OECD’s final BEPS report) was agreement on the need to introduce CbCR along with the associated Master File and Local File for large MNEs, ie those with global revenues exceeding €750 million ($830 million) (Action 13 of the BEPS Action Plan).

Under CbCR, tax administrations will obtain a global picture of where MNE profits, tax and economic activities are reported. This information will enable tax administrations to assess transfer pricing and other BEPS risks better than ever before and therefore where to allocate limited compliance resources. The OECD’s final BEPS report recommends that the first CbCR reports be required to be filed for MNEs’ fiscal years starting from 1 January 2016. 

As Table 1 shows, in May 2016, two-thirds of the ASPAC countries included in this survey have either already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Master File and Local File. 

Table 1

Overview of CbCR, Master File and Local File

To summarise, large MNEs will be required to prepare and file the following documents:

  • A CbC report that will provide a range of quantitative information annually and for each tax jurisdiction in which the MNE does business, including the amount of revenue, profit before income tax, income tax paid, number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction.
  • A Master File that provides high-level information regarding the MNE’s global business operations and transfer pricing policies to all relevant tax administrations.
  • A Local File that provides detailed transactional transfer pricing documentation specific to each country.

Annex III of the new Chapter V (Documentation) of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) contains the template for completion of the CbC report.Annexes I, II and III of the new Chapter V (Documentation) of the OECD TP Guidelines contains details of the information to be included in the Master File, Local File and CbC report (including the template to be completed) respectively.

The underlying intention in requiring the above three documents to be filed is that they will require MNEs to articulate consistent transfer pricing positions and to provide tax administrations with useful information to perform transfer pricing risk assessments. The interaction between the CbC report, Master File and Local File together with an overview of what is required to be included in each document is shown in Diagram 1.

Diagram 1

Potential implications for MNEs associated with CbCR

One of the underlying design features of CbCR is that the CbC report, once filed with the tax administration of the country in which the ultimate parent /reporting entity is located, will be automatically exchanged with tax administrations in other countries in which the MNE operates through mechanisms such as the exchange of information articles in double tax agreements and specifically designed agreements such as the ‘Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports’.

A further design feature is that CbC reports are intended to be  electronically transmitted between Competent Authorities in accordance with the CbC XML Schema developed by the OECD: see ‘Country-by-Country Reporting XML Schema: User Guide for Tax Administrations and Taxpayers, Version 1.0 – March 2016’. The OECD envisages that the first exchanges of CbC Reports will commence in 2018, with information on the 2016 calendar year.

With respect to ASPAC countries surveyed that have already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Table 2 shows the first income year to which CbCR will apply together with details of when the CbC report will need to be filed. 

Table 2

Secondary (filing) mechanism

It is important to recognise that MNEs with their ultimate parent/reporting entity located in an ASPAC country, which may decide not to introduce CbCR or which may delay the introduction of CbCR can still be impacted by the introduction of CbCR in other jurisdictions. This arises due to a further design feature of CbCR which is that where a jurisdiction fails to provide information to another jurisdiction, for example, because it has not required CbCR from the ultimate parent/reporting entity of such MNE groups, a secondary (filing) mechanism has been developed whereby tax administrations in jurisdictions in which subsidiary members of the MNE are located can require filing of the CbC report directly with them.

Situations such as those described above could be fairly common in the first year or two of operation of CbCR as jurisdictions progressively introduce CbCR requirements together with arrangements for the automatic and timely exchange of CbC reports.

In such situations, it will be important for subsidiarymembers of MNEs to:

  • ascertain whether the MNE will be preparing a CbC report
  • where the MNE will be preparing a CbC report – obtain a copy of the CbC report for filing by the due date
  • where the MNE will not be preparing a CbC report – maintain an open dialogue with the tax administration in the jurisdiction in which they are situated to ensure that it is aware that the ultimate parent/reporting entity of the MNE group is not required to prepare a CbC report, with a view to mitigating potential penalties.

We also envisage potential teething problems in the first few years of CbCR even in situations where the ultimate parent/reporting entity is located in a jurisdiction that has introduced a CbCR requirement. For example, delays could arise between the time of filing of the CbC report with the tax administration in which the ultimate parent/reporting entity is located and the provision electronically of the CbC report by that tax administration to the tax administration in the jurisdiction in which the subsidiary member of the MNE is located. Such delays could result in filing requirements falling on local entities even though the ultimate parent/reporting entity has filed theCbC report by the due date. This is illustrated in Diagram 2. 

Diagram 2

In such situations, it will be important for subsidiary members of MNEs to:

  • confirm that the MNE will be preparing a CbC report and will be filing it with the tax administration in which the ultimate parent/reporting entity is located by the due date, and
  • maintain an open dialogue with the tax administrationin the jurisdiction in which they are situated to ascertain whether the tax administration expects to receive the CbC report from the tax administration in which the ultimate parent/reporting entity for the MNE is located.

Given the likelihood that a secondary (filing) mechanism will be introduced in countries adopting CbCR, it will be important for MNEs to monitor and manage the filing dates for the CbC report in the various jurisdictions in which they operate. There are two key reasons to do so: first, filing dates for the CbC report may vary across jurisdictions; and second, penalties may be imposed for failing to file CbC reports by the due date in countries where a secondary mechanism has been introduced.

MNEs with operations in India should take particular care as the CbC report is due to be filed no later than the date the income tax return is due to be filed rather than within 12 months of the end of the period to which the CbC report relates which is the approach generally being adopted.

MNEs with operations in Australia should note that the obligation to file the CbC report is placed directly on an Australian member of the MNE rather than on the ultimate parent/reporting entity for the MNE. Nevertheless, once CbCR has been bedded down, it is anticipated that ordinarily the ATO would receive the CbC report from the tax jurisdiction in which the ultimate parent/reporting entity for the MNE is located.

Penalties

Penalties may apply for failing to file a CbC report by the due date.

Given the added compliance burden that CbCR will impose, some MNEs may be wondering what the consequences of not preparing and filing a CbC report could be. With respect to ASPAC countries surveyed that have already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Table 3 shows that penalties may be imposed for failing to file a CbC report and also provides an indication of the potential maximum penalty that could be imposed. 

Table 3

Conclusion

Given the added compliance burden that CbCR will impose, some MNEs may be wondering what the consequences of not preparing and filing a CbC report could be. With respect to ASPAC countries surveyed that have already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Table 3 shows that penalties may be imposed for failing to file a CbC report and also provides an indication of the potential maximum penalty that could be imposed. 

 

This article was originally published in the International Taxation Review Asia Transfer Pricing supplement (8th edition).

Tax Insights

KPMG Australia's analysis of tax issues and developments.

 
Read more

Transfer Pricing Services

Transfer Pricing Services

KPMG’s international Transfer Pricing Services team can help generate tax efficiencies and reduce the risk of challenges from revenue authorities.

Base Erosion and Profit Shifting (BEPS)

Base Erosion and Profit Shifting (BEPS)

Are companies paying their 'fair share' of tax? KPMG addresses the Base Erosion and Profit Shifting (BEPS) debate.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform