Outlining some key issues relating to the implementation of CbC reporting.
With deadlines for filing the first Country-by-Country (CbC) reports fast approaching, many multinational enterprise (MNE) groups are busy doing their best to obtain necessary information, to make sense of that information and to get their CbC reports into a format ready for filing. One issue for MNE groups relates to working out what financial information should be reported in Table 1 of the CbC report, which stem from interpretational matters, data availability and tax risk management.
Consolidated financial statements or separate entity financial accounts?
An issue being confronted by most MNE groups is whether financial information at the jurisdictional level should be presented in Table 1 based on information prepared for purposes of consolidated financial statements or information sourced from separate entity statutory financial accounts. Experience has shown there is not a single answer to this question and in many cases the approach adopted will be influenced by the existence or absence of internal systems to collect reliable financial information in a particular and consistent way.
It is not uncommon to encounter situations where audited financial data at the subsidiary level differs materially from the consolidated data available to the Ultimate Parent Entity (UPE) (e.g. due to different accounting standards applying or different year ends). In some cases this has generated discussions between different (regional) departments within the MNE group as it is commonly perceived that the likelihood of a local audit is greater when the financial data differs from that available to the respective tax authorities.
Reporting revenue – gross or net?
In the financial services industry it has been observed that situations could arise where related-party transaction revenue might be negative if reported on a net basis (e.g. where interest revenue is reported on a net basis). As the Organisation for Economic Co-operation and Development (OECD) guidance on reporting of revenues does not specify whether gross revenues or net revenues should be used, some MNE groups have considered whether to use gross revenues. However, reporting revenues on a gross basis would lead to considerably larger revenues being reported in the CbC report than would be reported in the MNE group’s consolidated P&L. Care is needed.
Table 3 (Additional information) of the CbC report
Where issues similar to those discussed above are under consideration by an MNE group, the MNE group should also consider the potential additional disclosures that may need to be made in Table 3 (Additional Information) of the CbC report (Table 3) and the potential implications of such disclosures. The key disclosures required in Table 3 with respect to the financial information disclosed in Table 1 relate to the sources of data used.
While the financial information disclosed in Table 1 can use data from the MNE group’s consolidation reporting packages, separate entity statutory financial statements, regulatory financial statements, or internal management accounts, the OECD seems to clearly intend that CbC reports should consistently use the same sources of data from year to year. As such, Table 3 requires the sources of data used to be briefly described and that where a change is made in the source of data used from year to year, that Table 3 should explain the reasons for the change and its consequences.
This is only a small sample of the potential implementation issues associated with CbCR. For MNE groups faced with the prospect of having to prepare and file their first CbC report, the key recommendation is don’t leave things to the last minute!
A version of this article was originally published in the International Taxation Review Asia Transfer Pricing supplement (9th edition).