The OECD has provided further clarifications in relation to four key areas of the country-by-country (CbC) reporting requirements: The treatment of investment funds, treatment of partnerships, ‘parent surrogate filings’ and clarification around the EUR750million threshold and how currency fluctuations affect this. Also this week, the US CbC Regulations have now been finalised.
The guidance reiterates the principle of following the accounting consolidation rules when determining what constitutes a multinational group and which entities are within scope.
For investment funds, the guidance confirms our understanding that where accounting rules do not require consolidation and instead permit investments to be fair valued, those investments should not form part of the group for CbC reporting purposes and should not be constituent entities. This needs to be worked through on a case by case basis, though it could reduce the compliance burden in this sector.
For partnerships, confirmation is provided that where a partnership is consolidated under accounting principles it should be viewed as a constituent entity within the multinational group. There are clarifications around using the concept of a ‘Stateless Entity’ which should be utilised in both table 1 and 2, and recommending notes in table 3 to explain the structure and that the stateless income is included in the jurisdiction(s) of the partners.
Clarification is also given that, in determining where an Ultimate Parent Entity that is a partnership is required to file a CbC reporting template, the jurisdiction under whose laws the partnership is formed governs if there is no jurisdiction of tax residence.
Where countries have implemented CbC reporting legislation but do not require filings for 2016, then providing certain conditions are met, an Ultimate Parent Entity tax resident in that country can make a ‘parent surrogate filing’ which will protect the group from requests for local filings for that year. Qualifying Competent Authority Agreements must be in effect between the parent country and the local country. The US, Switzerland and Japan have confirmed they will have parent surrogate filing mechanisms in place for 2016 periods and further countries are expected to be added to this list in due course.
Finally, it is confirmed that if the threshold in the country of the Ultimate Parent Entity is based broadly on the local equivalent of €750 million as at January 2015, then lower thresholds in other countries will not trigger a local filing for the group. The guidance states there is no reason for countries to periodically revise the threshold for currency fluctuations. This is an interesting question for the UK as the final version of the UK legislation was revised from a fixed threshold of £586million to the sterling equivalent of €750 million using the average exchange rate for the accounting period. This is of particular interest for the UK given the impact of the Brexit vote on the sterling exchange rate and we will be clarifying the UK position with HMRC.
In addition, this week the US Regulations have been finalised. There are a number of clarifications following the representations received on the draft. Further comments on the detail of the regulations will follow.