Different Country-by-Country Reporting requirements in a nutshell

1. Introduction

Since the implementation of BEPS Action 13 into domestic law, certain multinational enterprises (MNEs) are required to file a Country-by-Country (CbC) report. A CbC report contains information relating to the global allocation of the MNE’s income and taxes paid, together with indicators of the location of economic activity within the MNE. We refer to these reports as OECD CbC reports.

The OECD CbC reports are filed and subsequently exchanged among relevant tax authorities. Other stakeholders do not have access to the OECD CbC reports. Recently, initiatives were proposed to require MNEs to publish information that is very similar to the OECD CbC Report. The European Commission is working on an amendment proposal that requires European MNEs to publish key information on where profits arise and where taxes are paid. Additionally, the Global Reporting Initiative (GRI) has developed a voluntary reporting model that enables organizations to better understand and publicly communicate information on tax contributions. In the meantime, tax authorities are increasingly reviewing the available OECD CbC reports.

This article discusses the OECD CbC reporting requirements and chances to anticipate potential questions from various tax authorities. Subsequently, this article addresses both the European Commission’s and GRI’s initiative to publicly disclose CbC reporting information. We conclude that public CbC reporting should not only be viewed as a burden, but also as an opportunity.

2. OECD CbC reporting requirements

MNEs with consolidated revenues exceeding 750 million euros (or a near equivalent amount in domestic currency) in the year preceding the reporting year are required to file an OECD.

CbC report with the tax authorities. The CbC report should be filed annually by the MNE’s ultimate (or surrogate) parent entity no later than twelve months after the last day of the reporting fiscal year of the MNE. Any constituent entity of an MNE should notify its local tax authorities of the identity and tax residence of the entity that will file the OECD CbC report. The deadline for this notification is the last day of the reporting fiscal year of the MNE.

The OECD CbC report should be automatically exchanged with relevant tax authorities no later than 15 months after the last day of the reporting year of the MNE.

3. Red flag analysis

The aim of OECD CbC reporting is to provide tax administrations with more focused and useful information for transfer pricing risk assessments and audits. OECD CbC reporting data can, among other things, be used to analyse key figures with regards to tax liability. For example, an indication of the effective tax rate can be determined by calculating the current income tax accrued as a percentage of the profit before income tax. Tax authorities use such ratios like these to decide whether or not to request an explanation or start an audit procedure. To be one step ahead of tax authorities, taxpayers could analyse their OECD CbC reports to identify so-called “red flags”. The identified red flags could subsequently be used to anticipate questions, or proactively provide explanations (e.g. in the Local and Master Files).

4. Other initiatives: EU Public CbC reporting

The OECD CbC reports are only available to tax authorities. To make the OECD CbC report available for the public, the European Commission is working on an amendment proposal that requires European multinational organizations to publish key information on where profits arise and where taxes are paid. We refer to these reports as EU Public CbC reports. According to the European Commission, public scrutiny can help to ensure that profits are effectively taxed in the jurisdictions where they are generated. The proposed amendment has not yet been implemented but may be addressed in the EU decision-making process soon.

The consolidated CbC report will be published in a business register, to ensure certainty and availability over time. Public scrutiny is enabled through public accessibility of the reports on organizations’ websites for at least five consecutive years. To prevent commercially sensitive information from being published, the European Parliament introduced a safeguard clause that EU member states can implement.

5. Other initiatives: Global Reporting Initiative – Tax Standard

The GRI’s Sustainability Reporting Standards enable organizations to voluntarily report about financial, social and environmental sustainability. If taxation is a material topic for the organization, the new GRI Tax Standard can be adopted to provide stakeholders with insight on the fiscal strategy of the organization. The Tax Standard can also be used to show contributions with regard to different types of taxation, such as VAT and payroll taxes, and to provide a full image of the societal impact of an organization.

The Tax Standard consists of four disclosures. The first three disclosures are categorized as management approach disclosures that describe the organization’s fiscal approach, tax governance, control and risk management and stakeholder engagement. The fourth disclosure introduces a CbC reporting standard that requires reporting financial, economic and tax-related information.

6. Voluntary public CbC reporting

Some companies, such as Vodafone and Shell, have, on a voluntary basis, published a taxation report similar to the OECD CbC report. These companies took the opportunity to publicly disclose information on their tax strategy. This allowed them to inform the audience about their contributions to society such as job creation, building infrastructure and specific tax contributions including VAT and wage tax. By doing so, they were able to provide a full picture of their contributions, contrary to the limited picture an OECD CbC report provides, given its focus on income tax. This is a good example of how public CbC reporting can used as an opportunity for MNEs rather than a burden.

7. How can Loyens & Loeff assist you?

Loyens & Loeff can assist MNEs in preparing and filing both the OECD CbC report and the CbC reporting notification with the tax authorities. Furthermore, Loyens & Loeff can assist you in identifying “red flags”, which allows you to be one step ahead of tax authorities. Lastly, Loyens & Loeff can be you sparring partner in deciding whether publicly disclosing information on your tax strategy is beneficial