Implementation issues associated with CbCR
By Aaron Yeo of KPMG Australia, Chi Cheng and Rafael Triginelli Miraglia of KPMG China, Yosuke Suzaki of KPMG Japan and Baek Seung Mok of KPMG Korea.
With deadlines for filing the first country-by-country (CbC) reports fast approaching, many 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.
At the same time, the Organisation for Economic Cooperation and Development (OECD) and tax administrations continue to provide additional guidance. For example, the OECD has most recently issued 'Guidance on the Implementation of Country-by-Country Reporting' BEPS Action 13, Updated April 2017. While the existing guidance is helpful it is nevertheless incomplete and issues continue to arise as MNE groups proceed with preparing their first CbC report.
This article draws on the experiences of KPMG firms in four ASPAC countries that have adopted CbCR, Australia, China, Japan and Korea, to discuss a range of issues encountered by MNE groups in preparing their first CbC report and how these issues are being addressed.
The issues identified in this article may not be common to all ASPAC countries covered in this survey and local rules or tax authority administrative guidance may determine the approach to be taken in a particular country. Nevertheless it is apparent that MNE groups, regardless of which jurisdiction they call home, are facing many similar implementation issues. This article endeavours to shed light on some of the implementation issues being encountered.
Implementation issues in preparing the first CbC reports
Implementation issues continue to arise that are not addressed by OECD and/or tax administration guidance. A number of these issues are discussed below.
Who is the Ultimate Parent Entity (UPE)?
In many cases, identification of the UPE is likely to be straightforward. However, experience has shown that this is not always the case as the following examples illustrate.
Example 1: Consider the situation of an MNE group with a constituent entity that is listed on a stock exchange in an ASPAC country that has adopted CbCR. At first glance, it might be considered that the listed entity would be the UPE. However, the identification of the UPE is not as straight-forward when a significant interest (e.g. more than 50%) in the listed entity is held by a group of related private companies incorporated in another jurisdiction that has adopted CbCR.
Example 2: Incorporated joint venture (JV) arrangements between two different MNE groups, where each group owns 50% of the shares in the JV, also raises the question of which MNE group the JV belongs to (and therefore who its UPE is). In this case, the JV is a subsidiary of both MNE groups under the relevant accounting rules applicable to each group and the JV's financials are reflected in the consolidated financial accounts of each MNE group. Does the JV have two UPEs, being the UPE of each of the two MNE groups, and therefore is the JV a constituent entity for each MNE group whose financial data is included in the CbC report for each MNE group?
Reporting financial information in Table 1 of the CbC report
Issues continue to arise for MNE groups in working out what financial information should be reported in Table 1 of the CbC report (Table 1), 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 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 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.
Managing potential tax risks
Managing potential tax risks is a key part of any MNE group's business. The two examples below show some potential tax risks being identified by ASPAC-based MNE groups due to the way financial information might be presented in the CbC report.
Example 3: In industries such as oil & gas, it is very common for MNE groups to enter into production-sharing contracts whereby several parties set up a joint operation entity. Similarly, in the infrastructure sector, it is common for contractors to form a consortium and set up a joint-enterprise to execute a project. Under accounting standards applying to joint arrangements, revenue from joint operations could be recognised in the accounting statements either in the revenue line (which would be disclosed in Table 1 as revenues) or as an investment using the equity method (which may not be disclosed in Table 1 revenues). As such, following the accounting standards could lead to revenues being perceived to be over/under stated in particular jurisdictions and therefore present a potential tax risk.
Example 4: Some MNE groups historically may not have introduced transfer pricing policies for their cross-border related party transactions with the outcome being a lack of financial performance consistency with respect to foreign subsidiaries performing similar functions. Consequently, a number of MNE groups have recently been establishing or improving existing global transfer pricing policies, focusing on consistency. While such developments should provide better overall transfer pricing outcomes going forward, potential tax risks could arise given the lack of consistency in years prior to the introduction of CbC reporting.
Mismatches between filing deadlines for tax and accounting information
A common issue faced by MNE groups is managing mismatches between filing deadlines for tax information (including the CbC report) and accounting information across multiple jurisdictions. Under CbCR introduced in most jurisdictions, MNE groups are generally required to prepare and to file a CbC report in electronic format within one year of the end of the relevant fiscal year of the UPE.
To address timing mismatches, some ASPAC countries have introduced legislative or administrative mechanisms that enable an extension of time to be granted for purposes of lodging the CbC report (Korea) or that would permit the MNE group to align the 12 month reporting period for the CbC report in the local jurisdiction with the reporting period of the UPE (Australia).
Particular issues relating to timing mismatches have arisen in China and Japan which have been addressed as described below.
The fiscal year of most Japanese companies begins on April 1. The first year of CbC reporting in Japan relates to the fiscal period ending March 31 2017, with a filing date of March 31 2018. By contrast, the fiscal year of many subsidiaries of Japanese companies incorporated in other countries begins on January 1. As such, the filing date of the CbC report in these other countries is likely to be earlier than the filing date for the CbC report by the reporting entity in Japan. Generally, the subsidiaries of Japanese companies incorporated in other countries would apply for a filing extension until the reporting entity files its CbC report in Japan. However, the tax authorities in some countries may not grant such filing extensions. To address this concern, the Japanese tax authority has indicated that it will allow the Japanese reporting entity to file the CbC report before the due date for filing in the first year of CbC reporting.
In China, Announcement 42 requires the CbC report to be filed concurrently with the filing of the 'PRC Annual Related Party Transactions Reporting Forms' which are due by May 31 each year. The short timeframe proved to be a concern to some MNE groups, particularly when the country in which the UPE was located had a later filing deadline. This issue was addressed by the Chinese tax authorities by granting an extension to the local filing deadline where the Chinese resident entity provides written evidence that a CbC report for the relevant fiscal period will be filed by the MNE group's UPE or SPE in another jurisdiction which has a later filing deadline. (Available at www.oecd.org/tax/beps/country-by-country-reporting-update-on-exchange-relationships-and-implementation.htm; accessed on May 15 2017.)
Managing a CbC report project
While experiences to date with CbCR vary from country to country and from MNE group to MNE group, there is nevertheless much that is common in relation to managing a CbCR project and much that can be learned from the experiences of other MNE groups.
While the tax functional area is likely to have overall responsibility for the preparation of the CbC report, it is nevertheless crucial to ensure that the accounting, IT and human resources areas are also actively involved. A coordinated and systematic approach to CbC report preparation is preferable and should ideally be part of an MNE group's best practices and align with the internal governance processes of the MNE group.
Based on the experience of KPMG professionals, it seems the most important matter to address for purposes of ensuring a successful CbCR project outcome is to have the right internal stakeholders involved in managing and overseeing the CbCR project from the outset. Often times, this will involve establishment of a steering committee and a day-to-day working group.
Diagram 1 provides a high-level overview of matters to consider in undertaking a CbCR project.
To support ASPAC-based MNE groups to manage their CbCR projects, KPMG professionals have provided a range of assistance, including:
Providing technical input on the pros and cons of adopting alternative approaches for reporting financial information.
Identifying potential red-flags based on the audit consolidation working papers.
Synchronising the audit report preparation process with CbCR – i.e., the internal question list used for audit purposes was linked and cross-referenced in the CbC report, allowing a swift compilation of the CbC report.
Strategic review of information to be disclosed in the CbC report and setting-up a red-flag indicator tool based on risk indicators such as: tax rate not consistent with statutory headline tax rate, cash tax much lower than accrued tax, etc.
Having discussions with tax administrations about technical and practical aspects of CbC reporting.
This article has only scratched the surface of 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.
1 East Chang An Avenue, 8th floor, Oriental Plaza Beijing 100738
Tel: +86 10 8508 7608
Cheng Chi is the partner-in-charge of KPMG's Global Transfer Pricing Services for China and Hong Kong S.A.R. Cheng has led many transfer pricing and tax efficient supply chain projects in Asia and Europe, involving advance pricing arrangement negotiations, cost contribution arrangements, Pan-Asia documentation, controversy resolution, global procurement structuring, and headquarters services recharges for clients in the industrial market including automobile, chemical, and machinery industries, as well as the consumer market, logistic, communication, electronics and financial services industries.
In addition to lecturing at many national and local training events organised by the Chinese tax authorities, Cheng has provided technical advice on a number of recent transfer pricing legislative initiatives in China. A frequent speaker on transfer pricing and other matters, his analyses are regularly featured in tax and transfer pricing publications around the world. Cheng has been recommended as a leading transfer pricing adviser in China by the Legal Media Group.
Cheng started his transfer pricing career in Europe with another leading accounting organisation covering many of Europe's major jurisdictions while based in Amsterdam until returning to China in 2004.
Rafael Triginelli Miraglia
1266 Nanjing West Road, 50th floor, Plaza 66 Shanghai 200040
Tel: +86 21 2212 3176
Rafael is a senior tax manager with the Global Transfer Pricing Team of KPMG China and a member of KPMG International's BEPS Centre of Excellence. His practice focuses on design and implementation of transfer pricing systems, business restructuring advice, value chain analysis and planning and outbound investments.
Rafael graduated in Law (Universidade Federal de Minas Gerais, Brazil, 2004) and has obtained the degrees of Master of Laws (PUC-MG, Brazil, 2008) and LL.M. of Advanced Studies in International Tax Law (ITC – Leiden University, Netherlands, 2011). He is a transfer pricing lecturer at the ITC-Leiden University and has taught courses in tax and constitutional law at PUC/MG and customs law at UNA/MG. Rafael has been a member of the Brazilian Bar Association (Ordem dos Advogados do Brasil) since 2005.
Before joining KPMG China, Rafael worked as tax associate with a global law firm in the Netherlands between 2011 and 2015 and, prior to that, as had of tax with a Brazilian law firm.
KPMG in Japan
Izumi Garden Tower 1-6-1, Roppongi, Minato-ku, Tokyo 106-6012
Tel: +81 3 6229-8334
Yosuke Suzaki is a senior manager in KPMG Japan's Tokyo Global Transfer Pricing Services who has more than 15 years of experience in transfer pricing, valuation, and economic analysis services. Out of the 15 years, he has worked for KPMG in the US's New York transfer pricing practice for two years until September 2014 to support Japanese based companies as well as other multinational companies.
He has advised clients on matters in the areas of transfer pricing planning study, TP documentation, APAs, competent authority, cost sharing, IGS cost allocation, and examination issues. Also, he is a specialist of valuation and economic analysis such as intangible and businesses valuation and business planning.
Baek Seung Mok (William)
KPMG in South Korea
GFC 27th Floor, 737 Yeoksam Dong, Gangnam-gu, Seoul 135-984
Tel: +82 2 2112 0982
Seung Mok is the global transfer pricing services partner of KPMG in Korea. He graduated from the University of Seoul's tax department and has in-depth knowledge and field experience in tax consulting, focusing on international tax and transfer pricing matters.
Seung Mok has been working for KPMG since 2002 and specialises in transfer pricing documentation/planning, tax audit defences, appeal, APA/MAP and designing and implementation of tax optimised transfer pricing systems for multinational clients mostly investing in China, Vietnam, India, EU and the US.
He is a member of Korea CPA/CTA. He is currently a member of the BEPS TFT association, a collaborative committee of government and private institutions. He is also conducting many TP seminars for Korean multinational companies on transfer pricing matters including BEPS action plans and providing clients with various TP services.