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Country by country reporting and the changing landscape

The OECD issued a draft revised chapter V of the OECD guidelines on documentation on January 30 2014. The emphasis is now on both transfer pricing enquiry and on risk assessment. One of the key changes to help tax authorities with risk assessment is the introduction of guidance on country-by-country reporting (CBCR).

In the wake of the economic crises, companies have come under increasing scrutiny as to whether they are paying their fair share of taxes.

National tax laws are perceived to have failed to keep pace with the rapid rise of globalisation. Pressure is mounting for governments to alter the tax reporting landscape, adapt to the changing environment and provide greater transparency around corporate tax. One important challenge faced by tax administrations is their inability to capture the “big picture view” of taxpayers’ global value chains.

The revised draft chapter V includes a CBCR reporting template as Annex III. The draft indicates that the template "is to be provided to tax administrations as part of the global transfer pricing master file". What is interesting is that there is also an Annex which lists the information that is recommended for inclusion in the master file which is fairly comprehensive, and yet the stated purpose of the CBCR template is risk assessment. At the risk assessment stage, tax authorities do not necessarily require all the information in the master file and so this may not be an appropriate place for CBCR. The OECD has asked for views on whether this should be part of the master file or a separate document; in our view they should be clearly separated.

When implemented, CBCR reporting will require multinational companies to disclose key business and financial information for each country in which they operate.

The draft template includes:

· Revenues;

· Earnings before tax;

· Income tax paid;

· Capital and accumulated earnings;

· Employee details; and

· Specific information on intra-group payments, such as management fees and royalties.

Preparing and gathering such information may not necessarily be the remit a company’s tax department and some businesses consider this the responsibility of their financial reporting teams.

The OECD has asked for comments on whether to use a "bottom-up" or "top-down" approach to preparation and other questions on the methods of calculation. These are perhaps points that should be addressed by both financial reporting and transfer pricing specialists because the key questions here will be "how easy is the CBCR schedule to prepare?" and then "how meaningful will it be as a risk-assessment tool?".

In some businesses, such as those in the financial services and extractive industries sectors, there has already been a requirement for a certain level of CBCR to enhance transparency.

Within the financial sector, companies classified as credit institutions or investment firms are required to disclose information on income, tax paid as well as other economic measures. This information may therefore be readily available.

The OECD has requested comments from interested parties by Sunday February 23 2014.

Article by Zakariya Modan, associate (, Lorna Smith, associate director, ( and Wendy Nicholls, head of transfer pricing (, Grant Thornton UK.

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