As mentioned in a previous blog, the Organization for Economic Cooperation and Development (OECD) issued final recommendations on the 15 Action Items in its Base Erosion and Profit Shifting (BEPS) initiative on October 5, 2015. Detailed in Action 13 is a country-by-country (CbC) reporting requirement.
What is CbC Reporting, and What is a CbC Report?
U.S. multinational companies (MNCs) must report certain financial information on a CbC basis. As the cornerstone of the OECD’s recommendations, BEPS CbC reporting, as outlined in BEPS Action 13, requires multinational enterprises to include detailed financial and tax information relating to the global allocation of their income and taxes, among other indicators of economic activity. Essentially, they must provide an annual return – the CbC report – that delineates key elements of their financial statements by jurisdiction. This report offers local tax authorities with insight into income, revenue, tax paid and accrued employment, retained earnings, capital, activities and tangible assets.
While CbC reporting is ultimately intended to boost transparency and accuracy in reporting, it is also intended to help ensure that adequate taxes are paid in the jurisdiction where profits are generated, where value is added and where risk is taken.
To date, about 50 countries are in the process of proceeding with BEPS reporting legislation, and more expected to follow suit. Nearly 40 countries have also signed the OECD’s Multilateral Competent Authority Agreement on CbC reporting (aka, MCAA). MCAA calls for the automatic exchange of CbC reporting information among the signatories. The U.S. finalized its CbC reporting regulations in June 2016.
How Does CbC Reporting Affect MNEs?
The extent to which CbC reporting will affect MNEs depends on when specific countries implement it within their legal systems. As of January 1, 2016, some countries already implemented it. Others are engaged in the process of doing so.
Additionally, CbC reporting will likely impact U.S. MNEs in ways they may not yet be prepared for—including but not limited to the IRS requirement of a new reporting form, Form 8975, Country-by-Country Report, with an income tax return.
Finally, for cases involving countries that have implemented CbC reporting, Form 8975 should be filed within 12 months of the relevant year end.
How Are Global Companies Reacting to CbC Reporting Legislation?
Because the BEPS guidelines will fundamentally change the course of international taxation and transfer pricing for all MNEs, Thomson Reuters, in association with TPWeek, recently conducted its second survey of in-house tax and transfer pricing directors across more than two dozen industries to get a pulse on their level of preparedness and organizational response to BEPS reporting and related legislation. For this recent report, 207 tax professionals were surveyed.
Do Strategic Opportunities Lurk Within CbC Reporting Requirements?
Indeed, they do. When processed and analyzed thoroughly and thoughtfully, business owners and executives can gain significant insights from CbC reporting data that can help them plan strategically in ways that promote efficiency and fuel growth.
What Should MNEs Do to Prepare for CbC Reporting?
MNEs must assess their readiness to collecting and processing the specific data that is necessary under the new CbC reporting requirements. Specifically, they must understand how they will gather that data; what sources will be used in that effort; what technology is best suited to gathering and processing it; who will lead the charge; and when relevant deadlines must be met. Your ultimate goal should be to keep your business tax compliance and manage your effective tax rate.
This all entails a systematic approach that includes a comprehensive business assessment and proper planning, as well as the use of leading-edge technology and informed guidance. At Skoda Minotti, we advise clients to utilize the services of their trusted advisors in this effort.
For questions about country by country reporting or all other international tax issues, please contact Jason Rauhe, CPA, at 440-605-7124 or email email@example.com.