International Tax Alert - February 2016

February 2016

31 Countries Sign Tax Co-Operation Agreement to Enable Automatic Sharing of Country-By-Country Reports


Download PDF Version


Summary

On January 27, 2016, the Organisation for Economic Cooperation and Development (“OECD”) announced that 31 countries have signed the Multilateral Competent Authority Agreement (“MCAA”), which will allow automatic sharing of Country-by-Country (“CbC”) reports.


Details

In an unprecedented move towards implementation of the new CbC transfer pricing reporting requirements developed under Action Item 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting of the OECD/G20 Base Erosion and Profit Shifting Project (the BEPS Project), 31 countries signed the MCAA, a tax cooperation agreement that will allow for automatic exchange of CbC reports. The signing of the MCAA is part of continuing efforts by tax administrations to make it harder for multinational enterprises (“MNEs”) to engage in cross-border corporate tax avoidance. The 31 countries that are signatories to the MCAA are:
 
Australia
Austria
Belgium
Chile
Costa Rica
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Ireland
Italy
Japan
Liechtenstein
Luxembourg
Malaysia
Mexico
Netherlands
Nigeria
Norway
Portugal
Slovak Republic
Slovenia
South Africa
Spain
Sweden
Switzerland
United Kingdom


 

Action Item 13 seeks to enhance transparency of MNEs by providing tax administrations with adequate information to conduct transfer pricing risk assessments and audits. It contains detailed recommendations for transfer pricing documentation, including the new CbC reporting. Specifically, MNEs with consolidated annual revenues equal to or in excess of €750 million will be mandated to file CbC reports with tax administrations in their country of residence, disclosing specific information including identification of each entity within the MNE group operating in a particular tax jurisdiction, and information about the business activities each entity is engaged in. In his speech at the signing ceremony, the OECD Secretary-General Angel Gurria stated that under the MCAA, tax authorities will have “a single, global picture on the key indicators – profits, tax, and economic activities – of multinational businesses… allowing them to better assess transfer pricing and other BEPS risks, and deploy audit resources where they will be most effective.”

The OECD recommended that the first CbC reports be filed for MNEs with fiscal years beginning on or after January 1, 2016, and that MNEs be allowed one year from the close of the fiscal year to which the CbC report relates to prepare and file it, meaning the first reports are expected to be filed by December 31, 2017, for calendar year MNEs.

Under the MCAA, the information collected through the CbC report by an MNE’s country of residence will be automatically exchanged with other countries in which the MNE operates that are also party to the MCAA. The MCAA also allays concerns of many businesses about tax and commercially-sensitive information by ensuring that the confidentiality of such information is safeguarded. The first exchanges under the MCAA are expected to start in 2017/2018 on the 2016 tax year information.  

The next step in the process is the development of an electronic data transmission platform with encryption and a related User Guide to facilitate the electronic exchange of the CbC reports.


BDO Insights

The signing of the MCAA reaffirms the anticipation that many countries are moving forward with implementation of the CbC reporting requirements consistent with recommendations under OECD Action Item 13. The U.S. Treasury Department and Internal Revenue Service have signaled the United States’ commitment to Action Item 13 recommendations with the release of Proposed Regulations on CbC reporting in December 2015. The implication for United States resident MNEs remains unclear until the regulations are finalized or further guidance is provided with regards to obligations of United States MNEs.

It should be noted that where information cannot be exchanged, Action Item 13 provides an alternative filing approach tagged the ”secondary mechanism,“ which transfers the filing obligation to a ”constituent entity” of an MNE group operating in a country adopting the OECD’s recommendation. United States MNEs that have business operations in any of the 31 countries that are signatory to the MCAA can anticipate their constituent entities may be required to file CbC reports for the 2016 tax year. The MNEs should start assessing their ability to comply with the CbC reporting requirements as well as the potential for increased transfer pricing disputes and penalties for non-compliance.
 

For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner


 

Bob Brown
Partner

 

Jerry Seade
Principal


 
Scott Hendon
Partner
 

Joe Calianno
Partner and International Technical
Tax Practice Leader


 
Monika Loving
Partner
 

Michiko Hamada
Senior Director


 
Brad Rode
Partner
  Chip Morgan
Partner

 
Veena Parrikar
Principal
  Sean Kim
Senior Director, Transfer Pricing