On 8 February 2018, the Organisation for Economic Co-operation and Development (OECD) released additional guidance to give greater certainty to tax administrations and multinational enterprise (MNE) groups on the implementation and operation of Base Erosion and Profit Shifting (BEPS) Action 13 Country-by-Country (CbC) Reporting (CbCR). Accordingly, the existing guidance on the implementation of CbCR (the Guidance) has been updated to address two specific issues: (i) the definition of total consolidated group revenue, relevant to determine whether a filing obligation exists; and (ii) whether non-compliance with the confidentiality, appropriate use and consistency conditions constitutes a Systemic Failure, which could trigger an obligation for local filing of the CbC report.
Additionally, the OECD released a compilation (the Compilation) of the approaches adopted by 24 member jurisdictions of the Inclusive Framework on BEPS with respect to some of the issues where the Guidance allows for alternative approaches.
In June 2016, the OECD released additional guidance related to CbCR under BEPS Action 13.1 The OECD updated the guidance in December 2016,2 April 2017,3 July 2017,4 September 2017,5 and November 2017.6
On 8 February 2018, the OECD released an update to the Guidance wherein two specific issues were addressed, namely: (i) whether for calculating the total consolidated group revenue of an MNE group under Article 1.1 and 1.3 of the OECD model legislation on CbCR, the MNE group can use different accounting principles/standards; and (ii) whether non-compliance with the confidentiality, appropriate use and consistency conditions constitutes a Systemic Failure.
Moreover, the OECD released a compilation of the approaches adopted by a number of member jurisdictions of the Inclusive Framework with respect to some of the issues where the Guidance allows for alternative approaches.
Definition of total consolidated group revenue
One of the questions that was added in this update to the Guidance, considers whether for calculating the total consolidated group revenue of an MNE group under the definition of Group in Article 1.1 and under the definition of Excluded MNE group in 1.3 of the model legislation, the MNE group can use different accounting principles/standards. According to the Guidance, the MNE group is required to calculate total consolidated group revenue for the purposes of Article 1.3 based on the accounting standards that are used for identifying a group under Article 1.1.
Non-compliance with the confidentiality, appropriate use and consistency conditions and Systemic Failure
A new question has been added in part V of the Guidance (issues relating to the sharing mechanism for the CbC report (Exchange of information, surrogate filing and local filing)) which addresses whether non-compliance with the confidentiality, appropriate use and consistency conditions constitutes a Systemic Failure. Systemic Failure is one of the CbCR local filing triggering events. Therefore, if there has been Systemic Failure of the jurisdiction of tax residence of the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity, the MNE group could be required to local filing in the country that determines that there has been a Systemic Failure.
According to the Guidance, confidentiality, consistency and appropriate use are necessary conditions underpinning the obtaining and use of CbC reports by tax authorities. The consequences of non-compliance with these conditions will depend on the terms of the Qualifying Competent Authority Agreement (QCAA) between the jurisdictions. Without prejudice to other rights of suspension which may exist, under Section 8, Paragraph 5 of the Multilateral Competent Authority Agreement (MCAA) and Section 8, Paragraph 2 of the Model Competent Authority Agreement (CAA), a Competent Authority may temporarily suspend the exchange of information by giving notice in writing if it is determined that there is or there has been significant non-compliance by the other Competent Authority. The term “significant non-compliance” is not defined. However, as provided in the Guidance on the Appropriate Use of Information Contained in CbC Reports,7 this determination may, for example, be based on the outcomes of a jurisdiction’s peer review evaluation of appropriate use.
On the question of whether the suspension due to non-compliance with the conditions of confidentiality, appropriate use or consistency constitutes Systemic Failure, the Guidance answers negatively. According to the Guidance’s wording, Systematic Failure, as defined in Paragraph 13 of Article 1 of the Model Legislation, arises where a jurisdiction suspends automatic exchange of information for reasons that are other than in accordance with the terms of the relevant QCAA or otherwise persistently fails to exchange CbC reports in its possession. Because a temporary suspension of exchange of information under Section 8 is in accordance with the terms of the relevant QCAA, this does not constitute Systemic Failure and would not lead to a local filing obligation.
Compilation of approaches adopted by jurisdictions
The Compilation contains information on how 24 jurisdictions apply, or intend to apply, some of the guidance items that allow for alternative approaches. The jurisdictions currently covered in the Compilation are: Argentina, Australia, Belgium, Canada, Colombia, Costa Rica, Denmark, Guernsey, Hong Kong, Ireland, the Isle of Man, Japan, Latvia, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Russia, Slovenia, Sweden, the United Kingdom and the United States.
At this stage, the Compilation only contains the country positions on three items, namely: (i) whether extraordinary income and gains from investment activities are required to be included in the total consolidated group revenues when applying the €750 million threshold; (ii) how to apply the €750 million threshold in cases where the preceding fiscal year is less than 12 months; and (iii) whether a CbC report must be prepared by the UPE of an MNE group for the first fiscal period in which the group has independent existence, following disposal by another group. For further information on the alternative approaches allowed on points (ii) and (iii) above, see EY Global Tax Alert, OECD releases additional guidance on Country-by-Country Reporting, dated 4 December 2017.
The compilation of approaches has been prepared based wholly on information provided by the 24 jurisdictions which is included in the document and reflects information provided up to 1 February 2018. It can be of great use for MNE groups and other jurisdictions in determining whether a jurisdiction requires a CbC report to be filed in a particular scenario.
Non-compliance with the confidentiality, appropriate use and consistency conditions and Systemic Failure Since the OECD released the final report on Action 13, there has been ongoing and increasing activity around CbCR requirements. The Guidance marks the seventh release by the OECD regarding practical questions that have arisen concerning the implementation and operation of CbCR.
Both the Guidance and the compilation of approaches will continue to be updated with any further guidance that may be agreed by the Inclusive Framework on BEPS and any information received by the jurisdictions. Although the compilation of approaches provides insights on country positions, it does not state what it means for CbC reports that have already been filed in one of the countries covered by the compilation. MNE groups should consider the country position when preparing future CbC reports. Taxpayers should continue to closely monitor new or amended reporting requirements and how countries implement or react to the new Guidance.
1. See EY Global Tax Alert, OECD releases additional Guidance on implementation of Country-by-Country reporting, dated 29 June 2016.
2. See EY Global Tax Alert, OECD updates Guidance on Country-by-Country Reporting and launches new site on country-specific implementation, dated 5 December 2016.
3. See EY Global Tax Alert, OECD updates its Guidance on Country-by-Country Reporting, dated 7 April 2017.
4. See EY Global Tax Alert, OECD releases update of Guidance on the Implementation of Country-by-Country Reporting, dated 19 July 2017.
5. See EY Global Tax Alert, OECD releases further guidance on Country-by-Country Reporting, dated 7 September 2017.
6. See EY Global Tax Alert, OECD releases additional guidance on Country-by-Country Reporting, dated 4 December 2017.
7. For further information on the Guidance on the Appropriate Use of Information Contained in CbC Reports, see EY Global Tax Alert, OECD releases further guidance on Country-by-Country Reporting, dated 7 September 2017.
EYG no. 00810-181Gbl
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