CBCr – initial teething problems with country by country reporting

I was invited to join a panel discussion at the TP Summit to discuss initial teething problems around country-by-country reporting. During the panel we discussed specific topics and I thought I summarise the points below. By no means is the list complete, but I tried to share the most interesting points. What are your thoughts?

  1. How to approach timing differences in relation to implementation of CBCr between different tax jurisdictions where the reporting entity is not yet required to report? To state the problem differently, what if the reporting entity situated in Country A, only has to report for its 2017 year of assessment but a constituent entity (A constituent entity is just an entity/PE part of the MNE that has to report) in Country B will already have to report for its 2016 year of assessment. Could the reporting entity in Country A report its CBCr on a voluntary basis for 2016 which covers the constituent entity, or would that cause other issues, for example is everything in place to share the CBCr between the tax authorities. It is very unlikely that the tax authority in Country B would allow the constituent entity to delay (or not submit) its 2016 CBCr. That really only leaves one practical solution, the constituent entity would have to become a surrogate entity and therefore become the reporting entity for 2016. Practically that means, the surrogate entity would submit the data instead of the ‘previous’ reporting entity in Country A. This is then likely to change in 2017.
  2. What is a surrogate entity? The concept is quite easy, if a tax authority cannot get the CBCr from the ultimate parent as the reporting entity, another entity will stand in as the reporting entity, also know as the surrogate entity. There are some practical challenges, for example, the surrogate entity should report on the whole MNE, including above (i.e. the ultimate parent). But some local laws, for example the UK, may not require a surrogate entity to report on entities above, which could mean that the CBCr from the surrogate entity does not meet the requirements set by other countries. To put this differently, a surrogate entity submitting the CBCr as per the UK laws may not be sufficient in other jurisdictions, which could mean another surrogate entity will have to be elected.
  3. What is the issue with notifications for CBCr? Constituent entities will have to notify their respective tax authorities on which entity in the group is the reporting/surrogate entity. The timing for the notifications differ from country to country. Most are implementing a notification period of 12 months after the year of assessment, however, some countries already require notification by calendar year-end 2016. Another point to consider is how will a taxpayer notify the tax authorities, this could be done via the tax return or an online database. Sometimes tax authorities are slow and that could mean a taxpayer would have to actually submit a written letter to the tax authorities, notifying them of who the reporting/surrogate entity is. Some countries have implemented specific notification penalties, where the taxpayer fails to notify the tax authorities accordingly. Other countries are likely to just use compliance penalty provisions where applicable.
  4. What is meant by ‘related party’ in a CBCr context? The issue here is really around what constitutes a related party and related party revenue. There are different definitions but in the end it is likely that the definition in local law will take precedence. A taxpayer should consider these local requirements to determine firstly, if revenue disclosed is from a related or third-party, but also if there are additional constituent entities to be aware of.
  5. Where should the relevant data be selected from? The OECD has provided some data sources that should be considered, importantly the OECD acknowledges that the data in the CBCr is unlikely to reconcile to the consolidated data. Even with set offs and other consolidation exercises it is going to be very messy to try to reconcile the data back from the report to the consolidated statements. Another issue identified was that of exchange rates. The CBCr should be disclosed in the currency of the reporting entity at the average exchange rate for the year. Should that rate vary considerably from year to year it will result in changing ratios that the tax authorities may run. For example, profits over employees. If the exchange rate decrease (i.e. the currency is worth less in relation to the reporting rate) it looks like less money is being made by a constituent entity even if the employees remain the same and even if profits increase in local currencies.

Lastly there was a discussion around what information should be disclosed in table 3 of the CBCr, for example, the exchange rate data should be shown in table 3 to make the tax authorities aware of the potential issue (among others).

Are you on top of your transfer pricing?

Scores of South African corporate companies will soon be subject to increased scrutiny and cross-border tax reporting regulations as the country aligns its tax regulations with global standards. These latest requirements are contained in two draft notes from the SA Revenue Service (SARS).

The first deals with compulsory transfer pricing documentation retention requirements for companies with revenues over R1 billion and the second introduces the Country-by-Country Reporting (CBCR) Standard for Multinational Enterprises.

The requirement stems from the OECD-led Base Erosion and Profit Shifting (BEPS) project that aims to eliminate tax planning strategies which exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

The OECD reports that the magnitude of the problem, according to research since 2013, is conservatively estimated at between 4% and 10% of global corporate income tax revenues, worth between US$100 billion and US$240 billion annually.

The concept of eliminating profit shifting through practices such as transfer pricing is not new, but there has been renewed vigour on a global scale to accelerate agreement and compliance. The aim of the CBCR standard, which is the second draft note from SARS mentioned above, is to improve transparency of earnings by multinationals in multiple territories.

Through this measure, countries will be able to gain a more accurate picture of whether tax liabilities in their jurisdiction are being fully met.

The upshot of the new regulations is a far more vigorous reporting requirement on qualifying companies. The regulations call for organisations to submit their first reports as from 31 December 2017 for the fiscal year starting on or after 1 January 2016.

The threshold for companies to complete country-by-country financial reports has been set in South Africa at a turnover above R10 billion, with additional provisions that throw this net a little wider.

These additional provisions apply to South African tax resident companies that are not the ‘ultimate parent entity’ of a multinational group when their parent entity is not obligated to file a report in its tax jurisdiction; when the parent entity does not yet have a tax information sharing agreement with South Africa; or that fails to share information required by the new regulations.  Despite these options, the group must still meet the R10bn first, and then if any of these apply, the SA entity will be legally obligated to report according to the CBCR standards.

The finer details and definitions of what constitutes a parent entity are quite complex, but any large corporate that is a subsidiary of a global group or a South African entity operating in multiple international markets will undoubtedly be affected. What these regulations do make very clear, though, is that many large corporations are going to have to invest considerable time and effort to ensure they comply with the new reporting standards.

Apart from adopting new processes, companies that do not have the ability to consolidate financial statements across multiple entities, particularly cross-border operations, may have to invest in the necessary technology to minimise disruption to their accounting teams.

There is little doubt that hiding or shifting profits is going to become increasingly difficult as this new era of transparency and information sharing takes effect. Ultimately, this is for the good of the local and global economy, and companies are advised to take these measures seriously and start preparing for the first reports in order to avoid disruption or non-compliance.

South Africa releases specific draft regulations for country-by-country tax reporting

puzzle-696725_960_720I have recently joined Grant Thornton’s transfer pricing team and was given the opportunity to write transfer pricing alerts for Grant Thornton. Going forward, I will be publishing my posts via the Grant Thornton database but I will also post the same articles here with the hope to get more interaction.

My first post dealt with secondary adjustment and can be found here. I will not go into any further detail as this was previously discussed, but if you would like to pick up on any points please feel free to comment below.

My second post which deals with country-by-country reporting in South Africa can be found here.  What are your thoughts on the topic? Again I would love to hear your comments so please don’t be shy and post below.

Update on BEPS from the OECD – a transfer pricing perspective

No new taxesOn the 26th of May, the OECD hosted a live webcast to provide us with an update on the BEPS Project and its 15 Action Points. You can find the archived webcast here and even better you can download the slides if need be.

Arguably only 5 of the 15 Action Points actually related to transfer pricing and only the following 2 Action Points: TP Aspects of Intangibles (Action 8) and TP Documentation (Action 13) are going to be presented to the G20 in September. This obviously means that these 2 Action Points are prioritised from a transfer pricing perspective.

In short there was a lot of public interest and 462 comments were received. I thought the following points were interesting as they are from developing countries such as South Africa. Please note the list is derived from the OECD Live Webcast slides:

  • “Excessive payments to foreign affiliated companies in respect of interest, service charges, management and technical fees and royalties;
  • Supply chain restructuring that contractually reallocates risks, and associated profit, to affiliated companies in low tax jurisdictions;
  • Significant difficulties in obtaining the information needed to assess and address BEPS issues, and to apply their transfer pricing rules;
  • Use of techniques to obtain unintended treaty benefits;
  • Wasteful tax incentives designed to attract investment; and
  • Techniques used to avoid tax paid when assets situated in developing countries sold.”

The webcast does go into more detail on the different Action Points but I thought I provide the summary from the OECD slides on the 2 transfer pricing Action Points mentioned above for the guys who do not have time to watch the full webcast.

Transfer Pricing Aspects of Intangibles 


  • “Agreement within WP6 on the revised text of Chapter I and Chapter VI;
  • Chapter VI: up-to-date approach to identifying intangibles and how arm’s length considerations should be determined; and
  • The strong interaction between Section B and the work on risk, re-characterisation, capital and the related special measures is recognised in the paper.”

Next steps:

  • “Formal approval by WP6 and approval by CFA; and
  • Work on risk, re-characterisation, capital and the related special measures will be addressed by WP6 with priority.
    • This work stream together with the work on Intangibles will provide guidance on the most challenging TP issues, including excessive capitalisation, low functionality and mere contractual assumption of risk, and will develop approaches to deal with hard to value intangibles
    • The public release of a full draft report on these issues is expected in December 2014″

Transfer Pricing Documentation and CBC Reporting


  •  “Consensus in WP6 that the new approach will greatly improve the access for governments to relevant information for transfer pricing purposes;
  • Agreement on a three tier approach (CbC template, Masterfile and Local File);
  • As these are new tools, experience needs to be developed to assess the effectiveness and efficiency of the tools. WP6 is uniformly of the view that a monitoring mechanism is needed to assess whether the focus of the mechanism can or should be improved in the future;
  • There is also broad recognition within WP6 that a structured and careful implementation is necessary to guarantee:
    • consistency in the approaches by governments
    • that the relevant information is available to governments for which it is relevant on a timely basis
    • that commercially sensitive information is treated confidentially
    • that the costs for both taxpayers and tax administrations are balanced
    • to secure that the information is used as intended
  • WP6 will finalise the document shortly. After that it will be sent to CFA for formal approval”

There has been quite some reaction to BEPS and how it is going to work. But I am quite excited about the new BEPS stuff and believe it will be beneficial to all countries involved.

As always let me know your thoughts!