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?
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.
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.
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.
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.
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).
Previous TP disclosure requirements in the ITR14 have been expanded
SARS has introduced further changes and enhancements to its ITR14 return on 18 April 2016. Additional sections, questions, items and certain automatic calculations have been added throughout the ITR14. A full analysis of these changes can be found here, but I wanted to highlight the additional transfer pricing disclosure requirements.
The previous transfer pricing disclosure requirements in the ITR14 have been expanded to request details of the number of tax jurisdictions, countries and value per country in relation to related party income received/accrued or expenditure incurred. Furthermore, the amended ITR14 introduced additional transfer pricing questions to determine if the taxpayer:
Has made any changes to its transfer pricing policy since the previous reporting period including a change in its classification
Is transacting with a tax jurisdiction that does not have a tax treaty with South Africa
Selected a tested party which is not tax resident in South Africa
On or after 1990, transfer, alienate or disposed of intellectual property to any non-resident connected party or branch of a South African resident
Lastly, the new ITR14 also requests an additional financial ratio.
The new transfer pricing disclosure requirements as of 18 April, incorporating previous and new requirements, will assist SARS greatly in creating risk profiles for taxpayers and send additional information request to those, which are deemed to be higher risk. Please let me know your thoughts, and if you would like to discuss your specific case in a more private environment, please feel free to reach out to me here as well.