In October 2015, the Organization for Economic Co-operation and
Development (OECD) released its Base Erosion and Profit Shifting
(BEPS) Action 13, focused on new country-by-country (CbC) reporting
requirements for large multinational enterprises (MNEs). On July
29, 2016, the Department of Finance released draft legislation
focused on aligning Canadian reporting requirements with those
recommended by the OECD.
Key highlights and our insight regarding the importance of this
draft legislation as it relates to Canadian MNEs follows.
The draft legislation introduces Section 233.8 to the Income Tax
Act, which will require the ultimate parent entity of a MNE
resident in Canada to file a CbC report. In instances where the
ultimate parent entity does not have a requirement to file a CbC
report in its jurisdiction of residence or the jurisdiction of
residence of the ultimate parent entity is not party to the
competent authority agreement to exchange information with
Canada, a constituent entity resident in Canada will be required to
file. Surrogate filing provisions have also been introduced,
allowing for a surrogate parent entity to file in its respective
jurisdiction and meet Canadian reporting requirements as long as an
information exchange agreement is in effect with Canada. This
filing requirement is not applicable to MNEs with consolidated
group revenues less than EUR 750 million in the immediately
preceding fiscal year.
Timing for filing
The reporting requirements will come into effect for fiscal
years that begin after 2015. The CbC report must be filed in the
prescribed manner to the Minister within 12 months after the last
day of the reporting fiscal year.
The penalties that apply for failure to furnish foreign-based
information will apply to CbC reporting. These penalties can range
from CAD $12,000 to $24,000, depending on situations where the
taxpayer has failed to file or comply with a demand to file by the
The draft legislation mirrors the recommendations made by the
OECD in Action 13 of its BEPS initiative and has been expected
since the release of the 2016 Budget, where Canada's Finance
Minister announced the government's intention to strengthen
transfer pricing documentation by legislating CbC reporting
requirements for large MNEs.
The draft legislation has not provided certainty regarding the
prescribed form of the CbC report; however, we expect a similar
information reporting standard as presented in Action 13, which
recommended an overview of the global operations of the MNE. It
included information related to activities, revenue, profit, taxes
paid, stated capital, accumulated earnings, employee counts and
tangible asset values for each jurisdiction in which the MNE
maintains a taxable presence.
The first exchanges between tax jurisdictions of CbC reports are
expected to occur by June 2018. Before any exchange of information
with another tax jurisdiction occurs, the Canada Revenue Agency
will formalize an exchange arrangement with the other jurisdiction
and will ensure that it has appropriate safeguards in place to
protect the confidentiality of the reports.
Going forward, Canadian members of MNEs will need to assess the
applicability of CbC reporting requirements in Canada. MNEs will
need to determine the existence of a filing requirement, which
entity is the ultimate parent entity of the MNE and whether
surrogate parent entity rules can or should be applied. Given the
amount of information disclosure under this new reporting
requirement, we encourage MNEs to start their information gathering
now and assess the availability of data to avoid unanticipated
difficulties with filing deadlines.
In conjunction with current T106 filing requirements in Canada
for disclosing non arm's length transactions with
non-residents, the CbC report will provide the Canada Revenue
Agency and other tax authorities with another information source to
assess transfer pricing risk among MNEs.
No commentary has yet been provided by the Canada Revenue Agency
regarding the master file/local file transfer pricing documentation
standard as recommended by the OECD. MNEs should be mindful of the
increased information disclosures necessary in transfer pricing
documentation and how this information integrates with CbC
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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