Action Plan 13 of the BEPS project anchored by the Organisation for Economic Co-Operation and Development (OECD) and G20 had set out an extensive framework for Transfer Pricing Documentation. The framework includes a three-tier documentation requirement to cover Country-by-Country Reporting (CbCR), Master File and Local File. The framework has also paved the way for the automatic exchange of CbC reports among the participating countries.
As part of the efforts to enable the swift and consistent implementation of CbCR mechanism, the OECD has released 'Additional guidance on implementation of CbCR' from time to time during 2016 and 2017. The OECD, on September 2018, has released further guidance in this regard. The latest guidance addresses the following topics:
- Treatment of dividends received from constituent entities for reporting purposes
- Use of shortened amounts in preparing CbC report
- Treatment of major shareholdings
- Guidance on the approach to be applied in cases of mergers, demergers and acquisitions.
Treatment of dividends received from constituent entities
While it had been clarified that dividends received from other Constituent Entities (CE) are to be excluded from "Revenue" when preparing Table 1 of the CbCR. However, whether or not these dividends are to be included or excluded from "Profit/Loss before Income Taxes" had not been specifically clarified. This new guidance states that it would not want to place compliance burdens on taxpayers and allows for flexibility to treat the dividends for the purpose of reporting "Profit/Loss before Income Tax" along with adequate disclosure in Table 3 to state the necessary stance taken by the taxpayer. Furthermore, it has also been clarified that if dividends are included in the "Profit/Loss before Income Tax" column, in that case even the income tax accrued/paid on such dividends should be included in the relevant "Income Tax" columns.
Use of shortened amounts in preparing CbC report
It has been clarified that while taxpayers may be reporting shortened amounts in its individual/consolidated financial statements, for the purpose of disclosure under the CbCR, it is required to provide full/whole units.
E.g. if the amount to be reported is 500,500,500 which is shown as 500.50 million, the actual amount to be disclosed in the CbC report should be "500,500,500" and not "500.50."
Treatment of major shareholdings
For the purpose of applying the EUR 750 million threshold for determining the applicability of CbCR, in cases where minority interest in constituent entities are held by unrelated parties, it has been clarified that the group revenue should be based on the accounting rules in the jurisdiction of the Ultimate Parent Entity.
I.e., if the accounting rules require full consolidation, then the 100% of the entity's revenue should be included for the purpose of applying EUR 750 million. Whereas if the accounting rules require proportionate consolidation due to the presence of minority interests, then the pro-rated revenue may also be allowed.
Furthermore, in cases where pro-rated revenue is considered, the number of employees should also be reported on a pro-rata basis.
Interpretative guidance on the approach to be applied in cases of mergers, demergers and acquisitions
In cases of demerger, merger, or acquisition, the question of deciding whether the demerged or merged entity should be an excluded for CbCR threshold perspective, would depend on the accounting rules applicable for consolidation of the financial statements for that MNE group.
SKP's CommentsPursuant to the CbCR mechanism recommended by the OECD, many countries (including India) have introduced these in their domestic legislation. At this juncture, efficient as well as the consistent implementation of the CbCR and overall three-tier documentation approach is considered to be of utmost importance. To help in this direction, the OECD has provided several implementation guidance during 2016, 2017 and 2018.
As more countries implement CbCR, multinational businesses should keep themselves abreast of these reporting requirements and OECD guidance from time to time and well prepare in terms of designing suitable systems for data gathering and reporting.
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.