If international governments have their way, multinational corporations will soon be required to provide tax information to all of the jurisdictions in which they operate on a single report.
Recently, the 34-nation Organization for Economic Cooperation and Development (OECD) and the G20 countries issued their proposed Guidance on Transfer Pricing Documentation and Country-by-Country Reporting. The guidance is part of the OECD’s ambitious 2013 Action Plan on Base Erosion and Profit Shifting (BEPS), which is designed to constrain global tax avoidance.
Why Transfer Pricing?
It’s no surprise that the OECD and the G20 have set their sights on transfer pricing, which refers to pricing arrangements for transfers of goods, services and intangibles between related companies in different jurisdictions. These arrangements can be easily manipulated to shift profits into jurisdictions with lower tax rates, resulting in fraudulent transfer pricing.
Most countries have transfer pricing rules designed to deter this sort of tax avoidance by requiring intercompany transactions to have terms similar to arm’s-length transactions between unrelated parties. But not all jurisdictions require companies to document their transfer pricing decisions.
What Does The Guidance Require?
Under the guidance, companies that operate in two or more countries would file a single “country-by-country” report annually, disclosing revenues, profits before income tax, and income tax paid and accrued for each jurisdiction. They would also report total employment, capital, retained earnings and tangible assets in each jurisdiction. Finally, companies would be required to identify each entity within the group doing business in a particular jurisdiction and describe each entity’s business activities.
In addition, companies would provide high-level information regarding their global business operations and transfer pricing policies in a “master file” that would be available to all relevant tax administrations. Transactional transfer pricing documentation would be provided in a “local file” in each relevant jurisdiction. This file would identify relevant related-party transactions, the amounts involved in those transactions and the company’s analysis supporting its transfer pricing decisions.
According to the OECD, the documentation will help tax administrations identify whether companies have “engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.”
What Should You Do?
It’s not certain whether the OECD’s recommendations will be adopted and, if they are, when and by which countries. But given the high level of interest in global tax reporting, multinational companies should begin to think about the types of policies, procedures and systems they would need to have in place to comply with the OECD’s proposed reporting requirements.