Country by Country reporting and documentation

I’ve had a few days to think about the consultation on 12 November. I still cannot understand why there wasn’t a discussion of the issues that extractive companies have faced to date in the various forms of country by country reporting they are subject to, but today I’m going to run through some of the issues which were discussed.

Perhaps one of the most interesting agreements of the day was that between Richard Murphy (who despite no longer representing Tax Justice Network was representing the BEPS monitoring group) and Kathryn O’Brien of PWC but until recently GE Global Transfer Pricing leader. Kathryn made what I thought were some very good points about whether the transfer pricing documentation which is currently produced really serves much purpose and indeed whether it is read by the revenue authority recipients. I have held this view for some time and have always been advised that unless a company produces a detailed analysis then it won’t be taken seriously even if it is overlong.

They then went on to say (in somewhat different ways) that a country by country allocation might actually be more useful as a risk assessment tool than copious transfer pricing documentation. I think this is a useful starting point for designing the country by country template. It won’t be useful for checking transfer pricing in detail but it could be a very useful risk assessment tool for revenue authorities which would then lead on to enquiries about allocation of profits and transfer pricing. Unusually, I agree with Richard Murphy that if you have a risk assessment tool as a revenue authority then you don’t need copious transfer pricing documentation with the tax return but targeted documentation to answer the questions posed by the risk assessment as part of the audit process.

I also agreed with the speaker who said that we had some transfer pricing forms already which analysed at high level major transfer pricing transactions and shouldn’t these be part of the CBC template? Probably I agreed because this was exactly the recommendation I had made to OECD when I chaired the BIAC tax committee, a recommendation endorsed by Rio Tinto at that time. What we said was that there were currently forms required by the Australian, Canadian and US tax authorities to disclose this information as part of the tax return, wouldn’t it be sensible for OECD to develop a consistent template for all tax authorities to use if they wanted this information to reduce the compliance burden. Such a template could be part of a new approach to transfer pricing documentation based on risk assessment.

There were then some very odd interventions I thought. There was a discussion about the difference between IFS and US GAAP and the problems this caused. Now I’m not an expert on accounting, but my understanding was that there was a project under way under which IFS and US GAAP would converge and if there are differences then over time these differences would slowly reduce. More importantly though we are focussing here on the P&L and my understanding is that the differences here are not significant. If I’m wrong then I stand to be corrected, if I’m not I question the purpose of the intervention?

There was much discussion about confidentiality. Now this is understandable from a corporate perspective where commercial secrets might fall into the hands of a competitor and there are examples (even between OECD countries) where this is believed to have happened as a result of tax audits. This is a legitimate concern and as such any template and the exchange of information about it needs to address this issue. However, I thought some speakers pushed the confidentiality issue too far. One question they might have been asked is do extractive sectors companies believe their confidential information has been put at risk by the country by country reporting which they produce publically? I’m not aware of this. And again let us remind ourselves that the proposed template is to provide information to tax authorities not the public as Joe Andrus made very clear despite the protestations of civil society. I always worry when business argues that a measure is going to lead to catastrophic consequences that it weakens its case to be taken seriously. Overstating the case on confidentiality does this, instead we need to  focus on ways to maintain the confidentiality of tax information where there are legitimate concerns that it might be used for non tax purposes. In this sense the most sensible comment came from Jesper Barenfeld of Volvo – what we need is agreed guidelines on how the information in the template will be used. It was pleasing that Michelle Levac in her summary reiterated this point.

My take on this is that we do need a fundamental rethink on documentation, not merely an increase in the burden of documentation as a result of the country by country template. The purpose of documentation should be to allow revenue authorities to understand a taxpayers business and how the parts of that global business in their jurisdiction fit into this. The development of a country by country template to facilitate this, should see as a quid pro quo the retirement of some other documentation requirements. Documentation should be focussed on the most efficient amount of information to make an initial risk assessment – armed with this revenue authorities can ask for targeted information .


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