OECD consultation on reporting on a country by country basis

I watched the consultation this morning and will write some observations on what happened shortly but first I thought I would circulate the comments I made in a response to a request from OECD.

On the consultation here are a few preliminary comments.

I was puzzled why no one from the resources sector was asked to comment? While the country by country reporting there is not on all fours with a template for reporting to tax authorities, it seemed odd that their experience on some of the common issues was not sought?

Someone from business asked OECD tax authorities not to share information with non OECD tax authorities. This is an interesting perspective on a process which is a G20 process initiated by OECD and non OECD governments. Some people don’t understand that the world has changed and this isn’t an old style OECD consultation because of the BEPS overlay.

I will come back to it, but I thought the most disappointing part of the process was that where there were two options, business speakers agreed with both. If business does not have a clear view then they shouldn’t be surprised if the G20/OECD makes a unilateral decision.

The following are comments I submitted on the consultation paper.

1.What information should be required?


“Requiring reporting of net income before tax for each legal entity in the MNE Group, with numbers to be drawn from individual entity statutory financial statements.”


A) As is noted, this may cause issues about consolidation entries and eliminations. As a result it may be more useful to start with the accounting records which are the basis for the consolidated accounts and using these as the accounting information to reconcile with the tax returns. As the tax returns will be based (before tax adjustments) on the accounting records this gives information on a group consolidated level which can be reconciled with country information.



“Grouping companies either by place of organisation or by location of management would not necessarily indicate where the income of such companies is generated or where that income is subject to tax.”


b) This is correct. However it will indicate where an entity is tax resident, or not at all in some cases. This would show how the taxable presence matrix works in a group. (An interesting example is that some companies incorporated in low tax jurisdictions may be tax resident in high tax jurisdictions). From a risk management perspective this is useful if it is comprehensive. Dormant companies would be excluded.



“Some countries do not require statutory financials for every group company organised or managed in the country so that a workable substitute would have to be identified for at least some legal entities; “


c)Correct, but the tax returns will be reconciled to some accounting records. See 1a above.



“The sum of income reported in statutory financials likely would not add up to the total consolidated income of the group as the sum of financial statement income numbers may not fully reflect consolidating eliminations. “


d) Going back to 1a, the accounting records used at consolidated level with consolidation adjustments will be available.



“Income reported in the template could be based on taxable income as reflected on tax returns filed in a jurisdiction. Again, tax return data should be readily available within the MNE Group so the reporting burden should not be excessive. “


e)This raises the question of what the purpose of cbcr is? Cash tax paid in a year is useful in tracking what governments do with their revenues (EITI, EU). Cash tax will not relate to one tax year in an instalments regime. Current tax in the accounts will bear most relation to tax based on taxable profits for the year. As the accounts identify prior year adjustments and deferred tax relating to timing differences, current tax should best match taxable profits. Any process will not answer whether the right tax has been returned; it will provide information to make a risk assessment and to ask questions about the tax structure of the group.



“Should taxes be reported on a cash or accrual basis? Governments would ordinarily be most interested in cash taxes paid in a given year, or alternatively cash taxes paid with respect to the income reported in a given year, for risk assessment purposes. While tax accruals would perhaps align better with accrual based financial statement income (assuming income from statutory financials is ultimately what is reported), there could be a question as to whether reporting tax accruals as opposed to cash tax paid would introduce distortions related to deferred tax accounting, tax provisions and other accrual accounting issues.”


f) See 1 e above. If the purpose is to review the tax return which is based on the profits of the tax return period, then cash tax paid in respect of the tax return period is key. In reconciling to group consolidated numbers, then tax timing differences and permanent differences provided in the tax code need to be reversed out.



“Should tax reporting be limited to national level income taxes or should reporting of income taxes paid to other levels of government (states, provinces, cantons, municipalities, etc.) be required. If sub-national level taxes are reported, should they be segregated from national level income taxes?


g) For the federal, national level tax authority, payments to sub-national levels should be irrelevant unless these are audited at national level. Sub national authorities may be interested in the national level analysis.



“Is there any reason to require reporting of taxes other than income taxes? Such reporting would often seem to be largely irrelevant to transfer pricing risk assessment, e.g. property taxes, employment taxes, VAT collections etc. are not particularly helpful for transfer pricing risk assessment. There is also a question as to whether the template should require reporting of gross basis withholding taxes imposed as a substitute for a net income based tax. Consideration should be given to whether withholding tax is best reported by the payer or by the recipient of the payment that is subject to withholding tax. “


h) For all other taxes than withholding taxes, there should be little interest aside from where there are different permanent establishment positions for direct and indirect tax. Withholding tax may be different in requiring reporting, or reporting both the payment and non-payment of withholding tax together with the treaty position used.


“The project will need to consider whether the country-by-country reporting template should include data on measures of economic activity other than income and taxes.


Revenues by location of customers – some might argue that such information is not maintained or not readily available.”


i)This information should be available from Vat returns, with the obvious exception of the USA.



“Tangible assets by location”


j)As with unitary tax this poses some questions. If assets are leased from a third party how are they treated? How does the taxpayer know the value under a lease? How are moveable tangible assets like inventory treated?



“Employment, either by number of employees, total payroll or both”


k) Is it numbers or payroll? How are expats treated? How are contract staff treated who are employed by third parties?



“Location of intangibles by country”


l) Where is the intangible located? Where it is legally held? How are intangibles developed by a number of locations treated?



“Location of senior management (e.g. the geographic location of the 25 or 50 most highly compensated employees of the MNE group)”


m) Is this where they live and have their main residence? Where they spend time? Is an allocation required by days per year? Is there a de minimis exclusion on number of days?


“It will be necessary to consider currencies in which information should be presented in the country by country template. Should information be reported in functional currencies of each individual entity, should information be translated to a single consistently used currency (functional currency of the ultimate parent), or some combination.”


n)If the aim is to reconcile to the consolidated position then the functional currency of the group facilitates this most easily when coupled with the local currency information for the relevant country.


2 What mechanisms should be developed for reporting and sharing country-by-country data?



“It could be suggested that the required template be completed by the parent company in its home jurisdiction (place of incorporation / place of management) and then shared with other countries under treaty exchange of information mechanisms, including potentially automatic exchange.”


a)This would seem a reasonable approach particularly if the report is produced in the functional currency of the group. It could be included in the tax returns of subsidiaries (subject to materiality exclusion). As it would be obtainable under an audit enquiry and or exchange of information the provision of a standard document would impose no further compliance cost.



“Consideration should be given to whether the information sharing system should be structured in a way that excludes delivery of information to countries where adequate provisions do not exist to protect the confidentiality of competitively sensitive data and how this might be accomplished. “


b)This is an important issue and discussion needs to ensue as to how to deal with this issue.



“It could be suggested that the template be made available as part of the global master file to every country in which the MNE has an affiliate subject to tax and could further be suggested that local countries modify their domestic documentation and reporting rules to require any local affiliate of an MNE group to deliver the template. “

c)See answer 2a above






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