Regardless of IRS action, foreign implementation of country-by-country reporting means many US companies must file by end of 2017

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1 from Transfer Pricing Regardless of IRS action, foreign implementation of country-by-country reporting means many US companies must file by end of 2017 August 31, 2015 In brief Action 13 of the OECD s Action Plan on Base Erosion and Profit Shifting (BEPS) strives to enhance transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations through increased transfer pricing documentation requirements, specifically including a new country-by-country report (CbC report) and a master file. The OECD has recommended that the first CbC reports be required to be filed for multinational enterprises (MNEs) January 1, The OECD also recommends that MNEs be allowed one year from the close of the fiscal year to which the CbC report relates to prepare and file it, meaning that the first reports would be filed by December 31, 2017, for companies with fiscal years starting January 1, Questions have arisen, however, regarding the US Treasury Department s authority to require CbC reporting by US-headquartered companies, and whether the IRS may delay implementation for one year. However, even if the United States does not implement CbC reporting, or delays implementation for one year, US-parented MNE groups will be required to file reports by the end of 2017 if the group includes entities with operations in a foreign country in which CbC reporting requirements have been implemented. Under the secondary mechanism recommended by the OECD and already adopted by one country, the filing obligation would fall on any constituent entity of the MNE group operating in a country adopting the OECD s recommended approach. It is important to note that, under this approach, even though the obligation would fall to a constituent entity lower down in the MNE s chain of companies, the CbC report would need to include data for every jurisdiction in which the MNE group operates. It is also important to remember that the new master file report must be filed directly with the tax administrations in each relevant jurisdiction as required by those administrations. Consequently, USparented MNEs must file a master file report covering the entire MNE group in any jurisdiction in which they do business if that jurisdiction implements master filing reporting requirements.

2 In detail Action 13 of the BEPS Action Plan strives to enhance transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations through increased transfer pricing documentation requirements. On September 16, 2014, the OECD released its substantive recommendations under Action 13, establishing two new transfer pricing reporting requirements for MNEs the new CBC report and the master file report and recommending various changes to the so-called local file reporting requirements. On February 6, 2015, the OECD supplemented the first substantive report with additional guidance that, among other things, would (1) require master file reports to be filed directly with each jurisdiction in which the MNE group conducts business, and (2) require a CbC report to be filed with the jurisdiction in which the ultimate parent entity in the MNE group is tax resident and then be automatically transmitted by that jurisdiction, pursuant to applicable exchange of information provisions, to each jurisdiction in which the MNE group conducts business. On June 8, 2015, the OECD released a Country-by-Country Reporting Implementation Package that includes model legislation the OECD suggests could be used by countries to mandate filing of CbC reports. The OECD has recommended that the first CbC reports be filed for MNE January 1, The OECD also recommends that MNEs be allowed one year from the close of the fiscal year to which the CbC report relates to prepare and file it, meaning that the first reports would be filed by December 31, 2017, for companies with fiscal years starting January 1, For US-parented companies, an important question concerns when the obligation to file CbC reports will arise and how that obligation may or may not be influenced by the timeline for implementation of CbC reporting by the United States. Treasury and the IRS have stated that they are working towards implementation of CbC reporting in accordance with the OECD recommendation that reports be required for fiscal years starting on or after January 1, The recentlyreleased Priority Guidance Plan includes an item for regulations under Internal Revenue Code Sections 6011 and 6038 relating to CbC reporting. Questions have arisen, however, regarding Treasury s authority to require CbC reporting by US companies, and the Chairmen of the Senate Finance Committee and the House Ways and Means Committee have stated that they may consider whether Congress should take action to prevent collection of CbC reports from US companies. Given the substantial amount of work and resources necessary for the IRS to collect and share this information with foreign tax authorities, questions also have arisen regarding whether the IRS may delay implementation of CbC reporting by US companies for one year. However, it is important to note that the obligation for US-parented companies to file CbC reports for January 1, 2016, is not dependent solely on whether or when the US implements CbC reporting. The OECD model legislation includes a socalled secondary mechanism under which each jurisdiction would require a CbC report from any constituent entity of an MNE group that is tax resident in that jurisdiction if: the ultimate parent of the group is not obligated to file a CbC report in its jurisdiction of tax residence, the ultimate parent s jurisdiction of tax residence has an exchange of information relationship (through treaty, tax information exchange agreement, or the Multilateral Convention on Administrative Assistance in Tax Matters) with the constituent entity s jurisdiction of tax residence but does not have a competent authority agreement in place to effect CbC report exchange with that jurisdiction, or there has been a systemic failure by the ultimate parent s jurisdiction to carry out CbC report exchange. The model legislation also provides that, in these circumstances, if there is more than one constituent entity that is tax resident in a particular jurisdiction, the MNE group can designate one of those entities to file the CbC report with that jurisdiction. Thus, through the model legislation, the OECD members have recommended that each country should consider collecting the CbC report locally if the jurisdiction in which the ultimate parent is tax resident is not engaged in collecting and exchanging the reports. The model legislation also contains a provision that would allow MNEs to avoid filing CbC reports locally in situations in which reporting and exchange is not carried out in the ultimate parent s jurisdiction and instead to satisfy the CbC reporting requirements by designating a surrogate parent that is tax resident in a jurisdiction that collects and exchanges CbC reports. 2 pwc

3 The model legislation provides for an apparently burdensome system of notifications under which each constituent entity of the MNE is to notify its jurisdiction of tax residence whether it will act as the ultimate parent or surrogate parent and, if not, which entity in the group will act as the ultimate parent or surrogate parent or, when the CbC report will be filed locally and there is more than one constituent entity in the local jurisdiction, which entity will be designated as the filing entity. These notices are to be delivered to the tax administrations in each jurisdiction in which the MNE has Constituent Entities by the end of the fiscal year for which the CbC report would be made. Receiving and processing these notices also will place a further difficult administrative burden on the tax administrations, but presumably they are considered necessary for the tax administrations to know where the CbC report for each MNE group will be filed each year and from which country they will be exchanged. Consequently, even if the United States does not implement CbC reporting, or delays implementation, US-parented MNE groups will be required to file CbC reports by the end of 2017 if the group includes entities with operations in a foreign country in which CbC reporting requirements have been implemented. Under the secondary mechanism recommended by the OECD (and already adopted by Spain, for example) the CbC reporting obligation would fall on any constituent entity (or a surrogate parent entity ) of the MNE group operating in a country adopting the OECD s recommended approach. It is important to note that, under this approach, even though the obligation would fall to a constituent entity lower down in the MNE s chain of companies, the CbC report would need to include data for every jurisdiction in which the MNE group operates. As a recent example of how USparented-MNE groups may be affected by foreign CbC reporting requirements, on July 11, 2015, Spain s Ministry of Finance published Royal Decree 634/2015, approving corporate income tax regulations (the Regulations) that mandate new transfer pricing documentation requirements, which now incorporate a CbC reporting requirement in addition to the master file and local file requirements. Because Spain has implemented CbC reporting consistent with the OECD recommendations, if the IRS were to not implement CbC reporting for 2016, or delay implementation beyond 2016, US-parented MNEs doing business in Spain through Spanish subsidiaries or permanent establishments (PEs) would be required, by the secondary mechanism, to provide the CbC report to the Spanish Tax Administration (either through a local constituent entity or a surrogate parent) by the end of 2017 (for companies with fiscal years starting January 1, 2016). Following is a high-level summary of the new Regulations. General transfer pricing documentation requirements In general, any taxpayer subject to Spanish corporate tax either a Spanish head office or a Spanish subsidiary of a foreign group must prepare and have at the disposal of the Spanish Tax Administration a package of information containing: information on the MNE group to which the taxpayer belongs (the master file ), and information on the taxpayer itself (the local file). The Regulations set forth new informational requirements, as further described below, that will enter into force for tax periods starting on and after January 1, Country-by-country report Pursuant to the Regulations, the CbC report is a new filing requirement for the Spanish parent company of an MNE group, provided the parent company is not itself owned by a foreign related party. Furthermore, and consistent with the OECD s Action 13, this information must be filed for those entities that are tax residents in Spain, but are not the ultimate parent of an MNE group, if any of the following criteria are satisfied: The ultimate parent has designated the Spanish entities to file the CbC report. The ultimate parent of the MNE group is not obligated to file a CbC report in its jurisdiction of tax residence. The jurisdiction in which the ultimate parent is resident for tax purposes does not have an exchange of information agreement with Spain. The ultimate parent has an exchange of information agreement with Spain, but there has been a systemic failure (e.g., automatic exchange has been suspended between competent authorities) of the jurisdiction of the tax residency of the ultimate parent pursuant to notification from the Spanish Tax Administration. This new CbC report will be required for tax periods starting on or after January 1, 2016, and should be filed within 12 months of the end of every tax period in a model format (to be published). Note that, unlike the master file and local files that will need to be at the disposal of the Tax Administration, the CbC report must be filed every year. 3 pwc

4 Any reporting entity of an MNE group that is tax resident in Spain must notify the Spanish Tax Administration of its identity and tax residence before the end of the fiscal year for which the information will be prepared. The threshold for being subject to the CbC report is the same as that suggested by the OECD: EUR 750 million in turnover at the MNE group level for the previous 12 months. The information to be provided is mostly analogous to the BEPS model template (Annex III to Chapter V) and should be presented on an aggregate basis in euros for each jurisdiction as follows: The MNE group s gross income (revenues), differentiating between that obtained with related entities and that obtained with unrelated parties. Profit (loss) before income tax or taxes having an identical or analogous nature. Income tax paid (on cash basis), including withholdings incurred. Income tax accrued, including withholdings. Capital and other shareholders funds at the end date of the tax period. Average number of employees. (Note that Spain s regulations explicitly request average number of employees. That is different from the OECD template, which provides flexibility to MNEs on how to report number of employees, stating that number of employees may be reported as of the year-end, on the basis of average employment levels for the year, or on any other basis consistently applied across tax jurisdictions and from year to year. In Spain s case, that flexibility is not available). Tangible assets and investment property other than cash and cash equivalents. List of resident entities, including PEs and core activities carried out by each entity. Other information considered relevant and an explanation, if warranted, of the data included. Master file The Regulations expand upon the information to be provided with respect to the MNE group in the master file, which is in accordance with the Action 13 deliverable of the OECD s BEPS Action Plan (Annex I to Chapter V). The information to be included in the master file is as follows: Organizational structure. Business description. Intangibles. Financial activities. Financial and tax positions. (Note that the MNE group s information also must include information on PEs.) Local file For the local file, the Regulations require more detailed information on specific intragroup transactions to evaluate the arm s-length nature of material transfer pricing positions in the relevant jurisdiction. The information to be included in the local file is the information contained in Annex II to Chapter V of the Action 13 deliverable. Spanish PEs of foreignresident taxpayers also must prepare a local file for Spain. The takeaway The obligation for US-parented companies to file CbC reports for January 1, 2016, does not depend solely on whether or when the US implements CbC reporting. If the US does not implement CbC reporting, or delays implementation, many USparented MNE groups nonetheless would have to file CbC reports by the end of 2017, due to implementation of CbC reporting in foreign countries in which they are doing business. The new Spanish regulations implementing the OECD recommendations are an example of how foreign implementation of CbC reporting obligations could affect USparented companies to require CbC reporting. (As another recent example, the Australian Treasury has released exposure draft legislation to implement the OECD s recommendation on CbC reporting, to similar effect (see our Tax Insight dated August 7, 2015).) It is important to note that even though the obligation to file the CbC report would fall on an entity lower down in the MNE group s ownership chain, the CbC report still must include data for every jurisdiction in which the MNE group operates. It is also important to remember that the new master file report must be filed directly with the tax administration in each relevant jurisdiction as required by those administrations. Consequently, USparented MNEs must file a master file report covering the entire MNE group in any jurisdiction in which they do business if that jurisdiction implements master file reporting requirements. The impact of the new CbC and master file reports is significant in terms of the amount and type of information to be collected and included in transfer pricing documentation. Penalties may be assessed by local tax authorities to the extent a taxpayer does not prepare proper documentation. Accordingly, 4 pwc

5 taxpayers should start assessing their ability to comply with these new requirements, the potential of the new Let s talk For more information, please contact: documentation requirements to trigger increased transfer pricing disputes, and the potential for public disclosure of sensitive commercial information. Transfer Pricing David Ernick, Washington DC david.ernick@us.pwc.com Matias Pedevilla, Miami matias.l.pedevilla@us.pwc.com Javier González Carcedo, Madrid javier.gonzalez.carcedo@es.pwc.com David Nickson, New York david.a.nickson@us.pwc.com Kathryn Horton O Brien, Washington DC kathryn.horton.obrien@us.pwc.com Manuel Bouzas, Madrid manuel.bouzas@es.pwc.com Mike Danilack, Washington DC mike.danilack@us.pwc.com Michael Walter, Madrid michael.walter@es.pwc.com Transfer Pricing Global and US Leaders Isabel Verlinden, Brussels Global Transfer Pricing Leader isabel.verlinden@be.pwc.com Horacio Peña, New York US Transfer Pricing Leader horacio.pena@us.pwc.com Tax Controversy and Dispute Resolution Leader David Swenson, Washington DC david.swenson@us.pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions SOLICITATION 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC helps organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at 2 pwc