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Policy Proposals  Business Law Comments on the Public Consultation Document
Review of Country-by-Country Reporting (BEPS Action 13)

March 6, 2020

International Co-operation and Tax Administration Division
Centre for Tax Policy and Administration
Organisation for Economic Co-operation and Development

Comments on the Public Consultation Document
Review of Country-by-Country Reporting (BEPS Action 13)

1. Introduction

We are grateful for the opportunity to comment on Country-by-Country (CbC) Reporting.

The Base Erosion and Profit Shifting (BEPS) Project sought to enhance the transparency of tax administration while considering compliance costs for businesses, specifying that three types of documentation should be prepared for or submitted to tax administrations by multinational enterprises (MNEs): a CbC report, a master file for high level risk assessment, and a local file. Each jurisdiction would also ensure confidentiality, consistency, and appropriate use of CbC reports and the OECD would monitor its implementation. This transfer pricing documentation initiative contributes to establishing a common understanding of transfer pricing documentation among relevant jurisdictions, including non-OECD members.

The burden on MNEs to identify, gather, and organize the information necessary for the three tiers of documentation is considerable. For the master file, for example, MNEs must consider each jurisdiction's individual information requests and language requirements.

It is important to assume that each tier of documentation should play a mutually complementary role, eliminate the duplication of information requested, and reduce the administrative burden. CbC reports are intended for high level risk assessment. If information requests are gratuitous, it will not only make the administrative burden more onerous but also risks misuse and the imposing of taxation in a manner inconsistent with the documentation's purpose. Accordingly, a system that relies exclusively on CbC reports would be unsound. CbC reporting has become an important matter for MNEs in Japan, as elsewhere, and has provided an impetus for Japanese MNEs to develop their tax governance. CbC reporting in its current format was recently introduced so hasty changes should be avoided. If the system is revised, a sufficient transition period should be implemented.

We do not support the EU Commission's proposal for public disclosure of CbCR information as this would contravene the requirement to maintain the confidentiality of the CbCR.

Considering these viewpoints, we present below our comments in response to the questions posed.

2. Responses to the Questions

(1) 2. The appropriate and effective use of CbC reports

Only a few years have passed since CbC reports were first filed, and the number of corporations that have received queries from tax administrations is still limited. Ongoing and continuous review will be necessary to ensure appropriate and effective use of CbC reports.

For confidentiality, we prefer a system in which companies submit their CbC reports to the competent authority in the jurisdiction where the ultimate parent entity is located, after which the CbC reports are exchanged with other jurisdictions through tax treaties. However, some jurisdictions have received recommendations under the peer review process for failing to maintain confidentiality or for using CbC information inappropriately. Moreover, if competent authority agreements have not been concluded, CbC information cannot be shared. Maintenance of confidentiality and appropriate use of information are prerequisites for CbC reporting. If jurisdictions neglect these responsibilities, MNE groups should be allowed to suspend the filing of CbC reports via subsidiaries located in these jurisdictions until remedial measures are adopted.

(2) 3. Other elements of the BEPS Action 13 report

As we expressed concern before, master file formats in many jurisdictions deviate substantially from the OECD template which makes it difficult and time-consuming for MNEs to prepare master files. Unique requirements include the following: (1) subsidiaries' names, addresses, and details of corporate officers; (2) details of the function, asset, and risk analysis for each group company that accounts for at least 10 percent or more of consolidated gross sales, total assets, or profits; (3) names and shareholding ratios of the parent entity's major shareholders; (4) details of key service arrangements other than R&D; (5) specific group financing information, including the names of counterparties, principals, and interest rates; (6) details of R&D personnel employed worldwide; (7) the top 10 unrelated-party lenders; and (8) information about bilateral Advance Pricing Agreements. In jurisdictions where submission of master files is mandatory, the formats and information requested should be standardized, ideally as a minimum standard, so that MNEs need to prepare only one master file, without further amendments. If jurisdictions stipulate additional requirements, such as specifying file formats or limiting word-counts, this too will hinder standardized handling of master files.

Some jurisdictions require MNEs to submit master files soon after the fiscal year end, imposing a considerable burden. We recommend that jurisdictions should be required to respect the submission deadline in the jurisdiction where the ultimate parent entity is located.

Furthermore, submission in English should be permitted in all jurisdictions to avoid the administrative cost of translation, as well as discrepancies in content.

(3) 6. Should the level of the consolidated group revenue threshold be reduced?

The BEPS Action 13 report suggested a consolidated group revenue threshold of EUR 750 million, which would encompass approximately 90 percent of all corporate revenues. Any reduction of the revenue threshold should be carefully considered. In our view, no recent events have occurred that would warrant a reduction in the threshold. MNE groups with lower revenues may also have fewer resources so the burden these groups would incur would be more onerous compared with larger MNEs. Moreover, it may be assumed that smaller MNE groups will have lower overseas sales and a lower associated risk of tax avoidance. It is highly doubtful whether subjecting them to high level risk assessment is necessary.

The consolidated group revenue threshold may also be used as a threshold for Amount A in Pillar One and the income inclusion rule in Pillar Two which are included in the review of tax challenges arising from the digitalization of the economy that the Inclusive Framework on BEPS is currently discussing. The consolidated group revenue threshold should be maintained at the current level to limit the number of MNEs subject to this new tax regime.

(4) 7. Should a jurisdiction with a consolidated group revenue threshold denominated in a currency other than EUR be required or permitted to rebase its threshold periodically?

If jurisdictions are required or permitted to adjust their thresholds whenever necessary, corporations with revenues close to the threshold may need to more frequently reconsider their filing requirements which could increase the compliance burden. Given that CbC reporting was only recently introduced, there is no need to adjust thresholds now. Nonetheless, if thresholds are to be adjusted, one option may be to apply specific standards that can be applied consistently, such as limiting adjustments to those over five years in duration or limiting cases to those that deviate from the threshold by more than 10%.

(5) 11. In cases where the immediately preceding fiscal year of an MNE group is of a period other than 12 months, should the consolidated group revenue threshold (or, alternatively, consolidated group revenue in the immediately preceding fiscal year) be adjusted in determining whether the MNE group is an excluded MNE group?

In principle, the effects of an immediately preceding fiscal year being a period other than 12 months should be eliminated. However, if the threshold is to be adjusted the method should be simple to apply.

(6) 12. Should information in Table 1 be presented by entity rather than by tax jurisdiction?

The purpose of the CbC reporting system is to conduct high level risk assessment. We do not support an entity-based approach as it may increase the likelihood that the system is misused. For example, jurisdictions might depart from the reporting system's true purpose and levy taxes based on CbC information without conducting targeted transfer pricing analysis. Questions and investigations by tax administrations may also increase.

When a subsidiary is sub-consolidated with its own subsidiaries, it is very difficult for MNEs to obtain information for each level of constituent entities. Even if MNEs attempt to acquire such information, they may require radical modification of IT systems. Moreover, if subsidiaries pay taxes on a consolidated basis in their local jurisdictions, additional administrative burdens could arise, such as how to allocate tax expenses. An entity-based approach may also require MNEs to provide information in local currencies. Given there are risks of local filing, we are also concerned about confidentiality issues arising from submitting entity level information via subsidiaries. Information about individual entities should be obtained from tax returns in individual jurisdictions and other transfer pricing documentation; we see no need for this information in CbC reports which are for high level risk assessment.

(7) 13. Should consolidated data rather than aggregate data be used in Table 1?

We cannot support changing aggregate data to consolidated data because the administrative burden would increase extremely and implementation would be impractical.

CbC reporting does not currently require MNEs to consolidate by jurisdiction so a major increase in the administrative burden would be unavoidable. MNEs commonly compile accounting data by business lines in order to manage performance; jurisdiction-based consolidated data do not exist normally. Furthermore, such consolidated data would have no other business purpose.

To use consolidated data, MNEs would need to identify the amounts of revenues, unrealized gains or losses, and capital associated with the transactions and shareholdings among related entities in the same jurisdiction, and to offset and eliminate these amounts. MNEs would also need to distinguish between controlled transactions and uncontrolled transactions, which would require distinction between the two types at the transaction level. This would require the development of special IT systems, resulting in unreasonable loads. For MNEs that have multiple sub-consolidations that span different jurisdictions, the work involved in coordinating the relevant information would be especially cumbersome.

A considerable number of subsidiaries that are excluded from consolidated financial statements due to materiality thresholds are nevertheless included in CbC reports as constituent entities. MNEs do not collect information to eliminate intragroup transactions with nonconsolidated subsidiaries so this would introduce a significant new compliance burden. Some MNEs may have as many as a thousand subsidiaries and may also have considerable numbers of nonconsolidated subsidiaries (in some cases nonconsolidated subsidiaries account for more than 20 percent of all entities in a corporate group). Since unconsolidated subsidiaries are generally small companies, MNEs may need to identify and digitize related party transaction data stored on paper. Thus, gathering and consolidating the relevant information would impose an extremely heavy burden. It is also extremely difficult in practice for MNEs to track transactions with related parties' overseas permanent establishments.

In cases where the amounts of unrealized gains among constituent entities in the same jurisdiction are large, it can also be difficult to analyze the effective tax rate by comparing profit before tax with income tax accrued.

(8) 14. Should additional columns be added to Table 1?

In many cases, parent or subsidiary IT systems do not capture or distinguish income relating to royalties, services fees and expenses relating to interest, royalties, and service fees for related parties and unrelated parties. For interest income, companies that do not collect such data are likely to bear the cost of system renovation. Some income or expenses that do not correspond to accounting line items require additional aggregation, and in these cases the administrative burden and the costs of IT system modification increase further. To alleviate the administrative burden, thresholds could be set to allow smaller amounts to be omitted from Table 1.

We are concerned that adding columns to Table 1 will overstep the purpose of CbC reports as tools for high level risk assessment and the additional information may be used as a direct basis for levying taxes. For example, if jurisdictions use additional information items as profit splitting factors under the profit split method, disputes between tax administrations and taxpayers will increase.

The definitions and scope of additional items must be clearly described. For example, it is unclear whether "R&D expenditure" means R&D expenses under accounting or tax rules. Furthermore, for R&D arrangements between a parent entity and subsidiary, the scope should clarify for which entity the expenditure should be recorded.

Finally, deferred taxes are influenced by changes in valuation allowances based on recoverability and are not necessarily useful for analyzing the effective tax rate.

(9) 15. Should changes be made to how constituent entities that are not resident in any tax jurisdiction for tax purposes are categorized for CbC reporting purposes and how information on these entities is reported in Table 1?

Individual reporting on transparent entities and other stateless entities according to their attributes would present many challenges in terms of the administrative burden. A method that minimizes the burden should be considered considering corporate practice.

(10) 16. Should fields required in the XML schema (e.g., tax identification number) that are not in the CbCR template in the Action 13 report be incorporated into the template?

Incorporating the tax identification number required in the XML schema into the CbC reporting template would help to make the system clearer.

A related issue is the timing of notifications to tax administrations regarding constituent entities. The BEPS Action 13 report's model legislation (Article 3) sets the end of the reporting year as the notification deadline. Nonetheless, as the model legislation indicates this deadline in brackets, many jurisdictions defer the deadline. It is subsidiaries consolidated for accounting purposes that comprise the constituent entities for CbC reporting and these subsidiaries are not determined in the process of consolidated accounting until after the end of the fiscal year. Consequently, it is very difficult to determine the constituent entities based on the information available at the end of the reporting year. The model legislation should clearly state that notification by the end of the fiscal year is not required in all cases.

(11) 17. Should standardized industry codes be included in Table 2?

Using Standard Industrial Classification (SIC) codes or another system of detailed classification by industry would require the ultimate parent entity to individually classify each of its constituent entities corresponded to a standardized set of industry codes. This would complicate the reporting procedure, making the administrative burden onerous. And where entities are engaged in multiple businesses, it would be difficult to assign the entity a code. CbC reports are intended for high level risk assessment and including this type of information should be avoided. We are also concerned that such information may be interpreted differently based on CbC reports and the business descriptions in local files, causing unnecessary disputes.

(12) 18. Should predetermined fields be added to Table 3, in addition to free text?

We support standardization of the information requested as a means of simplifying the content of Table 3 provided that the pre-determined fields are kept simple and that MNEs may still make use of the free text area. Any additional information requested should comprise information already held by the parent entity. Specifically, such information should be limited to content required by the "Guidance on the Implementation of Country-by-Country Reporting" and check boxes for which applicability can be clearly determined. The following examples are given in the public consultation document: (1) applicable accounting standards used, (2) source of data, (6) accounts including income tax refunds, and (7) existence of negative accumulated earnings. In addition, duplication of content to be provided in the master file and elsewhere should be avoided.


Subcommittee on Taxation

Business Law