Country-by-Country Reporting and Global Master Files: OECD BEPS Action 13, <i>Global Tax Update</i>

Country-by-Country Reporting and Global Master Files: OECD BEPS Action 13, Global Tax Update

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The OECD's recent recommendations[1] with respect to transfer pricing documentation and country-by-country reporting may have the most significant impact on multinational enterprises ("MNEs") of all of the OECD's BEPS proposals. The adoption of these recommendations, without consensus on effective dispute resolution, is likely to alter the transfer pricing practices of many MNEs and may even impact their business models in the face of increased transfer pricing and nexus (permanent establishment) disputes.

What Must Be Reported?

The OECD recommends a three-tiered standardised reporting structure for MNEs with at least EUR 750 million of annual revenues, consisting of an annual country-by-country report ("CbC Report"), along with a global master file ("Global Master File") and local transfer pricing files ("Local Files"). The new reporting requirements would be effective with respect to 2016 and the first reports would thus have to be filed in 2017.

CbC Report. The OECD has published a model template for the CbC Report, which consists of three tables. The first table is an overview per jurisdiction (i.e., not per entity) of (i) the revenues, specifying both related-party and unrelated-party revenues, including service, royalty and interest income, (ii) the profits before tax, (iii) the income tax paid on a cash basis, (iv) the income tax accrued for the current year, (v) the stated capital, (vi) the accumulated earnings, (vii) the number of FTEs and (viii) the tangible assets (other than cash and cash equivalents). The second table is a list of constituent entities of the MNE per tax jurisdiction, including taxable branches and permanent establishments, and a designation of each such entity's main business activities, by ticking specific boxes. The third table allows, but does not require, the MNE to provide more information with respect to the compulsory information of tables 1 and 2.

Global Master File. The Global Master File is intended to be a "blueprint" of the MNE, or if justified, its separate business lines. It should include (i) an organisational structure chart, (ii) a description of the business, including the capabilities of the principal locations of the MNE and a brief functional analysis describing the principal contributions to value creation by individual entities within the group, (iii) an overview of the main intangibles of the MNE and of the intercompany arrangements relating to those intangibles, (iv) an overview of the financing structure of the MNE and its internal financing arrangements, (v) the consolidated financial statements of the MNE, even if the MNE is not obliged to prepare such statements, but does so only for internal management purposes and (vi) a list of existing tax rulings and advance pricing agreements "relating to the allocation of income among countries".

Where to File and Exchange of Information

The OECD recommends that the Global Master File and Local File be submitted with the local tax administration of all relevant jurisdictions and that the CbC Report be filed in the jurisdiction of the ultimate parent company or, if such jurisdiction fails to exchange the CbC Report with foreign tax administrations on undue grounds, a secondary jurisdiction. The CbC Report should then be shared automatically by the tax administration of the filing jurisdiction with foreign tax administrations based on competent authority agreements included in (i) the Multilateral Convention on Administrative Assistance in Tax Matters, (ii) bilateral tax treaties or (iii) Tax Information Exchange Agreements, provided that certain conditions are satisfied by the foreign tax administration. Unfortunately, the automatic exchange of information, as proposed by the OECD, is not subject to the condition that the other country submit to mandatory binding arbitration to effectively resolve disputes.

MNE Concerns

Pyrrhic Victory for Arm's-Length Standard. The agreement on CbC Reports and Global Master Files is a compromise between those pushing for unitary taxation with formulary apportionment and transfer pricing advocates. Even though the latter appear to have won the debate as the arm's-length standard remains, this may prove to be a Pyrrhic victory due to the acceptance of reporting standards and criteria that can easily be reconciled to a unitary taxation formula.

Inappropriate Use. The CbC Report is intended to be used by tax administrations to assess transfer pricing and BEPS risks, so that they can better allocate their audit resources and target their audit enquiries. The OECD notes specifically that jurisdictions should not propose adjustments to the income of a taxpayer on the basis of an income allocation formula based on the data from the CbC Report and that any such adjustments should be conceded promptly in any Mutual Agreement Procedure in the event of a transfer pricing dispute. It is questionable, however, if these intended safeguards indeed provide sufficient comfort to MNEs, as (i) they do not protect against transfer pricing adjustments that, although not based on formulary apportionment, are clearly tainted by such approach, and (ii) in many instances, the competent authority of the home jurisdiction of the MNE may not be a party to such transfer pricing dispute and may therefore not have a place at the table or much leverage in a Mutual Agreement Procedure.

Increase of Transfer Pricing and PE Disputes. There is consensus within the OECD that profits should be taxed where economic activities generating the profits are performed and where value is being created. In practice, however, tax administrations have differing views on what this means. In the absence of an effective dispute resolution mechanism, this is a significant concern to MNEs. The new reporting requirements will significantly increase this concern, because tax administrations of individual countries can be tempted to construe the data in the CbC Reports and Global Master Files to fit their particular perspective. This is undoubtedly going to result in more transfer pricing disputes globally and, possibly, disputes about the existence of taxable branches or permanent establishments.

No Mandatory Binding Arbitration. The OECD's work on Action 14 regarding dispute resolution is not progressing at the same pace as Action 13 and certain other actions. Unfortunately, there is no consensus within the OECD with respect to what would constitute an effective dispute resolution mechanism. According to the OECD, only 20 countries have expressed a willingness to adopt mandatory binding arbitration. Once the proposed measures of Action 13 enter into force, MNEs will thus be subjected to additional reporting requirements and the sharing of CbC Reports with governments that reject mandatory binding arbitration in the event of disputes.

Confidentiality. The CbC Reports and Global Master Files can include highly sensitive competitive information about the MNEs. The OECD recommends that tax administrations implement legal and systematic safeguards to ensure that no sensitive competitive business information from the CbC Reports will be leaked, that all information included in the CbC Reports will remain confidential and that the tax administration of the home jurisdiction is allowed to refuse to share CbC Reports if those safeguards are not met. Recent leaks of confidential governmental information and naming and shaming in the press may not give much comfort to MNEs that confidentiality of their information will be guaranteed.

No Way Back Even Without the United States

Despite concerns expressed by MNEs, practitioners, academics and politicians,[2] the consensus reached so far means that MNEs will be confronted with these new reporting requirements, even if their home jurisdiction ultimately decides not to endorse Action 13. Many countries are likely to require MNEs to submit a CbC Report and Global Master File in their jurisdiction, regardless of whether such MNE is required to produce these reports in its home jurisdiction. It is of no surprise that some of the jurisdictions that were very quick to endorse CbC reporting are also the jurisdictions that pose most of the above-described concerns.

Next Step: Public CbC Reporting (EU Commission Proposal)

On 17 June 2015, the European Commission launched a public consultation on corporate tax transparency in the European Union. The consultation aims to assess if country-by-country reporting should become public and is scheduled to close on 9 September 2015. Given the keenness of the European Commission to respond to the public sentiment regarding the tax affairs of MNEs and the country-by-country precedents for financial institutions and large extractive and logging industries under the EU Capital Requirements Directive, EU Accounting Directive and EU Transparency Directive, MNEs should get prepared for this possible next step, which would clearly aggravate all of the above concerns.


Dry Run. MNEs that have not done so already should conduct a dry run and prepare a draft CbC Report and Global Master File to learn from the reports' contents. Adverse findings can then still be corrected, underlying documentation and transfer pricing can be improved and the MNE can even decide to restructure its business model, all in anticipation of the tax administration's review.

Review Existing Local Reporting Practices. Some of the most relevant data in the CbC Report are likely to come from the financial statements of individual subsidiaries. Until recently, local financial reporting requirements did not receive much attention from MNEs, but choices made when drawing up these financial statements can turn out to appear very relevant when data from the local filings is transposed to the CbC Reports.

[1] See the September 2014 report "Guidance on Transfer Pricing Documentation and Country-by-Country Reporting", the February 2015 guidance note "Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting" and the June 2015 report "Country-by-Country Reporting Implementation Package".




[2] See the letters by Senate Finance Committee Chairman Orrin Hatch (R-Utah) and House Ways and Means Committee Chairman Paul Ryan (R-Wis.) to the Secretary of the Treasury of 9 June 2015 and 27 August 2015.



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