Country by country reporting: is your business ready?

Transcript

After years of political pressure around corporate tax avoidance and transfer pricing, the OECD announced a plan to address base erosion and profit shifting. Its recommendations – 15 actions – are now being adopted by its member countries. Tax automation experts Vertex are helping multinational corporations prepare – and they’re finding businesses are particularly concerned about action 13, and the country-by-country report. This is the first part of a three video series with Vertex: watch Nancy Manzano explain how to update your tax processes, and then watch Nancy and Bernadette discuss tax reputation risk.

Bernadette Pinamont: Action 13 has three components: it has the master file, the local file, and the country-by-country report. And certainly the country-by-country report is grabbing all of the headlines.

Some global multinationals are worried about filing the country-by-country report. Some are worried that it will be leaked, and it will be in the press for all to see, and they will need to step up to defend what is on the country-by-country report.

Some are worried about the expected increased audits. Large global multinationals are already seeing their audits change; and by change I mean, the aggressiveness of the audit is changing. So many companies are more focused on reviewing their transfer pricing methodologies and looking at their contracts and their substance.

World Finance: This is further complicated because countries are adopting and adapting the OECD’s recommendations in three different ways.

Bernadette Pinamont: The first is that there are many countries who are following exactly the OECD guidelines – the form itself, the timeline for adoption and filing: following exactly the guidelines as prescribed.

There’s a second group of countries – the US, for example – where we did not adopt action 13 in full. We did not adopt the master file and local file, and the reason for that is that the US has always had documentation compliance for transfer pricing, and it covers the majority of what the OECD guidelines for master file and local file prescribe, and there was no need for the US to adopt those.

And there’s a third group of countries like Mexico, which are adopting action 13 in full, but then with respect to the country-by-country report, adding to the requirements of what needs to be disclosed. For example, details around intercompany royalty transactions. So they’re expanding the requirements and the details on the report.

World Finance: They also need to prepare for the existing requirements to change. The OECD has already announced a review of its actions for 2020.

Bernadette Pinamont: Multinationals need to keep an eye on a lot of information and detail on their intercompany transactions with related parties, because I do believe that that’s where some of the expansion is going to be.

I think the potential for the audit creates another challenge for companies to think about. And that is even though the OECD guidelines don’t ask for any reconciliation of the country-by-country report to other documents, if you’re faced with an audit and it’s a transfer pricing audit, they need to be ready to reconcile the country-by-country report to existing transfer pricing documentation, to other forms that they filed with intercompany transactions detailed, and they have to be ready to reconcile that to financial statements, both local, statutory financials, and audited worldwide financials.