In this short article, we explain what a Country-by-Country report is, and when you need to create one. We also give an overview of what needs to be included.
The Aim of Country-by-Country Reporting
The CbCR requires large MNEs to provide aggregate jurisdiction-wide information relating to the global allocation of income, taxes paid, and economic activity among jurisdictions in which it operates. The report also requires a listing of all the Constituent Entities 51 for which financial information is reported, including the jurisdiction of incorporation (and residence), as well as the nature of the main business activities carried out by that Constituent Entity.
CbCR obligations only apply to large MNEs with an annual consolidated group revenue in the immediately preceding fiscal year of more than USD 750m.
What should be included in the CbCR?
In the CbCR MNEs should report per tax jurisdiction in which they are active:
- Profits before income tax
- Income paid and accrued
- Total employment
- Retained earnings
- Tangibles assets
Please note that OECD has developed specific templates for the CbCR, and provided detailed instructions how to complete these templates.[link]
How and when to file the CbC Report?
Many countries implemented legislation under which the MNEs “Ultimate Parent Entity” is responsible for filing the CbC Report annually in its home jurisdiction. The Ultimate Parent
Entity is a Constituent Entity that meets the following criteria:
- Its owns directly or indirectly a sufficient interest in one or more other Constituent Entities and is required to prepare Consolidated Financial Statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence.
- There is no other Constituent Entity of such MNE Group that owns directly or indirectly an interest described in subsection (i) above in the first mentioned Constituent Entity.
In case of failure of filing, in case the Ultimate Parent Entity is not obliged to file the CbC Report in its home jurisdiction, or in cases where the CbCR is effectively not shared by the tax administration of the MNEs Ultimate Parent Company, each Constituent Entity shall be obliged to file the CbCR. This is only different if a qualifying replacement (Surrogate Parent Entity) has been appointed by the MNE group as a sole substitute for the Ultimate Parent Entity.
Most countries require that the CbC Report is filed no later than twelve months after the last day of the year (consolidated reporting period for financial statement purposes) to which the CbCR relates.
Data used in the CBC Report
Sources of data should be used consistently from year to year when completing the CbCR template. The MNE can choose to use data from its consolidation reporting packages, from separate entity statutory financial statements, regulatory financial statements, or internal management accounts.
It is not necessary to reconcile the revenue, profit and tax reporting in the template to the consolidated financial statements. The MNE should provide a brief description of the sources of data. If a change is made in the source of data used from year to year, the MNE should explain the reasons for the change and its consequences.
Sharing of CbCR Reports between tax administrations Tax administrations are expected to automatically exchange the CbC Reporting with jurisdictions that have also implemented CbCR requirements, and have ascertained the confidentiality thereof in their legislation. The legal basis for this exchange of information
can be bilateral, or multilateral treaties.
Are there sanctions for not filing a CbCR?
The OECD model legislation does not include provisions regarding penalties to be imposed if a MNE fails to comply with CbC Reporting requirements. This will be up to the jurisdictions implementing these requirements. It has not been arranged how interpretation differences between the taxpayer and the tax administrations should be resolved. Attention points for the preparation and filing of the CbCR.
First, there are some tips on the data to be provided:
- Be consistent with data used for all Constituent Entities. Be consistent over time.
- Inconsistencies cannot always be avoided. Make sure you can explain them when they happen.
- Try to avoid misinterpretations by providing clear definitions, descriptions, and explanations when filing the CbCR.
- Bear in mind that the CbCR and corporate tax returns are reconciled.
On the process to prepare and file a CbCR:
- Start on time with the filing preparation.
- Engage internal stakeholders such as finance and legal at an early stage – you will need information from them!
- Seek support from external professionals.
- Do a dry run before the actual filing of the CbCR.
- Manage expectations at the tax authorities.