CBCR Guide

Purpose

Action 13 of the 2013 OECD Action Plan on Base Erosion & Profit Shifting (BEPS), recognised that enhancing tax transparency is an essential part of tackling the BEPS problem. In short, providing tax administrations with better information to conduct transfer pricing risk assessments and audits.

In September 2014, in response to Action 13, the OECD published guidance on revised standards for transfer pricing documentation and a proposed template for a country-by-country report (CBCR), highlighting income, earnings, taxes paid and certain other measures of economic activity that multinational corporations (MNCs) should be required to disclose.

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Full Transparency

The OECD CBCR template requires MNCs to prepare a detailed report based on 3 distinct but complementary tables:

Table 1 - Overview of allocation of income and taxes by tax jurisdiction;
Table 2 - List of all entities included in each tax jurisdiction with a summary of main business activities; and
Table 3 - Additional Explanatory Information.
The information required is extensive and not easily structured and presented in the OECD required format (see Table contents below).

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Challenge

CBCR requirements are likely to pose a heavy compliance burden for MNCs, in terms of gathering all relevant information, and reporting the data in the required format. This will require a significant time commitment from resources across the organisation.

Some MNCs may conclude that CBCR preparation is a labour intensive but routine compliance issue best left to junior tax and finance professionals. Such a conclusion would be wrong and could potentially imperil the tax profile of an MNC in multiple jurisdictions for many years to come generating negative publicity and/or multiple simultaneous local tax audits. MNCs need to consider the strategic implications and opportunities of CBCR compliance as well as the operational and IT systems challenges.

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Our thoughts

We believe that:

  • Your CBCR will become the most important tax document within your company;
  • You cannot prepare and submit a CBCR without a clear understanding (link) to your global TP data;
  • You may need to run a CBCR in multiple "draft versions" with different source data; and
  • It will be difficult to address the strategic and operational challenges of CBCR compliance within an existing system or using semi-automated, or manual compliance approaches (i.e. Excel worksheets).
  • The challenge of CBCR compliance calls for a technology solution with a clear linkage to your underlying global TP data.
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Our Solution

TP Controller is the only solution currently on the market that includes functionality to enable users to create of an OECD compliant CBCR easily at the click of a button. All entity business descriptions used in TP Controller are OECD compliant. In addition, TP controller allows users direct access to the underlying global TP data that will be required to defend positions disclosed in your CBCR, assess global TP risk, and create the important content required for Table 3. Easy data uploads allow users to quickly generate a CBCR using different financial source data, whilst keeping all other parameters unchanged.

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The OECD CBCR template

Table 1

For Table 1, an MNE will need to report the following data aggregated by tax jurisdiction:

  1. Revenues; 
    • Unrelated Party 
    • Related Party
    • Total
  2. Profit (Loss) Before Income Tax; 
  3. Income Tax Paid (on cash basis); 
  4. Income Tax Accrued – Current Year; 
  5. Stated capital; 
  6. Accumulated earnings; 
  7. Number of Employees; and
  8. Tangible Assets other than Cash and Cash Equivalents. 
Table 2

For Table 2, an MNE will need to report the following data by tax jurisdiction:

  1. Constituent Entities resident in the Tax Jurisdiction;
  2. Tax Jurisdiction of organisation or incorporation if different from Tax Jurisdiction of Residence 
  3. Main business activity(ies) using the following OECD classification:
    • Research and Development
    • Holding or Managing intellectual property
    • Purchasing or Procurement
    • Manufacturing or Production
    • Sales, Marketing or Distribution
    • Administrative, Management or Support Services
    • Provision of Services to unrelated parties
    • Internal Group Finance
    • Regulated Financial Services
    • Insurance
    • Holding shares or other equity instruments
    • Dormant 
    • Other 
Table 3

For Table 3, an MNE is asked to report certain additional information (i.e. source of data, exchange rates, other business activities etc.) and also has the opportunity to include any information or explanation they consider necessary or that would facilitate the understanding of the compulsory information provided in the CBCR.

Strategic Considerations

Key strategic considerations for CBCR compliance will include:

  • Your historic approach to disclosure and tax transparency;
  • Your current tax/TP model (aggressive/non-aggressive) and level of supporting TP documentation (Masterfile/Local Files etc.); 
  • Adjustments to your TP model or business model in anticipation of CBCR (tackling high risk areas);
  • Which source of data to use and whether CBCR presentation can be improved by selecting other data sources and/or reporting periods; 
  • Considering the strategic opportunity granted via Table 3 (i.e. providing more narrative to the tax authorities to aid understanding and proactively address some potential areas of concern).
Operational Challenges

Key operational challenges for CBCR compliance will include:

  • Gathering consistent data on a global basis from multiple systems and different parts of the business (i.e. tax, finance, controlling, HR);
  • Ensuring you have sufficient resources (people, time, and budget) to manage this additional burden; 
  • Auditing the accuracy and consistency of the data;
  • Confirming you have the underlying robust TP documentation to support "risky" positions disclosed in a CBCR;
  • Discussing with your external advisors "judgments calls" that will have to be made around definitions and areas where full data cannot be accessed;
  • Navigating each country’s implementation and interpretation of the regulations; and
  • Implementing technologies or making system changes to more accurately capture or report the data required.

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