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Country-by-country tax reporting

Tuesday, 21 April 2015   (0 Comments)
Posted by: Author: Fathima Naidoo
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Author: Fathima Naidoo (EY)

The Organisation of Economic Co-operation and Development’s (OECD’s) recently released guidance on transfer pricing documentation and country-by-country reporting is an opportunity for companies to assess the tax implications of their international business operations. This is according to Justin Liebenberg, International Tax Leader at EY Africa.

The guidance forms part of the recommendations outlined in the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan that was released in July 2013. The action plan is aimed at addressing global government concerns about the potential for multinational companies to reduce their tax liabilities through the shifting of income to no- or low-tax countries.

"This guidance merely reinforces the fact that multinational companies are going to see increased scrutiny into how they structure their businesses as well as their tax liabilities amid global efforts to minimise tax avoidance. One of the implications is that there will be more onerous disclosure requirements for multinational companies regarding their global activities,” Liebenberg says.

As part of the transfer pricing documentation guidance, the OECD has developed a country-by-country reporting template for key economic and tax data with respect to a multinational’s activities in each country in which it does business. Information that will need to be disclosed in this template includes headcount, revenues, earnings before tax, stated capital and accumulated reserves, tangible assets excluding cash and cash equivalents, cash tax paid and current tax charge. The companies will also be required to detail all entities, stating places of residence and main activities. South Africa’s Davis Committee, which is reviewing the country’s tax policy, recommends additional transaction data including interest payments, royalty payments and service fees.

According to Liebenberg, this information may be shared with tax authorities in all countries where the multinational company does business, giving such authorities a view of the company’s entire global footprint for the purposes of a high-level risk assessment. "We expect that tax authorities will use the information to conduct an assessment based on key comparative ratios, such as effect tax rate, profit margins and income generated per employee,” he adds.

Multinational companies will not only need to ensure they have the documentation in place, they will also have to review their company tax processes to ensure that they align with the OECD’s recommendations. With tax authorities now able to compare the profitability of similar operations of multinational companies based on the data provided, perceived inconsistencies could arise and this may lead to requests for additional information or explanations.

"Some of these inconsistencies, though, may be the result of the lack of a comprehensive global transfer pricing policy or the inability to implement such a policy due to country-specific challenges. It will therefore become important to identify any inconsistencies and determine their causes early so they can either be explained or remedied,” Liebenberg says.

More importantly, country-by-country reporting obligations will make it easier for authorities to identify tax avoidance practices. Multinational companies will therefore need to ensure they are not seen to be non-compliant by ensuring that their tax processes are above board and in line with each country’s laws.

The world is entering a new era in tax reporting as countries consider, and in some cases, implement the OECD’s recommendations. The BEPS Action Plan is ambitious in both scope and timing, thus underpinning a real sense of political imperative around increased transparency. "It therefore in the best interests of multinational companies to make an assessment of the impact of the proposed changes so that they are adequately prepared,” concludes Liebenberg.

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