OECD updates country-by-country reporting guidance, set rules on “appropriate use” of data

The OECD today released updated international tax guidance on country-by-country reporting by multinationals and new guidance detailing the “appropriate use” by tax administrations of the country-by-county data.

Both sets of guidance add further detail to 2015 agreements reached by OECD, G20, and other countries in action 13 of the base erosion profit shifting (BEPS) plan.

These BEPS action 13 agreements call for nations to obtain reports from large multinationals headquartered in their country on their tax affairs and to exchange these disclosures with the countries in which the multinational operates. The aim is to provide tax administrations with information they can use to identify whether a multinational operating in their country is likely to be avoiding tax.

Today’s release updates prior OECD guidance by specifying that multinationals must include extraordinary income and gains from investment activities as “revenues” in the country-by-country report submitted to their home country and exchanged as a part of the country-by-country reporting plan scheme.

The revised OECD document also describes which items shown in an MNE’s financial statement should be reported as revenues in table 1 of the country-by-country template when financial statements are used as the source of the country-by-country data.

The revised document further provides that countries may provide transitional relief to MNE groups with a short accounting period that starts on or after January 1, 2016 and ends before December 31, 2016.

In addition, the paper discusses how MNEs can appropriately report income tax accrued and income tax paid.

Appropriate use of data

The second document released by the OECD today discusses the “appropriate use” of the country-by-country reporting information by tax administrations.

The requirement for appropriate use, as well as requirements for confidentially and consistency, were agreed to by nations as a prerequisite to obtaining the country-by-country reports from other jurisdictions and as a prerequisite to using the information provided in a country-by-country report to assess a tax deficiency against a multinational.

Today’s release explains that the “appropriate use” requirement mandates that tax authorities use the country-by-country reporting information for assessing high-level transfer pricing and base erosion and profit shifting related risks only.

The information should not be used by itself as a basis for proposing changes to transfer prices, adjusting a taxpayer’s income using global formulary apportionment, the document states.

The consequences of non-compliance with the appropriate use condition are also detailed in the guidance.

It notes that countries signing on to the BEPS plan have agreed that if there is non-compliance with the appropriate use requirement the competent authority of that jurisdiction will concede the tax adjustment. The exchange of country-by-country reports may also be temporarily suspended if there is noncompliance, following consultation.

Included in the guidance is a checklist for countries to use to prepare to meet this requirement.

It suggests, for example, that countries make certain that their tax audit staff understands that a commitment has been made to concede any tax adjustment using an income allocation formula based on country-by-data.