Demonstrate the effectiveness of Action 13 BEPS report in tackling transparency.
The paper intends to demonstrate the effectiveness of Action 13 BEPS report in tackling transparency. The evaluation is based on the thesis statement that although there are some challenges in implementing the Action 13 BEPS requirement, the benefits of the report are profound.
The draft document of the OECD Country by Country Reporting or Country by Country Report, has as its final objective to replace chapter V of the current Guidelines on Transfer Pricing of the OECD, in response to the action plan 13 of BEPS[1]. In this way, it is sought to generate transfer pricing documentation that allows increasing transparency for the benefit of the tax authorities of the different countries. According to this document, the OECD will propose that the multinational groups prepare documentation of transfer prices annually, which would include two main parts, as well as an Annex “Country by Country” or “CbCR template”. The first part would be given a Master File, which in principle should be prepared by the Headquarters of the multinational group, whose purpose would be for the differentfiscos to have a tool to assess transfer pricing risks. This document would mainly include 5 categories of information: i) Organizational structure, ii) Description of the business (s), iii) Intangibles, iv) Financing activities, and v) Fiscal position.
The second part would consist of the Local File, whose purpose is basically to ensure that the transactions made by the local taxpayer comply with the arm’s length principle. Said Local File will require the preparation of the functional analysis and the usual economic analysis, although it could also require additional information such as a description of the persons to whom the local management reports and the country (s) where said individuals maintain their main offices, description of the business restructuring carried out, as well as the reasons why an analysis is made with financial information of various taxpayer exercises, if applicable, among others. Finally, in the Country by Country Annex, the multinational group should include information on each of its companies, as well as detail the location of the effective administration headquarters, codes of the entity’s activities, income, pre-tax earnings, taxes paid, employees (number and expense), among others. The proposed amendments have given rise to a strong debate at the global level and have generated concern in the business community, for sensitive aspects such as the confidentiality of information or the arbitrary use that the tax authorities of certain jurisdictions could make based on the information that It would pretend to share with all the fiscos. However, for the time being it seems to be the trend that the exchange of this information could only be done through the mechanisms available between fiscal authorities.
A cornerstone in tackling base erosion and profits shifting (BEPS) is increasing transparency. To achieve this, certain multinational enterprises (MNEs) will need to submit a Country-by-Country (CbC) report, as introduced in BEPS Action 13. The preparation and delivery of the CbC report not only requires extensive work compiling the relevant accounting data, but a deep understanding of each jurisdictions’
One of the justification of the effectiveness of Action 13 BEPS report is that under this report, MNEs must untangle the web of automatic exchange relationships between tax authorities to identify the relevant reporting entities and deadlines for both notifications and submissions in jurisdictions that the MNE has a presence in[2]. Transfer pricing was one of the main thrusts identified in the Action Plan on Base Erosion and Profit Shifting in 2013. The objective was to develop “rules applicable to documentation”. transfer pricing to increase transparency for the tax administration, taking into account the costs of discipline for companies . In particular, multinationals may be required to provide all relevant public authorities with the required information on their global distribution of income, economic activity and taxes paid in different countries, in accordance with a common model.[3].
Another justification that Action 13 BEPS report is appropriate is that the use of transfer pricing is an integral part of the normal management of multinational enterprises. According to the OECD, transfer prices refer to “prices at which a company transfers tangible property, intangible assets, or renders services to associated enterprises” located in different countries. Transfer prices are thus the prices of transactions between companies of the same group and residents of different states : they involve intragroup transactions and the crossing of a border[4]. Evidently, The transactions thus invoiced between two associated companies have the consequence of reducing the result of the first and increasing that of the second . The objective is thus to determine the tax due in each country according to the principle according to which all activity is imposed on the territory where it is carried out. However, to the extent that the practice of transfer pricing gives a group of companies some control over the location of its results – and this especially in a context marked by the importance of intragroup trade, a special check has been introduced[5].
It is also important to note that in order to avoid unjustified relocations of profits in low-tax countries, transfer prices are supposed to be set according to the arm’s length principle of the OECD wants the transfer price charged to be the same as if the two companies in question were two independent companies and were not part of the same group . Therefore transfer prices must be stopped as if they had been in a competitive market.
In a twofold perspective of increasing the scope and content of the information provided to the tax administration on the determination of transfer pricing, the final report on Action 13 replaced the previous applicable principles, adopted in their initial version in 1995. If the arm’s length principle in transfer pricing has been very quickly defined by the OECD, the principles developed in 1995 reflect a still embryonic vision of the role of transfer pricing within multinational enterprise groups. In particular, there was no list of documents to provide as part of transfer pricing documentation.
Action 13 BEPS report also has many tools that facilitate transparency. For example, in order to provide tax administrations with global and detailed information enabling them to apprehend risks related to transfer pricing, to better target controls and to have the necessary elements for verifications, Action 13 retains three tools: The first one is a “master file” containing general information on the activity of multinational enterprises and their worldwide transfer pricing policy, available to all tax administrations in the countries concerned. The second one is a “local file” specifying the determination of transfer prices from a transactional angle, specific to each country. The third one is a country-by-country return , filed each year by large multinational companies, describing for each of the tax jurisdictions in which they operate, accounting, market and list items for each group entity.[6]. The modalities of the BEPS agreement for the filing of these three documents vary: it is expected that the two files will be sent directly to the local tax authorities, while the country-by-country returns will be filed in the tax jurisdiction. the ultimate parent entity of the group, and then automatically exchanged between the tax administrations concerned . Exchange on demand, possibly provided for under bilateral agreements, would remain applicable to the information contained in the local file.With the political support of the G20, the OECD plays a central role in the implementation of these mechanisms: On the one hand, in the opening of the BEPS field to all the volunteer countries, placed on an equal footing, firstly for the negotiation, then for the application and follow-up of the recommended measures. The challenge now is to develop an inclusive monitoring and evaluation framework, modeled on the Global Forum on Transparency and Exchange of Information for Tax Purposes, which has included the dissemination of a minimum standard for exchange of banking information; On the other hand, in the definition of common models of domestic legislation and international agreements, in order to facilitate the implementation of the new information standards. In fact, the BEPS project should be analyzed as a double update of the international tax system, with regard to its rules, to better take into account the globalized dimension of economic exchanges, the growth of services and intra-group trade; as well as of its actors, with the affirmation of countries that have not participated in the initial definition of the international fiscal framework and do not always recognize the authority. Their participation in the work of BEPS is also aimed at integrating them into this normative corpus.[7].
It worth noting that the tools advocated by BEPS Action 13 fall precisely into this twofold objective: while many countries, including France, already apply rules concerning the documentation of transfer prices, the country-by-country declaration is a real innovation. In the tax administration’s analysis of transfer pricing, the country-by-country declaration intervenes upstream of the two global and local files, by drawing a portrait of the group of multinational companies and its various entities, as well as a geographical and sectorial cartography of the activities carried out[8]. They are designed to assess the risks associated with transfer pricing in order to focus the in-depth controls on the biggest issues previously identified . In fact, they are not a substitute for an in-depth analysis of transfer prices, which is subsequently carried out by means of the complementary documentary requirements. Companies with an annual turnover exceeding 750 million euros will be subject to this. It is expected that this threshold will be converted initially into the national currency, renewed until the review in 2020. According to the OECD, it ensures a certain balance between the declarative burden and the desired objective: it excludes close to 90% of multinational enterprise groups, bonded groups account for about 90% of the aggregated turnover of global companies.[9].
Action 13 BEPS report is also backed by appropriate model and mechanism. To enable rapid and consistent implementation of the mechanism, the OECD has defined a model of legislation requiring country-by-country reporting . It specifies the content of the declaration, by means of a model declaration attached to the report. The declaration includes three tables: the first gives an overview of the distribution of profits, taxes and activities of the group by tax jurisdiction, by tracing eight data relating to: turnover, profit or loss before taxes, taxes on profits actually paid, income taxes due for the current year, share capital, undistributed profits, number of employees, and non-cash tangible assets and cash equivalents; the second lists all the constituent entities of the group divided by tax jurisdiction, presenting the main activities they exercise among thirteen proposals; the third allows the group to provide additional information to facilitate understanding of the first two tables[10].
The first statements should focus on fiscal year 2016 ; one year from the closing of the accounts of the year is recommended for the filing of the declaration, so that the first declarations are expected at the end of 2017[11]. It is also important to note that with regard to the filing of the declaration, three modalities must be distinguished: the main mechanism provides that the ultimate parent companies of the multinational enterprise groups must proceed with the tax administration of their jurisdiction. The tax administrations of the different jurisdictions where the group is established will then proceed to the automatic exchange of the declaration, on the basis of an international agreement; the subsidiary mechanism applies if the parent company is located in a State or territory that has not adopted legislation that complies with the standard: it may entrust the task of fulfilling this reporting obligation to one of its subsidiaries located in a country that disposes of it, and the latter will ensure the exchanges. In addition, as a transitional measure, a voluntary deposit by the ultimate parent entity established in a State that has not yet adopted country-by-country reporting legislation, if it receives it and transmits it to other jurisdictions concerned is recognized by the OECD as an application of the Subsidiary Mechanism[12]; and the secondary mechanism provides that in the absence of designation of a subsidiary entity, each entity may be required by the State where it is located to locally subscribe the country-by-country declaration for the entire group to which it belongs.[13].
The final BEPS agreement also specifies the conditions for obtaining and using country-by-country declarations . In particular, the protection of the confidentiality of transmitted information, which must be a measure” At least equivalent to [that] that will apply if this information is communicated to the country under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a Tax Information Exchange Agreement” or a tax convention that meets the internationally agreed standard for exchange of information on request. These protections include limitations on the use of information, the rules on who the information may be communicated to, public order, and so on. Similarly, the use of the information collected is limited to two possibilities: the general assessment of the risks related to transfer pricing and other risks relating to the erosion of the tax base, as well as use for statistical purposes. In particular, they should not be used as a basis for adjustments to a company’s income.
In addition, the OECD issued guidelines for implementing country-by-country reporting on June 29, 2016, updated on December 5, 2016; a user guide and a secure electronic transmission scheme are also provided. In the past, the OECD published a draft document on the comparability of transfer pricing information in developing countries[14]. This document was presented in response to the G8, which has commissioned the OECD to investigate ways to solve the limitations and problems posed by developing countries, which have been mainly the quality and availability of information needed to manage transfer prices. The approaches proposed by the OECD in this draft document are four: i) Expand access to comparable information sources; ii) Use of information sources of comparables more effectively; iii) Reduce dependence on direct comparables; and iv) Use of Advance Price Agreements (APAs) and mutual agreement procedures. Based on the aforementioned approaches, the OECD proposes some concrete actions, which will have to be seen in each case how they evolve and are implemented[15]. These include, for example, the proposal to increase the coverage of commercial databases with respect to financial information and transactions in developing countries, as well as the discussion about the possibility of generating the obligation that companies declare their annual accounts in the jurisdictions in which they operate, with the objective of having more information about local comparable companies[16]. A relevant aspect of the document is the explicit mention of the so-called Sixth Method, “created” in Argentina in 2003, and then copied (and in general “improved”) by other countries, applicable to certain export operations of certain commodities to subjects linked, made with the intervention of certain international intermediaries[17]. Although the OECD points out that this method is not consistent with the principle of the independent operator and that it has many limitations due to differences in the conditions of transactions, dates or places to which it refers, among others; nevertheless it concludes preliminarily that, under certain – and, by the way, very limited – circumstances, this sixth method could be applicable[18].
The digital economy and its greatest impact on international business represents several challenges for current tax systems, given that situations arise where there is a minimization of the tax at source, either by avoiding the tax presence or by maximizing deductions, by lowering or null imposition at the level of who receives the digital good or due to the lack of taxation on the benefits at the level of the final parent company[19]. The OECD considers that categorizing the digital economy as an independent sector of the economy is wrong and that it is rather a process of evolution of all businesses. Therefore, it proposes the modification of the exceptions of the status of permanent establishment until now used, the creation of the concept “significant digital presence” as part of the concept of permanent establishment, the definition of the concept of “virtual presence” and issues related to retentions on digital transactions and options before taxation on consumption (VAT). These issues are central, since issues that affect competition with respect to entities that deal with digital businesses in the country or abroad can occur[20].
Conclusion
The Action 13 BEPS initiative is part of a significant, and largely irreversible, change on the part of governments in the perception that multinational businesses find additional facilities in tax matters that generate an advantage compared to purely domestic businesses. It would be recommendable for taxpayers to prepare for this new context, analyzing in particular how their operations are exposed in the new analysis scheme of the tax authorities, with particular emphasis on those entities whose parent companies are located in specified country. On the other hand, it would be convenient for the authorities to consider that this information does not occur automatically and that it represents significant costs for taxpayers, especially in the adaptation of information systems. An adequate evaluation of the costs and benefits of obtaining additional information will promote greater compliance of taxpayers. With regard to the technical modalities adopted , two observations can be made concerning: at the source of the data used in the declaration . The final report on BEPS Action 13 offers the possibility of choosing the source of usable data – consolidated, social or analytical data – provided that it is consistent from one exercise to another and that the sources and principles retained are explained to the tax authorities in the third table of the declaration containing the “additional information”.
Completed by the introduction of an automatic exchange between the tax administrations of the States Parties, the country-by-country reporting mechanism complements the tools for understanding the transfer pricing policy of a group of multinational companies. Given the existing requirements for transfer pricing documentation, the country-by-country reporting is not so much a reinforcement of the information available to the tax services as a means of making better use , especially by decompartmentalizing the different data. relating to the same group. In support of mapping the locations and activities of each entity in a group. It will be possible to carry out an initial risk analysis and to prioritize the in-depth evaluations to be conducted using the documentation already provided. It is in this sense that the country-by-country declaration is part of action 13 in addition to documentary obligations. Indeed, the contribution of this mechanism is twofold , in that it completes the information available to the tax administrations by presenting a portrait of the largest international firms, and that it reinforces the effectiveness of the pre-existing documentation mechanisms. transfer prices. If the exchange of information relating to these files remains governed by the principle of a request from one jurisdiction to another, the automatic exchange of country-by-country declarations removes an obstacle to its implementation. Indeed, to make a request for information to another jurisdiction, it is necessary to have sufficient elements leading to the in-depth analysis. Thanks to the country-by-country declarations and to the possible difficulties thus revealed, the requesting tax administration will be able to dispose of these elements more easily.
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