New Challenges for Companies Active in International Markets
Country by Country Reporting (in short CbCR) is part of the action plan of the OECD and G20 Member States to reduce base erosion and profit shifting (BEPS) in multinational corporations. The draft aims to counteract multinational companies’ skillful ability to take advantage of different tax systems. In the future, companies should pay their taxes in the countries in which the added value is generated. For this purpose, profits, tax payments, and entrepreneurial activities should be prospectively documented for each country.
Companies with Annual Turnover of € 750 Million and Above
In principle, Country by Country Reporting applies to multinational corporations with an annual turnover of € 750 million and above if a company’s consolidated report includes at least one foreign company or a foreign permanent establishment. All documentation must be drawn up and disclosed on an annual basis. Each national tax authority may then exchange the data with other foreign tax authorities.
Country by Country Reporting as Part of Transfer Pricing Documentation
Country by Country Reporting is included in Action 13 of the OECD’s BEPS initiative, which requires that transfer pricing documentation in the future is conducted based on a three-tiered structure. This means that the requirements for transfer pricing documentation developed almost 20 years ago have been completely revised. In the future, the documentation requirements should be completed based on this three-tiered approach: a master file, company-specific documentation in the local file, as well as country-specific reporting in the form of Country by Country Reporting.
Criticism from Different Viewpoints
While NGOs such as Tax Justice Network, Oxfam or Tax Research UK say the new regulations are not consistent enough, the OECD’s Business and Industry Advisory Committee (BIAC), which represents the interests of the industry, warns of significant administrative overhead and increased costs incurred by companies.
New Compliance Requirements
The guidelines for Country by Country Reporting have already been ratified by most European countries, the United States and Canada. Given these developments, the major accounting firms warn their clients of the risk of double taxation and complex compliance requirements. Therefore, companies should study the new regulations at an early stage and adapt their operations to them.