6 steps to solving the country-by-country reporting challenge
How to comply with CbC reporting requirements
INSIGHT ARTICLE |
In June 2016, the United States released final regulations on country-by-country (CbC) reporting aligned with the base erosion and profit shifting (BEPS) action plan. Action Item 13 requires taxpayers to articulate consistent transfer pricing positions that will provide tax administrators with the data necessary to:
- Assess transfer pricing risks
- Determine where to most efficiently deploy audit resources
- Provide the information necessary to commence and target needed audit inquiries
The new U.S. CbC reporting regulations are effective June 30, 2016 and will require U.S. multinational entities with global revenues of $850 million or more to file CbC reporting Form 8975 as part of their corporate tax return.
One challenge for affected companies: how best to comply?
6 steps to CbC reporting success
As illustrated above, affected companies may want to consider a six-step process to successfully comply with CbC reporting requirements.
Step 1: Research
The first step, research, focuses on understanding how the new U.S. CbC reporting rules, as well as rules adopted by numerous other nations, affect your operations. Research will be an extensive process and may involve reaching conclusions on issues like permanent establishment status or stateless entity situations arising from partnerships and joint ventures. The end objective of the research phase is to determine the company’s CbC reporting basis of accounting.
Step 2: Data sources
Both the Organisation for Economic Co-operation and Development (OECD) and the IRS have been flexible in allowing taxpayers to select the sources necessary for CbC reporting, as long as those sources are consistently used. Useful data sources may include:
- Certified financial statements
- Books and records maintained with respect to each constituent entity
- Records used for tax reporting purposes
- Regulatory financial statements
- Records used for internal management control purposes
In many cases, these will not serve as literal data sources. Instead, tax departments will need to dig into supporting detail to create information at the jurisdictional level and to apply conclusions from the research phase. Companies will also need to consider timing. When will data sources be available? Finally, you should consider conducting industry reconnaissance to compare selected data sources to those being used by other companies in your industry sector. This will reduce the odds that tax authorities will find that your CbC report creates an unfair portrait of your company’s activities.
While your enterprise resource planning (ERP) system may seem like the logical place to start with data collection, you should also review your foreign entity data collection package, which may indicate data that is either missing or hard to extract from your ERP system. Expanding your foreign entity data collection package may prove a better approach than creating or modifying reports from your ERP system.
Also, don’t overlook the likelihood that you are already collecting much of the necessary data for existing tax filings and other needs. The following graphic illustrates how such data may already meet key requirements of the CbC Table 1 report.
Step 3: Information requests
Once you have evaluated your existing information sources, the next step is to determine what new information requests you will need to make and the attributes and descriptive data necessary to frame those requests. Upfront planning can ensure efficient information gathering and avoid last-minute concerns about the quality or accuracy of the data provided by the business.
Step 4: CbC reporting tool choice
Companies will need to choose between a do-it-yourself (DIY) approach and one of a variety of CbC reporting tools vendors have developed. Be aware, though, that vendors have widely different perspectives on out of which tax process CbC reporting flows. Some offer tools that are add-ons to their tax compliance tools, others include CbC reporting as an extension of their core tax provision and global tax planning products, and others expect CbC reporting to be a new process for transfer pricing specialists. If you are considering licensing software, check to see which product is best aligned with your approach and processes.
Three key questions to consider:
- Will the vendor eventually merge its CbC reporting tool into its core tax compliance product, and if it does, how would that choice affect your operations?
- Since Form 8975 is now a required part of the corporate tax return for affected companies, why does the vendor feel that it is so unique that it requires a separate tool and license?
- How quickly will the vendor update its tool if one or more countries adopt new legislation affecting CbC reporting?
Companies choosing the DIY approach can take comfort in the fact that, in March 2016, the OECD published the Country-by-Country Reporting XML Schema: User Guide for Tax Administrators and Taxpayers. The schema enables taxpayers to express Table 1 and Table 2 as extensible markup language (XML) files that can be incorporated into e-file package that satisfies U.S. tax authorities.
Step 5: Data aggregation
Start by preparing or updating a master file of entity attributes, including entity name, tax jurisdiction and reporting status. Properly structured and formatted, this list can either be imported into your selected CbC reporting software or, for DIY taxpayers, can serve as a primary source table for Excel-based processes.
You will need to generate CbC reportable data, by jurisdiction, from your company’s global operations for:
- Balance sheet
- Tax expense
- Tax liability
Assuming that some of the data will be gathered by piggybacking off of U.S. tax or generally accepted accounting principles (GAAP) reporting, differences in entities to be included or differences in reporting treatment for certain income statement or balance sheet accounts will have to be accounted for in the data aggregation step.
Step 6: Filing
Finally, the last step is to convert the aggregated data into an XML format. Most vendor tools handle this conversion. DIY taxpayers can produce an XML file by using a simple XML converter.
CbC reporting presents new challenges for affected taxpayers. With a little upfront consideration and planning, following the above steps can make CbC reporting straightforward and easy to merge into existing tax processes.