OECD considers country-by-country reporting as part of tax transparency initiative

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17 Oct 2013

The Organisation for Economic Co-operation and Development (OECD) has released a summary of issues associated with country-by-country reporting by taxpayers responding to a particular aspect of a joint G20/OCED project investigating the fairness and integrity of global tax systems. The report follows the endorsement by the G20 of the OECD 'Action Plan on Base Erosion and Profit Shifting' (BEPS), the outcomes of which are aimed to be implemented by the end of 2015. The summary of issues explores various considerations arising in developing an internationally accepted and applied 'template' for country-by-country reporting as a part of transfer pricing documentation, and considers accounting requirements and other information as the base for the information which might be included in the template.

The report, Memorandum on transfer pricing documentation and country by country reporting responds to one of the 15 identified actions in the Action Plan (link to OECD website), which calls for the re-examination of transfer pricing documentation to increase transparency for tax administration, whilst also taking into consideration business compliance costs. A key part of this action is:

The rules to be developed will include a requirement that [Multinational enterprises] provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

The summary of issues report states that the "language of the BEPS Action Plan makes it clear that.. country-by-country reporting to governments will be an essential element of transfer pricing documentation proposals developed" and explores issues surrounding each measure suggested in the Action Plan:

  • Income earned in a country. The report considers whether such measures should be derived from income before tax for each legal entity on the basis of statutory financial statements, taxable income, a segregation of consolidated financial information based on segment reporting rules, internal consolidation information, or some other method. Each of these approach is seen to have difficulties, e.g. current reporting requirements for segment reporting under International Financial Reporting Standards and other GAAPs generally do not require the reporting of income on a country-by-country basis
  • Taxes paid by country. Issues around this reporting include whether the amounts should be reported on a cash or accrual basis, for which levels of government payments should be reported, and whether reporting should be limited to income taxes or extended to other taxes
  • Measures of economic activity. A wide range of other measures may be identified as indicative of economic activity in a particular country, and reported either on a statutory entity or country basis. Measures suggested for consideration include revenue by location of customers, tangible and intangible assets by location, employment measures, research and marketing expenditures and the location of senior management.

The paper also discusses consequential issues such as what functional currencies should be used by entities to report the information, aggregation criteria, the mechanisms that should be developed to report and share country-by-country information, and the need to protect the confidentiality of competitively sensitive data.

This development calling for country-by-country reporting of key income tax-related information is similar to calls for other types of country-by-country reporting, such as the Extractive Industries Transparency Initiative (EITI) and 'Publish What You Pay' initiative which both are focused on payments to governments by entities engaged in extractive industries. Both the European Union and United States have implemented disclosure requirements related to country-by-country reporting. Whilst the tax transparency initiative is driven by concerns about the erosion of tax bases in various countries and so is targeted at the gathering of relevant information for tax administrations of governments, in the broad context it shares many of the objectives of these other initiatives which seek to use transparency to benefit governments and their citizens. 

The IASB's agenda consultation 2011 revealed little support for introducing country-by-country reporting requirements into IFRS, and it does not currently plan to undertake any specific work in this area.

The OECD paper will be discussed at an upcoming consultative event to be held on 12-13 November 2013. Click for access to access to the OECD paper (link to OECD website).

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