Businesses Face More Onerous Transfer Pricing Documentation and Country-by-Country Tax Reporting

The CD proposes to reform transfer pricing documentation for multinational enterprises and to impose onerous country-by-country (CbC) reporting obligations, including disclosure of taxes paid in each country in which a business operates, in a bid to enhance revenue authorities' abilities to identify high risk transfer pricing situations and to make transfer pricing audits more thorough. The CD recently released a consultation paper on transfer pricing documentation that outlines a master file/local file approach in which a multinational would have to submit annually a master file for all countries in which it does business, including details of the multinational's business lines, intangibles, intercompany financial activities and financial and tax position”including the CbC breakdown, supplemented by a separate, local file for each  jurisdiction, with details on local entities and transactions. This initiative is one element of the multi-pronged BEPS Action Plan initiated last year by the CD that is designed to counter what revenue authorities consider to be inappropriate international corporate tax planning.

These guidelines, if adopted, will undoubtedly increase compliance costs for businesses in preparing the elaborate reporting. Of even greater concern is that the measures will potentially increase the incidence of double taxation, i.e., taxation of the same income by more than one country”which the CD aims to reduce”by acting as an invitation to jurisdictions to make even more aggressive transfer pricing adjustments. The new standards also raise significant concerns about the confidentiality of the documentation, which will include proprietary, commercially sensitive business information.

The CD recently solicited comments on the discussion draft. The CD was urged to adopt an approach that genuinely balances the legitimate needs of tax administrations for sufficient transfer pricing disclosure with the need to avoid the imposition of unnecessary or excessive compliance costs on businesses. Recommendations include minimizing the additional burden on business by allowing flexibility in preparing new documentation, for example choice of reporting by business line or enterprise-wide, by permitting use of existing financial and management reports to the greatest extent possible, and by permitting adequate de minimis thresholds and/or safe harbours. Tax administrations should also ensure that the transfer pricing documentation, including CbC reporting, be reviewed by those in the administration sufficiently senior and experienced in transfer pricing to assess the information fairly. Penalties should be limited to cases of deliberately or negligently inadequate reporting accompanied by material transfer pricing adjustments. Finally, the goal of ensuring consistency of transfer pricing documentation should be twinned with the goal of ensuring consistency of transfer pricing administration across jurisdictions by eliminating subjective application of transfer pricing rules on the part of tax administrators.

The CD is currently reviewing all the comments submitted and revised documentation guidelines are expected to be released later this year.

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