In June 2018, the Inclusive Framework (now 137 members) directed the Organization for Economic Co-operation and Development (OECD) Committee on Fiscal Affairs (CFA) Working Party 6 (on the Taxation of Multinational Enterprises) and Working Party 10 (on Transparency and Exchange of Information) to work together to conduct this 2020 review.
As of January 2020, approximately 90 members of the Inclusive Framework had implemented legislation to introduce a CbC reporting requirement (Egypt, KSA, UAE and Qatar in Middle East, North Africa (MENA)) and a further 25 had legislation in draft form (this most likely includes Bahrain in MENA).
The public consultation is organized as follows:
- Chapter 1 considers the implementation and operation of BEPS Action 13, including the multinational enterprise (MNE) group experience of CbC reporting implementation by jurisdictions, the use of CbC reports by tax administrations and other aspects of BEPS Action 13, being the master file and local file.
- Chapter 2 considers the scope of CbC reporting, including the definition of an MNE group, and the level and operation of the consolidated group revenue threshold.
- Chapter 3 considers the content of a CbC report, including whether aggregate or consolidated information should be provided in Table 1, whether information in Table 1 should be presented by entity rather than by tax jurisdiction, and whether additional or different information is needed.
Key Concerns—Largely Domestic Groups
Enterprises in MENA that are mainly domestic in nature are (at present) brought into the regulations and classified as an MNE if they have tax presence in one other location outside of the home country.
A group is defined as “a collection of enterprises related through ownership or control such that it is either required to prepare consolidated financial statements or would be so required if any of the enterprises were traded on a public securities exchange.”
An MNE group is defined as: “any Group that includes two or more enterprises resident in different jurisdictions or that includes an enterprise that is resident in one jurisdiction and is subject to tax through a permanent establishment in another jurisdiction, and that is not below the consolidated group revenue threshold.”
A number of entities are brought into the CbCR net due to the above definitions even though they may not have much in the way of intra-group transactions. A carve-out for mainly domestic groups would be helpful.
Key Concerns—Provision of Sensitive Information
The provision of sensitive information outside of the group is a concern to many MENA groups although the peer reviews are helpful in providing some confidence in this regard.
The Consultation poses the question as to whether more information should be provided with respect to entity information in Table 1 of the CbCR (currently this information is by location and not entity). The consultation also asks if related party interest income, royalty, service fee and other information should be provided. This may open MNEs up to additional scrutiny.
Key Concerns—Secondary Filings
There are currently in excess of 2,400 bilateral instruments in place for the exchange of CbC reports under the Multilateral Convention for Mutual Administrative Assistance on Tax Matters—however, there are still secondary filing requirements impacting MENA as the tax authorities are only beginning their dialogue with non-MENA tax authorities.
Key Concerns—How has the Information Been Used and How is it Going to be Used?
The consultation acknowledges that it may not be apparent whether a transfer pricing audit has been precipitated by CbCR information but it is clear that transfer pricing audits are increasing in frequency and intensity across MENA.
The OECD is currently developing a CbCR Tax Risk Evaluation & Assessment Tool (TREAT), which will support tax administrations in reading and interpreting CbCR reports. This may be helpful for MENA tax authorities and also for MNEs if TREAT is applied to assess risk and eliminate lower risk MNEs from transfer pricing audit scrutiny.
Key Concerns—Divergences from the OECD Approach
The MENA tax authorities are adopting the master file and local file template and approach and this is helpful for MNEs to have a consistent standard. There have been some divergences which include but are not limited to the following:
- the definition of control (KSA TP Regulations);
- the requirement to search for local comparables (most MENA TP Regulations);
- the requirement to get approval for not applying the Comparable Uncontrolled Price (Qatar TP Regulations);
Key Concerns—Groups Under Common Control
Many MENA headquartered groups operate as independent divisions and the collation of CbCR information can be costly and time consuming. However, the consultation poses the question as to whether separate CbCRs should be prepared by groups that are under common control and which in aggregate have consolidated group revenue above the CbC reporting threshold.
Key Concerns—Lowering the Threshold
The consultation asks the question whether the CbCR threshold should be lowered and this would be problematic for smaller groups. Egypt has imposed a lower threshold for reporting for Egypt parented groups but not many other tax authorities have stepped away from the OECD $850 million threshold (or approximated in the local currency).
MENA headquartered groups should take this opportunity to become part of the consultation and this article should help get that debate started. Submissions are required by March 6, 2020 and there are 40 specific questions that can be addressed by MNEs—a few of the more pressing concerns have been set out above.
Shiv Mahalingham is Head of Transfer Pricing, Deloitte MENA.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.