This is a recent addition to my ‘International Tax Update’ manual:
OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS)
Base erosion is reducing taxable income in a country, for example, taking large interest expense deductions. Profit shifting is when taxable profits are shifted from a high-tax jurisdiction to a low tax jurisdiction.
After a 2013 OECD report detailing the harmful impact of BEPS, the OECD published in the same year an “Action Plan on BEPS”. This action plan laid out 15 action points to correct existing international tax processes and was endorsed by the Finance Ministers of the G20. These actions give governments the domestic and international instruments needed to prevent corporations from inappropriately paying little or no taxes.
The 15 action points to combat BEPS (BEPS Package)
Action 1: Digital economy
Action 2: Hybrids
Action 3: CFC Rules
Action 4: Interest Deductions
Action 5: Harmful Tax Practices
Action 6: Treaty Abuse
Action 7: Permanent Establishment
Action 8-10: Transfer Pricing
Action 11: Data analysis
Action 12: Mandatory disclosure rules
Action 13: Transfer Pricing Documentation and Country-by-Country Reporting
Action 14: Dispute Resolution
Action 15: Multilateral Instrument
Under BEPS Action 13, all large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates. This CbC report is shared with tax administrations in these jurisdictions, for use in high level transfer pricing and BEPS risk assessments. This is the minimum standard for transfer pricing documentation.
The BEPS Action 13 report (Transfer Pricing Documentation and Country-by-Country Reporting) provides a template for multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business the information set out therein. This report is called the Country-by-Country (CbC) Report.
Action 13 – Three-Tiered Approach
Group Master File
· High level information about group operations and transfer pricing policies, capable of being provided to all relevant tax administrations
Local Country Files
· Required for each country of operation, detailing transactional data and material related party transactions, together with the transfer pricing methodology applied
Country-by-Country Report (CbCR or CbC Report)
· Sets out amount of tax being pad and accrued in each jurisdiction alongside other key financial information
· Risk assessment tool for tax authorities to decide on further necessary action
The US country-by-country requirements
The OECD recommended country-by-country reporting requirements to address base erosion and profit shifting. As a member of the OECD, The United States issued regulations to require country-by-country reporting by U.S. multinational enterprises (MNEs). The United States is not currently requiring the preparation of or filing of the Master and Local Files since substantially similar information is required under IRC 6662(e) transfer pricing documentation.
On June 30, 2016, the U.S. Treasury and IRS published final Treas. Reg.1.6038-4 on CbC reporting. Parent entities of U.S. multinational enterprise (MNE) groups with $850 million or more of revenue in a previous annual reporting period must file Form 8975, ‘Country-by-Country Report’.
The Form 8975 is used to report a U.S. MNE group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis.
The IRS will exchange Form 8975 information automatically with tax authorities with which the United States enters a bilateral Competent Authority Arrangement. Article 26 (Exchange of Information and Administrative Assistance) of the U.S. model treaty authorizes the exchange of information for tax purposes, including the automatic exchange of information.
Form 8975, Schedule A
A separate Schedule A (Form 8975) must be completed for each tax jurisdiction in which a group has one or more constituent entities resident. If any constituent entities in the group that do not have a tax jurisdiction of residence ("stateless"), then a Schedule A providing the information for each constituent entity that is stateless is completed.
LB&I Practice Unit Releases New Practice Unit on CbC Reporting (April 12, 2022)
The IRS Large Business and International (LB&I) issued a new Practice Unit on the rules entitled ‘Country-by-Country (CbC) Report in the Transfer Pricing Risk Analysis Process’. Practice Units are developed through IRS internal collaboration and serve as both job aids and training materials on tax issues. They are not official pronouncements of law or directives and cannot be used, cited or relied upon as such.
The purpose of the Practice Unit is to describe the background that led to the required filing of Form 8975 and Form 8975, Schedules A and to provide guidance about the appropriate use of these forms in the IRS high-level transfer pricing risk assessment process.
The CbC Report is one tool to identify potential transfer pricing risk to determine whether to proceed with an examination of a transfer pricing issue.
· The Form 8975 may be used during the initial assessment of a tax return for examination potential to identify whether there are indicators of transfer pricing risk
· The Form 8975 may be used once a tax return has been selected for examination to evaluate the transfer pricing risk of related party transactions in general or to further evaluate a significant related party transaction already identified
Other sources of information used in conjunction with the Form 8975 may include:
· The Form 5471, Schedule M and/or Form 5472, Part IV for the nature of the controlled transactions (e.g., sale or purchase of tangible goods, manufacturing, technical services, royalty payments, cost-sharing payments, platform contribution transaction (PCT) payments, financing, etc.) and the amounts of these transactions
· Transfer pricing documentation
· Form 1120 for related Schedule M-3s and Uncertain Tax Positions (UTP) disclosures