OECD examines requirements for country-by-country tax reporting

Ahead of a November meeting in Paris to discuss transfer-pricing documentation, the Organisation for Economic Co-operation and Development (OECD) has issued a Memorandum on Transfer Pricing Documentation and Country by Country Reporting, which summarises the questions that must be resolved if country-by-country income and tax reporting is to be implemented. Country-by-country reporting would require multinational companies to report to the governments of each country in which they operate their income and taxes paid, so that tax administrators could determine if they are avoiding paying taxes in countries in which they have economic activity. 

The OECD has been pushing for international co-operation to prevent multinational corporations from avoiding taxes. The OECD has called for country-by-country reporting as part of its transfer-pricing documentation proposals, and its Action Plan on Base Erosion and Profit Shifting calls for the development of a set of common requirements for taxpayer reporting of income, taxes paid and economic activity.

According to the memorandum, the two main questions to be resolved are:

1. What information should be required?; and
2. What mechanisms should be developed for reporting and sharing country-by-country data?

The OECD acknowledges that a balance must be struck between the usefulness of the data for tax administrators and the compliance burden on taxpayers. The memorandum looks at several information-reporting approaches that might be adopted. These include:

• Requiring reporting of net income before tax for each legal entity in a multinational enterprise group, with numbers to be drawn from individual entities’ financial statements;
• Basing income reported on taxable income as reflected on tax returns filed in a jurisdiction;
• Requiring a segregation of consolidated multinational enterprise group income among countries calculated by reference to accounting segment reporting rules; or
• Reporting data taken from the company’s internal consolidating income statements relating to each company’s contribution to consolidated income after eliminations.

The OECD notes that many other possible approaches exist.

On the issue of reporting taxes, the memorandum notes several questions that must be resolved:

• Should taxes be reported on a cash or accrual basis?
• Should tax reporting be limited to national-level income taxes, or should reporting of income taxes paid to other levels of government be required?
• Should reporting of taxes other than income taxes be required?

Although the OECD seems committed to the idea of country-by-country reporting, the memorandum notes that, “A key question in connection with all these items is whether their reporting will provide any meaningful guidance for risk assessment purposes about the location of real economic activity.”

The November 12th and 13th meeting, billed by the OECD as a “public consultation,” will discuss proposed revisions to the OECD transfer-pricing guidelines on intangibles as well as transfer-pricing documentation.

—Alistair Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.