prop · H40347 · 2016-12-06 00:00:00 — 32.Not all transactions that occur between associated enterprises are sufficiently material to require full documentation in the local file. Tax administrations have an interest in seeing the most important information while at the same time they also have an interest in seeing that MNEs are not so overwhelmed with compliance demands that they fail to consider and document the most important items. Thus, individual country transfer pricing documentation requirements based on to Chapter v of these Guidelines should include specific materiality thresholds that take into account the size and the nature of the local economy, the importance of the MNE group in that economy, and the size and nature of local operating entities, in addition to the overall size and nature of the MNE group. Measures of materiality may be considered in relative terms (e.g. transactions not exceeding a percentage of revenue or a percentage of cost measure) or in absolute amount terms (e.g. transactions not exceeding a certain fixed amount). Individual countries should establish their own materiality standards for local file purposes, based on local conditions. The materiality standards should be objective standards that are commonly understood and accepted in commercial practice. See paragraph 18 for the materiality standards applicable in completing the file. 33.A number of countries have introduced in their transfer pricing documentation rules simplification measures which exempt small and medium-sized enterprises (SMEs) from transfer pricing documentation requirements or limit the information required to be provided by such enterprises. In order not to impose on taxpayers costs and burdens disproportionate to the circumstances, it is recommended to not require SMEs to produce the amount of documentation that might be expected from larger enterprises. however, SMEs should be obliged to provide information and documents about their material cross- border transactions upon a specific request of the tax administration in the course of a tax examination or for transfer pricing risk assessment purposes. 34.For purposes of to Chapter v of these Guidelines, the Country-by-Country Report should include all tax jurisdictions in which the MNE group has an entity resident for tax purposes, regardless of the size of business operations in that tax jurisdiction. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 18 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION 35.Taxpayers should not be obliged to retain documents beyond a reasonable period consistent with the requirements of domestic law at either the parent company or local entity level. however, at times materials and information required in the documentation package (file, local file and Country-by-Country Report) may be relevant to a transfer pricing enquiry for a subsequent year that is not time barred, for example where taxpayers voluntarily keep such records in relation to long-term contracts, or to determine whether comparability standards relating to the application of a transfer pricing method in that subsequent year are satisfied. Tax administrations should bear in mind the difficulties in locating documents for prior years and should restrict such requests to instances where they have good reason in connection with the transaction under examination for reviewing the documents in question. 36.Because the tax administration’s ultimate interest would be satisfied if the necessary documents were submitted in a timely when requested by the tax administration in the course of an examination, the way that documentation is stored – whether in paper, electronic form, or in any other system – should be at the discretion of the taxpayer provided that relevant information can promptly be made available to the tax administration in the form specified by the local country rules and practices. Frequency of documentation updates 37.It is recommended that transfer pricing documentation be periodically reviewed in order to determine whether functional and economic analyses are still accurate and relevant and to confirm the validity of the applied transfer pricing methodology. In general, the file, the local file and the Country-by-Country Report should be reviewed and updated annually. It is recognised, however, that in many situations business descriptions, functional analyses, and descriptions of comparables may not change significantly from year to year. 38.In order to simplify compliance burdens on taxpayers, tax administrations may determine, as long as the operating conditions remain unchanged, that the searches in databases for comparables supporting part of the local file be updated every three years rather than annually. Financial data for the comparables should nonetheless be updated every year in order to apply the arm’s length principle reliably. The necessity of providing documentation in local language may constitute a complicating factor with respect to transfer pricing compliance to the extent that substantial time and cost may be involved in translating documents. The language in which transfer pricing documentation should be submitted should be established under local laws. Countries are encouraged to permit filing of transfer pricing documentation in commonly used languages where it will not compromise the usefulness of the documents. where tax administrations believe that translation of documents is necessary, they should make specific requests for translation and provide sufficient time to make such translation as comfortable a burden as possible. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 19 40.Many countries have adopted documentation-related penalties to ensure efficient operation of transfer pricing documentation requirements. They are designed to make non-compliance more costly than compliance. Penalty regimes are governed by the laws of each individual country. Country practices with regard to transfer pricing documentation- related penalties vary widely. The existence of different local country penalty regimes may influence the quality of taxpayers’ compliance so that taxpayers could be driven to favour one country over another in their compliance practices. 41.Documentation-related penalties imposed for failure to comply with transfer pricing documentation requirements or failure to timely submit required information are usually civil (or administrative) monetary penalties. These documentation-related penalties are based on a fixed amount that may be assessed for each document missing or for each fiscal year under review, or calculated as a percentage of the related tax understatement ultimately determined, a percentage of the related adjustment to the income, or as a percentage of the amount of the cross-border transactions not documented. 42.Care should be taken not to impose a documentation-related penalty on a taxpayer for failing to submit data to which the MNE group did not have access. however, a decision not to impose documentation-related penalties does not mean that adjustments cannot be made to income where prices are not consistent with the arm’s length principle. The fact that positions are fully documented does not necessarily mean that the taxpayer’s positions are correct. Moreover, an assertion by a local entity that other group members are responsible for transfer pricing compliance is not a sufficient reason for that entity to fail to provide required documentation, nor should such an assertion prevent the imposition of documentation-related penalties for failure to comply with documentation rules where the necessary information is not forthcoming. 43.Another way for countries to encourage taxpayers to fulfil transfer pricing documentation requirements is by designing compliance incentives such as penalty protection or a shift in the burden of proof. where the documentation meets the requirements and is timely submitted, the taxpayer could be exempted from tax penalties or subject to a lower penalty rate if a transfer pricing adjustment is made and sustained, notwithstanding the provision of documentation. In some jurisdictions where the taxpayer bears the burden of proof regarding transfer pricing matters, a shift of the burden of proof to the tax administration’s side where adequate documentation is provided on a timely basis offers another measure that could be used to create an incentive for transfer pricing documentation compliance. 44.Tax administrations should take all reasonable steps to ensure that there is no public disclosure of confidential information (trade secrets, scientific secrets, etc.) and other commercially sensitive information contained in the documentation package (file, local file and Country-by-Country Report). Tax administrations should also assure taxpayers that the information presented in transfer pricing documentation will remain confidential. In cases where disclosure is required in public court proceedings or judicial decisions, every effort should be made to ensure that confidentiality is maintained and that information is disclosed only to the extent needed. 45.The Guide (2012) “” on the protection of confidentiality of information exchanged for tax purposes provides guidance on the rules and practices that TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 20 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION must be in place to ensure the confidentiality of tax information exchanged under exchange of information instruments. 46.The requirement to use the most reliable information will usually, but not always, require the use of local comparables over the use of regional comparables where such local comparables are reasonably available. The use of regional comparables in transfer pricing documentation prepared for countries in the same geographic region in situations where appropriate local comparables are available will not, in some cases, comport with the obligation to rely on the most reliable information. while the simplification benefits of limiting the number of comparable searches a company is required to undertake are obvious, and materiality and compliance costs are relevant factors to consider, a for simplifying compliance processes should not go so far as to undermine compliance with the requirement to use the most reliable available information. See paragraphs 1.57-1.58 on market differences and multi-country analyses for further detail of when local comparables are to be preferred. 47.It is not recommended, particularly at the stage of transfer pricing risk assessment, to require that the transfer pricing documentation should be certified by an outside auditor or other third party. Similarly, mandatory use of consulting firms to prepare transfer pricing documentation is not recommended. 48.It is essential that the guidance in this chapter, and in particular the Country- by-Country Report, be implemented effectively and consistently. Therefore, countries participating in the /G20 Base Erosion and Profit Shifting (BEPS) Project have developed the following guidance on implementation of transfer pricing documentation and Country-by-Country Reporting. file and Local file It is recommended that the file and local file elements of the transfer pricing documentation standard be implemented through local country legislation or administrative procedures and that the file and local file be filed directly with the tax administrations in each relevant jurisdiction as required by those administrations. Countries participating in the /agree that with regard to the local file and the file confidentiality and consistent use of the standards contained in and of Chapter v of these Guidelines should be taken into account when introducing these elements in local country legislation or administrative procedures. Timing: When should the Country-by-Country Reporting requirement start? It is recommended that the first Country-by-Country Reports be required to be filed for MNE fiscal years beginning on or after 1 January 2016. however, it is acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law. In order to assist countries in preparing timely legislation, model legislation requiring ultimate parent entities of MNE TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 21 groups to file the Country-by-Country Report in their jurisdiction of has been developed (see to Chapter v of these Guidelines). Jurisdictions will be able to adapt this model legislation to their own legal systems. Given the recommendation in paragraph 31 that MNEs be allowed one year from the close of the fiscal year to which the Country-by-Country Report relates to prepare and file the Country-by-Country Report, this recommendation means that the first Country-by-Country Reports would be filed by . For MNEs with a fiscal year ending on a date other than , the first Country-by-Country Reports would be required to be filed later in 2018, twelve months after the close of the relevant MNE fiscal year, and would report on the MNE group’s first fiscal year beginning after 1 January 2016. It follows from this recommendation that the countries participating in the /agree that they will not require filing of a Country-by-Country Report based on the new template for MNE fiscal years beginning prior to 1 January 2016. The MNE fiscal year relates to the consolidated reporting period for financial statement purposes and not to taxable years or to the financial reporting periods of individual subsidiaries. Which MNE groups should be required to file the Country-by-Country Report? 51.It is recommended that all MNE groups be required to file the Country-by-Country Report each year except as follows. 52.There would be an exemption from the general filing requirement for MNE groups with annual consolidated group revenue in the immediately preceding fiscal year of less than million or a near equivalent amount in domestic currency as of January 2015. Thus, for example, if an MNE that keeps its financial accounts on a calendar year basis has million in consolidated group revenue for its 2015 calendar year, it would not be required to file the Country-by-Country Report in any country with respect to its fiscal year ending . 53.It is believed that the exemption described in paragraph 52, which provides a threshold of million, will exclude approximately 85 to 90 percent of MNE groups from the requirement to file the Country-by-Country Report, but that the Country-by- Country Report will nevertheless be filed by MNE groups controlling approximately 90 percent of corporate revenues. The prescribed exemption threshold therefore represents an appropriate balancing of reporting burden and benefit to tax administrations. 54.It is the intention of the countries participating in the /to reconsider the appropriateness of the applicable revenue threshold described in the preceding paragraph in connection with their 2020 review of implementation of the new standard, including whether additional or different data should be reported. 55.It is considered that no exemptions from filing the Country-by-Country Report should be adopted apart from the exemptions outlined in this section. In particular, no special industry exemptions should be provided, no general exemption for investment funds should be provided, and no exemption for non-corporate entities or non-public corporate entities should be provided. Notwithstanding this conclusion, countries participating in the /agree that MNE groups with income derived from international transportation or transportation in inland waterways that is covered by treaty provisions that are specific to such income and under which the taxing rights on such income are allocated exclusively to one jurisdiction, should include the information required by the country-by-country template with respect to such income only against the name of the jurisdiction to which the relevant treaty provisions allocate these taxing rights. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 22 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION Necessary conditions underpinning the obtaining and the use of the Country-by-Country Report Countries participating in the /agree to the following conditions underpinning the obtaining and the use of the Country-by-Country Report. Jurisdictions should have in place and enforce legal protections of the confidentiality of the reported information. Such protections would preserve the confidentiality of the Country-by-Country Report to an extent at least equivalent to the protections that would apply if such information were delivered to the country under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a Agreement (TIEA) or a tax treaty that meets the internationally agreed standard of information upon request as reviewed by the on Transparency and Exchange of Information for Tax Purposes. Such protections include limitation of the use of information, rules on the persons to whom the information may be disclosed, ordre public, etc. Jurisdictions should use their best efforts to adopt a legal requirement that MNE groups’ ultimate parent entities resident in their jurisdiction prepare and file the Country- by-Country Report, unless exempted as set out in paragraph 52. Jurisdictions should utilise the standard template contained in of Chapter v of these Guidelines. Stated otherwise, under this condition no jurisdiction will require that the Country-by-Country Report contain either additional information not contained in , nor will it fail to require reporting of information included in . Jurisdictions should use appropriately the information in the Country-by-Country Report template in accordance with paragraph 25. In particular, jurisdictions will commit to use the Country-by-Country Report for assessing high-level transfer pricing risk. Jurisdictions may also use the Country-by-Country Report for assessing other BEPS- related risks. Jurisdictions should not propose adjustments to the income of any taxpayer on the basis of an income allocation formula based on the data from the Country-by-Country Report. They will further commit that if such adjustments based on Country-by-Country Report data are made by the local tax administration of the jurisdiction, the jurisdiction’s competent authority will promptly concede the adjustment in any relevant competent authority proceeding. This does not imply, however, that jurisdictions would be prevented from using the Country-by-Country Report data as a basis for making further enquiries into the MNE’s transfer pricing arrangements or into other tax matters in the course of a tax audit.1 TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 23 The framework for government-to-government mechanisms to exchange Country-by-Country Reports and implementation package Jurisdictions should require in a timely from ultimate parent entities of MNE groups resident in their country and referred to in Section E.2.2 and exchange this information on an automatic basis with the jurisdictions in which the MNE group operates and which fulfil the conditions listed in Section E.2.3. In case a jurisdiction fails to provide information to a jurisdiction fulfilling the conditions listed in Section E.2.3, because (a) it has not required Country-by-Country Reporting from the ultimate parent entity of such MNE groups, (b) no competent authority agreement has been agreed in a timely under the current international agreements of the jurisdiction for the exchange of the Country-by-Country Reports or (c) it has been established that there is a failure to exchange the information in practice with a jurisdiction after agreeing with that jurisdiction to do so, a secondary mechanism would be accepted as appropriate, through local filing or through filing of the Country-by-Country Reports by a designated member of the MNE group acting in place of the ultimate parent entity and automatic exchange of these reports by its country of tax . Countries participating in the /have therefore developed an implementation package for government-to-government exchange of Country-by-Country Reports contained in to Chapter v of these Guidelines. •Model legislation requiring the ultimate parent entity of an MNE group to file the Country-by-Country Report in its jurisdiction of has been developed. Jurisdictions will be able to adapt this model legislation to their own legal systems, where changes to current legislation are required. elements of secondary mechanisms have also been developed. •Implementing arrangements for the automatic exchange of the Country-by-Country Reports under international agreements have been developed, incorporating the conditions set out in Section E.2.3. Such implementing arrangements include competent authority agreements (“CAAs”) based on existing international agreements (the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties and TIEAs) and inspired by the existing models developed by the working with G20 countries for the automatic exchange of financial account information. 62.Participating jurisdictions endeavour to introduce as necessary domestic legislation in a timely . They are also encouraged to expand the coverage of their international agreements for exchange of information. The implementation of the package will be monitored on an ongoing basis. The outcomes of this monitoring will be taken into consideration in the 2020 review. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 24 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION 1.Access to a mutual agreement procedure (MAP) will be available when the government-to- government exchange of the Country-by-Country Reports is based on bilateral treaties. In cases where the international agreements on which the government-to-government exchanges of the Country-by-Country Reports are based do not contain provisions providing access to MAP, countries commit to introducing in the competent authority agreement to be developed a mechanism for competent authority procedures to discuss with the aim of resolving cases of undesirable economic outcomes, including if such cases arise for individual businesses. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ANNEx I TO ChAPTER v. TRANSFER PRICING DOCUMENTATION – – 25 Transfer pricing documentation – file The following information should be included in the file: •Chart illustrating the MNE’s legal and ownership structure and geographical location of operating entities. Description of MNE’s business(es) •General written description of the MNE’s business including: -Important drivers of business profit; -A description of the supply chain for the group’s five largest products and/ or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram; -A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services;