prop · H40347 · 2016-12-06 00:00:00 — These new Country-by-Country Reporting requirements are to be implemented for fiscal years beginning on or after 1 January 2016 and apply, subject to the 2020 review, to MNEs with annual consolidated group revenue equal to or exceeding million. 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 facilitate the implementation of the new reporting standards, an implementation package has been developed consisting of model legislation which could be used by countries to require MNE groups to file the Country-by-Country Report and competent authority agreements that are to be used to facilitate implementation of the exchange of those reports among tax administrations. As a next step, it is intended that an xML Schema and a related User Guide will be developed with a view to accommodating the electronic exchange of Country-by-Country Reports. It is recognised that the need for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption and implementation of a Country-by-Country Reporting requirement. This need has been addressed when designing government-to-government mechanisms to be used to facilitate the automatic exchange of Country-by-Country Reports. 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. Mechanisms will be developed to monitor jurisdictions’ compliance with their commitments and to monitor the effectiveness of the filing and dissemination mechanisms. The outcomes of this monitoring will be taken into consideration in the 2020 review. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 11 Chapter V of the Transfer Pricing Guidelines on Documentation The text of Chapter V of the Transfer Pricing Guidelines is deleted in its entirety and replaced with the following language and annexes. 1.This chapter provides guidance for tax administrations to take into account in developing rules and/or procedures on documentation to be obtained from taxpayers in connection with a transfer pricing enquiry or risk assessment. It also provides guidance to assist taxpayers in identifying documentation that would be most helpful in showing that their transactions satisfy the arm’s length principle and hence in resolving transfer pricing issues and facilitating tax examinations. 2.when Chapter v of these Guidelines was adopted in 1995, tax administrations and taxpayers had less experience in creating and using transfer pricing documentation. The previous language in Chapter v of the Guidelines put an emphasis on the need for reasonableness in the documentation process from the perspective of both taxpayers and tax administrations, as well as on the for a greater level of cooperation between tax administrations and taxpayers in addressing documentation issues in order to avoid excessive documentation compliance burdens while at the same time providing for adequate information to apply the arm’s length principle reliably. The previous language of Chapter v did not provide for a list of documents to be included in a transfer pricing documentation package nor did it provide clear guidance with respect to the link between the process for documenting transfer pricing, the administration of penalties and the burden of proof. 3.Since then, many countries have adopted transfer pricing documentation rules and the proliferation of these requirements, combined with a dramatic increase in the volume and complexity of international intra-group trade and the heightened scrutiny of transfer pricing issues by tax administrations, has resulted in a significant increase in compliance costs for taxpayers. Nevertheless tax administrations often find transfer pricing documentation to be less than fully informative and not adequate for their tax enforcement and risk assessment needs. 4.The following discussion identifies three objectives of transfer pricing documentation rules. The discussion also provides guidance for the development of such rules so that transfer pricing compliance is more straightforward and more consistent among countries, while at the same time providing tax administrations with more focused and useful information for transfer pricing risk assessments and audits. An important overarching consideration in developing such rules is to balance the usefulness of the data to tax administrations for transfer pricing risk assessment and other purposes with any increased compliance burdens placed on taxpayers. In this respect it is noted that clear and widely TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 12 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION adopted documentation rules can reduce compliance costs which could otherwise arise in a transfer pricing dispute. B.Objectives of transfer pricing documentation requirements 5.Three objectives of transfer pricing documentation are: 1.to ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns; 2.to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and 3.to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses. 6.Each of these objectives should be considered in designing appropriate domestic transfer pricing documentation requirements. It is important that taxpayers be required to carefully evaluate, at or before the time of filing a tax return, their own compliance with the applicable transfer pricing rules. It is also important that tax administrations be able to access the information they need to conduct a transfer pricing risk assessment to make an informed decision about whether to perform an audit. In addition, it is important that tax administrations be able to access or demand, on a timely basis, all additional information necessary to conduct a comprehensive audit once the decision to conduct such an audit is made. Taxpayer’s assessment of its compliance with the arm’s length principle 7.By requiring taxpayers to articulate convincing, consistent and cogent transfer pricing positions, transfer pricing documentation can help to ensure that a culture of compliance is created. well-prepared documentation will give tax administrations some that the taxpayer has analysed the positions it reports on tax returns, has considered the available comparable data, and has reached consistent transfer pricing positions. Moreover, contemporaneous documentation requirements will help to ensure the integrity of the taxpayers’ positions and restrain taxpayers from developing justifications for their positions after the fact. 8.This compliance objective may be supported in two important ways. First, tax administrations can require that transfer pricing documentation requirements be satisfied on a contemporaneous basis. This would mean that the documentation would be prepared at the time of the transaction, or in any event, no later than the time of completing and filing the tax return for the fiscal year in which the transaction takes place. The second way to encourage compliance is to establish transfer pricing penalty regimes in a intended to reward timely and accurate preparation of transfer pricing documentation and to create incentives for timely, careful consideration of the taxpayer’s transfer pricing positions. Filing requirements and penalty provisions related to documentation are discussed in greater detail in Section D, below. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 13 9. while ideally taxpayers will use transfer pricing documentation as an opportunity to articulate a well thought-out basis for their transfer pricing policies, thereby meeting an important objective of such requirements, issues such as costs, time constraints, and competing demands for the attention of relevant personnel can sometimes undermine these objectives. It is therefore important for countries to keep documentation requirements reasonable and focused on material transactions in order to ensure mindful attention to the most important matters. Transfer pricing risk assessment 10.Effective risk identification and assessment constitute an essential early stage in the process of selecting appropriate cases for transfer pricing audits or enquiries and in focusing such audits on the most important issues. Because tax administrations operate with limited resources, it is important for them to accurately evaluate, at the very outset of a possible audit, whether a taxpayer’s transfer pricing arrangements warrant in-depth review and a commitment of significant tax enforcement resources. Particularly with regard to transfer pricing issues (which generally are complex and fact-intensive), effective risk assessment becomes an essential prerequisite for a focused and resource-efficient audit. The handbook on Transfer Pricing Risk Assessment is a useful tool to consider in conducting such risk assessments. 11.Proper assessment of transfer pricing risk by the tax administration requires access to sufficient, relevant and reliable information at an early stage. while there are many sources of relevant information, transfer pricing documentation is one critical source of such information. 12.There is a variety of tools and sources of information used for identifying and evaluating transfer pricing risks of taxpayers and transactions, including transfer pricing forms (to be filed with the annual tax return), transfer pricing mandatory questionnaires focusing on particular areas of risk, general transfer pricing documentation requirements identifying the supporting evidence necessary to demonstrate the taxpayer’s compliance with the arm’s length principle, and cooperative discussions between tax administrations and taxpayers. Each of the tools and sources of information appears to respond to the same fundamental observation: there is a need for the tax administration to have ready access to relevant information at an early stage to enable an accurate and informed transfer pricing risk assessment. Assuring that a high quality transfer pricing risk assessment can be carried out efficiently and with the right kinds of reliable information should be one important consideration in designing transfer pricing documentation rules. 13.A third objective for transfer pricing documentation is to provide tax administrations with useful information to employ in conducting a thorough transfer pricing audit. Transfer pricing audit cases tend to be fact-intensive. They often involve difficult evaluations of the comparability of several transactions and markets. They can require detailed consideration of financial, factual and other industry information. The availability of adequate information from a variety of sources during the audit is critical to facilitating a tax administration’s orderly examination of the taxpayer’s controlled transactions with associated enterprises and enforcement of the applicable transfer pricing rules. 14.In situations where a proper transfer pricing risk assessment suggests that a thorough transfer pricing audit is warranted with regard to one or more issues, it is clearly the case TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 14 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION that the tax administration must have the ability to obtain, within a reasonable period, all of the relevant documents and information in the taxpayer’s possession. This includes information regarding the taxpayer’s operations and functions, relevant information on the operations, functions and financial results of associated enterprises with which the taxpayer has entered into controlled transactions, information regarding potential comparables, including internal comparables, and documents regarding the operations and financial results of potentially comparable uncontrolled transactions and unrelated parties. To the extent such information is included in the transfer pricing documentation, special information and document production procedures can potentially be avoided. It must be recognised, however, that it would be unduly burdensome and inefficient for transfer pricing documentation to attempt to anticipate all of the information that might possibly be required for a full audit. Accordingly, situations will inevitably arise when tax administrations wish to obtain information not included in the documentation package. Thus, a tax administration’s access to information should not be limited to, or by, the documentation package relied on in a transfer pricing risk assessment. where a jurisdiction requires particular information to be kept for transfer pricing audit purposes, such requirements should balance the tax administration’s need for information and the compliance burdens on taxpayers. 15.It may often be the case that the documents and other information required for a transfer pricing audit will be in the possession of members of the MNE group other than the local affiliate under examination. Often the necessary documents will be located outside the country whose tax administration is conducting the audit. It is therefore important that the tax administration is able to obtain directly or through information sharing, such as exchange of information mechanisms, information that extends beyond the country’s borders. C.A three-tiered approach to transfer pricing documentation 16.In order to achieve the objectives described in Section B, countries should adopt a standardised approach to transfer pricing documentation. This section describes a three- tiered structure consisting of (i) a file containing standardised information relevant for all MNE group members; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a Country-by-Country Report containing certain information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group. 17.This approach to transfer pricing documentation will provide tax administrations with relevant and reliable information to perform an efficient and robust transfer pricing risk assessment analysis. It will also provide a platform on which the information necessary for an audit can be developed and provide taxpayers with a means and an incentive to meaningfully consider and describe their compliance with the arm’s length principle in material transactions. The file should provide an overview of the MNE group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. In general, the file is intended to provide a high-level overview in order to place the MNE group’s transfer TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 15 pricing practices in their global economic, legal, financial and tax context. It is not intended to require exhaustive listings of minutiae (e.g. a listing of every patent owned by members of the MNE group) as this would be both unnecessarily burdensome and inconsistent with the objectives of the file. In producing the file, including lists of important agreements, intangibles and transactions, taxpayers should use business judgment in determining the appropriate level of detail for the information supplied, in mind the objective of the file to provide tax administrations a high-level overview of the MNE’s global operations and policies. when the requirements of the file can be fully satisfied by specific cross-references to other existing documents, such cross- references, together with copies of the relevant documents, should be deemed to satisfy the relevant requirement. For purposes of producing the file, information is considered important if its omission would affect the reliability of the transfer pricing outcomes. 19.The information required in the file provides a “blueprint” of the MNE group and contains relevant information that can be grouped in five categories: a) the MNE group’s organisational structure; b) a description of the MNE’s business or businesses; c) the MNE’s intangibles; d) the MNE’s intercompany financial activities; and (e) the MNE’s financial and tax positions. 20.Taxpayers should present the information in the file for the MNE as a whole. however, organisation of the information presented by line of business is permitted where well justified by the facts, e.g. where the structure of the MNE group is such that some significant business lines operate largely independently or are recently acquired. where line of business presentation is used, care should be taken to assure that centralised group functions and transactions between business lines are properly described in the file. Even where line of business presentation is selected, the entire file consisting of all business lines should be available to each country in order to assure that an appropriate overview of the MNE group’s global business is provided. 21.Annex I to Chapter v of these Guidelines sets out the information to be included in the file. 22.In contrast to the file, which provides a high-level overview as described in paragraph 18, the local file provides more detailed information relating to specific intercompany transactions. The information required in the local file supplements the file and helps to meet the objective of assuring that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting a specific jurisdiction. The local file focuses on information relevant to the transfer pricing analysis related to transactions taking place between a local country affiliate and associated enterprises in different countries and which are material in the context of the local country’s tax system. Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method. where a requirement of the local file can be fully satisfied by a specific cross-reference to information contained in the file, such a cross-reference should suffice. 23.Annex II to Chapter v of these Guidelines sets out the items of information to be included in the local file. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 16 – ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION 24.The Country-by-Country Report requires aggregate tax jurisdiction-wide information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. The report also requires a listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of , as well as the nature of the main business activities carried out by that Constituent Entity. 25.The Country-by-Country Report will be helpful for high-level transfer pricing risk assessment purposes. It may also be used by tax administrations in evaluating other BEPS related risks and where appropriate for economic and statistical analysis. however, the information in the Country-by-Country Report should not be used as a substitute for a detailed transfer pricing analysis of individual transactions and prices based on a full functional analysis and a full comparability analysis. The information in the Country-by- Country Report on its own does not constitute conclusive evidence that transfer prices are or are not appropriate. It should not be used by tax administrations to propose transfer pricing adjustments based on a global formulary apportionment of income. 26.Annex III to Chapter v of these Guidelines contains a model template for the Country-by-Country Report together with its accompanying instructions. 27.Each taxpayer should endeavour to determine transfer prices for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction. Thus, a taxpayer ordinarily should give consideration to whether its transfer pricing is appropriate for tax purposes before the pricing is established and should confirm the arm’s length nature of its financial results at the time of filing its tax return. 28.Taxpayers should not be expected to incur disproportionately high costs and burdens in producing documentation. Therefore, tax administrations should balance requests for documentation against the expected cost and administrative burden to the taxpayer of creating it. where a taxpayer reasonably demonstrates, having regard to the principles of these Guidelines, that either no comparable data exists or that the cost of locating the comparable data would be disproportionately high relative to the amounts at issue, the taxpayer should not be required to incur costs in searching for such data. Practices regarding the timing of the preparation of the documentation differ among countries. Some countries require information to be finalised by the time the tax return is filed. Others require documentation to be in place by the time the audit commences. There is also a variety in practice regarding the amount of time given to taxpayers to respond to specific tax administration requests for documentation and other audit related information requests. These differences in the time requirements for providing information can add to taxpayers’ difficulties in setting priorities and in providing the right information to the tax administrations at the right time. TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING © 2015 ChAPTER v OF ThE TRANSFER PRICING GUIDELINES ON DOCUMENTATION – 17 30.The best practice is to require that the local file be finalised no later than the due date for the filing of the tax return for the fiscal year in question. The file should be reviewed and, if necessary, updated by the tax return due date for the ultimate parent of the MNE group. In countries pursuing policies of auditing transactions as they occur under co-operative compliance programmes, it may be necessary for certain information to be provided in advance of the filing of the tax return. 31.with regard to the Country-by-Country Report, it is recognised that in some instances final statutory financial statements and other financial information that may be relevant for the country-by-country data described in may not be finalised until after the due date for tax returns in some countries for a given fiscal year. Under the given circumstances, the date for completion of the Country-by-Country Report described in to Chapter v of these Guidelines may be extended to one year following the last day of the fiscal year of the ultimate parent of the MNE group.