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Transfer pricing: Introduction to Country-by-Country report (CbCR)

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Transfer pricing documentation and CbCR are provided by the Organization for Economic Cooperation and Development (OECD). These reports benefit and enable development for multinational enterprises (MNE’s) by leaps and bounds.

CbCR will include details of global profit allocations, taxes paid and economic activity indicators in countries in which the multinational organizations operate. This implies that CbCR will have significant transparency and illuminate technical, operational and systemic challenges that any business faces.

In order to compile such a detailed report, there must be an engagement at the Board level. Senior management will have to step in at the early stages itself to determine compliance with regulations pertaining to the sensitive information that needs to go on the report.

Adhering to compliances
Ensuring compliance with the regulations and developing the implementation plan involves few key steps:

  • Understanding the information: This involves developing a keen understanding of all the information that will need to go on the report; what to include and what not to include in the report.
  • Impact assessment: The organization should take a dry run by assessing the risks that will arise when the information is submitted for reporting.
  • Process overview: MNE should look into the resources needed to complete data gathering for the CbCR report. It should also check if more resources are required to manage the on-going reporting process, maintaining the master and local files.
  • Technological assessment: MNE should perform a strategic assessment of the technological abilities of the organization pertaining to CbCR reporting requirements and should ensure if the IT systems are capable of handling the requirements for data gathering.

 Probable challenges

  • Different tax jurisdiction and difference in timing of report filing: As MNE, an organization will be operating in multiple countries. For instance, an organization operating in two countries X and Y might face issues pertaining to timeline for report submission. The entity in Country X may only have to report for its activities in 2017, while the organization’s entity in Country Y might report for its activities in 2016 assessment also. So getting the whole picture might be difficult when different entities of the same organization have to submit report with data from different time periods.
  • Surrogate entities: In cases such as above where the tax authority is not able to get comprehensive details for CbCR from the parent organization, another entity or unit will stand in as the reporting entity. This entity is called the surrogate entity. This surrogate entity will report on the whole MNE.
  • Notifications for the CbCR: Organizations will have to notify tax authorities in all the countries in which they operate on the details of the entity that will stand in as the surrogate entity. There are notification penalties being enforced in some countries where an organization does not comply with this reporting timeline.
  • Choosing the data for reporting: OECD has provided guidelines on the relevant data sources to be considered for submission of CbCR. CbCR should be in the currency of the primary reporting entity.
  • Table 3 of CbCR: Lastly the information exchange rates should be made clear to tax authorities in the CbCR report in table 3.

CbCR template pioneered in the OECD guidance is an entirely new reporting requisite. Necessary steps on the part pf India-based MNE groups are required to ensure their ability to process information required inclusive of preparation of protocols for congregating information and developing internal procedures and responsibilities with respect to the new reporting. Additionally, MNE groups should monitor developments with regard to the adoption of such reporting requirements in the countries in which they operate.

For detailed information on transfer pricing, check other blogs posted, Transfer pricing made easy with APAsDomestic transfer pricing

If you require any assistance on transfer pricing documentation including transfer pricing reports, Form 3CEB, advance pricing agreements (APAs), domestic transfer pricing compliance, addressing and resolving intercompany transfer pricing issues.

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