Tax administrations prepare for automatic exchange of CbC reports – are you ready? Three takeaways

OECD announced that another important step has been taken to implement country-by-country (CbC) reporting requirements, as signatories to the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (the CbC MCAA) activated their automatic exchange relationships.

The OECD also signalled that additional jurisdictions will nominate partners with which they will undertake the automatic exchange of CbC reports under the CbC MCAA in the coming months, while other countries continue to work towards bilateral competent authority agreements for the automatic exchange of CbC Reports with specific partners.

Automatic exchanges of CbC reporting

By May 4, 2017, with over a year still to go before the first exchanges of CbC reports take place, tax authorities around the world had committed to more than 700 automatic exchange relationships, including those between EU member states under EU Council Directive 2016/881/EU, for exchanging CbC reports as of 2018. These relationships ensure that CbC reports filed by a multinational group in its parent jurisdiction will be automatically exchanged with the recipient countries where the multinational group has operations.

The current matrix of more than 700 automatic exchange relationships cover exchanges between EU member states as well as exchanges between specific countries. The table below summarizes some key exchange relationships established to date.

SELECTED EXCHANGE RELATIONSHIPS AS OF MAY 4, 2017

Countries and committed automatic exchange relationships:

Australia:
Belgium, Bermuda, Denmark, Ireland, Mexico, Norway, Netherlands, Spain, United Kingdom, Austria, Brazil, Canada,Estonia, Finland, France, Germany, Guernsey, Iceland, Isle of Man, Italy, Jersey, Liechtenstein, Mauritius, New Zealand, Norway, Slovenia, South Africa, Uruguay, Malaysia

Austria:
28 EU member states, Australia, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, Mexico, New Zealand, Norway, South Africa, Uruguay, Malaysia

Belgium:
28 EU member states, Australia, Mexico, Norway, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, New Zealand, South Africa, Uruguay, Malaysia

Denmark:
28 EU member states, Australia, Mexico, Norway, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, New Zealand, South Africa, Uruguay

Finland:
28 EU member states, Australia, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, Mexico, New Zealand, Norway, South Africa, Uruguay, Malaysia

France:
28 EU member states, Australia, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, Mexico, New Zealand, Norway, South Africa, Uruguay, Malaysia

Germany:
28 EU member states, Australia, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, Mexico, New Zealand, Norway, South Africa, Uruguay, Malaysia

Italy:
28 EU member states, Australia, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, Mexico, New Zealand, Norway, South Africa, Uruguay, Malaysia

Netherlands:
28 EU member states, Australia, Mexico, Norway, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, Mauritius, New Zealand, South Africa, Uruguay, Malaysia

Norway:
Australia, Belgium, Denmark, Iceland, Ireland, Mexico, Netherlands, Slovenia, South Africa, Spain, United Kingdom, Austria, Brazil, Canada, Estonia, Finland, France, Germany, Guernsey, Iceland, Isle of Man, Italy, Jersey, Liechtenstein, Mauritius, New Zealand, Uruguay, Malaysia

Spain:
28 EU member states, Australia, Mexico, Norway, Brazil, Canada, Guernsey, Iceland, Isle of Man, Jersey, Liechtenstein, New Zealand, South Africa, Uruguay, Malaysia

United Kingdom:
27 EU member states (excluding Gibraltar), Australia, Mexico, Norway, Brazil, Canada, Iceland, Liechtenstein, Mauritius, New Zealand, South Africa, Uruguay, Malaysia

Three takeaways

Multinational groups that file CbC reports in their home countries should expect tax authorities in all the other committed countries in which they operate to have access to these CbC reports. While it is intended that tax authorities in receipt of CbC reports should use them only as an indicator for in-depth audits, the availability of this information will add another layer of complexity to compliance risks and tax certainty for multinational groups.

At a minimum, the sharing of CbC reports between countries is likely to trigger reviews of local tax filings in the recipient countries. These reviews may raise all sorts of questions from tax authorities that taxpayers will have to answer properly. In some cases, the questions may lead to extensive discussions and disputes that have to be managed and resolved.

Multinational groups have been busy complying with the CbC reporting requirements. It is now time to get ready to manage the consequences that may follow from the sharing of these reports globally. In this exercise, it may be important for multinational groups to reconsider their global outbound tax strategy in the lights of increased scrutiny that is sure to follow automatic exchanges of their CbC Reports, but also to be proactive in defending their tax positions.

Developing a defensible tax position in every country could begin, in particular, by:

• Addressing the potential application of any domestic anti-avoidance rules (such as the Australian MAAL and UK’s Diverted Profits Tax) which may trigger taxation in the local jurisdictions
• Reviewing the local functional profiles to ensure that they are in line with the associated remuneration policies and
• Considering whether the local transfer pricing policies are in line with the global view and where possible to obtain bilateral advanced pricing agreements for certainty in significant tax positions.