Overview of the Three Tiered BEPS Action Plan Requirements
As enterprises continue to expand operations across borders, Base Erosion and Profit Shifting (BEPS) has become a prioritized issue in international taxation. BEPS refers to the tax planning strategies of multinational entities designed to exploit differences in tax rules among mixed tax jurisdictions.
Because of insufficient reporting requirements and lack of information sharing among international tax administrations, large organizations often artificially shift profits to either low or tax-free areas where there is little economic activity and as a result, avoid taxation in high-tax jurisdictions that harbor value-added economic activity.
Overview of the BEPS 13 Three-Tiered Standardized Approach
In an effort to enhance transparency of transfer pricing documentation for various tax administrations throughout the globe, the Organisation for Economic Co-operation and Development (OECD) issued the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan) in 2013.
The guidance in BEPS Action 13 encourages countries to develop a three-tiered standardized approach to transfer pricing documentation for multinational enterprise (MNE) which include a master file, local file and a country-by-country report.
This new approach to transfer pricing documentation endeavors to ensure taxpayers remit appropriate consideration per international transfer pricing regulations and to provide tax administrations with a useful base of information that would permit an effective audit of transfer pricing practices.
The master file contains high level information pertinent to all members of the MNE group and should be made available to all relevant tax administrations. The taxpayer should exercise judgement in determining the sufficiency of detail to be reported and need not include trivial elements. Usually, the master file will include an overview of the MNE’s global operations, overall transfer pricing policies, supply chain details, main profit drivers, and primary geographic markets. Each country determines who is required to file this.
The local file should include documentation supporting material intercompany transactions of the local group member of the MNE. The local file is specific to each country and should disclose detailed transfer pricing policies, amounts involved in material related party transactions and the company’s analysis of the transfer pricing documentation relating to each transaction. Materiality will vary per country, as the taxpayer should consider size and nature of local business activity relative to the local economy.
Additionally, the local file will include information about the entity such as management structure and business strategy. Each country determines who is required to file this.
The third and last element of standardized transfer pricing documentation is the country-by-country report (CbCR) which provides information relating to global allocation of the MNE group’s income and taxes paid on a per-country basis. It also requires MNEs to report number of employees, stated capital, accumulated earnings and tangible assets in each tax jurisdiction.
Additionally, it should identify each entity within a group doing business in each jurisdiction and its respective business purpose.
Generally, the CbCR on its own does not constitute concrete evidence that appropriate transfer pricing policies have been employed and the OECD strongly recommends that tax administrations do not exclusively require this form of documentation.
Any company who has over €750M in revenues (or $850M) is required to complete the CbCR. The threshold for reporting has been set by the OECD at €750M in revenues. However, some countries have provided a translated amount in the local currency. For example, the U.S. filing threshold is $850M USD.
Variations from Country to Country
Since the release of BEPS Action 13, many countries have implemented their own versions of the BEPS Standardized Approach. Consequently, the requirements for both the master and local file vary based on the specific country the entity is operating in.
For an overview of reporting requirements of countries in North America and selected other countries, please download our complimentary Guide (no form required)
While some now require each the master, local and country-by-country report, others have merely employed the use of one or two, and some have not yet at all. Each tax jurisdiction has a minimum revenue threshold for transfer pricing reporting and it is imperative that companies be wary of these thresholds as many jurisdictions have adopted penalties to increase compliance.
Connect with a Freed Maxick International Tax Expert on Transfer Pricing Issues
We strongly recommend that you review your business operations in all jurisdictions to determine if any of these reporting requirements affect your business.
If you have any questions or concerns about how these reporting requirements may impact you, please reach out to the International Tax Team at Freed Maxick for a complementary Tax Situation Review.
Call us at 716-847-2651 to discuss your tax situation, or start the process of setting an appointment by clicking here and submitting your contact information.