Tax Compliance and Technology for MNEs in 2017
In 2013, the Organisation for Economic Cooperation and Development (OECD) and G20 governments, with the engagement of over 80 developing countries, launched an initiative to revise international tax rules and prevent multinational entities (MNEs) from engaging in tax avoidance strategies such as base erosion and profit shifting (BEPS).
This initiative culminated in the release of the Action Plan on Base Erosion and Profit Shifting (OECD, 2013), which outlines 15 actions designed to ensure that MNEs’ profits are taxed in the jurisdiction where value is created and activities are carried out. Action 13, Transfer Pricing Documentation and Country-by-Country Reporting (CbCR) — the focus of this article — enables greater transparency of MNEs’ operations through revised transfer pricing documentation and implementation of CbCR.
How will Action 13 impact MNEs in participating countries?
All member countries of the OECD and G20 have committed to implementing CbCR; the majority of countries have committed to implementing the minimum standard as set out in the Action 13 Report, which calls for compliance with CbCR, Master File, and Local File effective 1 January 2016 with the first reports due by 31 December 2017. As such, MNEs based in participating countries need to prepare now for these three new reporting requirements, which includes evaluating data gathering measures to complete the reports while also ensuring the data can be accurately reconciled among each report, as well as with the MNE’s global and local statutory financial statements and tax return filings.
Assessing and mitigating risk, of both overall tax liability and reputation, are critical functions of tax departments in a post-BEPS world. An MNE must be prepared to defend data contained in its CbC report, Master file, and Local file, both when requested under tax authority audit examination, and potentially in the court of public opinion, especially if the reports are public record.
How can tax technology help mitigate risk and increase compliance?
To properly prepare for these new requirements, MNE tax departments can benefit from advanced tax technology that addresses the need for a repeatable, accurate, and consistent method of collecting, transforming, and summarizing the data needed for the CbC report. Tax departments should start by evaluating the role technology can play, not only with respect to data management, but the entire process including preparation to audit.
Enabling the right view of the data
Although the final CbC reporting template allows MNEs to use a wide variety of organised sources of financial information (e.g., consolidated financial statements, separate entity statutory statements, regulatory financial statements, or internal management books, if an MNE chooses local statutory statements, it is required to convert these statements from functional currency to the MNE’s reporting currency of record. Technology can assist an MNE with 1) sourcing transactions to specific countries while creating an audit trail of how each transaction is reported for financial statements, tax returns,
OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/9789264202719-en
and transfer pricing documentation, 2) ensuring accuracy and consistency of data year over year and 3) providing the ability to reconcile data across all external reporting.
Enabling control over the data
In some cases, MNEs may have trouble when using separate, local legal entity statutory financial statements because the underlying data used in compiling the local statutory financial statements is often outside the control of the corporate tax department. With enterprise-level tax technology, MNEs can implement sufficient centralized controls and processes that support the preparation of the CbCR, Master File and Local File reports, as well as related reconciliations.
Enabling data reconciliation and retention
Even though the OECD does not explicitly require it, best practice dictates that MNEs reconcile their financial information reported on the CbC report to (1) public financial statements, (2) local statutory financials, and (3) local country tax returns. These reconciliations can be complicated by new acquisitions, intercompany transactions, global expansion, operational changes and tax planning structures, but will be crucial to ensure accuracy of the template, as well as providing a defensible audit trail. Technology that comprehensively manages data for income tax purposes with an audit trail and record retention aids in these reconciliation requirements.
MNEs will benefit from tax technology that enables their compliance with and risk management of Action 13. The best technology solutions have data management as the core function, including capability for advanced analytics, reconciliation, and record retention. In addition, the ability to leverage the data for enhanced tax scenario planning and improved governance and control, thereby reducing risk and maximising the strategic value of tax lifecycle.
A tax technology provider for over 35 years, Vertex helps clients comply with ever-changing tax and regulatory requirements impacting the corporate tax life cycle. To learn more about how Vertex can help reduce risk and comply with BEPS reporting requirements, visit www.vertexinc.com/solutions/vertex-enterprise.
Bernadette Pinamont is a Director in the Chief Tax Office at Vertex, Inc. providing insight regarding in-house corporate tax department operations with respect to income and international tax matters, including transfer pricing. She is a lawyer and a licensed CPA.
George L. Salis is a Principal Senior – Tax Compliance at Vertex. He is also a Certified Business Economist (CBE) and tax lawyer specialising in International and European Taxation, Transfer Pricing, and Economic Law.