Mini-Panel: International Reporting Heavy Compliance Burden Ahead Amit Chadha KPMG JP Borman PwC Wally Horak Bowman Gilfillan Franz Tomasek SARS
Country-by-Country Reporting (CbyCR)
Background On October 5, 2015, the OECD published the implementation package on transfer pricing documentation and CbyC reporting. The OECD is focusing on a three-tiered approach for documentation: CbyC Report Objective: Prioritization of Audit Issues Approach: Provides summary data by jurisdiction including revenue, income, taxes, and indicators of economic activity Master file Objective: Risk Assessment Approach: Provides an overview of the multinational group and business Local file Objective: Appropriate considerations in setting transfer prices Approach: Provides additional detail on the operations and transactions relevant to that jurisdiction
OECD s Model CbyC Template CbyC Template Page 1 Overview of allocation of income, taxes and business activities by tax jurisdiction Tax Jurisdiction Related Party Revenue Unrelated Party Total Profit (Loss) before Income Tax Income Tax Paid (on Cash Basis) Income Tax Accrued Current Year Stated Capital Accumulated Earnings Number of Employees Tangible Assets Other than Cash and Cash Equivalents Country A Country B
R&D Holding/managing IP Purchasing & Procurement Manufacturing or Production Sales, Marketing or Distribution Administrative, Management or Support Services Provision of Services to unrelated parties Internal Group Finance Regulated Financial Services Insurance Holding Shares or Other Equity instruments Dormant Other OECD s Model CbyC Template (continued) CbyC Template Page 2 (onwards) Tax Jurisdiction Constituent Entities Resident in Tax Jurisdiction Tax Jurisdictions of Organization or Incorporation if Different from Country of Residence Activities Country A Entity A Country B Entity B CbyC Template Page 3 Opportunity to include any further information or explanation considered necessary or that would facilitate the understanding of the compulsory information provided in the CbyC report.
OECD Guidance on CbCR Implementation Some of the key information that a Multinational Entity (MNE) should be aware of includes: Which MNEs are required to file a CbyC report MNEs with consolidated group revenue in the preceding fiscal year of 750 million Euros or more Timing of CbyC report File for the fiscal years beginning on or after January 1, 2016 MNEs will be allowed one year from the fiscal year end to file the CbyC report Where filed and mechanisms for exchange File CbyC report in the country of the ultimate parent of the MNE. That country will exchange this information on an automatic basis with jurisdictions in which the MNE operates and that meet the necessary conditions Where ultimate parent entity is not i) required to file a CbyC report; or the parent jurisdiction s government has ii) not signed relevant information exchange agreements; or iii) systematically failed/ suspended its agreement to exchange information, the MNE can appoint a surrogate parent entity
CbCR Potential Issues and Challenges It s new Beyond Transfer Pricing (TP) information Risk assessment tool Will affect many MNEs Separate from transfer pricing documentation and not previously required Tax authorities will have the right to obtain data on profits in all countries in which the MNE operates Some of this information is not typically presented in existing transfer pricing studies Will require concerted effort by MNEs to determine process, ownership, and technology to obtain information Intended to be used by local countries as a risk-assessment tool Used by tax administrations in evaluating other BEPS related risks and potentially economic and statistical analysis Many major countries have indicated that they will adopt / already o legislated - requiring any MNEs with entities prepare regardless of headquarter location
What Does CbCR Mean for Africa? CbCR responsibility of parent. Heavy collection burden not expected on subsidiaries Not a one-size fits all - MNEs will require varying degrees of input from subsidiaries Might require data you haven t focused on before (e.g. income tax on a cash basis)
What Does CbyC Mean for Africa - Longer Term? Tax authority may have more information than you about profitability of your MNE s entities in other countries Tax authorities will have an easy way to compare your results to like affiliates elsewhere Could lead to more transfer pricing inquiries and disputes Potential for more double tax (although data is required to be used for risk assessments not adjustments)
Which countries in Africa have implemented CbCR? South Africa: The Competent Authority of South Africa signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports on 27 January 2016. Draft Regulations for implementing CbCR have also been issued CbCR applicable to a MNE Group with a consolidated group revenue of R10 billion or more. These Regulations are effective for Reporting Fiscal Years of MNE Groups beginning on or after 1 January 2016. Nigeria: Approval of a Multilateral Competent Authority Agreement (MCAA) for the exchange of CbCR is advancing, with approval by a government council and legislation expected to be introduced soon.
Countries signed up to the CbC MCAA
CbCR Analysis
SARS Draft Notice on Record Keeping
SARS Draft Notice on Record Keeping Who should keep specified records, books of account or documents? If aggregate of potentially affected transactions is the higher of R 50 million OR 5% of the Gross income Transactions > R1 mil SA tax payer or connected person
SARS Draft Notice on Record Keeping Documents - Structure and Operations a) Ownership structure; b) The name, principal office, legal form and tax residence of connected persons; c) Business operation summary, including: i. a description of the business; ii. an organogram showing with title and location of senior management; iii. major economic and legal issues affecting the profitability; iv. business restructurings or intangibles transfers; v. market share, relevant market competition environment and key competitors; vi. the key value drivers identified by available industry research findings or reports; vii. industry policy, incentives or restrictions; and viii. the role of the SA taxpayer and connected persons in the group s supply chain.
SARS Draft Notice on Record Keeping Documents Transactions a) The nature and terms (including pricing policy) of the transactions; b) Copies of contracts; c) Governance and regulatory documents, (e.g. board minutes and SARB applications and approvals); d) The tested party and reasoning; e) For offshore tested party, evidence of the functional and risk classification of the tested party, including: i. business description - type and details of business, organogram, business strategy and external market conditions; ii. contracts between the tested party and its customers and suppliers; and iii. commercial invoices between the tested party and its customers and suppliers; (f) Functional analysis; (g) Intangible assets;
SARS Draft Notice on Record Keeping Documents Transactions (continued) h) Operational flows: information flow, product flow, and cash flow; i) Segmented P&L for the tested party for transactions with related and independent parties, including: i. records of the application of the transfer pricing policy and ii. reconciliation to the annual financial statements; j) In the absence of (i), an allocation based analysis; k) Comparable analysis; l) Assumptions, strategies, policies and price negotiations in determining transfer prices/ allocations of profits or losses or contributions to costs; m) Details of price adjustments, if any, in statutory and tax accounts; n) For financial assistance transactions: i. contemporaneous financial forecasts, including a clear picture of the expected levels of interest cover, gearing or other relevant measures; ii. financial strategy of the business: how capital is allocated, the relationship between capital and cash flows from operations, etc.;
SARS Draft Notice on Record Keeping Documents Transactions (continued) o) For financial assistance transactions with a term > 12 months: i. a description of the funding structure, including dates of transactions, source of the funds (immediate and ultimate), reasons for obtaining the funds, how the funds were or will be applied (the purpose of the financial assistance) and the repayment terms; ii. a group structure covering all relevant companies and clearly setting out any changes to the structure taking place over the course of the financial assistance transactions; iii. financial statements/ management accounts when financial assistance obtained and after the financial assistance has been granted; and p) Existing unilateral, bilateral and multilateral APAs/ other tax rulings to which SARS is not a party and are relevant.
Common Reporting Standard (CRS)
International Exchange of Info International Action OECD/G20 initiative to achieve greater transparency and the automatic exchange of information between tax administrations OECD Standard For Automatic Exchange of Financial Account Information In Tax Matters, consisting of 1. Common Reporting Standard (CRS) - contains the due diligence rules for financial institutions to follow to collect and then report the information; and 2. Model Competent Authority Agreement (CAA) (Signed more than 90 countries, including most tax haven countries and by South Africa on the 23rd of October 2014).
International Exchange of Info Incorporation into South African Law Primary Legislation The primary enabling legislation for the exchange of information and reporting is the Tax Administration Act, 2011 (TAA); and Legislative amendments to the TAA, were effected during 2015 in order to implement the CRS and CbC reporting into South African law. Secondary Legislation CRS regulations - Effective from 1 March 2016.
International Exchange of Info CRS WHO NEEDS TO REPORT? Reporting Financial Institution must report to the relevant tax authority the prescribed information with respect to each Reportable Account of such Reporting Financial Institution Financial Institution means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company. Reportable Account means a Financial Account that is maintained by a Reporting Financial Institution and is held by one or more Reportable Persons or by a Passive NFE with one or more Controlling Persons that is a Reportable Person provided it has been identified as such pursuant to prescribed due diligence procedures. Reportable Person means a Reportable Jurisdiction Person other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a Related Entity of a corporation described in clause (i); (iii) a Governmental Entity; (iv) an International Organization; (v) a Central Bank; or (vi) a Financial Institution Controlling Persons includes a beneficial owner as defined in FATF Recommendations
International Exchange of Info CRS WHAT NEEDS TO BE REPORTED? Generally speaking - the identity and address of the warm body who ultimately benefits from the account could be beneficiaries of a discretionary trust; Name, address, jurisdiction(s) of residence, TIN (Tax Id Number), date, place of birth, account number, name and identifying number (if any) of the Reporting Financial Institution; account balance or value, total gross amount of interest paid or credited to the account; Several foreign banks are already requiring such reporting e.g. the Swiss Banks due to Swiss reporting laws which have already become effective; and The Swiss rules require the identity of the ultimate beneficial owner of the account e.g. where a discretionary family trust holds the account, the potential ultimate beneficial owners irrespective whether or not they are entitled to any benefit.
International Exchange of Info CRS WHEN TO REPORT? The first reporting period for financial institutions obliged to keep records commences on 1 March 2016 and ends on 28 February 2017, followed by a due date for returns of about June 2017 and exchange of the information by South Africa by September 2017. The due dates for reporting lead Treasury to announce the proposed tax and exchange control VDP dispensation with effect from 1 October 2016 until 31 March 2017.
International Exchange of Info CRS WHAT HAPPENS TO THE INFO? The tax authority of the Reporting Country is required to exchange the info with the tax authority of the country where the ultimate beneficial owner resides.
Exchange of Information between SARS and SARB Section 70 of the TAA: A senior SARS official may disclose to- the Governor of the South African Reserve Bank, or other person to whom the Minister delegates powers, functions and duties under the Exchange Control Regulations the information as may be required to exercise a power or perform a function or duty under the South African Reserve Bank Act or those Regulations. Therefore, SARS is required to disclose information to the extent required by SARB to police the Regulations.