Revised OECD guidance on country-by-country reporting offers new details on accounting classifications and adds Hong Kong, Liechtenstein, and Nigeria to the list of countries expected to allow voluntary reporting before their final rules take effect.
In its April 6 update to prior CbC reporting guidance issued in August 2016, the OECD addresses lingering technical questions on the definition of the term "revenues" for purposes of the €750 million (or near equivalent in local currency) filing threshold and identification of the proper accounting system to apply. The OECD's base erosion and profit-shifting report on action 13 uses consolidated revenue to determine which multinational groups should be subject to CbC reporting, and revenue -- unrelated party, related party, and total -- is one of the eight indicators that must be reported on a CbC basis. However, the action 13 report does not contain details on revenue classification, stating only that "revenues should include revenues from sales of inventory and properties, services, royalties, interest, premiums, and any other amounts."
Under the new guidance, revenues reported for each country on the CbC template must include not only operating revenues, but also investment gains and amounts considered extraordinary income. For purposes of calculating the consolidated group’s total revenue, however, it says that the ultimate parent entity’s jurisdiction may include investment gains and extraordinary income if they are reported in the group’s consolidated financial statements. It adds that, because financial sector companies may not report gains rather than gross revenue for some transactions, "the item(s) considered similar to revenue under the applicable accounting rules should be used in the context of financial activities."
"Those items could be labeled as net banking product, net revenues, or others depending on accounting rules. For example, if the income or gain from a financial transaction, such as an interest rate swap, is appropriately reported on a net basis under applicable accounting rules, the term revenue means the net amount from the transaction," it says.
For group entities with an unrelated-party minority interest, the revised guidance says that the accounting consolidation rules in the jurisdiction of the group’s ultimate parent should determine whether the entity’s revenue is fully includable in consolidated revenue or prorated according to the parties’ ownership percentages. Regarding identification of the applicable consolidation rules, it says that nonpublicly traded groups can apply local generally accepted accounting principles, international financial reporting standards, or, if permitted under local law, U.S. GAAP. However, it says whichever system is used must be applied consistently over time and when determining the amounts reported on the CbC template. Publicly traded groups must continue to use the accounting rules to which they are already subject, the guidance says.
Like its predecessors, the guidance sets out the conditions for parent surrogate filing, which is designed to avoid subjecting multinationals to local filing in multiple countries while their ultimate parent’s jurisdiction is in the process of adopting CbC reporting. Although the action 13 report set a January 1, 2016, deadline for CbC reporting, it also acknowledged that "some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law." The guidance says that countries may choose to honor CbC reports filed voluntarily in the ultimate parent’s jurisdiction, subject to implementation deadlines and other conditions.
The new version of the guidance adds Nigeria, Liechtenstein, and Hong Kong to the existing list of countries expected to accept and exchange surrogate parent filings. The August 2016 version of the guidance listed Japan, Russia, Switzerland, and the United States as likely participants. U.S. multinationals successfully urged the IRS to accept voluntary CbC reports for years beginning after January 1, 2016, but before July 1, the effective date of the U.S. Treasury’s CbC reporting regulations (T.D. 9773). Although the action 13 report does not require countries to accept CbC reports filed voluntarily in the ultimate parent’s jurisdiction during the transition period, they are encouraged to do so by the OECD's peer review criteria.
In addition to its CbC implementation guidance, the OECD released further guidance on implementation of the common reporting standard (CRS) for the automatic exchange of financial account information in tax matters. The additional guidance includes several FAQs on CRS-related issues, such as the identification of controlling persons of passive nonfinancial entities with financial institutions in the chain of legal ownership, the look-through requirement for widely held collective investment vehicles and pension funds in the form of trusts in nonparticipating jurisdictions, and whether low-value electronic money accounts can be considered as excluded accounts from reporting obligations.
The OECD also published a second edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters, which includes more information on the CRS XML schema, such as additional technical guidance on how to handle corrections and deletions within it.
Stephanie SOONG JOHNSTON
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