True to its intent to lead the way in terms of the reform of the international tax system, the UK has issued draft legislation that will implement country-by-country reporting. Issued to coincide with the release of the final OECD Base Erosion and Profit Shifting (BEPS) package on 5 October 2015, this is a key step towards increasing transparency in international tax.
From 1 January 2016, the largest UK-parented groups (ie with consolidated revenues of £586m or greater) will have to disclose key facts to HMRC, including profits, sales, employees, assets and income tax paid, for the countries they operate in. The deadline for submission of the first reports is likely to be 31 December 2017 and, during 2018, this data will then be shared with tax authorities in other countries, giving them a much clearer picture of what is going on cross-border. The report will not be made public, however.
Why bring in country-by-country reporting?
The OECD believes that improved transparency is the first stage towards addressing flaws in the international tax system, but a more joined up tax authority approach could have other consequences. As and when other countries implement country-by-country reporting, small UK subsidiaries of multinationals may find that HMRC has a clearer picture of their overall tax position than they do. Subsidiaries should be prepared for greater scrutiny from HMRC in possession of more information – and therefore should have access to the same information to defend their position.
OECD – transfer pricing documention
The UK will also adopt the OECD’s recommendations on transfer pricing documentation. This will impact all UK entities currently within the transfer pricing regime. The new approach will require the preparation of a master file, which will give an overview of the group’s business and include overall policies regarding pricing, and a number of local files, one for each territory. The local file will need to include evidence to support the pricing as being at arm’s length by reference to comparable or benchmarked data.
Although initially a compliance burden for international business, it will soon be the tax authorities that have to demonstrate a coordinated approach on information sharing. The OECD recommendations are meant to be even-handed to taxpaying groups, in that if some countries increase their tax base, then others will decrease. It is not just about stopping profits falling through the cracks. Groups will expect tax administrations to use the shared information in a constructive way.
This is a significant cultural change and a major challenge for international co-operation, an area where tax authorities do not have a great track record.
This will be the first of the BEPS actions to be implemented by the UK, although we can expect more in the Autumn Statement at the end of November.
For further information please contact Rebecca Reading.