CbC reporting requires a company or a group with worldwide consolidated revenue of €750m or more in its previous accounting period to identify its high value adding functions and key profit drivers by reporting on its activity levels and tax liability in each territory it operates in with stark visibility. Businesses need to be fully aware of what is required of them, when, and where.
As a high level reminder:
- UK parented groups with overseas operations must prepare and submit a CbC report to HMRC for all accounting periods for which the threshold requirement is met, starting on or after 1 January 2016; and
- If a UK company is part of a group with an overseas parent company, the UK sub-group may be required to prepare and submit a CbC report to HMRC: if there is no CbC reporting requirement in the parent company’s tax jurisdiction; the parent company’s jurisdiction does not have an effective exchange arrangement with the UK; or, a group company has not filed a global CbC report in a territory with an effective exchange arrangement with HMRC.
CbC reporting is designed to shine a light on scenarios where there may be a mismatch between commercial substance and taxable profit, helping tax authorities decide where to open enquiries. Given the increased powers of information sharing by tax authorities globally, the taxpayer needs to be very clear on how its CbC report is likely to be interpreted in the various jurisdictions in which it operates, and whether that stacks up next to the group’s existing transfer pricing documentation.
CbC reporting also requires the completion of a template ‘scorecard’. One may ask: how hard can it be to complete a template? However, once you scratch the surface a little, the practical challenges become highly apparent, such as:
- does the group’s accounting system allow for the required information to be extracted on a jurisdiction by jurisdiction basis? Do systems need to be reconfigured to obtain the information required?
- what does each entity around the world need to do to comply with its local CbC reporting requirement? We know what HMRC is expecting and when, but what are other jurisdictions expecting
- who will have responsibility, in-house, for compiling and reviewing the CbC report?
Once the group has established how to pull the source data together, what information should the report contain?
- What is classified as revenue in each jurisdiction?
- What accounting format should be used – UK GAAP/US GAAP/some other accounting framework?
- Who is counted as an employee? Full time? Part Time? Ex-pats? Consultants?
- What should the income tax category include? Accrued tax? Tax paid?
- How does this tie into any tax strategy or senior accounting officer reporting obligations?
- What evidence do I need to validate or corroborate information submitted in the report?
What do you need to know? We suggest that the reporting requirement is split into four discrete tasks.
- Systems review - review what accounting systems are in place across the group and who has responsibility for these
- Data capture - it will be vital to involve the group’s IT function, as responsive and compliant IT protocols will serve to simplify the data collection element of the CbC reporting process going forward.
- Risk review - what challenges could the group face once the required information is shared with the relevant tax jurisdictions?
- Reporting - who, when, where and what do I need to report?
We urge any companies or groups that are likely to be caught by CbC reporting to take action now, as the clock is ticking and the scorecard awaits your completion.