OECD has been concerned with the matter of transfer pricing documentation for a longer time. A debate material was already published in 2013, which made specific suggestions for global standardisation. The significance of the debate material was based on the fact that the chapter of the OECD Transfer Pricing Guidelines relating to documentation (Chapter V) was formulated more than 15 years ago and, for this reason, it does not provide proper guidance in today’s substantially altered economic environment.
Action 13 published in September 2014 stands out in the sense that the text of the study serves as a reformulation of Chapter V of the Transfer Pricing Guidelines
The study proposes the introduction of a three-level transfer pricing documentation rule:
- a master file providing high level information regarding the group’s global business operations,
- a local file concentrating on transactions and their details and
- a so-called “country-by-country” (CbC) report, which, as its name indicates, would require
the ultimate parent company of multinational enterprise groups to report annually for each tax jurisdiction in which they do business (this information would be shared between the countries concerned in an automatic exchange of information).
In general, we can say that the first two points do not represent major changes (at least not from a Hungarian and EU perspective) as the main document specific structure has been in use on the Old Continent for some time and OECD makes no secret of regarding the dual-level system of the EU as its example. Decree 22/2009 of the Finance Ministry containing the Hungarian rules of transfer pricing documentation has allowed the use of main document specific documentation for years.
CbC may bring real change but would increase administration substantially
Actually, the third point is the most interesting from a Hungarian (and EU) perspective as this is a completely new transfer pricing element (the proposed table is presented on pages 35 and 36 of the study). The CbC report requires multinational enterprises to report annually for each tax jurisdiction in which they do business their key financial indicators (in a breakdown by related and unrelated parties),e.g. the amount of net sales revenue, profit before income tax and the income tax paid (corporate tax),the number of employees, stated capital, accumulated earnings, tangible assets etc.
In addition, according to the proposal multinational enterprises would also have to report their related parties resident in each jurisdiction (and if the registering state is different from the state of residence of the related party),specifying the activity pursued by the related party. The options listed include research and development, holding, procurement, manufacturing, distribution, support services, financing etc. and even a classification of the activity as dormant.Let me add that this principle is not necessarily so novel from the perspective of Hungarian transfer pricing obligations as Hungarian enterprises are already obliged to report their related parties as soon as they entered into a contract with them for a certain transaction.
A number of countries (including Argentina, Brazil, China, Columbia, India, Mexico, South Africa and Turkey) indicated that they would need the reporting of additional transactional data beyond the ones stated in the CbC regarding, for example, related party interest payments, royalty payments and especially related party service fees.
The study itself contains proposals regarding the following aspects of the transfer pricing documentation obligation:
- principles of proportion and rationality applied to the cost of preparation of the transfer pricing documentation and the identification of comparable data and up-to-date nature of the data,
- time frame for the preparation of transfer pricing documentations – regarding the CbC report, the study proposes that it should be possible to extend the date for completion of the report to one year following the last day of the fiscal year of the ultimate parent of the multinational enterprise group,
- rules of defining small value intra-group transactions and relating documentation obligations,
- rules of keeping transfer pricing documentations and the revision of records and comparable data,
- language of the transfer pricing documentation, penalties, confidentiality, use of local comparable data.
- According to the closing provisions, the parties participating in the BEPS Actions will review the provisions of Action 13 concerning the documentation and the CbC report in 2020 based on the experience gathered until then.
Guidance has already been prepared for the action
A supplementary guidance to Action 13 was recently published in February 2015, which basically contains practical information concerning the CbC report with regard to the fact that this is an entirely new element in transfer pricing raising a number of questions.
The guidance contains four main sections:
Starting date of CbC reporting
The proposal suggests that CbC reports be required to be filed for the fiscal years beginning on or after 1 January 2016 and if we consider the 1-year deadline mentioned in Action 13, this means that the deadline for the submission of the reports would be 31 December 2017 in the case of companies applying the calendar year as their fiscal year.
Restriction of the CbC reporting obligation
There would be an exemption from the general filing requirement for the multinational enterprise groups with annual consolidated group revenue in the immediately preceding fiscal year (2015 in this case) of less than EUR 750 million. This limit amount would, however, be revised in 2020.
Necessary conditions underpinning the use of CbC report
- Countries participating in the BEPS project agree that proper regulation is necessary in the states concerned regarding the confidentiality of the data provided to the tax authority during CbC reporting.
- The data requested to be filed in CbC reporting should be standard and consistent in all states. The original report contains a template in this regard.
- Appropriate use of the data supplied. The guidance points out that the data acquired may be used for assessing transfer pricing and other BEPS related risks and specifically provides that tax authorities may not determine the correctness or incorrectness of the transfer price applied solely based on these data.
Framework for government-to-government mechanisms to exchange CbC reports and implementation package
Detailed rules for the automatic exchange of information between jurisdictions and for implementation will be elaborated until April 2015.
The above shows that the changes are large-scale and substantial although from a Hungarian perspective there are two aspects which may moderate the impact. Firstly, Action 13 does not seem so “radical” relative to the Hungarian transfer pricing regulation that is rather strict even in an international comparison. Secondly, it seems, at the moment, that most of the CbC reporting obligation will mostly have to be fulfilled by parent companies and the changes will most likely concern Hungarian companies to a smaller extent only (as presumably there will be no Hungarian parent companies with CbC reporting obligation due to the already mentioned EUR 750 million consolidated revenue limit).
However, the CbC reporting obligation may mark the start of a process, which may be extended to a wider circle of enterprises later on and which may serve as a basis for the elaboration of new audit methods in transfer pricing.