Asia-Pacific countries are enthusiastically adopting CbCR

A key outcome of the OECD's final comprehensive BEPS package of 13 reports issued in October 2015 (OECD's final BEPS report) was agreement on the need to introduce CbCR along with the associated Master File and Local File for large MNEs, ie those with global revenues exceeding €750 million ($830 million) (Action 13 of the BEPS Action Plan).

Under CbCR, tax administrations will obtain a global picture of where MNE profits, tax and economic activities are reported. This information will enable tax administrations to assess transfer pricing and other BEPS risks better than ever before and therefore where to allocate limited compliance resources. The OECD's final BEPS report recommends that the first CbCR reports be required to be filed for MNEs' fiscal years starting from January 1 2016.

As Table 1 shows, in May 2016, two-thirds of the ASPAC countries included in this survey have either already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Master File and Local File..

Table 1
	CbCR	Master File	Local File
Australia	✓	✓	✓
China	✓	✓	✓
Hong Kong	✓	✓	✓
India	✓	✓	✓
Indonesia	✓
Japan	✓	✓	✓
Korea	No announcement as at mid-May 2016	✓	✓
Malaysia	✓	✓	✓
New Zealand	Presently considering if a law change is required or if the current law is sufficient to implement these new requirements
Philippines	No announcement as at mid-May 2016
Singapore	✓	✓	✓
Sri Lanka	No announcement as at mid-May 2016
Taiwan	✓
Thailand	No announcement as at mid-May 2016		Presently under the procedure of enactment
Vietnam	No announcement as at mid-May 2016
1Signed Multilateral Competent Authority Agreement on Exchange of CbC reports on May 12 2016

To summarise, large MNEs will be required to prepare and file the following documents:

• A CbC report that will provide a range of quantitative information annually and for each tax jurisdiction in which the MNE does business, including the amount of revenue, profit before income tax, income tax paid, number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction;

• A Master File that provides high-level information regarding the MNE's global business operations and transfer pricing policies to all relevant tax administrations; and

• A Local File that provides detailed transactional transfer pricing documentation specific to each country.

Annex III of the new Chapter V (Documentation) of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) contains the template for completion of the CbC report.

Annexes I, II and III of the new Chapter V (Documentation) of the OECD TP Guidelines contains details of the information to be included in the Master File, Local File and CbC report (including the template to be completed) respectively.

The underlying intention in requiring the above three documents to be filed is that they will require MNEs to articulate consistent transfer pricing positions and to provide tax administrations with useful information to perform transfer pricing risk assessments.

The interaction between the CbC report, Master File and Local File together with an overview of what is required to be included in each document is shown in Diagram 1.

d1

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One of the underlying design features of CbCR is that the CbC report, once filed with the tax administration of the country in which the ultimate parent /reporting entity is located, will be automatically exchanged with tax administrations in other countries in which the MNE operates through mechanisms such as the exchange of information articles in double tax agreements and specifically designed agreements such as the 'Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports'.

A further design feature is that CbC reports are intended to be electronically transmitted between Competent Authorities in accordance with the CbC XML Schema developed by the OECD: see 'Country-by-Country Reporting XML Schema: User Guide for Tax Administrations and Taxpayers, Version 1.0 – March 2016'.

The OECD envisages that the first exchanges of CbC Reports will commence in 2018, with information on the 2016 calendar year.

With respect to ASPAC countries surveyed that have already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Table 2 shows the first income year to which CbCR will apply together with details of when the CbC report will need to be filed.

Table 2
	1st year to which CbCR will apply	Filing date for CbC report	1st filing date for CbC report
Australia	Income years commencing on or after January 1 2016	Within 12 months of end of period to which CbC report relates	December 31 2017
China	Tax years beginning on January 1 2016		Likely mid to late 2017
India	Financial year beginning on April 1 2016	On or before due date for filing income-tax return (currently November 30)	November 30 2017
Indonesia	Intention to introduce	No details as yet
Japan	Fiscal year starting on or after April 1 2016	No later than one year after the last day of the reporting fiscal year of the Ultimate Parent Entity	Reporting entity's fiscal (and tax) years beginning on or after April 1 2016)
Korea	No announcement as at mid-May 2016 although CbCR is expected for FY 2017
Malaysia	January 1 2017	No later than 12 months after last day of reporting financial year	December 31 2018
New Zealand	Presently considering if a law change is required or if current law is sufficient to implement these new requirements
Singapore	Financial years beginning January 1 2017	No later than 12 months from the last day of the reporting financial year	December 31 2018
Taiwan	Intention to introduce	No details as yet

It is important to recognise that MNEs with their ultimate parent/reporting entity located in an ASPAC country, which may decide not to introduce CbCR or which may delay the introduction of CbCR can still be impacted by the introduction of CbCR in other jurisdictions. This arises due to a further design feature of CbCR which is that where a jurisdiction fails to provide information to another jurisdiction, for example, because it has not required CbCR from the ultimate parent/reporting entity of such MNE groups, a secondary (filing) mechanism has been developed whereby tax administrations in jurisdictions in which subsidiary members of the MNE are located can require filing of the CbC report directly with them.

Situations such as those described above could be fairly common in the first year or two of operation of CbCR as jurisdictions progressively introduce CbCR requirements together with arrangements for the automatic and timely exchange of CbC reports.

In such situations, it will be important for subsidiary members of MNEs to:

• Ascertain whether the MNE will be preparing a CbC report;

• Where the MNE will be preparing a CbC report – obtain a copy of the CbC report for filing by the due date; and

• Where the MNE will not be preparing a CbC report – maintain an open dialogue with the tax administration in the jurisdiction in which they are situated to ensure that it is aware that the ultimate parent/reporting entity of the MNE group is not required to prepare a CbC report, with a view to mitigating potential penalties.

We also envisage potential teething problems in the first few years of CbCR even in situations where the ultimate parent/reporting entity is located in a jurisdiction that has introduced a CbCR requirement. For example, delays could arise between the time of filing of the CbC report with the tax administration in which the ultimate parent/reporting entity is located and the provision electronically of the CbC report by that tax administration to the tax administration in the jurisdiction in which the subsidiary member of the MNE is located. Such delays could result in filing requirements falling on local entities even though the ultimate parent/reporting entity has filed the CbC report by the due date. This is illustrated in Diagram 2.

d2

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In such situations, it will be important for subsidiary members of MNEs to:

• Confirm that the MNE will be preparing a CbC report and will be filing it with the tax administration in which the ultimate parent/reporting entity is located by the due date; and

• Maintain an open dialogue with the tax administration in the jurisdiction in which they are situated to ascertain whether the tax administration expects to receive the CbC report from the tax administration in which the ultimate parent/reporting entity for the MNE is located.

Given the likelihood that a secondary (filing) mechanism will be introduced in countries adopting CbCR, it will be important for MNEs to monitor and manage the filing dates for the CbC report in the various jurisdictions in which they operate. There are two key reasons to do so: first, filing dates for the CbC report may vary across jurisdictions; and second, penalties may be imposed for failing to file CbC reports by the due date in countries where a secondary mechanism has been introduced.

MNEs with operations in India should take particular care as the CbC report is due to be filed no later than the date the income tax return is due to be filed rather than within 12 months of the end of the period to which the CbC report relates which is the approach generally being adopted.

MNEs with operations in Australia should note that the obligation to file the CbC report is placed directly on an Australian member of the MNE rather than on the ultimate parent/reporting entity for the MNE. Nevertheless, once CbCR has been bedded down, it is anticipated that ordinarily the ATO would receive the CbC report from the tax jurisdiction in which the ultimate parent/reporting entity for the MNE is located.

Given the added compliance burden that CbCR will impose, some MNEs may be wondering what the consequences of not preparing and filing a CbC report could be. With respect to ASPAC countries surveyed that have already introduced, are in the process of introducing or have stated an intention to introduce CbCR, Table 3 shows that penalties may be imposed for failing to file a CbC report and also provides an indication of the potential maximum penalty that could be imposed.

Table 3
	Can a penalty be imposed for failing to file a CbC report?	Penalty that can be imposed
Australia	Yes	A penalty up to A$4,5001
China	Yes	At least 10,000 RMB, or 10,000-50,000 RMB if the circumstances are serious
India	Yes	Delay up to one month	INR 5,000 (USD75) per day
		Delay beyond one month	INR 150,000 + INR 15,000 (USD230) per day
		Continuation of delay after receipt of penalty order	INR 50,000 (USD 750) per day
Indonesia	Intention to introduce	No details as yet
Japan	Yes	A maximum penalty of JPY 300,000
Korea	No announcement as at mid-May 2016 although CbCR is expected for FY 2017
Malaysia	Yes	Amount not yet disclosed
New Zealand	Considering if a law change is required or if present law is sufficient to implement these new requirements
Singapore	No announcement as of yet
Taiwan	Intention to introduce	Amount not yet disclosed
1In the May 2016 Budget, the government announced a proposal to increase the maximum penalty to A$450,000.

The introduction of CbCR in particular along with the associated Master File and Local File for large MNEs arising out of the OECD/G20 BEPS project, will have significant and ongoing implications for large MNEs headquartered in or operating in ASPAC countries as a consequence of ASPAC countries enthusiastically adopting CbCR, irrespective of whether such countries are members of the OECD or G20.

Tony Gorgas Asia Pacific Regional Leader KPMG's Global Transfer Pricing Services, Tax KPMG Australia Tower Three International Towers Sydney 300 Barangaroo Avenue Sydney NSW 2000 Tel: +61 2 9355 8851 tgorgas@kpmg.com.au Tony is the Asia Pacific Regional Leader in KPMG's Global Transfer Pricing Services (GTPS) practice and has 20 years of experience advising multinational groups on complex transfer pricing issues. With prior commercial experience negotiating arm's length pricing arrangements, Tony provides a practical interpretation of the complex technical rule book. Tony's abilities to influence and negotiate on behalf of KPMG Australia and KPMG member firm clients are the cornerstone of his reputation. Tony's key strength is his leadership. He leads a number of transfer pricing projects in Australia and across the ASPAC region, and globally for key KPMG clients. Tony has extensive contacts within the Australian Taxation Office (ATO). He is well experienced in negotiating favourable outcomes for clients, given his strong working relationship and reputation with the ATO's Senior Executives and Competent Authorities. Tony has successfully concluded unique and valuable APAs (Advance Pricing Arrangements) involving business restructuring including resolution of collateral issues. He has concluded APAs on unilateral and bilateral bases, with key jurisdictions including Australia, US, UK, Japan, Korea, and he has valuable experience in the resolution of Mutual Agreement Proceedings between Competent Authorities.

Damian Preshaw Director, Damian Preshaw Consulting Pty Ltd KPMG Australia c/-147 Collins Street Melbourne, Australia, 3000 Tel: +61-423 780 219 dpreshaw1@kpmg.com.au Damian is a consultant to KPMG and is a transfer pricing specialist with more than 20 years' experience in both the private sector and with the ATO. Prior to establishing Damian Preshaw Consulting Pty Ltd in October 2015, Damian was a director in KPMG's Transfer Pricing Services Group in Melbourne for 12 years. In this capacity, Damian advised a wide variety of multinational clients on transfer pricing and profit attribution issues with a special focus on dispute resolution, financial services, financial transactions and business restructuring. Prior to joining KPMG, Damian was an international tax counsel in the ATO's Transfer Pricing Practice in Canberra and was an Australian delegate to the OECD's Working Party No.6 (Taxation of Multinational Enterprises) from 1994 to 2003. Damian is a member of the ATO's Division 815 Technical Working Group.