By Guy Sanschagrin
Posted: November 14, 2017

Updates Since March 2017

Post March 2017, BEPS initiative updates primarily focus on the adoption of country-by country (CbC) reporting. We find the most important updates provide clarification on CbC reportable revenue and on applicable accounting standards.

A. Definition of Revenue

The model CbC standard's definition of "revenue" is broad. All "revenue," "gains," "income," or "other inflows" are revenue for CbC reporting purposes

Generally, reportable revenue includes income statement items and P&L statement items such as:

• Sales revenues
• Asset sales related net gains
• Interest received
• Extraordinary income, and
• Certain unrealized gains

Items not considered revenue for CbC purposes

Generally, these are:

• "Comprehensive" income and/or earnings
• Unrealized gains "reflected in net assets," and
• Items reflected in a typical balance sheet's "equity" section

B. Other Guidance

Generally, accounting principles and/or standards are not stipulated by the model CbC standards. 

However:

• If an equity interest is publicly traded, accounting rules already followed by the MNE Group will control
• If the equity interest is not publicly traded, either local GAAP applicable to the MNE's "Ultimate" Parent will control, or IFRS will control
• The MNE Group should use the same standards across the group (presumably to allow for comparative analysis)

Currency fluctuations and the €750 million, "total consolidated," group threshold

• The model CbC standards prescribe a consolidated, €750 million, reporting threshold
• While adopting jurisdictions may denominate this threshold in non-euros, there is no requirement that these jurisdictions periodically revise the CbC threshold to reflect currency fluctuations. Note that as of this date, there is no indication that this threshold will be indexed for inflation – so smaller companies will increasingly be subject to CbC requirements over time.

Revenue included in the €750 million, "total consolidated," group threshold

• "[A]ll…revenue that is (or would be) reflected in the consolidated financial statements should be [included]"
• For financial institutions, items considered similar to revenue, under applicable accounting rules, should be included

Countries Adopting BEPS / Action 13 Implementation

Currently, more than 50 countries, including the US, have adopted elements of Action 13. If an MNE has an entity operating in one of those countries, it'll probably have to modify its reporting to comply.

As summarized in the table below, of countries adopting elements of Action 13, 57 have adopted CbC reporting. Six have draft legislation, and 15 have expressed an adoption intention. Because the CbC reporting requirement is part of the BEPS "Three Tier" reporting structure, many countries adopting CbC reporting have also adopted the MF/ LF structure.

Brief Examples of BEPS / Action 13 Implementation - China, India, and Mexico

Each country's adoption of BEPS principles will vary. Ultimately, countries' individual rules will control and many countries have instilled their own specific requirements while other countries have taken an “as in” approach. We provide brief updates on developments in China, India and Mexico.

A. China

In Summer 2016, China's State Administration of Taxation issued Public Notice 42 which stipulates new reporting requirements for related party transactions, documentation, and CbC. The Annual Related party transaction (RPT) forms include twenty-two different tables, including CbC, while documentation is now in the form of three-tiered Master File - Local File, and Special [Items] File, which is essentially a description of an MNE's supply chain.

B. India

In April 2016, India implemented a new "Finance Act" that adopted Action 13's three-tiered Master File - Local File, with CbC structure. Only MNEs with consolidated revenue exceeding €750 million are subject to CbC reporting requirements, in accordance with the Action 13 guidelines. However, India prefers to see each business line mapped separately, so a diversified MNE, with significant Indian operations, might consider developing multiple Master Files broken out by business line.

C. Mexico

In Spring 2017, Mexico's Tax Administrative Service issued its final Action 13 related compliance rules. Mexico adopted an objective turnover threshold for applying a CbC requirement. Subsidiary type entities, such as maquiladoras, must receive at least US $37 million to be subject to CbC reporting rules. Mexican entities must have met a turnover of US $.63 billion to be subject to CbC reporting rules. For Master Files, Mexico adopted Action 13's five products and five percent principles.

These are just some examples of countries' variable adoption of principles from the BEPS initiative, which is why performing a risks and opportunities analysis, before deciding on a new reporting structure and a transfer pricing documentation plan, is a worthwhile endeavor for most MNEs.

Given your level of interest in Action 13, we will provide updates on new developments periodically. Please contact me at +1 (866) 298-7829 Ext. 702 or guy.sanschagrin@wtpadvisors.com to let me know about topics you would like us to cover.