by Guy Sanschagrin, WTP Advisors

BEPS Action 13 Update

Earlier this year, our blog “Master File / Local File Transfer Pricing Documentation FAQs” provided an overview of what a Master File / Local File (MF/LF) system looks like along with practical considerations on implementing and maintaining the MF/LF system. As of today, our blog pops up at the top of Google search results for the terms “Transfer Pricing Master File” – ahead of content published by the OECD. This tells us that many found our content unique and helpful. Given your level of interest, we thought we’d provide an update on new developments associated with the implementation of Action 13 across the world.

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.

Adopted		Legislation	Intention
1.     Argentina	30.  Isle of Man	1.     Israel	1.     Botswana
2.     Australia	31.  Italy	2.     New Guinea	2.     Caymans
3.     Austria	32.  Japan	3.     Russia	3.     Costa Rica
4.     Belgium	33.  Jersey	4.     Switzerland	4.     Curacao
5.     Bermuda	34.  Latvia	5.     Taiwan	5.     Georgia
6.     Bosnia Herzegovina	35.  Liechtenstein	6.     Turkey	6.     Hong Kong
7.     Bulgaria	36.  Lithuania		7.     Kenya
8.     Brazil	37.  Luxembourg		8.     Mauritius
9.     Canada	38.  Malaysia		9.     Namibia
10.  Chile	39.  Malta		10.  New Zealand
11.  China	40.  Mexico		11.  Nigeria
12.  Colombia	41.  Netherlands		12.  Panama
13.  Croatia	42.  Norway		13.  Romania
14.  Cyprus	43.  Pakistan		14.  Ukraine
15.  Czech Republic	44.  Peru		15.  Uganda
16.  Denmark	45.  Poland
17.  Estonia	46.  Portugal
18.  Finland	47.  Singapore
19.  France	48.  Slovenia
20.  Gabon	49.  Slovakia
21.  Germany	50.  South Africa
22.  Gibraltar	51.  South Korea
23.  Greece	52.  Spain
24.  Guernsey	53.  Sweden
25.  Hungary	54.  United Kingdom
26.  Iceland	55.  United States
27.  India	56.  Uruguay
28.  Indonesia	57.  Vietnam
29.  Ireland

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 continue to provide updated on new developments periodically. Please email us at info@wtpadvisors.com to let us know of any topics you would like us to cover.

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