Country-by-country tax reporting

… a taxing issue for finance teams

The imminent introduction of country-by-country reporting was one of the hot topics in the recent 2015 UK Budget. The new reporting requirements will provide HMRC with information about multinational companies’ global activities, profits and taxes in an effort to clamp down on the base erosion and profit shifting (BEPS) highlighted in recent high profile cases whereby global brands have been found to be paying little or no corporation tax on millions of pounds worth of UK turnover.


Historically, multinational companies have reported their profits, revenue, taxes paid, and number of employees, on a global consolidated basis, dashing any hope of understanding a corporation’s operations in a specific country. Country-by-country reporting will require multinational companies to share this information for each country in which they operate. The information should give governments a much greater ability to spot irregular activity and to better assess international tax avoidance risks.


It is also intended that the information reported by multinationals will be shared with other relevant tax jurisdictions, giving them a much clearer understanding of the multinationals’ business within their own countries and therefore a better picture of where turnover and profits are truly being generated.


7 months and counting...


UK preliminary indicators suggest 2016 as the most likely start date for the introduction of country-by-country reporting, which is now only 7 months away. So, what does this mean for multinationals operating within the UK, or more importantly, what should your finance team be doing now to prepare for this legislative change?


One could assume that it is purely an issue for your tax team and that your wider finance team need not be impacted. However, the new reporting regime is expected to have a much wider impact than the usual UK Budget announcements, requiring companies effected to invest a significant time and effort in meeting the new reporting requirements or face being placed on the target list for potentially expensive and lengthy transfer pricing tax investigations in multiple tax jurisdictions.


With the clock ticking, now is the time for finance teams to check whether their systems can meet the reporting requirements. Where enhancements to your systems are required, now is the time to act to avoid late filing penalties or a last minute unexpected request from your tax function.


Running the Numbers


So what financial information must your systems be able to report and in what time frame?


Country-by-country reporting requires the disclosure of high level financial indicators across a global group in a way that provided headline comparables to each tax authority. It requires the completion of a three page template to capture all the required information.


The guidance sets out a three tier approach to what must be included:-

  1. A master file containing a high level overview of the multinational's business, its markets, key value drivers, financing arrangements and core functional analysis.
  2. Local country files describing the management structure, business strategy and functional analysis of the multinational together with its controlled transactions.
  3. A country-by-country report setting our specified information relating to the global allocation of the multinationals’ income and taxes paid together with locations of economic activity within the group.


Testing the finance team’s ability to run the numbers quickly and efficiently will be a key part of preparing for country-by-country reporting. This should be trialled as soon as possible, given system issues typically take time to overcome. The ability to produce the numbers will only be the start of your tax team’s work in preparation for this new reporting requirement, hence it's imperative that all multinational finance teams start looking at their reporting capabilities as soon as possible.


Risk Assessment


Tax authorities across the globe will be using country-by-country reporting as part of their transfer pricing risk review. These reports will be highly influential in determining whether a multinational is considered to carry a high transfer pricing risk and whether a full enquiry is justified with all its associated financial and time costs.


With this in mind, can your finance team risk not being prepared for this new tax legislation?

  1. Can your group’s systems cope effectively with the new reporting requirements?
  2. Does your head office finance team truly understand the position of local stakeholders and how the business is run in its different tax jurisdictions?


Is your finance team struggling to answer these questions? Now is the time for action, given compliance could be as little as 7 months away!