In response to comments received from the business community on the initial draft of the Country-by-Country (CbC) reporting template, the OECD attempted to lessen the compliance burden for multinational enterprises (MNEs) in the final version of the template by reducing the amount of financial information required and providing some flexibility the in sources used to report the data. But will this really help? Many would argue (rightfully, in my opinion) that the changes are not as helpful as they might appear to be on the surface. While the form itself is simplified, there is no doubt that the final CbC reporting template will pose substantial data-gathering and reconciliation challenges for MNEs.
In preparing for the CbC reporting template, MNEs should ask the following questions around data management:
Can the MNE's accounting systems provide the right view of the data? Although the final CbC reporting template allows MNEs to use a wide variety of organized sources of financial information (e.g., consolidated financial packages, separate entity statutory statements, regulatory financial statements, or internal management books), using any of these poses problems. Accounting systems are generally set up to prepare consolidated financial reporting and management accounts. The systems may gather information along business lines, rather than by legal entity or geographically, and may eliminate (or simply ignore) the tax transfer pricing for many of the intercompany transactions that are reported in the MNE’s global tax returns.
Does the tax department have control over the data collected? The use of separate legal entity (local stat) statutory financial statements in preparing the CbC reporting template may also become problematic for many MNEs. The underlying data used in compiling the local statutory financial statements is usually outside the control of the corporate tax department. It is also rare to find the local statutory financial statements being prepared within the MNE’s financial accounting systems used by corporate tax departments. And the lack of sufficient centralized controls and processes over the underlying data (absent investments in new technology) will make it difficult for tax departments to use the data in a timely manner – or to allocate it by country. Further complicating the issue is the requirement that if local stats are chosen, they must be converted to the parent entity's currency, while conversion to the parent entity's accounting standard is optional.
Will new processes need to be implemented to supplement data from the accounting systems? If an MNE chooses to use a consolidated data source it may have challenges splitting the financial data by country and it may need to consider changes to internal accounting systems or investments in new technology as well as the implementation of additional manual processes and controls.
Once the data is sourced and collected, can it be easily reconciled? Even though the template does not explicitly require it, best practice would dictate that MNEs be able to reconcile the financial information reported on the CbC reporting template to (1) its public financial statements, (2) its legal entity books, and (3) its local country tax return. These reconciliations will be complicated by new acquisitions, intercompany transactions, global expansion, operational changes and tax planning structures, but will be crucial to ensure accuracy of the template and provide a defensible audit trail.
These are just a few of the most notable data-related challenges the final CbC reporting template poses; there are others – and there are also ways to address these challenges, which I will discuss in my next post.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.
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William Brennan was formerly a Chief Tax Officer at Vertex, Inc. He has over 33 years of tax experience with a record of building, developing, and leading large corporate tax departments. Bill has worked in many industries throughout his career including healthcare, software, financial services, transportation and manufacturing. His tax practice experience has included planning, intercompany transfer pricing, structuring/restructuring of business operations, offshore intangibles, contract manufacturing, cross-border financing, mergers and acquisitions, legislation, private letter rulings, examinations, administrative appeals, and litigation. As a former Vertex Chief Tax Officer, Bill provided insight and thought leadership regarding in-house corporate tax department operations, global tax law and policies, and emerging tax industry trends. In addition, Bill advised Vertex’s Board of Directors and senior management on the development of the company’s income tax solutions under Vertex Enterprise. Prior to working at Vertex, Bill was the Vice President-Taxes at McKesson Corporation for 12 years. McKesson Corporation is a Fortune 15 company with revenue in excess of $130 billion, and is the largest pharmaceutical distributor and health care information technology company in North America. In addition, Bill has held senior leadership roles for a number of other Fortune 500 companies throughout his career. Bill received a Master of Science in Taxation from Golden Gate University and a Bachelor’s degree in Accounting from Marquette University. He is a licensed CPA and a member of the AICPA, IFA and USCIB.