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HMRC confirms country by country reporting format for multinationals

UK tax authority HM Revenue & Customs (HMRC) has confirmed the format in which multinational companies and partnerships based in the UK will have to provide a breakdown of all the countries in which they make profits and pay taxes around the world.17 Aug 2017

UK resident parent companies of a multinational enterprise with a consolidated group turnover of €750 million or more will have to file a country by country (CbC) report with HMRC every year. The report will show, for each country in which the multinational carries on business, the amount of revenue, profit before income tax and income tax paid and accrued. It will also show their total employment, capital, retained earnings and tangible assets.

Corporate tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-law.com, said: "This has long been awaited and many complaints have already been voiced about this onerous compliance exercise. Far from its stated purpose of providing tax authorities with a clear overarching snapshot of a multinational's global profit and tax position, we can all expect this to be used as evidence to back up further revenue raising efforts from the tax authorities involved, for all they claim it will not be used for such purposes."

Reports will take the form of an extensible markup language (XML) file. XML is designed to store and transfer data across different systems. The XML format is required by the OECD, which has prescribed the required structure for completing it, referred to as a ‘schema’. In addition HMRC has set out in a guidance note its rules for completing the schema. The report must be sent using HMRC's reporting service, which HMRC says will be available soon.

The requirement to file CbC reports applies to accounting periods commencing on or after 1 January 2016 and companies will have 12 months from the end of the relevant accounting period to file a report with HMRC.

UK entities in multinational groups within the scope of CbC reporting are also obliged to tell HMRC annually which entity in the group will file the CbC report and where. The notification must be made by the end of the period being reported on, or if later 1 September 2017. HMRC guidance sets out how this notification should be made.

CbC reporting was proposed by the OECD as part of its base erosion and profit shifting (BEPS). It is designed to provide tax authorities with a clear overall picture of the global position on profit and tax of the multinational groups operating in their jurisdiction.

"This snapshot approach is not as easy for tax managers to apply as it sounds, and will generate misleading PR data if not handled carefully," said Walker. "If the European Commission and UK parliament have their way and make such information public it could  generate bad press stories for companies."

CbC reports will be shared automatically by HMRC with tax authorities in those countries named in the report and with which the UK can exchange in accordance with international agreements governing the exchange of information. HMRC will receive information from other countries in respect of the UK operations of overseas headquartered groups. The OECD website sets out the countries between which information exchanges can take place.

HMRC can only use the data it receives from abroad for high level transfer pricing risk assessment, assessment of other BEPS related risks and economic and statistical analysis. HMRC says in its International Manual "HMRC has agreed not to use CbC reporting data as a substitute for a detailed transfer pricing analysis of individual transactions and prices based on a full functional analysis and a full comparability analysis."

At present CbC reports can only be accessed by tax authorities. The European Commission is proposing that CbC information should be made publicly available. Members of the European Parliament approved the rules in July. They contain a limited and temporary derogation for companies to allow them to avoid disclosing publicly sensitive information.

The Finance Act 2016 gives the government the power to make regulations requiring CbC reports to be made publicly available. The then financial secretary to the Treasury, Jane Ellison, said the provision would give the government the power to implement public reporting "when appropriate", but that any public reporting should be agreed on a multilateral basis.