When the Finance Bill 2015 receives Royal Assent in the next few weeks it will contain enabling legislation to usher in prescriptive documentation requirements for approximately 1,400 of the largest multi-national enterprises (“MNEs”) with a UK parent.
The enabling legislation will give HM Treasury the power to make regulations via statutory instrument to implement the final recommendations for country-by-country reporting that are being considered by the Organisation for Economic Co-operation and Development (“OECD”) as part of the wider project on Base Erosion and Profit Shifting (“BEPS”). The BEPS project is concerned with targeting harmful tax practices that result in the erosion of domestic tax bases. The UK is taking a leading role in adopting BEPS related measures; the country-by-country enabling legislation is being passed in the same Bill as the new Diverted Profits Tax, another BEPS-related piece of legislation.
When introduced, the UK’s country-by-country reporting regulations will likely adopt the OECD recommendations in full, although affected companies will need to note that the enabling legislation is widely drafted to allow HM Treasury discretion to require additional reporting measures.
How will it work?
MNEs with a UK parent will be required to complete and submit to HM Revenue & Customs (“HMRC”) an annual template style report showing the following items for each tax jurisdiction in which they do business:
- The amount of revenue;
- The profit before income tax;
- The income tax paid (and/or accrued);
- The total number of employees;
- The total capital;
- The total retained earnings; and
- The total tangible assets.
There will also be a requirement to identify each entity within the group doing business in a particular tax jurisdiction as well as provide an indication of business activities within a selection of broad areas which each entity is engaged in.
It is very important to note that this information can and will likely be shared with the other relevant jurisdictions. This will be a big worry to many affected MNEs regardless of the assurances from the OECD that country-by-country reporting is simply intended to be a risk assessment tool to help tax authorities identify when BEPS is taking place.
When will it come into force?
The enabling legislation becomes law once the Finance Bill 2015 receives Royal Assent; however, the specific regulations will only be prepared once the OECD has finalised the BEPS project later this year. It is therefore unlikely that affected MNEs will be subject to these requirements until 2016 at the earliest. If the reporting requirements are in line with the self-assessment cycle this would suggest that an affected MNE with a December financial year end would likely only be required to file in December 2018, which is in line with current OECD thinking. This is not to say that the UK may not unilaterally implement a tighter timeline.
HMRC is predicting that apart from the initial set up costs the additional on-going compliance burden to MNEs will be minimal. This however discounts the inevitable costs that will accompany the compliance effort. For example, the UK does not currently have prescriptive transfer pricing documentation with the result that most large MNEs will run their transfer pricing documentation on a two- or three-year cycle. However many affected MNEs may find it beneficial to submit accompanying transfer pricing reports alongside the country-by-country template report to better explain the complexities of their business model. Absent such an approach, MNEs may find that some tax authorities fall into the temptation of conveniently assessing BEPS risks without applying due diligence. This in turn may drive a need to produce more, and not less, transfer pricing documentation to better explain and defend business models and transfer prices. There will also be the fear that affected MNEs may find that, in reality, they are also having to produce additional underlying records such as detailed timesheets to justify transfer prices for service charges, for example.
It would appear that this enabling legislation could potentially be a game-changer for affected MNEs concerned that previously private information between the MNE and HMRC may now be shared with other tax authorities. There will also be concern that complex business practices may be inappropriately assessed as contributing to BEPS, simply because a summary reporting template results in tax authorities making unjustified summary conclusions.
The above notwithstanding, the biggest concern with this development is whether this will this lead to an increase in domestic and cross-border tax disputes and how these disputes will be resolved as between tax authorities. Will an increase in such disputes ultimately lead to an unintended fracture of the arm’s length principle as we know it?