Action 13 of the BEPS Plan: Country-by-Country Reporting and Transfer Pricing Documentation

Toward an Era of Tax Transparency

One of the most visible actions of the BEPS plan is Action 13 (country-by-country reporting and transfer pricing documentation). This action aims to enhance transparency for tax purposes by clarifying how multinational groups are organized and conduct intercompany transactions. Action 13 has come into effect, modifying Chapter V of the Transfer Pricing Guidelines for 2017, and in Mexico, through the incorporation of Article 76-A of the Income Tax Law in 2016.

The Three-Tiered Documentation Standard Proposed by Action 13

Action 13 of the BEPS plan, which amends Chapter V (Documentation) of the OECD Transfer Pricing Guidelines for 2017, establishes a three-tiered standard for compliance with documentary obligations. As a result, multinational groups required to comply must compile their intercompany operations through a Master File, a Country-by-Country Report, and a Local File, which must be prepared annually. The information required in each of these documents is as follows:

Master File

The Master File provides a general overview of the multinational group’s economic activity and its transfer pricing policies. The information required in the Master File includes:

1. The organizational structure of the multinational group
2. A description of the group’s business lines
3. The group’s intangibles
4. Financial activities
5. Financial and tax positions, specifically consolidated financial statements of the multinational group, as well as information related to advance pricing agreements (APAs) and/or “tax rulings” granted by any tax authority.

Action 13 of the BEPS plan allows each country to determine which taxpayers are required to submit the Master File. It is important to note that, due to general requirements on certain topics, the information presented by multinational groups in the Master File may vary in structure, detail, and analysis methods. Therefore, both the multinational group and its subsidiaries must be involved in preparing the Master File to ensure the final documentation accurately reflects its operations. Additionally, the Master File must include information on the adequacy of the group’s transfer pricing policies concerning other BEPS actions, particularly Actions 8-10.

Country-by-Country Report (CbC Report)

The Country-by-Country Report (CbC Report) provides information on each subsidiary of the group through three forms or tables:

• Table 1 contains an overview of income distribution, taxes, and activities by tax jurisdiction. It specifically requires:

  1. Tax jurisdiction where the group operates
  2. Revenue from related and unrelated parties, as well as total revenue
  3. Profit or loss before income tax
  4. Income tax paid on a cash basis
  5. Accrued income tax for the period
  6. Stated capital
  7. Retained earnings
  8. Number of employees
  9. Tangible assets other than cash and cash equivalents

• Table 2 requires a list of entities residing in each tax jurisdiction and their business activities, specifically:

  1. Tax jurisdiction of residence of the reported entity
  2. Entities incorporated in the tax jurisdiction
  3. Tax jurisdiction of organization or incorporation if different from the residence jurisdiction
  4. Main business activities, which may include R&D, IP management, procurement, manufacturing, sales, marketing, distribution, administrative or support services, financial services, insurance, holding shares or other equity instruments, and whether the company is inactive or engaged in other business activities.

• Table 3 requires multinational groups to provide any other information they consider relevant regarding their transfer pricing policies.

The Country-by-Country Report must be submitted by all multinational companies with annual consolidated revenues exceeding €750 million (approximately $850 million or MXN 12 billion).

Local File

According to Action 13, the Local File must provide information on the group’s subsidiaries at the local level, specifically:

1. Relevant information about the subsidiary’s organization at the local level
2. Information on intercompany transactions, including confirmation of the arm’s length condition for each transaction with related parties and the process used to reach those conclusions
3. The taxpayer’s financial information at the domestic level, including general and transactional financial statements, as well as financial information of comparable transactions or companies used in the analysis

As with the Master File, Action 13 allows each country to determine who must submit the Local File and under what conditions. In Mexico, compliance is ensured by requiring taxpayers who meet the criteria in Article 32-H of the Federal Tax Code to submit transfer pricing documentation required under Article 76, Section IX of the Income Tax Law or, alternatively, to provide specific information for the local declaration through the SAT’s online system.

Automatic Exchange of CbC Report Information

To further its objective of increasing transparency, the OECD has proposed that CbC report information be exchanged among tax authorities worldwide. The Action 13 implementation package suggests three mechanisms for facilitating the exchange of country-by-country reports:

1. Multilateral Competent Authority Agreement on the Exchange of CbC Reports (MCAA CbC Reporting), already signed by Mexico on January 27, 2016, along with 68 other jurisdictions
2. Competent Authority Agreement on the Exchange of CbC Reports under Double Tax Treaties (DTC CAA)
3. Competent Authority Agreement on the Exchange of CbC Reports under Tax Information Exchange Agreements (TIEA CAA)

Each of these mechanisms clearly defines the scope, deadlines, and safeguards (especially regarding the protection of information reported by multinational groups) for exchanging CbC report data.

Status of Action 13 and Country-by-Country Reporting Implementation

The OECD monitors the implementation of Action 13, including the requirement to submit CbC reports globally. It has also published guidelines to facilitate its implementation, including the proper use of CbC report information, emphasizing that it should only be used for:

1. High-level assessment of potential transfer pricing risks
2. Evaluation of other risks related to base erosion and profit shifting (BEPS)
3. Economic and statistical analysis of taxpayer behavior, where applicable

As part of the BEPS Inclusive Framework, as of December 31, 2017, more than 1,400 information exchange agreements had been activated.

National Requirement for Master File, CbC Report, and Local File Information (Article 76-A of the Income Tax Law)

In line with the BEPS Plan, on January 1, 2016, the Income Tax Law (LISR) introduced the obligation for legal entities conducting transactions with related parties to annually submit informative declarations based on the Master File, CbC Report, and Local File. These are referred to as:

• Master Declaration
• Local Declaration
• Country-by-Country Declaration

According to Article 76-A of the LISR, taxpayers required to file the Master and Local Declarations are those specified in Article 32-H, Sections I-IV of the Federal Tax Code (CFF). The Country-by-Country Declaration is only required for multinational parent entities residing in Mexico that meet certain conditions, including an annual consolidated revenue threshold of MXN 12 billion.

These reports must be submitted by December 31 of each year, with potential sanctions for non-compliance, including fines ranging from MXN 140,540 to MXN 200,090, restrictions on government contracts, and exclusion from the importer registry.

Autor:  Jesús Aldrin Rojas M. Socio, QCG Transfer Pricing Practice

[2] http://www.oecd.org/tax/beps/guidance-on-country-by-country-reporting-beps-action-13.htm

[3] http://www.oecd.org/ctp/beps/beps-accion-13-guia-sobre-el-uso-apropiado-de-la-informacion-contenida-en-los-informes-pais-por-pais.pdf

[4] http://www.oecd.org/tax/folleto-marco-inclusivo-de-beps.pdf

[5] Cifras actualizables