handbook-tb

Hugh J. Ault and Brian J. Arnoldadministrations to assess whether the income reported and the taxespaid in their jurisdiction were appropriate in the light of the globalactivities of the MNE. For example, it would allow tax authorities toidentify where base-eroding payments are received or to determinewhether the “low risk” return shown by a local distributor was appropriatein light of the residual profit being reported elsewhere.6.2.1 Country-by-country reportingAction 13 in the OECD Action Plan on BEPS proposes a requirementthat MNEs provide country-by-country (CbC) information in the contextof transfer pricing documentation. However, it is clear that theimportance of CbC reporting goes well beyond transfer pricing issuesbecause CbC reporting provides insight into the relations between thevarious parts of the MNE. It can assist the countries involved in determiningwhether the income and tax allocations of the group seem tomake sense in general terms. CbC information can also be useful as arisk assessment tool to help a tax administration make decisions aboutthe allocation of its auditing and investigative resources. This aspectis particularly important for developing country tax administrations,given their lack of resources.6.2.2 Technical issues in country-by-country (“CbC”) reportingAs the purpose of CbC reporting is to give a broad overall view of theactivities of an MNE, income and tax position, the necessary informationshould be at a fairly high level. Action 13 recommends thedevelopment of a “master file” containing information about the overallgroup organizational structure, lines of business and financial andtax position. In addition, the taxpayer would be required to preparea “country-by-country template” showing revenue, profit before tax,cash taxes and accrued taxes in the current year, stated capital andretained earnings, number of employees and tangible property. Finally,a “local file” is required with more detailed information about localtaxpayers (for example, subsidiaries and branches) and their transactionswith related parties, the financial aspects of those transactionsand a description of the transfer pricing method used.24