On 8 February 2018 the Inclusive Framework issued additional guidance to give on the implementation of country-by-country (CbC) reporting under Action 13 of the OECD/G20 project on base erosion and profit shifting (BEPS). The jurisdictions participating in the Inclusive Framework on BEPS are involved in the development of the monitoring process for the four minimum standards under BEPS and in the review mechanisms for other parts of the BEPS package.
The guidance covers the definition of total consolidated group revenue. It also deals with the issue of whether non-compliance with the confidentiality, appropriate use and consistency conditions constitutes systemic failure.
Definition of total consolidated group revenue
In calculating total group revenue the group should include all the revenue that is, or would be, reflected in the consolidated financial statements. The residence jurisdiction of the ultimate parent entity of the group is permitted to require the inclusion of extraordinary income and gains from investment activities in the total consolidated group revenue if those items are shown in the consolidated financial statements under the applicable accounting rules.
In the case of financial entities, which are not allowed to record gross amounts in their financial statements in relation to certain items, any items considered to be similar to revenue under the applicable accounting rules should be used in relation to financial activities. They could be called net revenues, net banking product or other labels depending on the accounting rules. An example would be the income or gain from an interest rate swap which could be reported on a net basis under applicable accounting rules. In that case the revenue is the net income or gain from the transaction.
If a multinational group is not required to prepare consolidated financial statements in its jurisdiction of residence it may still decide to prepare consolidated financial statements, for example to be used by investors and lenders. These financial statements may in some cases be prepared using generally accepted accounting principles that differ from those that must be used for determining the existence and membership of a group under the Model CbC legislation. In this situation the group is still required to calculate the total consolidated group revenue on the basis of the accounting standards to be used for identifying a group under Article 1.1 of the model legislation.
Non compliance with confidentiality, appropriate use and consistency conditions
The report on Action 13 of the action plan on base erosion and profit shifting (BEPS) sets out confidentiality, consistency and appropriate use as necessary conditions for obtaining and using CbC reports. The consequences of failure to comply with these conditions depend on the terms of the Qualifying Competent Authority Agreement between the relevant jurisdictions.
Under the multilateral Competent Authority Agreement (CAA) and the Model Bilateral CAAs in the report on BEPS Action 13 information exchange is subject to confidentiality rules and there are provisions limiting its use. The use of the information exchanged is limited to assessing high level transfer pricing and BEPS risks and for economic and statistical analysis where appropriate.
If it is determined that there has been significant non-compliance by one of the competent authorities the other competent authority may temporarily suspend the exchange of information by giving notice in writing. Significant non-compliance would include non-compliance with the conditions for confidentiality and appropriate use; or failure to provide timely or adequate information as required by the agreement.
In determining whether to temporarily suspend the information exchange a competent authority should take into account the frequency and severity of non-compliance and possibility of using other remedies. The multilateral CAA and the model bilateral CAAs require the competent authority to consult with the other competent authority before suspending the information exchange.
Systemic failure as defined in the model legislation arises if a jurisdiction suspends the automatic information exchange for reasons other than in accordance with the relevant qualifying CAA or if a jurisdiction persistently fails to exchange CbC reports that it possesses. Therefore temporary suspension of information exchange in accordance with the terms of the relevant Qualifying CAA does not constitute systemic failure.
