The UK Finance Bill 2015 that will be published soon after the budget announcements of 18 March 2015 is to contain legislation in respect of country by country reporting for purposes of transfer pricing documentation. The UK is committed to being one of the first countries to introduce this requirement that has been developed by the OECD as part of its work on base erosion and profit shifting (BEPS). Although multinational enterprises have complained that this measure will impose a greater tax compliance burden on them the UK is determined to show its resolve in tackling the perceived problem of artificial tax avoidance and tax evasion by multinationals.

Communications released after the UK’s autumn statement in December 2014 showed that the UK is determined to be a pioneer in introducing a template for multinationals to use in country by country reporting. Although details of the template are not yet available it is likely to closely follow the OECD’s suggestions and to require details for each jurisdiction in which the multinational operates in respect of profits, revenues, tax paid and accrued and staff numbers. These details would enable the tax authorities to gain an overview of the relationship between the economic substance, profits and tax paid in each territory where the multinational is operating.

The template would therefore be used by the tax authorities for high level transfer pricing risk assessment. For example, high revenue and staff numbers in a particular country combined with low tax paid might indicate that the group has used an artificial mechanism to shift profits out of that territory. Low staff numbers but high profits in a territory might indicate that profits may have been shifted artificially into a particular territory, perhaps because the tax rate there is low. Other indicators that could be required by the template include the tangible assets held in each territory but this will be clear when the UK Finance Bill 2015 is published.

There is however concern among multinational enterprises that in addition to the increased compliance burden they would be disadvantaged by the relatively superficial nature of the information required to be submitted, which could give rise to unnecessary enquiries about legitimate business operations. For example, the tax paid in a particular country could be reduced by tax losses brought forward and this would not be evident from the template, perhaps leading to unnecessary enquiries that lead to more costs and time spent on tax compliance.

Although the UK Treasury has suggested that the information required would be generally already in existence and would not lead to extra compliance costs, not all multinationals are set up in the same way and some might have more difficulty than others in compiling the information required by the template.

With regard to the timing of the introduction of country by country reporting, the OECD has stated that this would not be required until accounting periods ending on or after 1 January 2016. The country by country report could only be filed after all financial information is available, and an appropriate date for filing this report would be one year after the end of the fiscal year of the ultimate parent company of the group. The UK requirements on submission of the country by country reports will be clear when the draft legislation is published in the Finance Bill.