Tax administrations do not have the right to dictate to an MNE how to do business. MNEs are free to do business as they deem fit. However Tax administrations have the right to have the documents to evaluate the tax implications of the cross-border transactions between associated enterprises are subject to the applicable treaties and in particular of Article 9 of the OECD Model Tax Convention and OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 13.
Hence Multinational enterprises (MNEs) need to comply with various aspects of transfer pricing requirements including transfer pricing documentation. Transfer pricing involves setting the prices of products and services transferred between the divisions of an MNE, located in various tax jurisdictions. The prices of the transactions between the associated enterprises should be at arm’s length, which means the transactions should be treated the same way they would between unrelated enterprises in the open market.
The OECD recommends a three-tier approach for meeting the transfer pricing documentation requirement: the Master File, the Local File and Country-by-Country Reporting. Transfer pricing consultants in Dubai can provide you with reliable assistance for meeting the essential transfer pricing documentation requirements. In this blog, we will walk you through “Country-by-Country Reporting (CbCR).” Read ahead for more insights:
What is Country-by-Country Reporting?
The CbCR has been introduced as part of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 13. Large MNEs need to submit the CbC report that breaks down key elements of the financial statements by jurisdiction. A CbC report offers the local tax authorities visibility to revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities.
Why are CbCRs needed?
Through a CbC report, the tax authorities gain valuable information that helps them assess transfer pricing risks and determine how they allocate tax audit resources. Transfer pricing authorities can help you to prepare CbC reports. It may also be used by tax administrations in evaluating other BEPS-related risks and where appropriate for economic and statistical analysis.
What is required in a CbC report?
CbCRs require aggregate tax jurisdiction-wide information related to the global allocation of income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. It also requires a listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of residence, as well as the nature of the main business activities carried out by that Constituent Entity. The information that is required to be captured in the CbC Report for all Constituent Entity are:
- Revenues (related, unrelated and total)
- Profit/Loss Before Income Tax
- Income Tax Paid (cash) & accrued
- Number of Employees
- Stated Capital & Accumulated Earnings
- Tangible Assets other than cash & cash equivalents
Restrictions of the Scope of CbCR
As per the OECD Guidelines, the information in the CbCR can’t be a substitute for the detailed transfer pricing analysis of individual transactions and prices based on a full functional analysis and a full comparability analysis. The information in the CbCR on its own does not constitute conclusive evidence that transfer prices are or are not appropriate. It should not be used by tax administrations to propose transfer pricing adjustments based on a global formulary apportionment of income. Transfer pricing experts in Dubai can provide you with further information in this regard.
Who should submit CbCRs in the UAE?
In the UAE, CbCR requirements are applicable to the UAE-headquartered MNE Groups with ‘financial reporting years’ starting on or after January 1st 2019. Accordingly, for the financial reporting year starting on January 1st 2019, the CbC report must be submitted by December 31 2020 at the latest.
Avail of the Best Transfer Pricing Services in Dubai, UAE
The OECD’s Three-Tiered Approach, encompassing CbCR, Master Files, and Local Files, serves as a foundational framework to enhance transparency and consistency in transfer pricing practices. These documentation pillars empower tax authorities to assess the fairness of intercompany transactions, prevent profit shifting, and ensure that multinational enterprises pay their fair share of taxes in each jurisdiction. Transfer pricing advisers in Dubai such as Tax Gian, a brand of Jitendra Tax Consultants (JTC), provide reliable transfer pricing documentation assistance for businesses.
Tax Gian’s team of tax experts in Dubai offers top-notch corporate tax advice for all businesses. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. Avail of our tax advisory services in Dubai to ensure seamless compliance.