Background
On December 15, 2016, Canada introduced new legislation under Section 233.8 of the Income Tax Act (the “Act”) requiring Country-by-Country (“CbC”) reports be filed with the Canada Revenue Agency ("CRA") by certain Canadian Multinational Enterprises ("MNE"). On February 3, 2017 the CRA released RC4649 - Country-by-Country Report, detailing the information that MNEs need to report to comply with Section 233.8 of the Act. The release of RC4649 provides definitive guidance on what companies must report to the CRA and how that information should be reported.
CbC reporting is part of the global initiative, Base Erosion and Profit Shifting ("BEPS"), developed by the Organisation for Economic Cooperation and Development (“OECD”), to enhance transparency for tax administrations by providing adequate and consistent information with respect to transfer pricing documentation among participating jurisdictions. The OECD released the final details for CbC reporting in October 2015 under Action 13. Canada's legislation is substantially similar to the recommendations set forth by the OECD, including filing applicability, CbC Report data requirements, and effective dates and filing deadlines.
Canada's CbC reporting rules require the filing of the RC4649 Report for companies that satisfy one of the following conditions:
- (i) A Canadian parent company of a MNE with combined global revenue in excess of Euro 750 million during the preceding fiscal year;
- (ii) A Canadian subsidiary company if its foreign parent is: not obligated to file the CbC Report in the foreign jurisdiction (but meets the revenue threshold); the foreign jurisdiction has not signed the multi-lateral agreement to share this information; or, the foreign jurisdiction has experienced a "systemic failure" to collect, and to provide, the CbC Report from parent companies in that foreign jurisdiction; or
- (iii) Any Canadian subsidiary company if it has been designated by the foreign parent company to be the Surrogate Parent Entity to file the CbC Report in Canada.
The parent company of an MNE group needs to report the following information for each tax jurisdiction it operates in:
- Related party revenues;
- Unrelated party revenues;
- Total revenues;
- Profit or loss before income tax;
- Income tax paid (on cash basis);
- Income tax accrued in the current year;
- Stated capital;
- Accumulated earnings;
- Number of employees on a full-time equivalent basis (including independent contractors); and,
- Tangible assets other than cash and cash equivalents.
The CbC Report also requires the following information of all constituent entities of the group per tax jurisdiction:
- Name, city and country of the constituent entities resident in the tax jurisdiction;
- Tax identification number of constituent entities and related country code of tax jurisdiction that issued the number; and,
- Main activities of each subsidiary in each tax jurisdiction.
The CbC Report is required for taxation years that begin on or after January 1, 2016. The deadline for filing is 12 months after the last day of the taxation year (December 31, 2017 for a December 31, 2016 year-end). These filing deadlines are consistent with the deadlines set forth by the OECD as part of its BEPS recommendations.
Canada also introduced penalties to be levied on companies that fail to file the CbC Report by the due date, with a higher penalty in situations where the CRA sends a demand that the CbC Report be filed.
The MCAA is designed to enhance tax transparency in the operations of global enterprises by allowing tax authorities access to high-level information regarding the global allocation of income, taxes paid, and indicators of economic activities in each jurisdiction where the MNE group operates.
Countries who are signatories to the MCAA agree to automatically exchange CbC Reports received by the parent entity of the MNE group with other tax jurisdictions where the MNE group operates if the other tax jurisdictions are also participants to the MCAA. As of January 26, 2017, 57 countries, including Canada, have signed the agreement to participate in the CbC MCAA to automatically exchange their CbC Reports with other jurisdictions. In Canada, the first automatic exchanges of CbC Reports to MCAA participants are slated to begin by June 2018.
Information provided in the CbC Report can only be exchanged government-to-government between tax authorities through existing mechanisms under double tax conventions or other agreements – for example, the CbC MCAA. The information can only be used to assess high-level transfer pricing, base erosion and profit shifting related risks, and for economic and statistical analysis. Jurisdictions agree not to use the information as a substitute for a detailed transfer pricing analysis of individual transactions and prices. In addition, Jurisdictions agree not to use the information from the CbC Report relating to income allocation to propose an adjustment of any taxpayer's income as the CbC Report on its own does not constitute conclusive evidence on companies' transfer pricing policies. However, Jurisdictions may use the CbC Report data as a basis for further enquiries into the MNE's transfer pricing arrangements or other tax matters in the course of a tax audit.
The information from the CbC Reports will not be made available to the public.
Next steps
Now that the CbC reporting requirements have taken effect with the first reports due at the end of 2017, we recommend MNEs take the following steps to assess the robustness of their transfer pricing policies, pricing, and associated documentation to prepare for the new compliance environment:
- Conduct a transfer pricing policy review
- Test your accounting systems to determine your ability to compile the required data and potential challenge
- Prepare a draft RC4649
- Perform sensitivity testing using financial analyses to identify any transactions, structural issues, or policies that may be vulnerable to scrutiny
- Conduct a gap analysis based on identified transfer pricing risk
- Address risks and assess opportunities
The transfer pricing team at BDO can assist you at every phase of your CbC reporting strategy.