CbC Reporting: Actual Uses, Possible Misuses and Likely AbusesPar Robert Robillard - 15 juillet 2014
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There is no doubt that the “three tier approach (CbC template, Masterfile and Local File)” suggested in the OECD white paper is now gaining substantial traction all across the globe. A quick look at the latest OECD webcast (on May 26) is more than enough to convince anyone that « changes » are indeed coming in the transfer pricing landscape.
Canada will not be the exception. We expect major changes to section 247 ITA in 2015.
However, the three tier approach is not meant to be the cornerstone of an upcoming global formulary apportionment regime that would replace the arm’s lenght principle. At least, not for now. This new approach to transfer pricing documentation should instead be seen as a tool that may be useful to tax administrations in order to better risk-assess the controlled transactions occuring in their respective countries, with all its potential uses, misuses and abuses…
In a fascinating post at Taxresearch.org.uk, Mr. Richard Murphy, we respectfully submit, misconstrued the probable and intended use of CbC reporting in order to demonstrate that a certain multinational was a « massive user and maybe abuser » of tax havens. The harsh tone of that post, although from a respected tax accountant, provided us with a glance into the soon to be reality that could likely overwhelm numerous transnational firms across the globe.
Obviously, judgements of values are highly debatable and contentious as it pertains to tax haven use. Nowadays it would seem that more and more commentators are willing to mix their own morality with tax laws.
More to point: should we not fear the fact that tax administrations all over the world may be tempted by the same path? A quick look at the comments and heated exchanges that followed that post and statement on one company « state of tax affairs » will suffice to acknowledge that perspective.
Getting back to the nuts and bolts of the CbC reporting, this is simply not how the three tier approach, as a whole and in its components, should be considered. CbC reporting is not a gauge for tax morality, if such a concept should make sense in the first place. But it may well be, unfortunately, for tax administrations in search of enhanced revenue sources. CbC reporting will indeed increase tax litigations between countries as each tax administration now get access to more data, hence more opportunities to « fudge » with said data.
That we do not doubt. Multinational firms will need sooner than later to take a long hard look at their operations in order to minimize these inconveniences.
In Canada, various taxpayers have already tasted that medicine through the years through the legal system with unsuccessful challenges of section 231.6 ITA. More on that in posts to come on this blog. After all, CbC reporting should theoretically diminish the relevancy of that specific provision of ITA since data would now be available to the Canada Revenue Agency (CRA) on the non-Canadian party to any controlled transaction. But, we are sorry to say, tax litigations and transfer pricing litigations are nonetheless here to stay.
Indeed, just like CbC reporting can be used and then misused to infer questionnable results, it can also (and will soon likely) be grossly abused to « apportion » or, should we say, arbitrarily divide profits between entities. Factors such as sales and headcounts by country are, at best, proxies for the allocation of profits in a controlled transaction. Their relevance is doubtful in terms of their respective economic value to any controlled transaction.
They may sometime be useful in a profit split method provided that their respective economic value to the controlled transaction can be assessed and quantified properly. But they act solely as that: proxies.
In other words, the era where economic value was determined by the amount of « sweat » produced is long gone… Welcome to the 21st century should we say… Commercial and marketing intangibles anyone? There was an OECD consultation for that…
On the other hand, sales as a proxy remain highly controversial since it gives developing or smaller countries an unfair disadvantage in any profit allocation. That later debate is not new: it is simply a subtle variation of the old debate about taxation based on the source or the residency, a debate which dates from the 1920 at the League of Nations.
All this to reiterate that in spite of their own limitations, one should remember that the five comparability factors suggested by the OECD transfer pricing guidelines remains as useful as ever to understand the creation of value in any controlled transaction or any multi-country corporate operation for that matter. CbC reporting will not change that fundamental transfer pricing premise any time soon.
For pdf format: click here
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
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RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.