Country-by-Country Tax Reporting and Reviewing of Global Tax Risk: A Critical Analysis of Enhanced Regulatory Requirements for Multinational Corporations

Recently adopted legislation that requires the filing of Country by Country (CbC) data to tax authorities makes your group’s tax figures available for analysis by multiple jurisdictions where the group operates.

This tax data must therefore be correct and analyzed in detail in order for International business to have a full understanding of whether the reported figures could attract a tax authority’s interest. Furthermore, there are indications that the current OECD guidelines for CbC reporting are only the first step to increased global tax transparency.

It is therefore imperative to decide upon and implement a timely framework for CbC reporting (i.e. tax transparency reporting), in order to achieve an efficient management process and reasonable control of the group’s information filed with the tax authorities.

When creating such a framework, it is important to consider implementing processes to address the following points:

  1. Updated and historical company information including permanent establishments in Hong Kong and Mainland China.
  2. Being able to track changes in business activities for all entities located Hong Kong, Mainland China and oversea over time
  3. A firm process for gathering Hong Kong and Mainland China tax figures both for forecast and actual figures
  4. A process for analyzing International business’s Hong Kong or Mainland China data to identify risks

Since a comparison of data between years is an important part of the tax authority’s analysis, International business should be able to keep track of historical entity data and be able to identify changes in the legal structure as part of any risk analysis. Disposals and acquisitions of a company or a business line (or starting/closing down a business line) could also lead to significant swings in the figures between the years which they must be able to explain. Any tool used for keeping track of the

International Tax (HK) Co. Ltd. Assist in analyzing the CbC data International Business might want to consider, among other things, the following:

  • Identify which figures (in addition to the required CbC figures) could be interesting to collect for analysis purposes
  • Identify the ratios and key performance indicators that are relevant to analyze in International business’s group broken down by business activity, e.g. turnover per employee for all entities that have specified the business activity “internal group finance”
  • International business must be able to analyze both on a tax jurisdiction level (the level first analyzed by tax authorities) and on an entity level, since the follow up question likely will concern the legal entities
  • International business must be able to compare figures between years to allow you to identify significant differences which may attract interest from the tax authorities

Even though the gathering, analysis and filing is the responsibility of a head office function, a process for gathering and signing off relevant data, in many cases, must include a reporting process with local managers contributing at least part of the data. This is of course even more important if the group includes many subsidiaries, has a diversified business, or where the number of current changes in the legal and operational structure is significant.

Country-by-Country Tax Reporting and Reviewing :