More clarity on reporting requirements for multinationals

Who is required to file, how it should be filed and what is necessary to disclose.
Several South African-based multinational companies have less than six months to prepare their country-by-country reports for exchange with other tax jurisdictions.

Many have realised the magnitude of the information expected and have been setting up sophisticated systems to gather and compile the information.

The country-by-country reports, master file and local file submission requirements form part of the work done by the Organisation for Economic Cooperation and Development (OECD) to fight base erosion and profit shifting where profits are moved from high tax jurisdictions to low tax jurisdictions.

The country-by-country reports as well as the master and local file disclosure requirements form part of the comprehensive transfer pricing documentation set out by the OECD to combat tax leakage.

The South African Revenue Service (Sars) published a draft public notice at the beginning of last month (June 2), which will require certain South African companies to submit returns to meet the new reporting requirements.

A company – considered the parent entity of a group with more than R10 billion turnover – will have to submit returns relating to the country-by-country report, master file and local file.

Entities that potentially have transactions within the same group that exceed R100 million will have to submit returns relating to the master file and local file only.

One of the guiding features of the new transparent returns is the “business requirement specification” (BRS) for country-by-country and financial data reporting.

The final BRS has been published by Sars and now sets out the requirements in terms of how the country-by-country reports must be filed, and what is necessary to disclose in the master and local files.

Several tax experts have made submissions to Sars and final notice is expected within the next couple of months. The South African Institute of Tax Professionals (Sait) has recommended that the reporting requirements relating to the master and local files should not be more onerous than in other jurisdictions.

Sait CEO Keith Engel, says South Africa is rolling out the full array of reporting expected by the OECD.

“This reporting will place South Africa fully within the exchange of information grid between countries and is part of Sars’s heightened expectation of documentary proof from taxpayers,” he says.

Companies will have no choice but to commit internal and external resources to the effort to be fully compliant.

Scott Salusbury, tax associate at ENSafrica, says the major outstanding piece of the puzzle from a South African perspective has been the publication of the business requirement specifications for the master and local files as well as the legislative requirement to actually submit these documents, rather than just keeping them on record.

Now that it has been published the specifications are clear. Salusbury says since a lot of work has already been done over the last two years most multinationals are generally prepared.

Billy Joubert, tax director at Deloitte, says companies with an annual consolidated group turnover of more than R10 billion in the prior year should prepare and submit these reports.

In terms of the final BRS, multinationals will have to complete a specific form designed by Sars to file their country-by-country reports. The form requests “crisp information” on the functions, assets, personnel, revenue generated, profits earned, taxes paid, capital structure and retained earnings with respect to each entity of the multinational group in all the different countries.

The country-by-country report would assist in interpreting the transfer pricing policies of the multinational group.

The master file must cover the organisational structure, a description of the various businesses, intangibles used in the businesses, intercompany financial transactions and financial and tax positions.

The local file focuses on information relevant to the transfer pricing taking place between a local country affiliate and associated enterprises in different countries. Information required include relevant financial information regarding specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method.

According to Joubert, the master file will give an overview of the business of the group, the local file will relate to the operations of the local subsidiaries, and the country-by-country report will set out information relating to the global allocation of income, the taxes paid, and the location of economic activity among tax jurisdictions where the multinational operates.

“The cumulative picture effect of these base erosion measures is to force multinationals to display a much higher degree of transparency regarding their tax affairs,” says Joubert.

The first country-by-country reports for companies with a December year end will be due by December 31 this year.