County-by-Country Reporting (CbCR) and its Application in the UAE

Transfer price refers to the prices of goods and services charged on transactions between the related parties and with the connected persons. The Organization for Economic Co-operation and Development (OECD) Base Erosion Profit Shifting (BEPS) Action 13 requires that businesses should maintain proper documentation in a three-tiered structured way where the arm’s length value of their related party transactions exceeds a certain threshold in the relevant tax period and the same has been almost reproduced in the para 7.12 of the public consultation document of the United Arab Emirates (UAE) corporate tax.

The OECD guidelines (the guidelines) require that the transfer pricing documentation is crucial to achieving three core objectives. One of them is to ensure that businesses give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns. Secondly, documentation is required to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment, and thirdly, documentation is compulsory to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdictions.

To achieve the above-mentioned objectives, the guidelines require that the countries should adopt a three-tiered standardized approach to transfer pricing documentation, and Country-by-Country Reporting (CbCR) is one of them.

As discussed in our previous article, the master file is the “blueprint” of the Multinational Enterprise (MNE) group, while the local file provides information about the local entity and controlled transactions between the related parties. The local file gives assurance that the taxpayer has taken appropriate measures to ensure an arm’s length price has been charged for all material transactions between related parties/associated parties. The CbCR provides allocation of income, expenses, and business activities on a tax jurisdiction-by-tax jurisdiction basis. Annexure III of Chapter V of the guidelines contains a model template for the CbCR, which consists of three tables.

Table 1 of the CbCR template provides information about the tax jurisdiction, revenues from related and unrelated parties, profit/(loss) before income tax, income tax paid and accrued, share capital, accumulated earnings, number of employees and tangible assets other than cash and cash equivalents.

Table 2 of the template requires the reporting of the list of all constituent entities of the MNE group included in each aggregation per tax jurisdiction. This table provides information about all entities in one jurisdiction and entity-wise further information like research and development, holding or managing intellectual property, sales, purchases, manufacturing, support services, insurance, provision, internal group finance, holding share/equity instruments etc.

Table 3 requires additional information to be provided that would facilitate the understanding of the information provided in table 1 and table 2.

The CbCR template requires that permanent establishment data should be reported by reference to the tax jurisdiction in which it is situated. The guidelines further require that the template should cover the fiscal year of the reporting MNE group and reflect the information on a consistent basis. The Reporting MNE should consistently use the same sources of data from year to year in completing the template and provide a brief description of the sources of data used in preparing the template in the Additional Information section of the template. If the source of data has been changed, it should be disclosed in the additional information section accordingly.?

CbCR in the UAE

On 16th May 2018, OCED announced that the UAE had become a member of the BEPS inclusive framework. Being a BEPS member, the UAE is required to comply with four minimum BEPS standards, and CbCR is one of them. ?

In line to comply with the minimum requirement of CbCR, on 30 April 2019, the Cabinet Resolution No. 32 of 2019 on CbCR was issued in UAE, which later was replaced by the UAE’s Cabinet Resolution no. 44 of 2020 (the “Resolution”) and it was effective for the fiscal year starting on January 01, 2019.

According to the Resolution, each ultimate parent entity that is tax resident in the UAE and is part of an MNE group with consolidated revenues equal to or exceeding AED 3.15 billion (approx. USD 858 million) in the preceding financial year; shall notify the competent authority that it is the reporting entity, no later than the last day of the group’s reporting fiscal year.

Article 4 of the resolution states that the report shall be submitted by the twelve (12) months grace period after the last day of the reporting fiscal year of the MNE group.

Based on these requirements, we can conclude that the ultimate parent resident entities, which were part of the MNE group, and met the revenue threshold criteria, their first notification was due by December 31, 2019, and their initial report was due by December 31, 2020. For compliance purposes, such MNE groups are liable to submit the notification before the end of the fiscal year and report within 12 months from the end of the fiscal year.

?In case of non-compliance, four different types of administrative penalties are applicable, ranging from AED 50,000 to AED 1,000,000

?The MNE groups that have an ultimate parent entity in the UAE and their annual consolidated revenue is more than AED 3.15billion should submit the notification and report on time to avoid hefty penalties.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the public consultation document on corporate tax and OECD’s Guidelines. For any queries/clarifications, please write to him at?[email protected] .