In December, the annual country-by-country (CbC) reporting process kicks in for many multinational companies (MNCs). We share five areas for companies to consider in order to improve the CbC process.
1) Clear roles and responsibilities
First, companies need to ensure clear roles and responsibilities when it comes to CbC reporting:
CbC filings are increasingly managed in a centralized or center-led manner, with the Group tax function compiling CbC data, testing data reliability, preparing CbC templates, converting to XML and filing with the authorities; or the Group tax function oversees the process, with other functions or an outside service provider undertaking some or all of the individual steps.
Ensuring transparent and clear roles and responsibilities of the parties involved saves a lot of time and effort. While this is straightforward in a lot of cases, there are situations where roles and responsibilities in relation to tax and transfer pricing (TP) compliance are unclear, or where the responsibility for TP compliance is decentralized and handled by local business units. Further, every team experiences changing roles, attrition, etc. which reinforces the need for clear and transparent roles and responsibilities across all tax tasks.
Consequently, establishing a set of standard operating procedures (SOPs) for CbC will in many cases make sense and ensure a smooth CbC reporting process. Defining clear roles and responsibilities as well as standard workflows or SOPs is also be a good idea for organizations whose TP compliance responsibility lies with a finance/tax shared service or center of excellence, or where Group tax is relying on other functions to deliver and/or organize CbC data.
2) Country-by-country workflows
In addition to establishing explicit roles and responsibilities for the preparation of CbC reports, a workflow for compiling CbC data, organizing the report and reviewing the outcomes is something all MNCs should think about.
Workflows for CbC reporting (as well as other areas of tax reporting) are beneficial because they:
- Ensure consistency and robustness of data: Companies are often spending considerable time evaluating various sources of data in order to ensure reliability and consistency. Once the source (or more often sources) of CbC data have been identified and validated, this needs to be included in the workflow or SOP. In addition to ensuring consistency with respect to data capture, this also provides a basis for handing over data capture (e.g. from Group tax to finance or a shared service environment).
- Document the tax risk assessment/control framework, internal audit and related purposes: A set of SOPs (and the associated workflow) for the CbC process document part of the company’s TP compliance procedures, which are increasingly considered as part of regular tax audits as well as in the countries with tax governance and enhanced relationship programs.
- Reduce resources spent on CbC work. While in principle the process of compiling reliable CbC data and preparing and filing the CbC report is straightforward, we observe that it often involves a significant number of manual steps. Considering the process as part of establishing a workflow, and eliminating non-value-added steps, can significantly reduce the time spent on preparing CbC reports.
3) Data extraction and validation
As part of thinking about CbC-specific workflows, we often see two areas come up: Data extraction and validation are often areas where companies can significantly enhance their processes and start to use automated tools:
- Data sources and automation of data extraction: In order not to manually extract CbC data every year, organizations are increasingly designing CbC data extraction tools, to automate the process and limit the risk of getting the wrong data into the CbC report. In most organizations, reliable CbC data is based both on master data from ERP and/or finance systems as well as tax-specific data from other sources. While the data extraction tool can take many forms, we currently mostly observe first generation Excel-based tools, although some organizations are also designing CbC reports within existing finance modules. As companies increasingly adopt robotic process automation (RPA), we expect to see more organizations coding simple RPA applications for either the data extraction and validation or the end-to-end CbC process (see below).
- Data validation: Irrespective of how CbC data is sourced, it is critical to validate the reliability of the data. Validation has several aspects:
- Are the CbC data points reliable and is there a clear trail to the relevant master data (in cases where the CbC data is not based directly on ERP data)?
- Are CbC data points consistent form year to year, i.e. ensuring that relevant booking or accounting conventions have not changed (and making changes to the data extraction protocol if that is the case)
- How does CbC data tie to other sources of TP related data including TP reports, TP policies, local tax return filing, audited financials, etc.
In a scenario where responsibility is clear, the process of preparing and executing the different steps should also come with a final sign-off by both Group Tax and the local finance teams once notifications have been filed.
4) CbC analytics
While CbC reporting is a major step towards more transparency, there is still a lot of uncertainty about how tax authorities will respond to CbC reports. In principle, we expect CbC reports to inform the taxpayer risk assessment process and outcomes, which most tax authorities undertake (explicitly or otherwise). However, we also expect situations where CbC reports and the data contained therein will be the root cause of individual audits. Finally, it is reasonable to assume that some tax authorities will seek to mine CbC data for insights related to tax risk assessment in a broader sense.
Accordingly, companies can be at a disadvantage if they have not considered how CbC data may be used to asses taxpayer risk from the perspective of tax authorities, or in the context of individual audits or audit themes.
While CbC data certainly offers some interesting insights, it also contains a lot of noise. Further, in our experience there are significant differences from one company to another (although we also see some tendencies in relation to industry correlation). Therefore, aiming for the right level of analytics capabilities when it comes to CbC data is an individual question, although there are some common themes.
During the first years of CbC, flexibility should be a major concern for companies when it comes to building CbC-related (and other analytics applications) in the tax domain. As the practical use of CbC data by tax authorities will evolve over the coming years, getting locked into an inflexible analytics solution should be a concern.
Irrespective of how the analytics application is designed, we see leading organizations building databases of CbC data and reporting in anticipation of tax authority scrutiny in the years to come. The key to organizing the CbC data is again flexibility, to ensure that the CbC reporting master data can be accessed and used for data mining purposes, regardless of the choice of analytics application.
5) End-to-end CbC automation and tax data analytics
MNCs are increasingly exploring ways of organizing for a future in which tax data management and analytics is integrated with other tax tasks and responsibilities.
While CbC is only a small piece of this puzzle, it nevertheless represents an important step in the direction of more tax data transparency. In this area, flexibility is also a key concern, as MNCs move towards better line of sight with respect to all tax data as well as the appropriate analytics capabilities to support governance, business partnering, risk management and controversy initiatives and goals.
This is another area where the use of RPA is beginning to be tested, but where we call for some caution and an agnostic approach when it comes to choosing solutions. It is also an area where forward-looking organizations establish a view of the future in terms of data, analytics, organizational design and automation, before they make choices about technologies, solutions and vendors.
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