RC4651 “Guidance on Country-By-Country Reporting in Canada” 23 November 2018

Interpretive relevance of BEPS materials

Interpretation of Canadian CbCR legislation

[T]he Canadian CbCR legislation generally conforms to the OECD model legislation. Therefore, an understanding of the BEPS Action 13 Final Report is useful to interpreting the Canadian CbCR legislation and it should be read in conjunction with this guidance.

Filing apportionment where takeover

Change of UPE during a fiscal year

[W]here the UPE of an MNE group, that is not an excluded MNE group, changes in a fiscal year, the CRA expects the following to apply:

• The UPE of the acquired MNE group should file a CbC report including data for that MNE group up to the date of takeover.
• The parent entity of the acquirer MNE group should file a CbC report as normal for its fiscal year. That CbC report will include data for the CEs of the acquired MNE group from the date of acquisition until the end of the fiscal year.

GAAP determines whether investment fund investees are part of MNE group

Rules for investment funds

If, applying accounting rules, an investment entity does not consolidate investee companies, then those investee companies should not form part of an MNE group and should not be considered CEs. However, if the accounting rules require that the investment entity consolidates with an investee company, the investee company should be part of an MNE group (where one exists) and should therefore be considered a CE.

No exemptions other than for under €750M

Exemptions from filing in Canada

The only exemption from filing is for an MNE group with consolidated group revenue below the €750 million threshold. There are no exemptions for any specific industries, investment funds, entities with tax exempt status, non-corporate entities or entities that are not publicly listed.

Choice of accounting data/administrative tolerance

Completing the CbC Report

…The reporting entity may choose to use data from its consolidation reporting packages, from separate entity statutory financial statements, regulatory financial statements, or internal management accounts. ...

As a general matter, the CRA intends to provide a reasonable degree of flexibility for MNE groups filing a CbC report in Canada in situations where guidance or interpretation on certain issues may not have been available at the time of filing, or where jurisdictions vary in their approaches to certain issues.

No reconciliation to consolidated financials

Reconciliation of the Country-by-Country Report to consolidated accounts

[I]t is not necessary to reconcile the revenue, profit and tax reported in the RC4649 to the consolidated financial statements.

Amounts in Cdn$/functional currency

Table 1 – Overview of allocation of income, taxes and business activities by jurisdictions

For electronic filing, all amounts must be stated in Canadian dollars [except that] ...[w]here the reporting entity has made an election under paragraph 261(3)(b) ... to use a functional currency, that currency may be used.

...Where the reporting entity’s currency for financial reporting purposes is not Canadian dollars, and they have not elected under paragraph 261(3)(b) of the Act to use a functional currency for the purposes of filing the CbC report, the reporting currency for financial reporting purposes may still be used when filing the CbC report providing that the following conditions are met:

• The reporting entity’s reporting currency for financial reporting purposes is a “qualifying currency” as defined in subsection 261(1) of the Income Tax Act.
• The reporting entity discloses in Table 3 – Additional Information that it is reporting in one of the qualifying currencies notwithstanding that no election has been made by the reporting entity pursuant to paragraph 261(3)(b) of the Act. If the amounts in Table 1 required conversion into one of the functional currencies, the conversion rate used should be set out in Table 3.

Reporting of entities that are resident nowhere

Stateless entities

A stateless entity is a business entity that is organized under the laws of a particular country but that is not tax resident in any jurisdiction. A stateless entity may be the UPE of an MNE group; however, for all other purposes of the CbC report (Tables 1, 2 and 3), all financial and other data should be aggregated under the ‘X5’ (stateless) tax jurisdiction of residence.

Meaning of revenues

Revenues

…Revenues should be interpreted in the broadest possible sense to include income from sales of inventory and properties, services, royalties, interest, premiums and any other amounts. Payments received from other CEs that are treated as dividends in the payor’s tax jurisdiction should be excluded. …

“Revenues-Related Party” should be read as the aggregate amount of revenues generated from transactions between constituent entities listed in Table 2, for each relevant tax jurisdiction. The financial results of all intercompany transactions within the same jurisdiction must be aggregated and not consolidated.

No secondary reporting in Canada if NR UPE exceeded the threshold in local currency

The impact of currency fluctuations on the €750 million filing threshold

In Canada,,, the threshold for filing…[is] €750 million. Other jurisdictions may set this threshold using a near equivalent in domestic currency. …

[W]here the UPE of an MNE group is resident in a jurisdiction other than Canada, provided that jurisdiction has implemented a reporting threshold that is a near equivalent of €750 million in its domestic currency as it was at January 2015, an MNE group that complies with this local threshold will not be subject to the secondary reporting mechanism in Canada.

Use of average exchange rate

Conversion of consolidated group revenues to Euros

Given that revenues are typically earned throughout a fiscal year, using an average exchange rate for the period (as published by the Bank of Canada) is acceptable for the purpose of the conversion that may be required in the definition of excluded MNE group in subsection 233.8(1) of the Act.

CbCR exchanges only with jurisdictions respecting confidentiality

Confidentiality of CbCR reporting information

…Canada will automatically exchange CbCR information with only jurisdictions that are committed to using the information appropriately and preserving its confidentiality.

CbCR data not used directly in assessing

Appropriate use of CbCR reporting information

The BEPS Action 13 Final Report sets out three permitted uses for information contained in CbC reports, namely:

• to assess high level transfer pricing risk;
• to assess other BEPS-related risks; and
• for economic and statistical analysis.

…CRA will not use CbCR information, by itself, to make reassessments to the income of a taxpayer for the purposes of the Act.

Presumption of gross negligence after 2017 filing year

Paragraphs 162(10)(a) and (b) of the Act

The penalty under subsection 162(10) of the Act applies in two mutually exclusive situations described by paragraphs 162(10)(a) and (b).

The first situation arises where a person or partnership, knowingly or under circumstances amount to gross negligence, fails to file an information return as and when required by any of sections 233.1 to 233.4 or section 233.8. Where no demand has been served under section 233 to file the return, the penalty is $500 per month for up to 24 months. It begins to run from the month in which the return was required to be filed.

The second situation arises where a person or partnership required to file a return under any of sections 233.1 to 233.4 or section 233.8 has, knowingly or under circumstances amounting to gross negligence, failed to comply with a demand served under section 233 to file the return. The penalty in this case is $1,000 per month for up to 24 months. It begins to run from the month in which the demand was served.

Given the widespread understanding of CbC reporting requirements by multinationals, any failure to file a CbC report as required under subsection 233.8(3) of the Act will, for the 2018 and subsequent filing years, be presumed to be gross negligence unless special circumstances exist that explain the failure to file.

Procedure for requesting waiver of penalties

Requesting penalty relief

...To make a request, if paper filing the CbC report, attach a note to the cover page requesting relief for late filing penalties under subsection 220(3.1). If electronic filing, put a note in Table 3 clearly outlining the request, the applicable subsection and the reasons for the request.

Private Holdco can be a UPE

Non-publicly traded UPEs

There may be situations where one or more individuals ultimately own non-publicly traded entities and each of these entities has its own subsidiaries across more than one jurisdiction. In order to identify the existence and membership of an MNE group, the entity that is ultimately either required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of such business entities were traded on a public securities exchange, will be the UPE. This applies even if the top entity is a holding company.

Canadian constituent entity (CE) cannot be surrogate parent entity (SPE) of Canadian ultimate parent entity (UPE)

Reporting Entity

The reporting entity is the CE that, by virtue of domestic law in its jurisdiction of tax residence, files the CbC Report in its capacity to do so on behalf of the MNE Group.
Note: on the RC4649, the reporting entity is either:
• the UPE
• an SPE – a Canadian CE that has been designated as a surrogate parent of a foreign UPE. Note: A Canadian CE cannot be designated as an SPE of a Canadian UPE
• a CE, in cases of a local filing requirement

Filing obligations of Canadian CE that is SPE

Obligations of a surrogate parent entity in Canada

A CE resident in Canada that is appointed as an SPE of a foreign UPE is subject to filing requirements as if that entity were a UPE in Canada. In particular, subsection 233.8(1) of the Act defines an SPE as a CE of an MNE group that has been appointed by the MNE group — in substitution for the UPE — to file the CbC report on behalf of the MNE group, if one or more of the conditions in subparagraph 233.8(3)(b)(ii) applies (i.e., the conditions for the secondary reporting mechanism to apply).

The CE resident in Canada, which is appointed as an SPE, must notify the CRA, at the time filing, that it is filing as the SPE on behalf of the UPE of the MNE group.
An SPE in Canada may file the CbC Report in a format that is already prepared by the UPE, provided that the report is substantially similar to the RC4649 and is the CbC report that is required to be filed in a jurisdiction other than Canada.