How Country by Country Reporting will change the face of taxation in Nigeria (Part I)

CbyC reports can help tax authorities figure out when things don’t add up e.g. when the profits reported in their country are suspect. It’s the same way you look at a Ministry’s budget and immediately suspect that an allocation of nearly N800m to update a website does not add up or is simply outrageous.

You are an employee. You consider yourself one of the hardest workers at your workplace. You also get the best results (at least you think you do). You have a colleague. You are certain he does not do half as much work as you do or deliver results that are anywhere close to yours. You sometimes wonder why you are on the same pay grade but you never really dwell on it. One day you stumble on his payslip and realise; he earns nearly two times your salary! How would you feel? Dissatisfied? Cheated? Angry? What would you do? Go to your boss and threaten to resign? Demand for a bigger pay package?

Even if you used to be completely satisfied with your current pay (remember; ‘am only asking you to imagine); this new piece of information will change everything. And that’s the thing, information changes everything.

This is the same way that information obtained by tax authorities through Country by Country (CbyC) Reporting can affect their perception of whether the profits being reported (and hence tax being paid) by Multinational Enterprises (MNEs) in their country is adequate. It can push them to ask for more.

What is Country by Country reporting?

CbyC reporting is a fall out of Action 13 of the OECD/G20’s Base Erosion and Profit Shifting (BEPS) project. The objective of the BEPS project was to develop rules and recommendations that will help minimise the loss of tax revenues (mainly through cross border profit shifting).

The Action 13 recommendations on CbyC reporting are for countries to enact legislation that will mandate the Headquarter companies (HQ) of MNEs to prepare reports providing certain quantitative and qualitative business information on a Country by Country basis. These reports (CbyC Reports) are to be submitted to the tax authorities of the countries where the HQs are located; who (subject to certain conditions) could then share the reports with the tax authorities of the other countries where the MNE operates.

Why does it matter and what information will be required in the CbyC reports?

Why does it matter? Let’s just say the information in CbyC reports can help tax authorities figure out when things don’t add up e.g. when the profits reported in their country are suspect. It’s the same way you look at a Ministry’s budget and immediately suspect that an allocation of nearly N800m to update a website does not add up or is simply outrageous.

CbyC reports will require MNEs to provide

(for each of the countries where the MNEs operates) information such as: revenues from both related and unrelated parties in each country, profits or loss before tax in each country, number of  employees in each country, value of tangible assets in each country and the business activity of each entity resident in each country.

How will this type of information be used? 

Before you start to think so what? Consider this very simplified and possibly extreme illustration. As a tax administrator, you encounter a multinational group that is made up of only two companies (Company A and Company B) operating in two different countries (Country A and Country B). First you are informed that the two companies in the group report a combined profit of N20 billion. Next you are presented with a CbyC report that let you see that Company A employs 1,000 people; gets all its revenues from third party customers and makes N10 billion in profits. Company B on the other hand, employs 2 people, gets all its revenues from a related party (you can deduce this is Company A) and also makes N10 billion in profits. What would you make of this?

If you are still struggling to work out the issue, let me help with an old Oyo proverb: “a man does not wander far from where his corn is roasting”.

Chances are that the tax administrators in Country A will start to wonder why the group has only 2 people in Country B if indeed there is a N10 billion profit making business in that country. They will find it odd that Country B – where the group has no external customers – generates the same profit as Country A where all the group’s external customers – and practically all of its workforce (1,000 people) – are located.

Many tax authorities, including the Federal Inland Revenue Service (FIRS), are already asking these type of questions.

Conclusion

To be clear, there might very well be sound commercial justifications for some arrangements that appear not to add up “at first sight”. The point however is that questions will get asked and some of these questions may never have come up without the CbyC reports. CbyC reports will provide more information to tax administrators and as they say: the more the knowledge, the more the grief.

In my follow up article, I will discuss some of the steps Nigeria is already taking on CbyC reports as well as some of the specific obligations that Nigerian MNEs will have once CbyC reporting comes into force in Nigeria.

Seun Adu

Seun Adu is an Associate Director and Transfer Pricing Leader at PwC Nigeria. He is a regular writer and public speaker on tax and transfer pricing matters.

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