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16 February 2018

First country-by-country reports handed in – what’s next?

The first round of country-by-country reporting (CbCR) is over. Each group subject to the reporting duty had to provide selected financial and non-financial data, for the group and broken down by individual jurisdictions, in a special format.

Zdeněk Řehák
Soňa Saidlová

From the perspective of companies, this means an additional administrative burden. The crucial question thus is: what use will tax administrations make of the data? The BEPS Action Plan 13, based on which the country-by-country reporting has been implemented, only states that the data will be used by tax administrators for a high-level review of the correctness of transfer prices. What exactly does this entail?

An answer may be found in the handbook for tax administrators issued by the OECD in September 2017, which is freely available on the OECD website. It will come as no surprise that, according to the handbook, tax administrators should use the data obtained to calculate key indicators (ratios) that would subsequently help them identify possible transfer pricing risks. The key indicators include, for instance, revenues per employee, earnings before tax per employee, or effective tax rate.

A group whose ratios place the actual taxation into countries with advantageous tax regimes may be suspected of aggressive tax planning. The handbook also recommends that administrators analyse whether the group reports significant revenues without carrying out substantial activity or contrary to the group’s value chain in a specific jurisdiction, or whether the development of the values is contrary to the market development. The methodology also recommends reviewing whether the location of intangible assets and related revenues is separated from the respective business activities, and comparing changes in time, e.g., changes in the group structure and assets’ location.

An important methodological recommendation is that country-by-country reporting should not be used to calculate adjustments to the tax base in transfer pricing inspections. Such a recommendation is undoubtedly positive, as it is impossible to make any conclusions on transfer prices in specific business relationships based on the aggregated data.

According to the timeline given in the handbook, the exchange of information obtained from the reporting should take place within 15 months after the end of the group’s fiscal year. This roughly corresponds to the information provided by the Czech financial administration, which expects the first exchange of information between tax administrations to take place in June of this year.

The Czech tax administration’s methodology has not been published, but most likely will not substantially differ from the OECD handbook; at the moment we can just wait. In the meantime, using the published handbook, any company may interpret the CbC reporting data to get the same view of its group as will be available to the tax administrator.

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