In an effort to reassure multinational corporate tax payers that their submitted tax information won’t be abused or used for anything other than evaluating high-level tax risks, the Organisation for Economic Co-operation and Development (OECD) this week released guidelines for countries to make sure they’re not breaking the rules when using the data it collects.
The OECD currently is in the midst of rolling out its Base Erosion and Profit Shifting (BEPS) action plan and the latest installment, Action 13 – country by country (CbC) reporting – has some MNCs nervous. Action 13 calls for companies with revenue of more than 750 euro to report to their local tax authorities their tax filings for the previous 12 months. The goal is to provide local authorities information to see whether a multinational operating in their country is avoiding paying taxes.
But some MNCs have been worried that this information will be leaked or abused by other countries. With that in mind the OECD this week released guidelines that attempt to clarify what is abuse and what is not. The guidance explains “appropriate use” of the data, which mandates that tax authorities use the CbC report information for assessing high-level transfer pricing and BEPS-related risks only.
BEPS-related risk, according to the OECD, is “understood to refer to the high level assessment of tax risks that may result in the erosion of a country’s tax base.” Therefore, in practice, “while CbC Reports may be used to identify indicators of possible tax risk, it will usually only be possible to understand the arrangements giving rise to that risk once further enquiries have been conducted,” the guidance says.
The OECD says that it’s critical that this is well recognized, and that CbC information use should be limited to risk assessments and as a basis for making further requests for information in the course of a tax audit. That’s because extrapolating beyond what’s provided could be wrong. “In the same way that CbC [reporting] information on its own does not constitute conclusive evidence that transfer prices are not appropriate, it also does not constitute conclusive evidence that a group is engaged in other forms of BEPS,” the OECD says. In other words, the information provided in a CbC report is no substitute for a detailed transfer pricing analysis or analysis of other transactions and prices.
Still, German companies are concerned and have been vocal about it, according to Bloomberg BNA. They’re most worried about other countries abusing the information. “In our practical experience as well as in German tax literature, there is the growing concern that tax authorities will perform adjustments based on the country-by-country report only, which would not be in line with the arm’s length principle, and will ultimately result in double taxation,” Xaver Ditz of Flick Gocke Schaumburg in Bonn, tells Bloomberg.
Any tax authority that abuses the CbC reports will automatically have to retract its tax assessment if challenged by the company concerned, the OECD says. “If such adjustments based on Country-by-Country Report data are made by the local tax administration of the jurisdiction, the jurisdiction’s competent authority will promptly concede the adjustment in any relevant competent authority proceeding,” the OECD writes. Tax authorities that break the rules would also be temporarily barred from exchanging CbC reports with other countries, the OECD says.