On 6 September 2017 the OECD released guidance in relation to the appropriate use of information in Country by Country (CbC) reports exchanged under action 13 of the project on base erosion and profit shifting (BEPS). This includes guidance on the meaning of “appropriate use”, the consequences of non-compliance with the appropriate use condition and the various approaches that could be considered by tax administrations to make sure that the information in CbC reports is used appropriately.

Appropriate use

Appropriate use of the information received is a condition for jurisdictions to obtain and use the CbC reports. The appropriate use of the information in the CbC reports is limited to the following:

• High level transfer pricing risk assessment;
• Assessment of other BEPS risks; and
• Economic and statistical analysis where appropriate.

The guidance emphasizes that the CbC report should not be used by the tax administration instead of a detailed transfer pricing analysis of the individual transactions and prices, for which a full functional analysis and comparability analysis are required. The information in the CbC report cannot alone serve as evidence that the transfer pricing is not appropriate. Transfer pricing adjustments cannot be proposed by the tax administration on the basis of global formulary apportionment of the group’s income.

Although adjustments cannot be made on the basis of an income allocation formula applied to data from the CbC report the tax administration would be able to use the CbC report to make further enquiries about transfer pricing or other matters during a tax audit. The OECD’s Forum on Tax Administration has prepared a handbook to guide tax authorities in compiling a tax risk assessment on the basis of the information in CbC reports.

BEPS-related risk

BEPS generally entails an attempt to move profits to locations where they are taxed at lower rates and move expenses to locations where they are relieved at higher rates. Strategies may be put in place to use tax attributes such as losses brought forward or tax credits. The BEPS report contained examples of how tax rules could be used by groups to achieve low or no taxation, using a low-taxed branch of a foreign company; hybrid entities or financial instruments; conduit companies; derivatives used to avoid withholding tax; or profit shifting using the contractual allocation of risk and the pricing of intangibles.

The fifteen actions of the BEPS action plan were a comprehensive response to BEPS risks, aiming to align the taxable profit of a group with the areas of substantial economic activity as well as improving transparency. Assessment of BEPS related risks therefore involves a high level assessment of tax risks that could involve erosion of the tax base.

Non-compliance with appropriate use

If a jurisdiction does not comply with the appropriate use condition the consequences are given effect through the model competent authority agreements. These consequences include:

• Appropriate use would be a condition for receiving and using CbC reports;
• Competent authorities would commit to disclosing breaches of appropriate use to the Coordinating Body Secretariat or other competent authority;
• Competent authorities would commit to promptly conceding inappropriate adjustments; and
• Where there is non-compliance the competent authorities could temporarily suspend the exchange of CbC reports after consultation.

There is a risk that inappropriate use of CbC reports could result in the issue of incorrect tax assessments.

Approaches to ensure appropriate use of CbC reports

Jurisdictions could ensure that their multilateral or bilateral competent authority agreements on CbC reporting include appropriate use as a condition for obtaining and using the reports. Jurisdictions could also ensure that they have a clear written policy on the use of CbC reports, with guidance on appropriate use, and that this policy is communicated to staff that are likely to have access to the information from CbC reports in the course of their work. Jurisdictions can monitor the use of CbC reports to ensure appropriate use by imposing restrictions on access to reports and by ensuring that there is adequate evidence for appropriate use.

Guidance or training can be given to tax authority staff on the need to notify the appropriate authority of any cases of non-compliance with the appropriate use of information from CbC reports; and to promptly concede any competent authority procedure where there is a tax adjustment using an income allocation formula based on information from a CbC report.

Jurisdictions should put in place measures to review and update the controls and the outcomes of those reviews should be documented.