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Breaking News: Pillar Two: The new decree on the Transitional CbCR Safe Harbour

Requirements of a Qualified CbCR and Qualified Financial Statements

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Overview
 

The rules of the Minimum Taxation Act (“MinBestG”), which came into force on 31 December 2023, lead to an enormous administrative burden. For this reason, it should be possible to avoid a full calculation in the initial phase by taking advantage of safe harbour rules which are based on a simplified calculation. The data used for these CbCR Safe Harbour calculations are therefore essential and must meet certain requirements. 

In this regard, a decree to the Transitional CbCR Safe Harbours (referred to as CbCR-Safe-Harbour-V) was published on 5 December 2024. The aim is to specify in more detail the prerequisites for the qualified financial statements and the qualified country-by-country report required by Art. 55 (3) MinBestG for the calculation of the Transitional CbCR Safe Harbour Tests. In this regard, the Austrian tax authorities follow the framework set by the OECD, see our Tax & Legal News article.

 

Qualified country-by-country report

To be considered as “qualified”, the country-by-country report (“CbCR”) must on the one hand meet the requirements for the preparation of a country-by-country report. In this regard, the CbCR rules in the tax jurisdiction of the ultimate parent entity respectively in the tax jurisdiction of the surrogate parent entity are relevant. On the other hand, the CbCR must be prepared on the basis of qualified financial statements.

The assessment of whether these conditions are met is carried out separately for each safe harbour tax jurisdiction. A separate assessment must be made for each individual joint venture group correspondingly. 

Qualified financial statements
 

Whether the financial statements used can be considered as “qualified” depends, in essence, on the data sources used. For the purposes of qualified financial statements, three data sources can be
considered:

  • Financial accounts used to prepare the consolidated financial statements of the ultimate parent entity: these are accounting data that have been aligned with the recognition and valuation rules for consolidation purposes and are in this context referred to as reporting packages.
  •  Annual financial statements of the constituent entities: these must be prepared either in accordance with an acceptable or an authorized  financial accounting standard on a mandatory or voluntary basis. The information contained in the financial statements must be maintained on the basis of this accounting standard and must be reliable.
  • In the case of entities excluded from the consolidated financial statements solely based on their small size or on materiality grounds, the annual financial statements, which are used to  prepare the group’s country-by-country report, may also be used.


There is a special regulation for permanent establishments, as these usually do not prepare their own reporting packages or annual financial statements. In this case, the amount of revenue and profit before tax attributable to a permanent establishment can be determined based on the profit allocation between the main entity and the permanent establishment. Documents that have been prepared for the purposes of financial reporting, for supervisory purposes, for tax reporting or internal management control can be used for such profit allocation. A loss allocated to the permanent establishment may not reduce the profit before tax of the tax jurisdiction of the main entity.

 

Consistent use of accounting data
 

An additional requirement for the qualified financial statements is that the accounting data used for the simplified calculation in accordance with Art. 5 of the CbCR-Safe-Harbour-V must be based on a uniform data basis for a constituent entity and for all constituent entities in a tax jurisdiction (except for constituent entities excluded on the grounds of size or materiality and permanent establishments). The uniform use of data must also be maintained for all financial years. 

Furthermore, it should be noted that the accounting data used for the simplified calculation of the CbCR Safe Harbour tests may in principle no longer be adapted or changed. Only the adjustments explicitly required (e.g. in connection with PPA adjustments and hybrid arrangements) may respectively must be taken into account.

 

Amendments regarding PPA adjustments and hybrid arrangements
 

The financial statements of a constituent entity may include pushed-down adjustments from the application of the purchase price accounting method in the case of a business combination. However, to obtain the required “qualification”, adjustments of the financial data with regard to these “PPA effects” may be required. The extent to which an adjustment is necessary depends on the prior-year presentation in the country-by-country report in the sense of consistent reporting and must be examined on a case-by-case basis.

The CbCR-Safe-Harbour-V also contains special provisions for hybrid mismatches. These are arrangements agreed after 15 December 2022 which lead: 


(i)      to a deduction of expenses without corresponding inclusion of income,

(ii)     to a double deduction of expenses without double inclusion of income, or

(iii)   to a double consideration of a tax expense without double inclusion of the corresponding taxable income.

The extent to which an adjustment for the calculation of the CbCR Safe Harbour tests has to be made must be examined on a case-by-case basis respectively depending on the hybrid mismatch.

 

Conclusion

With the CbCR-Safe-Harbour-V the Austrian tax authorities follow the requirements developed by the OECD for a qualified CbCR and qualified financial statements. It shows that the leeway that companies were able to use for the data sources of the CbCR so far cannot be further utilized for the purposes of the CbCR Safe Harbours under Pillar Two. The requirements to the data quality for the purposes of the Transitional CbCR Safe Harbour calculations are much higher than the requirements for the purposes of the CbCR. It is therefore advisable that companies evaluate their existing CbCR processes and adapt them in such a way that the quality of the data used for the calculation and especially for the CbCR is sufficient to be classified as “qualified”.