OECD Released Report on Common Mistakes in Country-by-Country Report

The country-by-country report (CbCR) has gained higher importance in the context of Pillar Two, as it is used to determine the temporary CbCR safe harbour. The robustness and accuracy of the data in the CbCR is therefore key. The OECD recently published a new document outlining typical errors in the CbCR and providing guidance on correct disclosure. What are the key takeaways from this document?

The CbCR was introduced by the OECD in 2015 as part of the BEPS project and introduction in Switzerland followed three years later in 2018. Switzerland requires multinational groups with annual revenues of CHF 900 million or more to submit a CbCR. This requirement is based on the EUR/CHF exchange rate of 1.20 at the time; with the current exchange rate the threshold would rather equal CHF 700 million. Nonetheless, a voluntary submission of a CbCR is possible which is of relevance in the context of Pillar Two where the revenue threshold of EUR 750 million is translated into Swiss francs annually. The CbCR was originally intended as a tool for initial risk assessment of transfer pricing and profit allocation. Despite the legal obligation, the CbCR has been little used by tax administrations to date, based on Deloitte Switzerland's experience.

Increased Importance

In the course of Pillar Two, the CbCR has taken on a new significance. It serves as the basis for temporary administrative relief from the OECD minimum tax. If one of three tests is met, determined on the basis of selected data from the CbCR, no comprehensive Pillar Two tax return needs to be filed and, consequently, no top-up tax is payable. Switzerland also grants this temporary safe harbour for the Swiss domestic top-up tax. However, the OECD Model Rules requires the CbCR to be "qualified". This means that not only certain requirements of the Pillar Two rules must be met, but also the existing regulations on correct CbCR reporting. The OECD recently published a new document listing typical errors in CbCRs and comments on correct, accurate reporting. It is important that affected groups avoid these errors to prevent their CbCRs from being deemed "unqualified". We summarise the most important points below.

Currency

The CbCR must be prepared in the functional currency of the ultimate parent entity. The figures for all constituent entities (aggregated per jurisdiction) must therefore be converted into this currency. The CbCR should not contain more than one currency.

Rounding

The OECD requires that figures in the CbCR be published without rounding. Deleting the final three or final six digits, as may be done in completing consolidated final statements in thousands or millions of currency units, is not permitted.

Non-Consolidated Entities

Regarding the scope of the CbCR, the OECD refers to the group's consolidation scope. Only consolidated companies must be reported as constituent entities in the CbCR. However, the regulations do not specify what the OECD understands by a consolidation requirement.

In Deloitte Switzerland’s view and based on the OECD Model Rules, this term could be understood as an entity that is consolidated line-by-line due to common control. It should also be noted that the circumstances at the end of the financial year are not relevant. For example, if a constituent entity was sold during the financial year but was consolidated up to that date, it must be reported pro rata in the CbCR as well.

Permanent Establishments

If a constituent entity has a permanent establishment in another country, this must be reported as a separate constituent entity in that country.

Income Taxes

Income taxes paid must be reported as a positive (and not negative) amount. The same principle applies to accrued income taxes.

Table 2

Table 2 must contain various information on the individual constituent entities. The OECD points out the following:

• Each individual constituent entity whose figures are included in Table 1 must be reported in Table 2 as well.
• The tax identification number (TIN) of each constituent entity must be reported. The field must not be left blank or contain spaces/punctuation. Only if a company does not have a TIN, this may be noted as ‘NOTIN’.
• If a company is assigned ‘Other’ under Business Activity, information on the nature of the activity must be provided in Table 3.

Deloitte’s View

With Pillar Two, the importance of the CbCR has increased and even greater significance must be attached to the accuracy and robustness of the data. If the data is incorrect, there is a risk that the CbCR will not be "qualified". The OECD's short and easy-to-read document listing typical errors is helpful in this regard. However, other existing OECD regulations on CbCR, as well as the requirements in the OECD Model Rules and any country-specific requirements, must also be considered. Due to the advantages of the transitional safe harbour for the years 2024–2026, the status of the CbCR as "qualified" should be given high priority.

Authors

• Thomas Hug - Partner, National Tax Office
• Manuel Angehrn- Director, Pillar Two
• Kayla Imholz – Senior Manager, Tax & Legal