Latvia agrees to automatic exchange of transfer pricing country-by-country reports
On 21 October 2016 the Organisation for Economic Cooperation and Development (OECD) announced that Latvia has signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of country-by-country (CbyC) reports (i.e. reports that have to comply with the OECD BEPS Action 13 requirements). Action 13 entails a three-tiered approach to transfer pricing documentation for multinational entities with annual consolidated group revenue that equals to or exceeds EUR 750 million which consists of:
- Master File which provides an overview of the multinational group’s business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk;
- Local File which focuses on information relevant to the transfer pricing analysis related to transactions taking place between a local country affiliate and associated enterprises in different countries and which are material in the context of the local country’s tax system. Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method.
- CbyC report that includes information on revenue (related and unrelated party), profits, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets for each tax jurisdiction in which the multinational does business. In addition, the template includes information identifying each entity within the group doing business in a particular tax jurisdiction and the business activities each entity conducts.
The new CbyC reporting requirements are applicable for fiscal years beginning on or after 1 January 2016. Since specific rules of the Action 13 must be implemented by each country individually in its legislation, such criteria as revenue threshold and reporting periods may vary across multiple jurisdictions.
According to the OECD, the MCAA will enable implementation of new transfer pricing reporting standards developed under Action 13 of the BEPS action plan. With this, tax administrations will be able to obtain a complete understanding of the way multinational entities structure their operations, through the annual automatic exchange of CbyC reports.
The Action 13 is designed to highlight those low-tax jurisdictions where a significant amount of income is allocated, for instance, without proportionate presence of employees. In practice it means that there will be pressure to ensure that profit allocations to a particular jurisdiction are supported by appropriately qualified employees who are able to make a substantial contribution to the creation and development of intangibles.
This marks a further milestone towards the implementation of the OECD BEPS project in Latvia and a significant increase in cross border cooperation by the State Revenue Service on tax matters.
What does it mean to Latvian taxpayers?
Although the Latvian authorities have not officially released regulations implementing the BEPS Action 13 CbyC reporting, signing of the MCAA indicates the intent to adopt the OECD’s Action 13. In the table below we have provided an overview of what it means to Latvian taxpayers.
Since many countries have implemented or intend to implement the exchange of the CbyC reports for fiscal years beginning already in 2016, the signing of the MCAA will allow the Latvian tax authorities to have information on the operations of the whole multinational group for 2016 if a Latvian taxpayer is part of a group of enterprises qualifying for CbyC reporting. Thus, the Latvian tax authorities will have detailed information on the operations of the multinational group allowing to evaluate the appropriateness of allocation of income and profits between the group’s enterprises, as well as the necessity to conduct a transfer pricing audit.
In order to evaluate potential transfer pricing risks within a multinational group, it is strongly advised that group enterprises share the necessary information between each other before submitting it to local authorities.