On 4 July the Cabinet of Ministers (hereinafter – the Cabinet) approved the regulation project “On country by country reporting of groups of multinational companies”, where there are requirements of EU Council Directive 2016/881 implemented, which amend the Directive 2011/16/EU, regarding mandatory automatic information exchange in the field of taxation and implementing automatic exchange of information on the country-by-country reports of groups of multinational companies (hereinafter – country-by-country report). In the article, we look at the main things, the taxpayers shall observe and what actions are to be taken before 31 August of this year.
What is a CbyC report?
A country-by-country report includes the following information on each group company: revenue (from related and unrelated parties), profit, paid and accrued tax payments, number of employees, equity, retained earnings, tangible assets, etc. Additionally, a CbyC report would include information on the location and the type of activity of each group company.
Conditions under which CbyC reports become obligatory
Latvian taxpayers need to prepare a CbyC report if they are part of a group of multinational companies with consolidated net sales exceeding EUR 750 million. If this condition is met, the Cabinet regulations provide more detailed provisions on CbyC reports, namely:
— the parent company of the group of multinational companies, which is a resident of Latvia for tax purposes, must prepare a CbyC report and submit it to the State Revenue Service (hereinafter – SRS) within 12 months after the reporting date;
— an entity included in a multinational group of companies, which is a Latvian resident for tax purposes, but is not the parent company of the group, must prepare the CbyC report and submit it to the SRS if:
— its parent company has no obligation to provide a CbyC report, for example, CbyC reporting in the relevant jurisdiction is obligatory from 2017 taxation year rather than from 2016;
— there is no effective agreement with the competent authority of the country of the parent company to share the CbyC report (a);
— it is a substitute parent company in the group of multinational companies.
The parent company of a group of multinational companies will be required to prepare CbyC reports, but this report can be prepared by any other entity in the group provided an agreement has been made to that effect within the group of multinational companies. Where the parent or substitute parent company has submitted the CbyC report to the relevant tax administration and it is a resident of a Member State or a resident of a state which has signed an agreement on automatic exchange of information on country-by-country reports with Latvia, the Latvian taxpayer will not have to submit the CbyC report to the SRS.
Which period is covered by CbyC reports and when should it be submitted?
In Latvia, the country-by-country reporting year begins on 1 January 2016 and reports should be submitted within 12 months of the reporting date. Therefore, CbyC reports about the 2016 financial year in Latvia should be submitted before 31 December 2017. It is notable that in other countries which implemented CbyC reporting requirements much earlier the above report need only be submitted from the 2017 taxation period.(b)
If a Latvian taxpayer qualifies for CbyC reporting it should notify the SRS no later than on the last day of the reporting year that it has the obligation to prepare and submit the report. If it does not have the obligation to submit the CbyC report, the taxpayer should notify the SRS about the CbyC reporting entity and its country of residence. The information about the first reporting year which begins on 1 January 2016 should be provided before 31 August 2017.
Automatic exchange of country-by-country reports
Within 15 months of the end of the fiscal year of a group of multinational companies which is covered by the report, the SRS is to provide that the report is transferred to the competent authorities of the relevant countries.
The exchange of CbyC reports for the first reporting year, which starts on 1 January 2016, should be made by the SRS within 18 months of the last day of the fiscal reporting year, i.e. by 1 July 2018.
How to treat CbyC reporting?
As many countries have already implemented the CbyC reporting requirements for 2016 and have embedded them in their local legislation, not only will the Latvian tax administration receive CbyC reports but will also share them with other jurisdictions for 2016. Therefore, the SRS will receive information on the distribution of revenue and profit between all group companies to evaluate the risk of transfer pricing and whether or not to begin a transfer pricing audit.
To assess potential transfer pricing risks within a group of multinational companies for 2016, the group companies should coordinate the necessary information before it is submitted to, for example, the Latvian SRS. It is definitely worth focussing on, for example, whether revenue reflects the actual value of the actions carried out by the companies in various tax jurisdictions or whether a common methodology is in place for transfer pricing, which will be submitted to tax administrations of several countries at the same time?
(b) A detailed description of CbyC reporting requirements
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