Country-by-Country Reporting on Transfer Pricing Transactions
With the softening of the political environment after the cold war period after World War II, more liberal policies began to be followed in the economies of countries, and competition in commercial terms became more modern with the development of transportation and communication techniques. This environment has also enabled the rapid development of multinational enterprises.
In the academic literature, multinational companies are defined as enterprises that are engaged in production, distribution or service activities in many countries. In the General Communiqué on Disguised Profit Distribution through Transfer Pricing, multinational companies are defined as “a group consisting of two or more enterprises resident in different countries or a group formed due to the fact that the enterprise is subject to tax in another country due to its activities through its workplace or permanent representative”.
Multinational corporations have played an important role in the development of global finance. These organizations account for 2/3 of world trade and 1/3 of world income. 55% of multinational enterprises are based in the USA, 11% in Japan, 9% in the UK and 4.5% in Germany.
The international transparency of multinational enterprises that shape world trade is of great importance for the fiscal administrations that will carry out their audits and taxation. Multinational enterprises can reduce their tax liabilities by shifting their earnings to other countries in a tax-advantageous manner through the product prices (transfer prices) applied between their parent companies or branches. This may lead to tax losses, especially for the countries where the income is generated. In order to prevent these tax losses, in addition to the measures taken by local administrative institutions, there are improving regulations being introduced globally every day.
In 2015, the OECD (Organization for Economic Cooperation and Development) and G20 member countries announced the BEPS (Base Erosion and Profit Shifting) Action Plan, which consists of 15 main topics. The BEPS Action Plan aims to ensure that income is taxed where the economic activities that generate the income are carried out and where the value is created. The plan includes 15 actions to prevent tax losses. The 13th BEPS action plan is based on three types of reporting: General Report, Transfer Pricing Report and Country by Country Report (CbCR).
The Country-by-Country Report introduced a new reporting system in the area of transfer pricing and required OECD member countries to update their local laws and regulations in accordance with this system. Country-by-Country Reporting is a reporting system that increases transparency and reliability by enabling the exchange of information through bilateral agreements by reporting the profits, sales amounts, number of employees, assets and tax amounts paid in the relevant country.
In Turkey, the regulations regarding the preparation of the Country-by-Country Report were introduced to our legislation with the Communiqué Serial No. 4 Amending the General Communiqué No. 1 on Disguised Profit Distribution through Transfer Pricing published on 01.09.2020.
Article 5 of Communiqué Serial No. 4 added Section 7.4 titled “Country Based Report” to Communiqué Serial No. 1. Accordingly, the Turkish resident ultimate parent entity or surrogate entity of a multinational enterprise group whose total consolidated group revenue is EUR 750 million or more according to the consolidated financial statements of the previous accounting period shall prepare the country-based report until the end of the twelfth month following the reporting accounting period and submit it electronically to the Revenue Administration. If the consolidated financial statements are prepared in a currency other than Euro, the annual average of the foreign exchange buying rates announced by the Central Bank of the Republic of Turkey for the accounting period preceding the reporting period shall be taken into account in the calculation of the limit of EUR 750 million.
However, in cases where the ultimate parent or surrogate entity is not located in Turkey, if the above limit is exceeded and one of the following conditions is met, the entity resident in Turkey (one on behalf of the others in case the multinational enterprise group has more than one entity in Turkey) submits the country-based report electronically to the Administration:
a) The absence of a country-by-country reporting requirement in the country where the ultimate parent or agent is resident,
b) There is an obligation for country-based reporting in the country where the ultimate parent or surrogate is resident and there is an international agreement between the Administration and the country where the ultimate parent or surrogate is resident, but there is no competent authority agreement in force regarding the sharing of country-based report information,
c) There is an obligation for country-by-country reporting in the country where the ultimate parent or surrogate is domiciled, there is an international agreement between the Administration and the country where the ultimate parent or surrogate is domiciled, as well as a competent authority agreement on the exchange of country-by-country reports, but there is a systemic error in information sharing.
Upon completion of the activation process for the entry into force of the multilateral competent authority agreement mentioned above, the automatic exchange of information between Turkey and the countries that are parties to the agreement can start. The list of countries where the activation process has been completed is available on the OECD website. You can access the list of countries where the activation process has been completed here.
On the other hand, according to country-by-country reporting, consolidated financial statements are financial statements in which the financial statements of a group of multinational enterprises are presented as a single entity. Consolidated group income refers to the sum of all elements of income, gains and revenues included separately in the consolidated financial statements. In this framework, consolidated financial statements prepared in accordance with Turkish Financial Reporting Standards, Financial Reporting Standard for Large and Medium-Sized Enterprises, International Financial Reporting Standards or another accounting and financial reporting standard in force in the relevant country are taken into account in determining country-based reporting obligations.
There is no exemption for country-by-country reporting. A multinational enterprise group that exceeds the limit set for the reported accounting period must prepare the country-based report. For example, for the 2020 accounting period, if the consolidated group revenue of the multinational enterprise group is below EUR 750 million for the 2019 accounting period, a country-based report will not be prepared for the 2020 accounting period. However, for the 2021 accounting period, if the consolidated group income of the same group of multinational enterprises is EUR 750 million or more for the 2020 accounting period, a country-based report will be prepared for the 2021 accounting period and submitted to the Administration electronically until the end of 2022.
The country-based report consists of 3 tables and includes the following information.
| Tablo 1 | Tablo 2 | Tablo 3 |
|---|---|---|
| Distribution of income, taxes and business activities by country | List of all enterprises belonging to the group of multinational enterprises by country | Additional remarks |
| Relevant for each country in which the multinational business group operates; | The name/title of each enterprise of the multinational enterprise group resident in the relevant country on a country-by-country basis | Additional explanations required during the filling of the tables |
| Income, profit/loss before tax, | If the country of establishment is different from the country of tax residence, the name of this country | |
| Income/corporate tax paid, | The core business of each business | |
| Accrued income/corporate tax, | ||
| Capital, | ||
| Retained earnings, | ||
| Number of employees, | ||
| Property, plant and equipment other than cash and cash equivalents |
Information on whether they are the ultimate parent or surrogate entity, which entity will report on behalf of the group, and the accounting period will be provided by the members of the multinational enterprises group; each year, until the end of June of the year following the accounting period to be reported, the “notification form for country-based reporting” will be filled in accordance with the content in Annex (5) of the Communiqué and the explanations in the Internet Tax Office and will be submitted electronically via the Internet Tax Office.
If it is determined that there is an error or deficiency in the said notification, the notification form can be corrected by reorganizing the notification form until the end of the month following the end of the submission period of the notification form for country-based reporting. However, if the correction notification is submitted after the deadline, penal action will be applied in accordance with the provisions of the Tax Procedure Law. Country-based reporting can be sent by the taxpayer in person, or it can be sent through a certified public accountant who has an intermediary and liability agreement or a sworn public accountant who has a full attestation agreement.
In addition, country-specific report information that may be used for transfer pricing risk assessment, assessment of other risks of base erosion and profit shifting, or economic and statistical analysis purposes will not be used as a sole basis for direct base assessment.
As a result, with the globalization of the world economy, investments of multinational enterprises move easily between countries and tax losses may occur due to differences in local regulations between countries. In this situation, the exchange of information between administrations, the adoption of similar practices in all countries and the oversight of uniformity become a necessity. Country-by-country reporting is a system designed to meet this need. Accordingly, multinational enterprises operating in Turkey should carefully follow the regulations of the fiscal authorities and fulfill all their obligations regarding Transfer Pricing transactions, including country-based reporting.
