ABSTRACT

Commissioned by G20 Summit in July 2013, Organization for Economic Cooperation and Development ("OECD") announced its action plan on the Base Erosion and Profit Shifting ("BEPS") and gathered the 15 actions under 3 main headings upon this action plan. Reviewing the documentation obligations regarding the transfer pricing within the scope of the Action #13 of this plan, OECD prepared a three-stage documentation plan and launched the Country by Country Reporting ("CbCR") application. Multilateral Competent Authority Agreement on The Exchange of Country By Country Reports, which was signed in Ankara on 30 December 2019, was ratified by the Presidential Decree #3038, published in the Official Gazette dated October 1, 2020 and no. 31261.

Keywords: BEPS Action Plan, Transfer Pricing, Country By Country Reporting, CbCR.

INTRODUCTION

In the global world economy that ensures the investments are easily circulated internationally, Organization for Economic Cooperation and Development ("OECD") announced an action plan on Base Erosion and Profit Shifting ("BEPS") in 2013 and detailed the individual steps to be followed regarding the base erosion and profit shifting upon this action plan, as it was commissioned by G20 summit in an attempt to prevent the multinational companies from paying less tax due to their profits shifted to other countries, as a result of the discussions arising about the multinational companies.

The actions in BEPS Action Plan that lists 15 actions rely on 3 main principles. These 15 actions that are based on the rules of international harmonization of corporate tax, synchronous progression of taxation and 'substance over form' principle and ensuring the transparency in taxation, are as follows:

No.

Subject

1

Identifying the taxational problems regarding the digital economy

2

Preventing the negative effects of hybrid regulations arising from discrepancies between the countries' legislations

3

Consolidating the taxational rules for the Controlled Earnings of Foreign Corporations

4

Limitation on loss of base through interest and other financial payments

5

Avoiding harmful taxational practices

6

Preventing the abuse of Double Taxation Agreements

7

Preventing the situations of artificial avoidance of permanent establishment status

8

Transfer Pricing rules – Compliance of the location where the value is created in the transfers of intangible asset

9

Transfer Pricing rules - Compliance of the location where the value is created in the transfers of risk and capital

10

Transfer Pricing rules - Compliance of the location where the value is created in other high-risk transactions

11

Collecting and analysing the data on the practices of base erosion and profit shifting and determining the methods required for their estimation

12

Imposing an obligation to report on aggressive tax planning practices

13

Reviewing the rules of transfer pricing documentation

14

Rendering the resolution mechanisms for taxational disputes more effective (mutual agreement procedures, arbitration, etc.)

15

Developing a mechanism to produce multilateral solutions

Aiming to fully and accurately determine the complexity and the ever-increasing volume of the 'related person transactions' at the multinational companies by way of changing the documentation requirements within the scope of the Article #13 of this Action Plan, shown in detail above and formed to ensure fair distribution of tax bases and fair taxation, OECD created a three-stage transfer pricing documentation obligations plan.1 This three-stage reporting system is as follows:

  • General Report
  • Annual Transfer Pricing Report
  • Country by Country Report ("CbCR")

CbCR application was officially put into practice upon the ratification of Multilateral Competent Authority Agreement on The Exchange of Country By Country Reports, which was signed in Ankara on 30 December 2019 on behalf of the Republic of Turkey, by the Presidential Decree #3038, published in the Official Gazette dated October 1, 2020 and no. 31261, and it is discussed in this paper as the main topic.

I. COUNTRY BY COUNTRY REPORTING

One of the solutions developed by OECD, which aimed to increase transparency by providing sufficient information through BEPS Action Plan so that the risks associated with transfer pricing and BEPS can be assessed properly by the tax administrations, was the introduction of CbCR application.

Main actors of the said application are the multinational enterprises. Multinational enterprises group ("MNE") refers to a group of two or more businesses residing in different countries, or a group formed since a business is subject to taxation because of the operations it carries out in another country through a workplace or a permanent representative.

In addition to this transparency, it is also considered, among others, that MNEs are provided with a certainty and assurance tool to serve as a proof that they act at arm's length principle.2

The action #13 of BEPS Action Plan which updates the documentation requirements in transfer pricing stipulates that Turkey-based ultimate parent company of a MNE group with an annual total consolidated group revenue of €750 million plus is required to submit their country-specific reports to the tax authorities.

In calculating the €750 million limit, which determines the scope of the documentation requirement, the sum of the income, earnings and revenue items appearing in the consolidated financial statements are taken into account.

In this context, since the consolidated financial statements will be taken into account in determining the liability, it will be required to define the consolidated financial statements. The financial statements, prepared in accordance with the current accounting and financial reporting standards, in which the financial statements of a group of companies are presented as a single enterprise, are called "consolidated financial Statements".

Therefore, consolidated financial statements, prepared pursuant to Turkey Financial Reporting Standards, Financial Reporting Standards for Large and Medium-Sized Enterprises, International Financial Reporting Standards or any other accounting and financial reporting standards applicable in any relevant country, should be taken into account in determining the country by country reporting obligations.

On the other hand, the member businesses of the MNE group with its ultimate parent company located outside Turkey may submit the CbCR to the administration, as a reporting entity or deputy company.

Deputy company refers to the enterprise to submit the CbCR, acting on behalf of the ultimate parent company. In this context; the foreign companies in Turkey, in other words the member businesses of the MNE group with its ultimate parent company located outside Turkey, may submit the CbCR to the Fiscal Administration, in the presence of the following;

a. The country where the ultimate parent company or deputy company is located specifies no CbCR obligation,

b. The country where the ultimate parent company or deputy company is located specifies a CbCR obligation, and there is an international agreement in place between the Fiscal Administration and the administration of this country administration, whereas there is no applicable competent authority agreement regarding the sharing of CbCR information,

c. There is a systemic error in information sharing despite the availability of the agreements listed in item (b).

Information that MNE groups should include in CbCR are as follows;

a. Tangible assets other than income, pre-tax profit/loss, paid/accrued income/corporate tax, capital, accumulated earnings, number of employees, cash and cash equivalents with respect to each country in which they operate;

b. The name/title of each enterprise located in the relevant country, or if the country where the enterprise is established is different from the country of residence for taxation purposes, the name of such country and the nature of the main activities of each enterprise.

When examined in terms of the term, CbCR must be prepared and submitted not later than the end of the twelfth month following the fiscal period.

Furthermore, it is seen that there is an additional requirement for notification regarding the CbCR. Enterprises within the MNE group, within the scope of the CbCR obligation, are obliged to regularly report by which company and in which country the CbCR will be prepared and submitted, even if they are not the parent company. Thus, MNE members under the obligation of CbCR are liable to notify the Administration of the following not later than the end of June each year;

a. Whether they are the ultimate parent company or deputy company,

b. Information about which company will submit the report on behalf of the MNE group

c. Details about the fiscal period

CONCLUSION

It should be noted that it is of great importance to comply with this reporting requirement which offers a smoother and more straightforward control and follow-up over the internal transactions the Multinational Enterprises and provides the enterprises with a sort of assurance, in order to avoid any penal action within the scope of the new documentation obligation introduced in the transfer pricing.

Footnotes

1.Elif ARICIOGLU, Ozgen POLAT. "Three-Stage Reporting Requirements Included in Turkish Legislation for The Multinational Enterpirses". Nazali Gundem Magazine.

2.Tahir ERDEM. "Developments in Transfer Pricing Documentation and Country-By-Country Reporting", Issue #326, Journal of Tax Issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.