Country by Country Report, what is, how it works and how it could be used as a mechanism of risk assessment.

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University of Amsterdam

Advanced Master’s –International Tax Law

Research question

Title: Country by Country Report, what is, how it works and how it could be used as a mechanism of risk assessment.

By: Tatiana Ximena Pèrez Salazar

Supervisors: Prof. dr. Sjoerd Douma

Amsterdam, the Netherlands 27 July 2018

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2

Nowadays, we live in a globalized world with a growing international interaction for the expansion of trade and the economy, where technological developments have endorsed more dynamic operations1. Thus, at the moment, services can be provided via internet in real time between countries that are separated by an ocean of distance, and the advancement of transport means consents the rapid growth of trade. For instance, these days raw materials found in Asia are thereafter transported to America to be combined with other raw materials for manufacturing products that at a later stage will be exported to Europe2_.

Within this context, it is apparent that companies embark on new markets, giving rise to a cross-border expansion through new operating models, from country-specific level to a worldwide level3. This uptrend, has contribute that companies and other vehicles are based in different jurisdictions. These companies or group of companies whose economic activities cover more than one country and more than one local market are so-called "Multinational Enterprise" (MNEs) and currently have a significant role as economic agent of globalization4. The increase in the interaction of the Multinational Groups, through intra-group operations, along with the mismatches of the domestic legislations in which the MNEs are present have a clear impact on their taxation. Thus, in a world with dissimilar tax systems, such as tax rate differences, taxation on territorial or worldwide basis, favourable tax regimes; incentives are created for the MNEs to carry out intra-group operations that obey not only economic optimizations but also with tax aims5 with the possibility to obtain a more favourable tax treatment depending on the jurisdiction where the profits are relocated.

This is within the bounds of possibilities, since companies, taking advantages of being member of the same group, can agree on prices and operations in an artificial manner which in turn result in a big channel of profit shifting6. With this behaviour, the MNEs forget that the States are and always will be a partner of the companies by providing infrastructure, security, justice mechanisms etc, and taxation is a favoured means State uses to financing itself.

1_{OECD, ‘Action Plan on Base Erosion and Profit Shifting’ (OECD Publishing, Paris 2013).} 2_{OECD, BEPS Action Plan, supra n. 1, p. 7}

3_{OECD, BEPS Action Plan, supra n. 1, p. 7} 4_{IBFD, Glossary}

5_{OECD, BEPS Action Plan, supra n. 1, p. 9}

6_{M.T. Evers, I. Meier & C. Spengel, Transparency in Financial Reporting: Is Country-by-Country} Reporting Suitable To Combat International Profit Shifting?, 68 Bull. Intl. Taxn. 6/7 (2014), Journals IBFD p 1.

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5 MNEs are increasingly engaged in these practices and are using sophisticated structures of tax planning, lowering in this way their tax burden, which affects different stakeholders, namely, governments, individual tax payers and business7. This problem was mainly visible during the 2008 crisis and the response to the Base Erosion and Profit Shifting (BEPS) by the countries with the most developed economies, did not wait. The media influence also had a relevant role devoting special attention on the deficiencies of the tax system and on the payment of the fair share by MNE’s.

Accordingly, in June 2012 the leaders of the G-20 began to publicly express their rejection of Base Erosion and Profit Shifting and its interest in following the work of the OECD in this matter8_{. It is in this context that in February 2013 the OECD published its Report "Addressing}

BEPS" (Addressing the Base Erosion and Profit Shifting), by which it recognizes that “Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike” 9. The OECD also identified profit shifting as the most significant way to erode domestic tax base10. Subsequently, in July 2013, the OECD published its "Action Plan on Base Erosion and Profit Shifting", a programmatic plan that identifies the actions needed to counter BEPS; it lays down the deadlines to deliver these actions; and identify the indispensable resources and the methodology to launch these actions11. The G-20 in its November Summit of the same year adopted the Action Plan12_.

The BEPS action plan comprises a package of 15 actions focused on combating practices that, in the OECD’s view, erode the tax base of the countries. The BEPS plan implementation must be done through changes in domestic legislation, tax treaties and through the update of the OECD transfer pricing guidelines.

The plan is structured based in three important pillars: i) coherence in the interaction of the domestic law in different countries through the design of new international standards to eliminate loopholes and gaps that facilitate artificial structures; ii) substance: realigning taxation of companies with their economic activity and value creation, and iii) Transparency: by obtaining relevant information tax authorities are better equipped to identify risk areas to detect aggressive tax planning at earlier stages.

7_{According to the introduction of the Action plan on BEPS, OECD, BEPS Action Plan, supra n. 1, at p. 7 the} developments in the operation of the MNE’s become a critical issue for all parties: As for the Governments, coping with less revenue and a higher cost to ensure compliance. In addition, Base Erosion and Profit Shifting (BEPS) undermines the integrity of the tax system (…) • Individual taxpayers are also harmed. When tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted; and Businesses are harmed. MNEs may face significant reputational risk if their effective tax rate is viewed as being too low.(…) Similarly, corporations that operate only in domestic markets, including family-owned businesses or new innovative companies, have difficulty competing with MNEs that have the ability to shift their profits across borders to avoid or reduce tax. Fair competition is harmed by the distortions induced by BEPS.

8_{G20 Leaders Declaration (2012) see: University of Toronto Library:}

http://www.g20.utoronto.ca/2012/2012-0619-loscabos.html

9_{OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing. p 5} 10_{OECD, Addressing BEPS, supra n. 9, p. 5.}

11_{OECD, BEPS Action Plan, supra n. 1, p. 11}

12_{Russia G20. Outcomes of the Russian G20 Presidency see:}

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6 Among the BEPS package, action 13 on Transfer Pricing Documentation and Country-by-Country Reporting 13(CbCR). This action seeks to establish a global standard for the required documentation in terms of the transfer pricing regime. This standard is referred as the three-tiered approach to transfer pricing documentation by establishing the framework for the three documents that are part of it: Local File, Master File and Country by Country Report. One of the objectives of transfer pricing documentation requirements is that the tax authorities are provided with the necessary information to perform a tax risk assessment to identify BEPS in operation subject to transfer pricing risk14.

Understanding the novelty of the CbCR, it is important to scrutinize how good this new tool turns out to be, based on the requirement that specialized information has an impact on both, taxpayers and tax authorities. For the taxpayers, in regards the extra administrative burden, and for the tax administrations around the globe for the astronomical volume of information received through the new standardized tool for risk assessment and how to process and analyses all the data in order to take full advantage to obtain results identifying risk of BEPS activity.

2. Objectives

The main objective of the thesis is to analyse the limitations and advantages of the CbCR included in action 13 of the BEPS action plan as a tool for BEPS Risk Assessment, for which this research has the following secondary objectives: review what was the problem with the transfer pricing regime regarding the lack of transparency and low taxation before the existence of the BEPS action plan; examine the generalities included in action 13 of the BEPS action plan and what is the Three-tiered approach suggested by the OECD regarding transfer pricing documentation; study how the risk assessment can be carried out through the CbCR; to thereafter analyse through case studies the impact of the CbCR on the risk assessment by the tax authorities and finally issue conclusions and recommendations if possible in this regard.

3. Research questions

Under the new challenges that come with the development of intragroup operations worldwide and the mechanisms to avoid BEPS, the BEPS action 13 focuses on the documentation to be required by multinational companies under the Three-tiered approach, where a new report is found, the CbCR, added with the aim of being used as a measure of

13_{OECD (2015), Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final} Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.

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7 BEPS risk assessment. Bearing in mind the aforementioned the main research questions this research seeks to answer is:

Country by Country Report, what is, how it works and how could be using as a mechanism of risk assessment

The other sub-questions of this document will be the following:

 What has been the evolution of the problem regarding the lack of transparency and low taxation before and after the existence of the BEPS action plan?

 What is the role of the tax risk assessment for a tax administration?  How will the exchange of information and compliance of the CbCR?  What is the structure of the CbCR and what is this report looking for?  How can the CbCR for BEPS risk assessment be used?

Which are the advantages and shortcomings the CbCR have?

4. Scope and delimitation of the study

Taking into account that the CbCR is a report whose first year of application is FY2016 and the first reports were delivered between 2017 and 2018 by the taxpayers in the different countries of the world that have this obligation in their internal order, the analysis of the same will be theoretical through examples, which by time constrains will focus only on specific cases and not the development of all the variables that can be reviewed in the CbCR. Additionally, the bibliography to be taken into account is based on official documents of the OECD and current specialised articles for the novelty of the topic. However, this research seeks to perform a diagnostic analysis and why not, be a reference that can raise points that may be taken into account in the update of the CbC framework report to be made in 2020 by the OECD.

5. Research methodology

The thesis is based on internal and an external research, based on bibliography of texts issued by the OECD and other specialised articles. To answer the research question and to assess the reliability of the CbCR by means this document contains some cases of study based in public information available and assumptions with a reasonable support in order that the results of the analysis are as accurate as possible. For purpose of this exercise the information of the database of the financial superintendence of Colombia was used15, such entity publishes the financial statements and the relevant information of the main Colombian

15_{The Colombian Superintendence of Corporation is a technical body, attached to the Ministry of Commerce,} Industry and Tourism. It encourages and supports the development of the business sector and exercises inspection, surveillance and control of commercial companies. Taken from:

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8 Companies16_{; thereafter, in the search were chosen the companies Cerrejon in Colombia} (Carbones del Cerrejon Limited, Carbones Colombianos del Cerrejon SAS and Cerrejon Zona Norte SA). In other example the “public” CbCR of Vodafone to make a comparison between different jurisdictions was taken. Then in the charts (recreating table 1 of the CbCR) the relevant information needed for purposes of the case were included. The scenarios used were limited to less complex cases due the lack of some information that was not publically available. The cases will be explained theorically, then shown in the charts to finally be assessed in the frame of a tax risk assessment.

16_See:

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9 CHAPTER II. PRE- BEPS ACTION PLAN LANDSCAPE

1. Framework and concerns

1.1. Global focus on abusive tax structures

It is seen that within a globalized economy, competition is not only presented at companies’ level, but also moves to the States. In that sense, there seems to be a competition among jurisdictions to offer the best tax menu in order to attract more capitals, for which the tax system is designed around this by offering tax opportunities on business profit, capital or benefits in passive income. States are in legitimate right to do so, nevertheless, this can be debatable when States in that process end up eroding the tax base of other states, affecting their tax collection17_.

The existence of competition between states has represented an opportunity for the MNEs to optimize their resources by means of international tax planning strategies18, in order to generate greater profitability, which in principle is not against the law. The problem occurs when the MNEs engage in an aggressive tax planning19 (ATP) aimed at the relocation or artificial migration of the profits generated by a company in a fiscal jurisdiction (normally of high taxation), towards another with a more favourable tax treatment obtaining as a result low or non-taxation20, or moving expenses that can be taking at a higher rate in other Jurisdiction21.

To achieve this objective, MNEs used sophisticated structures or artificial legal or financial acts that do not obey the economic reality of the activities that take place in the jurisdictions involved22. According to the OECD there are studies that indicate that MNEs shift profits from mobile activities (for example intangible and significant risks) towards jurisdictions with more favourable tax regimes, which certainly means that the profits associated to those assets, or transferred risks are impacted with a lower effective rate or non-taxation23.

There were diverse schemes of aggressive tax planning by means of the profit shifting in the Pre-BEPS era. For instance, requesting a full deduction at the level of the payer, the potential reduction or elimination of (withholding) taxes at source, and the non-applicability of

17_{OECD, Addressing BEPS, supra n. 9, p. 89.}

18_{When the acts are carried out have effects in 2 or more jurisdictions.}

19_{According to the report on Addressing BEPS Issues being addressed in ATC include: “debt-push down,} artificial interest deduction techniques, avoidance of withholding tax at source, and circumvention of CFC and thin capitalisation rules. Also relevant is the work on after-tax hedging, which deals with schemes that use the different tax treatment of certain items of income to hedge against a risk on an after-tax basis, and in some cases also enable the taxpayer to obtain additional tax benefits”. OECD, Addressing BEPS, supra n. 9, p. 85. 20_{OECD, BEPS Action Plan, supra n. 1, p. 10.}

21_{OECD, Addressing BEPS, supra n. 9, p. 89.}

22_{In relation to financing, BEPS opportunities can be achieved using Low-taxed branch, hybrid entities, hybrid} financial instruments and other financial transactions. See OECD, Addressing BEPS, supra n. 9, p. 40 23_{OECD, Addressing BEPS, supra n. 9, p. 20.}

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10 avoidance rules in the source or residence country24. There was also planning in the companies’ capital through parent-subsidiary indebtedness operations instead of contributing capital (equity)25. In addition, in the supply chains of goods whose transfer prices were planned. The tax residence of the company, the effective control headquarters, was planned. Another way of planning was through the transfer of patents, royalties for intangibles and many other more26.

The profit shifting resulted from the deployment of indirect and artificial arrangements of the MNE, generated a loss of revenue in the States, phenomena so-called base erosion. That systematic tax planning was negatively impacting the budget of the states. This was apparent at the moment in which the States had to respond to the effects of the economic crisis of 2008 with austerity measures due to a budget deficit27. This affected collaterally the individual taxpayers who had to face a higher tax burden and also the MNEs themselves who would be affected their reputation before general public28.

The impact of the subsequent recession on governments and citizens led states, civil society and regulatory agencies to pay more attention to fiscal practices carried out by high profitable MNEs. That is why, in 2012, the strategies of aggressive fiscal planning came to light, causing a widespread media coverage29, which generated a great public debate and protests when citizen found out that large companies paid comparatively less taxes than individual taxpayers, leaving in the air a feeling of unfairness30.

1.2.Outdated tax systems

The problem in this sense revolves around the fact that domestic tax systems and international instruments, e.g. Double Tax Conventions did not adapt to the new challenges of a globalized world which is far more complex that the one in which they were conceived. In effect,

24_{OECD, Addressing BEPS, supra n. 9, p. 40.} 25_{OECD, ibid at 40}

26_{In practice, according to the OECD report “Addressing BEPS” any international tax planning will need to} incorporate a number of co-ordinated strategies, which often can be broken down into four elements (i) Minimisation of taxation in a foreign operating or source country (which is often a medium to high tax jurisdiction) either by shifting gross profits via trading structures or reducing net profit by maximising deductions at the level of the payer;(ii) Low or no withholding tax at source;(iii) Low or no taxation at the level of the recipient (which can be achieved via low-tax jurisdictions, preferential regimes or hybrid mismatch arrangements) with entitlement to substantial non-routine profits often built up via intra-group arrangements; and (iv) No current taxation of the low-taxed profits (achieved via the first three steps) at the level of the ultimate parent”. OECD, Addressing BEPS, supra n. 9, p. 73.

27_{G20 Leaders Conclusions on Financial Crises, 2008-2011}

http://www.g20.utoronto.ca/analysis/conclusions/fincrisis-l.pdf,

The Guardian. Gordon Brown heralds progress at G20 financial crisis talks

https://www.theguardian.com/business/2008/nov/15/economics-globaleconomy1

28_{OECD, ‘Action Plan on Base Erosion and Profit Shifting’ (OECD Publishing, Paris 2013) 8} 29_{Reuters. Starbucks, Amazon and Google to face UK lawmakers over tax. See:}

https://www.reuters.com/article/us-britiain-tax-idUSBRE8AB00E20121112 30_{Reuters. Anti-austerity protestors target Starbucks cafes. See:}

https://uk.reuters.com/article/uk-britain-starbucks/anti-austerity-protestors-target-starbucks-cafes-idUKBRE8B70CA20121208

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11 domestic standards were refined in an economic environment without the current levels of cross-border integration. In that context, the tax rules were elaborated in a world with less mobility and with a physical and non-virtual sales system. A world without hybrid instruments or entities, in which was common the transference of physical goods rather than transfer of technology, intellectual property and other types of intangibles, without thinking that the value of the companies would end up essentially residing in these elements and no longer in its material assets.

In view of the new scenario, it is observed that the States' concern, which arose in the 1920s until the end of the last century31_{, regarding international double taxation that could be an} obstacle to cross-border operations and investments (that was the engine of the Agreements to avoid Double Taxation) , has given way to a concern to the contrary assumption, the one of double non-taxation32 that result as a consequence of asymmetries in the fiscal rules of the different countries, which create gaps, loopholes whenever these rules interact33.

Furthermore, there is no international standards to ensure the coherence of the tax system that eliminates inconsistencies in the domestic tax regulations that facilitate artificial structures. In other words, there is no coordination between the different tax systems, which allows MNEs to engage in tax planning taking advantage of the mismatches that exist in the local regulations of the different jurisdictions in which they act34_{. The classic example is the} use of hybrid entities and/or instruments. That is why the need arose to find mechanisms to resolve these disparities and make the international tax system more coherent, which can be seen in some of the recommendations of the BEPS action plan.

1.3.Lack of transparency in corporate tax matters: missing the big picture of the MNE’s operations

With the financial crisis, the tax planning activities and low taxation of MNEs, especially high profitable ones and those on technology and/or digital sector35, were subject of a public debate. As a result of that, the civil society and media exhorted for more transparency in financial reporting36. The initiative arises in developed countries due to the fiscal needs originated in the crisis and the close attention of the public opinion, which, as mentioned before, reacted to the rescues to the financial sector and the revelation of aggressive planning schemes of large companies. Meanwhile, in the vast majority of developing countries it was the influence of developed nations that forced the path to transparency37.

In addition, before the financial crisis, one can tell that there was a limited access of financial information by tax authorities due, on one hand, to the lack of tools to see the overall picture

31_{OECD, BEPS Action Plan, supra n. 1, p. 9.} 32_{OECD, ibid at 10}

33_{OECD, ibid at 13} 34_{OECD, ibid at 13}

35_{J.P. Owens, Tax Transparency: The “Full Monty”, 68 Bull. Intl. Taxn. 9 (2014), Journals IBFD.}

36_{M.T. Evers, I. Meier & C. Spengel, Transparency in Financial Reporting: Is Country-by-Country} Reporting Suitable To Combat International Profit Shifting?, Discussion Paper No. 14-015. P 16

37_{OECD, Global tax and transparency: We have the tools, now we must make them work. See:}

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12 of a given company’s worldwide value chain and on the other hand, to the absence of consensus, especially for the jurisdiction that were opaque in terms of providing information38. That situation made it easier for MNEs to hide their correct taxation of the profits. Indeed, bilateral cooperation in the area of exchange of information was very scarce in practice, it was until 2009 when the Global Forum in Transparency and Exchange of Information made important progress as a response to G-20 request in this sense39.

In the same line of thoughts, the G-20 countries at summit in London on April 2, 2009 declared in their press release that "A global crisis requires a global solution", for this purpose the countries reached a series of agreements to act together and take the world economy out of recession. Within the measures for the strengthening of financial supervision and regulation, it was agreed that the era of bank secrecy is over40.

It can be said that this was an important starting point for countries to jointly seek to improve tax transparency and resolve the asymmetry of information that had been presented, this is all the information in the hands of taxpayers and their advisors and on the other hand, the limited access to it by the tax administrations of each country. That is why later on in the development of the BEPS initiate action plan one of the basic pillars is the improvement of transparency and legal security41_.

2. Transfer Pricing Documentation before BEPS

2.1. Transfer pricing guidelines

As it has been said, currently a large part of international trade is developed between related companies, usually part of MNE that carry out their activities in different countries which explains the increase in the scrutiny of transfer pricing issues by tax authorities. That is why the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) emerged to establish an international standard “intended to help tax administrations (of both OECD member countries) and MNEs to find

mutually satisfactory solutions to transfer pricing cases, thereby minimizing conflict among tax administrations and between tax administrations and MNEs and avoiding costly litigation(…)Tax administrations are encouraged to take the taxpayer’s commercial judgement with respect to transfer prices into account in the case of tax audits.(…) The Guidelines are also intended primary to govern the resolution of transfer pricing cases in mutual agreement proceedings between OECD member countries and, where appropriate, arbitration proceedings(…)42.

38_{P. Valente, Countering BEPS through Transfer Pricing Documentation, 54 Eur. Taxn. 6 (2014), Journals} IBFD. p.1.

39_{OECD, BEPS Action Plan, supra n. 1, p. 13.} 40_{London Summit – Leaders’ Statement (2009) See:}

http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/statement/wcms_178769.pdf

41_{OECD, BEPS Action Plan, supra n. 1, p. 14}_.

42_{OECD (2010), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations} 2010, OECD Publishing, Paris. Para. 15-17.

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13 An important aspect within the guidelines, and that is a priority in terms of tax compliance of both, tax authorities and companies, is related to the transfer pricing documentation by means of which the taxpayer support that transactions carried out with related parties are at market prices, that is in compliance with the arm’s length principle43_{. This documentation} has assisted the tax authorities to exercise control of intra-group transactions that are not the result of market forces, and that make them an instrument or means of reducing MNE’s tax burdens.

In this regard, Chapter V of the Transfer Pricing Guidelines issued in 1995 by the OECD4445, set out the guidelines or standards on the basis of which tax authorities around the world regulated the transfer pricing documentation and procedures applicable in each country, to help them to make the adaptation and interpretation that suit better every domestic system where the guides were followed46; on other part, the chapter include information that may be useful for determining transfer pricing 47_.

Chapter V of these Guidelines highlighted the desirability for reasonableness in the documentation from the perspective of both taxpayers and tax administrations and for greater level of cooperation between them to find a balance between the need for useful documentation to verify the arm’s length in cross-border intra-group transactions against the burden for taxpayers to obtain documentation48.

However, the chapter V was not clear regarding the documents to be included in a transfer pricing documentation package as “it is not possible to define in any generalised way the

precise extent and nature of information that would be reasonable for the tax administration to require and for the taxpayer to produce at the time of the examination”49_{and it also} expressly the information described “is not intended to set forth an exhaustive list of the information that a tax administration may be entitled to request”. Another issue in the 1995

43_{OECD, Transfer Pricing Guidelines, supra n. 45, para. 5.1.}

44_{In respect to the backgrounds of the 1995, Giammarco Cottani states that “In 1992, a Task Force of Working} Party No. 6 of the CFA began working on an update and consolidation of the 1979 and 1984 Reports on Transfer Pricing. An update was necessary to reflect developments in international trade (e.g. global trading) and technological developments. The 1995 OECD Guidelines aimed in particular at bridging the differences which have arisen between the United States and other OECD countries since the publication of the US White Paper in 1988. A worldwide standard on this matter was felt to be urgently needed, in particular to avoid double taxation (…) First, the Guidelines were presented as discussion drafts. Their final version was released in instalments, starting with chapters I to V in July 1995, covering the arm’s length principle (chapter I), traditional methods (chapter II), other methods (chapter III), administrative approaches (chapter IV) and documentation (chapter V). he second batch was released in March 1996, covering intangible property (chapter VI) and services (chapter VII). A chapter on cost contribution arrangements (chapter VIII) was published in October 1997. Guidelines for concluding APAs under the MAP were issued in October 1999” OECD Transfer Pricing Guidelines G. Cottani, Transfer Pricing, Topical Analyses IBFD (accessed 26 June 2018).

45_{The chapter V in force before revision and replacement made by Action 13 Final Report.} 46_{OECD, Transfer Pricing Guidelines, supra n. 45, paras. 5.3 -5.15.}

47_{OECD, Transfer Pricing Guidelines, supra n. 45, paras. 5.16-5.27.} 48_{OECD, Action 13 Final Report, supra n.14, para.2.}

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14 of chapter was the haziness of the link between the process for documenting transfer pricing, the administration of penalties and the burden of proof50.

Bearing in mind those circumstances, the obvious result was the lack of uniformity in the transfer pricing documentation requirements by the countries that adopt them since 199551_. That is why there are for instance divergences regarding timing of documentation disclosures and in the type and detail of the information maintained and submitted by the taxpayers (from very exhaustive in some countries to more high level in others52. In fact, the flexibility provided by the guidelines, as each country could tailor the transfer pricing requirements to its domestic legislation, prevent tax authorities to have an international compliance standard for transfer pricing documentation. For that reason, this local approach on transfer pricing documentation focus on one side of the equation was not enough for tax authorities since it hinders them to access to the big picture of the transfer pricing practices of a MNE group. Furthermore, in tax authorities’ opinion, the transfer pricing reports provide a partial information that results unsatisfactory for their tax enforcement and risk assessment needs53_. It can be claimed that Chapter V of the transfer pricing guidelines was the guidance on transfer pricing reports for more than 20 years and it was a relevant point of reference for many tax authorities around the globe. But it is also true, that in the current state of a more integrated economy with more complex intra-group transactions, it was required with urgency, to move from one-sided approach, where transfer pricing documentation was a compliance addressed at a domestic level, to a more multijurisdictional tool. With that in mind, as part of the OECD’s BEPS initiative, the Action 13 report, replace chapter V of the 2010 OECD transfer pricing guidelines which will be discussed in more detail in Chapter III. 2.2. Role of the transfer pricing documentation as tool for tax risk assessment Despite that transfer pricing it is thought to be a global language, as noted above, the transfer pricing documentation regime is subject to a national tax enforcement outlook and therefore, the requirements obey to the particularities of a given domestic legislation. Moreover, it was not manifest at all the times what was the objectives of the need of transfer pricing documentation. Given that, some countries went after general background information on the taxpayer and its transfer pricing positions. Other countries searched for information they

50_{OECD, Action 13 Final Report, supra n.14, para.3.}

51_{Nevertheless, there have been international attempts to create a common framework in TP documentation.} For instance, the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union (“EUTPD”) aiming at standardizing the documentation that MNEs carrying out business in Europe must provide to tax authorities on the operation subject to the transfer pricing regime in Europe. In that respect see Resolution of the Council and of the representatives of the governments of the Member States, meeting within the Council, of 27 June 2006 on a code of conduct on transfer pricing documentation for associated enterprises in the European Union (2006/C 176/01).

52_{OECD (2013), White Paper on Transfer Pricing Documentation (July 2013) para. 14, 16.} 53_{OECD, Action 13 Final Report, supra n.14, para.3.}

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15 might need to conduct a transfer pricing audit. In other cases, the information requested to a taxpayer in an audit is jointed to the scope of the transfer pricing documentation rules54. The above can be explained in the fact that in the Chapter V of the 1995 transfer pricing guidelines there was no distinction between the documentation that tax authorities might require to conduct a transfer pricing risk assessment and the data they may need to audit the transfer pricing practices of a taxpayer. This is crucial, taking into account that nowadays tax risk assessment has more relevance for tax authorities, as a way to identify and evaluate through the information provided to them the tax risks with regard to specific taxpayers and transactions. Such information can be used for case selection purposes, when are identified elements that might indicate that there is a significant amount of transfer pricing risk so that tax authorities focus their attention to those taxpayers which raise red flags55_.

Bearing this in mind, many countries opted to ask taxpayers for additional disclosure or information at the time of the annual tax return in relation with transactions with related parties. A few countries demand disclosure of the taxpayer’s financial statement evaluation of material transfer pricing exposures. In general, such additional information is deemed to be part of the transfer pricing report, but may be used by tax authorities for risk assessment purposes56_.

Therefore, the role played by the transfer pricing documentation in a pre-BEPS era was basically oriented to demonstrate that cross-border transactions between related parties were at market value and its role as a tool for tax risk assessment was non-existent, unless the particular country under its domestic legislation expressly stated that transfer pricing documentation served to carry out a transfer pricing risk assessment.

Hence, in November 2011, the OECD Global Forum on Transfer Pricing undertook a project on transfer pricing risk assessment whose objective was to produce a handbook providing clear and detailed steps that countries could follow to assess the transfer pricing risk presented by an individual taxpayer’s operations. It was intended to be suitably for both developing and developed countries to use in conducting transfer pricing risk assessments. However, the final version was published after as the Country-by-Country Reporting Handbook on Effective Tax Risk Assessment57.

54_{OECD, White paper, supra n. 55, para. 21} 55_{OECD, White paper, supra n. 55, paras. 47-49.} 56_{OECD, White paper, supra n. 55, para. 15.}

57_{OCDE, Public Consultation: Draft Handbook on Transfer Pricing Risk Assessment. See:}

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16 CHAPTER III. TRANSFER PRICING DOCUMENTATION IN A POST- BEPS

WORLD 1. Introductory remarks

Considering the necessity to update the Chapter V of the 2010 OECD transfer pricing guidelines, the OECD in 2011 initiated a work program with Working Party No. 6 of the Committee on Fiscal Affairs (WP6) aimed at adapting and simplifying such documentation requirements, which resulted in the issuance of a document known as White Paper on Transfer Pricing Documentation (White Paper) published in July 201358.

Besides, during that same month, the OECD adopted the BEPS action plan derived from the concerns expressed by governments and civil society, in the sense that activities and strategies used by the MNE’S in their cross-border transactions cause important erosion of the tax base and profit shifting. Subsequently, on October of 2015, the OECD published the final report of action 13 “Transfer Pricing Documentation and Country-by-Country Reporting”, which constitutes the new Chapter V of the updated version of the 2017 OECD transfer pricing guidelines.

These new guidelines on transfer pricing documentation retain to great extent the ideas originally contributed by the white paper, which proposed modification of the transfer pricing documentation to make the transfer pricing compliance simpler and more straightforward for the taxpayers, but also providing tax authorities with more useful information to conduct transfer pricing risk assessment and transfer pricing audits. In order to do so, the white paper advocates for a possible coordinated approach to transfer pricing documentation (“Coordinated Documentation Approach”) which follows a two-tier structure consisting of a master file and a local file “through which both the “big picture” information is made

available for risk assessment purposes and detailed information on the related party transactions can be required when the arm’s length character of specific transactions needs to be assessed”59.

58_{OECD, White paper, supra n. 55, p. 1.} 59_{OECD, White paper, supra n. 55, p. 1.}

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17 However, it is observed that Chapter V of the 2017 transfer pricing guidelines deviates from the simplification objective originally proposed in the White Paper60 and, it end up being updated by the final report on Action 13 to adopt the BEPS objectives.

According to that, in the new post-BEPS world the transfer pricing documentation requires higher level information. This seeks to provide tax authorities a big picture overview of the MNE’S transfer pricing practices across the countries to undertake transfer pricing risk assessments and face BEPS opportunities more efficiently. The new requirements are also expected to affect, from a fiscal standpoint, the behavior and attitude of taxpayers in relation to its intra-group transaction in a cross-border level.

2. BEPS Action 13: changing the landscape in the transfer pricing documentation

From the BEPS action package, Action 13 is one of the ones that has the most impact immediately in the day-to-day tax management of the MNE’s, and is one of the key pieces in the attempted restoration of the international tax system and some relevant OECD countries consider it the cornerstone to correct the inadequate levels of taxation of some MNEs in their territories.

This action is fully framed in two of the key objectives of the BEPS project, on the one hand the increased transparency on the part of multinationals in their relations with the Tax Administrations at a global level, and on the other hand, the alignment of taxation with the economic reality of the business, the economic substance and the value chain of the MNEs61. Action 13 final report provides guidance for tax authorities to develop rules that allow them to enhance transparency and obtain information to carry out appropriate risk assessments and transfer pricing examinations more efficiently62_{. The new approach will provide better} information to the tax authorities in terms of quantity and quality and in turn will require a greater effort on the part of the MNE’s, who must make additional investments e.g. human, economic and technological resources to adequately comply with the new documentation. The new transfer pricing documentation stated in Action 13, represents a change with respect to the previous documentation model. The former, portraits a clearer description of the documentation that MNEs should provide to comply with transfer pricing obligations, while the latter, was vague in the requirements for tax payers. Another difference is that with action 13 and the inclusive framework, more countries will apply the 2017 transfer pricing guidelines on Documentation, since the CbCR is regarded as a minimum standard63 whereas, in the past, the transfer pricing documentation regime was mainly followed by OECD

60_{In this regard, it is important to clarify that the white paper was not intended to provide all of the answers,} but rather offer a starting point to discuss ways to improve the transfer pricing documentation. For that reason, interested parties, countries and tax payers were invited to make comments on the proposals contained in the paper.

61_{OECD, BEPS Action Plan, supra n. 1, p. 23.} 62_{OECD, Action 13 Final Report, supra n.14, para.}_1.

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18 countries and some countries did not even have requirements of transfer pricing documentation. One more dissimilarity is that in the post BEPS-world, the information demanded from the taxpayer offers a picture of the global business context (three tier approach), as opposed to the domestic side of the transaction under the 2010 TPG (one sided approach). Finally, in action 13 is explicitly referred that one of the objectives of the transfer pricing documentation is provide useful information to tax authorities to undertake a transfer pricing risk assessment, conversely, the former chapter V did not contain any reference in that regard.

3. Objectives of transfer pricing Documentation requirements

The new transfer pricing documentation model brings up three main objectives of transfer pricing that should be considered in designing appropriate domestic transfer pricing documentation requirements6465.

First aim, is to ensure that taxpayers comply with their transfer pricing obligations in their operations with related parties. This objective seeks that taxpayers adopt coherent transfer pricing positions to be more aware of the transfer pricing requirements when establishing prices and other conditions and when reporting the income derived from for transactions with related parties. The idea is to promote a change of thinking in the taxpayers to comply on its own initiative rather than driven by a penalty.

Second, transfer pricing documentation as a tool for tax administrations to obtain relevant and reliable information to conduct an informed transfer pricing risk assessment at an early stage. It should be noted that, transfer pricing documentation is one important source of information to conduct the transfer pricing risk assessment. The inclusion of this objective can be explained because effective risk identification and assessment is a relevant process of select the right cases to perform transfer pricing audits or enquiries and focusing on the relevant issues without wasting tax enforcement resources. In case of transfer pricing issues, effective risk assessment becomes an essential precondition for a focused and resource-efficient audit. At this end, the OECD Handbook on Transfer Pricing Risk Assessment is a useful instrument to consider in conducting such risk assessments.

The Third objective is to provide tax administrations with useful information to carry out transfer pricing audits and to be able to demand all additional information necessary to conduct a comprehensive audit once the decision to conduct such an audit is made.

4. Three tier standard for transfer pricing documentation

In the pre-BEPS era, documentation requirements were focus on an individual country rules and taking into account the transactions of a local entity with its related parties. This state of

64_{OECD, Action 13 Final Report, supra n.14, para. 14.}

65_{As expressed in numeral 2, before the BEPS action plan, transfer pricing guidelines did not contain specific} mention of the objectives of the transfer pricing documentation.

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19 affairs made it difficult for tax authorities to get a broad perception of possible irregular practices of MNE’s, reason why sometimes the tax authorities put a lot of effort in minor matters, but missing matters of greater importance or higher transfer pricing risk66.

The transfer prices, incorrectly applied, can be one of the main causes of concern of the BEPS project and with a greater economic impact. Therefore, the three tier approach set out in action 13 provide a greater visibility to the tax authorities to execute an appropriate risk assessment. Additionally, it is a platform on which the relevant information for an audit can be developed and provide MNE’S with resources to demonstrate they are in compliance with the arm’s length principle67_.

In short, through the three tier approach, action 13 standardise the documentation of transfer pricing that imply a paradigm shift in terms of demand and quality of the content, based on a model that will be composed of three elements68_:

Masterfile that is intended to provide a high-level overview in order to place the MNE group’s transfer in a global context69_{available to tax authorities of all jurisdictions where a} Group operates). Company is required to provide: a) the organisational structure; b) a description of the business; c) the intangibles; d) the intercompany financial activities; and (e) the financial and tax positions70.

 A Local File for each Group entity, its objective is to provide detailed information about intercompany transactions. Its main objective is to support that operations carried out by the local entity with its related parties residing abroad were carried out observing the arm’s length principle.

 A Country by Country Report (CBCR) is a standardized template that gives visibility to the tax authorities about global allocation of income, benefits, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates.

As it has been reiterated in this document, the content of Action 13 of BEPS became the new Chapter V of the Guidelines of the OECD and it is recommended that individual jurisdictions adopt the "Three tiered approach" or focus on three blocks or elements.

The Country by Country report that complements the transfer pricing documentation, will be a risk assessment tool, which the tax authorities will be able to share through an information exchange mechanism that is expected to go to work very agile.

66_{OECD, White paper, supra n. 55, para. 41.}

67_{OECD, Action 13 Final Report, supra n.14, para. 17.} 68_{OECD, Action 13 Final Report, supra n.14, para.}_18. 69_{OECD, Action 13 Final Report, supra n.14, para. 15.} 70_{OECD, Action 13 Final Report, supra n.14, para. 19.}

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20 5. International Exchange of country-by-country reports

The CBCR was designed to be a risk assessment tool, but to be effective requires automatically exchange instruments, because the countries where the head office of MNE Groups are located need to be available to share the whole information with the other countries where the MNE are established.

Bearing in mind this situation and taking advantage of the Convention on Mutual Administrative Assistance in Tax Matters signed by 124 jurisdictions71_{the Multilateral} Competent Authority Agreement on the Exchange of CbC Reports (the "CbC MCAA") was designed to be an mechanism to exchange information if the jurisdiction agree and include the CbC MCAA by virtue of Article 6 of this Convention. In addition, two further model

competent authority agreements have been developed for exchanges of CbC Reports, one for exchanges under Double Tax Conventions and one for exchanges under Tax Information Exchange Agreements.72

71_{OCDE, Convention on Mutual Administrative Assistance in Tax Matters (2018). See:}

http://www.oecd.org/ctp/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm

72_{OCDE, Automatic Exchange Portal - Country-by-Country reporting. See:}

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21 CHAPTER IV. IMPACT OF THE COUNTRY BY COUNTRY REPORTING ON

TAX AUTHORITY'S TAX RISK ASSESSMENT: AN ATTEMPT TO UNDERSTAND THE MNES BIG PICTURE AND TO CONSTRAIN BEPS 1. Background

Although the CbCR is an element that really presents a novelty in the transfer pricing documentation, with respect to the transfer pricing guidelines of 2010, it is not an OECD original construction. The CbCR for MNE´s was as a result of a campaign by civil society organisations seeking for a mechanism to demanad global information of the MNEs rather than a segmental report that was the traditional approach in accounting practices73. The idea of CbCR was first developed in 200374 by Richard Murphy a member of Tax Justice Network (TJN)75. The concept was referred in the first Draft of 2003 as “A Proposed International

Accounting Standard Reporting Turnover and Tax by Location” 76 and latter in 2012 as “Country-by-country Reporting: Accounting for globalisation locally77_.

The proposal of the International accounting standard (IAS) required companies to disclose publically accounting information in a table that should include entities that are part of the group, the location of each entity and its activity, the financial performance in every country in which it operates, namely, sales to independent third parties o sales to other entities within the and sales to related parties, costs, profits, losses, tax, employees78_{. The purpose of the} CbCR is providing all the stakeholders interested (politician, regulators and civil society) the relevant accounting data for economic making decision79 interested in the operation of MNEs.

Along with that, in Murphy’s view the CbCR provides numerous benefits, not just for investors, but for other users of financial statements (for employees, suppliers), other regulatory agencies and tax authorities. For the latter, it represents a valuable source for tax

73_{The Conversation. Country by country reporting is a victory for citizens over companies (2013). See:}

http://theconversation.com/country-by-country-reporting-is-a-victory-for-citizens-over-companies-14654

74_{Murphy, Richard. (2012). “Country-by-Country Reporting: Accounting for globalization locally” p.65}

http://www.taxresearch.org.uk/Documents/CBC2012.pdf. The first draft can be found in

http://visar.csustan.edu/aaba/ProposedAccstd.pdf

75_{Senior Tax Policy Advisor, Tax Justice Network. Founder member of the Tax Justice Network.} http://www.taxresearch.org.uk/Documents/RichardMurphycvJuly2006.pdf

76_{Murphy, Richard. (on behalf of the Association for Accountancy and Business Affairs), 2003. A Proposed} International Accounting Standard Reporting Turnover and Tax by Location.

http://visar.csustan.edu/aaba/ProposedAccstd.pdf , accessed 20 May 77_{Murphy, Richard, Accounting for globalization locally, supra n.78}

78_{Murphy, Richard, A Proposed International Accounting Standard Reporting Turnover and Tax by Location,} supra n.80, p 2.

79_{Murphy, Richard, A Proposed International Accounting Standard Reporting Turnover and Tax by Location,} supra n.80, p 4.

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22 authorities to acquire data that was not available before to measure the compliance level of the entities that made part of a MNE80. As Murphy states:

“Country by Country reporting offers considerable opportunities to access new data for tax authorities anxious to ensure the subsidiary companies of multinational corporations are tax compliant when operating within their jurisdictions. Tax compliance is defined as seeking to pay the right amount of tax (but no more)in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes “81_.

In practice for tax matters, the CbCR could be function for tax authorities as a Risk assessment instrument, providing more significant Arm’s length pricing data in cases appropriate uncontrolled comparable are not found and as a supporting documentation for dispute resolution on mispricing investigations.

Conversely, in its beginnings the CbCR was used in the extractive industry sector involved in Mineral Development agreements as part of the requirements of the Extractive Industries Transparency Initiative (EITI), not for fiscal purposes, but as an instrument of transparency 82_{that helps fight corruption}83_{in developing countries that obtain a significant amount of} income from these industries.

2. Overview of the Country by Country Reporting (CbCR) The CbCR is a standard template that consists in 3 tables, namely:

Table 1. It should include information about the global attribution of income and taxes paid

by the group, together with certain relevant economic indicators to analyze the results. It should include:

The group's tax strategy in terms of tax payments globally refers to:

 unrelated party revenues

 related party revenues

 total revenues

 profit/(loss) before income tax

80_{Murphy, ibid. at 32} 81_{Murphy, ibid. at 37} 82_{Murphy, ibid. at 17} 83_{Murphy, ibid. at 18}

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23

 income tax paid (on cash basis)

 income tax accrued – current year

 stated capital

 accumulated earnings

 number of employees

 tangible assets other than cash and cash equivalents.

Table 2: It will also be necessary to report a list of all the entities of the group included in

the aggregation of each jurisdiction, indicating its country of fiscal residence and its country of incorporation or constitution, as well as the main line of business activity of each permanent entity or establishment.

Basically the data points for table 1 and 2 of the CbCR are a summary reflecting a value chain of a MNE and allow tax authorities to identify inconsistencies and/or potential transfer pricing and BEPS risk areas. At this point, it is important to precise that the main focus of the thesis is precisely to analyse the CbCR vis-à-vis the Tax Risk assessment. CbCR is innovative instrument that tax authorities have to fight BEPS and to select cases for audits based on a more robust analysis, but it is still in discussion whether or not the analysis of the date contained in the report prompt veracious risk indicators that can be meaningful for tax authorities for a tax audit

Table 3: Finally, and as a closing element of the information, a space is opened for the

company to explain those details of its operation that may have relevance for understand the figures included or any other information the MNEs consider.

It will not be necessary to report a breakdown of inter-company interest payments, or intra-group services, which was the idea if the initial template. It will be necessary to wait for the review of the situation planned for the year 2020 to see whether there will be changes or not.

3. CBCR as a tool of Tax Risk Assessment

Before talk about Tax Risk Assessment it is important to mention that tax avoidance exists worldwide on a large scale, and it is very profitable for the enterprises even if this implies penalties or reputational damages84. Given that in some cases could be unnoticed, the MNE Groups take advantage of tax harmful competition between countries using aggressive tax planning that results in low or non-taxation for MNE’s. Despite of that, there is no real evidence that proofs that the reputational damages for taxable matters implies a reduction of profits for MNE Group. As a way of example one can take Amazon, that faced an scandal

84_{M.H.J. Alink & V. van Kommer, Chapter 3: Developments in Society and the Tax Community in Handbook} on Tax Administration (Second Revised Edition) (IBFD28 2016), Online Books IBFD (accessed 1 August 2016).

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24 for obtaining tax advantages through sophisticated schemes of tax planning, but even though it reported net income of USD mill. 596 (FY2015), USD mill.2.371 (FY2016) and USD mill.3.033 (FY2017)85

The implementation costs of aggressive tax planning, including legal costs and planning advice, can be significant, but the magnitude of these costs apparently does not prevent corporations from engaging in tax avoidance either. In practice the extent to which corporations engage in aggressive tax planning and tax avoidance varies significantly.86. Given the proliferation of cases of tax avoidance the tax risk assessment emerge as a relevant mechanism exploited by tax authorities to design tools to identify factors that suggest particular taxpayers or arrangements may pose either an increased risk to their jurisdiction, where further compliance activity may be required, or a reduced risk, which may mean less compliance activity should be required87. Through this tools tax administrations could have a picture of the fiscal framework of sectors and companies and identify potential tax risks. In accordance with the BISEP Model and Spectrum of Taxpayer Attitudes to Compliance88, it can be said that an effective identification of potential tax risks, is one of the relevant steps to stop tax avoidance and tax elution since taxpayer may have less incentives to develop BEPS behaviors inasmuch as the probability to be exposed is high. However, nowadays most risk assessment systems still include a manual element and some are primarily or wholly manual89, making these process more subjective or may mean that risk cases could be set aside than with automated risk detection techniques.

85_{Amazon 10K FY2017.} https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-20171231x10k.htm#s0f97d84c752841e3a1c22a9b9b0cefae

86_{M.H.J. Alink & V. van Kommer, Chapter 3: Developments in Society and the Tax Community in Handbook} on Tax Administration (Second Revised Edition) (IBFD28 2016), Online Books IBFD (accessed 1 August 2016). 87_{BEPS action 13 Country by Country reporting - Handbook on Effective Tax Risk Assessment September} 2017. OCDE

88_{FORUM ON TAX ADMINISTRATION: COMPLIANCE SUB-GROUP - Information Note - Managing and} Improving Compliance: Recent Developments in Compliance Risk Treatments. 2009. Recent Developments In Risk Treatment Strategies – Introduction

89_{M.H.J. Alink & V. van Kommer, Chapter 3: Developments in Society and the Tax Community in Handbook} on Tax Administration (Second Revised Edition) (IBFD28 2016), Online Books IBFD (accessed 1 August 2016).

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25 BISEP Model and Spectrum of Taxpayer Attitudes to Compliance

Bearing that in mind and with the growing need of the countries to fight against tax evasion and tax avoidance, the BEPS initiative introduced in Action 13 the CbCR to provides a better understanding to tax authorities on how, where companies pay taxes etc, giving them a more complete and useful information.

Fiscal year 2016 (reported on 2017 or 2018) was the first year in which tax authorities around the world received through the CbCR information on large MNE groups with operations in their country, breaking down a group's revenue, profits, tax and other attributes by tax jurisdiction. This information has never previously been available to tax authorities and represents a great opportunity for them to understand the structure of a group's business in a way that has not been possible before and to perform a more informed risk assessment to detect possible BEPS risks.

The CBCR has become as a risk assessment tool, even more when the prevailing practice in

international taxation and accounting rules, allows MNEs to effectively avoid taxes within the boundaries of the Law. CbCR helps surpass the inadequacies of the current practice and provides stakeholders with information about company business activities and tax structures that would otherwise remain unknown90_.

The OCDE in the Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment (HETRA) propose some risk indicators that could be automatized because the CBCR is a report that will have to follow the Country by Country Status Message XML Schema stablished by the OCDE to be applied for tax administrators to submit this report in an XLM format.

90_{Charalampos Papalampros. Master thesis International Business Taxation / track: International Business} Tax Economics, Tilburg School of Economics and Management, Tilburg University - Tax transparency: Is Country-by-Country Reporting going public? (2017)

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26

4. Approaches to develop a tax risk assessment with CbCR

Following implementation of CbC Reporting, a tax authority will then need to start using the information they receive, either from a group directly or from a foreign tax authority. The Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment explores how this can be done, taking into account the different approaches to tax risk assessment applied in different countries, the types of tax risk indicator that may be identified using information contained in CbC Reports, and the challenges that may be faced by tax authorities and what they need to be aware of. It shows that CbC Reports can be a very important tool for the detection and identification of transfer pricing risk and other BEPS-related risk in the hands of a tax administration, used alongside other information that it holds and as a basis for further enquiries.

In words of Matthew Herrington and Cym H. Lowell:The country-by-country reporting data will facilitate risk assessment, and tax base protection as it provides a global data template for tax authorities to see the overall picture and proceed with examinations and adjustments accordingly.91

5. Ways in which CbCR can be used by tax administrations in assessing transfer pricing and other BEPS-related risks

The Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment suggests a number of tax risk indicators that may be detected using information contained in an MNE group's CbC Report and the method to interpret them would vary depending on the approach taken by each Jurisdiction. The indicators can be as follows92:

1. The footprint of a group in a particular jurisdiction. e.g. where a CbC Report indicates that a group has total revenues in the jurisdiction above a set threshold, this may flag the group for further risk assessment

2. A group's activities in a jurisdiction are limited to those that pose less risk: using a CbC Report to filter MNE groups where the nature of activities in the jurisdiction suggest the tax at risk is likely to be low.

3. There is a high value or high proportion of related party revenues in a particular jurisdiction: this increases the potential that an error in the transfer prices applied could give rise to a significant tax difference.

91_{Matthew Herrington and Cym H. Lowell. The Evolving World of Global Tax Planning: Part I. International} Transfer Pricing Journal January/February 2017

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27 4. The results in a jurisdiction deviate from potential comparable. To analyse Key financial ratios for jurisdictions where an MNE group has activities may be compared with those of other jurisdictions within the group; with the group as a whole; with potentially comparable entities outside the group; or with industry average:

 Income /employee

 Income/ tangible assets

 Profit before taxes/employee



5. The results in a jurisdiction do not reflect market trends: results may be distorted by BEPS activity.

6. There are jurisdictions with significant profits but little substantial activity. Profits may have shifted away from the jurisdiction where the underlying economic activity is taking place.

7. There are jurisdictions with significant profits but low levels of tax accrued. A low effective tax rate to indicate that a group is using BEPS to shelter taxable income

8. There are jurisdictions with significant activities but low levels of profit (or losses) Profits that are attributable to a jurisdiction may be being shifted to a jurisdiction where they are taxed more favourably.

9. A group has activities in jurisdictions which pose a BEPS risk group may be engaged in a known BEPS-related activity

10. A group has mobile activities located in jurisdictions where the group pays a lower rate or level of tax. A group may have shifted mobile activities to a jurisdiction to benefit from a favourable tax regime e.g. holding or managing Ip, sales

11. There have been changes in a group's structure, including the location of assets: Changes in a group's structure may be an opportunity for a group to engage in BEPS and could mean a need to revisit existing transfer pricing policies and methodologies, and re-consider the identification and pricing of related party transactions

12. Intellectual property (IP) is separated from related activities within a group Marketing entities could be earning profits that are not attributable to the jurisdictions where they are resident

13. A group has marketing entities located in jurisdictions outside its key markets. A group may be making high tax accruals for uncertain tax positions, which could indicate BEPS-related behaviour

Country by Country Report, what is, how it works and how it could be used as a mechanism of risk assessment.

TABLE OF CONTENTS