date | theme

9. May 2022 | Transfer pricing documentation: Details and notes

5 January 2022 | EU blacklist – what measures do tax havens take?

25. February 2021 | Tax assessment & tax collection at the German tax easing

23. August 2022 | Country-by-Country Report: How to explain correctly! Obligations – Procedure – Sanctions (this contribution)

§ 138a AO contains provisions for the preparation and transmission of the country-by-country report. In this case, reportable domestic group units of a multinational group of companies must provide certain information to the Federal Central Tax Office (BZSt) from a certain turnover size. This report is intended to provide domestic tax authorities with an overview of the global distribution of business activities. This includes selected indicators of economic activity such as employment, tangible assets and capital expenditure

1st Country-by-Country Report

1.1. Background of the Country-by-Country Report

In the course of the BEPS action plan indexed by the OECD, the legislator has created the new § 138a AO, which standardizes further reporting obligations for foreign activities. We have explained the history of the country-by-country report in detail in one of our other contributions.

This country-by-country report is intended to give domestic financial authorities an overview of the worldwide distribution of a company’s business activities. Therefore, the report must in particular record selected indicators of economic activity, such as employment, tangible assets and capital expenditure, and output data, such as revenue, profits, income tax payments.

1.2. Purpose of the Country-by-Country Report

The company data presented in the Country-by-Country Report are intended to show the audit fields that require further auditing to the auditing financial authorities as part of internal risk management. Thus, purely tax-motivated profit reductions and profit shifts can be better combated. This requires the provision of sufficient information on the multinational group of companies. Consequently, there is increased transparency, which is important for carrying out well-founded risk assessments, in particular with regard to transfer pricing. These risk assessments are intended to show where fiscal risks stemming from transfer pricing and other tax design measures threaten countries and thus enable the scarce human audit resources to be used effectively in these areas. Therefore, particular attention is paid to the general risk assessment through transfer pricing and the assessment of other profit-reduction risks.

Nevertheless, the country-by-country report should also give the tax administration the opportunity to conduct economic or statistical analyses, for example to determine the impact of tax law changes on tax revenue.

1.3. Tables of the Country-by-Country Report

The country-by-country report is divided into three tables.

Table one is the overview within the meaning of § 138a paragraph 2 no. 1 AO. It contains a numerical overview, broken down by tax jurisdiction, of the distribution of revenues, profits, income tax payments and other key indicators of economic activity of a multinational group of companies.

Table two, on the other hand, concerns the listing pursuant to § 138a(2)(2) AO and contains information on the main business activities carried out by the individual Group units in the respective tax jurisdictions.

In accordance with § 138a paragraph 2 no. 3 AO, the third table contains further information or explanations from the reportable group company, which may be useful for the understanding of the information in the other tables for the auditing tax authorities. This is intended to prevent misinterpretations and to reduce potential pick-up risks from the point of view of the reporting group.

2nd scope of application of the Country-by-Country Report

2.1 Priority domestic corporate subsidiaries

Priority for the preparation and submission of a country-by-country report are affected domestic companies. However, a few conditions must be met for this. First of all, there must be a domestic group parent company of a multinational group of companies which must prepare consolidated financial statements. This must include at least one foreign group sub-unit in the legal form of a corporation, a foreign partnership or a foreign permanent establishment. The consolidated revenues reported in the consolidated financial statements, i.e. the revenues generated only with companies not included in the consolidated financial statements (so-called external sales revenues), must amount to at least € 750 million in the financial year preceding the reporting financial year.

This makes it clear that only multinational groups are affected from a certain turnover size. For sales characteristics, it does not matter whether these were achieved domestically or abroad. This means that large German medium-sized business groups can also be subject to the notification obligation, even if a large part of the sales revenue is generated in Germany. A foreign subsidiary or a foreign permanent establishment is sufficient to trigger the reporting obligation if the turnover threshold is exceeded.

A domestic corporate parent company is exempt from country-by-country reporting if it is included in the consolidated financial statements of a parent foreign corporate parent company. With this exception to the reporting obligation, the aim is to avoid the need to draw up and submit a country-by-country report for the same multinational group of companies on an international scale.

2.2. Appointment of a domestic group company as rapporteur

Furthermore, a country-by-country reporting obligation of a domestic group company may result from the fact that a foreign parent company commissions them to submit a country-by-country report on their behalf and for the group.

Under certain conditions, both the BZSt and other domestic auditing tax authorities would not have access to the worldwide corporate data of a group of companies. Therefore, according to § 138a (4) sentence 1 AO, each domestic group sub-unit of a multinational group with a certain turnover size is obliged to prepare and submit a country-by-country report within the framework of the so-called secondary mechanism. In order to counteract the resulting general obligation of all domestic group units, the foreign group parent company can specifically commission a domestic group company included in the consolidated financial statements to prepare the country-by-country report on behalf of all other domestic group units and to transmit it to the BZSt. However, this Group unit should be able and particularly suitable in terms of personnel and facts. Then the country-related reporting obligation for all other domestic Group units according to § 138 (4) sentence 1 AO ceases.

2.3 Secondary mechanism

Despite the regulations described, domestic auditing tax authorities would not have access to a country-by-country report for the global group of companies for the purposes of general risk assessment if the foreign group parent company is not required to submit the same in its country of tax residence or if there is no effective international agreement with the country of residence that enables the automatic transmission of the country-by-country report between states or if the exchange is not actually carried out.

In order to remedy the above lack of information for domestic auditing tax authorities, § 138a (4) sentence 1 AO obliges a domestic group company or domestic permanent establishment to prepare and transmit a country-by-country report for its higher foreign group parent company if the BZSt does not receive it elsewhere.

Formal requirements of the Country-by-Country Report

The Country-by-Country Report can be submitted in English. For the information in tables one and two, this is not particularly relevant, since the XML file to be created only contains country codes for the tax jurisdiction, numerical data and the names of the group units. The information or explanatory notes in Table 3 shall be provided in English.

When filing the tax return, each domestic group entity or the domestic establishment of a foreign group entity must specify whether it is a reportable domestic group parent, a reportable commissioned group sub-unit, or a domestic group sub-unit included in a consolidated financial statements of a foreign group parent. In the case of the latter, it must be specified by which domestic or foreign group company and which tax authority the country-by-country report is submitted. This is to ensure that the existing obligation to produce a country-by-country report as a substitute is also fulfilled by clarifying each domestic group sub-unit through demand who produces the country-by-country report for the group. If this declaration is missing, the Group company itself is obliged to submit the country-by-country report.

4. procedure of the Financial Authority

The information in Table 1 of the Country-by-Country Report can be related by the auditing financial authorities, for example by means of ratios, in order to be able to compare these ratios within the same group. One of the objectives of this comparison is regularly to identify inequalities within the group, the causes of which could be of interest, for example, for a more detailed transfer pricing check.

The unequal distribution of certain inputs and output data does not, however, constitute evidence of profit shifts carried out by means of transfer pricing agreements or other tax design measures and cannot therefore in itself justify an income correction by the auditing tax authorities.

5. sanctions

From the calendar year 2020, if the country-related report is not, not completely or not submitted to the BZSt on time, the BZSt may impose a fine of up to € 10,000 pursuant to § 379 paragraph 2 number 1 letter c, paragraph 5 AO due to the existence of an administrative offence. If there is a reckless tax reduction according to § 378 AO, a fine of up to 50 000 € is possible.

However, an incorrect country-by-country report is not threatened with a fine. Insofar as technical difficulties in the BZSt have led to a rejection of the country-by-country report and thus to a time delay in the submission, a sanction is also not considered.