In 2017, an amendment to the Act on International Cooperation in Tax Administration introduced a new notification duty in the Czech Republic as part of the international information exchange, referred to as Country by Country Reporting. This amendment stipulates a duty for groups of companies with consolidated global income exceeding EUR 750 million to file the Country by Country Report to tax administrations on an annual basis, summarising financial information of this group. The duty to file the CbC Report, which is subsequently subject to automated information exchange between individual countries, to the tax authority is usually carried out by the ultimate parent company in the state of its residence on behalf of the entire group.

Groups of companies in the Czech Republic and in cooperating countries most frequently filed the first CbC Reports in December 2017 for the 2016 taxation period. As CbC Reports are filed pursuant to legislation in the relevant country, deadlines as well as the respective taxation periods may vary.

A list of jurisdictions to which the automated information exchange with the Czech Republic applies was published in the February issue of the Financial Bulletin (02/2018). The first exchange of CbC Reports between those jurisdictions should take place in June 2018. From this date, tax administrations will have available another tool for the monitoring of international group transactions.

In the CbC Report, multinational groups of companies must publish especially the following information:

• In which countries (jurisdictions) the group operates;
• The amount of revenues generated by the group with related and unrelated parties in individual countries;
• The group’s profit or loss before tax in individual countries;
• The amount of tax paid;
• The amount of the group’s registered capital and number of employees in individual countries; and
• The amount of the group’s tangible assets other than cash and cash equivalent in individual countries etc.

For each country, the group must provide a list of entities operating therein, specifying the character of their business activities.

What are the potential implications of exchanging CbC Reports for Czech companies? 

Pursuant to available information, the tax administrator will combine data from the CbC Report with information included in the transfer pricing annex to the tax return and other information available to it. Based on this information, the tax administrator will select entities, or transactions, exposed to risk for a possible in-depth analysis.

Various combinations of reported data may be considered exposed to risk: high payments for licence fees, interest and management services to countries in which companies have a low number of assets/employees while reporting high revenues vs. low taxation rate. Tax administrations will certainly focus on situations in which the group’s production plants (for which a similar activity may be anticipated) report in individual countries different profitability levels under similar turnover, in consideration of the aggregate taxation rate etc.

In order to eliminate risks, we recommend that companies which are subject to CbC reporting give sufficient attention to the CbC Report. Unless it is available to them, companies should require the CbC Report from the Group well in advance and verify the information included therein. We recommend analysing the report from the viewpoint of the tax administration – how the reported data may be interpreted by the tax administration and what other issues may possibly arise.

Subsequently, we recommend assessing the outcomes of the analysis in view of the supporting documentation used by the company to prove, during tax audits, the pricing in group transactions, along with transfer pricing documentation if available. Such review may indicate potential areas for debate with the group that may clarify some issues, or a need to provide additional documents or promptly address the situation. Such actions should certainly be performed prior to an audit by the tax office.

The article is part of dReport – June 2018, Tax news; Grants and investment Incentives