OECD’s CbCR risk assessment Handbook– A veracious indicator to Tax Administrations : Part 1

February 08,2018
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Arun Chhabra (Director, Grant Thornton Advisory Private Limited)

Balaji Ravindran (Manager, Grant Thornton India LLP)

The Organisation for Economic Cooperation and Development (“OECD”) has over the years published 15 reports providing guidance on effectively managing the base erosion and profit shifting strategies adopted by the multinational enterprises (“MNEs”). The Country-by-country reporting (“CbCR”) is one of the four minimum standards prescribed by the OECD to which over 100 countries have committed to implement. The final guidance on CbCR was issued by the OECD in October 2015, followed by several clarifications on the implementation and appropriate use of the information captured in CbCR.

The year 2017 being the first year of CbCR filing by MNEs, turns out to be a key milestone for OECD. This will be the first year, where the revenue authorities are expected to receive specific information on the consolidated revenue, profits, tax and other attributes of an MNE Group operating in their country. While there are several traditional tools / techniques adopted by the countries in conducting a transfer pricing risk assessment, the details captured in CbCR provides a bird’s eye view of the operations of the MNE Group, enabling the revenue authorities to carry out a risk assessment of the prevailing transfer pricing policies of the group which could potentially identify the base erosion and profit shifting issues prevailing in their jurisdiction. The CbCR captures data in a standardised format with numerical data and tick boxes, which enables the revenue authorities to easily identify the cases requiring a detailed scrutiny and initiate compliance actions towards those entities, which pose a higher tax risk. Further, the revenue authorities would be in a better position to review the activities of the MNEs in their jurisdiction and their contribution to the overall profitability of the Group. The CbCR supports the refinement of existing strategies and develops new techniques for identifying the audit worthy cases.

Overview of the handbook on effective risk assessment

Apprehension regarding confidentiality and potential misuse of the CbCR information by inexperienced and/or overzealous officials was a major concern for the MNEs. With a view to ensure the effective outcome of CbCR, OECD has released the handbooks on effective implementation and effective tax risk assessments, at its plenary meeting on the Forum on Tax Administrations. The Handbook on Effective Tax Risk assessment provides a well-designed risk assessment framework to the revenue authorities in disseminating the information obtained under CbCR into their tax risk assessment processes. The Handbook further goes about to discuss the potential tax risk indicators that the Revenue authorities could come across and the practical difficulties they might face while evaluating the information.

The Handbook also discusses on the risk assessment approach adopted in tax jurisdictions such as Australia, Brazil, Canada, Chile, India, The Netherlands and Spain. These jurisdictions use a variety of automated and manual risk procedures and the risk approach adopted by them are either centralised or decentralised. The selection of the risk assessment approach by these countries depends on various factors such as the number of cases for scrutiny, the availability of committed resources and a number of other things.

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