Using OECD Data For Country Risk Assessment [VIDEO]
Posted by Valentiam Group on December 9, 2019
In 2017, the Organisation for Economic Cooperation and Development (OECD) released a publication indicating ways that Country-by-Country (CbC) data can be used by local tax authorities for country risk assessment.
CbC reports, which contain information on a company’s business deals in every country where it operates, are a required part of transfer pricing documentation. The OECD guidance on effective risk assessment is designed to help tax authorities utilize CbC report data to assess taxpayers for potential risks.
This article provides a breakdown of how CbC data can be used for country risk assessments, along with best practices taxpayers can follow to help prevent audits and disputes.
How can CbC data be used for country risk assessment?
As noted in its publication, the OECD suggests that tax authorities create various ratios based on details such as profits to sales, profits per employee, and profits to assets for each legal entity in the company. Using software, tax authorities can then compare ratios across all legal entities to identify potential outliers, such as countries with unusually high profits.
Creating various ratios and comparing them across legal entities allows tax authorities to assess which taxpayers may not be paying enough in taxes. The OECD also recommends that tax authorities look for inconsistencies between the data contained in CbC reports and other sources, such as other transfer pricing documentation requirements, intercompany agreements, tax returns, and different sources of public information.
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An example of skewed results: If one company has a total profit of $100, with $70 of those profits attributed to one entity. This imbalance would likely prompt tax authorities to review additional information to determine whether that particular entity is performing the highly profitable functions necessary for the data to reflect an arm’s length outcome.
The following video is a visual demonstration of how OECD data is used for risk assessment:
Best Practices: Using CbC Data For Risk Assessment
Organizations can use business intelligence tools to create visual dashboards for displaying financial data. Graphs are much more compelling than spreadsheets—not to mention more persuasive during an audit. This sort of visual impact is something taxpayers should be thinking about when compiling CbC reports. A clarifying visual can help taxpayers anticipate the reactions of tax authorities when they review CbC reports with data outliers.
Corporate leaders should make it a point to review their company’s financial data to get a better sense of where their risks may lie. (Tweet this!) Generally speaking, CbC data are imperfect and are not always an accurate depiction of a company’s business dealings. For example, if a company has two separate legal entities located in one country, the CbC data may show a different profit performance than that realized by either entity. This will distort the data and may raise a red flag for tax authorities.
If a particular data set appears unusual, it may be prudent to offer some upfront explanation. A seasoned transfer pricing consultant can provide significant value. A consultant can make recommendations on the optimal ways to present CbC data, as well as whether or not to explain certain anomalies in reports. Transfer pricing consultants typically have extensive experience working with different tax authorities and know what they expect to see, as well as how they might react in certain scenarios.
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The Unified Approach is a radical departure from the existing system, in that it overlays formulary apportionment on top of the arm's length principle.
The OECD has released a new Pillar One digital tax proposal known as the Unified Approach, which goes beyond the digital economy and arm's length principle