Treatment of dividends received in the Country-by-Country Report
Frederic BARAT
Avocat associé chez ForvisMazars Avocats, Leader TP pour la France de ForvisMazars, et co-leader TP pour le monde de ForvisMazars
As a reminder, the purpose of the Country-by-Country Report (CbCR), resulting from the work of Action 13 of the BEPS, is to provide transparency on the international allocation of profits subject to corporation tax for large international groups. This reporting obligation has been in place since 2016 for large international groups with a turnover of €750 million or more. It is also important to note that the CbCR will become public and will have to be published by reporting companies for financial years starting after 22 June 2024. This will increase reputational pressure on MNEs.
The first table of the declaration enable the reporting company to set out, in particular, per tax jurisdiction, the turnover achieved with independent parties and with related parties, and the profit or loss before tax.
Since the introduction of the CbCR, it has been consistently held that payments received from other constituent entities that are treated as dividends in the payer’s tax jurisdiction should be excluded from the turnover to be reported in the first table of the Country-by-Country Report. This position results from the publication of the Action 13 report of the BEPS.
However, the question of the declaration of dividends received from other constituent entities with regard to pre-tax profit (or loss) remained unresolved. This ambiguity was negatively impacting the efficiency of the measures by creating uncertainty for reporting multinational enterprises (MNEs) on the one hand and a breach in the uniformity of the reporting framework for local tax administrations on the other. This was causing issues with the evaluation of the worldwide taxable profit allocation.
In the most recent update to the OECD's Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13, the OECD have provided a negative response to the issue at hand. They have stated that the dividends received by other constituent entities should not be included in the pre-tax profit (or loss). Furthermore, the Guidance has indicated that in order to qualify a payment as a dividend, the payment must be considered as a dividend in the jurisdiction of establishment of the payer.
In a related matter, the update to the Guidance provides a much-needed clarification regarding the inclusion of profits from other entities in local financial reporting. When local financial reporting rules require the inclusion of such profits in the report, they should be treated as dividends received from another constituent entity. This means that the profits should be excluded from the turnover and profit reporting in the CbCR, unless the entity in question is transparent for tax purposes.
This update is welcome, as French law and administrative guidance were silent on the subject and limited to referencing the OECD guidance.
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