Suspension of the Automatic Exchange of Country-by-Country Reports with Switzerland and the Cayman Islands

The Federal Tax Service ("FTS") has published an updated List of Foreign States (Territories) with Whose Competent Authorities the Automatic Exchange of Country-by-Country Reports is Carried Out ("the List"), approved by Order No. YeD-7−17/1226@ of 20 December 2022 ("the Order"). The Order took effect from 7 February 2023, automatically annulling the previous version of the List as approved by FTS Order No YeD-7−17/449@ of 27 May 2022.

Under the Order, Tunisia has been added to the List, while Switzerland and the Cayman Islands have been excluded from it.

For its part, Switzerland announced back in the autumn of 2022, following a meeting of the Federal Council on 16 September 2022, that it intended to suspend the exchange of all tax-related information with Russia, including Country-by-Country reports.

The Cayman Islands, on the other hand, has not yet announced the cessation of the automatic exchange of Country-by-Country reports with Russia.

As a result, the Swiss tax authorities are not automatically exchanging with the Federal Tax Service of Russia CbC reports for 2021[1] that were filed by taxpayers in Switzerland before 31 December 2022 and will not exchange such reports in future periods until automatic exchange is resumed.

The FTS will in turn stop automatically exchanging CbC reports for 2021[2] and subsequent periods with the tax authorities of Switzerland and the Cayman Islands starting from the effective date of the Order (7 February 2023).

As noted in a previous B1 alert, the List has already undergone several changes, resulting in the automatic exchange of CbC reports being initiated with seven new states and territories, while at the same time it has been suspended with Great Britain and some of its dependencies.

Consequences of the changes for taxpayers

Switzerland

Under Swiss law, constituent entities of multinational enterprise groups ("MNE Groups") that are tax residents of Switzerland but are not parent or surrogate parent companies may be requested by the tax authority to provide a Country-by-Country report under the "secondary filing" mechanism if there is no automatic exchange of CbC reports with the countries in which the parent companies of the MNE Group are tax resident. If requested, a company must provide a CbC report within 12 months of receiving the request.

This means that Russian MNE groups that have constituent entities in Switzerland must, if requested, prepare and submit a CbC report in XML format to the Swiss tax authorities.

Late submission of a CbC report incurs a fine of 200 Swiss francs for each day of the delay up to a total of no more than 50,000 Swiss francs.

We should also point out that a fine of up to 100,000 Swiss francs may be imposed on taxpayers who deliberately provide incomplete or incorrect information in a CbC report.

The Cayman Islands

Cayman Island law does not currently establish a "secondary filing" mechanism for Country-by-Country reports. CbC reports are filed only by parent or surrogate parent companies of an MNE Group. This means that, although the FTS has stopped automatically exchanging CbC reports with the tax authorities of the Cayman Islands, taxpayers in the Cayman Islands that are not parent or surrogate parent companies of an MNE Group are not obliged to prepare a CbC report under the "secondary filing" mechanism.

We should point out in this regard that any MNE Group entity registered in the Cayman Islands must, no later than the last day of the MNE Group’s reporting period (for example, 31 December if the MNE Group’s financial year ends on 31 December), prepare a notification of participation in an MNE Group and complete a special form on the Tax Authority’s portal indicating which parent or surrogate parent company will file a CbC report and in which jurisdiction.

A notification of participation in an MNE Group is filed once, but if any of the information stated in the notification should change, the tax resident of the Cayman Islands must submit a revised notification to the tax authorities.

A taxpayer that fails to comply with filing obligations (to file a CbC report and a notification of participation in an MNE Group) may be liable to a fine of up to USD 10,000 and/or imprisonment for up to 6 months.

The Russian Federation

Since Switzerland suspended the automatic exchange of Country-by-Country Reports in the autumn of 2022, the FTS may request MNE Group entities whose parent companies are based in Switzerland to provide a Country-by-Country report for 2021 and subsequent reporting periods. In some cases, it is possible that the FTS would request the provision of CbC reports for 2020 if those reports have not already been received by the Russian tax authorities through automatic exchange.

To fulfil the request, the taxpayer would need to file a CbC report in a timely manner (not later than three months after the receipt of the request) in XML format in accordance with the CbC XML schema requirements established by FTS Order No. MMV-7−17/123@ of 6 March 2018.

In accordance with the Russian Tax Code, failure to submit a CbC report on time or submission of a CbC report containing false information incurs a fine of 100,000 roubles.

Additional circumstances

We draw your attention to the fact that failure to submit a CbC report or submission of a CbC report containing false information, whether in Russia or in foreign jurisdictions under the "secondary filing" mechanism, may give rise to increased scrutiny by the tax authorities, more detailed examination of intra-group transactions with foreign MNE Group entities, and potentially in a decision by the tax authorities to carry out a transfer pricing audit or a general tax audit.

Furthermore, the above circumstances may give rise to substantial reputational risks, including the creation of a reputation as a "bad faith" taxpayer.