FTS plans to introduce a new "black list" of countries for CbCR purposes

16 November 2023
Tax Messenger
On 13 November 2023, the draft order of the Federal Tax Service of Russia ("FTS") (hereinafter, the Draft Order) was published on the Federal Portal of Draft Regulations to establish the list of countries (territories) that fail to ensure the automatic exchange of country-by-country (CbC) reports on a regular basis (hereinafter, the List).

Pursuant to current Order No. ED-7−17/1226@ of the FTS dated 20 December 2022 (hereinafter, the Order) effective since 7 February 2023, the FTS is engaged in the automatic exchange of CbC reports with the tax authorities of 67 countries and 8 territories.

The Draft Order has been published for the first time and specifies 21 countries and one territory that are required to ensure the automatic exchange of CbC reports but fail to do so on a regular basis. In particular, the List includes the following countries (territories): Australia, Austria, Belgium, Germany, Greece, Denmark, Ireland, Spain, Italy, Cyprus, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Slovenia, Finland, France, Sweden, Japan and Bermuda.

The approval of the List will mean that Russian constituent entities of foreign multinational enterprise groups (hereinafter, MNE Groups) having their ultimate parent entities (hereinafter, UPEs) registered in any country included in the List may be subject to additional tax obligations.
Consequences for taxpayers

In accordance with Article 105.16−3 of the Tax Code of the Russian Federation (hereinafter, the Russian Tax Code), Russian constituent entities of foreign MNE Groups have the right not to submit CbC reports to the FTS subject to certain conditions, including when foreign UPEs of such foreign MNE Groups are tax residents of the countries (territories) that automatically exchange CbC reports with Russia. In such cases, the FTS may obtain CbC reports prepared by UPEs of foreign MNE Groups in their tax jurisdictions as part of the automatic data exchange with the tax authorities of the respective jurisdictions.

However, if UPEs of foreign MNE Groups are tax residents of the countries included in the list of countries (territories) that fail to ensure the automatic exchange of CbC reports on a regular basis, the FTS is authorized by clause 7 of Article 105.16−3 of the Russian Tax Code to request CbC reports directly from Russian constituent entities of foreign MNE Groups as part of the "secondary filing" procedure due to the fact that it is not possible to obtain CbC reports as part of the automatic data exchange.

To fulfill the respective obligation, taxpayers are required to prepare and submit electronic CbC reports in a timely manner (not later than three months from the date of receiving the request) in accordance with the requirements for the preparation of the XML schema of CbC reports, as established by Order No. ММV-7−17/123@ of the FTS dated 6 March 2018. A fine of RUB 100,000, which is to be increased to RUB 1,000,000 starting 1 January 2024 after the introduction of the expected changes[1] to the Russian Tax Code, is charged for a failure to submit a CbC report or for submission of a CbC report containing inaccurate information.

In addition, we note that there are currently no clarifications with regard to the reporting periods to which the List will apply once it enters into force. Specifically, it is unclear whether the List may be applied retrospectively. Therefore, there is a risk that the FTS will request CbC reports from Russian constituent entities of foreign MNE Groups, including with respect to prior reporting periods for which no CbC reports were obtained as part of the automatic data exchange with the respective countries.

There is also uncertainty regarding the amount of fines to be charged in relation to CbC reports for prior reporting periods that may be requested by the FTS after 1 January 2024. In particular, there is a risk that a fine of RUB 1,000,000 may also be applied to prior reporting periods.

It should be also noted that the published List does not include countries that were excluded from the Order because they had previously suspended the automatic exchange of CbC reports with Russia (e.g., Great Britain, Switzerland and Cayman Islands). Please note that the FTS may also request CbC reports from Russian constituent entities whose UPEs are registered in the above countries based on the fact that such countries are not parties of the Competent Authority Agreements concluded by Russia to ensure the international automatic exchange of CbC reports (paragraph 3, subclause 2, clause 6, Article 105.16−3 of the Russian Tax Code).

A failure to provide a CbC report upon request or provision of inaccurate information may cause the FTS to pay particular attention to intragroup transactions effected between Russian and foreign constituent entities of MNE Groups, and potentially result in TP or general tax audits by the FTS or develop a reputation of a "mala fide" taxpayer.
Conclusions — new obligations

If the Draft Order is adopted in its current form, Russian constituent entities of foreign MNE Groups will be subject to additional obligations with regard to submission of CbC reports, as the FTS will be authorized to request CbC reports for:

  1. Future reporting periods, and
  2. Prior reporting periods, in case the respective reports were not submitted to the FTS earlier as part of the automatic data exchange with the countries included in the List

For example, if CbC reports were not submitted to the FTS as part of the automatic data exchange, it may request such reports for the following periods:

  • 2021 — the automatic data exchange should have occurred no later than 31 March 2023
  • 2022 — the automatic data exchange will occur no later than 31 March 2024

In addition, a failure to provide a CbC report upon request or provision of inaccurate information, as described above, will entail greater responsibility for Russian constituent entities of foreign MNE Groups given the expected changes in the Russian Tax Code.

Therefore, we recommend that Russian constituent entities of foreign MNE Groups:

  • Carefully analyze the provisions of the Draft Order to clarify whether the UPEs of their MNE Groups are tax residents of foreign countries (territories) included in the List
  • Communicate with the UPEs of their MNE Groups in advance to discuss the respective matters and obtain CbC reports prepared in the tax jurisdictions of the UPEs
  • Collect additional information that is missing in the UPE’s CbC report and is required for successful preparation and submission of the CbC report to the Russian tax authorities as part of the "secondary filing" procedure
  • Prepare a CbC report in XML format in advance in accordance with the Russian legislative requirements that are substantially different from those of other jurisdictions in order to ensure timely submission of the CbC report to the FTS
How B1 can help

  • Preparation and submission of notifications of participation in an MNE Group in XML format in accordance with the Russian legislative requirements, and assistance in preparing and submitting notifications of participation in an MNE Group in accordance with the requirements of foreign jurisdictions
  • Preparation of CbC reports in XML format in accordance with the Russian legislative requirements and the requirements of foreign jurisdictions that do not participate in the automatic data exchange
  • Submission of a CbC report in XML format to the FTS on behalf of the taxpayer, and assistance in submitting the CbC report to the tax authorities of foreign jurisdictions that do not participate in the automatic data exchange
  • Methodological support on various matters related to CbC reporting, including assistance in communicating with the tax authorities

Authors:
  • Maria Frolova
    Partner
    Tax & Law
  • Ruslan Radzhabov
    Partner
    Transfer Pricing and Operating Model Effectiveness
  • Yuriy Mikhailov
    Director
    Transfer Pricing Services for Financial Institutions and Financial Transactions
  • Daria Eronteva
    Assistant Manager
    Transfer Pricing Services for Financial Institutions and Financial Transactions
  • Anna Ashurkova
    Advanced Staff
    Tax & Law
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