Strategizing International Tax Best Practices – by Keith Brockman

The Canada Revenue Agency (CRA) published Transfer Pricing Memorandum (TPM)-15 for intra-group services.  TPM-15 is meant to “clarify” CRA’s audit policy of intra-group services.  Although the guidance references OECD’s 2010 Transfer Pricing Guidelines, it is issued in advance of new OECD guidelines, thereby leading to further global inconsistency and instances of double taxation.  Links to a PwC summary and TPM-15 are included for reference:

http://www.pwc.com/en_GX/gx/tax/newsletters/pricing-knowledge-network/assets/pwc-canada-intra-group-services-guidance.pdf

http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/tpm15-eng.html

CRA’s four-pronged approach to allocating costs is:

  1. Shareholder costs (no allocation)
  2. Specific non-Canadian entity costs (no allocation to Canadian entities)
  3. Specific Canadian entity costs (no allocation to non-Canadian entities)
  4. Corporate group costs, allocated via an arm’s length charge

Other highlights:

  • “Auditors should refrain from accepting the proportion of sales revenues as a single allocation basis for management fees.”
  • Specific provisions in the Income Tax Act on non-deductibility of certain costs trumps treaty arguments, leading to double taxation.
  • Indirect tax considerations are also addressed in the memorandum.

CRA’s aggressive approach, coupled with its timing, will result in additional complexity cloaked outside of the double treaty mechanisms for which the goal of avoiding double taxation may be ameliorated via appeal mechanisms.

All organisations with operations in Canada for which costs are allocated should review this memorandum to better understand CRA’s audit intent and processes.

Accordingly, documentation of the benefit provided locally, lack of duplication and transparency of the allocation method is vital in proving the tax benefit for intra-group services.

 

 

TEI submitted comments on the Modified Nexus Approach for IP (BEPS Action 5) and International VAT/GST Guidelines.  Links to the submissions are provided for reference:

http://tei.org/Documents/TEI%20Comments%20-%20BEPS%20Action%205%20Harmful%20Tax%20Practices%20-%20FINAL%20to%20OECD%2019%20February%202015.pdf

http://tei.org/Documents/OECD%20VAT%20Guidelines%20-%20B2C%20Practical%20Application%20-%20TEI%20Comments%20-%20FINAL.pdf

Summary: IP, BEPS Action 5:

  • Accelerated  comment process will likely lead to suboptimal results.
  • The singular entity approach to benefit from the IP regime is problematic from a potential restructuring necessity and poses deviations from the arm’s length principle.
  • R&D and patents have been expressly stated as benefitting from the IP regime, whereas other activities are not yet mentioned.
  • Limiting the preferential regime to strictly patents, vs. innovative software, etc., represents a myopic approach.
  • The 2021 expiration date for existing regimes seems too short-sighted for patents that may last 20 years.

Summary: International VAT/GST Guidelines

  • Unilateral implementation of such guidelines erodes the neutrality principle, leading to double taxation or double non-taxation.
  • Recommendations should align with the OECD discussions for a reverse charge mechanism in B2B scenarios.
  • Supplier based documentation requirements should be practical and simple.
  • The statement that a VAT/GST registration does not create PE should be moved from a footnote to the body of the document for clarity.
  • The lack of consistency in application of transfer pricing adjustments for VAT/GST will provide increased risk of double taxation.
  • Final rules that are clear and uniformly interpreted should be implemented via simple, consistent, flexible and proportional guidelines.

TEI’s comments for these two critical topics convey practical and thoughtful considerations for change prior to final implementation.  They should thereby be reviewed to better understand the global context and potential consequences for these actions.

 

BEPS: Asset manager focus

EY’s Global Tax Alert focuses on BEPS considerations for asset managers,  This is a very timely and informative aspect of BEPS, as it will certainly have an impact on asset managers worldwide.  Early review and consideration of three significant proposals is recommended to ensure timely planning and relevant documentation.  The proposals include county-by-country reporting (Action 13), treaty abuse (Action 6), and hybrid mismatch arrangements (Action 2).

http://www.ey.com/Publication/vwLUAssets/BEPS_considerations_for_asset_managers/$FILE/2015G_CM5228_BEPS%20considerations%20for%20asset%20managers.pdf

The Alert is informative for all MNE’s and fund managers, ensuring the BEPS review umbrella appropriately encompasses direct and indirect aspects of operations, including the investment fund industry.

BEPS: APAC Network update

The Asia-Pacific Regional Network on BEPS discussed the impact of BEPS on their region in its meeting on 12-13 February 2015, with over 50 senior tax officials from 21 jurisdictions and international organisations attending.  Attendees included the Asian Development Bank, IMF, US Agency for International Development (USAID) and the Study Group on Asian Tax Administration and Research (SGATAR).

Twelve direct participants in the BEPS project consist of Australia, Japan, Korea, New Zealand, China, India, Indonesia, Malaysia, Singapore, Bangladesh, Philippines and Vietnam.  The discussion summary is included for reference:

http://www.oecd.org/ctp/beps-regional-network-asia-co-chairs-summary-of-discussions.pdf

Discussion Summary:

  • Participants supported the cooperative and inclusive process for developing countries to support the OECD/G20 strategy.
  • All stakeholders, including MNE’s, should be engaged to address BEPS solutions.
  • Recognition of uncoordinated regional efforts addressing interest deductibility (Action 4), PE (Action 7), transfer pricing issues (Actions 8-10), and transfer pricing documentation (Action 13).
  • The introduction of toolkits, further support, and assistance is welcomed, including their participation in the OECD dialogue process.
  • Further guidelines on dispute resolution were requested by business and NGO representatives.
  • Future involvement will focus on additional engagement, participation and collaboration with various partners.
  • Next meeting is scheduled for 16-18 March 2015.

As the BEPS project proceeds to finalize its deliverables this year, the input of this organization and other interested parties will provide a limited window of opportunity to share views and practical suggestions to ensure consistency for taxpayers and tax administrations regionally and globally.  Accordingly, monitoring (including active participation in) future developments will be critical to form Best Practices for taxpayers and tax administrations.

Most importantly, it will be critical to ensure regional participants do not execute unitary legislation prior to release of the final OECD guidelines to ensure the BEPS process is successful.  The timing of such initiatives should also be a priority for the Asia-Pacific Network, its participants and other countries around the world. 

Related posts:

  1. OECD Tax Inspectors Without Borders (TIWB) and Toolkit: 30 January 2015
  2. Creation of task force and prior meeting of SGATAR: 1 December 2014
  3. OECD BEPS Strategy for Developing Countries: 13 November 2014

 

 

EY’s Global Tax Alert highlights the 250 risk-based transfer pricing (TP) audits that commenced recently, as well as the relevant risk factors and transfer pricing submission details that are useful in determining transfer pricing risk currently and ongoing.  The Transfer Pricing Unit of the Ghana Revenue Authority was established in September 2012, highlighting the focus that this Unit has placed on gaining access to transfer pricing information from which a risk-based approach can be implemented.

http://www.ey.com/Publication/vwLUAssets/Ghana_commences_transfer_pricing_audits/$FILE/2015G_CM5216_TP_Ghana%20commences%20TP%20audits.pdf

Summary:

  • Transfer Pricing disclosure return (due 4 months after year-end):
    • Related party transactional overview and values
    • Location of related parties
    • Arm’s length pricing methodologies
  • Transfer pricing risk factors (Yes / No format):
    • Intercompany transactions to / from Ghana
    • Intercompany transactions with low-tax jurisdictions
    • Other transactions
    • Local restructurings
    • Senior management secondments
    • Operating losses for 2 years or more
    • Royalties
    • Compliance with transfer pricing returns
    • Contemporaneous transfer pricing documentation

Best Practice points / learnings from Ghana’s approach:

  • Would a risk-based jurisdictional template be useful to compare other jurisdictions similarly to address potential risks
  • Focus on location of senior management highlights the use of a significant people function approach, highlighting coordination with the global mobility function and providing relevant rationales to justify the local benefit
  • Location of related parties and transactions with low-tax jurisdictions may require further disclosure in transfer pricing documentation to address perception-based conclusions
  • Necessity for local transfer pricing knowledge, with internal / external resources to answer questions accurately

Tax risk roadmap

EY’s extract highlights operational tax risks, Best Practices and a roadmap to implement opportunistic changes.

http://www.ey.com/CA/en/Services/Tax/TaxMatters-February2015-Eight-steps-to-handle-tax-risks

Highlights:

1. Establish and sustain effective tax policies

2. Enhance performance management

3. Organize globally

4. Recruit and retain the best people

5. Implement, monitor and constantly upgrade tax processes and controls

6. Improve data quality

7. Implement the right technology

8. Consider whether existing compliance and reporting capabilities meet today’s needs

Commencing with a global tax policy encompassing a comprehensive tax risk framework, BEPS induced changes are accelerating transparency initiatives and a risk-based focus.

Tax administrations are looking beyond details of data for a country-by-country reporting template for an overall risk assessment of all taxes and relevant processes.  A comprehensive risk framework and system of mitigation controls will also present win-win opportunities for co-operative compliance relationships and discussions of tax risk controls between the taxpayer and tax administration.

 

Indirect Taxes: 2020 & Beyond

KPMG’s informative tax guide not only provides detailed insight into the indirect tax schemes of 21 APAC countries, but most importantly offers valuable insight into the future including the role of Big Data.  Indirect tax developments are becoming more significant, evidenced by a new GST for Malaysia effective 1 April 2015.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/2015-asia-pacific-indirect-tax-country-guide.pdf

Key Summary:

  • The indirect tax base will become more comprehensive and a global framework for cross-border services and intangibles will form a consistent “destination” principle approach.
  • Post-2020 Big Data propositions:
    • Real time tax settlement
    • Big Data will close the VAT/GST gap
    • Tax transparency debate will shift to indirect taxes
    • Data quality and analysis will be the new audit background
    • You won’t control all your own data
    • Your data will become very interesting to others
    • Indirect tax rules will be written with data analytics in mind
    • Tax manager role will be redundant by 2020

The Guide provides valuable thoughts about the future of indirect taxes, while providing a comprehensive reference for APAC indirect taxes of 21 countries.  This trend is already seen with ERP data analyses conducted by IS experts within the tax administrations.  As BEPS induced transparency has become the new focus for direct taxes, indirect taxes will surely be the next frontier.

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