Strategizing International Tax Best Practices – by Keith Brockman

As countries continue to align and/or expand the OECD’s transfer pricing documentation (Master File and Local File), including country-by-country (CbC) reporting, the path towards consistency continues to widen, introducing subjective determinations that will potentially lead to additional disputes and double taxation.  EY’s Global Tax Alert provides the relevant details.

The Guidelines adopt a substance over conduct principle associated with contracts and require a more detailed analysis of functions performed, assets employed and risks assumed.

The Guidelines require the functional analysis to align value-creating activities with transfer pricing outcomes by increasing remuneration for significant functions undertaken, with an emphasis on financial capacity to assume risk and exercise control over risk. Failure to conform to the terms of the written contract may cause the transaction to be recharacterized according to the factual substance, and transactions without a commercial substance can be disregarded.

Most importantly, the tax authorities will be looking at contracts with the ability to recharacterize or disregard such transaction.  To the extent additional approvals and guidelines are not adopted by the relevant tax administration, this may lead to new chaos in the transfer pricing world, including a potential ability to avoid tax treaty interpretations and increase the risk of double taxation.

The intent of various countries to adopt the new OECD transfer pricing models needs to be reviewed early to determine potential risks in one or more countries.

http://www.ey.com/Publication/vwLUAssets/Malaysia_updates_transfer_pricing_guidelines_and_introduces_master_file_requirements/$FILE/2017G_04640-171Gbl_TP_Malaysia%20updates%20TP%20guidelines%20and%20introduces%20master%20file%20requirements.pdf

As the time for US seems to tick ever closer, EY’s Global Tax Alert highlights the tax accounting implications that would take effect on the “enactment date.”

Key items for consideration:

  • Tax attributes re: one-time repatriation/taxation of foreign earnings
  • Capital expensing impact
  • State tax impact, dependent on if they automatically follow federal tax law
  • APB 23, how will this be affected?

Although such items are hypothetical at the moment, some items may require additional planning to have the data available for the requisite disclosures.  Thus, the time for planning and consideration is the present.

http://www.ey.com/Publication/vwLUAssets/US_Administration_releases_Joint_Statement_on_Reform_-_Income_Tax_accounting_considerations_related_to_potential_future_US_tax_legislation_and_steps_companies_can_take_now_to_prepare/$FILE/2017G_04560-172Gbl_US%20joint%20statement%20on%20tax%20reform.pdf

US CbC Agreements

The US jurisdictional Country-by-Country (CbC) status table, link provided herein, provides a quick reference into the countries that will automatically accept the US 2016 CbC report, as it is not an obligatory filing for US MNE’s.  To the extent a country is not on this list, a detailed review will be required to ensure that timely reporting is done, possibly on a surrogate country basis.

This list should be monitored to ensure proper governance of the CbC reporting requirements, noting that filing less reports is simpler due to possible different rules, currencies and/or interpretations of similar rules by different countries.

https://www.irs.gov/businesses/country-by-country-reporting-jurisdiction-status-table

OECD has published, pursuant to OECD BEPS Action 2, its framework entitled “Neutralising the Effects of Branch Mismatch Arrangements.”  A link to the report is provided for reference.

The report includes five types of branch mismatch arrangements:

  • Disregarded branch structures where the branch is not a Permanent Establishment (PE)
  • Diverted branch payments
  • Deemed branch/notional payments
  • Branch payments leading to a double deduction (DD)
  • Imported branch mismatches

Recommendations to domestic law are included to prevent perceived abuses for the five types of mismatch arrangements.  Numerous examples are also provided in the document to illustrate the branch arrangements and recommendations thereto.

This document is required reading for all international tax practitioners, as tax administrations will be seriously considering the recommendations and may decide to try to enforce such rules prior to official legislative actions.

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/neutralising-the-effects-of-branch-mismatch-arrangements-action-2_9789264278790-en#.WX0tijOZOqA#page1

With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase.  One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.

For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.

For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward.  This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.

It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.

The UK EU exit bill has been introduced in Parliament, paving the way for suggested interpretations of:

  • Existing EU law
  • Loss of EU Directives
  • New customs regime
  • Transitional EU VAT case law
  • Social security contributions/benefits
  • Corporation tax impact of UK vs. EU law/Directives
  • Employee mobility
  • Employment law

This document portrays a glimpse into the thoughts behind the complex and myriad evolutions that will take place with the Brexit negotiations.  Tax, supply chains, individual changes, VAT, etc. and related unknown implications are still to be discovered; the EY Global Tax Alert provides a primer into the brave new world of a country exiting the EU.  Note, this is also a valuable reference for other countries considering this option.

http://www.ey.com/Publication/vwLUAssets/UK_Government_introduces_European_Union_(Withdrawal)_Bill/$FILE/2017G_04283-171Gbl_UK%20Government%20introduces%20European%20Union%20Withdrawal%20Bill.pdf

On 22 June 2017, the “Platform for Collaboration on Tax” (the Platform) – a joint effort of the Organisation for Economic Co-operation and Development (OECD), United Nations (UN), International Monetary Fund (IMF) and World Bank Group (WBG) – released a toolkit (the Toolkit) designed to help developing countries address the lack of “comparables” for transfer pricing analyses and better understand mineral product pricing practices.

This Toolkit should also be reviewed by multinationals (MNEs) in developing countries to address the potential lack of comparables to better understand how the tax authorities will approach a transfer pricing audit.  The mining supplement is required reading for those working in that industry.

Additional toolkits will be forthcoming:

  • TP documentation
  • Indirect transfer of assets
  • Base eroding payments
  • Tax treaty negotiation capacity
  • Supply chain management
  • BEPS risk assessment

As the first edition of the Toolkit has now been published, it will be interesting to watch developing countries apply the tools prescribed, providing a baseline going forward.  All international tax practitioners should be familiar with this latest joint endeavor, as it is an indication of the shared resource approach that is now our future.

EY’s Global Tax Alert provides additional details, and the OECD Toolkit are referenced for review.

http://www.ey.com/Publication/vwLUAssets/OECD_UN_IMF_and_World_Bank_issue_toolkit_for_addressing_difficulties_in_accessing_comparable_data_for_transfer_pricing_analysis/$FILE/2017G_04037-171Gbl_OECD%20UN%20IMF%20and%20World%20Bank%20issue%20toolkit%20for%20difficulties%20in%20accessing%20comparable%20data%20for%20TP%20analysis.pdf

http://www.oecd.org/tax/toolkit-on-comparability-and-mineral-pricing.pdf

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