Strategizing International Tax Best Practices – by Keith Brockman

Archive for July, 2013

OECD: White Paper on Transfer Pricing Documentation

http://www.oecd.org/tax/transfer-pricing-documentation.htm

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

PwC transfer pricing survey: Intercompany loans, pooling, guarantees

http://www.pwc.com/gx/en/tax/transfer-pricing/navigating-the-complexity/download.jhtml

PwC has conducted a survey, as referenced in the attached link, of transfer pricing aspects for financial transactions in over 40 countries in the Americas, Asia Pacific and Europe.  The insightful information, current as of 1/1/2013, initially provides a comprehensive overview of intercompany loans, cash pooling and guarantees followed by transfer pricing details for each country.

Each country included in the survey provided responses to the following topics:

  • Transfer pricing rules and regulations, domestic / OECD guidelines
  • Thin capitalisation
  • Intercompany loans (arms-length nature, transfer pricing methodologies, etc.)
  • Cash pooling; transfer pricing methodologies
  • Intercompany guarantees
  • Documentation requirements
  • Advance certainty via APA, etc.

Transfer pricing questions and issues re: intercompany loans and various aspects of financial transactions are becoming more common and complex as businesses are continuing global expansion.  Accordingly, multinational tax and treasury departments need to be mutually aware of transfer pricing rules for arms-length principles, contemporaneous documentation requirements, and inherent risks / opportunities for intercompany financial transactions.

Evolving rules in this area dictate continual training, awareness and strategizing risks from a global tax and treasury perspective.  Transfer pricing training should be provided at regional / global treasury conferences;  conversely treasury should ensure tax is aware of new financing tools that arise in different markets to ensure alignment.

OECD Country MAP Profiles & Statistics – Valuable tools

http://www.oecd.org/ctp/dispute/countrymapprofiles.htm

http://www.oecd.org/ctp/dispute/mapstatistics20062011.htm

The links provide reference to the OECD Country MAP Profiles and MAP Statistics 2006-2011.  The OECD MAP content provides valuable information that should be included as an integral component of audit risk strategies.

The Country MAP Profiles provide the following content for OECD member countries, in addition to Argentina, People’s Republic of China, Russia, and South Africa:

  • Competent Authority contact information
  • Organisation of the Competent Authority
  • Scope of MAP & MAP Advance Pricing Arrangements (APAs)
  • References to domestic guidelines and administrative arrangements
  • MAP request content, timelines, fees and documentation requirements
  • Provisions on tax collection, penalties and interest pending outcome of the MAP process
  • Other dispute resolution mechanisms, and
  • Links to websites for the relevant jurisdiction.

The MAP Statistics include information on MAP inventories, cases initiated, completed, withdrawn, and average cycle time.  These statistics are provided for the OECD member countries and some non-OECD economies.  This information is very helpful in reviewing the trend of MAP filings in relevant jurisdictions.  There were 3,838 open MAP cases by OECD member countries at the end of 2011, with an average completion time of 25 months.

The OECD Forum on Tax Administration (FTA) convenes later this year to discuss Best Practices for improving MAP: refer to prior post 27 June 2013.

With the increase of transfer pricing controversies that are inherently complex and subjective in nature, MAP is a tool that is being used more frequently worldwide.  Examples of Best Practices to strategize MAP are provided for insight:

  • Document domestic and bilateral/multilateral avenues of appeal upon commencement of an audit to facilitate advance planning.
  • Review Double Tax Treaties for relevant Arbitration provisions that are providing an impetus for some jurisdictions to finalize negotiations.
  • Determine the interplay of domestic appeals (informal settlement, formal Appeals, Court filings, etc.) with MAP early in the audit process.
  • Outline deadlines for domestic appeals, MAP and other bilateral/multilateral tools (i.e. EU Arbitration Convention)
  • Develop a pro-forma multilateral calculation to strategize solutions minimizing double taxation.
  • Ensure MAP and other appeal strategies are integrated in the Tax Risk Framework.

    OECD Map with accession (green) and discussion...

    OECD Map with accession (green) and discussion (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)

OECD exchange of information: Multilateral Convention review

http://www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm

This link provides access to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters prescribing procedures for the exchange of information between tax authorities, in addition to press releases and related documents.

The Convention, and its provisions, are becoming more important with increased tax transparency and sharing of Best Practices among tax jurisdictions.  The Multilateral Convention, as well as factors leading to its current and future importance provide valuable context in understanding the current state of affairs, and intentions to increase the exchange of information worldwide.

UK Finance Act 2013: GAAR has arrived

http://www.legislation.gov.uk/ukpga/2013/29/pdfs/ukpga_20130029_en.pdf

http://www.hmrc.gov.uk/avoidance/gaar.htm

The links provide reference to the UK Finance Act 2013 and information about the development and intent of the new general anti-avoidance rule (GAAR).

The GAAR legislation, effective at date of enactment, includes various taxes with its stated purpose as counteracting tax advantages arising from tax arrangements that are abusive.  A “tax arrangement” must also be “abusive” for GAAR to apply. Part 5, in part, is provided herein for reference.

207 Meaning of “tax arrangements” and “abusive”

(1) Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

(2) Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,

 (b) whether the means of achieving those results involves one or more  contrived or abnormal steps, and

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.

The UK GAAR legislation, as in other countries, is principle based and subjective.  Accordingly,  a comprehensive understanding of the GAAR legislation, and inherent intent, is required.  An interesting aspect of the UK GAAR legislation is the formal procedure to be used by HMRC for application of GAAR.

Best Practices include preparation of a memorandum for planning transactions that objectively states the business / economic reasons to provide rationale for the proposal, thereby deriving business intent for application of the GAAR rules.  Additionally, benefits of early discussions with tax authorities in countries for which co-operative compliance programs are in place (refer to 13 June 2013 post: OECD – A Framework for Co-operative Compliance) should be considered.  

OECD Base Erosion and Profit Shifting (BEPS) report & Action Plan

http://www.oecd.org/tax/beps.htm

http://www.loyensloeff.com/nl-NL/Documents/OECD.pdf

The BEPS report, previously released, and the new Action Plan are available for public review, with many commentators already providing insight on the Action Plan.

The 24 month Action Plan is comprehensive and aggressive, with tax transparency and disclosure rules likely to be implemented early in that timeline.  The report also discusses an improvement of global rules in developing countries, further referenced by work of the Tax Inspectors without Borders study, as discussed in my 9 June 2013 post.

One very interesting proposal in the report is the development of a multilateral convention to address BEPS issues.  This will allow countries to rapidly implement some actions without formally renegotiating bilateral treaties.  Additionally, Appendix C provides examples of tax planning structures by multinational organizations.

The OECD BEPS report and Action Plan will provide additional momentum and debate for the proposed actions, for which multinationals should prepare an internal action plan to address such initiatives.

Tax transparency; Seizing the initiative

http://www.ey.com/Publication/vwLUAssets/Tax_Transparency_-_Seizing_the_initiative/$FILE/EY_Tax_Transparency.pdf

I highly recommend reviewing this comprehensive publication by Ernst & Young, focusing on strategies and questions Boards should ask to prepare for tax transparency reporting.  One insightful section describes key stakeholders for tax transparency reporting, including consumers, NGOs, Parliamentarians, OECD, and the media.

The publication encompasses the following concepts:

  • Current context for transparency
  • Current tax transparency reporting requirements
  • What others are reporting
  • Information that could be disclosed
  • Challenges to be faced
  • Deriving value from tax transparency
  • Next steps

There is an excellent summary, at the end of the publication, depicting a structured approach for managing your tax profile, outlining ideas leading to a Best Practices strategy.

A Best Practices initiative for tax transparency reporting should be initiated, forming a framework to address challenges and identify opportunities.

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