Strategizing International Tax Best Practices – by Keith Brockman

Archive for January, 2014

OECD Discussion Draft: TP Documentation & Country-by-Country Reporting

OECD has just published their Discussion Draft on Transfer Pricing Documentation and Country-by-Country reporting, with comments due by 23 February.  A reference to the Draft is hereby provided:

http://www.oecd.org/ctp/transfer-pricing/discussion-draft-transfer-pricing-documentation.pdf

The Discussion Draft raises many questions and scenarios open to comment, with a very limited time frame in which to remit such comments.  All multinationals and interested parties should prioritize a review of this document and consider submitting comments, as it will be a cornerstone for additional reporting and documentation in the near future.

UN requests input: Practical Manual on TP for Developing Countries

The UN Committee of Experts on International Cooperation in Tax Matters published the UN Practical Manual on Transfer Pricing for Developing Countries in 2012.  A new Subcommittee was formed on Article 9, Associated Enterprises, which will draft additional chapters on intra-group services, management fees and intangibles.  The letter for assistance is referenced herein:

http://www.un.org/esa/ffd/tax/InputUNTPmanual.pdf

The Subcommittee invites input into the Manual for this drafting exercise, and aims to consider such comments in the update of the Manual.  Input from developing countries in particular is requested, and non-governmental organizations and academics in the policy and administration of transfer pricing, to provide clear and workable guidance.

The letter reiterates the operation of Article 9 of the UN Model Convention and the arms-length principle embodied therein.

As stated at the conclusion of the letter, “As agreed during the 2013 Annual Session of the UN Committee, wide input is sought into the next update of the Manual to ensure its effectiveness for developing countries seeking to address transfer pricing issues in accordance with Article 9.”

Written input is requested no later than 28 February 2014, with any questions addressed to Michael Lennard, Secretary of the UN Tax Committee.  

This request aids transparency, and comprehensive understanding, into the evolving issues of intra-group services, management fees and intangibles.

All multinationals should consider this important request, and follow developments of the UN Committee as it receives comments and drafts additional guidance.  It is noted that the letter sought to emphasize the arms-length principle of transfer pricing.

OECD comments: PE avoidance strategies

OECD has published the “only” response received  for its work on BEPS Action 7 (Artificial Avoidance of PE Status) from a Chartered Accountant in India, outlining strategies that may result in the artificial avoidance of PE status re: base erosion and profit shifting.  The comment discusses a few measures generally adopted by multinationals to avoid PE in the source jurisdiction.  The link is provided herein for reference:

http://www.oecd.org/ctp/treaties/oecd-publishes-comments-on-strategies-allegedly-resulting-in-artificial-avoidance-of-pe-status.htm

The examples, and short references to the comments, detail the following “artificial measures” to avoid PE:

  • “Preparatory and auxiliary activities” exception: processing of goods exception may require review as “auxiliary” in character
  • Agent PE: local entity  appointed as “agent” acting on behalf of foreign multinational, high threshold of definition restricting tax authorities
  • Independent Agent: activities of Principal, multiple Principals
  • Professional service provider: definition requires substantial amendment
  • PE definition and “permanency”: developing a “negative list” category re: performance of activities in source countries
  • Income attribution and transfer pricing: Broaden PE scope/lower PE threshold, electronic commerce reference

As PE is a hot topic that is being undertaken by the OECD, this comment should be reviewed, especially due to the fact that it is the only response received.

Canadian Treaty Shopping: TEI comments

The Tax Executives Institute (TEI) has submitted comments in response to Canada’s treaty shopping proposals.  TEI’s comments are referenced herein:

http://www.tei.org/Documents/Treaty_Shopping_in_Canada_TEI_submission.pdf

Canada proposes that if all of the following circumstances exist, it would be justified in denying treaty benefits due to the lack of economic substance, and a bona fide purpose, and the ultimate beneficiaries are third-country residents not entitled to direct benefits from the treaty.  Such circumstances include all of the following:

  • A tax treaty resident uses the tax treaty to obtain a reduction of Canadian tax otherwise payable on Canadian source income,
  • The intermediary entity is owned or controlled mainly by residents of another country which are not entitled to at least the same treaty benefits,
  • The intermediary entity pays no or low taxes in its country on the item of income earned in Canada, and
  • The intermediary entity does not carry on real and substantial business activities, other than managing investment income) in its country.

TEI also provides general comments stating the following concepts:

  • Treaty Limitation on Benefit (LOB) Provisions should be the favored approach rather than domestic legislation
  • Unilateral Approach should be eschewed in favor of a multilateral approach
  • Evidence of the scope and degree of treaty abuse in Canada is inconclusive

TEI’s comments also addressed the specific questions raised in the consultation paper of 14 August, 2013:

  1. Advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both
  2. Merits of OECD approaches to treaty shopping, and other possible approaches re: treaty shopping
  3. Preference for a general, versus a specific and objective approach; achieving balance between effectiveness, certainty, simplicity, and administration
  4. Views on a domestic law general purpose test and its effectiveness in preventing treaty shopping and achieving taxpayer certainty
  5. Details for preference of a specific approach
  6. Comments addressing applicability of a domestic anti-treaty shopping rule in addition to a comprehensive anti-treaty shopping rule

TEI’s comments are well written, posing arguments for all multinationals to consider for Canada, and in the broader context of domestic general anti-avoidance rules (GAAR), vs. treaty based benefits, and the impetus behind countries to adopt unilateral domestic rules prior to dates in the OECD BEPS Action Plan for issues that should be internationally consistent.  For reference, prior posts have addressed GAAR provisions advocated by several countries that can be accessed for future insight.

PwC TP update / Best Practices

PwC has published an informative update addressing hot topics in transfer pricing for different industries.

http://www.pwc.com/gx/en/tax/publications/transfer-pricing/perspectives/assets/pwc-tpp-perspectives.pdf

Key industries and issues addressed comprise the following:

  • Oil & Gas: intercompany service charges re: direct/indirect benefit and Competent Authority in non-treaty countries
  • Global Audits: MAP, OECD BEPS Action Plan, Cooperative Compliance programs, arms-length principle, PE, GAAR and Strategic Risk Assessment
  • Industrial Products: Cost Sharing Agreements, Intangibles, Supply chain management, M&A interaction
  • Interco. Financing: Guarantee fees, transfer pricing methodologies
  • Financial Industry: Dodd-Frank Act, Regulatory practice coordination with transfer pricing
  • Russia TP: New rules 2012 introducing arms-length principle, new Department and work group re: TP, specialized TP group re: intercompany transactions
  • S. America: Global marketing/sourcing, intercompany services documentation, currency restrictions
  • Real Estate Funding
  • ERP Systems and TP
  • Politics of taxation: OECD BEPS Action Plan, TP disclosures, PE risks
  • Pharmaceutical / Life Sciences
  • Value Chain Transformation: Model Maturity matrix

This publication is relevant and timely, including Best Practices and transfer pricing issues for different industries.

France Finance Bill 2014 & Employer tax

The 2014 Finance Bill was published 30 December 2013, containing the following measures as summarized in the KPMG link herein.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/france-transfer-pricing-provisions-enacted-finance-bill-2014.aspx

  • Limitation for related party interest, if lender is not equal to a minimum of 25% of corporate income tax under French law
  • Requirement to provide “analytical accounts” to the French tax authorities during a tax audit if certain thresholds are exceeded
  • Requirement to provide “consolidated accounts” to the French tax authorities during a tax audit
  • Repeal of a provision staying tax collection when a French taxpayer files a MAP case

Note the above provisions are in addition to a new employer tax of a 50 per cent levy on the portion of wages above 1 million euros in 2013 and 2014.  Including social contributions, the rate will effectively remain about 75 per cent, though the tax will be capped at 5 per cent of a company’s turnover.

These significant provisions should be reviewed and monitored closely by MNEs with French operations, or contemplating entering the French market.  Future tax measures should also be expected in France in an effort to improve their GDP and economic growth.

 

 

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