From a OECD perspective, Would penalties be applicable when a Country-by-Country (CbC) template is not completed, if such information is part of the Transfer Pricing Master File?
The Australian Tax Office (ATO) has already started its process to collect similar information as the CbC template, with 125 review notification letters to be sent to taxpayers, requesting detailed international data and a presentation to the ATO.
The ATO review would include details of global corporate value chains, including sales, profits, and taxes paid in every jurisdiction, payments to / from low tax jurisdictions, e-commerce and tax risk governance. The ATO should ensure that confidential information is only shared with other tax authorities in alignment with confidentiality protocols judicially established in each respective jurisdiction. Additionally, it will be interesting to note how such information is defined, or not defined, by the ATO to ensure information that is collected from taxpayers will be consistent for analyses.
These actions bring forth additional questions re: the OECD proposals, the ATO’s response and advance warnings to taxpayers of how such information will be collected and provided in advance of the OECD’s timelines. To the extent procedures are enacted by taxpayers to collect such data, while the OECD and other tax authorities provide different rules, definitions and timelines, it will substantially increase time and cost by multinationals to respond to multiple initiatives.
Another point of consideration is the symmetry of ATO’s CbC request with that of the OECD: Will the ATO change their rules to coincide with that of the OECD when such rules are issued, and will the separate country’s legislation trump / override the OECD’s final recommendations?
The Tax Executives Institute (TEI) has commented on the OECD Transfer Pricing Documentation and Country by Country Reporting (CbC) discussion draft.
TEI has provided strategic and logical arguments in response to requested comments by the OECD for transfer pricing documentation and CbC reporting. One of the exemplary comments put forth is that the CbC reporting template should be the last item for completion, based upon actions of the other items, to achieve maximum efficiency, relevance and avoidance of duplication in work efforts.
The TEI comments should be read by all multinationals and interested parties to further understand the business rationale and inherent complexity of the OECD proposal that may lead tax authorities to deviate from the arm’s length principle based solely on the CbC information provided.
PwC and the World Bank have published a study on tax trends from 2004-2012 in 189 economies. The Paying Taxes study, part of the World Bank Doing Business project, looks at tax systems from the business tax perspective, including direct and indirect taxes, employment taxes, mandatory contributions, property taxes, environmental taxes, and others. A link is provided for reference.
The study is valuable in analyzing trends, and also is helpful in depicting the different types of taxes that multinationals are paying in different regions around the world. The disparity in countries and regions becomes immediately apparent. This information also provides context for corporate sustainability reports reflecting global tax transparency for direct and indirect taxes in addition to economic contributions.
The OECD has recently published a revised timeline for its Base Erosion and Profit Shifting (BEPS) Action Plan that can be accessed via the attached link:
With a short timeframe for comment to multiple initiatives, it is imperative to review this timeline change, especially if comments are to be prepared. This revision in timing also provides transparency for the OECD’s aggressive objectives to assess the milestones accordingly.
The OECD timeline also highlights the expedited actions of individual EU Member States, and other countries, to implement independent BEPS initiatives that may, or may not, be in alignment with the OECD’s final proposals. To the extent such objectives are significantly different in principle and approach, it has not yet been envisaged if, and how, such disparities will be resolved by taxpayers and tax authorities.
Tax Fraud: Commission looks at how VAT collection and administrative cooperation can be improved
Today (12 Feb.) the Commission adopted two reports which shed more light on problems linked to fighting Value Added Tax (VAT) fraud within the EU, and which identify possible remedies. The first report looks at VAT collection and control procedures across the Member States, within the context of EU own resources. It concludes that Member States need to modernise their VAT administrations in order to reduce the VAT Gap, which was around €193 billion in 2011. (see IP/13/844) Recommendations are addressed to individual Member States on where they could make improvements in their procedures.
The second report looks at how effectively administrative cooperation and other available tools are being used in order to combat VAT Fraud in the EU. It finds that more effort is needed to enhance cross border cooperation, and recommends solutions such as joint audits, administrative cooperation with third countries, more resources for enquiries and controls and automatic exchange of information amongst all Member States on VAT. Both reports are part of the broad Commission Action Plan to fight against tax fraud and evasion (see IP/12/1325), and can be found online on the European Commission’s Taxation and Customs Union website .
It is interesting to compare developments on topics such as joint audits, automatic exchange of information, and tax controls with that of the OECD and UN for corporate income tax. The reports provide a valuable reference in regards to VAT developments in the EU, which are observed by non-EU countries for Best Practices.
Details of Canada’s initiative to develop its own Base Erosion and Profit Shifting (BEPS) action plan are outlined in its 2014 Federal Budget, with a link to KPMG’s comments on the Budget referenced herein.
Highlights of the tax initiatives include proposals to expand existing anti-avoidance rules for thin capitalization, and a back-to-back loan provision. Additionally, the Budget has requested comments, by June 2014, to the following questions for a frameworkto develop its own BEPS Action Plan:
What are the impacts of international tax planning by multinationals on other participants in the Canadian economy?
Which of the international corporate income and sales tax issues identified in the OECD BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified?
Would concerns about maintaining Canada’s competitive tax system are alleviated by coordinated multilateral implementation of base protection measures?
What actions should the government take to ensure the effective collection of sales tax on e-commerce sales to Canadian residents by foreign vendors?
The Budget also addressed the treaty shopping consultation paper released in August 2013, which TEI provided comments thereto (refer to 14 January 2014 post). The government’s position is that a domestic law re: treaty shopping is preferable to a treaty-based approach. This proposed rule would be included in Canada’s Income Tax Convention Interpretation Act, thus applicable to all of Canada’s treaties. Comments on this position are to be submitted within 60 days. General provisions of this rule are summarized for reference, with a separate link provided for KPMG’s Submission on Canada’s Consultation on Treaty Shopping in December 2013 :
The domestic treaty-shopping rule is a “general purpose” provision, versus a “limitation on benefits” approach.
A tax treaty benefit is denied for relevant treaty income if it is reasonable to conclude that one of the main purposes for undertaking a transaction, or a transaction that is part of a series of transactions or events, that results in the benefit was for the person to obtain such benefit.
It relies on the conduit presumption for tax treaty benefits, absent proof to the contrary. Safe harbour presumptions are provided for this test.
With the OECD working aggressively to finish the BEPS Action Plan items timely, including the recent draft of a Country-by-Country Reporting template for comment, it is hoped that new international principles and documentation standards being developed are not adopted earlier, and unilaterally, by countries each changing such rules based on its sole interpretation and discretion, which later are effected into local legislation.
Most importantly, multinationals and other interested parties should monitor BEPS related provisions in countries proposing separate legislation, in addition to that proposed by the OECD. To the extent the OECD’s principles differ from separate country legislation, international tax challenges will significantly increase, with additional likelihood of double taxation.
Saudi Arabia’s tax treaty with Tunisia, effective from 1 January 2014, generally follows the OECD model treaty. Additionally, Saudi Arabia is pursuing treaties with Algeria, Kyrgyzstan and Barbados.
Saudi Arabia also introduced reforms to the Foreign Investment Act in March 2013, providing penalties for Saudi Arabia General Investment Authority (SAGIA) registered foreign investors who fail to comply with its new Code of Conduct for Foreign Investors. The Code provides for approx. 60 forms of breaches, including penalties that include fines and cancellation of the legal entity’s license, thus strict compliance with the Code should be adhered to and monitored.
The Qatar Financial Centre’s (QFC) new transfer pricing manual features guidance on transfer pricing regulations and rules. Thin capitalization, capital / debt structuring, transfer pricing documentation and necessity of a comprehensive transfer pricing study to withstand lengthy queries are components in this new manual. The arm’s length standard of the OECD is to be relied on by the QFC Tax Department for transfer pricing determinations. Additionally, rulings and/or APAs can be requested. Intercompany transactions are being closely reviewed by the QFC Tax Department, thus such changes should be reviewed.
KPMG has provided additional details for further reference:
As the Middle Eastern tax authorities gain transfer pricing expertise, legislative actions and experience in the application of transfer pricing methodologies, it is important to note alignment of such practices with OECD. To the extent double tax treaties are not yet negotiated, double taxation issues should be considered.
A Report on Compensating Adjustments, issued by the EU Joint Transfer Pricing Forum in January 2014, provides a practical solution to address different approaches by EU Member States. The Glossary of the OECD Transfer Pricing Guidelines defines a “compensating adjustment” as “an adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer’s opinion, an arm’s length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises. This adjustment would be made before the tax return is filed.” In general, an adjustment is made at a later time to the transfer prices set at the time of a transaction.
A link to this report, and an excellent article by CGMA, are provided for reference:
Compensating adjustments are enacted using one of two approaches, an ex-ante (arm’s length price setting approach), or ex-post (arm’s length outcome testing approach). The ex-post approach generally involves testing, and possible adjustment, of transfer prices at year-end, prior to closing the books or filing the tax return.
When both Member States apply an ex-post approach and require compensating adjustments, a risk of double taxation, or double non-taxation, may arise.
An ex-post approach by one Member State, with an ex-ante approach by a separate Member State, presents conflicts on making such adjustments.
Guidance by the OECD is limited, with reference to the Mutual Agreement Procedure (MAP) to resolve disputes. Member States use their discretion re: application of compensating adjustments.
A practical solution is described for transactions in which (i) profits are calculated symmetrically, and (ii) a compensating adjustment initiated by the taxpayer should be accepted if various conditions are met. However, if the Member States have less prescriptive rules for such adjustments, those rules are to apply.
Upward as well as downward adjustments should be accepted.
The practical solution provided should not limit a tax administration’s ability to make a subsequent adjustment and has no bearing in a MAP procedure.
The adjustment should be made to the most appropriate point in an arm’s length range, with reference to OECD guidance.
The subject of compensating adjustments is an important topic in addressing potential double taxation, or double non-taxation. The Report is timely, offering practical guidance for Member States to achieve consistency, although only within the EU.
It will be interesting to follow this topic, and future guidance, by the OECD, as well as commentaries from EU Member States, UN, and other interested parties. The practical solution will be most effective if adopted in principle, or in legislation, by the EU Member States, with other countries referring to such guidance to resolve challenging transfer pricing issues fairly and effectively.
KPMG provides a timely and relevant update of tax dispute resolution issues, coupled with Best Practice ideas. The publication can be accessed from this link:
A summary is provided for quick reference:
US: New IDR process: Required (new) IDR process for all large-case exams: IDR Collaboration (carrot) & delinquency notice/summons procedures (stick)
Risk from whistleblowers: Current climate and Best Practices, including avoidance of retaliation, ethics hotline, procedural awareness, tax dept. procedures, and what to do if you suspect whistle blowing
IRS practices, various items of interest
Global tax disputes, including a focus on UK GAAR (also refer to a prior blog post)
This publication provides insight into today’s tax challenges and risks, to be mitigated by Best Practice ideas that should be an integral part of all multinationals tax framework.
It will be interesting to note developments into the new procedure by IRS as demonstrated by the agents performing the exam, as the summons procedure process is mandatory and has no exceptions. Additional time should be spent understanding the issue raised by IRS, as well as collaborating on the draft inquiry, to benefit from undue data collection and audit inefficiencies.
Additionally, the whistleblower comments should be used to test, modifying as necessary, current internal governance procedures. Such procedures should be reviewed, tested, and modified on an annual / recurring basis.
KPMG has published an informative and timely publication reviewing strategies for the use of unilateral, bilateral and multilateral Advance Pricing Agreements (APA’s), with a detailed focus on recent APA developments in Turkey. The KPMG publication cites the OECD’s June 2013 report “A Step Change in Tax Transparency” prepared for the G8 Summit. The KPMG and OECD reports are referenced herein for review.
The KPMG report is a valuable reference, providing strategic insight into using unilateral, bilateral and / or multilateral APA’s globally with a specific focus on Turkey. The report includes chapters on Transfer Pricing in Turkey, Global APA Trend, Opportunities that APA Offers, When Should You Pursue an APA and the APA Process in Turkey. The OECD report provides additional input on the exchange of information which is especially valuable against the backdrop of OECD’s recent request for guidance.
The transfer pricing landscape is changing, from a OECD perspective and also separate country initiatives that may, or may not, correlate with guidelines to be established this year and next by the OECD. Accordingly, the use of APA’s should be reconsidered for developed and developing countries to achieve further certainty and avoidance of double taxation in these changing and challenging times.