Strategizing International Tax Best Practices – by Keith Brockman

Archive for February, 2015

Canada’s TP memorandum: Unilateral rules preceding OECD’s guidelines

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:

Click to access 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 comments: BEPS IP & VAT Guidelines

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:

Click to access TEI%20Comments%20-%20BEPS%20Action%205%20Harmful%20Tax%20Practices%20-%20FINAL%20to%20OECD%2019%20February%202015.pdf

Click to access 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).

Click to access 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:

Click to access 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

 

 

Ghana’s TP risk approach: Best Practice ideas

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.

Click to access 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.

Click to access 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.

BEPS update: Actions 5 & 15

The OECD has updates available with respect to Action 5 (Intangibles), Action 15 (Multilateral instrument) and Action 13 (Country-by-Country reporting – refer to prior post of 6 Feb. 2015).  Links are provided for the OECD’s statement of intent addressing these three actions in particular.

http://www.oecd.org/tax/first-steps-towards-implementation-of-oecd-g20-efforts-against-tax-avoidance-by-multinationals.htm

Click to access beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf

Click to access beps-action-15-mandate-for-development-of-multilateral-instrument.pdf

Summary – Action 5 (Intangibles):

  • The Modified Nexus Approach is generally accepted.
  • 30% uplift of qualifying expenses re: outsourcing and acquisition costs in addition to significant R&D activities of taxpayer.
  • Existing regimes will be closed by 30 June 2016 to new entrants; legislation to be effected in 2015.
  • Grandfather rules for existing regimes may extend 5 years (i.e. 30 June 2021).
  • Methodology of tracking / tracing R&D expenditures will be developed.
  • Guidance to be issued re: definitions; patents qualify, whereas trademarks do not qualify.

Summary – Action 15 (Multilateral Instrument):

  • The intent to develop a multilateral instrument to implement specific BEPS Actions is still desirable and feasible.
  • The instrument will be designed to implement treaty-related measures of the BEPS Project.
  • Several BEPS Action items that are known to be inclusive are Action 2 (Hybrid entities), Action 6 (Treaty abuse), Action 7 (PE) and Action 14 (Dispute resolution).  Other Action items may be included after final guidance is developed, including a mechanism to exchange information for country-by-country reporting.
  • Each Action item may be optional, or there may be a minimum number of Actions that a country will have to execute.
  • The instrument is not compulsory and is open to all jurisdictions.
  • Development of the instrument will be accomplished by an ad-hoc group that is under the aegis of the OECD and G20.
  • Outputs are expected Sept. 2015, with final development of the instrument concluded by 31 Dec. 2016.

The timing of 31 Dec. 2016 will be critical to monitor, as many countries may decide to develop unilateral legislation prior to this date.  It is hopeful that tax administrations will not try to (informally) implement BEPS guidelines prior to the time that effective legislation is executed.

Lux’s new transfer pricing framework

The Luxembourg Parliament has approved a draft law, effective 1/1/2015, that will provide a formal transfer pricing framework, coupled with relevant transfer pricing documentation.

PwC’s newsletter provides a summary of these developments:

Click to access pwc-luxembourg-transfer-pricing-legislation-formalised.pdf

Summary of key points:

  • Alignment with the arm’s length principle as stated in the OECD Model Tax Convention, covering transactions between Luxembourg related parties or cross-border transactions.
  • Tax return report of upward, or downward, transfer pricing adjustments whenever the transfer prices do not reflect the arm’s length standard.
  • Transfer pricing documentation expectation for the three-tiered approach in accordance with the OECD’s final Chapter V guidelines.
  • APA’s: Competent Authority will seek advice for advance tax confirmations from a tax rulings commission for additional legal certainty.  The tax confirmation rulings will be published in anonymous and summary form.

Luxembourg sends a strong statement of its alignment with the arm’s length principle and revised OECD transfer pricing documentation guidelines.  Tax transparency of the APA ruling process and recognition of transfer pricing adjustments, upward or downward, also provide a revised state of play in this jurisdiction that performs a vital tax and economic role going forward for MNE’s and other tax administrations.

TEI’s comments: BEPS Actions

TEI has provided comments in response to several OECD BEPS Actions, linked herein for reference.

Action 10:Profit Splits-Key comments:

  • Profit split methodologies should be limited to scenarios where there is not reliable arm’s length pricing.
  • Simple examples provided do not provide a comprehensive basis for detailed replies and consideration.
  • A profit split approach may be subject to abuse by tax authorities.
  • Hindsight application of transfer pricing methodologies should only be used in exceptional circumstances.

Click to access TEI%20Comments%20BEPS%20Action%2010%20-%20Profit%20Splits%20-%20FINAL%20to%20OECD%206%20February%202015.pdf

Actions 8-10: TP Guidelines

  • Transfer pricing analyses discussed in the proposal would require significant resources for MNE’s and tax authorities.
  • The possible merging of the approaches of attributing profits for Article 7 (PE) and Article 9 (Associated Enterprises) should be clarified.
  • The imposition of “insufficient transfer pricing documentation” penalties should be abandoned/relaxed by tax authorities for a reasonable period of time after implementation of the new guidelines.
  • Additional compliance burdens elicit increased complexity and confusion.

Click to access TEI%20Comments%20BEPS%20Actions%208-10%20-%20Risk%20and%20Recharacterisation%20FINAL%20to%20OECD%206%20February%202015.pdf

Action 4: Interest

  • The proposal represents a shift away from the arm’s length principle, introducing difficult and impractical problems to resolve.
  • Capitalisation factors include many considerations other than tax.
  • Double tax consequences are more likely, as MNE’s will not be able to easily rearrange financing structures worldwide.
  • The withholding tax impacts should be clarified for foreign tax credit and related calculations.
  • MNE’s with a higher effective tax rate, and thus less prone to base erosion or profit shifting arrangements, should be excluded.
  • The concept of global limitation calculations, and interest sharing, needs to be further discussed to determine efficient audit guidance.

Click to access TEI%20Comments%20BEPS%20Action%204%20-%20Interest%20Deductions%20-%20FINAL%20to%20OECD%203%20February%202015.pdf

Action 10: Commodities

  • Right to use publicly available quoted exchange prices as a comparable is a welcome proposal.
  • Discussion of other issues, including pricing, pricing date, and documentation should be further considered and clarified.

Click to access TEI%20Comments%20BEPS%20Action%2010%20-%20Commodity%20Transactions%20-%20FINAL%20to%20OECD%203%20February%202015.pdf

 

TEI’s comments are always informative, practical and highlight issues that are both useful as well as problematic.  Therefore, these comments provide an excellent forum, along with comments from other interested parties, for further consideration prior to drafting final guidance.

Indonesia: New MAP guidelines

The Indonesian Ministry of Finance has issued updated MAP guidelines, evidencing focus by the Indonesian Tax Office (ITO) on multilateral dispute resolution.  This regulation is the third MAP related guidance, with the inclusion of additional restrictions.  A link to KPMG’s Tax News Flash is provided for reference:

Click to access Tax-News-Flash-January-2015.pdf

Key summary:

  • The MAP process will be terminated when the Indonesian tax court “deems” that it has conducted sufficient hearings.
  • A tax audit for the MAP years may be conducted, without clarity if such audit is restricted to the MAP issues.
  • A concurrent Indonesian MAP request is required for a MAP request by another country’s tax authority.
  • MAP does not postpone the obligation to pay the tax, unlike domestic legislation.

Indonesia is uniquely interpreting the tax treaty to limit the opportunity for MAP appeals, while introducing additional subjectivity in the rules via vagaries of  the Indonesian tax court’s hearing process.  Most importantly, it will be important to consider the MAP process upon the commencement of an Indonesian audit due to ongoing uncertainties.  

Notably, this guidance is being issued prior to the finalization of the OECD dispute resolution guidelines that will most likely result in inconsistent guidelines for MAP.   

UK: HMRC Penalties Discussion Document

HMRC published a discussion document on 2 February addressing the role and imposition of penalties, with a closing date for comments 11 May 2015.  A link to the document is included:

Click to access 150130_HMRC_Penalties_a_Discussion_Document_FINAL_FOR_PUBLICATION__2_.pdf

Key Points:

  • HMRC’s compliance strategy is based on three principles: Promote good compliance via systems/processes, prevent non-compliance and respond to risks.
  • Questions for comment address concerns about current penalties and suggestions for changing the penalties process.
  • The process and next steps are developed in 5 stages: (1) Setting out objectives, (2) Developing options and a framework for implementation, (3) Drafting legislation, (4) Implementing/monitoring the change, and (5) Reviewing/evaluation the change.
  • Annex A provides an overview of the main penalty regimes, with a matrix of penalty percentages dependent on careless, deliberate, or deliberate and concealed behavior.

The document represents a willingness and “good faith” effort on behalf of HMRC to address the current state and request comments for Best Practice processes.  Interested parties should review the document and provide comments accordingly.

As the Diverted Profits Tax option seems to be moving forward quickly to be potentially effective in April, 2015, relevant processes for imposition of a 5% “tax penalty” and accelerated payments should be weighed against the five principles of HMRC’s penalty process.  The five principles state: The penalty regime should be designed from the customer perspective, they should be proportionate, penalties must be applied fairly ensuring that compliant customers are in a better position, penalties must provide a credible threat and customers should see a consistent and standardized approach.  Does the Diverted Profits tax process and objectives meet the principles expressed in the Discussion Document?

BEPS Action 13: CbC reporting guidance

The OECD has provided additional information re: the timeline and mechanism for providing the Country-by-Country (CbC) template.  A link to the document is included herein:

Click to access beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf

Summary of key points:

  • Master file and local file should be implemented by, and filed directly with, the relevant jurisdiction
  • Information to be provided for fiscal years beginning on or after 1/1/2016
  • Information to be filed by ultimate parent by 31 Dec. 2017 in their jurisdiction of residence
  • Exemption for MNE groups with annual consolidated revenues less than EUR 750M in immediately preceding year
  • The countries participating in the OECD / G20 BEPS Project agree that they will not require filing of a CbC report based on the new template for fiscal years beginning prior to 1/1/2016
  • Secondary reporting mechanism re: sharing of information between jurisdictions
  • Monitoring mechanism coupled with a 2020 review
  • The participating countries agree to:
    • Confidentiality provisions
    • Consistency (i.e. no additions or changes to template requirements)
    • Appropriate Use: No income allocation formula adjustments; CbC report adjustments are to be conceded by their Competent Authority

The guidelines are fairly short and concise, and it will be important to monitor laws in the parent jurisdiction for details of the respective filing process.  Additionally, it is even more important to watch countries that are NOT participating in the BEPS Project for different timelines, information and processes to be followed for customized CbC templates that would create additional complexity and global inconsistency.

Danish GAAR moves forward

Following up on its intent to introduce a “Super GAAR” (refer to 03 Jan 2015 post), a draft bill has been issued by the Danish tax authorities to achieve this objective.  The new anti abuse provisions would take effect 01 May 2015 with no grandfathering exception.

The draft bill would contain two GAAR provisions:

  • EU tax directive following the EU Parent-Subsidiary Directive (PSD) adopted by the European Council on 27 January.
  • Domestic provision, mirroring language in the PSD, that would apply to all EU Directives, including the Interest and Royalty Directive.

The provisions would apply to existing and new Danish tax treaties based on the premise that treaty benefits are not available in arrangements that include abuse of treaty provisons.

The inherently subjective nature of the GAAR proposals, including the override of EU Directives, will likely be challenged by taxpayers and possibly the courts.  In the interim, Danish transactions should be exercised with an element of care re: the potential application of GAAR that would reverse the tax advantage obtained.

The final OECD BEPS guidelines are yet to be issued, thus inconsistencies may arise between the unilateral legislation speeding into Danish tax law and OECD’s final guidance that aims at worldwide consistency.

UK Consultation document: Tax Avoidance sanctions

HMRC has released a Consultation document entitled: Strengthening Sanctions for Tax Avoidance.  The document was provided on 30 January 2015, with comments due by 12 March 2015.  The document targets repeat offenders of tax avoidance schemes, and also proposes GAAR penalties and processes.

A link is included for reference:

Click to access Strengthening_sanctions_for_tax_avoidance_-_consultation_document.pdf

Key provisions:

  • It is focused on “tax avoidance” arrangements, specifically targeting “serial avoiders.”
  • A tax surcharge and special measures are suggested for repeated use of tax avoidance schemes.
  • A “name and shame” approach is also suggested, although being wary of reputational damage.
  • GAAR: It is now the right time to reconsider imposition of a GAAR-specific penalty and surcharge.  The document addresses maintenance of the current GAAR Independent Advisory Panel and related guidance, for which a flowchart is provided in Annex B for reference.
  • A series of questions re: Serial Avoiders and GAAR Penalties are provided for comment.

It is interesting to note the surcharge and accelerated payment concepts, also introduced in the controversial Diverted Profits Tax proposal.  Additionally, retaining the GAAR independent panel is a welcome statement that is not proposed for comment.

The inherent subjectivity of “tax avoidance” proposals potentially subject taxpayers and tax administrations to further complexity, additional costs and potential double taxation.  Therefore, all interested individuals and organisations should review this document and prepare comments to address this initiative, as other countries will be following these developments for possible application in their respective jurisdictions.

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