Strategizing International Tax Best Practices – by Keith Brockman

Author Archive

VAT: European Commission update

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 .

Click to access com(2014)71_en.pdf

Click to access com(2014)69_en.pdf

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.

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OECD / UN

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Canada’s BEPS initiative, with Treaty Shopping: 2014 Federal Budget

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.

Click to access tnfc1408.pdf

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 framework to 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 :

Click to access kpmg-submission-to-treaty-shopping-consultation.pdf

  • 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.

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Transfer Pricing

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Saudi Arabia & Qatar Tax/TP developments

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:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/mesa-tax-update/Pages/saudi-arabia-tax-revenues.aspx

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/mesa-tax-update/Pages/qatar-new-manual.aspx

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.

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Transfer Pricing

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TP Compensating Adjustments: Update

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:

Click to access jtpf_009_final_2013_en.pdf

http://www.cgma.org/magazine/news/pages/20149479.aspx

Highlights of the Report:

  • 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.

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Transfer Pricing

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Tax Dispute Resolutions: Best Practices / Update

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:

Click to access tdr-quarterly-magazine-winter-2013.pdf

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.

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Tax Risk Management

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Strategizing APA’s in Turkey & OECD’s Tax Transparency Report

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.

Click to access turkey-feb3-2014.pdf

Click to access taxtransparency_G8report.pdf

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.

Category:

OECD / UN, Transfer Pricing

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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:

Click to access 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.

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Transfer Pricing

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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:

Click to access 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.

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OECD / UN

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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.

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PE

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:

Click to access 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.

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Transfer Pricing

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PwC TP update / Best Practices

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

Click to access 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.

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Transfer Pricing

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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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Tax Risk Management

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Holding Regimes: 2013

Loyens & Loeff provides their annual concise and practical holding company update of holding company regimes for 2013.

Click to access Holding_Regimes_2013.pdf

Several topics are covered for each of the following countries

  1. Belgium
  2. Cyprus
  3. Hong Kong
  4. Hungary
  5. Ireland
  6. Luxembourg
  7. Malta
  8. Netherlands
  9. Singapore
  10. Spain
  11. Switzerland
  12. United Kingdom
  • Tax on capital contributions
  • Corporate income taxes
  • Withholding taxes
  • Capital gains taxes
  • Anti-abuse provisions / CFC rules
  • Income tax treaties as of 1/1/2013

This publication is a timely and valuable update, especially with respect to non-European countries and the topics of anti-abuse provisions and CFC rules.

Best Practices should include an annual review of the global legal entity structure, especially with upcoming OECD guidelines, re: general anti-avoidance rules (GAAR), anti-abuse provisions and CFC rules.

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Tax Risk Management

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Dutch Holding companies: Substance requirements / information exchange

Holding companies in the Netherlands that conduct finance and leasing operations must meet substance requirements as of 1/1/2014, with confirmation provided in the annual income tax return.  To the extent that one, or more, of the requirements are not fulfilled, such information is required to be disclosed, with such disclosures spontaneously provided to the relevant treaty partner who can use it to review tax treaty benefits.  A Tax Flash from Loyens & Loeff provides a summary of these requirements, as well as an interesting comparison of the substance requirements to those relevant for an APA of a group financing company.

http://www.loyensloeff.com/nl-NL/News/Publications/Flashes/Pages/TaxFlash22October2013.aspx

A taxpayer must meet all of the following substance requirements:

  • 50% or more of decision-making board members reside in the Netherlands, and have the relevant professional knowledge to perform their duties
  • Qualified employees are in place to implement and register transactions
  • Management decisions are taken in the Netherlands
  • (Authority for) main bank accounts is retained in the Netherlands
  • Books are kept in the Netherlands
  • Business address is in the Netherlands
  • The taxpayer is not a dual resident with another country
  • Risks are evident for financing, licensing or leasing activities
  • An appropriate equity is maintained with regard to the functions performed

Beneficial ownership rules are subject to additional review and attention by OECD and global tax authorities, and Netherlands is using this prescriptive approach to ensure that substance is maintained and exchange of information provisions are in place to identity taxpayers not meeting such requirements.  All multinationals should monitor this topic, while also ensuring that Dutch holding companies meet the relevant substance requirements

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Tax Risk Management

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Vietnam: Risk based audits

KPMG’s Transfer Pricing Alert highlights current transfer pricing audits in Vietnam based on risk assessments, including key observations and insights.

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/tp-vietnam-dec18-2013.pdf

Following the Action Plan on Transfer Pricing Management (the Action Plan) announced by the Ministry of Finance under Decision 1250/QD-BTC dated and effective 21 May 2012, the General Department of Taxation (GDT) has rolled out transfer pricing audits across a number of provinces in the context of challenging 2013 tax revenue collection.

Key observations include the preference of transfer pricing methods, secret comparables, irrelevance of commercial/economic factors and arbitrary transfer pricing adjustments.

Audits in Vietnam and similar markets should be monitored closely, noting appeal and arbitration opportunities that may mitigate double taxation.  Refer to my prior post of 2 December 2013 summarizing Vietnam’s proposed anti-treaty shopping rules to deny tax treaty benefits.  

Category:

Transfer Pricing

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