Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Transfer Pricing’ Category

WIPO’s 2017 IP report: Intangible capital

The 2017 World Intellectual Property Report was recently issued by the World Intellectual Property Organization (WIPO), a biennial report, and provides some interesting findings that are important to understand as US tax reform and other countries are now focusing on the taxation of intangibles and the income resulting therefrom:

First-ever figures reveal that nearly one third of the value of manufactured products sold around the world comes from “intangible capital,” such as branding, design and technology, according to a WIPO study of the global value chains companies use to produce their goods.

Some WIPR 2017 findings

  • Intangible capital accounted, on average, for 30.4 percent of the total value of manufactured goods sold throughout 2000-2014.
  • The intangible capital share rose from 27.8 percent in 2000 to 31.9 percent in 2007, but has remained stable since then.
  • Overall, income from intangibles increased by 75 percent from 2000 to 2014 in real terms, amounting to USD 5.9 trillion in 2014.
  • Three product groups – food products, motor vehicles and textiles – account for close to 50 percent of the total income generated by intangible capital in the manufacturing global value chains.

References to the Report and summaries are provided for reference:

http://www.wipo.int/pressroom/en/articles/2017/article_0012.html

http://www.wipo.int/edocs/pubdocs/en/wipo_pub_944_2017-intro1.pdf

APA update: China

China’s State Administration of Taxation (SAT) has issued its 2016 Advance Pricing Agreement (APA) update, noting that 14 APA’s were entered into for 2016.

Value chain quality and location specific advantages are positive factors leading to an efficient APA process.

It is noteworthy that China has increased scrutiny re: intercompany service agreements, and formal documentation thereto, thus an APA may prove to be advantageous provided that the relevant documentation can be timely provided.

The report, which is referenced herein as well as EY’s analysis, commences with the following summary: “This is the eighth APA annual report released by the State Administration of Taxation (“SAT”) to describe the latest mechanisms, procedures, and implementation of the APA program in China. This report is intended to provide guidance to enterprises interested in entering into APAs with the Chinese tax authority, and to serve as a reference for competent authorities of other countries (regions) and the general public to better understand China’s APA program. It does not have legal validity, and therefore should not be regarded as a legal basis for enterprises or the Chinese tax authority to negotiate or conclude an APA.”

With the ongoing BEPS complexity, and country dissimilarities / double taxation issues being compounded, the attached documents are a valuable reference in deciding on an APA decision (unilateral or bilateral) with China.

 

http://www.ey.com/Publication/vwLUAssets/China_issues_2016_Advance_Pricing_Agreement_Annual_Report/$FILE/2017G_06540-171Gbl_TP_China%20issues%202016%20APA%20Annual%20Report.pdf

http://www.chinatax.gov.cn/n810214/n810606/c2873201/part/2873221.pdf

Taiwan TP: Master File

Taiwan’s new transfer pricing (TP) guidance encompasses the local file, country-by-country (CbC) report and the Master File, effective for the 2017 tax year.

Inclusion of the TP Master File as a required document to be submitted annually is a new trend, apart from having it available upon audit.  Although generally protected by a tax administration’s confidentiality provisions, increasing circulation around the world increases the chances of a leak, inadvertent or otherwise.

Thus, it would be prudent to consider such information as being in the public domain when finalizing this report for distribution. 

https://home.kpmg.com/content/dam/kpmg/tw/pdf/2017/11/tw-e-tax-alert-issue100-eng.pdf

US CbC Agreements

The US jurisdictional Country-by-Country (CbC) status table, link provided herein, provides a quick reference into the countries that will automatically accept the US 2016 CbC report, as it is not an obligatory filing for US MNE’s.  To the extent a country is not on this list, a detailed review will be required to ensure that timely reporting is done, possibly on a surrogate country basis.

This list should be monitored to ensure proper governance of the CbC reporting requirements, noting that filing less reports is simpler due to possible different rules, currencies and/or interpretations of similar rules by different countries.

https://www.irs.gov/businesses/country-by-country-reporting-jurisdiction-status-table

Hybrid mismatches: EU / Rest of World

On May 29. 2017 the EU Council adopted the Anti-Tax Avoidance Directive (ATAD), to be effective by 1/1/2020 between EU and the rest of world for hybrid mismatch arrangements.  This Directive is known as ATAD-2 and follows the intent of BEPS Action 2, hybrid mismatch arrangements.

ATAD 2 expands the scope to address hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches.

EY’s Global Tax Alert provides additional details; all hybrid mismatch arrangements will be of limited use going forward to the extent they are included in these new rules.

http://www.ey.com/Publication/vwLUAssets/EU_Council_adopts_Directive_ATAD_2_to_address_hybrid_mismatches_with_third_countries/$FILE/2017G_03493-171Gbl_EU%20Council%20adopts%20Directive%20to%20address%20hybrid%20mismatches%20with%20third%20countries.pdf

Double Tax disputes: Draft EU Directive

The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States.  A summary of the Draft Directive is provided, as well as referenced herein.

This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.

Key points:

  • 3 years, from first notification, to file a complaint by the taxpayer
  • Each competent authority (CA) acknowledges receipt within 2 months
  • Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
  • Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
  • Taxpayer may appeal per national rules a rejection of the complaint
  • CA’s try to resolve issue within 2 years, which may be extended by 1 year
  • Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement.  This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
  • Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
  • Advisory Commission to adopt a decisions within 6 months
  • CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
  • Professional secrecy standards are prescribed
  • Advisory or Alternative Commission opines in 3-6 months
  • CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
  • Final decision does not constitute a precedent
  •  (Redacted) decision is published and maintained in an online central repository
  • Evaluation of process by June 30, 2024 and issue a report

As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s.  The Directive can be reviewed via the attached link:

http://data.consilium.europa.eu/doc/document/ST-9420-2017-INIT/en/pdf

Financing risk roadmap: ATO

The Australian Tax Office (ATO) has issued a roadmap and risk guidelines re: intercompany financing parameters.  Taxpayers have an 18-month amnesty period to move their related party financing arrangements to a “green” low-risk zone.  EY’s Global Tax Alert provides further details.

Rest of World: All countries watch what other tax administrations are legislating, thus this roadmap/risk rating process may be arising in many other countries.  This should be an additional warning signal to multinationals to review such arrangements, as what one considers “arm’s-length” may not be completely nil risk dependent on the legislation of particular countries.  Unfortunately, this will lead to additional complexity and probably double taxation consequences.  

http://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Offices_compliance_approach_for_cross-border_related_party_financing_arrangements_has_major_impact_on_multinational_businesses/$FILE/2017G_03234-171Gbl_TP_AU%20TOs%20compliance%20approach%20for%20cross-border%20related%20party%20financing%20arrangements.pdf

%d bloggers like this: