The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – has undertaken, at the request of the G20, the development of a series of “Toolkits” to help guide developing countries in the implementation of policy options for issues in international taxation of greatest relevance to these countries.
This toolkit, in draft version, is intended to provide an analysis of policy options and a “source book” of guidance and examples to assist low capacity countries in implementing efficient and effective transfer pricing documentation regimes.
This first part of the Toolkit provides information on the background, context and objectives of transfer pricing documentation regimes.
Part II then discusses a number of general policy options and legislative approaches relevant to all types of documentation requirements.
PART II. OPTIONS FOR COUNTRIES TO IMPLEMENT TRANSFER PRICING DOCUMENTATION
This section discusses various policy considerations and options relevant to designing a regime for transfer pricing documentation. These include:
- The regulatory framework, through a combination of primary legislation, secondary legislation and guidance;
- Confidentiality of taxpayers’ documentation and information;
- Timing issues concerning when documentation must be in place and when it is required to be submitted to the tax administration;
- Enforcement, including penalties and measures to assist and promote voluntary compliance;
- Dealing with access to information outside the jurisdiction; and
- Simplification and exemptions.
Part III focuses more specifically at each kind of documentation in turn, and examines the specific policy choices that are relevant to each, as well as providing a number of examples of country practices.
The final part sets out a number of conclusions.
This 2017 edition of the OECD Transfer Pricing Guidelines incorporates the substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. It also includes the revised guidance on safe harbours approved in 2013 which recognises that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.
A link to the Guidelines is attached for reference.
The UN Transfer Pricing Subcommittee has provided a work designed to move forward its guidance in updating the UN Practical Manual on Transfer Pricing for Developing Countries. The paper provides three attachments addressing:
- Financial Transactions, a new chapter
- Profit Splits, revised text
- Establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits, revised text
All three attachments are significant and timely issues, noting the EU and other countries similar emphasis on these topics.
The paper is a valuable read in understanding UN’s direction on the above issues, and is included as a referenced link.
The EU Joint Transfer Pricing Forum recently published a paper illustrating when to use the profit split method (PSM) and how to accomplish the split of profits per the OECD Guidelines. The report is linked as a reference.
The report is a complement to, and supports, the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.
As this method is not simple, and is also a focus on transfer pricing issues in the US, this paper is valuable into the application and concepts of PSM.
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:
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.
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.