The Toolkit on Tax Treaty Negotiation (the “Toolkit”), has been prepared in the framework of the Platform for Collaboration on Tax (the “PCT”) by the IMF, the OECD, the UN and the WBG (the “PCT Partners”).
Date and time:
Wednesday, November 4, 2020 9:00 am Eastern Standard Time (New York, GMT-05:00) Change time zone
2 hours 30 minutes
Please join The Platform for Collaboration on Tax (PCT) for the public consultation webinar of its draft Toolkit on Tax Treaty Negotiations. The toolkit authors and expert speakers will discuss how the toolkit can help developing countries, followed by a demo of the interactive, web-based version of the toolkit and a feedback roundtable with experienced negotiators.
PCT’s draft Toolkit on Tax Treaty Negotiations is a joint effort to provide capacity-building support to developing countries on tax treaty negotiations, building on existing guidance, particularly from the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (the “UN Manual”). The Toolkit provides tax officials with:
***Information on the steps involved in tax treaty negotiations ***Practical tips for treaty negotiators on the conduct of negotiations and negotiation styles ***Easy access to already publicly available resources that treaty negotiators will find useful
The design of the Toolkit also allows regular updates and improvements based on the feedback from users and experienced negotiators.
The PCT released the draft toolkit for public feedback from June 29th to September 24th, 2020 through its website and the KSP-TA hub. In addition to written comments, this virtual workshop aims to gather further feedback from stakeholders, particularly treaty negotiating teams.
The Toolkit represents a joint effort to provide capacity-building support to developing countries on tax treaty negotiation, building on previous contributions and reducing duplication and inconsistencies.
The German Federal Minister of Finance has published a draft law, implementing the EU anti-tax avoidance directive. However, the legislation is very far-reaching! Although the provisions are still draft, there are 2020 effective dates.
Eliminates current TP hierarchy for methods
Looks at conduct, vs. contracts
Codifies function and risk analysis
Best method rule
Legal definition of “intangibles”
Intangible price-adjustment clause
Addresses transfer of functions valuation
Deductibility of German interest expense
Expands related party definition
Reduces turnover amount to prepare a TP Master File
The Thailand Revenue Department (TRD) has published a new transfer pricing (TP) form for taxpayers with revenue of THB 200 million, effective as of 1/1/19 and due by May 29, 2020 for calendar-year taxpayers. The form delineates different forms of intercompany transactions for separate disclosure.
The disclosure form will be used for TP analysis and potential audits.
This risk analysis technique is becoming more the norm for countries, vs. trying to review the tax return for which such information is not readily apparent.
Accordingly, the tax return review process, via regionally, globally or external advisors, should be reviewed to ensure this form is prepared in advance with the relevant governing controls for accuracy.
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.
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.
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.
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.
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.
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:
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.
India has released its APA annual report, providing valuable insight into recently filed APAs and the process.
Intragroup services by the Indian applicants have been the most covered international transactions in the bilateral APAs.
The transaction net margin method has been used in 70% of the unilateral cases and 90% of the bilateral cases.
India has concluded unilateral APAs in 29 months and bilateral APAs in 39 months.
As India is recognized as very creative and aggressive in its transfer pricing practices, this report should be reviewed to test whether an APA should be filed, as well as in other countries for additional certainty.
EY’s Global Tax Alert provides additional details, included for reference.
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