Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Transfer Pricing’ Category

Australia’s DPT: License to tax

EY’s Global Tax Alert provides details on Australia’s new Diverted Profits Tax (DPT), effective in 2018 for calendar year taxpayers.

  • Penalty up to 40% can be assessed
  • Interaction with transfer pricing documentation and country-by-country (CbC) risk assessment
  • Diverted profits taxed at less than 24% are vulnerable
  • Proactive review of one’s documentation and risk assessment is recommended

Australia has patterned their DPT after the UK implemented a similar scheme, although posing some different characteristics.

As countries are reaching out to tax profits that are subject to a lower rate of tax elsewhere, this is providing a license to tax that cannot be ignored by multinationals with Australian operations.

Click to access 2017G_01485-171Gbl_Australia%20passes%20Diverted%20Profits%20Tax%20and%20Penalties%20law.pdf

Category:

Transfer Pricing

Tagged with:

EU: Broader CbC public disclosures envisioned

Members of the European Parliament (MEPs) have put forth additional recommended disclosures and requirements for the Accounting Directive of public Country-by-Country (CbC) reporting, prior to enactment of the original proposal.

The Accounting Directive allows a simple majority for passage, and involves additional complexities and cost as the OECD model is now just a starting point for new information.

The Parliament would also like to extend the proposal to include the following information in company reports:

  • The geographical location of the activities
  • The number of employees employed on a full-time equivalent basis
  • The value of assets and annual cost of maintaining those assets
  • Sales and purchases
  • The value of investments broken down by tax jurisdiction
  • The amount of the net turnover, including a distinction between the turnover made with related parties and the turnover made with unrelated parties
  • Stated capital
  • Tangible assets other than cash or cash equivalents
  • Public subsidies received
  • The list of subsidiaries operating in each tax jurisdiction both inside and outside the EU and data for those subsidiaries corresponding to the data requirements on the parent undertaking
  • All payments made to governments on an annual basis as defined in the Directive, including production entitlements, income taxes, royalties and dividends
  • The report shall not only be published on the website of the company in at least one of the official languages of the EU, but the undertaking shall also file the report in a public registry managed by the Commission

EY’s Global Tax Alert, referenced herein, provides the relevant details, although it appears the CbC report is not being construed as one tool for total transfer pricing assessment, but a public tool to determine one’s fair share of tax irrespective of the legal laws and limitations in each country.  

An alternative approach would be to design a standard (transfer pricing) audit template for the tax authorities that would include some, or all, of the above factors to the extent deemed important to assess a company’s tax liability in that relevant jurisdiction.  However, this non-public and Best Practice audit tool is not the focus in this post-BEPS world, to date.  

Click to access 2017G_00761-171Gbl_EU%20Parliament%20members%20submit%20amendments%20to%20public%20CbCR%20proposal.pdf

Category:

Tax Risk Management, Transfer Pricing

Tagged with:

TP & Developing Economies: World-Bank Handbook

The attached link provides access to an invaluable transfer pricing (TP) handbook which is an excellent resource for all international tax practitioners/advisors.

With the advent of the BEPS era and new/novel approaches to arms’s-length pricing are voiced, this resource is a great desktop reference with experience gained by the authors in both applying TP principles as well as teaching those principles to tax administrations in developing economies.    

Examples and “boxes” of summary content are provided in the handbook, in addition to a discussion on TP disputes that is inevitable with BEPS Actions and unilateral actions (both legislative and “soft law”) being applied across the world.

A summary of the chapter titles provides a summary of the details therein:

  • TP, Corporate strategy, and the Investment Climate
  • The International Legal Framework
  • Drafting a TP Legislation
  • Applying the Arm’s-Length Principle
  • Selected Issues in TP
  • Promoting Taxpayer Compliance through Communication, Disclosure Requirements, TP Documentation, and Penalties
  • Avoiding and Resolving TP Disputes
  • Developing a TP Audit Program

https://openknowledge.worldbank.org/handle/10986/25095

Category:

Transfer Pricing

Tagged with:

US update: Tax reform is near

With the (unexpected) victory for President-elect Trump, coupled with a majority in both the House and Senate, it is highly likely US tax reform is near.  There is a close correlation with Trump’s Plan and the Republican’s Blueprint tax reform initiative, although transitional details (Foreign Tax Credits, Earnings & Profits, etc.) still need to be completed.  The US tax rate may no longer be one of the highest in the world, and the tax economics of moving business initiatives, and repatriating cash, to the US are welcome thoughts for US based multinationals.  However, attention needs to be focused on the details, including Q4 2016 actions that may provide more efficiencies for the expected 2017 US tax reform.

EY’s Global Tax Alert, and the Blueprint are included for reference.

http://www.ey.com/gl/en/services/tax/international-tax/alert–us-election-2016-and-the-tax-landscape

Click to access ABetterWay-Tax-PolicyPaper.pdf

Category:

Transfer Pricing

Tagged with:

US Sec. 385: Final reg’s at last

The US Treasury and IRS issued the long-awaited Sec. 385 rules re: debt characterization, documentation and potential impact on a company’s international treasury system and related borrowings/distributions.

There are some exemptions everyone was wanting: foreign-to-foreign transactions, cash pooling (notwithstanding related documentation), in addition to relaxed timing for documentation matched to the timing for filing the US federal income tax return and a transition rule pre-2018.  However, there are strict documentation rules re: cash pools, including a trigger for substantially modifying terms of the agreement and other significant changes.

Note, the new rules are in addition to the subjective rules on debt characterization in IRC Sec. 385, further complicating characterization of debt instruments.

EY’s Global Tax Alert provides a comprehensive summary of this latest development, which all multinationals are studying to determine what impact it has for 2016, and future operations.

As treasury operations and tax strategies/planning are ineffective operating in silo fashion, it is also a good time to assess the organizational structure for tax and treasury operations to ensure they are operating as one strategic unit.  

Click to access 2016G_03341-161Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2014%20October%202016.pdf

Category:

Transfer Pricing

Tagged with:

EU State Aid: Long term uncertainty

With the recent decision re: Ireland state aid by the European Commission, the litigious stage now commences by Ireland, as the order has been provided to collect the state aid, with interest, from the multinational.

As the relevant rulings were not brought forward for approval upon their commencement by Ireland from the European Commission, the Commission now has the right to consider if such rulings are state aid.

This determination will not probably be final for several years as it progresses through the courts, however it does indicate a further trend of uncertainty re: transfer pricing rulings granted by EU Member States.  Coupled with the intent of BEPS, the legal aspects of transfer pricing may start to sway towards a perceived “intention” for fairness and non-discrimination, with a “fair tax” flag being waved ever more rigorously.

This uncertainty will provide further chaos with new international tax perspectives being displayed in the public domain.

The EY Global Tax Alert is provided for reference.

Click to access 2016G_02659-161Gbl_European%20Commission%20finds%20Ireland%20granted%20illegal%20State%20aid%20and%20orders%20recovery.pdf

Category:

Transfer Pricing

Tagged with:

Denmark’s TP documentation: OECD+

Denmark has new transfer pricing documentation rules in place, effective for tax year 2016, while country-by-country (CbC) reporting for non-Danish HQ companies is delayed until tax year 2017.

The local transfer pricing file is to include a copy of intercompany arrangements and details of IP re: “DEMPE” functions including the Development, Enhancement, Maintenance, Protection and Exploitation attributes.

The additional details extend beyond the OECD Guidelines and will lead to further complexity re: the ability to efficiently provide globally consistent transfer pricing documentation around the world. This may be followed by other countries as they follow the particular leader at the team, and thus EY”s Alert should be reviewed by interested tax practitioners.

Click to access 2016G_01098-161Gbl_TP_DK%20issues%20stricter%20requirements%20for%20TP%20documentation.pdf

Category:

OECD, Transfer Pricing

Tagged with:

UK interest consultation

The UK government has updated its October 2015 interest expense consultation paper as of 12 May 2016, and is seeking comments by 4 August, 2016.  The paper outlines the intent of OECD’s BEPS interest guidelines and provides questions for further consideration of limitations re: interest expense going forward.

The UK previously legislated hybrid mismatch arrangements that will be effective 1/1/2017, and the new rules are not expected to be effective until April 2017.  In the interim, taxpayers will not have certainty re: current arrangements and new rules going forward.

Although following the footsteps of the OECD, UK is not afraid to take an aggressive stance as evidenced by its Diverted Profits Tax legislation, intention to adopt BEPS Actions 8-10 re: transfer pricing at an early stage and inserting risk rules in its Manual with a UK tax strategy governance.  This paper is intended to be a future roadmap for UK tax, thus it should be read by all interested parties.

A reference to the paper is provided for reference, and a summary of the questions.

https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense/tax-deductibility-of-corporate-interest-expense-consultation

  1. What are your views on when a general interest restriction should be introduced in the UK?
  2. Should an interest restriction only apply to multinational groups or should it also be applied to domestic groups and stand-alone companies?
  3. Are there any other amounts which should be included or excluded in the definition of interest?
  4. How could the rules identify the foreign exchange gains and losses to be included?
  5. If the rules operate at the UK sub-group level, how should any restriction be allocated to individual companies?
  6. Are there items which should be excluded from both the definition of interest and from “tax EBITDA”, as referred to in the section on a fixed ratio rule?
  7. What do you consider would be an appropriate percentage for a fixed ratio rule within the proposed corridor of 10% to 30% bearing in mind the recommended linkages to some of the optional rules described below?
  8. What are your views on including in any new rules an option for businesses to use a group ratio rule in addition to a fixed ratio rule?
  9. What form of de minimis threshold would be most effective at minimising the compliance burden without introducing discrimination or undermining the effectiveness of any rules?
  10. What level should the de minimis threshold be set at, balancing fairness, BEPS risks and compliance burdens?
  11. Should SMEs as defined by the EU criteria be exempted from the rules, in addition or as an alternative to a de minimis threshold?
  12. What is the best way of ensuring that the rules remain effective and proportionate even when earnings are volatile?
  13. In what situations would businesses choose to use the PBP exclusion? How would this differ if no group ratio rule was implemented?
  14. Do you have any suggestions regarding the design of a PBP exclusion, taking account of the OECD recommendations?
  15. Do you have any views on the specific risks that might sensibly be dealt with through targeted rules?
  16. Do you have any suggestions as to how to address BEPS issues involving interest raised by the banking and insurance sectors?
  17. What are the types of arrangement for which transitional rules would be particularly necessary to prevent any rules having unfair or unintended consequences, and what scope would these rules need to be effective?
  18. To what extent do you believe that the new general interest restriction rule should replace existing rules?

 

Category:

OECD, Transfer Pricing

Tagged with:

Chile: BEPS + disclosures

The Chilean Internal Revenue Service has implemented a 24 question disclosure based on BEPS, although going farther than the OECD’s Actions.  EY’s Global Tax Alert is provided for reference:

Highlights:

  • Percentage of related party revenues
  • EBITDA percentage of related party expenses
  • Foreign related parties with no staff or relevant assets, and identify those which participated in intercompany transactions
  • Corporate reorganizations, transfer of functions involving foreign companies.

  • Taxpayers listed in the Large Business Division (Grande Contribuyente) must file SS No. 1913, as well as those considered large companies by the Chilean IRS. SS No. 1913 must be filed annually from 2016 onwards before filing the corporate return (Form 22), which is due in April.

A careful reading of the new disclosures should be undertaken by those having Chilean operations; this is also a trend that will probably develop in other countries.

 

Click to access 2016G_CM6128_Chile%20creates%20new%20sworn%20statement%20linked%20to%20BEPS%20Actions.pdf

Category:

Tax Risk Management, Transfer Pricing

Tagged with:

France’s Finance Act 2016:new trends

The French Parliament has adopted the Finance Act for 2016, in addition to amendments of the 2015 Finance Act.  A comprehensive summary by Bird & Bird is provided for reference:

http://www.twobirds.com/en/news/articles/2016/france/finance-act-for-2016-and-amended-finance-act-for-2015-company-taxation

Highlights:

  • Country-by-country (CbC) reporting, effective for the 2016 tax year, for French based MNE’s and other companies not subject to a CbC requirement.  (Note for US MNE’s: under the proposed Regulations, this would require CbC reporting in France, and other countries, for 2016 whereas the 2017 tax year would be reported to the IRS in the US)
  • Penalty up to EUR 100k if a CbC report is not filed.
  • In addition to current French regulations for transfer pricing information, a new requirement has been added: Identification of jurisdictions where intra-group transactions are conducted or where group members own intangible assets.
  • The 10.7% exceptional contribution on corporate income tax has not been extended, thereby lowering the total effective tax rate.  Calendar year taxpayers will not be subject to this charge for 2016.
  • Dividend distributions commencing in 2016 within a French fiscal group, or from an EU member, is subject to a 1% (vs. 5%) income inclusion, to bring its legislation into compliance with European law.
  • The EU Parent-Subsidiary Directive’s provisions are adopted: Anti-abuse de minimis clause including a “main purpose” or “one of the main purposes” test.  Additionally, “an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”
  • An advisory committee for the research tax cried and innovation tax credit has been created.

The new legislation highlights new trends that may be followed by other countries:

  1. Significant penalties for non-filing of required CbC reports.
  2. Additional subjectivity for anti-abuse provisions.
  3. Legislation that has been adopted to conform with the European Court of Justice determinations.
  4. Additional information reporting, including a focus on IP ownership.

All MNE’s should review these new provisions with a global perspective, not only with respect to companies operating in France.

 

Category:

Transfer Pricing

Tagged with:

Argentina’s FX Controls eased

Argentina has eased its foreign exchange controls, effective this month.  The changes affect imports, services, repatriations and bank controls.  Deloitte’s International Tax Alert provides further details:

Click to access dttl-tax-alert-argentina-26-december-2015.pdf

Foreign exchange controls are important to monitor, as they affect transfer pricing, cash funding/repatriation, timing of reimbursements and contemporaneous documentation requirements for clearance.  Argentina’s announcement is good news for international business, and it is hopeful that other countries with similar controls follow their lead.

Tax and treasury practices should be integrated with respect to foreign exchange controls to gain maximum efficiencies in any organization.

 

Category:

Tax Risk Management, Transfer Pricing

Tagged with:

CbC: US proposed Reg’s – a question of timing

The US Treasury has released proposed Regulations setting forth details for country-by-country (CbC) reporting by US-based multinationals.  A link to the proposed Reg’s is provided:

Click to access 2015-32145.pdf

The proposed Reg’s have been issued for comment, and two significant timing issues arise in the current version:

  1. Final Regulations would not take effect until tax years beginning after publication in the Federal Register, which would be 2017 for calendar-year taxpayers.
  2. The CbC report would be submitted to IRS with the US corporate income tax return, due Sept. 15.

Although the proposed Reg’s are conformed to the OECD model and have been purposeful in its comments on confidentiality and the exchange of information provisions for CbC reporting, the timing mismatch for the 2016 tax year presents a complexity that hopefully will be overcome in the Final Regulations.  If no changes are made to the effective date, the 2016 tax year would be a dysfunctional method of reporting around the world, based on whom are considered surrogate entities or determining which countries have rules that provide for direct submission to their tax authorities absent a US requirement.  

Additionally, the submission of the CbC report by Sept. 15 accelerates the year-end timing envisioned by the OECD.  This acceleration should be expected by multinationals, thereby leaving less time to coordinate and review the information via developing an efficient and sustainable CbC reporting process.

 

 

Category:

OECD, Transfer Pricing

Tagged with:

LOB: European Commission takes aim

The European Commission has aimed its sights upon the Limitation on Benefits (LOB) provision between Netherlands and Japan.  Netherlands has been asked to change this treaty provision on the grounds that it is incompatible with EU law.

As the LOB provision is widely used in the US treaty network, as well as many other countries, the impact of this recent development may expand exponentially with global ramifications.  Accordingly, this pursuit should be closely followed.

Deloitte’s summary is provided for reference:

http://www2.deloitte.com/nl/nl/pages/tax/articles/european-commission-challenges-lob-in-treaty-with-japan.html

Category:

OECD / UN, Transfer Pricing

Tagged with:

European Parliament’s tax policy paper

The European Parliament’s Policy Dept. A has provided a tax policy paper upon the request of the TAXE Special Committee of European Parliament.  An EY summary, and detailed report, are provided for reference:

Click to access 2015G_CM5880_European%20Parliament%20publishes%20paper%20on%20the%20EU%20Third-Country%20Tax-Governance%20Issues.pdf

Click to access IPOL_IDA(2015)563449_EN.pdf

Key topics:

  • Developing country tax governance issues
  • Tax system trends and challenges
  • Impact of tax havens on EU countries
  • Challenges faced by tax policy makers
  • Exchange of information
  • Tax transparency
  • Illicit activities
  • Harmful tax competition

As the EU has stepped in to take the lead on various post-BEPS initiatives, this policy paper is recommended reading to gauge the trend in these topics that will also take place worldwide.

Category:

OECD, Tax Risk Management, Transfer Pricing

Tagged with:

EU transparency: New Ruling Directive re: tax ruling exchange moves forward

The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017.  A copy of the press release is provided:

Click to access 40802203260_en_635797403400000000.pdf

Key observations:

  • Cross-border tax rulings and advance pricing agreements (APAs) will be automatically exchanged between EU Member States.
  • The rulings will be stored in a EU central repository, with access available to the Member States.
  • Rulings issued from 2012 will generally be included in the exchange of information, subject to de minimis thresholds.

This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.

Multinationals should review prior rulings subject to this exchange to avoid potential surprises.

Category:

Transfer Pricing

Tagged with: