Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Transfer Pricing’ Category

Canada’s TP memorandum: Unilateral rules preceding OECD’s guidelines

The Canada Revenue Agency (CRA) published Transfer Pricing Memorandum (TPM)-15 for intra-group services.  TPM-15 is meant to “clarify” CRA’s audit policy of intra-group services.  Although the guidance references OECD’s 2010 Transfer Pricing Guidelines, it is issued in advance of new OECD guidelines, thereby leading to further global inconsistency and instances of double taxation.  Links to a PwC summary and TPM-15 are included for reference:

Click to access pwc-canada-intra-group-services-guidance.pdf

http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/tpm15-eng.html

CRA’s four-pronged approach to allocating costs is:

  1. Shareholder costs (no allocation)
  2. Specific non-Canadian entity costs (no allocation to Canadian entities)
  3. Specific Canadian entity costs (no allocation to non-Canadian entities)
  4. Corporate group costs, allocated via an arm’s length charge

Other highlights:

  • “Auditors should refrain from accepting the proportion of sales revenues as a single allocation basis for management fees.”
  • Specific provisions in the Income Tax Act on non-deductibility of certain costs trumps treaty arguments, leading to double taxation.
  • Indirect tax considerations are also addressed in the memorandum.

CRA’s aggressive approach, coupled with its timing, will result in additional complexity cloaked outside of the double treaty mechanisms for which the goal of avoiding double taxation may be ameliorated via appeal mechanisms.

All organisations with operations in Canada for which costs are allocated should review this memorandum to better understand CRA’s audit intent and processes.

Accordingly, documentation of the benefit provided locally, lack of duplication and transparency of the allocation method is vital in proving the tax benefit for intra-group services.

 

 

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Transfer Pricing

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Ghana’s TP risk approach: Best Practice ideas

EY’s Global Tax Alert highlights the 250 risk-based transfer pricing (TP) audits that commenced recently, as well as the relevant risk factors and transfer pricing submission details that are useful in determining transfer pricing risk currently and ongoing.  The Transfer Pricing Unit of the Ghana Revenue Authority was established in September 2012, highlighting the focus that this Unit has placed on gaining access to transfer pricing information from which a risk-based approach can be implemented.

Click to access 2015G_CM5216_TP_Ghana%20commences%20TP%20audits.pdf

Summary:

  • Transfer Pricing disclosure return (due 4 months after year-end):
    • Related party transactional overview and values
    • Location of related parties
    • Arm’s length pricing methodologies
  • Transfer pricing risk factors (Yes / No format):
    • Intercompany transactions to / from Ghana
    • Intercompany transactions with low-tax jurisdictions
    • Other transactions
    • Local restructurings
    • Senior management secondments
    • Operating losses for 2 years or more
    • Royalties
    • Compliance with transfer pricing returns
    • Contemporaneous transfer pricing documentation

Best Practice points / learnings from Ghana’s approach:

  • Would a risk-based jurisdictional template be useful to compare other jurisdictions similarly to address potential risks
  • Focus on location of senior management highlights the use of a significant people function approach, highlighting coordination with the global mobility function and providing relevant rationales to justify the local benefit
  • Location of related parties and transactions with low-tax jurisdictions may require further disclosure in transfer pricing documentation to address perception-based conclusions
  • Necessity for local transfer pricing knowledge, with internal / external resources to answer questions accurately

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Transfer Pricing

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Lux’s new transfer pricing framework

The Luxembourg Parliament has approved a draft law, effective 1/1/2015, that will provide a formal transfer pricing framework, coupled with relevant transfer pricing documentation.

PwC’s newsletter provides a summary of these developments:

Click to access pwc-luxembourg-transfer-pricing-legislation-formalised.pdf

Summary of key points:

  • Alignment with the arm’s length principle as stated in the OECD Model Tax Convention, covering transactions between Luxembourg related parties or cross-border transactions.
  • Tax return report of upward, or downward, transfer pricing adjustments whenever the transfer prices do not reflect the arm’s length standard.
  • Transfer pricing documentation expectation for the three-tiered approach in accordance with the OECD’s final Chapter V guidelines.
  • APA’s: Competent Authority will seek advice for advance tax confirmations from a tax rulings commission for additional legal certainty.  The tax confirmation rulings will be published in anonymous and summary form.

Luxembourg sends a strong statement of its alignment with the arm’s length principle and revised OECD transfer pricing documentation guidelines.  Tax transparency of the APA ruling process and recognition of transfer pricing adjustments, upward or downward, also provide a revised state of play in this jurisdiction that performs a vital tax and economic role going forward for MNE’s and other tax administrations.

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Transfer Pricing

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Indonesia: New MAP guidelines

The Indonesian Ministry of Finance has issued updated MAP guidelines, evidencing focus by the Indonesian Tax Office (ITO) on multilateral dispute resolution.  This regulation is the third MAP related guidance, with the inclusion of additional restrictions.  A link to KPMG’s Tax News Flash is provided for reference:

Click to access Tax-News-Flash-January-2015.pdf

Key summary:

  • The MAP process will be terminated when the Indonesian tax court “deems” that it has conducted sufficient hearings.
  • A tax audit for the MAP years may be conducted, without clarity if such audit is restricted to the MAP issues.
  • A concurrent Indonesian MAP request is required for a MAP request by another country’s tax authority.
  • MAP does not postpone the obligation to pay the tax, unlike domestic legislation.

Indonesia is uniquely interpreting the tax treaty to limit the opportunity for MAP appeals, while introducing additional subjectivity in the rules via vagaries of  the Indonesian tax court’s hearing process.  Most importantly, it will be important to consider the MAP process upon the commencement of an Indonesian audit due to ongoing uncertainties.  

Notably, this guidance is being issued prior to the finalization of the OECD dispute resolution guidelines that will most likely result in inconsistent guidelines for MAP.   

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Transfer Pricing

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UK: HMRC Penalties Discussion Document

HMRC published a discussion document on 2 February addressing the role and imposition of penalties, with a closing date for comments 11 May 2015.  A link to the document is included:

Click to access 150130_HMRC_Penalties_a_Discussion_Document_FINAL_FOR_PUBLICATION__2_.pdf

Key Points:

  • HMRC’s compliance strategy is based on three principles: Promote good compliance via systems/processes, prevent non-compliance and respond to risks.
  • Questions for comment address concerns about current penalties and suggestions for changing the penalties process.
  • The process and next steps are developed in 5 stages: (1) Setting out objectives, (2) Developing options and a framework for implementation, (3) Drafting legislation, (4) Implementing/monitoring the change, and (5) Reviewing/evaluation the change.
  • Annex A provides an overview of the main penalty regimes, with a matrix of penalty percentages dependent on careless, deliberate, or deliberate and concealed behavior.

The document represents a willingness and “good faith” effort on behalf of HMRC to address the current state and request comments for Best Practice processes.  Interested parties should review the document and provide comments accordingly.

As the Diverted Profits Tax option seems to be moving forward quickly to be potentially effective in April, 2015, relevant processes for imposition of a 5% “tax penalty” and accelerated payments should be weighed against the five principles of HMRC’s penalty process.  The five principles state: The penalty regime should be designed from the customer perspective, they should be proportionate, penalties must be applied fairly ensuring that compliant customers are in a better position, penalties must provide a credible threat and customers should see a consistent and standardized approach.  Does the Diverted Profits tax process and objectives meet the principles expressed in the Discussion Document?

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Transfer Pricing

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BEPS Action 13: CbC reporting guidance

The OECD has provided additional information re: the timeline and mechanism for providing the Country-by-Country (CbC) template.  A link to the document is included herein:

Click to access beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf

Summary of key points:

  • Master file and local file should be implemented by, and filed directly with, the relevant jurisdiction
  • Information to be provided for fiscal years beginning on or after 1/1/2016
  • Information to be filed by ultimate parent by 31 Dec. 2017 in their jurisdiction of residence
  • Exemption for MNE groups with annual consolidated revenues less than EUR 750M in immediately preceding year
  • The countries participating in the OECD / G20 BEPS Project agree that they will not require filing of a CbC report based on the new template for fiscal years beginning prior to 1/1/2016
  • Secondary reporting mechanism re: sharing of information between jurisdictions
  • Monitoring mechanism coupled with a 2020 review
  • The participating countries agree to:
    • Confidentiality provisions
    • Consistency (i.e. no additions or changes to template requirements)
    • Appropriate Use: No income allocation formula adjustments; CbC report adjustments are to be conceded by their Competent Authority

The guidelines are fairly short and concise, and it will be important to monitor laws in the parent jurisdiction for details of the respective filing process.  Additionally, it is even more important to watch countries that are NOT participating in the BEPS Project for different timelines, information and processes to be followed for customized CbC templates that would create additional complexity and global inconsistency.

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OECD / UN, Transfer Pricing

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Danish GAAR moves forward

Following up on its intent to introduce a “Super GAAR” (refer to 03 Jan 2015 post), a draft bill has been issued by the Danish tax authorities to achieve this objective.  The new anti abuse provisions would take effect 01 May 2015 with no grandfathering exception.

The draft bill would contain two GAAR provisions:

  • EU tax directive following the EU Parent-Subsidiary Directive (PSD) adopted by the European Council on 27 January.
  • Domestic provision, mirroring language in the PSD, that would apply to all EU Directives, including the Interest and Royalty Directive.

The provisions would apply to existing and new Danish tax treaties based on the premise that treaty benefits are not available in arrangements that include abuse of treaty provisons.

The inherently subjective nature of the GAAR proposals, including the override of EU Directives, will likely be challenged by taxpayers and possibly the courts.  In the interim, Danish transactions should be exercised with an element of care re: the potential application of GAAR that would reverse the tax advantage obtained.

The final OECD BEPS guidelines are yet to be issued, thus inconsistencies may arise between the unilateral legislation speeding into Danish tax law and OECD’s final guidance that aims at worldwide consistency.

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Transfer Pricing

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UK Consultation document: Tax Avoidance sanctions

HMRC has released a Consultation document entitled: Strengthening Sanctions for Tax Avoidance.  The document was provided on 30 January 2015, with comments due by 12 March 2015.  The document targets repeat offenders of tax avoidance schemes, and also proposes GAAR penalties and processes.

A link is included for reference:

Click to access Strengthening_sanctions_for_tax_avoidance_-_consultation_document.pdf

Key provisions:

  • It is focused on “tax avoidance” arrangements, specifically targeting “serial avoiders.”
  • A tax surcharge and special measures are suggested for repeated use of tax avoidance schemes.
  • A “name and shame” approach is also suggested, although being wary of reputational damage.
  • GAAR: It is now the right time to reconsider imposition of a GAAR-specific penalty and surcharge.  The document addresses maintenance of the current GAAR Independent Advisory Panel and related guidance, for which a flowchart is provided in Annex B for reference.
  • A series of questions re: Serial Avoiders and GAAR Penalties are provided for comment.

It is interesting to note the surcharge and accelerated payment concepts, also introduced in the controversial Diverted Profits Tax proposal.  Additionally, retaining the GAAR independent panel is a welcome statement that is not proposed for comment.

The inherent subjectivity of “tax avoidance” proposals potentially subject taxpayers and tax administrations to further complexity, additional costs and potential double taxation.  Therefore, all interested individuals and organisations should review this document and prepare comments to address this initiative, as other countries will be following these developments for possible application in their respective jurisdictions.

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Transfer Pricing

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EU TP Forum: Ready, set, go

The European Commission has formally established the EU Joint Transfer Pricing Forum expert group, based on the press release of 26/01/2015.  The Forum will be composed of transfer pricing experts that will discuss TP problems, advise the Commission on TP issues and assist the Commission in finding practical solutions.

Members will consist of Member States’ tax administrations and 18 organisations, for which guidelines for application are also attached for reference.  The names of the organizations will be published.  Rules for observer status are also set forth.  The Commission will publish all relevant documents such as agendas, minutes and participants’ submissions.  The Decision is applicable until 31 March 2019.

The definition of organisations is stated as: “Companies, associations, NGO’s, trade unions, universities, research institutes, Union agencies, Union bodies and international organisations.”  Application are to be submitted by 25 February 2015.

Click to access decision_c(2015)247_en.pdf

Click to access call_applications_2015_en.pdf

Further work on the work of the Forum may be accessed at:

http://ec.europa.eu/taxation_customs/taxation/company_tax/transfer_pricing/forum/index_en.htm

This development should be closely followed, notably in the member selection, recommendations provided, and TP solutions proposed.

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OECD / UN, Transfer Pricing

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Inconsistent (tax) terminology adds to confusion

The inconsistent use of (tax) terminology in drafting / enacting legislation and communicating issues re: perceived tax abuse, developing specific/targeted/general anti-avoidance rules (SAAR, TAAR, GAAR), anti-abuse rules, etc. promotes subjectivity, uncertainty, and misguided perceptions in trying to understand complex legal and technical international tax laws and regulations.

The recently drafted anti-abuse rule in the EU Parent-Subsidiary Directive (attached link for reference) is designed as a minimum standard to be adopted by EU Member States.  Article 1, paragraph 4 of the Directive states “This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”  This language should be compared to other tax legislation that introduce additional subjectivity and confusion with undefined and misunderstood terminology.

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016633%202014%20INIT

Subjective terminology that accompanies undefined verbiage as a basis for tax laws and regulations, such as anti-avoidance / abuse rules, further complicates comprehension, application, interpretation, and assessment of complex international tax rules.

The phrases “tax evasion” and “tax fraud” clearly set forth bright legal lines for definition and enforcement, whereas inherently subjective phrases of “tax avoidance,” “aggressive tax planning,” “intent of Parliament”, “tax abuse,” and similar terminology result in additional uncertainty for deciphering the true intent of significant tax legislation.

It would be beneficial to recognize the inherent inconsistencies of terminology applied in tax laws and regulations, and commence inclusion of verbiage and definitions that provide clarity promoting consistent application, implementation and enforcement of international tax guidelines.

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OECD / UN, Transfer Pricing

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Slovakia joins interest limitation parade

Slovakia joins the march of others, including Germany and S. Africa, that have adopted EBITDA limitations for interest deductions.  Slovakia limits interest to 25% of EBITDA, with no carryovers allowable.  The 2015 tax amendments also extend transfer pricing rules to domestic related party transactions, as well as potential loss of future benefits for net operating loss carryovers.

EY’s Global Tax Alert summarizing these changes is included for reference:

Click to access 2014g-cm4890-slovak-parliament-approves-2015-tax-amendments.pdf

BEPS continues to focus on interest deductions and limiting or allocating such deductions based on the premise that they are a base eroding mechanism that should not be fully deductible.  However, such limitation introduces a mismatch of the related party’s interest income that is not similarly limited, thereby increasing the incidence of unfair taxation.  This argument is contrary to the hybrid entity mismatch rules whereby a deduction is not allowable for income that is not includible, or limited in the case of a double deduction situation.  Accordingly, BEPS seeks not only to create a neutral result for a deduction and the related income, but BEPS disallows the tax benefits of common intercompany financing arrangements while (unfairly) retaining domestic benefits for full taxation of related party interest income to increase the country’s domestic fisc.  

Countries that have adopted EBITDA limitations will not be incentivized to change such legislation for the final OECD BEPS guidelines re: interest, thereby causing further complexity, a potential lack of global consistency and avenues of deviation for BEPS implementation.

MNE’s operating in such countries should review the financial and tax impact of the new rules, noting this will be a significant trend in the future that changes the manner in which debt financing is structured in the worldwide organization.

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Transfer Pricing

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CbC reporting: Spain is 2nd

The Spanish Treasury has announced that a Country-by-Country (CbC) reporting obligation will be included in the new Regulations, expected to be adopted in the first half of 2015 and effective on 1/1/2016.  This announcement follows an earlier decision by the UK to adopt CbC reporting for UK headquartered companies, also effective as of 2016 (refer to 12 December 2014 post).

The Spanish CbC reporting template is expected to mirror the OECD BEPS proposal to ensure alignment.

Best Practice notes:

  1. Timing: The OECD Guidelines are expected to include CbC reporting for the 2016 tax year, with one year provided to provide such documentation due to differing tax years of subsidiaries, timing of statutory reports, etc. upon which the relevant information is based.  The UK and Spanish CbC reporting are also focusing on 2016, although no date has been yet prescribed for providing the documentation to the tax authorities.  The dates legislated into law by the countries may precede the OECD suggested timeline.
  2. Coordination of CbC and TP documentation: If there are perceptive gaps or issues that are to further explained and referenced in the transfer pricing documentation, the date for providing contemporaneous TP documentation may be earlier than the CbC reporting date.  Therefore, planning should start now to take into consideration that not enough time may be available in 2017 to coordinate both sets of reports effectively.
  3. CbC definitions:  Ideally the UK, Spain and other countries adopting CbC will use consistent definitions for the items to be reported for global consistency.  To the extent there are different definitions, additional complexity, time and cost will be incurred by MNE’s.
  4. Items to report for CbC: At an early stage, it appears that the UK and Spain are adopting identical items for reporting purposes.  However, it is expected that some countries will use the OECD Guidelines as a base upon which other “wish list” items are to be included, resulting in further complexity.
  5. Sharing of CbC information: The first countries to adopt CbC reporting may share such information as a means of transparency with other tax authorities.  Therefore, it is expected that all countries may have access to this information very quickly irrespective of their domestic laws.

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OECD / UN, Transfer Pricing

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S. Africa’s BEPS incentivized interest rules

S, Africa’s new interest limitation on related party debt, approximating 40% of EBITDA, is effective as of 1/1/2015.  The new rules are prescribed prior to the OECD BEPS Action 4 Guidelines re: interest limitations.  Disallowed interest is carried over indefinitely, subject to the subsequent year’s limitation.

PwC’s guidance is provided for reference:

Click to access pwc-south-africa-introduces-interest-deduction-limits-debts-owed.pdf

As countries aggressively enact BEPS incentives with unilateral legislation, the premise of worldwide consistency for new OECD guidelines diminishes virtually daily.  New legislation also reduces the country’s further incentive to change such legislation to align with final OECD guidelines.

As S. Africa’s new rules demonstrate, there should be a BEPS champion/team in place at MNE’s to capture such changes worldwide and measure such impacts upon the global organization.  Additionally, future strategic planning should consider current BEPS initiatives, and unilateral legislation that has been passed, to measure tax efficiencies of current and future debt structures.

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Transfer Pricing

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Ireland GAAR: New rules

Ireland’s new Finance Bill has introduced a new General Anti-Avoidance Rule (GAAR), effective as of 23 October 2014.

The GAAR rule provides that where a taxpayer enters into a transaction, the tax authority may invoke the GAAR rule if it would be reasonable to consider that it is a “tax avoidance” transaction resulting in a tax advantage.  Accordingly, any reduction in tax payable is disallowed, in addition to a 30% surcharge.

PwC’s recent summary of Ireland’s tax developments is included for reference, including the GAAR rule on page 20:

Click to access 2014-pwc-ireland-budget-finance-bill.pdf

Key observations:

  • No time limit for raising a GAAR assessment.
  • A “protective notification” procedure is provided, protecting the taxpayer from the surcharge.
  • The taxpayer is obliged to furnish all documentation pertaining to the transaction along with an opinion as to why they believe the transaction does not fall within the GAAR provisions.

The GAAR rules are imposing additional arenas of uncertainty, dependent on the subjective interpretations and conclusions of the tax administration.  For Ireland, there is no time limitation and significant penalties are imposed for such assessments.

Due diligence procedures should be provided as an internal governance process to identify and review GAAR rules, domestic and/or treaty application, and possible avenues of appeal for transactions that may be affected.  (Note, details of the EU Parent-Subsidiary Directive GAAR provisions are provided in the 11 December, 2014 post)

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Tax Risk Management, Transfer Pricing

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UK Diverted Profits Tax: Conference notes

The UK Diverted Profits Tax (DPT) Conference on 13 January, sponsored by the Oxford University Centre for Business Taxation, was presented to a packed audience.  Attendees represented news agencies, advisors, tax executives as well as other countries, including Australia.

The speaker panel was inclusive of the following presenters that provided excellent thoughts for discussion:

  • Philip Baker QC, a barrister and QC practising from Field Court Tax Chambers.
  • Michael Devereux, Director of the Oxford University Centre for Business Taxation, Professor of Business Taxation and Professorial Fellow at Oriel College, Oxford.
  • Paul Morton, Head of Group Tax at Reed Elsevier Group plc.
  • Heather Self, Partner at Pinsent Masons.
  • Mike Williams, Director of Business and International Tax at HMRC.

A few statements from the panelists offer some background on this debatable issue:

Philip Baker: The DPT is a Targeted Anti-Avoidance Measure.

Michael Devereux: This may represent an overlay of economic substance over existing international tax rules, and there is a debatable point if the UK treatment should depend on the incidence of income / tax inclusion somewhere else.

Paul Morton: A very real, and complex, set of facts were presented showing that countries’ initiatives may result in a tax burden that exceeds 100% of the income without adequate recourse to avoid double taxation.

Heather Self: Practical aspects, from a MNE perspective, of the proposal were presented, supplemented by comments in her 19 December article of Tax Journal.  One of the conclusions in her article states: “This measure will make BEPS more difficult to achieve, and it risks a whole raft of unilateral measures being introduced by other countries.”

Mike Williams: The DPT proposal has alot of political commitment; it is consistent with EU law and treaty obligations; the UK is trying not to tax beyond its fair share of profits; loan exclusions probably do not go far enough and to combat aggressive tax planning, why wait another year.

Comments also addressed the aggressive effective date of April 2015, noting this timeline is in advance of the final OECD BEPS guidelines and there is very little time for reasoned comments and review between now and April.

This initiative has drawn the attention of many countries, anxious to examine the potential benefits it would add to their economy.  Accordingly, it is imperative to track this proposal, its effective date, implementation and a “Follow the Leader” approach in other jurisdictions.

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Transfer Pricing

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