Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Transfer Pricing’ Category

EU State Aid: A primer

PwC has provided an outline of EU State Aid requirements.  This comprehensive and succinct summary provides context for the  OECD BEPS provisions, tax arrangements that are considered illegal State Aid, and a valuable reference for potential EU State Aid cases in the foreseeable future.  A link to the outline is provided for reference:

Click to access pwc-eu-fiscal-state-aid.pdf

This information provides a valuable context against which the recent inquiries have been focused, as well as potential areas (including OECD BEPS Actions) that may constitute illegal State Aid in the future.  All MNE’s with European operations should be familiar with these legal provisions and the continuing importance that they have in today’s rapidly changing international tax environment.

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EU Commission: State aid investigations

KPMG’s Euro Tax Flash provides a summary of the European Commission’s formal state aid investigations into tax rulings granted by Ireland (Apple) and Luxembourg (Fiat).  This round of investigations follows three investigations, announced 11 June 2014, into alleged state aid granted by Ireland (Apple), Luxembourg (Fiat) and the Netherlands (Starbucks) via transfer pricing rulings.

The procedure is now open for interested parties, including Member States to provide comments to the Commission.

The KPMG Euro Tax Flash and preliminary decisions (English version for Ireland, French version for Luxembourg) are attached for reference:

Click to access tp-eu-sept30-2014.pdf

Click to access 253200_1582634_87_2.pdf

Click to access 253203_1582635_49_2.pdf

Key observations:

  • State Aid – Apple; Section 3.1, par. 46: Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the provision of certain goods shall be incompatible with the common market, insofar as it affects trade between Member States.
  • Qualification as state aid – Apple; Section 3.1, par. 47:  The following cumulative conditions must be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.
  • Arm’s length pricing – Apple; Section 3.1, par. 55: The Court of Justice has confirmed that if the method of taxation for intra-group transfers does not comply with the arm’s length principle, and leads to a taxable base inferior to the one which would result from a correct implementation of that principle, it provides a selective advantage to the company concerned.
  • OECD Guidelines – Apple; Section 3.1, par. 56: The OECD Guidelines are a reference document recommending methods for approximating an arm’s length pricing outcome and have been retained as appropriate guidance for this purpose in previous Commission decisions.

These formal rulings and comments by interested parties should be followed closely, especially in today’s challenging international tax environment.

EU case law and European Commission reviews have a significant impact upon the new international tax principles being established by the OECD and EU.  For example, the general anti-abuse rule (GAAR) provision in the Proposal for the 2014 EU Parent-Subsidiary was ultimately not included in the final version of the 2014 Directive, one reason being that the requirements exceeded the precedents of EU case law and would not be ultimately sustained.

To the extent that new OECD guidelines provide an alternative, or exceptions, to the arm’s length principle, it should have a direct impact upon the precedence for reliance by the European Commission re: transfer pricing issues.

 

 

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IMF Policy Paper: Int’l Tax Spillover Effect

The International Monetary Fund (IMF) has published an interesting paper addressing the impacts that current, and proposed, international tax legislation has on others.  Selected key issues include tax treaties, indirect transfers of interests, interest deductibility, arm’s length pricing, formulary apportionment, treaty shopping, and appendices of tables and statistics.  The paper also highlights guiding principles for international tax design, timely concepts as the OECD is preparing to publish responses to several of its BEPS Action Plan items this coming week.

The paper can be referenced at:

Click to access 050914.pdf

The paper is valuable in addressing tax policy topics and issues, thereby setting the stage for future international tax debates.

 

 

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Transfer Pricing

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Best Practice TP article: TP documentation: time for a strategy refresh

I have attached for reference my first published article, addressing transfer pricing documentation: time for a strategy refresh.

The article was published by Accountancy Magazine.  A reference to the article is included for reference:

https://www.accountancylive.com/transfer-pricing-documentation-time-strategy-refresh

The article addresses the OECD BEPS proposals, including country-by-country reporting, with Best Practice ideas included for Action Plan items.

Additionally, insights into processes for developing a comprehensive plan for revised TP documentation are discussed.

Finally, the hot topics of General Anti-Avoidance Rules (GAAR), local tax disclosures and tax policy statements are addressed for further insight.

 

 

 

 

 

 

 

 

 

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Australia TP: Self-assessment regime

Australia’s new transfer pricing rules require that officers signing the corporate tax return must sign off for transfer pricing arrangements on a self-assessment basis.  The self-assessment process would affirm that the transfer pricing is pursuant to arm’s length consideration that would be transacted between unrelated parties.  Details of the new self-assessment regime are referenced at the attached link:

http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/tax-insights/Pages/a-new-obligation-for-public-officers-28-august-2014.aspx

Additional review of transfer pricing documentation may be required for self-assessment consideration.  The OECD BEPS proposals may also impact such reporting in the future.

 

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Service fees & royalties: China’s SAT new (backward) focus

China’s State Administration of Taxation (SAT) issued an internal circular, instructing tax bureaus to review, and report, companies that have made large service fee or royalty payments between 2004 and 2013.  Tax bureaus will submit their findings to the SAT by September 15, 2014, followed by special investigations and potential tax adjustments.  The transfer pricing audit period is 10 years, thus the look-back period is within the statute of limitations.  The KPMG Tax Alert is provided for reference:

Click to access tp-china-aug25-2014.pdf

Key observations:

  • SAT’s commentary to the UN in April 2014 sets forth stricter guidelines for payment and deductibility than the OECD guidelines suggest (i.e., if the beneficiary is not in need of such services or the provider also benefits, then benefit by the service recipient alone is not justification).
  • Additionally, the SAT argues that the definition of shareholder services in the OECD Guidelines is too narrow.
  • Payments made to “tax haven” jurisdictions will receive special attention.
  • Economic substance in overseas entities will be reviewed.

Service fee and royalty payments are receiving global attention by tax authorities, although this retroactive review and narrow interpretation of deductible payments by the SAT will lead to additional assessments and the risk of double taxation going forward.  Multinationals should review transfer pricing documentation with respect to China, including the identification of any duplicative services as well as the benefits received from such services by major jurisdictions.

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Chinese GAAR: Review of a draft “Administrative measure”

The Chinese State Administration of Taxation (SAT) has released draft General Anti-Avoidance Rules (GAAR) to supplement its current GAAR legislation and Circular 2.  The draft rules, when final, will be effective for all arrangements executed after 1/1/2008, the effective date of the Corporate Income Tax Law and the Detailed Implementation Rules.  The KPMG tax alert provides relevant information for this draft guidance, which can be referenced at the following link:

http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/ChinaAlerts/Documents/China-tax-alert-1407-19-Guidance-on-Chinese-General-Anti-Avoidance-Rule.pdf

Observations of “clarifications” to the law:

  • Shift from a “primary purpose” test to include “one of its main purposes” to obtain tax benefits.
  • Ordering rules are set forth: Domestic SAARs, Treaty SAARs, and domestic GAAR.
  • It is noted that in most recent Chinese tax treaties, there is a “Miscellaneous Rule” article reserving the right to use GAAR irrespective of treaty commitments.
  • There is not a GAAR review committee.
  • Documentation to be provided by taxpayers includes communications between the taxpayer and its tax advisors, and other parties to the transaction.
  • Documentation may also be requested directly from the tax advisors to the taxpayer.
  • GAAR adjustments include re-characterization of the arrangements, or income, deductions, tax incentives and related foreign tax credits, denial of the existence of a party to the transaction, and any other reasonable method.

This draft emphasizes the use of GAAR by tax authorities to counter perceived tax abuse and treaty shopping techniques.  There is a complex interplay between the treaty provisions, by which treaty relief may be sought, and domestic legislation whereby there is a higher possibility of double taxation.  Prior posts re: GAAR may also be searched in this blog, detailing a non-uniform burden of proof standard, high subjectively threshold and the continuing development of this anti-abuse provision by tax authorities around the world.

It is noted that the draft rules also extend documentation requests directly to tax advisors, including communications to or from the taxpayer.  This explicit provision emphasizes the importance of coordinating relevant communications between the taxpayer and all outside parties to ensure that form and substance requirements are aligned.

GAAR documentation should be considered for all transactional planning, including prior transactions for which current developments are evolving.

 

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Treasury related transfer pricing disclosures: Czech Republic

The Czech Republic has published new tax return disclosure requirements for the 2014 year, including 2013 data for selected taxpayers.  A link to the requested information is provided for reference:

Click to access KPMG-Financial-Update-2014-07-Special-Issue.pdf

The Czech Republic disclosures include the amount of short-term and long-term intercompany receivables and payables at the end of the current and prior years for comparison.

Best Practice: Treasury training for BEPS – As more countries implement transfer pricing disclosure legislation, with increased emphasis on intercompany loans and financing transactions, it is imperative that Tax Team members provide BEPS training for international treasury centers.  This training should raise awareness of the OECD BEPS initiatives resulting in increased disclosures and inquiries from Business Units, as well as provide internal transparency and governance for significant treasury transactions.

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APAs, MAP, Self-Assessment: Vietnam update & Best Practice ideas

Vietnam has recently adopted regulations on Mutual Agreement Procedures (MAP) and Advance Pricing Agreements (APAs), with additional transfer pricing measures.    A link to the informative summary prepared by KPMG is provided as reference:

http://www.internationaltaxreview.com/Article/3319685/Vietnam-Getting-up-to-speed-in-Vietnam.html

Key Highlights:

  • The APA negotiation and conclusion procedures, consisting of five steps, is expected to take nine months from submission to a concluded APA.
  • Formal guidance has been issued for MAP implementation.
  • Related party transaction disclosure is to be submitted with 2014 tax returns, based on a self-assessment process with contemporaneous documentation to effectively shift the burden of proof to the tax authorities.

Re: Best Practices, transfer pricing opportunities and documentation requirements, by Vietnam as well as all other countries, should be mapped to formulate new audit defense strategies, cooperative compliance ideas and transfer pricing governance guidelines.

In today’s volitive transfer pricing environment, a member of every multinational company’s global tax department should have responsibility for a real-time assessment of all new developments, thereby providing a significant value-add for legal structuring, debt financing, transfer pricing documentation, and audit defense strategies to avoid double taxation.  To the extent such resources are not being focused, a cost/benefit analysis of missed opportunities may be helpful to achieve additional Best Practice methodologies.

 

 

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Transfer pricing documentation & BEPS: Refresh strategy

As time is of the essence for various OECD BEPS proposals to be made public, the interim time gap may be an excellent time to refresh global transfer pricing documentation strategies.  Several questions that may be addressed in a transparent and critique perspective include the following:

  • Have each of the BEPS proposals been matched to current TP methodology, questioning the future state of global TP documentation?
  • For current cooperative compliance relationships, is a discussion contemplated / scheduled to discuss the potential impacts of BEPS on the ongoing ways of working, including TP documentation?
  • Are future cooperative compliance relationships in focus, aligned with BEPS initiatives, especially among countries seeking unilateral legislative actions re: General Anti-Avoidance Rules (GAAR) implementation, etc.?
  • Are the attributes of a GAAR, including a taxpayer’s responsibility for GAAR compliance, being considered globally and /or in local country files?
  • Should compliance roles and responsibilities of TP compliance change re: internal / external resources due to BEPS with additional complexities envisioned?
  • If a Master File and Local Country file methodology is not currently in place, will there be a global and/or regional shift to such methodology?  What is the proposed timing for change?
  • Are the local tax return disclosures re: TP aligned with that country’s TP documentation?
  • What tax team / TP resources are being aligned to address the BEPS initiatives and proposed documentation?
  • Are tax policy statements of the Tax Risk Framework being reviewed for desired TP transparency?
  • Have there been “idea” meetings to discuss next steps in a creative atmosphere?

A BEPS / TP review will be valuable in aligning future vision, flexibility and transparency in today’s volatile atmosphere of TP assumptions and perceptions.

 

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European Commission report: TP adjustments/audit plan

The European Commission published a report 4 June 2014 on the work of the EU Joint Transfer Pricing Forum in the period July 2012 to January 2014.  The report highlights the effect, including double taxation, of secondary and compensating adjustments, in addition to a flowchart for a recommended transfer pricing audit plan.  The link to this report is included for reference, with key excerpts from the report:

Click to access com(2014)315_en.pdf

Secondary adjustments

The report presents the general aspects of secondary adjustments and gives recommendations on how to deal with possible double taxation in this context. Member States in which secondary adjustments are not compulsory are advised to refrain from making them in order to avoid double taxation. Member States in which secondary adjustments are compulsory are advised to provide ways and means to avoid double taxation.

Drawing on the EU Parent Subsidiary Directive (PSD) the report recommends characterising secondary adjustments within the EU as constructive dividends or constructive capital contributions. Accordingly, the PSD ensures that no withholding tax is imposed on the distribution from a subsidiary to its parent within the EU. For cases not covered by the PSD, the report describes and recommends the procedure of repatriation in the context of a Mutual Agreement Procedure (MAP) available under the respective applicable Double Taxation Agreement (DTA) or even at an earlier stage. Further it is recommended that Member States should refrain from imposing a penalty with respect to the secondary adjustment.

Compensating adjustments

The report recommends that Member States should accept a compensating adjustment initiated by the taxpayer (upward as well as downward adjustment), if the taxpayer has fulfilled certain conditions: the profits of the concerned related enterprises are calculated symmetrically, i.e. enterprises participating in a transaction report the same price for the respective transaction in each of the Member States involved; the taxpayer has made reasonable efforts to achieve an arm’s length outcome; the approach applied by the taxpayer is consistent over time; the adjustment has been made before the tax return is filed; in case a taxpayer’s forecast differs from the result achieved, the taxpayer is able to explain why this occurred, should it be required by at least one of the Member States involved.

The application of secondary adjustments may lead to double taxation. Therefore, if secondary adjustments are not compulsory, it is recommended that MS refrain from making secondary adjustments when they lead to double taxation. Where secondary adjustments are compulsory under the legislation of a Member State, it is recommended that Member States provide for ways and means to avoid double taxation (e.g. by endeavouring to solve it through a MAP, or by allowing the repatriation of funds at an early stage, where possible). These recommendations assume that the taxpayer’s behavior does not suggest an intent to disguise a dividend for the purpose of avoiding withholding tax.

When repatriation is agreed in a MAP settlement, it is recommended that the MAP agreement states that no withholding tax will be applied by the Member State out of which the repatriation is made and no additional taxable burden will be imposed in the Member State to which the repatriation is made.

As taxpayers may not be aware of the fact that in certain situations a separate request needs to be made for avoiding double taxation resulting from secondary adjustments, Member States which do not consider that secondary adjustments can be treated under the AC are encouraged to highlight in their public guidance the fact that a separate request under Art 25 OECD MTC may be needed to remove double taxation. For reasons of efficiency, it is recommended that taxpayers submit both requests in the same letter.

TP Audit Work Plan

This TP audit work plan is an example of the various steps that are typically performed during a TP audit (not a comprehensive audit) on the side of the taxpayer and on the side of the tax administration, respectively. It should be understood as an informative guide rather than as prescriptive rules. It is recognised that the structure suggested may not fit into all MSs’ and taxpayers’ legal framework and administrative practice. An underlying assumption of the work plan is that properly prepared documentation – as requested by local tax authorities – is available and well-trained staff act on both sides.

 

Re: Best Practices, this is an excellent document to review.  It explains secondary and corresponding adjustments, which are often areas overlooked in audits until the final assessment is issued and the audit has been settled in the primary jurisdiction.  Additionally, the TP audit work plan is a valuable document to develop Best Practices with the tax authorities in planning an audit, developing mutual trust and cooperation.  These principles should also be applied globally, not only within the EU.

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TP disclosure on tax returns: Malaysia

The Malaysian Inland Revenue Board (MIRB) has added a new check box on the 2014 tax return form for corporate taxpayers to declare whether transfer pricing documentation has been prepared.  Contemporaneous documentation should be prepared accordingly (i.e. 7 months from the close of the financial year).  The KPMG Newsletter describing this new initiative is referenced at the following link:

Click to access tp-malaysia-may6-2014.pdf

Re: Best Practices, new transfer pricing boxes / questions on tax returns are becoming a common practice.  Some questions by a multinational to ensure proper governance for tax return transfer pricing disclosures include:

  • What internal governance mechanism is in place to alert the tax dept. timely of new disclosures for proper planning of contemporaneous documentation, etc.?
  • Is the tax return preparer / reviewer knowledgeable about the transfer pricing documentation processes in place to answer the questions accurately?
  • If a transfer pricing question is to be answered negatively (i.e., no documentation exists), is there adequate time to proactively address, as applicable?  Is there any correlative impact for a financial statement tax reserve?
  • For transfer pricing methodology questions, who ensures the proper methods are accurately disclosed?
  • Is there a pre-audit strategy, upon notification, to review tax return disclosures?
  • Is there a documented process in the global tax risk framework that alerts the tax dept. of new disclosures?

These questions, among others, should be discussed to ensure internal and external alignment in a corporation’s tax risk policy.

 

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TEI comments – OECD BEPS Action 2: Hybrid Mismatch Arrangements

Tax Executives Institute, Inc. (TEI) has provided comments on the OECD BEPS Action 2 proposal addressing hybrid mismatch arrangements.  The submission is referenced at the following link:

Click to access TEI%20Comments%20-%20OECD%20BEPS%20Action%202%20Hybrids%20-%20FINAL%20to%20OECD%201%20May%202014.pdf

Some key highlights of Submission:

  • Some suggested solutions are overly broad and administratively unworkable.
  • The comments are not limited to hybrid arrangements that are inappropriate or abusive.
  • Simultaneous adoption by countries is encouraged, versus a question of adoption and / or timing of adoption by countries.
  • Double taxation issues, with Competent Authority requests, may increase.
  • A “bottoms-up” approach, applying only to instruments held between related parties, is recommended, using a 50% or greater rule for related parties.
  • For deductible payments not included in “ordinary income” of the holder’s jurisdiction, the term “ordinary income” should be expanded.
  • Further clarification could be provided by delineating how two countries that simultaneously apply their domestic anti-hybrid instruments can coordinate their application.
  • The impact on financial accounting in application of the hybrid rules should be considered.
  • Recommended rules for hybrids will not always produce uniformity due to differing tax systems (i.e., worldwide or territorial).
  • An anti-abuse rule adopted by the OECD should only apply in narrowly targeted axes of abuse, with strict bright line tests.
  • Bilateral tax treaties are not a tool to address legal tax planning adopted by various countries.

TEI’s excellent comments provide further insight into this significant, and broad, proposal.  Accordingly, they should be reviewed to understand complexities of adopting a complex rule without increasing risks of double taxation, with increased pressures on the Competent Authority process.

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Australia draft TP ruling: need for comment

The Australian Taxation Office (ATO) has issued a draft transfer pricing law introducing subjective provisions that would be enforced via self-assessment.  PwC has provided relevant details in the following link:

Click to access Australia-ATO+draft+ruling+-reconstruction+of+transactions+04252014.pdf

Key Aspects of Ruling:

  • Transactions would be reconstructed, with various exceptions
  • Self-assessment mechanisms are required, based on consistency with 2010 OECD Transfer Pricing Guidelines, for three exceptions:
  1. Form is inconsistent with substance
  2. Independent entities would have instead entered into other transactions that differ in substance from the actual transactions
  3. Independent entities would not have entered into commercial or financial relations at all
  • The taxpayer needs to hypothesize what independent entities behaving in a commercially rational manner would have done.  If different from the actual transactions, identification of the arm’s length conditions must be based on what the independent entities would have done
  • Thin capitalization reconstruction provisions are included in the self-assessment analysis
  • Comments are due by 30 May 2014

All interested parties should review this ruling, including the Appendix that does not form part of the binding ruling.  There are many reasons why the draft ruling will be difficult to implement by multinationals and the ATO, primarily due to the subjective content and process of hypothesizing.  Additionally, double taxation issues should be addressed re: reconstructed transactions and corresponding adjustments, as well as alignment and intent of the OECD provisions cited.

 

 

 

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TP profiles: EU Joint Transfer Pricing Forum update

The EU Joint Transfer Pricing Forum has published a valuable update highlighting local country perspectives on a common criteria.  The link is attached for reference:

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

The common criteria provided by each country is as follows:

  1. Reference to the Arm’s-Length Principle
  2. Reference to the OECD TP Guidelines
  3. Definition of related parties
  4. Transfer pricing methods
  5. Transfer pricing documentation requirements
  6. Specific audit procedures and/or specific transfer pricing penalties
  7. Information for small and medium enterprises on transfer pricing
  8. Information on dispute resolution
  9. Relevant regulations on Advanced Pricing Arrangements
  10. Links to relevant government websites
  11. Other relevant information

Countries included in the update consist of:

  • Austria
  • Belgium
  • Bulgaria
  • Croatia
  • Cyprus
  • Czech Republic
  • Denmark
  • Estonia
  • Finland
  • France (coming soon)
  • Germany (coming soon)
  • Greece
  • Hungary
  • Ireland
  • Italy
  • Latvia
  • Lithuania
  • Luxembourg
  • Malta
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Slovenia
  • Spain
  • Sweden
  • UK

The information is highly relevant and should be used as a primary resource re: the respective country’s views on transfer pricing, OECD alignment and dispute resolution methodologies.

For Best Practices, the information should be compared with the transfer pricing documentation prepared re: the arm’s-length principle and consistency of audit principles by tax authorities.

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