Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Transfer Pricing’ Category

Treaty overrides: India’s High Court comments

The PwC News Alert, issued today, highlights statements of India’s High Court re: treaty override situations in a recent decision of Vodafone South Ltd.  These statements are significant in determining whether retrospective amendments can override treaty benefits.  The link to the Alert is attached for reference:

Click to access pwc_news_alert_14_april_2014__vodafone_south_ltd.pdf

Important observations noted in the Alert:

  • Sovereign power extends to “breaking” a tax treaty.
  • Unilateral cancellation of a tax treaty through an amendment to domestic law, subsequent to conclusion of a tax treaty, is a recognized sovereign power.
  • If , after the tax treaty came into force, an Act of Parliament was passed which contained a provision contrary to the tax treaty, the scope and effect of the legislation could not be curtailed by the tax treaty.
  • India is not a signatory to the Vienna Convention on the Law of Treaties (Vienna Convention), although such principles have previously been relied on by several Indian courts as such concepts have been accepted as a source of international law.

The concept of treaty override is becoming a very significant issue, evidenced by various GAAR provisions that have been enacted in domestic law that override general tax treaty provisions.  Additionally, recently released OECD draft on BEPS Action Plan 2 (22 March 2014 post) highlights the complex interplay of GAAR provisions with primary and linking mechanism proposals set forth to ensure consistency and uniformity.

In summary, the concepts of the Vienna Convention, combined with current events and complexities re: tax treaty override, merit special attention as tax audits become more complex leading to costly and lengthy appeals, while legislated issues become more subjective all leading to additional cases of double taxation and controversies based on uncertainties of international tax law.

 

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Transfer Pricing

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Asia TP: International Tax Review

International Tax Review has published, in association with KPMG, an informative summary of transfer pricing (TP) landscapes in the following countries:

Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam.  I will summarize key highlights from each country, with the following link provided for a complete reference:

Click to access Asia%20Transfer%20Pricing%202014.pdf

  • Australia: New TP legislation is aligned with a policy intent of self-assessment; market support strategies classified as a capital or revenue nature
  • China: Location savings; Focus on domestic contributions as a part of the global value chain; value-add analysis of intra-group services; domestic GAAR; expert panel at the SAT level providing TP opinions
  • Hong Kong: Bilateral/multilateral APA focus; TP documentation to mitigate risk
  • India: Valuation of share investments; advertising expenditures resulting in marketing intangibles; intra-group services; “significant people function” approach to intangibles
  • Indonesia: Automatic tax audits; ITO tax revenue focus; MAP/APA trend; unpredictability
  • Japan: Combined TP and income tax audits; bilateral APA’s; documentation of related party profits in intercompany transactions
  • Korea: Intercompany royalties; intra-group service fees; local benchmarking focus; TP audit process diagram; TP Review Committee
  • Malaysia: Local company comparable supplement to TP documentation; Intercompany transaction disclosure to assess TP risk; proof that intercompany services have been rendered and are not duplicative
  • New Zealand: Inter-group financing / credit assessment tools; OECD alignment; TP questionnaires to taxpayers re: risk assessment; collaboration
  • Philippines: Internal database for risk assessment; year-end adjustments; withholding taxes
  • Singapore: Intra-group service fees; APA / MAP procedures
  • Taiwan: Specialized TP teams; inspection forms to re-complete economic analysis on a transaction-by-transaction basis; intra-group funding; cross-border licensing; China-Taiwan OECD model based cross-strait taxation agreement
  • Thailand: Forthcoming reforms in TP, thin capitalization, CFC rules and GAAR; inter-company services re: benefits received; FX documentation; local comparables; APA and MAP process
  • Vietnam: MAP and APA regulations; annual disclosure of related party transactions effective 1/1/2014; targeted sectors for TP audits

 

There are many common themes highlighted in this region, and it is evident that transfer pricing processes and reporting obligations have increased significantly.  Accordingly, this region may merit a special TP review re: contemporaneous documentation and the particular risk areas for each country.

 

 

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Transfer Pricing

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Portugal: Unilateral APA opportunities

Portugal has introduced new transfer pricing rules, including the ability to request a unilateral APA, absent a tax treaty between Portugal and the other jurisdiction.  KPMG has provided a concise summary for these changes:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/2014-1/portugal-transfer-pricing-law-changes-allow-more-unilateral-apa.aspx

Multinationals should consider this new provision to obtain additional certainty re: Portugal’s application of transfer pricing rules.  Recognizing that a unilateral APA does not eliminate the risk of double taxation, this opportunity should be reviewed within the context of the global tax risk framework.

 

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Transfer Pricing

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TEI’s comments: UN TP Manual, Competent Authority & APA’s

TEI has published comments addressing the UN Practical Manual on Transfer Pricing for Developing Countries, in addition to US IRS Notices for revisions to Revenue Procedures setting forth new policies to implement the Competent Authority (CA) and Advance Pricing Agreement (APA) procedures.  References to TEI’s submissions are included for reference:

UN TP Manual key comments:

Click to access TEI%20Comments%20on%20UN%20Transfer%20Pricing%20Manual%20March%202014.pdf

  • Harmonize UN and OECD Transfer Pricing (TP) guidelines to reduce cross-border disputes
  • Risk assessment should be the primary focus, with most multinationals (MNE’s) “low-risk” status due to global and consistent TP policies and documentation
  • First step of tax authorities should be to address overall business, group TP policy and risk control framework
  • Domestic legislation defeats the purpose of a standard international TP guideline
  • Recharacterization by tax authorities should only be permitted in clear cases of abuse
  • TP documentation flexibility must be preserved
  • Burden of proof should reside with tax authorities, with penalty protection granted to taxpayer upon providing sufficient TP documentation
  • Intangible discussion precedes work of the OECD on revision of its Chapter VI Guidelines, reducing likelihood of harmonization
  • Intra-group services and management fees: Consistency of UN and OECD approaches for clarity, in addition to uniform safe harbors
  • TP documentation: “Less is more” approach to assess risk, materiality consideration on a group and country level, global and regional comparables, English language
  • Chapter 10 policy objectives are not aligned with the UN TP Manual and the arm’s-length principle

US Competent Authority key comments to Notice 2013-78 re: revisions to Revenue Procedure:

Click to access TEI%20Comments%20on%20Notice%202013-78%20Revised%20CA%20Revenue%20Procedure%20-%20FINAL%20to%20IRS%20Mar%2010%202014.pdf

  • Opening the CA process to taxpayer initiated adjustments is welcome
  • A new procedure whereby an informal consultation is arranged with taxpayers to discuss its exhaustion of remedies to reduce its foreign tax before claiming a US Foreign Tax Credit (FTC) should not be compulsory.  The timeliness of such advice is also of concern.
  • CA initiated MAP cases and required inclusion of MAP issues that are not a part of the taxpayer’s request for assistance raises many questions.
  • Provision of all information to both CA’s is over broad and may not be mutually relevant.
  • US CA assistance may be denied if a foreign initiated adjustment is agreed to without consulting the US CA: this raises resource and timeliness issues and should also have no impact upon  the merits for claiming a US FTC.

US APA key comments to Notice 2013-79 re: revisions to Revenue Procedure

Click to access TEI%20Comments%20on%20Notice%202013-79%20Revised%20APA%20Revenue%20Procedure%20-%20FINAL%20to%20IRS%20Mar%2010%202014.pdf

  • The Notice reflects prior creation of the Advance Pricing and Mutual Agreement (APMA) program
  • Details are set forth regarding the “pre-filing” process
  • Appendix is included stating the required materials to be submitted for inclusion
  • Rules are provided for when the IRS may cancel or revoke a completed APA
  • Inapplicable information should not be submitted, but a “suitable explanation” why the information is not relevant must be provided
  • The suggested changes will increase information required for application, and time required for APA completion, thereby reducing the likelihood that taxpayers will proceed with an APA request

 

In alignment with the OECD’s BEPS proposals, unilateral country legislation including General Anti-Avoidance Rules (GAAR), and the UN TP Manual principles for developing countries, tax controversies are expected to increase significantly.  Tremendous pressure will be placed on CA assistance around the world, and possibilities for new APA ‘s will be reviewed to reduce inherent uncertainty.

Accordingly, all multinationals and interested parties should read TEI’s excellent comments to better understand the issues to be confronted, with suggestions for thoughtful and practical ideas to achieve mutual objectives for taxpayers and tax authorities around the world.

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Transfer Pricing

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Nigeria: TP documentation to be filed with 2014 tax return

The Nigerian Transfer Pricing (TP) Division of the Federal Inland Revenue Service (FIRS) has requested companies to submit copies of their Group’s Transfer Pricing Policy.  Additional details of this request are included in the KPMG link for reference:

Click to access tp-nigeria-march11-2014v2.pdf

Although this request is directed towards a “Transfer Pricing Policy” the initiative is an indication of the focused transfer pricing objectives of developing countries, and heightened awareness for application of the “arm’s-length” principle.  The initiative is interesting due to the fact that the request is for a macro basis policy re: arm’s-length transactions between related entities, vs. a detailed template of information that may not have direct relevance on assessing risk from a transfer pricing perspective.

For Best Practices, this request invites multinationals to develop a general transfer pricing policy as an integral part of the Tax Risk Framework documentation, with potential application of a useful documentation tool to provide publicly as applicable.

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Transfer Pricing

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Multilateral Convention: New countries

The Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol, is effective for the following countries:

  • March 1: Canada, New Zealand, Slovakia, South Africa
  • June 1: Croatia

The Convention provides for the mutual exchange of tax information with other tax administrations.

Best Practice ideas:

  1. Consistent coordination of responses to tax authorities by multinationals: As tax authorities share more information on a real-time basis, in accordance with the Multilateral Convention, global consistency is required for proper factual and risk determinations around the world.
  2. Regional and Headquarter tax office coordination to issues: Processes and methodologies should be in place to ensure consistency and internal governance.
  3. Tax (return) information reporting: More countries are adopting transfer pricing information reporting requirements, including transfer pricing methodology, and identification of relevant intercompany transactions in that country and/or other countries in accordance with their legislation.  A review of identifying current, and new information requirements should be established on a global master schedule ensuring internal coordination.
  4. Tax information questionnaires: A process should be established to identify questionnaires received with a global methodology for proper governance.

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Transfer Pricing

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TEI’s response to OECD’s Discussion Draft on TP Documentation & Country by Country reporting

The Tax Executives Institute (TEI) has commented on the OECD Transfer Pricing Documentation and Country by Country Reporting (CbC) discussion draft.

Click to access OECD%20Transfer%20Pricing%20Documentation%20and%20CbC%20Reporting.pdf

TEI has provided strategic and logical arguments in response to requested comments by the OECD for transfer pricing documentation and CbC reporting.  One of the exemplary comments put forth is that the CbC reporting template should be the last item for completion, based upon actions of the other items, to achieve maximum efficiency, relevance and avoidance of duplication in work efforts.

The TEI comments should be read by all multinationals and interested parties to further understand the business rationale and inherent complexity of the OECD proposal that may lead tax authorities to deviate from the arm’s length principle based solely on the CbC information provided.

 

 

 

 

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OECD / UN, Transfer Pricing

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Canada’s BEPS initiative, with Treaty Shopping: 2014 Federal Budget

Details of Canada’s initiative to develop its own Base Erosion and Profit Shifting (BEPS) action plan are outlined in its 2014 Federal Budget, with a link to KPMG’s comments on the Budget referenced herein.

Click to access tnfc1408.pdf

Highlights of the tax initiatives include proposals to expand existing anti-avoidance rules for thin capitalization, and a back-to-back loan provision.  Additionally, the Budget has requested comments, by June 2014, to the following questions for a framework to develop its own BEPS Action Plan:

  • What are the impacts of international tax planning by multinationals on other participants in the Canadian economy?
  • Which of the international corporate income and sales tax issues identified in the OECD BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
  • Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
  • What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified?
  • Would concerns about maintaining Canada’s competitive tax system are alleviated by coordinated multilateral implementation of base protection measures?
  • What actions should  the government take to ensure the effective collection of sales tax on e-commerce sales to Canadian residents by foreign vendors?

The Budget also addressed the treaty shopping consultation paper released in August 2013, which TEI provided comments thereto (refer to 14 January 2014 post).  The government’s position is that  a domestic law re: treaty shopping is preferable to a treaty-based approach.  This proposed rule would be included in Canada’s Income Tax Convention Interpretation Act, thus applicable to all of Canada’s treaties.  Comments on this position are to be submitted within 60 days.  General provisions of this rule are summarized for reference, with a separate link provided for KPMG’s Submission on Canada’s Consultation on Treaty Shopping in December 2013 :

Click to access kpmg-submission-to-treaty-shopping-consultation.pdf

  • The domestic treaty-shopping rule is a “general purpose” provision, versus a “limitation on benefits” approach.
  • A tax treaty benefit is denied for relevant treaty income if it is reasonable to conclude that one of the main purposes for undertaking a transaction, or a transaction that is part of a series of transactions or events, that results in the benefit was for the person to obtain such benefit.
  • It relies on the conduit presumption for tax treaty benefits, absent proof to the contrary.  Safe harbour presumptions are provided for this test.

With the OECD working aggressively to finish the BEPS Action Plan items timely, including the recent draft of a Country-by-Country Reporting template for comment, it is hoped that new international principles and documentation standards being developed are not adopted earlier, and unilaterally, by countries each changing such rules based on its sole interpretation and discretion, which later are effected into local legislation.

Most importantly, multinationals and other interested parties should monitor BEPS related provisions in countries proposing separate legislation, in addition to that proposed by the OECD.  To the extent the OECD’s principles differ from separate country legislation, international tax challenges will significantly increase, with additional likelihood of double taxation.

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Transfer Pricing

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Saudi Arabia & Qatar Tax/TP developments

Saudi Arabia’s tax treaty with Tunisia, effective from 1 January 2014, generally follows the OECD model treaty.  Additionally, Saudi Arabia is pursuing treaties with Algeria, Kyrgyzstan and Barbados.

Saudi Arabia also introduced reforms to the Foreign Investment Act  in March 2013, providing penalties for Saudi Arabia General Investment Authority (SAGIA) registered foreign investors who fail to comply with its new Code of Conduct for Foreign Investors.  The Code provides for approx. 60 forms of breaches, including penalties that include fines and cancellation of the legal entity’s license, thus strict compliance with the Code should be adhered to and monitored.

The Qatar Financial Centre’s (QFC) new transfer pricing manual features guidance on transfer pricing regulations and rules.  Thin capitalization, capital / debt structuring, transfer pricing documentation and necessity of a comprehensive transfer pricing study to withstand lengthy queries are components in this new manual.  The arm’s length standard of the OECD is to be relied on by the QFC Tax Department for transfer pricing determinations.  Additionally, rulings and/or APAs can be requested.  Intercompany transactions are being closely reviewed by the QFC Tax Department, thus such changes should be reviewed.

KPMG has provided additional details for further reference:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/mesa-tax-update/Pages/saudi-arabia-tax-revenues.aspx

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/mesa-tax-update/Pages/qatar-new-manual.aspx

As the Middle Eastern tax authorities gain transfer pricing expertise, legislative actions and experience in the application of transfer pricing methodologies, it is important to note alignment of such practices with OECD.  To the extent double tax treaties are not yet negotiated, double taxation issues should be considered.

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Transfer Pricing

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TP Compensating Adjustments: Update

A Report on Compensating Adjustments, issued by the EU Joint Transfer Pricing Forum in January 2014, provides a practical solution to address different approaches by EU Member States.  The Glossary of the OECD Transfer Pricing Guidelines defines a “compensating adjustment” as “an adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer’s opinion, an arm’s length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises.  This adjustment would be made before the tax return is filed.”  In general, an adjustment is made at a later time to the transfer prices set at the time of a transaction.

A link to this report, and an excellent article by CGMA, are provided for reference:

Click to access jtpf_009_final_2013_en.pdf

http://www.cgma.org/magazine/news/pages/20149479.aspx

Highlights of the Report:

  • Compensating adjustments are enacted using one of two approaches, an ex-ante (arm’s length price setting approach), or ex-post (arm’s length outcome testing approach).  The ex-post approach generally involves testing, and possible adjustment, of transfer prices at year-end, prior to closing the books or filing the tax return.
  • When both Member States apply an ex-post approach and require compensating adjustments, a risk of double taxation, or double non-taxation, may arise.
  • An ex-post approach by one Member State, with an ex-ante approach by a separate Member State, presents conflicts on making such adjustments.
  • Guidance by the OECD is limited, with reference to the Mutual Agreement Procedure (MAP) to resolve disputes.  Member States use their discretion re: application of compensating adjustments.
  • A practical solution is described for transactions in which (i) profits are calculated symmetrically, and (ii) a compensating adjustment initiated by the taxpayer should be accepted if various conditions are met.  However, if the Member States have less prescriptive rules for such adjustments, those rules are to apply.
  • Upward as well as downward adjustments should be accepted.
  • The practical solution provided should not limit a tax administration’s ability to make a subsequent adjustment and has no bearing in a MAP procedure.
  • The adjustment should be made to the most appropriate point in an arm’s length range, with reference to OECD guidance.

The subject of compensating adjustments is an important topic in addressing potential double taxation, or double non-taxation.  The Report is timely, offering practical guidance for Member States to achieve consistency, although only within the EU.

It will be interesting to follow this topic, and future guidance, by the OECD, as well as commentaries from EU Member States, UN, and other interested parties.  The practical solution will be most effective if adopted in principle, or in legislation, by the EU Member States, with other countries referring to such guidance to resolve challenging transfer pricing issues fairly and effectively.

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Transfer Pricing

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Strategizing APA’s in Turkey & OECD’s Tax Transparency Report

KPMG has published an informative and timely publication reviewing strategies for the use of unilateral, bilateral  and multilateral Advance Pricing Agreements (APA’s), with a detailed focus on recent APA developments in Turkey.  The KPMG publication cites the OECD’s June 2013 report “A Step Change in Tax Transparency” prepared for the G8 Summit.  The KPMG and OECD reports are referenced herein for review.

Click to access turkey-feb3-2014.pdf

Click to access taxtransparency_G8report.pdf

The KPMG report is a valuable reference, providing strategic insight into using unilateral, bilateral and / or multilateral APA’s globally with a specific focus on Turkey.  The report includes chapters on Transfer Pricing in Turkey, Global APA Trend, Opportunities that APA Offers, When Should You Pursue an APA and the APA Process in Turkey.  The OECD report provides additional input on the exchange of information which is especially valuable against the backdrop of OECD’s recent request for guidance.

The transfer pricing landscape is changing, from a OECD perspective and also separate country initiatives that may, or may not, correlate with guidelines to be established this year and next by the OECD.  Accordingly, the use of APA’s should be reconsidered for developed and developing countries to achieve further certainty and avoidance of double taxation in these changing and challenging times.

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OECD / UN, Transfer Pricing

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OECD Discussion Draft: TP Documentation & Country-by-Country Reporting

OECD has just published their Discussion Draft on Transfer Pricing Documentation and Country-by-Country reporting, with comments due by 23 February.  A reference to the Draft is hereby provided:

Click to access discussion-draft-transfer-pricing-documentation.pdf

The Discussion Draft raises many questions and scenarios open to comment, with a very limited time frame in which to remit such comments.  All multinationals and interested parties should prioritize a review of this document and consider submitting comments, as it will be a cornerstone for additional reporting and documentation in the near future.

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Transfer Pricing

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Canadian Treaty Shopping: TEI comments

The Tax Executives Institute (TEI) has submitted comments in response to Canada’s treaty shopping proposals.  TEI’s comments are referenced herein:

Click to access Treaty_Shopping_in_Canada_TEI_submission.pdf

Canada proposes that if all of the following circumstances exist, it would be justified in denying treaty benefits due to the lack of economic substance, and a bona fide purpose, and the ultimate beneficiaries are third-country residents not entitled to direct benefits from the treaty.  Such circumstances include all of the following:

  • A tax treaty resident uses the tax treaty to obtain a reduction of Canadian tax otherwise payable on Canadian source income,
  • The intermediary entity is owned or controlled mainly by residents of another country which are not entitled to at least the same treaty benefits,
  • The intermediary entity pays no or low taxes in its country on the item of income earned in Canada, and
  • The intermediary entity does not carry on real and substantial business activities, other than managing investment income) in its country.

TEI also provides general comments stating the following concepts:

  • Treaty Limitation on Benefit (LOB) Provisions should be the favored approach rather than domestic legislation
  • Unilateral Approach should be eschewed in favor of a multilateral approach
  • Evidence of the scope and degree of treaty abuse in Canada is inconclusive

TEI’s comments also addressed the specific questions raised in the consultation paper of 14 August, 2013:

  1. Advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both
  2. Merits of OECD approaches to treaty shopping, and other possible approaches re: treaty shopping
  3. Preference for a general, versus a specific and objective approach; achieving balance between effectiveness, certainty, simplicity, and administration
  4. Views on a domestic law general purpose test and its effectiveness in preventing treaty shopping and achieving taxpayer certainty
  5. Details for preference of a specific approach
  6. Comments addressing applicability of a domestic anti-treaty shopping rule in addition to a comprehensive anti-treaty shopping rule

TEI’s comments are well written, posing arguments for all multinationals to consider for Canada, and in the broader context of domestic general anti-avoidance rules (GAAR), vs. treaty based benefits, and the impetus behind countries to adopt unilateral domestic rules prior to dates in the OECD BEPS Action Plan for issues that should be internationally consistent.  For reference, prior posts have addressed GAAR provisions advocated by several countries that can be accessed for future insight.

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Transfer Pricing

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PwC TP update / Best Practices

PwC has published an informative update addressing hot topics in transfer pricing for different industries.

Click to access pwc-tpp-perspectives.pdf

Key industries and issues addressed comprise the following:

  • Oil & Gas: intercompany service charges re: direct/indirect benefit and Competent Authority in non-treaty countries
  • Global Audits: MAP, OECD BEPS Action Plan, Cooperative Compliance programs, arms-length principle, PE, GAAR and Strategic Risk Assessment
  • Industrial Products: Cost Sharing Agreements, Intangibles, Supply chain management, M&A interaction
  • Interco. Financing: Guarantee fees, transfer pricing methodologies
  • Financial Industry: Dodd-Frank Act, Regulatory practice coordination with transfer pricing
  • Russia TP: New rules 2012 introducing arms-length principle, new Department and work group re: TP, specialized TP group re: intercompany transactions
  • S. America: Global marketing/sourcing, intercompany services documentation, currency restrictions
  • Real Estate Funding
  • ERP Systems and TP
  • Politics of taxation: OECD BEPS Action Plan, TP disclosures, PE risks
  • Pharmaceutical / Life Sciences
  • Value Chain Transformation: Model Maturity matrix

This publication is relevant and timely, including Best Practices and transfer pricing issues for different industries.

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Transfer Pricing

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Vietnam: Risk based audits

KPMG’s Transfer Pricing Alert highlights current transfer pricing audits in Vietnam based on risk assessments, including key observations and insights.

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/tp-vietnam-dec18-2013.pdf

Following the Action Plan on Transfer Pricing Management (the Action Plan) announced by the Ministry of Finance under Decision 1250/QD-BTC dated and effective 21 May 2012, the General Department of Taxation (GDT) has rolled out transfer pricing audits across a number of provinces in the context of challenging 2013 tax revenue collection.

Key observations include the preference of transfer pricing methods, secret comparables, irrelevance of commercial/economic factors and arbitrary transfer pricing adjustments.

Audits in Vietnam and similar markets should be monitored closely, noting appeal and arbitration opportunities that may mitigate double taxation.  Refer to my prior post of 2 December 2013 summarizing Vietnam’s proposed anti-treaty shopping rules to deny tax treaty benefits.  

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Transfer Pricing

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