China’s State Administration of Taxation (SAT) has issued its 2016 Advance Pricing Agreement (APA) update, noting that 14 APA’s were entered into for 2016.
Value chain quality and location specific advantages are positive factors leading to an efficient APA process.
It is noteworthy that China has increased scrutiny re: intercompany service agreements, and formal documentation thereto, thus an APA may prove to be advantageous provided that the relevant documentation can be timely provided.
The report, which is referenced herein as well as EY’s analysis, commences with the following summary: “This is the eighth APA annual report released by the State Administration of Taxation (“SAT”) to describe the latest mechanisms, procedures, and implementation of the APA program in China. This report is intended to provide guidance to enterprises interested in entering into APAs with the Chinese tax authority, and to serve as a reference for competent authorities of other countries (regions) and the general public to better understand China’s APA program. It does not have legal validity, and therefore should not be regarded as a legal basis for enterprises or the Chinese tax authority to negotiate or conclude an APA.”
With the ongoing BEPS complexity, and country dissimilarities / double taxation issues being compounded, the attached documents are a valuable reference in deciding on an APA decision (unilateral or bilateral) with China.
India has released its APA annual report, providing valuable insight into recently filed APAs and the process.
- Intragroup services by the Indian applicants have been the most covered international transactions in the bilateral APAs.
- The transaction net margin method has been used in 70% of the unilateral cases and 90% of the bilateral cases.
- India has concluded unilateral APAs in 29 months and bilateral APAs in 39 months.
As India is recognized as very creative and aggressive in its transfer pricing practices, this report should be reviewed to test whether an APA should be filed, as well as in other countries for additional certainty.
EY’s Global Tax Alert provides additional details, included for reference.
The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.
As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures. Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.
The EY Global Alert provides additional details of this new development.
Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.
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:
- 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.
China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015. The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.
- The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
- A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
- “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
- Advance Pricing Agreement (APA) procedures are clarified.
- The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test. The use of secret comparables, one comparable, one or multiple year results are allowed.
- Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
- Profitability monitoring will be used to establish a tax risk hierarchy system.
Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation. Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.
All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.
The Indonesian Minister of Finance has released recent Regulations addressing the methodical approach for which taxpayers and the tax administration are to be aligned in seeking an APA. Most importantly, the approach outlines the advance timing and necessary information by which tax authorities will utilize in considering APA requests.
A link to KPMG’s Tax News Flash is provided for reference:
As countries continue to enact unilateral legislation, with or without BEPS Actions, it may be prudent to consider a proactive transfer pricing approach to enter into APA’s for significant intercompany transactions. As the Mutual Agreement Procedure (MAP) procedures are still being refreshed, the transition period would be an excellent time to prepare for additional certainty via APA’s. The Indonesian approach provides an excellent example to better appreciate the timing, information and exchanges that will become part of this process.
Armed with the foresight that such APA’s may be included in transfer pricing documentation and exchanged between tax authorities around the world, it may be a worthwhile roadmap demonstrating consistency for significant transactions.
The European Commission published a package of tax transparency measures on 18 March 2015. The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:
- The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
- Tax rulings will be automatically exchanged every 3 months.
- Feasibility of public disclosure of certain tax information of MNE’s will be examined.
- The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
- The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
- Next steps: The tax rulings proposal will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
- Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.
Tax Transparency proposal:
- Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
- The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
- The tax gap quantification will be explored to derive more accuracy.
- The global automatic exchange of information for tax rulings will be promoted by the EU.
Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:
- Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
- Article I definition of “advance cross-border ruling:
- any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
- is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
- concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
- relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
- is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
- Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
- In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
- EU central repository to be established for submission of information by Member States.
- Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.
Q and A’s:
- Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
- Standard/template information for the quarterly exchange of information includes:
- Name of taxpayer and group
- Issues addressed
- Criteria used to determine an APA
- Identification of Member States most likely to be affected
- Identification of any other taxpayer likely to be affected
- Commission could open an infringement procedure for Member States not following the disclosure obligations.
- Domestic tax rulings are exempt.
- The EU could be a global standard setter of tax transparency.
- The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.
The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items. These actions are also intended to be a standard for global setting in the new era of international tax transparency. As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings. Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.