Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘APA’

OECD peer reports: Valuable insights

The Organisation for Economic Co-operation and Development (OECD) on 30 August released a fourth round of stage 1 Base Erosion and Profit Shifting (BEPS) Action 14 peer reports on improving tax dispute resolution mechanisms. The reports assess each country’s efforts to implement the Action 14 minimum standard.

Valuable insights from these reports can be gained, especially if a taxpayer is under audit where some of these questions/uncertainties may arise.  The peer reports are performed on a desk audit basis, with other parties comments considered by OECD.

Some insights are APA rollbacks, granting of MAP in all/certain transfer pricing cases, etc.  Reference links are provided.

Reports covering Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugalwere published.

http://www.oecd.org/tax/beps/oecd-releases-fourth-round-of-beps-action-14-peer-review-reports-on-improving-tax-dispute-resolution-mechanisms.htm

 

APA update: China

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.

 

http://www.ey.com/Publication/vwLUAssets/China_issues_2016_Advance_Pricing_Agreement_Annual_Report/$FILE/2017G_06540-171Gbl_TP_China%20issues%202016%20APA%20Annual%20Report.pdf

http://www.chinatax.gov.cn/n810214/n810606/c2873201/part/2873221.pdf

India’s APA results

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.

http://www.ey.com/Publication/vwLUAssets/India_issues_APA_annual_report/$FILE/2017G_03043-171Gbl_TP_India%20issues%20APA%20annual%20report.pdf

 

US: BEPS Action 5 sharing

 

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.

http://www.ey.com/Publication/vwLUAssets/US_IRS_will_follow_BEPS_Action_5_recommendation_by_exchanging_summaries_of_unilateral_APAs_V2/$FILE/2016US_03632-161US_TP_US%20IRS%20will%20follow%20BEPS%20Action%205%20rec%20by%20exchanging%20summs%20of%20unilateral%20APAs.pdf

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

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

http://www.consilium.europa.eu/press-releases-pdf/2015/10/40802203260_en_635797403400000000.pdf

Key observations:

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

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

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

China’s proposed TP documentation; Non-transparent

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.

http://www.ey.com/Publication/vwLUAssets/Chinas_Tax_Authorities_issue_groundbreaking_consultation_draft_to_update_transfer_pricing_rules_in_a_Post-BEPS_environment/$FILE/2015G_CM5783_TP_Chinas%20TAs%20issue%20groundbreaking%20consultation%20draft%20to%20update%20TP%20rules%20in%20a%20Post-BEPS%20environment.pdf

Key observations:

  • 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.  

Indonesia APA: Methodical approach

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:

http://www.kpmg.com/ID/en/IssuesAndInsights/ArticlesPublications/Documents/TNF%20APA.pdf

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.

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