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.
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.
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 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
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.
Tax Executives Institute, Inc. (TEI) recently published comments re: OECD BEPS Action 10, addressing Low Value-Adding Intra-Group Services, and Action 14 re: Dispute Resolution Mechanisms. The comments elicit practical considerations, including worldwide consistency, in their well written and reasoned responses. Although many individuals/organizations have provided comments, TEI’s submissions merit required reading and thoughtful consideration. Links to TEI’s comments are included for reference:
Published MAP guidelines and procedures are welcome, although redacted settlements would also reveal legal basis for outcomes, and may be used as precedent for taxpayers.
KPI’s should be established.
Monitoring the MAP process is an excellent proposal suggested in the report.
A global dispute resolution mechanism and mandatory binding arbitration should be developed, with arbitration available as a pre-MAP appeal avenue.
Deadlines for Competent Authority (CA) requests should be in place, along with penalties for CA if they do not respond timely.
Maintaining confidentiality is critical and should be a primary focus, especially for countries initially adopting this process.
Transparency of independency for Competent Authorities would improve confidence in the process.
Taxpayers should participate in face-to-face meetings to facilitate the process, and a simplified process should initiate MAP assistance.
Precluding taxpayers from using MAP, directly or indirectly giving up their rights, is not acceptable.
Binding arbitration provisions and/or use of a domestic or treaty-based anti-abuse rule should not preclude MAP.
Tax, interest and penalties should be suspended during the MAP process.
The comments on Action 14 are especially critical, as dispute resolution will be a critical factor in ensuring that the BEPS guidelines legislated into law will have consistent, fair and transparent processes to resolve disputes timely and effectively.
The Inland Revenue Authority of Singapore (IRAS) has published an expanded Transfer Pricing (TP) e-Tax Guide (linked herein for reference) that consolidates the four previous TP guides. The Guidance adheres to the TP arm’s length principle, while expanding required disclosures in alignment with the OECD BEPS objectives.
IRAS will adjust profits upwards for understated profits, although no mention is made of downward adjustments.
IRAS welcomes discussions to discuss difficulties in applying the arm’s length principle.
Contemporaneous TP documentation = on or before the tax return due date.
Group level TP documentation includes an organization chart of all related parties transacting with the Singapore taxpayer, the group’s business models and strategies, profit drivers including a list of intangibles and legal owners, business activities and functions of each group member with relevant supply chains, business relationships among related parties and group financial statements for the lines of business involving the Singapore taxpayer.
Entity level documentation includes a list of related parties to whom the local management reports for its operations, number of employees in each department, business models and strategies, contracts/agreements apart from detailed functional and benchmark analyses.
TP documentation exceptions include in-country related party transactions, routine services charged at cost + 5%, APA agreements or de-minimis stated thresholds for transactions and services between related parties.
Collaborative engagement methodologies are outlined for the Transfer Pricing Consultation program, by which TP methods and documentation of selected taxpayers will be reviewed. Examples of high risk transactions are included in Section 7.5
Unilateral APAs are not accepted.
APA rollback years are acceptable, generally limited to 2 years.
MAP and APA methodologies are stated, including factors when IRAS will discontinue the MAP or APA process.
Section 16 summarizes updates and amendments of the TP Guidelines.
These guidelines should be reviewed, especially the new TP documentation guidelines as other countries in the APAC region and elsewhere will monitor and possibly adopt similar guidelines.
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:
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.
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.
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.
OECD Working Party 1 has formed a Dispute Resolution Focus Group to address BEPS Action Plan item 14, copied herein for reference.
Focus areas of WP 1:
Access to Mutual Agreement Procedure (MAP)
Multilateral MAPs & APAs
Adjustment issues, including timing for corresponding adjustments, self-initiated adjustments, and secondary adjustments
Interest & Penalties
Legal status of a mutual agreement
In the US, IRS has also issued Notice 2013-78 detailing a proposed Rev. Procedure on US Competent Authority procedures, including an emphasis on informal consultation for US Foreign Tax Credit determinations.
OECD BEPS ACTION 14
Make dispute resolution mechanisms more effective
Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.
(iv) From agreed policies to tax rules: the need for a swift implementation of the measures
There is a need to consider innovative ways to implement the measures resulting from the work on the BEPS Action Plan. The delivery of the actions included in the Action Plan on BEPS will result in a number of outputs.
Some actions will likely result in recommendations regarding domestic law provisions, as well as in changes to the Commentary to the OECD Model Tax Convention and the Transfer Pricing Guidelines. Other actions will likely result in changes to the OECD Model Tax Convention. This is for example the case for the introduction of an anti-treaty abuse provision, changes to the definition of permanent establishment, changes to transfer pricing provisions and the introduction of treaty provisions in relation to hybrid mismatch arrangements.
Changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. If undertaken on a purely treaty-by-treaty basis, the sheer number of treaties in effect may make such a process very lengthy, the more so where countries embark on comprehensive renegotiations of their bilateral tax treaties. A multilateral instrument to amend bilateral treaties is a promising way forward in this respect.
This new initiative highlights innovative and forward thinking by the OECD.
Best Practice thoughts include:
Using MAP as a roll-forward mechanism to an APA to cover additional years beyond the MAP request
Using simultaneous appeals and Competent Authority relief provisions
These developments merit additional attention to self-initiated adjustments, Best Practices to address secondary / corresponding adjustments and creative thinking to resolve bilateral / multilateral disputes.
The EU Joint Transfer Pricing Forum has released statistics for pending Mutual Agreement Procedures (MAPs) and APAs under the Arbitration Convention.
The MAP comparables provide interesting observations for countries in which there is no activity in contrast to active case developments in France, Germany, and the UK. The average cycle time noted in several countries ranges from 9 to 47 months, which presents additional challenges in timely case resolution. Reasons provided for cycle time variations included 24% being waived for the time limit with taxpayer’s agreement, 16% pending before court and 15% settled in principle, waiting exchange of closing letters for MAP.
The APA statistics reflect 222 EU and 168 Non-EU APAs in force at the end of 2012, 561 EU and 119 Non-EU APA requests in 2012, while 353 EU and 85 Non-EU APAs were granted in 2012.
The statistics for seeking resolution via the EU Arbitration Convention provide additional insight for evaluation of issues that are not being settled effectively at the local country level.