Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘Arm’s length principle’

TP & Developing Economies: World-Bank Handbook

The attached link provides access to an invaluable transfer pricing (TP) handbook which is an excellent resource for all international tax practitioners/advisors.

With the advent of the BEPS era and new/novel approaches to arms’s-length pricing are voiced, this resource is a great desktop reference with experience gained by the authors in both applying TP principles as well as teaching those principles to tax administrations in developing economies.    

Examples and “boxes” of summary content are provided in the handbook, in addition to a discussion on TP disputes that is inevitable with BEPS Actions and unilateral actions (both legislative and “soft law”) being applied across the world.

A summary of the chapter titles provides a summary of the details therein:

  • TP, Corporate strategy, and the Investment Climate
  • The International Legal Framework
  • Drafting a TP Legislation
  • Applying the Arm’s-Length Principle
  • Selected Issues in TP
  • Promoting Taxpayer Compliance through Communication, Disclosure Requirements, TP Documentation, and Penalties
  • Avoiding and Resolving TP Disputes
  • Developing a TP Audit Program

https://openknowledge.worldbank.org/handle/10986/25095

European Commission’s new Action Plan

My prior post of 30 May 2015 revealed that the European Commission would be developing a new Action Plan, the contents of which are hereby revealed.

The objectives of the new Action Plan are:

  1. Re-establish the link between taxation and where economic activity takes place
  2. Ensuring that Member States can correctly value corporate activity in their jurisdiction
  3. Creating a competitive and growth-friendly EU tax environment
  4. Protecting the Single Market and securing a strong EU approach to external corporate tax issues, including BEPS measures, to deal with non-cooperative tax jurisdictions and to increase tax transparency

The new Action Plan is provided for reference:

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/fairer_corporate_taxation/com_2015_302_en.pdf

5 Key Action Areas:

  1. Mandatory Common Consolidated Corporate Tax Base (CCCTB), with the consolidation component included as a second step.
  2. Taxation of profits where they are generated (“However, it is clear that the current transfer pricing system no longer works effectively in the modern economy.”)
  3. Enhance the EU’s tax environment via cross-border loss offset and improving double taxation dispute resolution mechanisms.
  4. Increased tax transparency via an EU-wide list of third country non-cooperative tax jurisdictions and assessing whether additional disclosure obligations of certain tax information should be introduced.
  5. Providing EU Coordination Tools to improve Member States’ tax audit coordination and reforming the Code of Conduct for Business Taxation and the Platform on Tax Good Governance.

The European Commission’s Action Plan clearly reveals a large step away from the traditional arm’s-length transfer pricing principle and toward an economic activity based source of taxation.  This clear divergence, with the OECD and established legislation in most countries, sets the stage for a new evolution in transfer pricing and a hybrid of different approaches by various jurisdictions in the next several years.

Accordingly, the Action Plan is required reading to appreciate short and long-term objectives of the European Commission to unify the Member States.

US & BEPS conformity: (Un)certainty

The attached letter from the Congressional tax-writing Committees to US Treasury sets the stage for future US BEPS conformity and policy approach.  This letter is especially revealing after the US has declined an invitation to be a member of the ad-hoc group for creating a BEPS Multilateral Instrument, of which over 80 countries have signaled their positive intent.

The letter also questions the positive verbal nods from the US that it has relevant legislative authority to collect the Country-by-Country report, and disseminate it, in accordance with OECD’s intent.

Additionally, the letter confirms that the US strongly adheres to the arm’s length transfer pricing principle, which was in clear evidence during the BEPS proceedings.

Only time will reveal the final answers, however the inward US focus is clearly evident as has been the case for other countries that have already adopted BEPS incentivized legislation that may not conform with OECD’s final guidelines.
The letter is attached for reference, with my highlights for emphasis.

Hatch, Ryan Call on Treasury to Engage Congress on OECD International Tax Project
Lawmakers Push to Ensure Global Tax Law Recommendations Benefit U.S. Interests
June 9, 2015 – PRESS RELEASE
Ryan: BRENDAN BUCK (202) 226-4774
Hatch: JULIA LAWLESS (202) 224-4515

WASHINGTON — In advance of the 2015 Organisation for Economic Cooperation and Development (OECD) conference on Base Erosion and Profit Shifting (BEPS) taking place this week in the nation’s capital, Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways & Means Committee Chairman Paul Ryan (R-WI) called on Treasury Secretary Jack Lew to work with Congress to ensure the international tax proposals being considered under the BEPS project are beneficial to American workers and job creators.
“As your BEPS discussions continue and proposals are considered, we strongly encourage you to continue engagement with us and to solicit input from the tax-writing committees,” wrote Hatch and Ryan in a letter today. “We have been monitoring, and continue to monitor, the BEPS project, and we understand the significance it carries in the global community and its potential impact on U.S. workers and their multinational employers. We stand ready to work with you as the BEPS discussions conclude and final reports are issued this year so that we reach good outcomes for the United States and U.S. companies and provide an atmosphere within which we can continue to work towards U.S. tax reform.”

The text of the letter is a below and a signed copy can be found here.

June 9, 2015

The Honorable Jacob Lew

Secretary of the Treasury

U.S. Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20220

Dear Secretary Lew:

As the leaders of the Congressional tax-writing committees, we are writing to you about the need for the Treasury Department to remain engaged with Congress as you and your colleagues negotiate and develop proposals with member countries of the Organisation for Economic Co-operation and Development (OECD) and others on fundamental changes in international tax rules under the OECD’s Base Erosion and Profit Shifting (BEPS) project.

Congress is tasked with writing the tax laws of the United States, including those associated with cross-border activities of U.S. companies. Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft the tax rules that it believes work best for U.S. companies and the U.S. economy. Close consultation between Congress and the Treasury Department should inform the BEPS discussions. We expect that as we move forward on U.S. tax reform, U.S. tax policy will not be constrained by any concessions to other nations in the BEPS project to which Congress has not agreed.

As your BEPS discussions continue and proposals are considered, we strongly encourage you to continue engagement with us and to solicit input from the tax-writing committees. We have been monitoring, and continue to monitor, the BEPS project, and we understand the significance it carries in the global community and its potential impact on U.S. workers and their multinational employers. We stand ready to work with you as the BEPS discussions conclude and final reports are issued this year so that we reach good outcomes for the United States and U.S. companies and provide an atmosphere within which we can continue to work towards U.S. tax reform.

We appreciate some of the work that your team has done as part of the OECDs BEPS project, especially efforts to defend and advocate certain long-standing tax principles, such as the arms-length transfer-pricing standard. However, we are troubled by some positions the Treasury Department appears to be agreeing to as part of this project. For example, we are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations. We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies. We are also concerned about interest-deductibility limitation proposals on the basis of questionable empirics and metrics.

Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require CbC reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable. In addition, the benefits to the U.S. government from agreeing to these new reporting requirements are unclear, particularly since the IRS already has access to much of this information to administer U.S. tax laws. Therefore, we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals. We also request that you provide a document: (i) identifying how the CbC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating in the United States will be utilized, and; (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments. In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.

We also have significant concerns about many of the provisions included in several other proposals of the BEPS project, including, among others, modifying the permanent establishment (PE) rules, using subjective general anti-abuse rules (GAAR) in tax treaties, and collecting even more sensitive data from U.S. companies to analyze and measure base erosion and profit shifting. These are but a few of the areas where we recommend that we work together to find consensus and identify a path forward for consideration as part of the BEPS negotiations and, if necessary, Congressional actions.

In the coming months, we look forward to working with you with respect to the BEPS project. In the interim, we want to remind the Treasury Department that it has the ability to refrain from signing on to the BEPS final reports, and we expect you to do just that if doing so protects the interests of the United States and of U.S. persons. Many of the OECD’s BEPS project objectives are sound, and international cooperation – as well as competition – in tax policies is desirable. We trust that you agree, however, that precipitous decisions to impose constraints on U.S. tax policy and added burdens on U.S. companies, especially on the basis of weak empirics and metrics, are not desirable.

Thank you for your attention to these important matters.

European Parliament 24-0 vote for public disclosure: CbC & Beneficial Ownership

The European Parliament recently voted unanimously for public disclosure rules to fight tax evasion, tax avoidance and establishing fair, well-balanced, efficient and transparent tax systems.  A copy of the press release is provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20150601IPR61336/html/Development-MEPs-call-for-action-to-target-tax-evasion-in-developing-countries

Summary:

  • All countries to adopt country-by-country (CbC) reporting, with all information available to the public
  • Beneficial ownership information to be made publicly available
  • Call for coordination to combat tax evasion and avoidance by the European Investment Bank, European Bank for Reconstruction and Development and EU financial institutions.
  • Request to the Commission for an ambitious action plan, without delay

The outcry for public reporting, currently underway by the OECD, European Parliament and European Commission is increasing exponentially within Europe.  Other countries will obviously follow the EU approach, with perceptions of complicated international tax rules increasing disparity between application of the transfer pricing arm’s length principle.

The CbC reporting, and beneficial ownership detail, should be expected to be in the public domain if this trend continues.  Currently, it is a sign of an incoming tsunami that cannot be completely avoided.

 

BEPS Action 3-CFC Rules: TEI comments

TEI has provided recent comments addressing OECD’s Discussion Draft for BEPS Action 3: CFC rules.  A link to their comments are provided for reference:

http://tei.org/Documents/TEI%20Comments%20BEPS%20Action%203%20-%20CFC%20Rules%20FINAL%20to%20OECD%2030%20April%202015.pdf

Key comments:

  • Lack of definitive guidance will introduce additional complexity, double taxation and inconsistency of treaty applications.
  • Overlap with other BEPS Actions and the role of CFC rules questions new complex rules at this time.
  • Confusion re: transfer pricing rules and excess profits approach with arm’s length principle.

The well drafted comments provide clarity surrounding the complexity and uncertainty for new rules addressing BEPS concerns by interested parties.  The first question therefore should always be: Do we need these rules at this time?

Notwithstanding the Discussion Draft’s proposals and comments by TEI, among others, MNE’s should plan for increased efficiencies to coordinate and report information, while ensuring global consistency for application of transfer pricing methodologies.

Singapore’s (expanded) TP Guidelines

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.

http://www.iras.gov.sg/irashome/uploadedfiles/e-Tax_Guide/etaxguide_Transfer_Pricing_Guidelines_(Second_Edition)_2015_01_06.pdf

Key observations:

  • 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.

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:

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/tp-eu-sept30-2014.pdf

http://ec.europa.eu/competition/state_aid/cases/253200/253200_1582634_87_2.pdf

http://ec.europa.eu/competition/state_aid/cases/253203/253203_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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