Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘best practices’

OECD: Comparable Data draft released for comment

The OECD has released a paper for comment discussing four possible approaches to addressing concerns on utilization of comparable transactions for transfer pricing analysis.  Written comments should be provided by 11 April 2014.  The following link is provided for reference:  

Click to access transfer-pricing-comparability-data-developing-countries.pdf

The paper will be discussed in two parallel sessions on the last day of the Global Forum on Transfer Pricing meeting of 26–28 March 2014. 

This paper sets out and briefly discusses four possible approaches to addressing the concerns over the lack of data on comparables expressed by developing countries.

• Expanding access to data sources for comparables, including steps to improve the range of data contained in commercial databases, expand developing country access to such databases, and improve access to comparables data in developing countries with a significant number of sizeable independent companies.

• More effective use of data sources for comparables, including guidance or assistance in the effective use of commercial databases, the selection of foreign comparables, whether and how to make adjustments to foreign comparables to enhance their reliability, and alternative approaches to finding comparables.

• Approaches to identifying arm’s length prices or results without reliance on direct comparables, including guidance or assistance in making use of proxies for arm’s length outcomes, the profit split method, value chain analysis, and safe harbours, an evaluation of the impact, effectiveness and compatibility with the arm’s length principle of approaches such as the so called “sixth method”, which is increasingly prevalent particularly in developing countries in Latin America and Africa, and a review of possible anti-avoidance approaches.

• Advance pricing agreements and mutual agreement proceedings, including a review of developing country experiences with the pros and cons of advance pricing agreements and negotiations to resolve transfer pricing disputes, as well as guidance or assistance with respect to mutual agreement proceedings.

The paper is timely, relevant and addresses practical and administrative concerns addressed by developing countries, as well as discussion of the arm’s-length principle.  The items addressed should be considered in addressing Best Practices for transfer pricing documentation methodologies by taxpayers and tax authorities.

Category:

OECD / UN

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Alternative Dispute Resolution (ADR): Australia’s proactive approach

The referenced PwC Alert highlights the proactive efforts by the Australian Tax Office (ATO) to initiate dispute resolution mechanisms in the audit process, as well as focus on relevant internal training to successfully accomplish these objectives.

Click to access TaxTalk-Alert-Tax-Controversy-01Feb14.pdf

The ATO is committed to the following objectives:

  • Early engagement and direct negotiation with taxpayers
  • Improving all dispute resolution processes starting with the assessment
  • ADR utilization at every stage of the dispute resolution process
  • Independent review of the audit position prior to conclusion of the audit aimed to narrow / reconsider the issues
  • Internal ADR training
  • Focused “risk-focused” approach to managing disputes

The ATO’s initiatives are timely, relevant and a welcome effort to adopt Best Practices to resolve disputes prior to costly and time-consuming formal unilateral, bilateral or multilateral appeal avenues via domestic legislation and/or double tax treaty relief.

 

Category:

Audits

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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.

Category:

Transfer Pricing

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Australia BEPS: Not waiting for OECD

KPMG has provided an excellent overview of Australia’s unilateral efforts to carry out OECD’s proposals.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/2014-1/australia-effects-of-documentation-country-by-country-reporting-for-australian-taxpayers.aspx

Some key questions include:

  • From a OECD perspective, Would penalties be applicable when a Country-by-Country (CbC) template is not completed, if such information is part of the Transfer Pricing Master File?
  • The Australian Tax Office (ATO) has already started its process to collect similar information as the CbC template, with 125 review notification letters to be sent to taxpayers, requesting detailed international data and a presentation to the ATO.
  • The ATO review would include details of global corporate value chains, including sales, profits, and taxes paid in every jurisdiction, payments to / from low tax jurisdictions, e-commerce and tax risk governance.  The ATO should ensure that confidential information is only shared with other tax authorities in alignment with confidentiality protocols judicially established in each respective jurisdiction.  Additionally, it will be interesting to note how such information is defined, or not defined, by the ATO to ensure information that is collected from taxpayers will be consistent for analyses.

These actions bring forth additional questions re: the OECD proposals, the ATO’s response and advance warnings to taxpayers of how such information will be collected and provided in advance of the OECD’s timelines.  To the extent procedures are enacted by taxpayers to collect such data, while the OECD and other tax authorities provide different rules, definitions and timelines, it will substantially increase time and cost by multinationals to respond to multiple initiatives.

Another point of consideration is the symmetry of ATO’s CbC request with that of the OECD: Will the ATO change their rules to coincide with that of the OECD when such rules are issued, and will the separate country’s legislation trump / override the OECD’s final recommendations?

 

 

 

 

 

 

 

 

Category:

OECD / UN

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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.

 

 

 

 

Category:

OECD / UN, Transfer Pricing

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Global & Regional tax trends: World Bank / PwC study

PwC and the World Bank have published a study on tax trends from 2004-2012 in 189 economies.  The Paying Taxes study, part of the World Bank Doing Business project, looks at tax systems from the business tax perspective, including direct and indirect taxes, employment taxes, mandatory contributions, property taxes, environmental taxes, and others.  A link is provided for reference.

Click to access pwc-paying-taxes-2014.pdf

The study is valuable in analyzing trends, and also is helpful in depicting the different types of taxes that multinationals are paying in different regions around the world.  The disparity in countries and regions becomes immediately apparent.  This information also provides context for corporate sustainability reports reflecting global tax transparency for direct and indirect taxes in addition to economic contributions.

Category:

Tax Risk Management

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OECD BEPS Action Plan: Revised timeline

The OECD has recently published a revised timeline for its Base Erosion and Profit Shifting (BEPS) Action Plan that can be accessed via the attached link:

Click to access calendar-planned-stakeholders-input-2013-2014.pdf

With a short timeframe for comment to multiple initiatives, it is imperative to review this timeline change, especially if comments are to be prepared.  This revision in timing also provides transparency for the OECD’s aggressive objectives to assess the milestones accordingly.

The OECD timeline also highlights the expedited actions of individual EU Member States, and other countries, to implement independent BEPS initiatives that may, or may not, be in alignment with the OECD’s final proposals.  To the extent such objectives are significantly different in principle and approach, it has not yet been envisaged if, and how, such disparities will be resolved by taxpayers and tax authorities.

Category:

OECD / UN

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VAT: European Commission update

Tax Fraud: Commission looks at how VAT collection and administrative cooperation can be improved

Today (12 Feb.) the Commission adopted two reports which shed more light on problems linked to fighting Value Added Tax (VAT) fraud within the EU, and which identify possible remedies. The first report looks at VAT collection and control procedures across the Member States, within the context of EU own resources. It concludes that Member States need to modernise their VAT administrations in order to reduce the VAT Gap, which was around €193 billion in 2011. (see IP/13/844) Recommendations are addressed to individual Member States on where they could make improvements in their procedures.

The second report looks at how effectively administrative cooperation and other available tools are being used in order to combat VAT Fraud in the EU. It finds that more effort is needed to enhance cross border cooperation, and recommends solutions such as joint audits, administrative cooperation with third countries, more resources for enquiries and controls and automatic exchange of information amongst all Member States on VAT. Both reports are part of the broad Commission Action Plan to fight against tax fraud and evasion (see IP/12/1325), and can be found online on the European Commission’s Taxation and Customs Union website .

Click to access com(2014)71_en.pdf

Click to access com(2014)69_en.pdf

It is interesting to compare developments on topics such as joint audits, automatic exchange of information, and tax controls with that of the OECD and UN for corporate income tax.  The reports provide a valuable reference in regards to VAT developments in the EU, which are observed by non-EU countries for Best Practices.

Category:

OECD / UN

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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.

Category:

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.

Category:

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.

Category:

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.

Category:

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.

Category:

Transfer Pricing

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France Finance Bill 2014 & Employer tax

The 2014 Finance Bill was published 30 December 2013, containing the following measures as summarized in the KPMG link herein.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/france-transfer-pricing-provisions-enacted-finance-bill-2014.aspx

  • Limitation for related party interest, if lender is not equal to a minimum of 25% of corporate income tax under French law
  • Requirement to provide “analytical accounts” to the French tax authorities during a tax audit if certain thresholds are exceeded
  • Requirement to provide “consolidated accounts” to the French tax authorities during a tax audit
  • Repeal of a provision staying tax collection when a French taxpayer files a MAP case

Note the above provisions are in addition to a new employer tax of a 50 per cent levy on the portion of wages above 1 million euros in 2013 and 2014.  Including social contributions, the rate will effectively remain about 75 per cent, though the tax will be capped at 5 per cent of a company’s turnover.

These significant provisions should be reviewed and monitored closely by MNEs with French operations, or contemplating entering the French market.  Future tax measures should also be expected in France in an effort to improve their GDP and economic growth.

 

 

Category:

Tax Risk Management

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Holding Regimes: 2013

Loyens & Loeff provides their annual concise and practical holding company update of holding company regimes for 2013.

Click to access Holding_Regimes_2013.pdf

Several topics are covered for each of the following countries

  1. Belgium
  2. Cyprus
  3. Hong Kong
  4. Hungary
  5. Ireland
  6. Luxembourg
  7. Malta
  8. Netherlands
  9. Singapore
  10. Spain
  11. Switzerland
  12. United Kingdom
  • Tax on capital contributions
  • Corporate income taxes
  • Withholding taxes
  • Capital gains taxes
  • Anti-abuse provisions / CFC rules
  • Income tax treaties as of 1/1/2013

This publication is a timely and valuable update, especially with respect to non-European countries and the topics of anti-abuse provisions and CFC rules.

Best Practices should include an annual review of the global legal entity structure, especially with upcoming OECD guidelines, re: general anti-avoidance rules (GAAR), anti-abuse provisions and CFC rules.

Category:

Tax Risk Management

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