Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD Action Plan’

Singapore: TP comments

The Inland Revenue Authority of Singapore (IRAS) has issued a consultation paper requesting comments on a revision to their transfer pricing (TP) guidelines.  The particular questions for which comments are requested, no later than 24 September, consist of the following:

  • Challenges in preparing TP documentation contemporaneously
  • Difficulties in obtaining group and entity information in Annex A of the paper
  • Examples of low-risk documentation areas
  • Frequency of documentation updates

A link is provided for reference to the consultation paper:

Click to access pconsult_IT_Transfer%20Pricing%20Documentation_2014-09-01.pdf

Key observations:

  • TP documentation to be organized in alignment with the OECD master file and local entity reporting methodology.
  • TP documentation not applicable for routine services with a 5% safe harbour mark-up
  • Inadequate TP documentation will lose the support of IRAS in MAP discussions to resolve double taxation.
  • Annex A provides additional requests for group information that may be the source of requested comments, including:
    • Worldwide organization chart
    • Group’s business models and strategies
    • Profit drivers, including a list of legal ownership for intangibles
    • Supply chain activities and functions
    • Business relationships among all related parties
    • Group’s transfer pricing policies for all types of transactions between related parties
    • Consolidated group financial statements

Singapore is a jurisdiction (and there may be many more) that is reviewing the OECD’s Action Plan country-by-country reporting template and forthcoming comments as a base upon which to expand TP reporting.

Multinationals will need to capture every country’s additional legislative requirements arising from the OECD’s Action Plan.  The additional complexity, cost and time will place a further constraint upon the ability to provide information perceived to be directly relevant for every jurisdiction around the world.  Additionally, the threat of lack of support for the MAP process via a determination of inadequate TP documentation (if legislated into law) will increase the risk of double taxation and TP appeals worldwide.

All interested parties should take time to submit comments prior to the 24 September deadline.



EY 2013 Global Transfer Pricing survey: A sea of change

Click to access EY-2013-GTP-Survey.pdf

This very insightful, and timely, survey of senior tax professionals in 26 countries clearly portrays a significant increase in transfer pricing controversies and resulting double taxation.  The survey indicates that 66% of the respondents identified “risk management” as the highest transfer pricing priority.

Some challenges cited in the report include:

  • Governmental authorities expanding definitions of “aggressive tax planning”
  • Permanent Establishment (PE) assertions, including reliance on proposed changes to the commentary to Article 5 of the OECD Model Treaty
  • Reputational risks
  • Public perception
  • Increased transfer pricing complexity

Other findings include:

  1. 55% increase in Competent Authority cases from 2010
  2. 28% of the companies utilized Mutual Agreement Procedure (MAP)
  3. 26% of the companies entered into Advance Pricing Agreements (APAs)
  4. Master file documentation methodology may not be compliant in Africa, Asia and Latin America
  5. 41% expect intangibles to be the most important area in the next 2 years
  6. Intangible issues included assertion of uncompensated marketing intangibles and dispute over legal vs. beneficial ownership
  7. Over 75% of PE issues arose from frequent business travelers, seconded employees and providing services through employees or other personnel abroad (PE statistics on page 23)
  8. BRICs and Africa are #1 or #2 ranking in transfer pricing priority for 30% of such companies, although 75% of those companies have no full-time transfer pricing personnel located in those jurisdictions

The report concludes with detailed survey responses for each of the 26 countries, addressing the following topics:

  1. Importance of transfer pricing
  2. Audit and controversy experience
  3. Trends in transfer pricing approaches, topics and enforcement
  4. Operationalizing transfer pricing

Best Practice considerations presented for insight include:

  • Indirect taxes, including customs and VAT, should be an integral part of the transfer pricing process, notwithstanding different functional reporting
  • Attention to detail, via frequent reviews, for intercompany transactions should be  a recurring process to ensure substance matches the form cited in transfer pricing documentation
  • Review of current transfer pricing methodologies
  • Renewed focus on controversy and dispute resolution techniques, including MAP, APAs and arbitration
  • Reputational risk consideration

The survey provides a thoughtful perspective in addition to recently issued consultation documents by the OECD re: transfer pricing documentation and intangibles, as well as recent general anti-abuse rules (GAAR) drafted and/or legislated into law.

This survey is especially insightful when compared to prior posts re: OECD Revised Draft on Transfer Pricing Aspects of Intangibles (3 August), OECD White Paper on Transfer Pricing Documentation suggesting a Masterfile and Local file approach (31 July), UK Finance Act 2013: GAAR has arrived (21 July), OECD BEPS report and Action Plan (19 July), PwC PE survey: Trends & Challenges (14 July), OECD: A Framework for Co-operative Compliance (13 June), UN: Practical Manual on Transfer Pricing & Tax Training Initiatives (2 June), A new role: Head of tax controversy (3 May), Global Mobility & International Tax: Alignment for Best Practices (24 April), and  PE Risks & Best Practices for Awareness & Planning (14 April).

OECD: White Paper on Transfer Pricing Documentation

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

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