The Canada Revenue Agency (CRA) published Transfer Pricing Memorandum (TPM)-15 for intra-group services. TPM-15 is meant to “clarify” CRA’s audit policy of intra-group services. Although the guidance references OECD’s 2010 Transfer Pricing Guidelines, it is issued in advance of new OECD guidelines, thereby leading to further global inconsistency and instances of double taxation. Links to a PwC summary and TPM-15 are included for reference:
CRA’s four-pronged approach to allocating costs is:
Shareholder costs (no allocation)
Specific non-Canadian entity costs (no allocation to Canadian entities)
Specific Canadian entity costs (no allocation to non-Canadian entities)
Corporate group costs, allocated via an arm’s length charge
“Auditors should refrain from accepting the proportion of sales revenues as a single allocation basis for management fees.”
Specific provisions in the Income Tax Act on non-deductibility of certain costs trumps treaty arguments, leading to double taxation.
Indirect tax considerations are also addressed in the memorandum.
CRA’s aggressive approach, coupled with its timing, will result in additional complexity cloaked outside of the double treaty mechanisms for which the goal of avoiding double taxation may be ameliorated via appeal mechanisms.
All organisations with operations in Canada for which costs are allocated should review this memorandum to better understand CRA’s audit intent and processes.
Accordingly, documentation of the benefit provided locally, lack of duplication and transparency of the allocation method is vital in proving the tax benefit for intra-group services.
EY’s Global Tax Alert focuses on BEPS considerations for asset managers, This is a very timely and informative aspect of BEPS, as it will certainly have an impact on asset managers worldwide. Early review and consideration of three significant proposals is recommended to ensure timely planning and relevant documentation. The proposals include county-by-country reporting (Action 13), treaty abuse (Action 6), and hybrid mismatch arrangements (Action 2).
The Alert is informative for all MNE’s and fund managers, ensuring the BEPS review umbrella appropriately encompasses direct and indirect aspects of operations, including the investment fund industry.
TEI has provided comments in response to several OECD BEPS Actions, linked herein for reference.
Action 10:Profit Splits-Key comments:
Profit split methodologies should be limited to scenarios where there is not reliable arm’s length pricing.
Simple examples provided do not provide a comprehensive basis for detailed replies and consideration.
A profit split approach may be subject to abuse by tax authorities.
Hindsight application of transfer pricing methodologies should only be used in exceptional circumstances.
Actions 8-10: TP Guidelines
Transfer pricing analyses discussed in the proposal would require significant resources for MNE’s and tax authorities.
The possible merging of the approaches of attributing profits for Article 7 (PE) and Article 9 (Associated Enterprises) should be clarified.
The imposition of “insufficient transfer pricing documentation” penalties should be abandoned/relaxed by tax authorities for a reasonable period of time after implementation of the new guidelines.
Additional compliance burdens elicit increased complexity and confusion.
Action 4: Interest
The proposal represents a shift away from the arm’s length principle, introducing difficult and impractical problems to resolve.
Capitalisation factors include many considerations other than tax.
Double tax consequences are more likely, as MNE’s will not be able to easily rearrange financing structures worldwide.
The withholding tax impacts should be clarified for foreign tax credit and related calculations.
MNE’s with a higher effective tax rate, and thus less prone to base erosion or profit shifting arrangements, should be excluded.
The concept of global limitation calculations, and interest sharing, needs to be further discussed to determine efficient audit guidance.
Action 10: Commodities
Right to use publicly available quoted exchange prices as a comparable is a welcome proposal.
Discussion of other issues, including pricing, pricing date, and documentation should be further considered and clarified.
TEI’s comments are always informative, practical and highlight issues that are both useful as well as problematic. Therefore, these comments provide an excellent forum, along with comments from other interested parties, for further consideration prior to drafting final guidance.
The Indonesian Ministry of Finance has issued updated MAP guidelines, evidencing focus by the Indonesian Tax Office (ITO) on multilateral dispute resolution. This regulation is the third MAP related guidance, with the inclusion of additional restrictions. A link to KPMG’s Tax News Flash is provided for reference:
The MAP process will be terminated when the Indonesian tax court “deems” that it has conducted sufficient hearings.
A tax audit for the MAP years may be conducted, without clarity if such audit is restricted to the MAP issues.
A concurrent Indonesian MAP request is required for a MAP request by another country’s tax authority.
MAP does not postpone the obligation to pay the tax, unlike domestic legislation.
Indonesia is uniquely interpreting the tax treaty to limit the opportunity for MAP appeals, while introducing additional subjectivity in the rules via vagaries of the Indonesian tax court’s hearing process. Most importantly, it will be important to consider the MAP process upon the commencement of an Indonesian audit due to ongoing uncertainties.
Notably, this guidance is being issued prior to the finalization of the OECD dispute resolution guidelines that will most likely result in inconsistent guidelines for MAP.
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.
S, Africa’s new interest limitation on related party debt, approximating 40% of EBITDA, is effective as of 1/1/2015. The new rules are prescribed prior to the OECD BEPS Action 4 Guidelines re: interest limitations. Disallowed interest is carried over indefinitely, subject to the subsequent year’s limitation.
PwC’s guidance is provided for reference:
As countries aggressively enact BEPS incentives with unilateral legislation, the premise of worldwide consistency for new OECD guidelines diminishes virtually daily. New legislation also reduces the country’s further incentive to change such legislation to align with final OECD guidelines.
As S. Africa’s new rules demonstrate, there should be a BEPS champion/team in place at MNE’s to capture such changes worldwide and measure such impacts upon the global organization. Additionally, future strategic planning should consider current BEPS initiatives, and unilateral legislation that has been passed, to measure tax efficiencies of current and future debt structures.