Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD transfer pricing guidelines’

OECD TP Guidelines

This 2017 edition of the OECD Transfer Pricing Guidelines incorporates the substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. It also includes the revised guidance on safe harbours approved in 2013 which recognises that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.

A link to the Guidelines is attached for reference.

Norway: TP confidentiality ok, transparency violated

The attached KPMG Alert provides dangerous precedent for transfer pricing audits in Norway.  In summary, the Supreme Court has ruled that Norwegian tax authorities may use comparables of other taxpayers to provide assessment information for a taxpayer, while asserting that such information is confidential.

In this era of transparency, Norway has violated the mutuality of this concept while attempting to hide behind its method of transfer pricing assessments with information it is not willing, and legally not obliged, to share with the taxpayer.

Taxpayers should be aware of this development, and proactively engage the tax authorities as to their intent to use secret comparables for any purposes during the audit.

Norway – Tax authorities may use “secret comparables”
April 15: Tax authorities may have information available to them from examinations of other taxpayers or from other sources of information not disclosed to taxpayers undergoing transfer pricing audits. The use of this information, when determining the arm’s length price, is referred to as the use of “secret comparables.” In a recent decision, the Norwegian Supreme Court held that the Norwegian tax authorities may use such secret comparables.
The Supreme Court found that the Norwegian tax authorities had provided the taxpayer with sufficient information regarding the secret comparables—third-party contracts provided by other taxpayers—for the taxpayer in this case to have an adequate opportunity to defend its own position and to invoke effective judicial safeguards by the courts.

In the case before the high court, a Norwegian resident oil company sold gas to a related-party company.

The oil company / taxpayer was the subject of a tax audit, and the Norwegian tax authorities concluded that the company’s transfer pricing determinations for its related-party gas sales were not in adherence with the arm’s length principle.

The tax authorities conducted a discretionary assessment of income and used contracts that had been provided to the tax authorities by other taxpayers—third-party contracts—in performing the comparability analysis. The tax authorities did not fully disclose these contracts to the taxpayer, due to confidentiality rules barring the disclosure of sensitive information.

At issue was whether the tax authorities were required to fully disclose the third-party contracts and whether the tax authorities were allowed to base a reassessment on secret comparables.
Confidentiality rule

The Supreme Court first assessed whether the duty relating to confidentiality prevented the tax authorities from sharing the third-party contracts with the taxpayer. The high court concluded that the tax authorities could not share the third-party contracts with the taxpayer because of the confidentiality rule.
Secret comparables

Because the Supreme Court concluded that the confidentiality rule blocked full disclosure of the third-party contracts, the next question was whether the Norwegian tax authorities could base its reassessment on secret comparables.

The Supreme Court referred to measures under the OECD transfer pricing guidelines—i.e., tax authorities must use great care when relying on information available to them from examinations of other taxpayers within the limits of the domestic confidentiality requirements.

According to the Supreme Court, the tax authorities had shared with the taxpayer as much information about the third-party contracts as they could without violating the domestic confidentiality rule. Therefore, the Supreme Court found that the tax authorities could use the third-party contracts—the secret comparables—in their comparability analysis. The Supreme Court explained that the tax authorities had shared sufficient information about the third-party contracts so that the taxpayer would have had an adequate opportunity to defend its own position and to invoke effective safeguard controls by the courts.

In addition, the high court emphasized that the taxpayer had received several enquiries regarding resale prices from the tax authorities, but had not provided a satisfactory response.

The Supreme Court concluded that the tax authorities were allowed to use secret comparables.
KPMG observation

The case illustrates a conflict between a taxpayer’s right to have access to evidence and the duty of confidentiality imposed on the tax authorities. Further, the case also sheds light on the level of disclosure required in order for the tax authorities to use secret comparables.

Even though this decision and a previous decision regarding captive insurance have allowed the use of secret comparables, tax professionals in Norway have expressed an opinion that the tax authorities need to refrain from using data or information from other sources that may not or cannot be disclosed to the taxpayer. As has been observed, when the tax authorities use secret comparables, the taxpayer has a limited opportunity to defend itself and the courts’ have a limited ability to control the discretionary assessment performed by the tax authorities. Further, the use of secret comparables may affect a taxpayer’s right to due process. Still, despite these concerns, this decision of the Supreme Court shows that the Norwegian courts may accept the use of secret comparables in certain cases.

Canada’s TP memorandum: Unilateral rules preceding OECD’s guidelines

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:

Click to access pwc-canada-intra-group-services-guidance.pdf

CRA’s four-pronged approach to allocating costs is:

  1. Shareholder costs (no allocation)
  2. Specific non-Canadian entity costs (no allocation to Canadian entities)
  3. Specific Canadian entity costs (no allocation to non-Canadian entities)
  4. Corporate group costs, allocated via an arm’s length charge

Other highlights:

  • “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.



Lux’s new transfer pricing framework

The Luxembourg Parliament has approved a draft law, effective 1/1/2015, that will provide a formal transfer pricing framework, coupled with relevant transfer pricing documentation.

PwC’s newsletter provides a summary of these developments:

Click to access pwc-luxembourg-transfer-pricing-legislation-formalised.pdf

Summary of key points:

  • Alignment with the arm’s length principle as stated in the OECD Model Tax Convention, covering transactions between Luxembourg related parties or cross-border transactions.
  • Tax return report of upward, or downward, transfer pricing adjustments whenever the transfer prices do not reflect the arm’s length standard.
  • Transfer pricing documentation expectation for the three-tiered approach in accordance with the OECD’s final Chapter V guidelines.
  • APA’s: Competent Authority will seek advice for advance tax confirmations from a tax rulings commission for additional legal certainty.  The tax confirmation rulings will be published in anonymous and summary form.

Luxembourg sends a strong statement of its alignment with the arm’s length principle and revised OECD transfer pricing documentation guidelines.  Tax transparency of the APA ruling process and recognition of transfer pricing adjustments, upward or downward, also provide a revised state of play in this jurisdiction that performs a vital tax and economic role going forward for MNE’s and other tax administrations.

Australia draft TP ruling: need for comment

The Australian Taxation Office (ATO) has issued a draft transfer pricing law introducing subjective provisions that would be enforced via self-assessment.  PwC has provided relevant details in the following link:

Click to access Australia-ATO+draft+ruling+-reconstruction+of+transactions+04252014.pdf

Key Aspects of Ruling:

  • Transactions would be reconstructed, with various exceptions
  • Self-assessment mechanisms are required, based on consistency with 2010 OECD Transfer Pricing Guidelines, for three exceptions:
  1. Form is inconsistent with substance
  2. Independent entities would have instead entered into other transactions that differ in substance from the actual transactions
  3. Independent entities would not have entered into commercial or financial relations at all
  • The taxpayer needs to hypothesize what independent entities behaving in a commercially rational manner would have done.  If different from the actual transactions, identification of the arm’s length conditions must be based on what the independent entities would have done
  • Thin capitalization reconstruction provisions are included in the self-assessment analysis
  • Comments are due by 30 May 2014

All interested parties should review this ruling, including the Appendix that does not form part of the binding ruling.  There are many reasons why the draft ruling will be difficult to implement by multinationals and the ATO, primarily due to the subjective content and process of hypothesizing.  Additionally, double taxation issues should be addressed re: reconstructed transactions and corresponding adjustments, as well as alignment and intent of the OECD provisions cited.




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