OECD has issued its latest discussion draft on hard-to-value intangibles; comments are due by June 30, 2017.
OECD’s press release states: The Final Report on Actions 8-10 of the BEPS Action Plan (“Aligning Transfer Pricing Outcomes with Value Creation”) mandated the development of guidance on the implementation of the approach to pricing hard-to-value intangibles (“HTVI”) contained in Section D.4 of Chapter VI of the Transfer Pricing Guidelines.
This discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, presents the principles that should underline the implementation of the approach to HTVI, provides examples illustrating the application of this approach, and addresses the interaction between the approach to HTVI and the mutual agreement procedure under an applicable treaty.
As intangibles are one of the most contested issues in transfer pricing, also fact specific with subjectivity, this discussion draft merits a review by all international tax practitioners to view the current thinking by the OECD, as well as a chance to provide comments in reaction.
EY’s Global Tax Alert and the Discussion Draft references are provided:
After a long waiting period, with many discussions as to its predicted content, the OECD’s Multilateral Convention pursuant to BEPS Action 15 is ready for prime time. Links to EY’s Global Tax Alert, and OECD’s Explanatory Statement and Multilateral Convention are provided for reference.
The Multilateral Convention is very flexible as to what a country wants, or does not want, within its treaty related provisions to signify its alliance with BEPS Actions.
EY’s Global Tax Alert states: “The tax treaty related BEPS measures covered by the multilateral instrument include (elements of): (i) Action 2 on hybrid mismatch arrangements, (ii) Action 6 on treaty abuse, (iii) Action 7 on the artificial avoidance of the PE status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The multilateral instrument does not modify or add to the substance of these provisions. The instrument is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.”
Due to the flexibility of the new Convention, this unilateral based process poses many questions as to the consistency of intent for the related BEPS Actions around the world. It is certain that, in the short term, there will be considerable complexity and varying interpretations of what the Convention means. Accordingly, the Explanatory Statement and Multilateral Convention are to be reviewed carefully to understand short and long-term trends in this new era of international tax.
As MNE’s are preparing for the country-by-country (CbC) reporting in 2017 for the 2016 tax year, it is readily apparent that the OECD’s intent of Dec. 31, 2017 is readily being eroded by several countries.
For example, US has proposed reporting (obligatory for the 2017 tax year) as of Sept. 15 of the following year, aligned with timing for filing of the federal income tax return.
China has imposed a May 31 date, if a Cbc report is required, aligned with its tax return due date.
Other countries are choosing different dates for CbC reporting, as well as Master File and Local File reporting, that impose additional compliance and timing demands on all MNE’s, based on the earliest date chosen by a country in which it operates.
What does this mean? Earlier preparation, compressed timelines, mismatching of Master File, Local File and CbC reports, notwithstanding its intended comprehensive alignment.
Additionally, all US MNE’s must now review rules to determine if a surrogate filing entity is required for the 2016 CbC report as the US report is not obligatory. The stated filing entity must be communicated by this year-end, 2016, with varying penalty amounts applicable for non-reporting.
As a simple idea is turning into a tsunami of complexity, tax administrations will have to understand how such information is beneficial for transfer pricing risk analysis, as most people will concede that a CbC report has no direct relationship to transfer pricing.
The draft country-by-country (CbC) law has been forwarded to Parliament, in alignment with the EU Directive for 2016 tax year reporting.
A surrogate parent entity should file a CbC report with the Luxembourg tax authorities in one of the following cases:
- The ultimate parent entity (UPE) is not obliged to file a CbC report in its country of residence,
- The UPE is obliged to submit a CbC report, but there is no automatic exchange of CbC reports between Luxembourg and the country of residence of the UPE or
- The UPE is obliged to submit a CbC report,and there is automatic exchange of CbC reports, but due to systematic failure, no effective exchange of information takes place.
As the terminology includes “obliged” vs. voluntary filings in some countries, the filing entity and disclosure rules should be reviewed. Additionally, there are significant penalties for late/non-filing.
The EY Global Tax Alert, linked for reference, provides additional details.
The OECD, in its June release of country-by-country (CbC) guidance, sets forth guidance of BEPS Action 13 re: parent-surrogate reporting that includes the US, Japan and tentatively Switzerland, for which there are no obligatory filing requirements for the calendar tax year 2016.
However, several countries have previously enacted legislation that may not literally accommodate such rules (i.e. voluntary filing to a parent surrogate). To the extent there is this possibility, will the parent surrogate country indemnify such taxpayers for non-filing penalties, etc. imposed by another country for failing to file according to its specific legislation? Alternatively, a detailed review of the specific legislation of all countries adopting CbC is in order. Simplification of CbC filing is the intent of the OECD Guidelines, however additional assurance would be welcome by the parent surrogate countries to support this presumption.
The OECD guidance is attached for reference:
The US administration has released final regulations on its CbC reporting requirements. This guidance provides voluntary filing for a 2016 calendar year US MNE, whereas 2017 is the required reporting year, due in 2018. The OECD has also issued guidance to provide impetus for countries to accept voluntary filings by US MNE’s with IRS, rather than rely solely on its legislation for 2016. However, this premise should be carefully reviewed, as countries have already enacted legislation and may not wish to change it.
Additionally, the filing period for a US MNE is Sept. 15th for a calendar year taxpayer, accelerating the Dec. 31st date proposed by the OECD.
This guidance will have widespread impact and contains many clarifications that should be understood prior to collecting data.