Tax Executives Institute (TEI) has provided comments to the OECD Draft Handbook on Transfer Pricing Risk Assessment, for which the relevant links are provided for reference. A link to TEI is also included in the Recommended Links page of this blog.
These comments are useful in comprehending the complexity of transfer pricing risks and documentation concerns, especially against the backdrop of OECD’s recent White Paper on Transfer Pricing Documentation (31 July post) and its Revised Draft for the Transfer Pricing of Intangibles (3 August post). International tax executives should review OECD’s proposals and public comments from TEI and other organizations to develop a risk framework for new transfer pricing challenges and country-specific initiatives.
As a follow up to the OECD G20 Report post on 8 September, information about the Exchange of Tax Information Portal is provided for further reference. The respective jurisdiction can be selected, with agreements available via PDF files. This site will be even more useful as countries complete the relevant Peer 1 and Peer 2 reviews.
The Exchange of Tax Information Portal is an initiative of the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum conducts peer reviews of its member jurisdictions’ ability to co-operate with other tax administrations in accordance with the internationally agreed standard. The standard provides for exchange of information on request where it is foreseeably relevant to the administration and enforcement of the domestic tax laws of the requesting jurisdiction. Effective exchange of information requires that jurisdictions ensure information is available, that it can be obtained by the tax authorities and that there are mechanisms in place allowing for the exchange of that information. The Global Forum’s peer review process examines both the legal and regulatory aspects of exchange (Phase 1 reviews) and the exchange of information in practice (Phase 2). The EOI Portal will track the development of these peer reviews, including changes that jurisdiction’s make in response to the Global Forum’s recommendations. The Portal can be accessed from the following link:
OECD’s report to the G20 leaders in St. Petersburg, Russia is attached for reference, consisting of a Progress Report to the G20 in Part I, and details of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and offshore tax evasion efforts in Part II. This posting will capture some highlights from the report, and pose analogies for Best Practices in alignment with the OECD’s initiatives. The report may be accessed at:
The Introduction provides commentary on “legal tax avoidance,” renewed demands for greater transparency, calling for all taxpayers to pay their fair share, and completion of a global model for automatic exchange of information by 2014.
Initiatives of the Global Forum on Transparency and Exchange of Information (the Global Forum) have resulted in 119 jurisdictions committed to standards of transparency and exchange of information. Best Practices includes communicating results of the Global Forum to global and regional tax teams, and business leaders, to ensure that global consistency of information is being provided to tax authorities.
The Global Forum promotes exchange of information via a monitoring and peer review process. The process includes Phase 1 reviews, examining a jurisdiction’s legal framework for exchange of information, and Phase 2 reviews that examine information exchange in practice. How well does the exchange of information process work for Multinational Enterprises (MNEs)? Is this report, with a schedule of subsequent discussions on its impact, automatically sent to all tax team members, or is each individual personally responsible for accessing, reading and comprehending the report, including Phase 1 and Phase 2 reviews?
Peer reviews result in recommendations for improvement, with all jurisdictions required to provide follow-up reports describing actions taken. Re: global audits, are recommendations for improvement provided during, and after, the audit, with action steps documented?
The Global Forum has organized four training seminars in 2012, and five training seminars this year, in addition to implementation toolkits. Appendix 4 of Part 1 provides a listing of members and observers, inherently resulting in potential impacts for these proposals beyond the OECD member countries. How many training forums and business tools have been provided by MNEs in the last two years to review the ongoing trend of global tax proposals?
Part 2 lists the 15 activities of the BEPS Action Plan to be addressed by all relevant stakeholders. For analogy, has the MNE also listed those same activities, addressing potential impacts, risk quantifications and expected actions for each of the proposals, including a relevant timeline and accountability? Are all international tax team members and business leaders aware of the BEPS Action Plan?
Automatic exchange of information is becoming the norm, versus the exception, for tax authorities around the world. How are tax changes, audit queries, changes in tax laws, etc., communicated within the MNE enterprise quickly and efficiently? Is a tax newsletter communicated to the global business, addressing areas of focus and learning?
Annex 2 of the Progress Report outlines a model of multilateral automatic exchange of information designed to implement a step change in transparency. This section is useful in addressing future legislative changes, draft model competent authority agreements, legal / confidentiality concerns, and legal bases for the exchange of information. MNEs should track public comments and future changes of OECD member countries and observers to address these initiatives.
The highlights of the OECD G20 Report, and suggested comments for Best Practices, are meant to promote creative thought and reflection to effectively plan for the rapid evolution of change in the international tax arena.
With China’s commitment on 27 August 2013, all G20 countries have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention), resulting in automatic exchange of information as the new global standard.
Tax authorities are cooperating multilaterally and automatically, as the Convention provides for spontaneous exchange of information, simultaneous tax examinations and tax assistance. The accompanying press release, including a list of the 56 signatories, is available at:
What are the implications on Best Practices for these continuing developments? Ideas for consideration include the following:
Providing taxpayer information to one authority should be viewed as being provided to many countries worldwide, thus maintaining consistency is essential. A formal methodology will ensure Best Practices are being followed.
Tax assistance, simultaneous examinations and joint audits should be envisioned for reviewing the global Tax Risk Framework.
Best Practices for implementation of Mutual Agreement Procedure (MAP) are a topic of frequent discussion by tax authorities worldwide; thus Best Practices for Multinationals should also be focused on risk identification, measurement and application of MAP.
Related posts for reference:
23 July, OECD exchange of information: Multilateral Convention review
27 June, OECD FTA MAP forum to develop Best Practices
25 June, OECD report to the G20: Status, training, effectiveness
20 June, OECD Global Forum on Transparency and Exchange of Information: Activities
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
Increased transfer pricing complexity
Other findings include:
55% increase in Competent Authority cases from 2010
28% of the companies utilized Mutual Agreement Procedure (MAP)
26% of the companies entered into Advance Pricing Agreements (APAs)
Master file documentation methodology may not be compliant in Africa, Asia and Latin America
41% expect intangibles to be the most important area in the next 2 years
Intangible issues included assertion of uncompensated marketing intangibles and dispute over legal vs. beneficial ownership
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)
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:
Importance of transfer pricing
Audit and controversy experience
Trends in transfer pricing approaches, topics and enforcement
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).
Working Party No. 6 of the Organization for Economic Cooperation and Development (“OECD”) has prepared a Revised Discussion Draft on Intangibles, following an earlier Discussion Draft in June 2012. This revised Draft includes changes based upon comments received, including a public consultation, in 2012.
This Draft addresses, directly and indirectly, actions contained in the OECD Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”). Refer to my 19 July 2013 post for information on the OECD BEPS Action Plan.
The changes in the Draft include a new section addressing local market features, location savings, assembled workforce and group synergies, in addition to explanatory changes to the definition of intangibles. As stated in the Revised Discussion Draft, a transfer pricing intangible is not solely determined by its general tax or accounting characterization. The intangible definition is also mutually exclusive from the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention. Additionally, functions, assets and risks related to intangibles are determined via the functional analysis, and are not presumed to be held by the legal owner of the intangible.
The Draft includes an interesting discussion of the use of projected growth rates and discount rates, including examples in the Annex to illustrate the guidance on special considerations for intangibles.
Written comments may be submitted to the OECD on or before 1 October 2013. A public consultation will also be held on 12-13 November 2013 in Paris, France, selecting speakers from those providing written comments.
Analogous to my 31 July 2013 post for the OECD White Paper on Transfer Pricing Documentation, this Revised Discussion Draft should be reviewed and compared with the current methodology for intangibles, noting significant variations for internal analysis. Intangibles are a significant component of transfer pricing, thus this Draft should be seriously considered by all multinationals.
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.
PwC has conducted a survey, as referenced in the attached link, of transfer pricing aspects for financial transactions in over 40 countries in the Americas, Asia Pacific and Europe. The insightful information, current as of 1/1/2013, initially provides a comprehensive overview of intercompany loans, cash pooling and guarantees followed by transfer pricing details for each country.
Each country included in the survey provided responses to the following topics:
Transfer pricing rules and regulations, domestic / OECD guidelines
Intercompany loans (arms-length nature, transfer pricing methodologies, etc.)
Cash pooling; transfer pricing methodologies
Advance certainty via APA, etc.
Transfer pricing questions and issues re: intercompany loans and various aspects of financial transactions are becoming more common and complex as businesses are continuing global expansion. Accordingly, multinational tax and treasury departments need to be mutually aware of transfer pricing rules for arms-length principles, contemporaneous documentation requirements, and inherent risks / opportunities for intercompany financial transactions.
Evolving rules in this area dictate continual training, awareness and strategizing risks from a global tax and treasury perspective. Transfer pricing training should be provided at regional / global treasury conferences; conversely treasury should ensure tax is aware of new financing tools that arise in different markets to ensure alignment.
The BEPS report, previously released, and the new Action Plan are available for public review, with many commentators already providing insight on the Action Plan.
The 24 month Action Plan is comprehensive and aggressive, with tax transparency and disclosure rules likely to be implemented early in that timeline. The report also discusses an improvement of global rules in developing countries, further referenced by work of the Tax Inspectors without Borders study, as discussed in my 9 June 2013 post.
One very interesting proposal in the report is the development of a multilateral convention to address BEPS issues. This will allow countries to rapidly implement some actions without formally renegotiating bilateral treaties. Additionally, Appendix C provides examples of tax planning structures by multinational organizations.
The OECD BEPS report and Action Plan will provide additional momentum and debate for the proposed actions, for which multinationals should prepare an internal action plan to address such initiatives.
The Global Forum has 120 members and is the premier international body re: implementation of internationally agreed transparency standards and exchange of information. This Forum is very active in today’s tax environment, as demonstrated by its recent activities including:
2nd meeting of the Competent Authorities on 30-31 May 2013, attended by 174 delegates from 77 jurisdictions. Delegates shared procedures for Exchange of Information networks to tackle tax evasion, tools to enhance effective communication between Competent Authorities, as well as providing opportunities to share experiences and practices.
Regional Training Seminar in Brazil 7-10 May 2013, attended by 70 tax administrators from Argentina, Brazil, Columbia, Costa Rica, Dominican Republic, El Salvador, Paraguay and Uruguay. Panama and the United Kingdom provided expert trainers, focusing on an OECD overview of Exchange of Information, the 2012 update to Article 26 of the OECD Model Tax Convention and its Commentary, and the Multilateral Convention on Mutual Administrative Assistance.
Regional Training Seminar in Dakar, Senegal 24-26 April 2013, attended by 20 tax authorities in 8 francophone African countries (Burkina Faso, Cameroon, Democratic Republic of Congo, Gabon, Morocco, Niger, Senegal and Tunisia). The African countries are recent members of the Global Forum and will have Phase 1 peer reviews in 2014. Belgium and Qatar provided expert trainers, focusing on the peer review process and preparation for evaluation of legal and regulatory frameworks for the exchange of information.
The activities of this Forum are visibly expanding transparency initiatives and the exchange of information around the world. The recent G8 conference encouraged all countries to join in order to share mutual benefits.
Regional and global tax teams should review internal processes to ensure global consistency and adherence with internal governance protocols. Additionally, a dialogue should be established between tax and the business leaders to heighten global awareness and ensure strategic alignment.