The OECE Forum on Tax Administration (FTA) has published a handbook explaining participation in the international compliance assurance program (ICAP).
This objective was started in 2018, and is now taking more substance. It is a three-stage process. The taxpayer provides relevant available transfer pricing documentation, and if all relevant jurisdictions and the taxpayer agree, a risk assessment is developed by the tax administrations. The final stage includes a risk graded letter.
The program does not provide absolute certainty, although it may provide learnings into potential gaps, while also providing tax administrations some limited certainty after their comprehensive review.
The handbook, link attached, provides additional details.
As the OECD ventures forth in digital transactions and global minimum tax standards, it is always helpful to keep in mind the UN Practical TP Manual for Developing Countries, which adheres to the arm’s-length principle. Links to the Manual and the Committee of Experts on International Cooperation in Tax Matters are provided for reference.
In April 2019, a new chapter was added on Financial Transactions, Profit Splits and revised text on establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits.
- Attachment A: the proposed new Chapter B on Financial Transactions. The draft discusses the importance of corporate financing decisions within multinational groups and how those decisions could lead to tax base erosion. The Chapter discusses interaction with rules and measures against base erosion; common types of intra- group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions; the process and system of credit rating; potential transfer pricing methods, including the use of simplification measures/safe harbours; different types of intra group loans and relevant characteristics; determining the arm’s length nature of intra-group loans; different types of intra group financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and available methods. The chapter also discusses cash pooling practices and captive insurance, without getting into further detail on the delineation and arm’s length pricing of those specific transactions. Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length nature of intra-group loans: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken as well as (iii) selection and (iv) application, of the most appropriate transfer pricing method.
- Attachment B: Revision to the guidance contained in the Manual on the transactional profit-split method (Chapter B.3.3.) with the main focus being on seeking consistency of this guidance with the work done in the context of the Inclusive Framework on BEPS, while providing more practical examples.
- Attachment C: A progress draft of the work on sections C.2. Establishing Transfer Pricing Capability in Developing Countries (previously C.5.); C.4. Risk Assessment (Previously part of C.3.) and C.5. Transfer Pricing Audits. The purpose is mainly to streamline the sequences of presentation and to eliminate overlaps in the current text.
Click to access 18STM_CRP1_Update-UN-Practical-Manual-on-Transfer-Pricing.pdf
EY’s Global Tax Alert provides details on Australia’s new Diverted Profits Tax (DPT), effective in 2018 for calendar year taxpayers.
- Penalty up to 40% can be assessed
- Interaction with transfer pricing documentation and country-by-country (CbC) risk assessment
- Diverted profits taxed at less than 24% are vulnerable
- Proactive review of one’s documentation and risk assessment is recommended
Australia has patterned their DPT after the UK implemented a similar scheme, although posing some different characteristics.
As countries are reaching out to tax profits that are subject to a lower rate of tax elsewhere, this is providing a license to tax that cannot be ignored by multinationals with Australian operations.
Click to access 2017G_01485-171Gbl_Australia%20passes%20Diverted%20Profits%20Tax%20and%20Penalties%20law.pdf