Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘TP’

UN: Practical Manual on TP

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.

https://www.un.org/esa/ffd/wp-content/uploads/2019/04/18STM_CRP1_Update-UN-Practical-Manual-on-Transfer-Pricing.pdf

https://www.un.org/esa/ffd/tax-committee/about-committee-tax-experts.html

Australia: Self-assessed Distributor margin profile

In what may be the next int’l trend in risk assessment, the Australian Tax Office (“ATO”) has quantified, in sector tables, stated ranges of distributor profit margins by which a taxpayer’s risk will be determined for potential review/audit.  A Reportable Tax Position schedule will be the reporting vehicle for such self-assessment, effective for years ending on or after June 30, 2018.

The guidance is likely to affect the ATO’s starting position for unilateral APA, Mutual Agreement Procedure and bilateral APA discussions.

All inbound distributor arrangements are subject to reporting.  As a result, many multinationals may further consider an APA going forward.

General distributor results are as follows:

High risk: Less than 2.1%

Medium risk: 2.1% – 5.3%

Low risk: Above 5.3%

EY’s Global Tax Alert provides additional guidance on this important development:

https://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Office_releases_final_guidance_on_compliance_approach_to_distributor_profit_margins_-_Action_required/$FILE/2019G_000801-19Gbl_TP_Australia%20-%20Guidance%20to%20distributor%20profit%20margins%20-%20Action%20required.pdf

 

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