Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘transfer pricing’

The Platform’s TP toolkit

On 22 June 2017, the “Platform for Collaboration on Tax” (the Platform) – a joint effort of the Organisation for Economic Co-operation and Development (OECD), United Nations (UN), International Monetary Fund (IMF) and World Bank Group (WBG) – released a toolkit (the Toolkit) designed to help developing countries address the lack of “comparables” for transfer pricing analyses and better understand mineral product pricing practices.

This Toolkit should also be reviewed by multinationals (MNEs) in developing countries to address the potential lack of comparables to better understand how the tax authorities will approach a transfer pricing audit.  The mining supplement is required reading for those working in that industry.

Additional toolkits will be forthcoming:

  • TP documentation
  • Indirect transfer of assets
  • Base eroding payments
  • Tax treaty negotiation capacity
  • Supply chain management
  • BEPS risk assessment

As the first edition of the Toolkit has now been published, it will be interesting to watch developing countries apply the tools prescribed, providing a baseline going forward.  All international tax practitioners should be familiar with this latest joint endeavor, as it is an indication of the shared resource approach that is now our future.

EY’s Global Tax Alert provides additional details, and the OECD Toolkit are referenced for review.

http://www.ey.com/Publication/vwLUAssets/OECD_UN_IMF_and_World_Bank_issue_toolkit_for_addressing_difficulties_in_accessing_comparable_data_for_transfer_pricing_analysis/$FILE/2017G_04037-171Gbl_OECD%20UN%20IMF%20and%20World%20Bank%20issue%20toolkit%20for%20difficulties%20in%20accessing%20comparable%20data%20for%20TP%20analysis.pdf

http://www.oecd.org/tax/toolkit-on-comparability-and-mineral-pricing.pdf

Intangibles: OECD’s discussion draft

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:

http://www.ey.com/Publication/vwLUAssets/OECD_releases_implementation_guidance_on_hard-to-value_intangibles/$FILE/2017G_03394-171Gbl_OECD%20releases%20implementation%20guidance%20on%20hard-to-value%20intangibles.pdf

http://www.oecd.org/tax/transfer-pricing/BEPS-implementation-guidance-on-hard-to-value-intangibles-discussion-draft.pdf

Double Tax disputes: Draft EU Directive

The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States.  A summary of the Draft Directive is provided, as well as referenced herein.

This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.

Key points:

  • 3 years, from first notification, to file a complaint by the taxpayer
  • Each competent authority (CA) acknowledges receipt within 2 months
  • Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
  • Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
  • Taxpayer may appeal per national rules a rejection of the complaint
  • CA’s try to resolve issue within 2 years, which may be extended by 1 year
  • Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement.  This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
  • Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
  • Advisory Commission to adopt a decisions within 6 months
  • CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
  • Professional secrecy standards are prescribed
  • Advisory or Alternative Commission opines in 3-6 months
  • CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
  • Final decision does not constitute a precedent
  •  (Redacted) decision is published and maintained in an online central repository
  • Evaluation of process by June 30, 2024 and issue a report

As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s.  The Directive can be reviewed via the attached link:

http://data.consilium.europa.eu/doc/document/ST-9420-2017-INIT/en/pdf

UN: TP Manual for Developing Countries

The UN has published the second edition (First edition in 2013) of a transfer pricing manual for developing countries.

The world has changed considerably since 2013, notably affected by BEPS and the OECD’s  actions, including collaborating with developing countries.  However, the UN notes developing countries may not have the sophistication as other developed countries, and this manual provides valuable insight into the trends in this area.

The transfer pricing practices of Mexico, China and Brazil are also summarized in this edition.

The TP Manual is a “must read” for international tax practitioners to fully understand today’s complex dynamics that do not lead to global consistency or simplification.

http://mnetax.com/wp-content/uploads/2017/04/UN-2017-Manual-TP.pdf

 

EU: Broader CbC public disclosures envisioned

Members of the European Parliament (MEPs) have put forth additional recommended disclosures and requirements for the Accounting Directive of public Country-by-Country (CbC) reporting, prior to enactment of the original proposal.

The Accounting Directive allows a simple majority for passage, and involves additional complexities and cost as the OECD model is now just a starting point for new information.

The Parliament would also like to extend the proposal to include the following information in company reports:

  • The geographical location of the activities
  • The number of employees employed on a full-time equivalent basis
  • The value of assets and annual cost of maintaining those assets
  • Sales and purchases
  • The value of investments broken down by tax jurisdiction
  • The amount of the net turnover, including a distinction between the turnover made with related parties and the turnover made with unrelated parties
  • Stated capital
  • Tangible assets other than cash or cash equivalents
  • Public subsidies received
  • The list of subsidiaries operating in each tax jurisdiction both inside and outside the EU and data for those subsidiaries corresponding to the data requirements on the parent undertaking
  • All payments made to governments on an annual basis as defined in the Directive, including production entitlements, income taxes, royalties and dividends
  • The report shall not only be published on the website of the company in at least one of the official languages of the EU, but the undertaking shall also file the report in a public registry managed by the Commission

EY’s Global Tax Alert, referenced herein, provides the relevant details, although it appears the CbC report is not being construed as one tool for total transfer pricing assessment, but a public tool to determine one’s fair share of tax irrespective of the legal laws and limitations in each country.  

An alternative approach would be to design a standard (transfer pricing) audit template for the tax authorities that would include some, or all, of the above factors to the extent deemed important to assess a company’s tax liability in that relevant jurisdiction.  However, this non-public and Best Practice audit tool is not the focus in this post-BEPS world, to date.  

http://www.ey.com/Publication/vwLUAssets/EU_Parliament_members_submit_amendments_to_public_County-by-Country_Reporting_proposal/$FILE/2017G_00761-171Gbl_EU%20Parliament%20members%20submit%20amendments%20to%20public%20CbCR%20proposal.pdf

TP & Developing Economies: World-Bank Handbook

The attached link provides access to an invaluable transfer pricing (TP) handbook which is an excellent resource for all international tax practitioners/advisors.

With the advent of the BEPS era and new/novel approaches to arms’s-length pricing are voiced, this resource is a great desktop reference with experience gained by the authors in both applying TP principles as well as teaching those principles to tax administrations in developing economies.    

Examples and “boxes” of summary content are provided in the handbook, in addition to a discussion on TP disputes that is inevitable with BEPS Actions and unilateral actions (both legislative and “soft law”) being applied across the world.

A summary of the chapter titles provides a summary of the details therein:

  • TP, Corporate strategy, and the Investment Climate
  • The International Legal Framework
  • Drafting a TP Legislation
  • Applying the Arm’s-Length Principle
  • Selected Issues in TP
  • Promoting Taxpayer Compliance through Communication, Disclosure Requirements, TP Documentation, and Penalties
  • Avoiding and Resolving TP Disputes
  • Developing a TP Audit Program

https://openknowledge.worldbank.org/handle/10986/25095

India states its UN TP intent

The 2016 draft of the UN TP Manual includes India’s latest expression of alignment, as well as differing views from the OECD BEPS Actions 8-10 and 13.

Accordingly, the Indian tax administration is of the view that the guidance flowing from the final report of the BEPS project on Actions 8-10 should be utilized by both the transfer pricing officers (TPOs) and taxpayers in situations of ambiguity in interpretation of the law. However, India has not endorsed the guidance in the BEPS report pertaining to low value adding intra group services under Action 10 and has not opted for the simplified approach. Further, India has endorsed the recommendations contained in the BEPS final report on Action 13, which supported the three-tiered documentation regime comprising a Local File, a Master File and a Country-by-Country Report and has already carried out legislative changes in its domestic law.

India is known for its creativity, non-technical aggressive positions, and the number of years required to appeal initial assessments.  Some of these positions, currently in litigation and dispute, have been reiterated as a further stance in their hard line position on transfer pricing to enhance its economic fisc.  Accordingly, interested international tax practitioners should be cognizant of these positions, as other countries will surely “look and see” if such positions could also benefit their economic fisc similarly. 

EY’s Global Tax Alert is provided for reference.

http://www.ey.com/Publication/vwLUAssets/India_revises_Country_Chapter_comments_in_UN_Practical_Manual_on_Transfer_Pricing_Issues_for_Developing_Countries/$FILE/2016G_03873-161Gbl_TP_IN%20revises%20Cntry%20Cptr%20comments%20in%20UN%20Practical%20Manual%20on%20TP%20Issues%20for%20Dev%20Cntries.pdf

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