Attached is a free pdf/ebook prepared by Alexander Weisser, covering permanent establishment, treaty characterization and transfer pricing.
These issues are becoming more important as we get closer to OECD Pillar One and Two blueprints, in addition to proposed UN Article 12B re: a new digital services tax focused on developing countries.
Alexander has provided advance permission for this informative inclusion:
The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – has undertaken, at the request of the G20, the development of a series of “Toolkits” to help guide developing countries in the implementation of policy options for issues in international taxation of greatest relevance to these countries.
This toolkit, in draft version, is intended to provide an analysis of policy options and a “source book” of guidance and examples to assist low capacity countries in implementing efficient and effective transfer pricing documentation regimes.
This first part of the Toolkit provides information on the background, context and objectives of transfer pricing documentation regimes.
Part II then discusses a number of general policy options and legislative approaches relevant to all types of documentation requirements.
PART II. OPTIONS FOR COUNTRIES TO IMPLEMENT TRANSFER PRICING DOCUMENTATION
This section discusses various policy considerations and options relevant to designing a regime for transfer pricing documentation. These include:
- The regulatory framework, through a combination of primary legislation, secondary legislation and guidance;
- Confidentiality of taxpayers’ documentation and information;
- Timing issues concerning when documentation must be in place and when it is required to be submitted to the tax administration;
- Enforcement, including penalties and measures to assist and promote voluntary compliance;
- Dealing with access to information outside the jurisdiction; and
- Simplification and exemptions.
Part III focuses more specifically at each kind of documentation in turn, and examines the specific policy choices that are relevant to each, as well as providing a number of examples of country practices.
The final part sets out a number of conclusions.
Click to access draft-toolkit-transfer-pricing-documentation-platform-for-collaboration-on-tax.pdf
The EU Joint Transfer Pricing Forum recently published a paper illustrating when to use the profit split method (PSM) and how to accomplish the split of profits per the OECD Guidelines. The report is linked as a reference.
The report is a complement to, and supports, the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.
As this method is not simple, and is also a focus on transfer pricing issues in the US, this paper is valuable into the application and concepts of PSM.
Click to access report_on_the_application_of_the_profit_split_method_within_the_eu_en.pdf
Tax Executives Institute (TEI) recently submitted a letter in response to requested comments by the OECD re: revisions to its transfer pricing guidelines. The submission is well drafted and articulate, generally urging OECD to improve current practices rather than adopting new complex mechanisms.
An example of several suggestions is provided:
TEI suggests a number of elements should be included in future guidance to improve transfer pricing compliance practices. First, tax authorities should share their risk assessments with taxpayers so taxpayers can improve their compliance processes where appropriate, or engage in a discussion with tax authorities regarding their view of the taxpayer’s compliance risk. Second, to avoid transfer pricing disputes, Chapter IV should urge tax authorities to focus audit activity on transactions that are more likely to be tax motivated (i.e., between high and low tax jurisdictions), rather than simple intercompany transactions where the taxpayer makes reasonable efforts to price the transactions and where the possibility of a tax motivation is remote. For example, head office cost allocations between countries with relatively comparable tax rates should be viewed as low risk. Finally, the OECD should encourage countries to consider halting interest and penalties if dispute resolution takes longer than two years and if the country does not have a mandatory arbitration procedure.
TEI’s submission should be read in its entirety to further understand the direction of OECD and possible remedies in the complex world of transfer pricing.
Click to access TEI%20Comments%20-%20OECD%20TPG%20-%20Chapter%20IV%20and%20VII%20-%20FINAL%20to%20OECD%2019%20June%202018.pdf
The OECD is considering starting two new projects to revise the guidance in Chapter IV (administrative approaches) and Chapter VII (intra-group services) of the Transfer Pricing Guidelines.
OECD has issued scoping papers for public comments addressing transfer pricing disputes and intra-group services, provided for reference herein in addition to Deloitte’s Global TP Alert with insightful comments.
Comments on both subjects are due by June 20, 2018. Both topics are significant, thus a review of the scoping paper focus is recommended, with an opportunity to provide comments.
Click to access dttl-tax-global-transfer-pricing-alert-18-013-11-may-2018.pdf
Click to access scoping-of-future-revision-of-chapterIV-of-the-transfer-pricing-guidelines.pdf
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.
Click to access 2017G_04037-171Gbl_OECD%20UN%20IMF%20and%20World%20Bank%20issue%20toolkit%20for%20difficulties%20in%20accessing%20comparable%20data%20for%20TP%20analysis.pdf
Click to access toolkit-on-comparability-and-mineral-pricing.pdf
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:
Click to access 2017G_03394-171Gbl_OECD%20releases%20implementation%20guidance%20on%20hard-to-value%20intangibles.pdf
Click to access BEPS-implementation-guidance-on-hard-to-value-intangibles-discussion-draft.pdf
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.
Click to access 2017G_00761-171Gbl_EU%20Parliament%20members%20submit%20amendments%20to%20public%20CbCR%20proposal.pdf
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
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.
Click to access 2016G_03873-161Gbl_TP_IN%20revises%20Cntry%20Cptr%20comments%20in%20UN%20Practical%20Manual%20on%20TP%20Issues%20for%20Dev%20Cntries.pdf
The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.
As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures. Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.
The EY Global Alert provides additional details of this new development.
Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.
Click to access 2016US_03632-161US_TP_US%20IRS%20will%20follow%20BEPS%20Action%205%20rec%20by%20exchanging%20summs%20of%20unilateral%20APAs.pdf
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.
Click to access 2016G_02418-161Gbl_TP_Luxembourg%20introduces%20draft%20law%20on%20country-by-country%20reporting.pdf
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:
Click to access guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf