Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘transfer pricing’

EU transparency: New Ruling Directive re: tax ruling exchange moves forward

The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017.  A copy of the press release is provided:

Click to access 40802203260_en_635797403400000000.pdf

Key observations:

  • Cross-border tax rulings and advance pricing agreements (APAs) will be automatically exchanged between EU Member States.
  • The rulings will be stored in a EU central repository, with access available to the Member States.
  • Rulings issued from 2012 will generally be included in the exchange of information, subject to de minimis thresholds.

This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.

Multinationals should review prior rulings subject to this exchange to avoid potential surprises.

Category:

Transfer Pricing

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China’s proposed TP documentation; Non-transparent

China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015.  The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.

Click to access 2015G_CM5783_TP_Chinas%20TAs%20issue%20groundbreaking%20consultation%20draft%20to%20update%20TP%20rules%20in%20a%20Post-BEPS%20environment.pdf

Key observations:

  • The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
  • A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
  • “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
  • Advance Pricing Agreement (APA) procedures are clarified.
  • The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test.  The use of secret comparables, one comparable, one or multiple year results are allowed.
  • Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
  • Profitability monitoring will be used to establish a tax risk hierarchy system.

Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation.  Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.

All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.  

Category:

Transfer Pricing

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Kuwait: Virtual Service PE

Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.

Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.

EY’s Global Tax Alert provides additional details into this development:

Click to access 2015G_CM5779_Kuwait%20Tax%20Authorities%20adopt%20Virtual%20Service%20PE%20concept.pdf

Key observations:

  • The Virtual Service PE concept takes into account only the duration of the contract itself.
  • Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
  • The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
    • A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
    •  The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.

The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.

Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument.  Practically, it may also be difficult to obtain tax treaty relief from double taxation.

 

Category:

PE

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TFEU: Tool for EU Directives

The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States.  Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.

Article 116 TFEU:

Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates  is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.

If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives.  Any other appropriate measures provided for in the Treaties may be adopted.

 

The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:

  • EU Common Corporate Tax Base (CCTB)
  • Country-by-Country (CbC) reporting, public disclosure
  • Tax rulings, (redacted) public disclosure
  • Permanent Establishment (PE) definition
  • Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
  • Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
  • EU Dispute Resolution approach

Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.

Category:

OECD

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New age of transparency / reputational risks

The latest EY tax risk and controversy survey series, entitled A new mountain to climb, provides some insights re: preparing for and proactively management tax / reputational risks.  A link to the report is provided for reference:

Click to access ey-managing-tax-transparency-and-reputation-risk.pdf

Key observations:

  • Media coverage of how much companies pay in tax / low effective tax rates is extensive, although engaging with the media is seen by many companies as a “no-win” situation.
  • Leading companies have transformed  the process of communication for tax risks and controversy to internal and external stakeholders.
  • Transparency is providing information to tax authorities re: how much tax is being paid in other jurisdictions as a tool to decide if the company is paying enough tax in their jurisdiction.
  • Global disclosure and transparency requirements will continue to grow in the next two years.
  • Transparency readiness of companies is a significant and underestimated need.
  • Direct ERP access by tax authorities represents a next phase of risk assessment.
  • Transparency readiness can help mitigate reputation risk.
  • Reputation risk strategy elements:
    • Actively monitor the changing landscape.
    • Assess readiness/desire to respond.
    • Enhance communication with internal and external stakeholders.
    • Gain insight into the total tax picture through the lens of public perception.
    • Decide with whom the company wishes to communicate.
    • Embed reputation risk thinking into core business strategy.
  • Transparency is the new norm, and (media) reputation risk may be a permanent risk.

Transparency demands have created a new toolbox required by all multinational organisations.

A tax policy and reputation risk strategy should be essential tools in a comprehensive tax risk framework.  The EY report is required reading for all parties interested in learning more about tax risk trends and Best Practice ideas to proactively address the new world of transparency.

Category:

Tax Risk Management

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Reputation risk: are you ready?

EY’s article highlights the importance of planning a proactive risk strategy re: reputation risk.  A link to the article is provided for reference:

http://taxinsights.ey.com/archive/archive-articles/six-actions-that-help-you-mitigate-reputation-risk.aspx

Key observations:

  • Six distinct actions
    • Actively monitor the changing landscape
    • Assess readiness/desire to respond
    • Enhance communication with stakeholders
    • Drill into the details to prepare the total tax picture
    • Decide on whom communication is  to be established
    • Embed reputation risk into daily business strategy
  • Questions for self-assessment, gleaned from this topic:
    • Who monitors media coverage of the company
    • Who monitors social media channels re: the tax function
    • Who monitors new tax disclosures to assess trends and new compliance requirements
    • Is the tax structure transparent re: taxes paid by country
    • Do profits and taxes paid align?  If not, rationalize the gap
    • Who follows tax litigation in each jurisdiction
    • Is the (tax) risk officer aligned with tax strategies
    • Are Board members aware of new documentation requirements to assess tax strategy around the world
    • Has the legal team been educated on BEPS actions and related company strategies
    • Is there a metric to measure reputation risk
    • What new disclosures are taking place
    • Will the company address questions from the public
    • Should more tax information be disclosed to mitigate reputation risk
    • What information is shared with investors; does the current process need to be reviewed
    • Is tax risk an element of every new business initiative/strategy
    • What functions are aware of BEPS and the changing landscape

This article is a snapshot for an increasingly important risk: a company’s reputation.  As new tax disclosures emerge around the world, interrelated with Board awareness and acknowledgment, it is imperative that the subject of reputation risk is addressed as an immediate priority by all companies.  As soon as there is damaging press, truthful or not, it may be too late to respond.

This subject is also of importance for tax administrations: tax information is confidential and technical areas may be unclear, thus a company’s rights should be protected while an issue is raised, investigated and ultimately resolved.  The tax administration’s reputation risk is also of paramount importance, as it looks to increase trust and establish an understanding of a company’s functions, assets and risks within the relevant jurisdiction.

Category:

Tax Risk Management

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Australia’s draft law: CbCR, TP documentation

The Australian Treasury announced its draft law encompassing country-by-country reporting (CBCR) and transfer pricing documentation.

EY’s tax publication provides relevant details in the referenced Global Tax Alert:

Click to access 2015G_CM5672_Australia%20releases%20draft%20law%20implementing%20CbC%20reporting%20and%20increasing%20penalties%20for%20TA%20and%20TP.pdf

Key observations:

  • Conforms to OECD’s recommended 3-tier transfer pricing approach, CBCR, master file and local file.  The master file and local file will need to provided, whereas the CBCR may not be necessary if the group’s parent entity jurisdiction has an information sharing agreement.
  • It is expected the Australian Taxation Office (ATO) will release additional guidance for the CBCR, hopefully by year-end 2015.
  • Increases penalties for tax avoidance and transfer pricing where there is not a reasonably arguable position by the taxpayer.

Australia has been a leader in following the BEPS Actions and putting such intent into their domestic legislation.  As Australia continues to take this lead position, it is expected many other countries will follow similarly.  All multinationals should continue to monitor these developments, while accelerating planning and execution for the new CBCR and transfer pricing documentation regime.

Category:

Transfer Pricing

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CbC Bank Reporting Review: EU Parliament Group

This is a valuable insight into the use of country-by-country reporting, based on a report of 26 EU-based banks.  Although the reporting criteria is based on the Capital Requirements Directive IV (CRD IV), the interpolations and extrapolations indicate the trend by which such reports could be used, especially when viewed in isolation by recipients in the public domain.

A link to the report is provided for reference:

Click to access CRDivCBCR2015.pdf

Key observations:

  • The reporting was used to test the hypothesis that profits were overstated in low tax/offshore jurisdictions, with understatement of profits in base country or major operating locations.
  • Unitary tax reporting/allocation was used to determine the likelihood that there was base erosion and profit shifting.
  • Four methods of assessing profit shifting were used to provide an overall ranking.
  • If existing Directive is used, it should be used consistently across all EU jurisdictions.
  • Turnover should include intra-group sales  with reconciliation to reported group turnover.
  • The OECD’s template should be considered as an alternative reporting tool. 
  • Formulary comparisons are measured and used to reapportion the profits.

This report is indicative of conclusions that may be drawn, although data is incomplete and inconclusive, from a table of reported amounts in various jurisdictions.

Most importantly, the group utilized formulary apportionment to derive an expectation of profit levels among various jurisdictions.

Accordingly, all interested parties should review this report as the OECD is nearing completion of the BEPS Action Plans and CbC reporting.

Category:

Tax Risk Management

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Tax Risk Training: Tax Risk Framework element

As tax authorities, most recently Australia and UK, place added focus on a tax risk framework and providing evidence of diligence re: such procedures, it is critical that new financial leaders receive tax risk training upon entering an organization as well as a review on a recurring basis.  The training should also be reviewed and updated annually for new developments.

Examples of topics for discussion:

  • Beneficial ownership & disclosures (coordinated with Treasury Know Your Customer perspective)
  • Permanent Establishment (PE)
  • General Anti-Avoidance rules (GAAR)
  • Transfer pricing methodologies, internal governance procedures
  • Transfer pricing documentation process
  • BEPS governance strategies
  • Financial statement tax reserve criteria and timing
  • Interrelationship of domestic law and double tax treaties
  • Tax policy
  • Elements of tax risk framework
  • Tax audit protocol
  • Tax audit methodologies
  • Customs / Transfer pricing coordination
  • BEPS Country-by-Country report, future trends

The training generally provides additional awareness, thereby mitigating tax risk exposures and providing a win-win opportunity that cascades across the organization.

Category:

Tax Risk Management

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OECD Tax Inspectors Without Borders (TIWB): Now a reality

The OECD’s long-awaited Tax Inspectors Without Borders (TIWB) initiative (posts of 9 June 9, 2013 & 30 January, 2015) has now become a reality.  The program is a collaboration of the OECD with the United Nations (UN) Development Programme.

A framework of international tax experts will augment local tax authorities on current audits, providing advice on transfer pricing and cross-border information exchange that will result in significantly increased tax revenue collection by developing countries.

http://www.oecd.org/tax/launch-of-tax-inspectors-without-borders.htm

Ways of Working / Transparency observations:

  • Will the list of countries’ receiving support be transparent?
  • How will issue consistency be assured for similar issues of different taxpayers across that jurisdiction: will the “experts” also be developing this process?
  • Will the “experts” be assisting in addressing/developing audit queries, issue determination, appeals and/or Competent Authority proceedings?
  • Will the “experts” be available to discuss issues directly with the taxpayer, if they have assisted with determination of such potential issue?
  • Is there a common “Memorandum of Understanding” that is shared with the taxpayer upon commencement of an audit, outlining the relevant processes that will be performed in collaboration by the relevant tax authority?

Answers to these questions, among others, will be helpful in providing additional context and understanding between taxpayers and tax authorities for this important initiative.

The metrics for monitoring such progress should include not only the amount of additional revenues assessed/collected, but should be inclusive of Best Practice methodologies and consistent methods of transfer pricing risk determination aligned with established laws in such jurisdiction.  

It is hopeful the UN and OECD will endeavor to provide additional mutuality and transparency for this initiative that will further enhance win-win opportunities.

 

 

Category:

OECD / UN

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IMF, World Bank: Support for developing countries

The World Bank and the IMF have released a new initiative to support tax systems in developing countries; a link to the press release is provided for reference.

http://www.imf.org/external/np/sec/pr/2015/pr15330.htm

Key observations:

  • World Bank Group President Jim Yong Kim’s statement: “If everyone pays their fair share – developing countries can close their financing gaps and promote inclusive growth.”
  • The IMF and World Bank will continue to collaborate with the OECD and other development partners in expanding tax assistance and expertise.
  • Two pillars of development:
    • International tax dialogue to increase their collective voice
    • Developing diagnostic tools to evaluate and strengthen tax policies

These developments will be a key metric to monitor, in view of the increased complexity and documentation demands in a post-BEPS era.

Multinationals may also view these developments as added impetus to be more proactive in engaging with tax authorities in developing countries to better understand their business, as well as provide expertise in the complex transfer pricing arena.

Category:

OECD / UN

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European Parliament’s resolution: Ambitious disclosure plan

The European Parliament, following its recent push for public disclosure (03 June 2015 post), passed a non-binding resolution by 550 votes to 57 to make this happen.

A copy of the press release is provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20150703IPR73914/html/Tax-MEPs-advocate-country-by-country-reporting-to-help-developing-countries

Key observations:

  • Country-by-country tax reporting (CbCR) should be publicly disclosed to fight tax evasion and avoidance.
  • Perceived benefits of public disclosures include better tax justice and an end to tax havens.
  • All countries should adopt CbCR.
  • Company ownership should be in the public domain.
  • EU institutions should monitor actions by the Member States to determine ongoing funding decisions.

The EU continues to be a proactive force in introducing public disclosure changes, which will be a spark for all other countries to follow.  Accordingly, monitoring such activities will be a key to understanding future trends and disclosures that can be planned for currently.

 

 

Category:

Tax Risk Management

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New Customs and TP Guide by WCO

The World Customs Organization (WCO) has published a new Guide to Customs Valuation and Transfer Pricing.

The Guide will:

  • Provide a policy/audit/control tool for Customs officials
  • Cross reference transfer pricing documentation that may be relevant for customs purposes
  • Address transfer pricing misconceptions
  • Reconfirm “transaction value” as the starting point for customs valuation
  • Encourage consideration of transfer pricing studies
  • Encourage consistency of transfer pricing adjustments
  • Encourage the provision of advance customs valuation rulings
  • Provide Best Practices for business, integrating customs and transfer pricing documentation/discussions

A succinct summary by DLA Piper, and the Guide, are provided for reference:

https://www.dlapiper.com/en/uk/insights/publications/2015/06/wco-publishes-guide-to-customs-valuation/

http://www.wcoomd.org/en/topics/key-issues/revenue-package/~/media/36DE1A4DC54B47109514FFCD0AAE6B0A.ashx

The Guide should also be used as a proactive tool to review reporting structures of transfer pricing and customs employees/advisors, functional integration, etc. to address the new changes in transfer pricing and the possible effect on customs valuations and documentation going forward.

 

Category:

Tax Risk Management

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BEPS Action 13 CbC reports: To whom, by whom, for whom

The OECD has released its final guidance on BEPS Action 13, Country-by-Country (CbC) Reporting Implementation Package.  The CbC reporting complements the previous drafts for transfer pricing documentation in the form of a master file and local country file.  The three pillars of reporting for this Action have been acknowledged by OECD as representing its definitive approach, with the dissemination of the Action 13 document to be issued later this year with the other Action items.

Click to access beps-action-13-country-by-country-reporting-implementation-package.pdf

Key points:

  • Three model Competent Authority Agreements based on the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions, and Tax Information Exchange Agreements (TIEAs).
  • In accordance with the recent OECD webcast, countries will have 6 months for the initial year to exchange such information (i.e. June 30, 2018 calendar year basis for the 2016 tax information submitted by Dec. 31, 2017, and 3 months for the following reporting year).
  •   Introduces the term “Surrogate Parent Entity” for substitute reporting.
  • Provides conditions for application of the Surrogate Parent Entity approach.
  • The CbC report shall be filed in a form identical to the OECD template.
  • Confidentiality provisions are discussed.
  • Penalties: “It is assumed that jurisdictions would wish to extend their existing transfer pricing documentation penalty regime to the requirements to file the CbC report.”

The manner in which countries implement this initiative should be closely monitored, as there will be differences to the general approach.  For example, Poland recently introduced this proposal into its domestic legislation, whereas other countries have relied on the ultimate parent entity concept for collecting such information.  Additionally, Spain also requires amounts to be reported in local currencies, a process that will not be uniform globally.

MNE’s should be cognizant of the flexibility required for this new transfer pricing risk initiative, while also foreseeing the recent public disclosure proposals by the European Parliament, European Commission and other interested parties.

Category:

OECD

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European Parliament 24-0 vote for public disclosure: CbC & Beneficial Ownership

The European Parliament recently voted unanimously for public disclosure rules to fight tax evasion, tax avoidance and establishing fair, well-balanced, efficient and transparent tax systems.  A copy of the press release is provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20150601IPR61336/html/Development-MEPs-call-for-action-to-target-tax-evasion-in-developing-countries

Summary:

  • All countries to adopt country-by-country (CbC) reporting, with all information available to the public
  • Beneficial ownership information to be made publicly available
  • Call for coordination to combat tax evasion and avoidance by the European Investment Bank, European Bank for Reconstruction and Development and EU financial institutions.
  • Request to the Commission for an ambitious action plan, without delay

The outcry for public reporting, currently underway by the OECD, European Parliament and European Commission is increasing exponentially within Europe.  Other countries will obviously follow the EU approach, with perceptions of complicated international tax rules increasing disparity between application of the transfer pricing arm’s length principle.

The CbC reporting, and beneficial ownership detail, should be expected to be in the public domain if this trend continues.  Currently, it is a sign of an incoming tsunami that cannot be completely avoided.

 

Category:

OECD / UN, Transfer Pricing

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