As of 1/1/2021, the TP Master File and Local File are required to be submitted to the tax authorities within 60 days after filing the tax return, with daily penalties imposed for not meeting the timeline.
The permanent establishment (PE) rules are also being modified: the PE definition will be conformed to the 2017 OECD definition, with deviations for a building site becoming a PE from day 1, and a trading activity is required for a PE resulting from investments in shares, receivables and financial instruments.
Additionally, the Court of Justice of the European Union (CJEU) on 12 June 2018 (case C-650/16, Bevola) held that Danish law was incompatible with European Union law because a Danish company could not claim a tax deduction for a final loss in a foreign PE. Denmark’s revised guidance will be effective from 2019, providing opportunities to claim such losses.
EY’s Global Tax Alert provides recent developments for BEPS by Australia, Austria, Belgium, EU, Germany, Iceland, India, Niger, and Romania.
Australia: Local File is OECD +, going beyond OECD’s recommendations, including transactional detail. This development is proving that global consistency is a rapidly fading ideal, as countries legislate what they think benefits them the most. Unfortunately, this adds to the cost, time and complexity of preparing global reports.
Austria: Transfer pricing documentation draft regulations follows the OECD.
Economic and Financial Affairs Council of the European Union (ECOFIN): EU Member States Finance Ministers, envision adopting the Anti-Tax Avoidance Directive on 17 June 2016, subject to amendments. Legal agreement was also reached on adoption of the Directive on the exchange of non-public country-by-country tax information. Conclusions were also adopted on the European Commission communication on an external tax strategy and tax treaty abuse measures.
Germany: Transfer pricing technical draft introducing transfer pricing documentation standards as recommended by the OECD. Master File and Local File documentation requirements introduced.
India: A 6% Equalization Levy (EL) to apply on gross payments for certain digital services received by a nonresident.
Niger: Thin capitalisation rules introduced.
Romania: To become a BEPS Associate and participate in the OECD’s framework.
As the above developments note, BEPS guidelines and intent remains very strong in the global community, with many changes already made and many more to come.
Denmark has new transfer pricing documentation rules in place, effective for tax year 2016, while country-by-country (CbC) reporting for non-Danish HQ companies is delayed until tax year 2017.
The local transfer pricing file is to include a copy of intercompany arrangements and details of IP re: “DEMPE” functions including the Development, Enhancement, Maintenance, Protection and Exploitation attributes.
The additional details extend beyond the OECD Guidelines and will lead to further complexity re: the ability to efficiently provide globally consistent transfer pricing documentation around the world. This may be followed by other countries as they follow the particular leader at the team, and thus EY”s Alert should be reviewed by interested tax practitioners.
The Austrian Ministry of Finance has published its new country-by-country (CbC) and transfer pricing (TP) draft legislative rules, detailed in the referenced EY Global Tax Alert.
The Multilateral Competent Authority Agreement on the Exchange of Country by Country Reports is now included in Austrian domestic law. Moreover, the legal requirements stipulated in the European Directive regarding mandatory automatic exchange of information in the field of taxation (2011/16/EU) is now national law.
The CbC and TP documentation are effective for the 2016 taxable year. TP documentation can be requested by the tax authorities within 30 days after filing the corporate income tax return. CBC information is required, dependent on the size of the organisation, and is subject to significant penalties for late filing/inaccurate information. Information on surrogate entity filing is also within the draft guidance.
Notification of the CbC filer is required by the end of this year, as in several other countries, requiring all US based multinationals to monitor the EU pending legislation and consider alternatives for filing if the US Final Regulations do not obligate CbC filing for the 2016 tax year.
The BEPS/CbC/transparency impetus is still growing, with no signs of slowing down. Demands for additional transparency are mounting, while the complexity of reporting, and filing, the respective reports is significantly increasing.
OECD’s BEPS Action 13 provides for a Surrogate Entity substitution concept if the headquarter jurisdiction of a multinational does not provide for country-by-country (CbC) reporting for the 2016 tax year. The concept is ideal, if a CbC reporting country considers this Surrogate Entity concept in its legislation.
A review of CbC legislative actions by different countries reveals that such legislation will be inconsistent and will require the multinational to file separate CbC reports in various countries, irrespective of its choice of appointing a surrogate country that has an extensive tax treaty network with exchange of information provisions.
For example, the legislative language of Spain does not provide for the Surrogate Entity concept, thereby requiring a Finnish (and possibly U.S., dependent on Final Regulations) based multinational to file the 2016 Spanish CbC report in Euros. One of the Spanish tax authority representatives recently expressed an opinion that no advance rulings/arrangements will be acceptable for CbC Surrogate Entity filing: The law is the law.
Several issues for consideration by a multinational thinking of a Surrogate include:
Every country’s CbC adopted legislation will require review to determine if a Surrogate filing is acceptable.
For countries that will require a local filing, adoption of such country’s CbC rules will be required re: content, timing, reporting currency, etc.
Upon conclusion of the dynamic review, the CbC template may require adaptation for local filings of countries that have OECD + CbC legislation, adding details beyond those prescribed in BEPS Action 13.
Most countries have penalties (fines/civil/criminal) applicable for failure to file a CbC report.
The definition of a Surrogate Entity, in addition to BEPS Action 13, are included for reference.
The term “Surrogate Parent Entity” means one Constituent Entity of the MNE Group that has been appointed by such MNE Group, as a sole substitute for the Ultimate Parent Entity, to file the country-by-country report in that Constituent Entity’s jurisdiction of tax residence, on behalf of such MNE Group, when one or more of the conditions set out in subsection (ii) of paragraph 2 of Article 2 applies.
EY’s survey of nearly 100 jurisdictions provides timely insight into unilateral activities and required legislative efforts to implement OECD BEPS Actions 8-10, transfer pricing guidelines, and Action13, transfer pricing documentation / country-by-country (CbC) reporting.
A link to the survey is provided for reference:
OECD TP Guidelines:
7 countries (including the UK) to adopt the changes without need for legislative/administrative action
54 countries refer to OECD TP Guidelines by tax authorities/courts for interpretation, but are not binding
21 countries refer to OECD TP Guidelines in domestic legislation
TP Guidelines are meant to be an extension of the Commentary to the arm’s length principle in Article 9; if the revised Guidelines go beyond such rules a change in existing treaties will be required for implementation, although the multilateral instrument in development under Action 15 may remedy this
Tax authorities have used BEPS initiatives for leverage in Australia, Spain, Hungary, New Zealand, Finland, Indonesia, France and India
TP and CbC documentation may be provided as an exchange of information if they are “foreseeably relevant”
Legislative action will be required in most countries with current TP legislation to implement Master / Local File requirements
Most countries will require a change in law for CbC reporting; 38 countries are/will have such implementation legislation, 49 countries are not yet known, while only 11 countries are not expected to implement in the short/medium term
CbC information will be widely exchanged via exchange of information articles in double-tax treaties, tax information exchange agreements or Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (and the corresponding Multilateral Competent Authority Agreement)
The survey is a “must read” for interested parties that will be affected by OECD Actions 8-10 and 13; it magnifies the imperative of collecting such information timely and is not dependent on which countries adopt certain provisions the first year (as information will be exchanged quickly around the world regardless of which jurisdiction the parent entity resides in).
The Angolan transfer pricing documentation submission deadline was 30 June 2015 re: tax year 2014 for large taxpayers. EY’s publication provides details on the recent enforcement penalties, including business limitations and reputational risk considerations notwithstanding the insignificant penalty amount for late filing.
Key observations / lessons learned:
Insignificant monetary penalties due to non-filing or incomplete transfer pricing documentation may be a consideration in modifying a standard OECD documentation template based on cost/benefit. However, other factors that may be ignored in this analysis may have more inherent risks for consideration.
Business and reputational risks should be an essential input for filing complete, and accurate, transfer pricing documentation.As countries seek to individualize such documentation, this task is more timely and costly, although ignoring such nuances may prove to be damaging.
In Angola, the list of non-compliant taxpayers are provided to the National Bank of Angola (via requirements of a Presidential Decree). Accordingly, inclusion on this list may limit foreign exchange transactions ongoing.
EY’s Global Tax Alert provides a succinct summary of the latest BEPS (incentivized) developments around the world. A link to the Alert is provided for reference:
Overview of the Alert:
OECD: Documents re: initiative for automatic exchange of financial account information
Africa: Best Practice regional meeting to develop measures for countering BEPS
Australia: Exposure draft law re: transfer pricing documentation to be effective 1/1/2016
Brazil: Report to eliminate interest on net equity (INE) regime
Chile: Foreign residents are to provide a sworn statement to receive treaty benefits
Europe: TAXE Committee’s interim report re: tax rulings and BEPS related topics
Ireland: Knowledge development box
Italy: Patent box regime
Japan: Interest limitations
Korea: VAT re: electronic services
Luxembourg: EU Parent-Subsidiary Directive inclusions (anti-hybrid and anti-abuse clauses)
Saudi Arabia: Virtual Service PE
Spain: Patent box regime
The Alert highlights the continuous and frenzied pace of the BEPS measures, as well as the unilateral efforts that are mirroring the intent of BEPS, although not necessarily in a consistent and cohesive framework.
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:
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.
The OECD has provided additional information re: the timeline and mechanism for providing the Country-by-Country (CbC) template. A link to the document is included herein:
Summary of key points:
Master file and local file should be implemented by, and filed directly with, the relevant jurisdiction
Information to be provided for fiscal years beginning on or after 1/1/2016
Information to be filed by ultimate parent by 31 Dec. 2017 in their jurisdiction of residence
Exemption for MNE groups with annual consolidated revenues less than EUR 750M in immediately preceding year
The countries participating in the OECD / G20 BEPS Project agree that they will not require filing of a CbC report based on the new template for fiscal years beginning prior to 1/1/2016
Secondary reporting mechanism re: sharing of information between jurisdictions
Monitoring mechanism coupled with a 2020 review
The participating countries agree to:
Consistency (i.e. no additions or changes to template requirements)
Appropriate Use: No income allocation formula adjustments; CbC report adjustments are to be conceded by their Competent Authority
The guidelines are fairly short and concise, and it will be important to monitor laws in the parent jurisdiction for details of the respective filing process. Additionally, it is even more important to watch countries that are NOT participating in the BEPS Project for different timelines, information and processes to be followed for customized CbC templates that would create additional complexity and global inconsistency.
The Davis Tax Committee has released its First Interim Report on Base Erosion & Profit Shifting (BEPS), including an introductory document and comprehensive analyses of the following BEPS Action Items:
1, Digital Economy
2, Hybrid Mismatches
5, Harmful Tax Practices
6, Treaty Abuse
8, Transfer pricing re: intangibles
13, Transfer pricing documentation
15, Multilateral instrument
Summary of recommendations
The Committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability. Links to the Media Statement, Davis Tax Committee’s website and Report are provided for reference:
Comments by all interested parties should be submitted by 31 March 2015.
The documents are a valuable reference in comprehending each of the OECD BEPS Action Items of the Report, not only the viewpoint of S. Africa. Most importantly, it outlines the tax policies for continued foreign direct investment balanced against BEPS and General Anti-Avoidance Rule (GAAR) initiatives, while providing tax transparency and certainty with a balanced, sustainable tax policy going forward.
The Inland Revenue Authority of Singapore (IRAS) has issued a consultation paper requesting comments on a revision to their transfer pricing (TP) guidelines. The particular questions for which comments are requested, no later than 24 September, consist of the following:
Challenges in preparing TP documentation contemporaneously
Difficulties in obtaining group and entity information in Annex A of the paper
Examples of low-risk documentation areas
Frequency of documentation updates
A link is provided for reference to the consultation paper:
TP documentation to be organized in alignment with the OECD master file and local entity reporting methodology.
TP documentation not applicable for routine services with a 5% safe harbour mark-up
Inadequate TP documentation will lose the support of IRAS in MAP discussions to resolve double taxation.
Annex A provides additional requests for group information that may be the source of requested comments, including:
Worldwide organization chart
Group’s business models and strategies
Profit drivers, including a list of legal ownership for intangibles
Supply chain activities and functions
Business relationships among all related parties
Group’s transfer pricing policies for all types of transactions between related parties
Consolidated group financial statements
Singapore is a jurisdiction (and there may be many more) that is reviewing the OECD’s Action Plan country-by-country reporting template and forthcoming comments as a base upon which to expand TP reporting.
Multinationals will need to capture every country’s additional legislative requirements arising from the OECD’s Action Plan. The additional complexity, cost and time will place a further constraint upon the ability to provide information perceived to be directly relevant for every jurisdiction around the world. Additionally, the threat of lack of support for the MAP process via a determination of inadequate TP documentation (if legislated into law) will increase the risk of double taxation and TP appeals worldwide.
All interested parties should take time to submit comments prior to the 24 September deadline.
OECD has just published their Discussion Draft on Transfer Pricing Documentation and Country-by-Country reporting, with comments due by 23 February. A reference to the Draft is hereby provided:
The Discussion Draft raises many questions and scenarios open to comment, with a very limited time frame in which to remit such comments. All multinationals and interested parties should prioritize a review of this document and consider submitting comments, as it will be a cornerstone for additional reporting and documentation in the near future.
The OECD has provided a discussion memorandum in advance of its 12-13 November public consultation on the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles and the White Paper on Transfer Pricing Documentation. The memorandum presents questions for discussion in addressing implementation issues of a country-by-country reporting template. A summary of the memorandum is provided, with a link for reference:
The memorandum outlines two questions, with alternatives provided for each:
What information should be required?
A. The most critical item will be a report of income earned in a country, with the following approaches outlined.
Net income before tax for each legal entity
Taxable income per tax returns
Accounting segment reporting rules
Internal consolidating income statements
B. Taxes paid by country
Cash or accrual basis
National vs. local income taxes
C. Measures of economic activity
Revenues by customer location
Tangible assets by location
Employees / payroll
Research expenditures by company/country
Marketing expenditures by company /country
Location of intangibles by country
Location of senior management (e.g. 25-50 most highly compensated employees of group)
An interesting comment is also provided for insight: “A key question is whether such reporting will provide any meaningful guidance for risk assessment purposes about the location of real economic activity.” It is noted that the emphasis seems to focus on economic activity, with little mention of transfer pricing functions, assets, or risks.
What mechanisms should be developed for reporting or sharing country-by-country data?
Template completed by parent company and shared via treaty exchange of information mechanisms
Exclusion of information to countries where adequate provisions do not exist to protect confidentiality
Template inclusion in global master file to every country in which there is an affiliate subject to tax
These developments provide valuable insight into the future trend of transfer pricing documentation that will provide numerous challenges for every multinational.