Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘transfer pricing documentation’

BEPS update

EY’s Global Tax Alert provides recent developments for BEPS by Australia, Austria, Belgium, EU, Germany, Iceland, India, Niger, and Romania.

http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_6_June_2016/$FILE/2016G_01449-161Gbl_The%20Latest%20on%20BEPS%20-%206%20June%202016.pdf

Highlights:

  • 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’s TP documentation: OECD+

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.

http://www.ey.com/Publication/vwLUAssets/Denmark_issues_stricter_requirements_for_transfer_pricing_documentation/$FILE/2016G_01098-161Gbl_TP_DK%20issues%20stricter%20requirements%20for%20TP%20documentation.pdf

Austria’s CbC / TP rules

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.

http://www.ey.com/Publication/vwLUAssets/Austria_publishes_draft_Transfer_Pricing_Documentation_Law/$FILE/2016G_01054-161Gbl_TP_Austria%20publishes%20draft%20Transfer%20Pricing%20Documentation%20Law.pdf

CbC Surrogate: A reporting trap!

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.

http://www.oecd.org/ctp/transfer-pricing/beps-action-13-country-by-country-reporting-implementation-package.pdf

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.

Dutch draft TP & CbC law

The Dutch State Secretary of Finance has released a draft law that correlates to BEPS Action 13 for transfer pricing documentation and country-by-country (CbC) report.

The CbC report will not be required to be filed in the Netherlands if such report is filed with a jurisdiction that has an information exchange agreement with the Netherlands on such reports.

http://www.ey.com/Publication/vwLUAssets/The_Netherlands_releases_draft_law_implementing_new_transfer_pricing_documentation_requirements_in_line_with_BEPS_Action_13/$FILE/2015G_CM5764_TP_NL%20releases%20draft%20law%20implementing%20new%20TP%20doc%20requirements%20in%20line%20with%20BEPS%20Action%2013.pdf

  • The draft law states that a transfer pricing adjustment may not be based on the CbC report.
  • The CbC report aligns with the BEPS Action 13 requirements.
  • The Master and Local file re: transfer pricing documentation will be required contemporaneously with the filing of the tax return, with such information to be provided upon request.
  • A criminal offense will take place, for the most serious cases, if the CbC reporting requirements are not satisfied.

The draft law should be reviewed by organisations with operations in the Netherlands, noting it follows the BEPS Action 13 proposal.

The contemporaneous requirement for the Master file and Local file should be met to avoid potential fines/penalties.

BEPS TP & CbC reporting: EY Survey

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:

http://www.ey.com/Publication/vwLUAssets/EY-country-implementation-of-beps-actions-8-10-and-13/$FILE/EY-country-implementation-of-beps-actions-8-10-and-13.pdf

Key observations:

  • 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).

Angolan TP documentation penalty: Lessons learned

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.

http://www.ey.com/Publication/vwLUAssets/Angolan_Tax_Authorities_apply_penalties_for_failure_to_file_transfer_pricing_documentation/$FILE/2015G_CM5706_TP_Angolan%20TAs%20apply%20penalties%20for%20failure%20to%20file%20TP%20documentation.pdf

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.
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