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25th Annual Health Sciences Tax conferenceTransfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
December 8, 2015
Page 1 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Disclaimer
► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.
► This presentation is © 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.
► Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.
► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.
► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.
Page 2 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Presenters
► Collin ImhofCelgene CorporationBerkeley Heights, NJ
► Bob PepeFormerly at Forest Laboratories Inc. and Pernix Therapeutics Holdings, Inc.
► Barbara AngusErnst & Young LLPWashington, DCbarbara.angus@ey.com+1 202 327 5824
► Gerrit GroenErnst & Young LLPNew York, NYgerrit.groen@ey.com+1 212 773 8627
► Siv SchultzErnst & Young LLPNew York, NY siv.schultz@ey.com+1 212 773 3818
Page 3 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Agenda
► Update on Organisation for Economic Co-operation and Development (OECD) BEPS project
► BEPS final reports – Immediate impacts to life sciences industry► Intangibles► Cost sharing► Risk and return► Transfer pricing documentation
► Reactions outside the US► Status of adoption of BEPS► Actions 8-10► Action 13
► Conclusions
Page 4 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Update on OECD BEPS project
Page 5 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
OECD BEPS project – Action Plan
SubstanceAction 6:
Preventing tax treaty abuse
Action 7:Avoidance of PE status
Action 8:Transfer pricing (TP)
aspects of intangibles
Action 9:TP/risk and capital
Action 10:TP/high-risk transactions
TransparencyAction 11:
Methodologies and data analysis
Action 12:Disclosure rules
Action 13:TP documentation and
country-by-country reporting
Action 14:Dispute resolution
Action 1: Digital economy
Action 15: Multilateral instrument
Coherence
Action 3: Controlled foreign
corporation (CFC) Rules
Action 4:Interest deductions
Action 5:Harmful tax practices
Action 2:Hybrid mismatch
arrangements
Page 6 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
OECD BEPS project timeline
February 12Initial Report:Addressing base erosion andprofit shifting
November 12-13Public consultationon transfer pricing(Actions 8 and 13)
July 16 Report:Action plan on baseerosion and profit shifting
July 30Revised discussion drafton transfer pricing forintangibles(Action 8)
July 30White paper on transferpricing documentation(TP Doc) (Action 13)
January 30Discussion drafton TP documentation andcountry-by-country(CbC) reporting(Action 13)
March 14Discussion drafton treaty abuse(Action 6)
March 19Discussion drafton hybrid mismatcharrangements(Action 2)
March 24Discussion drafton digital economy(Action 1)
April 14-15Publicconsultationon treaty abuse(Action 6)
April 24Publicconsultationon digitaleconomy(Action 1)
May 15Public consultationon hybrid mismatcharrangements(Action 2)
May 19Public consultationon TP documentation and CbC reporting(Action 13)
September 16Output delivered on:
Digital economy(Action 1)
Hybrid mismatcharrangements(Action 2)
Harmful tax practices(Action 5)
Treaty abuse(Action 6)
Transfer pricingfor intangibles(Action 8)
TP documentation andCbC reporting(Action 8)
Multilateralinstrument(Action 15)
2013 2014
Page 7 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
OECD BEPS project timeline
October 31Discussion Drafton permanentestablishment(Action 7)
2014 2015
November 3Discussion drafton low value-adding services(Action 10)
November 21Discussion drafton follow-up workon treaty abuse(Action 6)
December 16Discussion drafton profit splits(Action 10)
Discussion drafton commoditytransactions(Action 10)
December 18Discussion drafton value-added tax (VAT)/general sales tax (GST)Guidelines(Action 1)
Discussiondraft on interest(Action 4)
Discussiondraft on disputeresolution(Action 14)
December 19DiscussionDraft on Risk,Recharacterizationand Special Measures(Actions 8-10)
January 21Public consultationon PE(Action 7)
January 22Public consultationon treaty abuse(Action 6)
January 23Publicconsultationon disputeresolution(Action 14)
February 6Guidance onharmful taxpractices(Action 5),CbC reporting(Action 13)and multilateralinstrument(Action 15)
February 17Public consultationon interest(Action 4)
February 25Public consultationon VAT (Action 1)
March 19-20Public consultationon transfer pricing(Actions 8-10)
March 31Discussion drafton disclosure ofaggressive taxplanning(Action 12)
April 3Discussion drafton CFC rules(Action 3)
April 16Discussion drafton BEPS dataand analysis(Action 11)
April 29Discussiondraft on costcontributionarrangements(Action 8)
May 11Public consultationon disclosure ofaggressive taxplanning(Action 12)
May 12Public consultationon CFC rules(Action 3)
May 15Revised discussiondraft on PE(Action 7)
May 18Public consultationon BEPS dataand analysis (Action 11)
May 22Revised discussiondraft on treatyabuse (Action 6)
JulyPublicconsultationon transferpricing(Actions 8-10)
October 5Final reports on all actions items issued by the OECD
October 8G20 FinanceMinisters meeting
Page 8 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Final BEPS reports
► On October 5, 2015, the OECD issued its final reports on the 15 focus areas identified in its Action Plan on Base Erosion and Profit Shifting. These were discussed and endorsed at the G20 Finance Ministers’ meeting on October 8, 2015, and the G20 Leaders’ meeting on November 15-16, 2015.
► The recommendations range from new minimum standards to reinforced international standards to common approaches and best practices.
Common approaches and best practicesMinimum standards Reinforced standards
► Action 2 – Hybrid mismatch arrangements
► Action 3 – Controlled foreign company rules
► Action 4 – Interest deductions and other financial payments
► Action 12 – Mandatory disclosure rules
► Action 5 – Harmful tax practices
► Action 6 – Treaty abuse
► Action 13 – Country-by-country reporting
► Action 14 – Dispute resolution
► OECD Transfer Pricing Guidelines► Actions 8-10 (transfer pricing)► Action 13 (transfer pricing
documentation)► OECD Model Tax Convention
► Action 2 (hybrid mismatch arrangements)
► Action 6 (treaty abuse)► Action 7 (permanent
establishment status)► Action 14 (dispute resolution)
► The output also includes analytical reports on Action 1 (digital economy) Action 11 (economic analysis) and Action 15 (multilateral instrument)
Page 9 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
BEPS beyond 2015
► OECD activity► Continuation of unfinished technical work on various Actions► Negotiation of multilateral instrument► Peer review process with respect to treaty mutual agreement
procedure► Monitoring of country implementation of BEPS recommendations
► EU activity► Country activity
► BEPS-driven legislative and enforcement activity happening already
► BEPS-related changes in more than 50 countries since start of 2014
► G20 activity
Page 10 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
ObservationsBEPS is broader than tax
► Financial reporting► Treasury and finance► Mergers and acquisitions► Operating model/supply chain► Technology► Public profile
Page 11 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
BEPS Action items with transfer pricing focus (highlighted yellow)
Tax challenges of digital economy 1 3
Controlled foreign corporation rules2
Hybrid mismatch arrangements
4Deductibility of interest and other financial payments 6
Treaty abuse5
Harmful tax practices
7Artificial avoidance of permanent establishment status 9
Transfer pricing for risks and capital8
Transfer pricing for intangibles
10 Transfer pricing for other high-risk transactions 12
Disclosure of aggressive tax planning arrangements11
Development of data on BEPS and actions addressing it
13Transfer pricing documentation 15
Development of a multilateral instrument for amending bilateral tax treaties
14Effectiveness of treaty dispute resolution mechanisms
Page 12 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 5Harmful tax competition
What happened Questions to ask► Substantial activity criterion to determine whether tax
regimes are harmful► Nexus approach as the agreed approach► Intellectual property (IP) regimes for patents and
copyrights ► Grandfathering rules on existing IP regimes
(maximum five years)► Extended IP definition for enterprises with
revenue of less than EUR50m► Improving transparency
► Framework for the compulsory, spontaneous-exchange of information on certain rulings► Preferential regimes ► Unilateral advance pricing agreements
(APAs) or other cross-border unilateral rulings in respect of transfer pricing
► Cross-border rulings providing for a downward adjustment of taxable profits
► Permanent establishment rulings► Related-party conduit rulings
► Will more countries adopt IP regimes?► What is the interaction with Action 6 (treaty abuse)?► Impact on modeling, valuation and due diligence?► Migration to multilateral APAs?► Interaction with Action 14 (dispute resolution)?
Page 13 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 7Permanent establishment status
What happened Questions to ask► Preventing foreign enterprises from operating in a
country without creating a permanent establishment:► Commissionaire and similar sales and marketing
models are most likely to create the finding of a permanent establishment► Habitually concludes contracts or plays a
principal role leading to the conclusion of contracts
► Closely related parties not considered independent
► Article 5.4 activities restricted to preparatory or auxiliary► Some countries seem to have reserved for
this► Anti-fragmentation: preparatory or auxiliary
activities under the new article 5.4 that are cohesive with other business activities in the countries still create a permanent establishment
► Splitting up of contracts under general anti-avoidance (referenced in Action 6)
► No specific provisions for insurance (unlike discussion draft)
► What is the likely timing of treaty negotiations in countries where your company operates?
► Will changes be accelerated through the multilateral instrument?
► In which countries does your company claim auxiliary or preparatory treatment?
► What does your company’s sales negotiation process look like?
Page 14 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
BEPS final reports – immediate impacts to life sciences industry
Page 15 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
BEPS Action items specific to transfer pricing
Tax challenges of digital economy 1 3
Controlled foreign corporation rules2
Hybrid mismatch arrangements
4Deductibility of interest and other financial payments 6
Treaty abuse5
Harmful tax practices
7Artificial avoidance of permanent establishment status 9
Transfer pricing for risks and capital8
Transfer pricing for intangibles
10 Transfer pricing for other high-risk transactions 12
Disclosure of aggressive tax planning arrangements11
Development of data on BEPS and actions addressing it
13Transfer pricing documentation 15
Development of a multilateral instrument for amending bilateral tax treaties
14Effectiveness of treaty dispute resolution mechanisms
Page 16 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Actions 8 through 10 changing perceptions of entitlement to profit from intangibles
1980s 2015 1990s
Owner
Legal owner Legal owner
R&D funderInvestor
Controller/functional contributor
Developer DeveloperRoutine Developer
Developer/functional contributor
User UserPure user
Value contributor
Non-routine (residual claimant)
Routine
Legal owner
Economic owner
Developer
User
2000s
Page 17 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Actions 8 through 10Intangibles/risk and capital/high-risk transactions
What happened Questions to ask► New versions of:
► Chapter VI of the OECD TP Guidelines addressing intangibles
► Chapter VIII of the OECD TP Guidelines covering cost contribution arrangements
► New guidance on:► Commodity transactions (additions to Chapter II
of the OECD TP Guidelines)► Low-value-adding intragroup services (revisions
to chapter VII of the OECD TP Guidelines)► Amended guidance on:
► Identification of the actual transaction undertaken ► Control of a risk► When the actual transaction undertaken may be
disregarded for transfer pricing purposes► Unchanged guidance (2014 Report on Intangibles) on
comparability factors including:► Location savings, assembled workforce and
multinational enterprise group synergies (additions to chapter I of the OECD TP Guidelines)
► What is the relevance of OECD Transfer Pricing Guidelines in the countries where your company operates?► No relevance► Soft law► Reference to OECD TP Guidelines
► When and how do revisions to these guidelines become effective in these countries?
Page 18 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 8Transfer pricing for intangibles
Description► Recommendations contain revised standards
for transfer pricing of intangibles, including:
i. The definition of intangibles
ii. Guidance on hard-to-value intangibles
iii. Identifying and characterizing controlled transactions involving intangibles
iv. Determining arm’s-length conditions for transactions involving intangibles
v. Ensuring that intangible-related profits are allocated in accordance with value creation (development, enhancement, maintenance, protection and exploitation (DEMPE)) functions
vi. Revised guidance on cost contribution arrangements
Status/next steps► Final report issued on October 5, 2015
► Final guidance on the application of the transactional profit split method for pricing intangible transactions expected in early 2017
Page 19 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 8 Cost contribution arrangements (CCAs)
Description► The final provisions of Chapter VIII of the OECD TP
Guidelines are deleted in their entirety and replaced by new guidelines.
► Key features of the report include:
i. A revised definition of the concept of a CCA
ii. Two commonly encountered types of CCAs: “development CCAs” and “services CCAs”
iii. A requirement that CCA participants must have the capability and authority to control the risks associated with the CCA activities
iv. New guidance requiring contributions to be measured at value rather than at cost
v. New guidance on estimating shares of each participant’s expected benefits from the CCA
vi. Five examples illustrating the principle that a CCA participant should control the risk and that contributions by participants in CCAs should generally not be measured at cost
Status/next steps► Final report issued on October 5, 2015
► As per the 2010 OECD TP Guidelines, expectations of mutual benefit remain a prerequisite to participate in a CCA
► The novelty in the 2015 TP Guidance is that control is now a prerequisite for an enterprise to be a participant in a CCA
► The OECD’s goal in this area is to ensure transfer pricing results align profits with value-creating functions and the control of risks
► Where groups have separated functions that contribute to value creation from the entities that realize the profits, relevant contributions of each entity are assessed using the existing framework to determine which entity within the group controls the economically significant risks
Page 20 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Actions 8 through 10 – transfer pricing for risks and capital and other high-risk transactions
Descriptioni. Transfer pricing guidance for low value-adding
intragroup services to provide protection against common types of base eroding payments
ii. Adopting transfer pricing rules/special measures to clarify situations wherein transactions can be recharacterized
iii. Developing rules on use of profit splits in the context of global value chains
iv. Developing transfer pricing rules with respect to cross-border commodity transactions
Status/next steps► Final guidance issued in October 2015
► Follow up work to be done on the transactional profit split method during 2016 and 2017
► New guidance will be supplemented with further work on profit split and financial transactions
Page 21 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Actions 8 through 10 Impacts on life sciences companies
► Typically, intangibles are a key focus in life sciences planning strategies► Intercompany licenses, cost sharing, research and development (R&D) funding, etc.► Another closely linked element of planning is the allocation of risk
► Definition of intangible property► Intangible definition in draft guidelines generally consistent with life sciences concepts such as
patents, technology/know-how or regulatory approval/government licenses► However, the revised guidelines provide more focus on a broader category of intangible that
may be transferred only in combination with other assets, such as goodwill► How does the clarification on marketing intangibles affect the return to limited risk distributors?
► Role of functions and risk► More emphasis on controlling risk may impact entities that:
► Bear product liability► Pay for R&D► Are responsible for quality control
► Potential challenges to late-stage licenses and licensee’s management of product commercialization
Page 22 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Actions 8 through 10Impacts on life sciences companies
► Impact of revised guidelines on pricing methodologies► Comparable uncontrolled price method – Continues as a viable method with increased focus on
comparability► Profit split – Subject to further work, more discussion on the reliability of projections► Valuation techniques – Brings in US cost-sharing concepts
► Effect on supply chain operations► More need for substance and control in principal location
► Can you demonstrate that key value drivers are controlled by the licensee and its IP licensor?
► Will the greater focus on “value contributors” translate to more returns to R&D service providers?
► Do you have inter-company transactions where one or both parties use intangibles in connection with the sale of goods or provision of services?
Page 23 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 13Master and local file
What happened Questions to ask► Master file requires information on:
► Operating entities ► Supply chain► Intangible property ► Treasury operations ► Rulings and APAs► Global transfer pricing policies
► Local file requires information on:► Management structure ► Organization chart► Business and business strategy► Material controlled transactions ► Local entity financial statements ► Transfer pricing methods
► Which countries where your company operates require new transfer pricing documentation?► Are the reporting requirements the same?► What are the association thresholds?
And what does this mean?► When should this be done?
► Along with/instead of normal transfer pricing filing
Page 24 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 13Country-by-country reporting
What happened Questions to ask► Reporting required by multinational corporations with
revenue of EUR750m or more► To be implemented for fiscal years beginning on or
after 1 January 2016 ► Generally January 1, 2016 be filed in country of tax
residence of ultimate parent entity and shared with other countries through automatic exchange of information
► Aggregate country information on revenues, profit, cash taxes, accrued taxes, stated capital, accumulated earnings, employees and tangible assets
► What entities are in your company’s group?► Does your company meet or exceed the de minimis
threshold?► Will that change year to year?
► Is your company headquartered in a jurisdiction that will implement country-by-country reporting?► What if your company is headquartered in a
country that will not implement such reporting?► How will tax authorities look at your country-by-
country reporting?
Other considerations► Expansion of European Union Capital Requirements
Directive (CRD) IV reporting?► Potential for public reporting?
Page 25 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
Page 26 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Status of adoption Country implementation of BEPS
BEPS news since 2014
BEPS news (source: EYbi-weekly newsletters)
Red – more than 10Yellow – between 5 and 9Green – between 1 and 4Grey – none
Page 27 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Status of adoption Country implementation of BEPS
► Countries in which the amended OECD TP Guidelines (which reflect the BEPS Actions 8-10 recommendations), will apply automatically without the need for legislative action as soon as they are formally approved by the OECD’s Council: ► Hungary► Mexico► Norway► Ireland (some form of administrative action is required)► Australia (some form of administrative action is required)► UK (an order from the Treasury is needed)
Page 28 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Overview of countries with Actions 8-10 activities
Proposed amendments to Circular 2
Page 29 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 13 – CbC reporting Implementation status
Already implementedImplementation in progress
Status
US will require CbC reporting for calendar year 2016
Non-compliance is a criminal offense in the Netherlands
Mandatory for large UK-parented groups only
► Spain group definition based on control► Does not include surrogate parent concept► Equity rather than stated capital and
accumulated earnings
China: Filing due with tax return May 31
Norway
DenmarkPoland
Spain
Netherlands
United Kingdom
China
Australia
Mexico
Page 30 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 13 – CbC reporting adopted
OECD Mexico Spain Poland
Status Adopted legislative change applicable as of 1 January 2016
Adopted implementing regulations applicable as of January 1, 2016
Adopted regulations applicable as of January 1, 2016
Who Ultimate parents of group with revenue of EUR750 million or greater
Threshold of 12 billion pesos (approximately EUR650 million)
When For fiscal years starting in 2016, with filing within 12 months from fiscal year-end
Secondary filing rule
1. Local filing Or2. Filing by named “surrogate
parent” entity
Local filing None
Penalties Left to countries In addition to penalties, non-compliant taxpayers may be disqualified from entering into contracts with the Mexican public sector.
General penalty for non compliance with reporting obligations
General penalty for non-compliance with reporting obligations
Consistent with OECD recommendations
Page 31 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 13 – CbC reporting proposed
OECD United Kingdom Australia Denmark China Netherlands Ireland France
Status Draft regulationspublished
Implementing bill produced andunder review
Draft legislation published
Draft legislation published
Draft legislation published
Draft legislation published, further regulations to be developed
Draft legislation passed by the lower chamber of the Parliament
Who Ultimate parents of group with revenue of EUR750 million or greater
Threshold of £586 million (approximately EUR 790million)
Threshold of AUD 1 billion (approximately EUR 670 million)
Threshold of DKK 5.6 billion (approximately EUR 750 million)
Threshold of RMB 5 billion (approximately EUR 705 million)
When For fiscal years starting in 2016, with filing within 12 months from fiscal year-end
To be filed together with the annual tax return (due May 31); possible to apply for an extension.
Secondary filing rule
1. Local filing Or2. Filing by
named “surrogate parent” entity
Voluntary local filing
Local filing Local filing
Penalties Left to countries Specific penalty for non-compliance
General penalty for non-compliance
General penalty regime
General penalty regime
Criminal penalty for non-compliance
Penalty applicable for not complying with tax return obligation
Specific penaltyregime; should not exceed EUR 100,000
Consistent with OECD recommendations
Page 32 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Master/local fileImplementation status
Already implementedImplementation in progress
Status
Poland: master file mandatory for entities larger than EUR20 million, local file more than EUR10 million
Spain: mandatory for groups larger than EUR45 million
Singapore and Greece already implemented documentation requirements similar to Action 13 master file and local file
NorwayDenmark
Poland
Spain
Netherlands
China
Australia
Korea
Singapore
Mexico
Page 33 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Action 13 – master file and local file adopted and proposed
Singapore Spain Poland Mexico Australia China Netherlands South Korea
Status Transfer PricingGuidelines adopted on January 6, 2015 with immediate effect
Adopted implementing regulations to apply as of January 1, 2016
Adopted regulations to apply as of January 1, 2017
Adopted legislative change applicableas of January 1, 2016
Implementing Bill produced and under review
Draft legislation published
Draft legislation published
Draft budget proposal published on August 6, 2015
Who Based on the type of the transaction and its value (several dollar value thresholds)
Groups with an aggregate net turnover lower than EUR 45 million in the preceding year would be exempt from the preparation of the master file
Polish tax residence entities with revenue or cost over EUR 20 million
Entities that currently have a TP documentation obligation in Mexico
Entities that are part of a group whose annual global revenue exceeds AUD 1 billion
Entities that currently have a TP documentation obligation in China.
Entities that are part of a group whose annual global revenue exceeds EUR 50 million
Domestic corporations that have transactions and assets exceeding specific thresholds to be defined and foreign corporations having a permanent establishment in Korea
When Upon request, but must be ready by the time the tax return is submitted
Upon request No filing obligation, however Management Board would need to attach to corporate income tax return their confirmation that documentation is complete
Upon request, but must be ready by the time the tax return is submitted
Not clear yet Upon request, but must be ready by the time the tax return is submitted
Upon request By the corporate tax return filing due date
Penalty The general penalty regime will apply
The new enforced penalties amount to EUR1,000 per omitted or false fact, or EUR 10,000 per group of omitted or false facts, as well as a 15% of the gross adjustment, if applicable
The general penalty regime would apply
In addition to penalties, non-compliant taxpayers may be disqualified from entering into contracts with the Mexican public sector
Not clear yet The general penalty regime would apply
The general penalty regime would apply
Failure to comply with the reporting requirement will result in a penalty not higher thanKRW 10 million (USD 8,500).
Page 34 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
China► In mid-September, China released a consultation draft circular,
“Implementation Measures for Special Tax Adjustments”► The Measures would replace the 2009 “Circular 2,” which governs transfer pricing
in China► Key provisions of the Measures include:
► New chapter on intangibles, similar to BEPS guidance but with a sharper focus on market “promotion” activities; DEMPE operations are repackaged as DEMPEP, with the final P standing for promotion as value creating function► Emphasizes importance of ‘middle value chain activities’ often performed in China (trial
production, etc.)► New chapter on services, following OECD “benefit test” but with broader definition
of “shareholder” activities► Numerous anti-profit-shifting provisions, such as disallowing deductions for
payments to limited-substance affiliates► BEPS “value creation” focus is reflected in extensive requirements for “value chain
analysis”
Page 35 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
Singapore► In January 2015, Singapore’s tax authority, the Inland Revenue Authority of
Singapore (IRAS) published its updated e-Tax Guide on Transfer Pricing. The guidelines set out clarifications on the need for companies to prepare contemporaneous transfer pricing documentation, as well as the documentation requirements, exclusions and materiality thresholds, and various procedures that apply.
► The nexus approach requiring substance is somewhat established in Singapore as firms have to demonstrate substance to qualify for tax incentives.
► The Singapore Ministry of Finance indicated that it welcomes the OECD recommendations, and Singapore has already implemented measures that have parallels to the approach outlined in the BEPS reports.
► Singapore is generally expected to implement all BEPS Action items.
Page 36 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
Ireland► The Minister announced that Ireland would be one of the first countries in the
world to introduce CbC reporting.► The Irish Strategy Statement Update reaffirms the Irish government’s
commitments in an international tax context and outlines how the country will respond to the OECD BEPS reports and emerging tax-related proposals from the European Union.
► Ireland has actively engaged in the OECD’s BEPS project and will continue to engage in the project’s remaining work.
► In October 2015, Finance Bill 2015 was published. It includes draft legislation on Ireland’s new intellectual property regime – the Knowledge Development Box – following the OECD’s recommendations, expected to be effective as of January 1, 2016 (alignment with modified nexus approach of BEPS Action 5).
Page 37 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
UK► On October 5, 2015, the United Kingdom’s (UK) HM Revenue & Customs
(HMRC) published a draft statutory instrument that would implement CbC reporting in the UK for accounting periods beginning on or after January 1, 2016.
► Certain countries have introduced anti-avoidance legislation in response to BEPS Action 7 and Actions 8-10 with the most notable development being the diverted profits tax (DPT) recently introduced in the UK.
► The UK DPT took effect from April 1, 2015, and can potentially affect captive insurers located anywhere in the world whether the affiliated group is headquartered in the UK or overseas.
► Draft patent box legislation expected in December 2015 (alignment with BEPS Action 5) should be limited to jurisdictions where IP research and development is undertaken based on the OECD’s nexus approach
Page 38 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
Netherlands► Netherlands is only willing to unilaterally amend its legislation with respect to
BEPS Actions that prescribe clear minimum standards (CbC reporting (BEPS Action 13), treaty abuse (BEPS Action 6) and transparency/exchange of (info on) rulings (BEPS Action 5 and EU standard)). Other actions should be implemented on a multilateral basis through hard law (i.e., multilateral instrument (BEPS Action 15) or EU “specific BEPS” directive).
► An anti-hybrid financing rule has been introduced (implementation of amendments to Parent – Subsidiary Directive and BEPS Action 2) effective as of January 1, 2016.
► An update of the innovation box regime is expected by January 1, 2017 (alignment with BEPS Action 5).
Page 39 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Reactions outside the US
Switzerland► The third series of corporate tax reforms currently under way takes certain
BEPS outcomes into account:► Provision is made for a standard-compliant patent box (or royalty box)► Certain Swiss tax regimes are being abolished (cantonal holding privilege)
► Switzerland will create the necessary legal basis for the exchange of information on tax rulings with the approval of the OECD/Council of Europe multilateral administrative assistance convention.
► The Federal Council has instructed the Federal Department of Finance, in collaboration with the cantons and business circles, to analyze the amendment of Swiss corporate tax law in the light of international developments.
Page 40 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Conclusions
Page 41 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Final thoughts
► Next steps on BEPS► Country reactions► For more information, please visit the EY BEPS website:ey.com/GL/en/Services/Tax/OECD-base-erosion-and-profit-shifting-project
Page 42 Transfer pricing in life sciences – key developments and reaction around the world to base erosion and profit shifting (BEPS)
Questions?
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