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OECD BEPS project outcomes:Focus on Transfer Pricing related Actions

TEI Carolinas Chapter12 November 2015

OECD BEPS project outcomes: Focus on Transfer Pricing related Actions

Karen KirwanEY International Tax Services—Transfer PricingWashington, DC

OECD BEPS project outcomes:Focus on Transfer Pricing related Actions

Final BEPS reports

Minimum standards

► Action 5 – Harmful tax practices

► Action 6 – Treaty abuse► Action 13 – Country-by-

country reporting► Action 14 – Dispute

resolution

Reinforced standards

► 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)

Common approaches and best practices

► Action 2 – Hybrid mismatch arrangements

► Action 3 – Controlled foreign company (CFC) rules

► Action 4 – Interest deductions and other financial payments

► Action 12 – Mandatory disclosure rules

► On 5 October 2015, the OECD issued its final reports on the 15 focus areas identified in its Action Plan on Base Erosion and Profit Shifting (BEPS). These were discussed and endorsed at the G20 Finance Ministers' meeting on 8 October 2015.

► The recommendations range from new minimum standards to reinforced international standards to common approaches and best practices.

► The output also includes analytical reports on Action 1 (digital economy), Action 11 (economic analysis) and Action 15 (multilateral instrument)

Further development

► Follow on work on several Actions► Framework for monitoring country implementation and

involvement of additional countries

Impact of BEPS final reports

Immediate impact

► Action 8 – Transfer pricing for intangibles

► Action 9 – Transfer pricing for risks and capital

► Action 10 – Transfer pricing for other high-risk transactions

► Action 13 – Transfer pricing documentation and country-by- country reporting

Treaty-based action

► Action 2– Hybrid mismatch arrangements

► Action 6 – Treaty abuse► Action 7 – Permanent

establishment status► Action 14 – Dispute resolution ► Action 15 - Multilateral

instrument

Legislative action

► Action 2 – Hybrid mismatch arrangements

► Action 3 – CFC rules► Action 4 – Interest

deductions and other financial payments

► Action 5 – Harmful tax practices

► The final reports on the 15 Actions differ in timing of impact and further steps are needed.

► Some measures may have (almost) immediate effect in a number of countries; others require treaty based action or legislative action by countries. The OECD also has announced plans for additional work on some Actions.

Country-by-Country reportHigh level information about

MNC’s jurisdictional allocation of revenue, profit,

taxes, assets and employees to be shared

with all tax authorities where MNC has operations

Action 13: Country-by-Country reporting (CbC)Who, when, where, how and what?

► Multinational groups with consolidated revenue of € 750 million or more

► Fiscal years beginning on or after 1 January 2016, with first Country-by-Country (CbC) reports to be filed by 31 December 2017

► Filing with tax authority in parent country, to be shared with tax authorities in countries where group has entities or branches► Secondary reporting either

directly by each local entity or for group by ‘surrogate parent’ entity

Transparency

readiness

Master fileHigh level information

about MNC’s business, transfer pricing policies and

agreements with tax authorities in single

document available to all tax authorities where MNC

has operations

Local fileDetailed information about

MNC’s local business, including related party

payments and receipts for products, services,

royalties, interest, etc.

CbC reporting templateTable 1 and Table 2

Tax jurisdiction

Revenues

Profit (loss) before

income tax

Cash Tax Paid (CIT and WHT)

Current year tax accrual

Stated capital

Accumu

lated earnings

Tangible assets other

than cash and cash

equivalents

Number of employeesUnrelated

partyRelated

partyTotal

1.

2.

3.

4.

5.

Tax jurisdiction

Constituent entities

resident in the tax

jurisdiction

Tax jurisdiction of organization

or incorporation if different from

tax jurisdiction of residence

Main business activity(ies)

R & D

Holding or managing

IP

Purchasing

or procurement

Mfg or

production

Sales, marketing or distri.

Admin., Mgmt

or suppor

t service

s

Provision of services

to unrelated

parties

Internal

group

finance

Regulated

financial

services

Insurance

Holding shares or other equity

instruments

Dorman

t

Other

1.

2.

3.

1.

2.

Table 1:

Table 2:

CbC reporting Implementation status

China: Filing due with tax return on31 May

Spain’s group definition based on control

Does not include surrogate parent concept

Equity rather than stated capital and accumulated earnings

Non compliance is a criminal offense in the Netherlands

Mandatory for large UK parented groups only

Already implementedImplementation in progress

Status

CbC reporting Implementation specifics

OECDUnited

KingdomSpain Poland Australia Denmark China Netherlands Mexico

Status Implementation packages released in February and June 2015 with model legislation and model competent authority agreements

Draft regulations published

Adopted implementing regulations on 11 July 2015

Draft regulations published

Implementing Bill produced and under review

Draft legislation published

Draft legislation published Draft legislation published

Draft legislation published

Who Ultimate Parents of group with revenue of EUR 750 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)

Threshold of 12 billion pesos (approximately EUR 650 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 31 May). Possible to apply for an extension. Enforcement period not specified.

Secondary filing rule

1. Local filing or2. Filing by named

“Surrogate Parent” entity

Voluntary local filing

Local filing Not required Local filing Local filing No information yet

Penalties Left to countries Specific penalty for non compliance

General penalty for non compliance

Transfer pricing documentationpenalties



Criminal penalty for non compliance


Consistent with OECD recommendations

Who is the reporting entity?

Ultimate Parent Surrogate Parent Any local entity

Group: Collection of two or more enterprises related through ownership or control such that it is required to prepare consolidated financial statements (or would be so required if publicly traded)

► Top entity► No other entity owns a

controlling interest

► If country of Ultimate Parent does not require CbC reporting for the Group, or

► Local country is not receiving CbC report from Ultimate Parent jurisdiction

► Unless the Group appoints Surrogate Parent, and

► Local country rules allow for Surrogate Parent

► If country of Surrogate Parent requires CbC reporting and local country has arrangement in place to receive such information from country of Surrogate Parent, and

► Country of Surrogate Parent and local country both have been informed

► Files CbC report with tax authority in each such local country under country’s rules

► Files CbC report with tax authority where it is resident

► Tax authority will share with other countries under information exchange relationships

► Files CbC report with tax authority where it is resident

► Tax authority will share with other countries under information exchange relationships

PRIMARY REPORTING

SECONDARY REPORTING

Specific secondary reporting mechanism

UK subsidiaries of non-UK MNCs are not required to file a CbC report. They may do so voluntarily for instance to serve as a Surrogate Parent.

Spain and China: No Surrogate Parent provision in the legislation; only secondary filing mechanism is local filing

Follows OECD Local reporting entity filing No filing required No details yet Voluntary local filing

CbC reporting methodology

► Develop a high level overview of IT landscape specifically for CbC reporting

► Identify challenges for the enterprise in the ‘real world’ for CbC reporting

► Identify early any system/data gaps

Phase 1b: Current state readiness

► Build overall CbC reporting data inventory

► Identify any gaps in controls and processes for future state CbC reporting

► Identify solutions to address data and process challenges

Phase 2:Data inventory

► Implement data/system solution within the current IT infrastructure

► Configure CbC reporting data repository

► Deliver CbC report, master and local file reports

Phase 3: Repository configuration

► To create an overall picture of the information to be submitted to the tax authorities

► To anticipate the questions/issues that could be raised

► To consider remediation needs

Phase 1a: CbC reporting

assessment tool

Pri

ori

ty f

ocu

sS

ust

ain

able

rep

ort

ing

Profit per employee vs. Effective Tax Rate (ETR)

► Visualization of profit per employee vs. ETR by tax jurisdiction

► Ability to filter by business activity and division

Phase 1a: CbC reporting assessment toolSample reports

Phase 1a: CbC reporting assessment toolSample reports

Related party revenue/Total revenue

Profit/Total revenue

Related party revenue

► Visualization of related party revenue vs. total revenue and profits vs. total revenue

Phase 1b: Current state readinessHigh level data and technology readiness assessment

► Data readiness assessment► Review current IT landscape and identify potential data sources► Identify what data is present in the organization’s data warehouse► Benchmark the environment’s complexity to determine the most

appropriate solution for gathering, transforming and reporting on the CbC reporting data

► Tools and technology assessment► Understand existing technology environment for extracting and

gathering source data, analyzing and transforming data and consolidating and reporting for similar purposes

► Compare new requirements to current technology► Analyze and recommend alternatives or incremental approaches

for technology and reporting tools and processes

Phase 2: Data inventoryMapping data points and requirements gathering

► Data inventory► Document and map data requirements to existing sources► Determine transformation necessary to reach fit-for-purpose

validated data► Establish the processes and resource requirement to

address data readiness gap► Define taxonomy to store unstructured data

► Requirements gathering► Gather and document requirements with respect to data

analysis capabilities, reporting capabilities and audit trail

One challenge that many MNCs are facing is how to collect and collate the information required for the reports from their various systems across the globe. Some MNCs will be able to source data centrally from consolidating systems, while others may need to use local data sources.

Data Processing Outputs

► (Sub) consolidated trial balances and cash flow statements

► Single or multiple ERP systems

► Supplemental data from other systems or manual input

► Exchange rate information

► Categorization

► Upload or extraction

► Mapping

► Cleansing

► Adjusting

► Scenario analysis

► Ratio calculations

► Assessment:

► Risk analysis

► Visualization

► Scenarios

► Reporting

► Real-time monitoring

► Customized reports

Phase 3: Repository configurationCbC reporting data collection

Action 13: Master fileWho, when, where, how and what?

► All MNCs operating in countries that require master file above a certain threshold

► Not all countries require master file

► Some countries have (different) threshold amounts

► Possibly for financial years starting on or after 2016

► Filed with local tax authorities through normal transfer pricing documentation procedures





Transparency

readiness









has operations

Master fileInformation required

Organization structure

Business description Intangibles Intercompany financial activities

Financial and tax positions

Structure chart: Important drivers of business profit

Overall strategy description

Financing arrangements for the group

Annual consolidated financial statements

► Legal ownership

► Geographic location

Supply chain of:► 5 largest products/services

by turnover► Products/services

generating more than 5% of turnover

List of important intangibles and legal owners

Identification of financing entities

List and description of existing unilateral Advance Pricing Agreements (APAs) and other tax rulings

Main geographic markets of above products

List of important intangible agreements

Details of financial transfer pricing policies

List and brief description of important service arrangements

R&D and intangible transfer pricing policies

Functional analysis of principal contributions to value creation by individual entities

Details of important transfers

Business restructuring/ acquisitions/ divestitures during fiscal year

Master fileQuestions

► How different is it from current master file practice?► How many master files?

► Jurisdictional considerations► Different association thresholds► Different revenue thresholds

► Organizational considerations

► What is meant by operating entity?► Legal/constituent/dormant?► JV/ minority interests? ► Consistency with CbC reporting?

► Materiality?► Language?

Master fileFlexible and scalable approach?The organizational set-up is often diverse and provides some complexity for the master file

Division A

Business unit 1

Sub-unit B

Sub-unit E

Micro division 1

Micro division 2

Sub-unit A

1 Division/group level

2

3

4

Business unit level

Sub-unit level

Micro division level

1

2

3

4

Division B

Micro division 4

Micro division 3

Business unit 2

Sub-unit C

Business unit 3

Micro division 5

Micro division 6

Micro division 8

Micro division 9

Micro division 7

Sub-unit D

Master fileWhat level?Compliance with the Action 13 Master file requirements

MNC X

1.

Division

level

2.

Business unit level

4.

Micro division level

3.

Sub-unit level

►Master file can be prepared at a “divisional level”

►Master file can be prepared at a “business unit level”

►Master file can be prepared at a “sub-unit level”

►Master file can be prepared at a “micro division level”

# of Master files

2

3

5

9

1►Master file can be prepared at a

“company level”

Action 13: Local fileWho, when, where, how and what?

► All MNCs operating in jurisdictions that require local file (above local country threshold)

► Not all countries require local file

► Some have (different) threshold amounts

► Possibly for financial years starting on or after 2016

► Filed with local tax authorities

► Through normal transfer pricing documentation procedures





Transparency

readiness





has operations





Local fileInformation required

Local entity Controlled transactions Financial Information

► Management structure

► Local organization chart

► Details on individuals to whom local management reports

► Description of material controlled transactions and context in which they take place.

► Identification of associated enterprises party to controlled transactions and relationship

► Functional analysis► Transfer pricing methods used► Comparables and details of methodology

Local entity financial statements

Description of business and business strategy pursued

Amounts of intra-group payments and receipts for controlled transactions (i.e. products, services, royalties, interest etc.)

Reconciliation to show how financial data used in applying the transfer pricing method ties to the financial statements

Details of business restructurings and/or intangible transfers

Unilateral and bilateral/multilateral APAs and other tax rulings related to the controlled transactions

Summary of relevant financial data for comparables and sources from which data was obtained

Key competitors R&D and intangible transfer pricing policies

Details of important transfers

Local fileQuestions

► Materiality thresholds? ► Price setting or outcome testing?► Reconciliation with local financial reporting► What is meant by payment?► Are database searches updated on a regular basis?► What rulings and APAs are to be included?► How is the documentation process organized?

Master/Local FileImplementation status

Spain: mandatory for groups larger than 45 million

Poland: master file mandatory for entities larger than 20 million euros, local file more than 10 million

Singapore and Greece already implemented documentation requirements similar to Action 13 master file and local file

Already implementedImplementation in progress

Status

Action 13: Transparency readiness

► Companies need to be ready for increased transparency► Actively monitor the

changing landscape

► Assess readiness for new reporting

► Communicate with internal and external stakeholders

► Consider additional explanatory reporting

► Consider broader proactive engagement with tax authorities









has operations





Transparency

readiness

Action 13: Looking ahead

► Consistency ► Master file; Local file; CbC report► Reconciliation with tax returns► Reconciliation with financial statements► Reconciliation with transfer pricing policy

► Management approach► Central or local► Involvement of other stakeholders

► Preparation for questions and controversy

Action 8-10Intangibles/ Risk & Capital/ High Risk Transactions

► What is the relevance of OECD Transfer Pricing Guidelines in the countries where your company operates?► No relevance► Soft law► Reference to OECD guidelines

► When and how do revisions to these guidelines become effective in these countries?

What happened Questions to ask

► New versions of: ► Chapter VI of the OECD TP guidelines addressing

intangibles, including new guidance on the return to funding activities and on hard-to-value 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 MNE

group synergies (additions to chapter I of the OECD TP Guidelines)

Overview of countries with Actions 8-10 activity

Resources

BEPS online: ey.com BEPS site

www.ey.com/tax

Action 13 material► Action 13 overview► Action 13 implementation survey► CbC reporting readiness

Overall BEPS assessment framework

Tax Alerts online: ey.com/taxalerts

Mobile devices: ey.com/TaxGuidesApp ey.com/EYInsights

Twitter: @EY_Tax

http://www.ey.com/GL/en/Services/Tax/OECD-base-erosion-and-profit-shifting-project



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Documents

dc oecd beps project

transfer pricingaction

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ernst young global limited

global organization

global leader

harmful tax practices

treaty abuseaction