transfer pricing newsletter - kreston · 2020-02-10 · 02 transfer pricing newsletter january 2020...

Transfer Pricing Newsletter

January 2020

01

OECD updates and other transfer pricing news

www.kreston.comTransfer Pricing Newsletter January 2020

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OECD Releases 14 Additional Country Profiles Containing Key Aspects of Transfer Pricing Legislation

In April, the OECD published new transfer pricing country

profiles for 14 new countries including Australia, China,

Estonia, France, Georgia, Hungary, India, Israel,

Liechtenstein, Norway, Poland, Portugal, Sweden and

Uruguay, which brings the updated country profile count

to 45. These new profiles reflect key Transfer Pricing

legislation and practices specific to each country such as:

• Arm’s Length Principle

• Transfer Pricing Methods

• Comparability Analysis

• Intangible Property

• Intra-Group Services

• Cost Contribution Agreements

• Transfer Pricing Documentation

• Administrative Approaches to Avoiding & Resolving

Disputes

• Safe Harbors

Each country profile is intended to reflect the current state

of that country’s legislation and indicate to what extent their

rules follow the OECD Transfer Pricing Guidelines.

OECD Considers Two New Projects to Revise the Guidance in Chapter IV and Chapter VII of the Transfer Pricing Guidelines

In May, the OECD invited public comments on the scope of

the future revision of Chapter IV, “Administrative Approaches

to Avoiding and Resolving Transfer Pricing Disputes” and

Chapter VII of the Transfer Pricing Guidelines, “Special

Considerations for Intra-Group Services.” The comments were

published by the OECD in June.

The goal is to finish the exercise by the end of 2018 and

make changes that will proactively handle tax disputes and

guidelines associated with risk assessment.

Although the OECD has come to the conclusion that there

isn’t a current need to change or update guidance on safe

harbors and arbitration, they are open to public comments

on those issues as well as a handful of others.

OECD Releases New Guidance on the Application of the Approach to Hard-to-Value Intangibles and the Transactional Profit Split Method under BEPS Actions 8-10.

In June, the OECD released two reports with new

guidance on BEPS Actions 8-10. The first report was

related to Guidance for Tax Administrations on the

Application of the Approach to Hard-to-Value Intangibles.

The new guidance for tax administrations on the

application of the hard-to-value intangibles (HTVI)

approach is aimed at creating a simplified common

language among tax administrators on how to apply

adjustments. The result is a more consistent process that

should reduce the risk of economic double taxation.

The second report revolved around Revised Guidance on

the Application of the Transactional Split Method. The

profit split method will still apply when considered the most

appropriate method in each situation, but the new

guidance will aid in determining when it is in fact deemed

to be the most appropriate.

Transfer Pricing Update Q2 2018

OECD Releases BEPS Discussion Draft on the Transfer Pricing Aspects of Financial Transactions

In early July, the OECD invited public comments on a

discussion draft dealing with the transfer pricing aspects of

financial transactions. The discussion draft’s goal is to

provide guidance on the application of the principles

outlined in the 2017 OECD Transfer Pricing Guidelines,

drawing special attention to Chapter I, financial

transactions. Other items related to financial transactions

that are in discussion include:

• Treasury Function

• Intra-Group Loans

• Cash Pooling

• Hedging

• Guarantees and Captive Insurance

Those who wish to weigh in on the discussion draft are

asked to send their comments by September 7th, 2018 by

email to [email protected] in word format. Those

comments should be addressed to the Tax Treaties, Transfer

Pricing and Financial Transactions Division, OECD/CTPA.

The OECD has published new transfer pricing country profiles, which brings the updated country profile count to 45. In

the following CBIZ & MHM Q2 2018 Transfer Pricing update, we will outline the key aspects of these new profiles, the

OECD’s request for public comments on several new projects, and new guidance on BEPS Actions 8-10.

Two major initiatives from the Organisation for Economic Co-operation and Development (OECD) could have a significant impact on companies with transfer pricing requirements. In our fourth quarter 2019 transfer pricing update, we’ll take a closer look at how these updates could affect international reporting.

Impact of OECD proposal to rewrite international profit allocation rules In October 2019, the OECD published the ‘Unified Approach’ (Pillar 1), which is an effort to bring together three proposals for consideration by the 134 countries under the OECD/G20 project to address tax challenges associated with digitalisation of the economy.

If Pillar 1 is agreed upon, it will significantly alter the international tax regime and impact a large number of consumer-facing businesses. The overall goal of Pillar 1 is to allocate a greater share of taxing rights to the countries where consumers are located, regardless of whether a business has any physical presence there.

The main Pillar 1 approach recommends a departure from the arm’s length principle (ALP) in certain situations and circumstances, which could also simplify the ALP for some routine activities. The existing ALP would be supplemented with two formulaic measures – one based on traditional ALP concepts, the other a new approach – and would be achieved via one new rule and two modifications to the existing rules, as follows:

Amount A• New formulaic allocation of a portion of deemed global residual

profit in excess of an agreed baseline and financial statements

• Among countries where customers are located, regardless of where the businesses’ physical activities are located

• Would apply equally to both profits and losses, although percentages have not been confirmed in the OECD consultation document.

Amount B• Fixed-percentage return allocated to some routine functions, such

as marketing and distribution

• Would simplify and standardise a distribution return to market countries.

Amount C• Would apply where a businesses’ activities in a country are

deemed greater than routine functions under Amount B

• A country could seek to assess additional amounts if warranted, similar to the existing transfer pricing system.

The changes are focused on ‘large, consumer-facing’ businesses – those that interact remotely with users, or engage and interact with customers from a remote location. Local nexus thresholds will also need to be determined through revenue thresholds. Situations in which non-paying users aren’t located where revenues are booked will also need to be considered.

Financial services, commodities, and certain business-to-business (B2B) situations may be subject to Pillar 1, but whether different business lines within a group will be segmented remains to be clarified. Financial accounting standards and reporting requirements could be an option.

General policy, technical, and administrative issues have been raised by the Pillar 1 approach and comments were requested from stakeholders by 12 November 2019, followed by a consultation meeting in Paris.

TimingThe OECD seeks agreements on the proposed changes by the end of the month.

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Disputes

• Safe Harbors















































• Cash Pooling

• Hedging










OECD releases Pillar 2 consultation document In November 2019, the OECD released a public consultation document, ‘Global Anti-Base Erosion Proposal – GloBE’ (Pillar 2).

This document is the second part of the OECD’s efforts to develop a two-pronged solution to rewrite profit allocation rules for large, consumer-facing businesses (Pillar 1) and address tax challenges that result from globalisation and digitalisation (Pillar 2).

Unlike Pillar 1, the Pillar 2 consultation document includes minimum tax rules that would apply to large international businesses in all sectors. This could significantly increase tax and compliance costs for a wider range of businesses.

The consultation document only addresses part of the Pillar 2 issues as outlined in the May 2019 Programme of Work and focuses primarily on the development of an income inclusion rule, which seeks to regulate the foreign taxes paid by a business’ overseas branches or controlled entities. The starting point for this calculation appears to be financial accounts, but is still open to consideration and discussion.

The key technical areas included in the Pillar 2 consultation cover three main topics:

Financial accounts• Given the differences between accounting standards and tax

bases, there is a balance to strike in identifying truly low-taxed profits.

• For differences that would not even out over time, such as non-taxable income or non-deductible expenses, the consultation recommends removing certain amounts as standard.

• For differences that would even out over time, such as profits recognised in different years for tax and accounting purposes, three options have been suggested:

• Carrying forward excess taxes paid for offset in future years

• Using IFRS deferred tax accounting standards instead of cash tax recognised in accounts

• Averaging over multiple years.

Blending• The consultation seeks views on blending – i.e. whether groups

could consolidate taxes at an entity, jurisdiction, or worldwide basis to determine whether the effective taxes paid on profits are high enough.

• Factors under consideration include the cost of compliance, impact on volatility, and allocation of profits and taxes between entities and jurisdictions.

Carve-outs • Carve-outs may be required, and the consultation notes indicate

that there is often a trade-off between certainty and complexity.

• No specific industries or regimes are identified for carve-outs, but broad questions have been raised for consideration such as whether carve-outs are appropriate on the basis of a group’s global size or industry, the scale of local presence, and the potential behavioural impacts that carve-outs may have.


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Disputes

• Safe Harbors















































• Cash Pooling

• Hedging










What OECD updates mean for international companies In summary, the Pillar 1 proposal and Pillar 2 consultation document seek to address fundamental concerns that the Base Erosion and Profit Shifting (BEPS) Project did not provide a proper solution to the risks of activities and profits being moved to low- or no-tax jurisdictions. The potential impact should be noted by all international businesses, including those that are already subject to US Global Intangible Low Taxed Income (GILTI) rules.

While there is fairly broad support for the total package and the OECD is operating on the basis that both pillars would be agreed upon together, enthusiasm for Pillar 2 appears to be mixed. Taxpayers will want to analyse the potential impact of the prospective tax liability and increased compliance and filing burden on their businesses and make their views known to the OECD.

The OECD will seek political agreement among the members of the Inclusive Framework on the proposed changes in January 2020, so that technical work on the execution and mechanics of both Pillars can occur throughout 2020.


Josh FinfrockManaging Director - Transfer PricingEmail: [email protected]

Author


https://www.cbiz.com/insights-resources/details/articleid/7558/new-gilti-regulations-provide-relief-for-taxpayers

Rethinking Transfer Pricing in the Middle East


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Disputes

• Safe Harbors















































• Cash Pooling

• Hedging










BackgroundTransfer Pricing (TP) is one of the most critical concerns for finance functions of multinational businesses worldwide, and TP legislation has been an intrinsic part of the tax systems of developed countries for a few decades now.

Tax authorities in the Middle East (ME) have traditionally not paid too much attention to TP, although the arm’s-length principle has been embedded in the tax laws of most countries. However, recent trends such as falling energy prices, decreased economic activity and government agendas to bolster non-oil revenues have resulted in a rethink of tax legislation in these countries.

The developments arising out of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Base Erosion and Profit Shifting (BEPS) project have been accelerators in this regard. ME countries that have signed up to the BEPS Inclusive Framework (IF) include Bahrain, Egypt, Kingdom of Saudi Arabia (KSA), Oman, Qatar, United Arab Emirates (UAE) and recently Jordan. Members of the BEPS IF are committed to implementing the four minimum BEPS standards, one of which is Action 13 relating to TP documentation and country-by-country reporting (CbCR).

Country TP updatesAmong the various TP-related developments in the ME, the following are notable:

• Egypt: One of the first movers in the region, Egypt first introduced TP guidelines in 2010. In October 2018, Egypt updated its guidelines with TP documentation and CbCR requirements consistent with BEPS Action 13, but with some deviations such as a lower CbCR threshold for Egyptian-parented groups (EGP 3 billion).

• KSA: This was quickly followed by KSA, which introduced TP by-laws on 15 February 2019. The by-laws, applicable from Financial Year (FY) 2018 onwards, prescribe TP and CbCR largely consistent with the OECD Guidelines.

• Qatar: Qatar has had TP provisions consistent with OECD principles under its state tax regime and the Qatar Financial Centre (QFC) regime. In June 2019, Decision No. 16 of 2019 implementing CbCR from FY 2018 onwards was made applicable only for Qatar-headquartered groups having consolidated revenues exceeding QAR 3 billion.

• UAE: On 30 April 2019, the UAE published Ministerial Resolution No. 32 of 2019, introducing CbCR effective from FY 2019 for groups with consolidated revenues exceeding AED 3.15 billion and having a presence in at least two jurisdictions (one of which is the UAE).

Bahrain, Oman and Jordan are also BEPS IF signatories, and it remains to be seen what guidelines or regulations will be issued by these countries.

Rethinking Transfer Pricing in the Middle East

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• Safe Harbors















































• Cash Pooling

• Hedging










Audit trendsAlong with the release of TP regulations, some of the more mature tax authorities – especially in KSA and Egypt – have expanded their teams, and an increase in TP audits is witnessed in these countries. Areas of particular interest to regional tax authorities include:

• Head office charges. These are among the most commonly disallowed expenses by tax authorities in the region. Head office payments made by regional operating companies for management/support services need to be at ‘arm’s length’. They also need to be supported by robust TP documentation, evidencing the actual benefits received from the provision of these services.

• Intellectual property (IP). It is common for ME regional hubs (e.g. in UAE) to house group IP in the form of patents, brands, technology, customer data, etc. When such IP is exploited by regional operating locations, the resultant royalty and technical service fees paid to the hub need to be at ‘arm’s length’ and are commonly scrutinised.

• Finance charges. Interest and financial charges are one more expense category that invite tax authorities’ interest. Combined with the thin capitalisation rules that exist in some countries (e.g. Oman and Qatar’s QFC rules), tax authorities look for evidence of the ‘arm’s length’ nature of these payments and disallow any excess payments.

In the context of the ME region, groups most likely to feel the impact of TP scrutiny are those with a complex volume of intercompany transactions and which operate in the arena of oil and gas, financial services, or consumer/industrial products.

ConclusionIn view of the pace of TP developments in the region, it has become very important for businesses operating in the ME to fully comprehend the impact of TP on their operations, the various country-specific compliance requirements applicable to them (disclosure forms, TP documentation and/or CbCR), and the associated opportunities and/or risks. A robust TP policy is a must-implement for companies operating from and within the ME. Consequences of non-compliance – i.e., audits, adjustments and/or penalties – must be clearly and seriously understood. Interaction(s) of TP with other taxes – withholding taxes, VAT, customs, excise taxes – should be considered.

While most of the TP regulations that are being introduced in the ME place reliance on the OECD principles, there are unique local nuances in respect of the laws of each country that businesses will need to be aware of as they seek to ensure local compliance.

Further, there are a number of ME countries (including Kuwait, Iran, Iraq and Lebanon) that currently do not have an OECD-consistent TP framework. Countries like UAE and Bahrain are members of the BEPS IF but have zero/low taxes and hence, no TP regulations. For ME-based businesses, the combination of operating in jurisdictions with full-fledged compliance requirements and those with no/few requirements naturally presents numerous regional planning opportunity(ies) through structuring of intercompany transaction(s).

What remains certain is that more significant developments around substance requirements, information sharing and transparency, as well as TP and CbCR, can be expected in the ME region in the next few years. Businesses need to brace themselves – and fast! – for the imminent onslaught.

Aparna LakshminarasimhanTransfer Pricing DirectorEmail: [email protected]

Author


Australian simplified transfer pricing record-keeping options


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Disputes

• Safe Harbors


















OECD Releases New Guidance on the Application of the Approach to Hard-to-Value Intangibles and theTransactional Profit Split Method under BEPS Actions 8-10.





























• Cash Pooling

• Hedging










In many jurisdictions, the devil is always in the detail concerning the record-keeping needed with transfer pricing matters. In Australia, it is no different.

In recognition of the fact that meeting all the requirements of Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 (i.e., the transfer pricing documentation standards) may impose a disproportionate administrative burden on small business, the Commissioner of Taxation aimed to relieve some of this burden by publishing Practical Compliance Guideline PCG 2017/2 (‘the PCG’) on 22 February 2017. The PCG sets out a practical administration approach to assist small businesses in complying with the law. It is regularly updated, with the most recent update on 11 September 2019. The current version applies to income years commencing on or after 1 July 2018.

The PCG provides seven simplified transfer pricing record-keeping options. Each option is available only to businesses that have not made sustained losses, have not undergone a restructure within the year, and have assessed compliance with the transfer pricing rules. The key eligibility criteria for the options are summarised below. You should refer to the PCG for more complete criteria and practical examples.

1. Small taxpayersAvailable to entities with group turnover of less than $50million that:

• Do not have related-party dealings involving royalties, licencefees, or research and development arrangements exceeding$500,000 combined;

• Do not have specific related-party dealings exceeding 15% ofturnover; and

• Are not a distributor.

2. DistributorsAvailable to entities subject to the same criteria as above, but donot have a profit before tax ratio of less than 3% of turnover.

3. Low value adding intra-group servicesAvailable where you have international related-party intra-groupservices of either:

• $2 million or less combined value of services received andprovided, or

• Greater than $2 million, but• The total amount paid for intra-group services must not

amount to more than 15% of the total expenses of theAustralian economic group

• The total amount received for intra-group services mustnot be more than 15% of total revenue of the Australianeconomic group

and:• Low value-adding intra-group services expenses don’t exceed

25% of profit before intra-group services.• Your mark-up on costs of the relevant services of 5% or less

for services you receive, and 5% or more for services youprovide.

4. Low-level inbound loansAvailable if you have combined cross-border loans of $50million or less, and:

• For each of your inbound loans the interest rate is no morethan 2.33% in the 2020 financial year (the rate is adjustedeach year – it was 3.76% in the 2019 financial year).

• The funds and loan agreements are reflected in Australiandollars.

• Associated expenses are in Australian dollars.

https://www.ato.gov.au/law/view/document?docid=COG/PCG20172/NAT/ATO/00001

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5. Materiality Available if the total turnover for your Australian economic group is no more than $100 million, and total international related-party dealings are no more than 2.5% of that turnover.

6. Technical services May be available if your income from, and expenditure on, technical services does not exceed 50% of the total international related-party dealings of your Australian economic group, and:

• The mark-up on costs of the relevant services does not exceed 10% for services you receive, and is more than 10% for services you provide.

7. Low-level outbound loans Eligibility for this option is similar to that for inbound loans, but in this case the interest rate must be no less than 2.33% in the 2020 financial year.

Where you choose a simplified record-keeping option, you notify the Australian Taxation Office (ATO) through a disclosure on your International Dealings Schedule, which forms part of your Australian income tax return. The ATO will generally not allocate compliance resources to entities that satisfy one of the seven options, beyond reviewing their records to confirm their eligibility to use that option.

Darren O’MalleyTax Partner, Stanley & Williamson, Sydney, AustraliaEmail: [email protected]

Author

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transfer pricing newsletter - kreston · 2020-02-10 · 02 transfer pricing newsletter january 2020...

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