Dividends are considered a potentially affected transaction by SARS

I was reading the “How to complete and submit your country by country information” external guide published by SARS and came across the below.

For the purposes of calculating the value of a taxpayer’s annual aggregate (potentially affected transactions): Continue reading “Dividends are considered a potentially affected transaction by SARS”

Weekly transfer pricing roundup – 22 May 2017

Chevron decided to appeal the AUD340 million transfer pricing ruling in relation to its financial arrangement between the US and Australia. The previous ruling is now going to the High Court and I look forward to the drama that will unravel. The ATO already started looking at other taxpayers for similar arrangements and even published some draft guidance on what is high or low risk. But more about that below. Continue reading “Weekly transfer pricing roundup – 22 May 2017”

Weekly transfer pricing roundup – 15 May 2017

Arguably this week has been a little softer on us in relation to transfer pricing developments, but tax authorities are still going after MNEs in different ways. The OECD has also released some more info on CRS and a great summary on CBCR per country. See below for more. Continue reading “Weekly transfer pricing roundup – 15 May 2017”

Weekly transfer pricing roundup – 10 April 2017

On 6 April 2017, the OECD released additional guidance on the implementation of CbCR (find the full report here).  The additional guidance addresses some of the uncertainties raised by different organisations, including: Continue reading “Weekly transfer pricing roundup – 10 April 2017”

Weekly transfer pricing roundup – 30 Jan 2017

The OECD signed up a few more countries to the Multilateral Competent Authority Agreement making it 57 countries and the inclusive framework now has more than 100 countries. As you know, countries signing up to the inclusive framework agree to implement the minimum standards which include CbCR (the minimum standards include a total of 4 action points).

It has been a busy week and I am still trying to catch up with all the reading. The draft transfer pricing toolkit for developing countries was also released and comments on the draft are due on 21 February. If you have any comments but don’t want to go through the hassle of sending something through formally, please send me your rough thoughts and I will merge them with my comments. Depending on the outcome I will either post them via Grant Thornton or the SAIT/SAICA transfer pricing sub committee which I am part of.

Happy reading, and don’t forget to comment.

Updated UN manual reveals India’s transfer pricing positions (MNE Tax)

“The new India chapter demonstrates that the tax authority has accepted several transfer pricing positions in OECD BEPS guidelines that had previously been the subject of significant litigation, revealing some light at the end of the tunnel.

However, there are certain inconsistencies, from which one can infer that there is some road to travel, such as the discussion on low value intra-group services and the approach towards marketing intangibles.

It will be necessary for Indian taxpayers to acid test their transfer pricing documentation in view of the discussion in the India chapter to strengthen their positions and ward off potential disputes arising from intra-group transactions.”

Find out more about India’s approach on the following aspects in the article, if you do business in India it’s a must read:

  • Low value adding intra-group services
  • Country-by-country reporting
  • Marketing intangibles
  • Location savings, location specific factors
  • Intangibles generated through research and development services
Transfer pricing toolkit for developing countries jointly released by IMF, OECD, UN, World Bank Group (MNE Tax)

“The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN, and World Bank Group – on 24 January released a draft toolkit addressing ways that emerging economies can overcome lack of comparable data or market prices for goods and services in the area of transfer pricing. The Platform has asked for comments and input on the draft by 21 February from interested stakeholders to finalise the toolkit…

The toolkit is designed to help emerging countries foster strong and credible transfer pricing regimes applying the principles developed in the OECD/G20 BEPS project and, hence, protect their tax bases from aggressive or inappropriate tax planning by multinational corporations.

The toolkit addresses some of the challenges associated accessing comparables data. It also focuses on how to make the best use of available data and on the importance of the choice of the most appropriate transfer pricing method.

It also describes issues and possible solutions when adequate data on transactions between independent parties are not available, including the potential for developing safe harbours or prescriptive approaches. Finally, due to the complexity of the topic, the toolkit sets out areas where further work is planned, and summarises a number of conclusions.

In addition, in recognition of the importance of the extractive industries and other commodities sectors to the economies of many developing countries, the draft toolkit addresses the information gap on prices of minerals sold in an intermediate form.”

New transfer pricing requirements in Latin America under BEPS (JDSUPRA)

“Several countries in Latin America have established new transfer pricing documentation obligations associated with the OECD’s BEPS initiative.

In this new year, Mexico, Colombia and Peru have included in their local legislation new documentation requirements that follow a three-tiered approach: CBC report, master file, and local file. These requirements are based on the revised Chapter V of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration…”

Seven more jurisdictions sign tax co-operation agreement to enable automatic sharing of country-by-country information (OECD)

“As part of continuing efforts to boost transparency by MNEs, Gabon, Hungary, Indonesia, Lithuania, Malta, Mauritius and the Russian Federation have now signed the Multilateral Competent Authority Agreement for Country-by-Country Reporting (CbC MCAA), bringing the total number of signatories to 57. Lithuania and Hungary joined the Agreement in October and December 2016 respectively…

Gabon, Indonesia, Malta, Mauritius and the Russian Federation signed the Agreement at a signing ceremony held during the second meeting of the Inclusive Framework on BEPS on 26-27 January 2017. The inclusive framework brings together over 100 countries and jurisdictions to collaborate on the implementation of the OECD/G20 BEPS package.”

Information on the Potential Impact on IRS and U.S. Multinationals of Revised International Guidance on Transfer Pricing (United States Government Accountability Office)

In short the report states: “The Revised Guidelines Effect on IRS Administrative Costs is Likely Small, But The Effect on Compliance Costs for U.S. MNEs is Uncertain”.

There is much more to it, but I won’t try and summarise the 50 page report here.

Weekly transfer pricing roundup – 16 Jan 2017

The traffic is starting to increase in Johannesburg, which means things are getting back to normal and so is this blog. Obviously I have more content planned for 2017 but I won’t promise too much upfront.

On another note, you will see below that CbCR has formally been introduced in South Africa. Once you open the ITR14 you will see the tax return has also been amended to ask for additional information but no space has yet been provided to actually notify SARS about the reporting entity. Hopefully SARS will introduce a painless notification process that doesn’t require additional registrations or more admin for taxpayers.

Updated Singapore transfer pricing guidance allows simplified method for related party loans (MNE Tax)

“Singapore’s Inland Revenue Authority (IRAS) on January 12 published the fourth edition of its e-Tax Guide on transfer pricing.

The new guidance includes a discussion of risk analysis and adds new provisions allowing taxpayers to optionally use an indicative margin for related party loans instead of preparing a detailed transfer pricing analysis. The new procedure can be applied to related party loans obtained or provided from January 1…”

It is a great idea to introduce something like this for cross border related party loans as a proper thin capitalisation analysis/study (or TP work for credit ratings and arm’s length interest rates) can be rather costly. The issue with introducing something like this is similar to that of safe harbours. The difference here is that the tax authorities can manage the risk by making sure the indicative margin is low enough to keep profit stripping via high interest deductions at bay but yet keep it high enough to for taxpayers to not ‘create’ other transactions to shift profits.

SA finalised specific regulations for CbC reporting (Grant Thornton)

“The final South African regulations for country-by-country (CbC) reporting were gazetted on 23 December 2016. With the release of the final regulations, South African multinational group companies are now obliged to report certain information in line with the Base Erosion and Profit Shifting (BEPS) project, directed by the Organization for Economic Co-operation and Development (OECD)…”

Indonesia revises tax rules on transfer pricing (The Straits Times)

“Indonesia has revised tax rules for transfer pricing documentation to match global standards and curb practices of tax avoidance, an official with the tax office said yesterday.

A finance minister’s decree signed last year but made available to the public only last week called for firms doing cross-border transactions with affiliates to prepare transfer pricing documents detailing global structure and payments…”

Tax Department Signs Advance Pricing Pact With Japanese Firm (Profit NDTV)

“The [Indian] tax department on Friday signed a Bilateral Advance Pricing Agreement (BAPA) with Indian subsidiary of a Japanese trading company as the department looks to reduce litigations by providing certainty in transfer pricing.

Recently, the Central Board of Direct Taxes (CBDT) has also modified an existing Bilateral Advance Pricing Agreement with another Indian subsidiary of a Japanese company to include rollback provisions, an official statement said.

In all, three Bilateral Advance Pricing Agreements are now signed with Indian subsidiaries of Japanese companies, all including rollbacks. The total number of Bilateral Advance Pricing Agreements entered into by CBDT now stands at eight, it added…”

SA finalised specific regulations for CbC reporting

The final South African regulations for country-by-country (CbC) reporting were gazetted on 23 December 2016. With the release of the final regulations, South African multinational group companies are now obliged to report certain information in line with the Base Erosion and Profit Shifting (BEPS) project, directed by the Organization for Economic Co-operation and Development (OECD).

The final regulations have not changed from the previous draft and are in line with the OECD BEPS Action 13. The first reporting period is to commence for fiscal years starting on or after 1 January 2016 (reporting fiscal year). This means that the first CbC reports will be required to be filed with SARS from 31 December 2017.

South African taxpayers that are not the reporting entity (which is generally the top company that has an obligation to submit a CbC report in a multinational group) are referred to as a constituent entity and will have to notify SARS of the reporting entity 12 months after the last day of the reporting fiscal year.

The consolidated group revenue threshold (which is either R10 billion for South African held group companies or 750 million Euro for foreign group companies) which require certain taxpayers to submit a CbC report or notify SARS have not changed.

If you have any questions, please let me know below or contact me.

CBCr – initial teething problems with country by country reporting

I was invited to join a panel discussion at the TP Summit to discuss initial teething problems around country-by-country reporting. During the panel we discussed specific topics and I thought I summarise the points below. By no means is the list complete, but I tried to share the most interesting points. What are your thoughts?

  1. How to approach timing differences in relation to implementation of CBCr between different tax jurisdictions where the reporting entity is not yet required to report? To state the problem differently, what if the reporting entity situated in Country A, only has to report for its 2017 year of assessment but a constituent entity (A constituent entity is just an entity/PE part of the MNE that has to report) in Country B will already have to report for its 2016 year of assessment. Could the reporting entity in Country A report its CBCr on a voluntary basis for 2016 which covers the constituent entity, or would that cause other issues, for example is everything in place to share the CBCr between the tax authorities. It is very unlikely that the tax authority in Country B would allow the constituent entity to delay (or not submit) its 2016 CBCr. That really only leaves one practical solution, the constituent entity would have to become a surrogate entity and therefore become the reporting entity for 2016. Practically that means, the surrogate entity would submit the data instead of the ‘previous’ reporting entity in Country A. This is then likely to change in 2017.
  2. What is a surrogate entity? The concept is quite easy, if a tax authority cannot get the CBCr from the ultimate parent as the reporting entity, another entity will stand in as the reporting entity, also know as the surrogate entity. There are some practical challenges, for example, the surrogate entity should report on the whole MNE, including above (i.e. the ultimate parent). But some local laws, for example the UK, may not require a surrogate entity to report on entities above, which could mean that the CBCr from the surrogate entity does not meet the requirements set by other countries. To put this differently, a surrogate entity submitting the CBCr as per the UK laws may not be sufficient in other jurisdictions, which could mean another surrogate entity will have to be elected.
  3. What is the issue with notifications for CBCr? Constituent entities will have to notify their respective tax authorities on which entity in the group is the reporting/surrogate entity. The timing for the notifications differ from country to country. Most are implementing a notification period of 12 months after the year of assessment, however, some countries already require notification by calendar year-end 2016. Another point to consider is how will a taxpayer notify the tax authorities, this could be done via the tax return or an online database. Sometimes tax authorities are slow and that could mean a taxpayer would have to actually submit a written letter to the tax authorities, notifying them of who the reporting/surrogate entity is. Some countries have implemented specific notification penalties, where the taxpayer fails to notify the tax authorities accordingly. Other countries are likely to just use compliance penalty provisions where applicable.
  4. What is meant by ‘related party’ in a CBCr context? The issue here is really around what constitutes a related party and related party revenue. There are different definitions but in the end it is likely that the definition in local law will take precedence. A taxpayer should consider these local requirements to determine firstly, if revenue disclosed is from a related or third-party, but also if there are additional constituent entities to be aware of.
  5. Where should the relevant data be selected from? The OECD has provided some data sources that should be considered, importantly the OECD acknowledges that the data in the CBCr is unlikely to reconcile to the consolidated data. Even with set offs and other consolidation exercises it is going to be very messy to try to reconcile the data back from the report to the consolidated statements. Another issue identified was that of exchange rates. The CBCr should be disclosed in the currency of the reporting entity at the average exchange rate for the year. Should that rate vary considerably from year to year it will result in changing ratios that the tax authorities may run. For example, profits over employees. If the exchange rate decrease (i.e. the currency is worth less in relation to the reporting rate) it looks like less money is being made by a constituent entity even if the employees remain the same and even if profits increase in local currencies.

Lastly there was a discussion around what information should be disclosed in table 3 of the CBCr, for example, the exchange rate data should be shown in table 3 to make the tax authorities aware of the potential issue (among others).

Weekly transfer pricing roundup – 16 October

5856708903_294549a95a_bYou know a lot has happened in a transfer pricing week when the blog post is close to 1,000 words. I tried to summarise the weeks news below by quoting certain sections only, but for some articles this may not do them justice. Happy reading.

Ireland: The Apple Case: An Irish Perspective (Mondaq)

This is a great article that provides the different viewpoints on the Apple case. If you have time I suggest to read the full article by clicking on the link above, for those of us in a rush, I have quoted the Irish tax position from the article below.

“While Ireland taxes Irish resident companies on their worldwide profits, non-Irish resident companies are only subject to corporation tax on the income attributable to their activities in Ireland. Ireland’s approach in agreeing the tax rulings was to tax Apple under the applicable Irish rules which required that the two Apple companies be taxed in Ireland on the basis of the income generated by their Irish branches only. As the remainder of the income of those companies was not generated by their Irish branches, it was not subject to tax in Ireland.

Transfer pricing rules and the “arm’s length principle” as set out in the OECD’s Transfer Pricing Guidelines were introduced in Ireland in 2010, almost two decades after the 1991 ruling, and three years after the 2007 ruling. Ireland also unilaterally amended its corporate tax residence rules in October 2013 to address a mismatch between the tax rules in Ireland and other jurisdictions (principally the US) which had resulted in so-called “stateless” companies. However, the Commission’s decision is effectively forcing Ireland to levy back taxes on the basis of current rules which were not in force in Ireland at the time that the arrangements in question were in place. The retroactive nature of the decision will be a key ground of any appeal…”

Wayne Swan doubles down on BHP tax evasion accusations (The Sydney Morning Herald)

“Former treasurer Wayne Swan has doubled down on his allegations that BHP Billiton has been evading taxes for more than a decade and misleading the government about it.

Following up on comments first made using parliamentary privilege on Wednesday night, Mr Swan has gone after the mining giant in the public sphere, accusing it of profit shifting to avoid paying taxes to the Australian government…

Mr Swan said in Parliament on Wednesday that BHP had been “gaming the system” by using aggressive transfer pricing – shifting profits out of Australia to a Singaporean marketing hub – denying the Australian government $5.7 billion in tax revenue. On Thursday morning he repeated the claim outside of Parliament…”

UN tax committee to consider major updates to transfer pricing manual, model tax treaty (MNE Tax)

“The UN Committee of Experts on International Cooperation in Tax Matters (Committee) has released several reports in advance of its annual meeting, slated for October 11–14 in New York, revealing that significant changes to the UN’s transfer pricing manual and model tax treaty are under consideration.

A revised version of the United Nations Practical Manual on Transfer Pricing for Developing Countries, to be presented for consideration and approval at the meeting, will have a new format, according to a report of the subcommittee developing the manual.

The chapters have also undergone “significant updating” to take into account global tax issues, such as the G20/OECD base erosion profit shifting (BEPS) plan output. Moreover, new chapters on cost contribution arrangements, intragroup services, and intangibles will be added to the revised transfer pricing manual, the subcommittee said…”

Transfer Pricing Function Benchmarking Survey 2016 (TP Minds)

“Earlier this year, we asked esteemed transfer pricing professionals from across the globe to partake in a new survey, tackling the intricacies of BEPS implementation, budget allocation with transfer pricing and much more…”

Singapore: The IRAS releases guidance on CBCR (IRAS)

IRAS has released guidance on CBCR in Singapore. Follow the link above for the full e-tax guide. In a nutshell:

“Singapore will implement CbCR for Singapore MNE groups from FY 2017 onwards [Financial years starting 1 January 2017].

Broadly, CbCR will be required for a MNE group in relation to a financial year (the first such year being FY 2017), where: (a) The MNE group is a Singapore MNE group; (b) The consolidated group revenue in the preceding financial year is at least S$1,125 million; and (c) The MNE group has subsidiaries or operations in at least one foreign jurisdiction…”

ECOWAS Member-States Take Stock of Transfer Pricing in the Region (Front Page Africa)

“The Economic Community of West African States (ECOWAS), the Federal Inland Revenue Service (FIRS) and the World Bank Group will co-host the first Transfer Pricing Regional Meeting for ECOWAS Member States in Abuja, Nigeria from October 11-13, under the European funded Improved Business and Investment Climate in West Africa Project…

The transfer pricing component of this project is an example of the World Bank’s initiative to support domestic resource mobilization by helping countries to protect their corporate tax base from profit shifting…”

US, Mexico agree to transfer pricing framework for maquiladoras (MNE Tax)

“The US IRS today announced agreement with Mexico on a transfer pricing framework for US multinational enterprises that have maquiladora operations which, if applied in a unilateral advance pricing agreement (APA) with Mexico’s Servicio de Administración Tributaria (SAT), will be accepted by the US as arm’s length.

Maquiladoras are Mexican companies that operate as contract manufacturers of foreign manufacturers, importing material and duty free and tariff free and exporting assembled or manufactured goods.

The new agreement updates and expands a 1999 agreement between the US and Mexico, and seeks assist in the resolution of about 700 pending unilateral APA requests…”

Weekly transfer pricing roundup – 28 August

hands-1167620_960_720As you will have seen from previous roundups European countries have been very busy with transfer pricing audits and the US has picked up on that, especially in relation to US companies being audited in the EU. It was only a matter of time until governments would get into conflict over cross border tax issues with the new BEPS laws being introduced. It will be interesting to see where this goes and if other countries feel similar grievances. See the articles below.

It was only a matter of time until governments would get into conflict over cross border tax issues…

On another note, I will be giving a seminar on country-by-country reporting, master file and local file and was wondering if you have encountered any issues/concerns in practically implementing these that I could research to discuss during my case studies. Any thoughts are much appreciated. Happy reading and if you believe this blog adds value, please share it.

Poland: Increased number of transfer pricing audits, increased assessments (KPMG)

“A summary of the results of tax audits conducted in the first half of 2016 reveals an increase in the number of transfer pricing audits conducted in Poland. In the first half of 2016, the tax auditors made determinations imposing more than PLN 9.5 billion in additional tax assessments (compared to the previous year, an increase of 36.6%). Officials expect that by the end of 2016, the amount of total assessments will exceed PLN 20 billion (approximately U.S. $5.2 billion).”

US attacks power grab by Brussels over Apple tax probe (The Telegraph)

“The US has launched a stinging attack on Brussels’ tax investigations into Apple and other companies in an escalation of the transatlantic battle over alleged EU targeting of US multinationals.

In a last-ditch shot before Brussels announces the results of its lengthy investigation into Apple’s Irish tax affairs, the US Treasury accused the European Commission of trying to become a “supranational tax authority”…

US slams EU competition policies (EUObserver)

“The US has accused the European Commission of imposing unfair fines on US firms in competition cases and launching investigations that threaten to “undermine progress” in the global fight against tax avoidance.

In a white paper published on Wednesday (24 August) the US Treasury strongly criticises the EU executive’s investigations into Apple, Fiat Chrysler and Amazon over state aid and tax avoidance” …

Belgian companies must fulfil reinforced transfer pricing obligations (Lexology)

“As part of the BEPS implementing measures, the Belgian Law of 1 July 2016 introduces a set of new transfer pricing rules that apply to Belgian companies as from 1 January 2016 (see Articles 321/1 to 321/7 of the Belgian Income Tax Code – BITC). These new provisions aim to implement Action 13 of the BEPS action plan under Belgian law.

In a nutshell, from a practical perspective, the new regime completes and broadens the already existing regime regarding specific forms of Belgian companies or information that they must provide to the tax authorities in respect of their transfer prices (i.e., Master File, Local File, and Country-by- Country report). Failure to comply with these new rules is sanctioned by administrative fines (up to EUR 25,000 – to be further detailed by Royal Decree)” …

The U.K.’s Proposed Interest Restriction Rule—Too Much Too Soon? (BNA)

“The U.K. government has been consulting on a proposed “Interest Restriction” rule which will limit the amount of interest expense U.K. companies will be allowed to offset against their income for tax purposes (to 30% of their taxable earnings before interest, tax and amortization). The second consultation phase on the new rule having ended on August 4, the next steps are publication of draft legislation by the end of this year followed by the release of final legislation with Finance Bill 2017 to take effect next April.

It is not surprising that a range of key investor associations have expressed increasing alarm about the proposed introduction of these new limits on deductible interest. Investments in property development and in buying and turning around companies, for example, are usually highly leveraged as the high risk and high returns are expected to more than cover the cost of borrowing. Severely reducing the amount of interest which some investors will be allowed to deduct from their taxable income will increase the tax on their profits, reduce the returns on projects and cause the U.K. to lose the benefits of some of these investments—including some large infrastructure projects and much-needed housebuilding” …