I see more and more articles on India’s secondary adjustment and maybe it should be amended before it is enacted. I am part of the camp that doesn’t believe a deemed loan is the most appropriate way to treat a secondary adjustment. The reason for this is that practically it is a nightmare, but maybe I should give India the benefit of the doubt and they may actually be able to pull this off?
As you will see below, more countries are introducing transfer pricing requirements and very soon everyone will have introduced some sort of transfer pricing regulations. I guess that means this blog will continue for a while, which is good news. Happy reading.
“… the Taxation Review Committee’s proposals to widen the tax base and encourage compliance included the “introduction of transfer pricing rules that would curb any undesirable tax avoidance as well as underscore the alignment of this country’s tax system to international best practice; [and] amending the [tax code] to impose a penalty for non-filers irrespective of whether there is any tax to pay or not.””
“On 6 February 2017, the UK tax authorities (HM Revenue & Customs or HMRC) published guidance on the tax considerations of cash pooling arrangements (CPAs). The guidance is included in the International Manual at INTM503100, and focuses on transfer pricing matters, including: the setting of interest rates; synergies achieved through cash pooling and how the benefit of a CPA should be apportioned among the cash pool header and the pool participants; the implication of long-term versus short-term balances; and the consequences of netting balances and the circumstances in which this might be appropriate.
Overall, the guidance illustrates that HMRC, like tax authorities in other jurisdictions, has an increased focus on cash pooling.
There are many commercial benefits of CPAs within groups of companies, which may include a reduction in external borrowing costs, liquidity management, better foreign exchange management and greater visibility of cash flows. These arrangements can result in potentially complex transfer pricing issues when determining the allocation of the benefit of such arrangements amongst members of a group. HMRC, however, acknowledges that the principal reason for groups entering into such arrangements is for commercial rather than tax reasons…”
Even though the HMRC or other tax jurisdictions may provide guidance for and accept cash pooling, some countries may not. The reason for this is not a transfer pricing problem but some countries like South Africa have exchange controls in place which may prohibit this unless there are special approvals in place. It is important to keep this in mind, as the power behind a cash pooling arrangement is the management of cash funds around the group, and if not everyone can participate it may limit the benefit. Also, and this is a more contentious topic, negative interest rates may need to be considered, but I leave this for another post.
It may get even more difficult where notional cash pooling is considered. The difference between normal cash pooling and notional cash pooling is that with the first one, actual cash is moved, whereas with notional cash pooling there is an agreement in place between the banks/group companies part to the cash pool (no movement of cash). The notional cash pool is preferred where there are transaction fees involved, but it makes the arrangement more complex, not just from a transfer pricing perspective but also things like withholding taxes etc.
In a previous post I highlighted the fact that Colombia now has transfer pricing requirements in place. This post provides a summary of these requirements.
RF Supreme Court consolidates court practice on the application of transfer pricing and thin capitalization rules (JDSupra)
“On February 16, 2017, the Presidium of the Supreme Court of the Russian Federation approved the Review of Court Practice in the Consideration of Cases Involving the Application of Certain Provisions of Section V.1 and Article 269 of the Tax Code of the Russian Federation (the “Review”). There is no doubt that the Review will significantly influence the future application of the law in issues related to transfer pricing and thin capitalization rules.”
Follow the link in the heading for a list of the key points of the Review.