Weekly transfer pricing roundup – 23 Jan 2017

This week’s transfer pricing roundup is packed with:

  • New guidance by the ATO,
  • A report on Microsoft being audited by the New Zealand tax authorities,
  • Seven things Apple looks for before agreeing to set up a manufacturing business in a specific country,
  • That German MNE’s don’t really trust non-EU tax authorities with confidentiality of their CbC reports,
  • Liberia’s new transfer pricing regulations, and
  • Why Seagate is moving its manufacturing business from China.
Australian transfer pricing guidance on marketing, sales and distribution hubs released (MNE Tax)

“The ATO on January 16 released important guidance setting out the ATO’s approach to transfer pricing issues related to marketing, sales and distribution, and other hubs.

The aim of the guidance, Practical Compliance Guideline 2017/1, is to help companies manage the compliance risk and therefore the compliance costs associated with hubs. It follows an August 9, 2016, consultation on the topic and will apply from July 1 to existing and newly created hubs.

The guideline offers taxpayers a tool to self-assess the compliance risk of their Australian transfer pricing outcomes in accordance with the ATO’s risk framework, as it reveals the approach, the type of analysis, and evidence that the ATO will likely adopt in these cases.

The self-assessment risk framework is not mandatory. However, if a taxpayer implements it with a self-assessment of the risk rating, the ATO’s tax compliance activity will be tailored to suit the risk rating adopted by the taxpayer, as long as the ATO agrees with the rating.

The guideline assumes that hubs usually have commercial and economic substance. However, if a hub arrangement does not have a commercial rationale such that independent entities would not have entered into a similar arrangement or would have entered into the arrangement on different commercial or financial terms, the guideline will have no application to the taxpayer.

The hub risk framework is made up of six risk zones. It starts from the “white zone,” where self-assessment of risk rating is unnecessary, such as a case where an advance pricing agreement is in place. The remaining zones range from the “green zone,” where there is low Australian transfer pricing risk, to the “red zone,” which involves hub arrangements that are very high risk…

The guideline states that, typically, the higher the risk rating the more detailed and comprehensive the taxpayer’s transfer pricing documentation and supporting evidence should be.

Moreover, it explains how to reduce the risk rating. Taxpayers outside the green zone can decrease their rating through constructive cooperation with the ATO and thus gain greater confidence regarding the Australian transfer pricing outcomes their hubs.

Finally, the guideline provides assistance and guidance for preparing a transfer pricing analysis in cases where a hub is subject to ATO review.

This guidance is designed to help taxpayers understand the types of ATO enquiries and potential areas of concern so these concerns can be addressed prior to dealing with the ATO. For this purpose, the guidance provides a series of framing questions which are indicative of the issues that the ATO will consider when reviewing a hub.

The guideline concludes with a schedule on offshore marketing hubs to be used to set out the ATO risk assessment framework for offshore marketing hub arrangements. The guideline stresses that this schedule cannot be relied upon for other types of hubs.”

Inland Revenue audits Microsoft NZ over transfer pricing practices (Stuff)

“Microsoft New Zealand is bracing for possible action from the taxman.

The company said in its annual accounts that Inland Revenue was auditing payments charged to it by Microsoft companies overseas over the two years to June 2015.

Microsoft NZ listed the Inland Revenue audit as a “contingent liability” for which it might have to fork out.

It said its directors and its lawyers believed its tax practices were adequate.

But it said the “ultimate outcome of the tax audit cannot be reliably estimated at this time”…

The transfer pricing audit was revealed against the backdrop of growing public and political concern over the tax practices of multinationals.”

Apple detailed Indian iPhone manufacturing demands to Modi in October letter (appleinsider)

“…the letter contains a list of seven demands, or “pre-requisites,” the company deems necessary to jumpstart iPhone manufacturing in India.

Some, like tax breaks and duty exemptions on raw materials and equipment for manufacturing, have already been reported as key to Apple’s ongoing negotiations with the country’s government. The newly divulged letter, however, offers a fresh look at the company’s behind-the-scenes tactics and expands on prior information from secondhand sources.

For example, the duty exemption Apple seeks covers more than materials and components, but also capital equipment for 15 years for domestic and export markets…”

German Multinationals Fear Disclosure of Global Tax Reports (BNA)

“Multinational companies headquartered in Germany worry that when they report their global tax and profits for 2016, some countries will leak their country-by-country reports to the press.

German parents of multinational groups with annual consolidated group revenue of at least 750 million euros ($797 million) are required to file, with the German tax administration, country-by-country reports for financial years starting after Dec. 31, 2015.

German companies aren’t concerned about confidentiality breaches by the German tax authorities because “German confidentiality rules are very strict and the same applies for other EU member states,” Julian Boehmer of Linklaters LLP in Dusseldorf told Bloomberg BNA Jan. 18 in an e-mail. “German multinationals doubt that other non-EU states, especially the BRICS states and less developed states in Asia and Africa, will apply similar safeguards…”

Liberia official transfer pricing regulations (IRA)

Liberia introduced transfer pricing regulations. As per the regulation these shall be applied in line with Article 9 of the OECD Model Tax Convention on Income and Capital; the United Nations Model Tax Convention and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Seagate’s move to close factory in China adds to fears of suffocating tax regime (South China Morning Post)

“Decision by disk drive manufacturer reportedly comes after months long battle with local officials over whether it should pay more in levies.

A decision by Seagate, the world’s biggest maker of hard disk drives, to close a factory in Suzhou in eastern China and lay off some 2,000 workers has raised questions over whether the nation’s tax regime is suffocating its economy.

Although both the local tax authority, where the plant is located, and Seagate have cited a “business reshuffle” as the reason for the closure, analysts and chamber of commerce officials said the tax system might have played a role in convincing the company to downsize its mainland operations. Seagate paid US$225 million in taxes in early 2015 and was required to pay an “additional” 400 million yuan (HK$450 million) in tax annually.

“The tax situation makes it very difficult for Seagate, who made a business decision to leave Suzhou. As far as I know, the company felt the need to undo its tax burden,” William Zarit, chairman of the American Chamber of Commerce in China, said at a briefing in Beijing last week…”

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