The TP Range - August 2019
The TP Range - August 2019
A Note from BDO’s Transfer Pricing Practice
The TP Range covers important changes around the world in today’s transfer pricing climate. The name TP Range is a nod to the U.S. and OECD transfer pricing guidelines, which call for a taxpayer's transfer prices to fall within an arm's-length range of results for most method applications.
In this month’s news, Amazon won a major appeals court decision against the IRS. The OECD published peer review reports that assess MAP processes in the U.S., the UK, Belgium, Switzerland, Canada, and the Netherlands. This month also includes updates from the Dominican Republic, Hong Kong, Israel, Luxembourg, New Zealand, Qatar, and the UAE.
BDO USA’s Transfer Pricing Team
Amazon Wins Prime Ruling in Appeals Court
On August 16, in a decision that could save Amazon.com, Inc. billions, a federal appeals court ruled that the IRS wrongly calculated the taxes Amazon owed based on a cost-sharing arrangement that shifted assets from the U.S. to the company’s subsidiaries in Europe. Amazon restructured its European businesses in 2005 and 2006, allowing it to shift income generated by its U.S.-based entities to European subsidiaries and simultaneously allowing the European entities to use Amazon’s pre-existing intangible assets to generate income. The IRS claimed that Amazon had undercharged its European entities in the buy-in payment for the transferred assets and adjusted Amazon’s buy-in payment by $3.2 billion for 2005 and 2006. Amazon, however, disputed the IRS’ discounted-cash-flow method for valuing the company’s pre-existing intangible assets, which including all intangible assets of value, including residual-business assets. Amazon instead argued that the CUT method should be used to evaluate three distinct groups of transferred assets: website technology, marketing intangibles, and European-customer information.
The judges of the U.S. Court of Appeals for the Ninth Circuit ruled in Amazon’s favor, holding that the definition of “intangible” in Section 482 of the tax code during the applicable period did not include the residual-business assets. However, it is important to note that this case likely only holds implications for companies dealing with certain previous tax years. In 2009, the Treasury broadened the range of contributions covered by a buy-in payment; furthermore, Congress later amended and broadened the definition of “intangible property” within Section 482. The court affirmed that the IRS’ position would have prevailed if the case were governed by the 2009 regulations or the 2017 statutory amendment.
New OECD Peer Review Reports Available for the U.S., UK, Belgium, Switzerland, Canada, and the Netherlands
On August 13, the OECD published six “stage 2” peer review reports assessing whether the United States, United Kingdom, Belgium, Switzerland, Canada, and the Netherlands had adopted recommendations made previously to improve their cross-border tax dispute resolution procedures. The reports address the 2016 through 2017 period and conclude that the results demonstrate positive change across all six jurisdictions. The U.S. was the only country of the six assessed that exceeded the recommended 24-month average timeframe to close MAP cases during 2016-2017. Nonetheless, each jurisdiction either maintained or reduced the amount of time it took to complete a MAP case in comparison to the earlier period.
The OECD observed that all six countries were missing provisions that meet Action 14 minimum standards in some of their bilateral tax treaties. Each country had some tax treaties that omitted a provision stating that mutual agreements shall be implemented irrespective of time limits in domestic law, or an alternative provision setting a time limit for making transfer pricing adjustments, and some treaties among the countries were missing certain double taxation and MAP request provisions recommended under the BEPS project. However, the OECD added that since its last report, some jurisdictions have corrected issues in their MAP guidance and some have added MAP personnel.
Dominican Republic: Changes to Small Taxpayers Regime
The Dominican Republic recently passed new legislation (Presidential Decree No. 265-19 of 1 August 2019) that brings changes to its regime for small taxpayers. Those who qualify for the new regime can expect several changes, including:
- Taxpayers no longer need to make certain declarations to the tax authority.
- Taxpayers will not have to make advanced income tax payments.
- Asset tax payments will be eliminated if related to economic activity.
Taxpayers can qualify for the new tax regime provided they pass the annual gross income requirements as well as the annual purchases and imports requirements. To qualify based on annual gross income, a taxpayer must earn less than DOP 8.7 million (approx. USD 170,000) annually. Those that qualify will pay an effective tax rate of 7 percent. To qualify based on purchases and imports, a taxpayer cannot exceed DOP 40 million (approx. USD 780,000) in purchases over the course of a year. For taxpayers who qualify under these requirements, annual returns are due no later than the final day of February the following year. The new tax regime is effective immediately and applies to fiscal years 2019.
Read the full text
Hong Kong: New Guidance Regarding Transfer Pricing Rules and Documentation Requirements
On July 19, the Hong Kong Inland Revenue Department published three DIPNs that specify how Hong Kong’s transfer pricing guidelines should be followed by taxpayers. The first note, DIPN no. 58, establishes Master File, Local File, and CbC reporting requirements. The note also provides a number of exemptions for Master and Local File requirements based on size of the business, revenue and assets, number of employees, and transaction amounts. Additionally, this note details the administrative penalties associated with non-compliance to the new documentation rules. DIPN no. 59 clarifies the application of the arm’s-length principle and transfer pricing methodologies to intercompany transactions under Hong Kong transfer pricing rules. Finally, DIPN no. 60 establishes Hong Kong’s policy on how to tax the profits gained by individuals who carry out business in Hong Kong, but who are not permanently established in the country. The new rules largely follow the OCED’s guidance on transfer pricing documentation, transaction analysis, and permanent establishment profit attribution.
Israel: Updates to Transfer Pricing Declaration Form 1385
The Israeli Tax Authority has issued an update to its Form 1385 under Section 85A of the Income Tax Ordinance (Determining Market Conditions), 5768. The update to Form 1385 addresses the intercompany transactions taxpayers have among their related foreign parties. Form 1385 mandates that Israeli entities declare that all intercompany transactions were made in accordance with the arm’s-length principle. The revised Form 1385 requires more information to be provided of the subsidiary, including the tax identification number of the foreign related party, or TIN, and whether certain transactions would apply under safe harbors under Income Tax Circular 12/2018. With the updates, the ITA expects to have greater ease obtaining information about subsidiaries of Israeli organizations.
This summary was provided by Amit Shalit, Partner and Tal Benaeous, Manager, BDO Israel and Desire’e Barkai, Manager, BDO US
Luxembourg: New CbC Report Filing Procedures
Luxembourg’s Tax Authorities, or Administration des contributions directes, has updated its CbC report filing procedures on July 15. The new procedures are effective as of August 1, 2019. The modifications were made to allow the taxpayer to manage the correction of the data included in the CbC Report directly and to improve the filing process of the XML files (especially for larger files). The modifications introduced include an indicator for message type (messages for initial data or corrective data); an indicator for a correction or non-correction for unitary data; removal of the <CountryCode> and <CountrySubentity> fields; and moving the MNE group name data to follow the OECD schema.
This summary was provided by Paul Leyder, Partner; Adina Conner, Director; and Daral Pala, Manager of BDO Luxembourg
New Zealand: International Tax a Part of the 2019-2020 Tax Policy Work Program
On August 8, the Finance Minister and Revenue Minister of New Zealand addressed the government’s updated tax policy work program for 2019 through 2020. The program is designed to improve the living standards and wellbeing of New Zealand citizens. Of eleven different tax policy workstreams under the program, international tax policy has received attention due to the rise in digital companies. As we’ve written before, there is a growing concern that digital companies, or companies that operate and earn income through digitalized business models, pay proportionately low levels of income taxes, which raises questions for the existing international income tax framework. As a result, the OECD and New Zealand taxing authorities are reviewing the framework to address the expansion of digitalization. The government did not determine if it should incorporate separate digital services taxes, however it will make changes such as monitoring and adjusting BEPS, and will continue to focus on a multilateral approach to the issue.
Qatar: CbC Reporting Requirements Released in New Ministerial Decision
Qatar published Ministerial Decision No. 16 of 17 in June 2019, which announces new provisions regarding CbC reporting. The provisions applies to fiscal years that begin on or after January 1, 2018, except for the local filing and notification requirements for non-parent constituent entities, whose application will be determined in a later decision. This decision repeals Ministerial Decision No. 21 of 2018, which announced CbC reporting requirements for 2017. These new provisions state that ultimate parent entities of MNE group residents of Qatar with QAR 3 billion or more in annual consolidated group revenue in the previous year are required to submit a CbC report. Non-parent, Qatar resident, constituent entities of MNE groups who also meet the QAR 3 billion threshold may be required to submit a CbC report to Qatar in certain situations where the information would not otherwise be filed and then shared via automatic exchange.
Additional provisions regarding situations where local entities are not required to file are provided in the decision. All constituent entities of Qatar must submit a CbC notification by the end of the reporting fiscal year, and CbC reports are due electronically within 12 months of the end of the reporting fiscal year. Penalties of up to QAR 500,00 (approx. USD 137,000) may be imposed upon the constituent for failure to comply with any of the obligations providing in the decision.
Read the decision (in Arabic).
This summary was provided by Gavin Brown, Managing Partner, and Kartik Parmar, Manager, BDO Qatar
UAE: New CbC Requirements Effective January 1, 2019
On April 30, the UAE Ministry of Finance issued new CbC requirements for MNEs with consolidated group revenue greater than AED 3.15 billion (approx. USD 8.59 billion) in the previous fiscal year. The new rules will come into effect for fiscal years that begin on or after January 1, 2019. Under the new regulations, MNE groups that meet the filing obligations will be required to prepare a CbC report and file a notification if their ultimate parent entity is outside of the UAE. The content requirements of the UAE CbC report closely follow the OECD’s format. Taxpayers may be penalized for administrative failures, such as failing to file by the required date or failure to file completely or accurately, up to AED 1,000,000, or approximately USD 272,000 (not including penalties related to failure to notify or file the report timely). In addition to the information in the CbC report, the ministry may also ask for further information to verify if the report is accurate.
Read the resolution