The TP Range – December 2019
The TP Range – December 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, the OECD is making efforts to gain support for its proposal on taxing the digital economy, while countries have proposed their own measures for a DST. This month also includes updates from Hong Kong and Ireland.
BDO USA’s Transfer Pricing Team
Digital Services Taxes
Although the OECD is at the forefront of addressing the taxation of the digital economy, tax authorities worldwide are also attempting to address the taxation of digital services in their jurisdictions. To minimize inefficiencies and duplicate efforts, the European Commission has issued proposals for a temporary European Union digital tax, applying to revenues from online advertising, sale of user data, and intermediation services, which would be applicable to companies with a global turnover of 750 million euros or more and other additional characteristics. Most jurisdictions intend to apply a threshold set by the EU Commission. However, certain tax authorities are proposing taxes to MNEs with global turnovers that are below the EU Commission threshold. Currently, the UK tax authority’s guidance is applicable to MNE’s exceeding GBP 500 million (around EUR 600 million), while the Canadian tax authority’s threshold is currently CAD 1 billion (around EUR 680 million). The fluctuation in thresholds could result in companies paying digital services tax in some jurisdictions, while not meeting the threshold in others. Of course, all of this is subject to change based on future OECD guidance.
Part of the tax authorities’ efforts on this topic will focus on double taxation agreements. The preliminary concern among companies is whether the new digital services tax is covered in the current tax treaties. For example, Turkey has proposed a digital tax under the Turkish tax legislation. According to local experts, there is uncertainty as to whether the tax is categorized as an income tax or as an expenditure tax. This difference in treatment could result in the tax treaties not covering the digital services tax, leading to potential risks for cross-border tax controversies.
As the policies surrounding DSTs are still evolving, there are additional uncertainties. These include the scope of the tax, the effective date, and payment date. Companies’ concerns rise when they are unsure whether the tax applies to them or of the effective dates. For example, the French government published guidance for a DST on October 16, 2019. This digital services tax was retroactively effective from January 1, 2019, the first payment was due on October 25, 2019, and the guidance could have been changed by November 29, 2019. The draft did not, however, provide enough clarity on the scope of the tax. The immediacy and uncertainty of the proposed tax brought opposition from large MNEs (mainly U.S.-based), and from the U.S. government, which has threatened retaliatory tariffs on French imports.
On the other hand, there is also concern that a DST may negatively affect a country’s economy. For example, Poland recently rejected a proposal for a digital services tax, although the tax was estimated to generate about USD 50 million. Seemingly, the general approach of the Polish government was that this tax has the potential to negatively affect the economy.
Notwithstanding the example of Poland, the number of countries proposing digital sales tax on international companies conducting sales within their tax jurisdictions is continually growing. Canada, the EU, and the OECD have all expressed discontent with “web giants” collecting large profits without paying taxes that reflect those local/domestic revenues. As such, more countries, including Austria, Czech Republic, Italy, and Uganda (among many others) are issuing DST proposals intended to take effect in 2020. Without global coordination by the OECD or among countries themselves, global digital companies will face a growing and complex set of new taxes and the very real threat of double taxation.
In November 2019, the OECD released a proposal to address the widespread digitalization of the global economy. This “Unified Approach” was intended to be a consensus solution drawn from different proposals submitted by OECD members. The Unified Approach would give countries the right to tax profits of international business based upon the jurisdictions in which those businesses generate revenue or have users, thus going beyond the arm’s-length principle in certain cases. The proposal also goes far beyond the original notion of addressing taxation of the digital economy and includes “consumer-facing” businesses in any industry. The proposal would re-allocate profit to jurisdictions where an MNE’s sales within that jurisdiction exceed a certain threshold, even if that company is not physically present in that market.
Hong Kong Clarifies Country-by-Country Reporting Thresholds for Large MNEs
On October 16, Hong Kong’s Inland Revenue Department published a list of frequently asked questions that clarify their rules regarding CbC reporting thresholds for MNEs. Hong Kong’s existing rules resemble Action 13 of BEPS, stating that MNE Groups that generate a consolidated group revenue of the specified threshold, (i.e HKD 6.8 billion, EUR 750 million, or equivalent) for the previous accounting period and operate in multiple tax jurisdictions must file a CbC report. The department’s FAQs attempt to clarify how MNEs should calculate their global consolidated income, and do not alter existing transfer pricing documentation regulations. The FAQs clarify the following CbC reporting rules:
- If the total consolidated group revenue of an MNE group exceeds the IDR’s CbC filing threshold for the preceding accounting period but falls below the threshold for the current accounting period, the MNE still must file a CbC report in Hong Kong.
- When calculating total group revenue for an MNE, the IRD will include extraordinary income and income generated from investment activities.
- If the MNE group controls between 20-50 percent of an entity, the group may not be required to include the revenue generated by that entity in their consolidated totals. If applicable accounting rules require consolidation or pro rata consolidation of the entity into the group’s total consolidated financials, the group must include that entity’s revenue, or pro rata share of revenue, when calculating their group’s consolidated revenue.
- If an MNE group has a preceding accounting period that is shorter than 12 months, that group must compare their consolidated revenue in that accounting period to the pro rata share of the specified threshold amount that corresponds to the short accounting period.
Read the department’s FAQs.
Changes to Ireland’s Transfer Pricing Regime - Finance Bill 2019
On September 2, Ireland’s Department of Finance published its Finance Bill 2019, which is expected to introduce new documentation requirements for large businesses operating in Ireland based on the 2017 OECD Guidelines. As part of the bill, businesses resident in Ireland will have to prepare a Local File and a Master File if their group’s consolidated revenue exceeds EUR 50 million and EUR 250 million, respectively. These documents must be submitted within 30 days to the Irish tax authority or taxpayers will be penalized based on their annual revenue. The bill will come into effect starting on January 1, 2020.
Read the Finance Bill 2019.
Read BDO UK’s insight on the new bill.