The TP Range - February 2019
The TP Range - February 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.
Last month, digital taxation remained top-of-mind as the OECD unveiled four proposals on the table to address challenges arising from the digitalization of the economy; Belgium became the latest European country to introduce digital tax proposals to its government; and the European Commission confirmed plans to propose a temporary digital transaction tax. Meanwhile India introduced amendments to its country-by-country regulations, and the UK has unveiled a new program to assist in DPT corrections. We also cover safe harbor rules in Poland for related party debt, effective January 1.
BDO USA’s Transfer Pricing Team
OECD Discusses Four Proposals on the Table to Address Economy Digitalization
On January 29, the OECD released several communications regarding progress made towards addressing tax challenges arising from the digitalization of the economy. In the 11th iteration of its OECD Tax Talks series, Director of the Center for Tax Policy and Administration Pascal Saint-Amans discussed four proposals under consideration by the OECD, and other topics. The four proposals were mentioned in a policy note issued on the same day of the webcast. The proposals are to (1) revise the existing nexus rules by reference to user contribution; (2) undertake a marketing intangible approach, where value that is created by the market jurisdiction is recognized; (3) assign nexus where there is significant economic presence, which is covered in the BEPS Action 1 report; and (4) allow residence and source countries to tax back profits, subject to no or very low tax rates in jurisdictions where those profits are derived, similar to the U.S. GILTI tax. Mr. Saint-Amans acknowledged the usefulness of the arm’s-length principle under certain transfer pricing methods, though he also stated that some of these proposals would go beyond the arm’s-length principle.
During the webcast, it was confirmed that aggregated CbCR statistics will be made available with the second edition of Corporate Tax Statistics in early 2020, though some information from the report may be available as early as June 2019 when the G20 report is issued.
BEPS Has Failed on Key Issues, Says the ICRICT
The Independent Commission for the Reform of the International Corporate Taxation, a coalition formed by civil society and labor organizations to combat corporate tax avoidance, gave its criticisms of the BEPS project in a January 17 report. In its report, the ICRICT states that the core problem of the BEPS project is failure to address the contradictions of the transfer pricing system in which companies can still shift profits to low-tax jurisdictions under the arm’s-length principle. The report’s purported issue with the arm’s-length principle appears to be in the difficulty of judging a true transaction price at arm’s length, though it does not apply its criticisms to specific examples. According to the report, trade using the arm’s-length principle is susceptible to shifting profits to low-tax jurisdictions; a lack of transparency make it difficult to quantify, monitor, or prevent such abuse.
Though the commission concedes certain progress made under the BEPS program, it calls for changes that fundamentally re-think the global taxation system. The ICRICT wants governments, the UN Tax Committee, and multilateral institutions to consider alternatives to transfer pricing, such as unitary taxation for multinationals with an effective minimum tax rate between 20 and 25 percent.
Read the ICRICT report
India Implements Country-by-Country Reporting Requirements for Multinationals
The Indian government has amended its country-by-country reporting requirements for Indian subsidiaries of large multinationals. Under current requirements, Indian constituent entities of multinationals must file a country-by-country report if the multinational enterprise has a consolidated revenue exceeding INR 55 billion, approximately USD 846 million, in the last accounting year.
Under the amended regulations, Indian multinationals will be required to furnish CbCR requirements within 12 months from the end of the reporting fiscal year. Constituent entities that reside in India but have non-resident parents are required to file a CbCR in cases where the non-resident parent is not required to file a CbCR in its jurisdiction of residence, although timing to furnish the CbCR in these cases has not yet been specified. Indian multinationals that constitute an Alternative Reporting Entity and have a non-resident parent entity may furnish the CbCR by the due date specified by the parent entity’s jurisdiction of residence.
The guidelines also amend the definition of an agreement, and define a reporting year as the accounting year in which the financial and operational results are required to be reflected in the report. The amended regulations are set to take effect retroactively from April 1, 2017, and will apply going forward from the assessment year 2017-2018.
Read more about the guidelines
Belgium Proposes a Plan to Tax Digital Services
Belgium has become the latest European country after France, Austria, and Italy to reconsider the taxation of digital companies such as Facebook Inc., Alphabet Inc., and Amazon, Inc. On January 23, two draft bills were introduced to the Belgian Parliament aimed at levying new taxes on the revenue of multinational technology companies. One of these bills introduced a 3 percent DST on the supply of certain digital services characterized by user value creation. The DST would apply to companies with annual worldwide revenue exceeding EUR 750 million and total taxable revenues earned by the European entity exceeding EUR 50 million.
The second draft bill would extend the definition of a domestic permanent establishment under Belgian law to a “significant digital presence.” Significance, as defined by the bill, applies to cases in which a company’s digital services revenue exceeds EUR 7 million, in which the users of a company’s digital services exceed 100,000, or in which there are more than 3,000 business contracts for a company’s digital services, all within a given tax jurisdiction. In both cases, the IP address of the user’s device and its use in Belgium will be used to establish nexus with Belgium.
With the current political climate and the upcoming federal elections in May, it is unlikely that these proposals will be approved in the near-term.
This summary was provided by Olivier Michiels, Senior Manager, BDO Belgium
EU Digital Tax, Tax Reform Top Priorities for European Commission
The European Commission will lay out plans to close a deal on a proposed EU temporary digital transaction tax, first announced in March 2018. The European Commission has been deadlocked regarding the digital transaction tax because of procedural requirements that call for unanimity among members, and invites EU leaders to endorse their Roadmap to implement a more efficient proceeding, and to decide on or consider the use of passerelle clauses, depending on the matter. Passerelle clauses allow certain alterations of a legislative procedure without a formal amendment.
Read more about the European Commission’s plans
Poland’s Transfer Pricing Reform: Interest Rate Safe Harbor for Related-Party Debt
Poland’s Ministry of Finance introduced rules for its new interest safe harbor for related-party debt. The notice, effective January 1, sets the safe harbor rate as the sum of a reference rate plus a 2 percent margin. The safe harbor rate can be applied to any amount of debt less than PLN 20 million or any foreign currency equivalent. To be implemented, the loan must meet certain conditions: the loan period may not be longer than 5 years; there cannot be any additional payments associated with the loan, such as premiums or commissions; and the lender may not be located in a tax haven.
Another safe habor rate is applicable to low-value intragroup services transactions, assuming that the following conditions are met: (i) the markup has been applied on the basis of a cost plus method and is not more or less than 5 percent of costs in the case of receipt or provision of services, respectively, (ii) the service provider is not located in a tax haven, and (iii) the service recipient owns the calculation presenting the type and level of costs included in calculating the value of the transaction, as well as the methodology and justification related to the applied allocation keys. Along with the safe harbor rate, Poland’s Ministry of Finance introduced other transfer pricing rules related to country-by-country reporting, selection of a transfer pricing method, and the use of discounted cashflow models for valuation of intangibles, also effective January 1.
This summary was provided by Rafal Kowalski, Partner and Magdalena Moczarska, Senior Consultant, BDO Poland
UK Companies Can Avoid Penalties Under A New Program
The UK’s tax office is allowing companies an opportunity to disclose their intercompany transactions and any tax exposure they might have through its Profit Diversion Compliance Facility. The goal of this new facility is to encourage companies with arrangements that may fall under its scope to review their transfer pricing policies, change them where appropriate, and to put forward a report with proposals to pay any additional tax, interest, and penalties owed due to improper arrangements. Companies will be allowed to provide an unprompted disclosure, which elicits a lower minimum penalty than if the disclosure were prompted, and undergo an accelerated process to resolve issues with their transfer pricing under the guidance set out by the Profit Diversion Compliance Facility.
Read more about the policy, its requirements, deadlines, and other such information.