The TP Range - January 2019
A Note from BDO’s Transfer Pricing Practice
This issue of The TP Range covers important changes around the world in today’s transfer pricing climate.
Digital taxation continues to be a pressing issue, with the U.S. proposing a tax on marketing activities of multinationals that sell digital advertising. Meanwhile, new transfer pricing rules have taken effect in Australia and Poland, while Japan has drafted new transfer pricing guidelines. Ireland and Malta seek to put an end to a tax structure known as the “Single Malt” — read on for details.
BDO USA’s Transfer Pricing Team
The U.S. is proposing a tax on the marketing activities of large multinationals that sell digital advertising worldwide as an alternative to proposals such as the three percent digital services tax proposed by the European Commission. Brian Jenn, Deputy International Tax Counsel of the U.S. Department of the Treasury, has stated that the U.S. has proposed a tax on marketing intangibles to give market countries additional, well-defined taxing rights with respect to sales or amount of users in their jurisdictions, and not specific to digital business models. Earlier in 2018, Senators Orrin Hatch and Ron Wyden addressed a letter to the presidents of the European Council and the European Commission (respectively, Donald Tusk and Jean-Claude Juncker) expressing their concern regarding the Commission’s proposed three percent tax on revenues from the provision of certain digital services. Hatch and Wyden wrote that the digital tax proposal would discriminate against U.S. companies and undermine the international tax treaty system and urging consensus with leading economies in the OECD. Then, on October 25, Treasury Secretary Steven Mnuchin issued a statement, also expressing concern that a gross sales tax would unfairly target technology and internet companies, and urging continuing cooperation with the U.S. to determine a fair, income-based tax.
You can read the letter from Senators Hatch and Wyden, here
, and Secretary Mnuchin’s letter, here
One of the main goals of the new Base Erosion and Anti-Abuse Tax, or “BEAT” regulations, is to encourage large U.S. taxpayers to shift valuable intangible property (IP) back to the U.S. Under the proposed rules, all tax-deductible payments made to foreign parties can be required to pay a BEAT, including payments related to amortization of IP over the useful life of the asset. The BEAT regulations also apply to all payments in-kind, such as stock or property, which could potentially subject previously tax-free global restructures to BEAT. BDO recommends all U.S. corporations with recent or proposed inbound IP transfers or restructures to review the BEAT guidance and consult with their tax professionals.
You can read more about the IRS BEAT regulations here.
In November, Irish Finance Minister Paschal Donohoe announced that Ireland and Malta have established a Competent Authority Agreement to prevent the “Single Malt,” an aggressive tax structure that allows some multinational corporations to avoid taxation by incorporating a subsidiary in Ireland while its residence is in Malta. The published CAA outlines Ireland and Malta’s mutual understanding of this tax structure and explicitly states that the tax structure will be dismantled once the Base Erosion and Profit Shifting Multilateral Convention on Tax Treaties is in full effect for both countries. Ireland is currently taking the final legislative steps to ratify the Organisation for Economic Cooperation and Development’s Multilateral Convention by the end of 2018.
To read more about the agreement between Ireland and Malta, click here.
The Australian Tax Office (ATO) has issued new guidelines to assess transfer pricing risk for inbound distributors. The guidelines characterize inbound distributors as the intermediaries between the owner of intellectual property (IP) and the customer or end-user. Inbound distributors are also defined as primarily selling to other businesses, and distribution includes both tangible goods and digital products or services for which the associated IP is owned by related foreign entities.
The guidelines assess distributors using three risk categories with respect to their transfer pricing arrangements: low-risk, medium-risk, or high-risk. Each category is subject to different levels of compliance oversight by the ATO. The ATO has specified that it will be using qualitative data, such as the industry sector in which a taxpayer operates and the taxpayer's economically significant functions, as well as quantitative data, such as a five-year weighted average EBIT margin, to evaluate risk. Taxpayers' profit outcomes will be then be compared against profit markers for independent inbound distributors in the same industry to determine risk level.
The ATO offers guidelines for expected EBIT margins in several industries, including general distributors, ICT, life sciences, and motor vehicles. For general distributors, low-risk distributors are expected to earn an EBIT above 5.3%; for medium-risk, between 2.1-5.3%, and for high risk, below 2.1%.
You can read the new guidelines here.
From BDO in Japan: On December 31, 2018, the Japanese ruling party released its, “Outline of tax system reform 2019.” Major topics covering transfer pricing matters are: (i) the clarification of the definition of intangibles, (ii) the introduction of new measures to adjust the transfer pricing of hard to value intangibles, (iii) the approval of the discounted cash flow method, and (iv) the extension of the statute of limitations for transfer pricing assessments from six to seven years. In addition, new CFC rules covered in the outline include the following: (i) limiting the definition of a “paper company,” (ii) expanding of the definition of a “cashbox company,” (iii) relaxing the threshold of the unrelated entity test for insurance companies, and (iv) revising the scope of income aggregation. The provisions are in draft form and subject to change as they are deliberated.
This summary was provided by Toshiaki Tamura, Partner, BDO Japan
From BDO in Poland: Beginning January 2019, new Polish transfer pricing regulations have been introduced. The most significant changes relate to transaction thresholds, which are no longer based on a taxpayer’s revenues or cost. The thresholds are:
- PLN 10 million for financial and tangible assets transactions of one type
- PLN 2 million for services and other intercompany transactions of one type
- PLN 100,000 for transactions with tax havens
Further, each transaction described in a taxpayer’s transfer pricing documentation must be supplemented with a benchmarking analysis or a description of the taxpayer’s compliance with the arm’s length principle, with the exception of safe harbor transactions. Statutory deadlines have also been extended as follows: (i) from three months to nine months after the end of the financial year to prepare local transfer pricing documentation and submit information regarding transfer prices, and (ii) from three to 12 months after the end of the financial year to prepare the Master File (the Master File may be prepared by any group entity, and may be prepared in English).
This summary was provided by Rafal Kowalski, Partner and Magdalena Moczarska, Senior Consultant, BDO Poland.