The TP Range - July 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 9th U.S. Circuit Court of Appeals reversed the decision on Altera, while the OECD Secretary-General issued a report to the G-20 on the impact of the BEPS Action Plan. Switzerland passed tax reform that will eliminate tax advantages to foreign corporations beginning in 2020. This month also includes updates from Argentina, Colombia, the Czech Republic, India, Mauritius, and Seychelles.
BDO USA’s Transfer Pricing Team
On June 7, the 9th
U.S. Circuit Court of Appeals reversed a July 27, 2015, U.S. Tax Court decision regarding QCSAs. The 2015 opinion issued by the tax court nullified 2003 IRC Section 482 cost-sharing regulations that require controlled entities entering QCSAs to share stock-based compensation costs. The ruling was issued on the basis that Treasury and the IRS did not adequately support its claims with evidence that unrelated parties would share stock-based compensation costs, or that stock-based compensation must be included in QCSAs to achieve arm’s-length results. The 9th
Circuit recently reversed this opinion, rejecting the tax court’s assumption that market comparables are the IRS’s only basis for exercising its authority to make allocations and reflect related parties’ taxable income. The 9th
Circuit concluded that the Treasury’s interpretation of 26 C.F.R., §1.482-7A(d)(2) was reasonable in requiring internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and that the regulations are a reasonable method for achieving the results required by the statute.
Altera has challenged the ruling and petitioned for a rehearing en banc
(where 11 9th
Circuit judges hear the case). If Altera fails to convince the majority of the 9th
Circuit judges, their next option would be to appeal their case to the U.S. Supreme Court.
You can read our alert on the topic here
and the full text of the decision can be read here
In a report submitted to the G-20 finance ministers, the OECD Secretary-General noted the improvement in the international tax environment because of BEPS. According to the report, over 90 countries exchanged data on 47 million financial accounts with a value of approximately EUR 5 trillion in 2018 through the automatic exchange of information under the Multilateral Competent Authority Agreement on the Exchange of CbC Reports. Compared to 2008, when only 40 automatic exchange of information agreements existed, in 2018 there were more than 4,500 such agreements in force. The report also noted that the greater transparency has also contributed to an increase in tax revenue for OECD and G-20 countries by EUR 95 billion between 2009 and 2019. Great transparency has also caused bank deposits in International Financial Centres to shrink by 34 percent over the past decade.
You can find the full OECD report here
On May 19, 2019, Switzerland voted “yes” to a new corporate tax structure. The tax reform, which won 64 percent of the vote, will ensure that Switzerland remains a low tax domicile for companies, while still complying with OECD guidelines. The new legislation follows a 2017 Swiss proposal to reform corporate taxation, which was considerably more favorable to corporations, and failed as a result of concerns that it would lead to a higher tax burden for individuals and cuts for public services. Under the new rules, foreign companies based in Switzerland will no longer receive a preferential tax rate as compared to “normal” resident companies. However, foreign corporations will be able to claim deductions on patent income or from spending on research and development.
Read more on the Swiss vote here
In late May, the Federal Administration of Public Revenues streamlined the deadlines for submitting transfer pricing forms F.867 and F.741. The new deadlines will apply to tax years starting on or after January 1, 2018. Form F.741 relates to exports and imports of commodities to or from independent parties and Form F.867 relates to exports and imports of tangible goods (not commodities) to or from independent parties. The submission deadline is eight months following the end of the fiscal year, and taxpayers will need to refer to the last digit of their tax identification number to determine the exact date. The Federal Administration of Public Revenues also introduced thresholds for related party transactions covered under form F 743 and 4501: ARS 300,000 per transaction and ARS 3 million for all related party transactions. A minimum threshold of ARS 10 million is applied to Form F 867.
On July 25, Argentina’s Tax Administration announced that an extension to the above deadlines would be granted, and a new General Resolution that will introduce major changes to local transfer pricing studies and returns. However, these changes do not yet have legal force.
This summary was provided by Luis Braini, BDO Argentina
Colombia’s National Directorate of Taxes and Customs has further clarified transfer pricing documentation, returns and CbC reporting rules in resolutions no. 000033 and 000034. The directorate clarified that local and master files must be submitted electronically via Forms 1729 V-8 and 5231 V-2, respectively, and transfer pricing returns must be submitted together with the CbC notification within Form 120. The directorate also reaffirmed that all necessary documentation must be submitted with the forms. If a taxpayer experiences a technical problem, they are required to submit all the necessary documents and forms within one day after the issue has been resolved. Deadlines and penalties for noncompliance were previously released by the Colombian Ministry of Finance and Public Credit in Decree 2442 and Section 260-11 of the Colombian Tax Code, respectively.
This summary was provided by Luis Miguel Jimenez Cifuentes, BDO Colombia
In late May, the Czech Ministry of Finance released a series of new transfer pricing guidelines under Guidance Note D-34 and D-32, which adhere more closely to OECD standards. The new guidelines consider the recommendations of the BEPS Action Plan on documentation as well as current local transfer pricing case law. Guidance Note D-32 updates the conditions for obtaining advanced pricing agreements to prevent disputes with tax administrations and to determine the tax base of a permanent establishment. With respect to the best method selection, the guidelines state this will depend on the availability of reliable information on third-party transactions.
This summary was provided by Jiří Jakoubek, BDO Czech Republic
India’s Central Board of Direct Taxes has recommended changes to Article 7, Rule 10 of the 1962 income tax rules pertaining to non-resident entities that have permanent establishment in India. The board has issued a Public Consultation Notice with their recommendation to amend Rule 10 to allow profits attributable to operations in India to be evaluated based on three equally weighted factors of sales, employees, and assets. The board’s amendments are intended to prevent the OECD digital tax proposals from disproportionately shifting the tax burden to the supply-side operations of non-resident entities with permanent establishment in India. The recommended rule changes provide exception for companies with Indian subsidiaries that have sales of less than INR 1,000,000, and for companies that incur losses but receive compensation at an arm’s-length rate.
More details can be found in CBDT’s Public Consultation Notice here
On May 4, the Mauritius Revenue Authority issued Government Notice No. 86, amending regulations under the Income Tax Act of 2018. The amendments impose penalties on multinational entities that fail to comply with CbC reporting requirements, providing exceptions for when there are reasonable grounds for non-compliance, but not for circumstances involving an insufficiency of funds or reliance upon another person. Multinational groups that are tax residents of Mauritius with annual consolidated group revenue of EUR 750 million and fiscal years starting on or after July 1, 2018, must comply with the country’s CbC reporting requirements, or be held liable to the following penalties: (i) CbC compliance failure penalty of INR 5,000 with additional penalties of INR 10,000 imposed for every month thereafter, but not to exceed INR 120,000, and (ii) accuracy-related penalties of up to INR 50,000 for deliberately providing inaccurate information, or failing to inform the Director-General of any known inaccuracy.
The full text of the notice can be read here
In late May, Seychelles’ Revenue Administration published regulations for CbC reporting. The regulations will not apply to groups with a total consolidated group revenue of less than EUR 750 million during the previous fiscal year, but do apply to groups that have a parent entity as a tax resident in Seychelles. For the first year, CbC reports must be filed within twelve months after the tax year ending December 31, 2019, and within 12 months after every tax year thereafter. Notification requirements must be fulfilled within three months after the tax year ended December 31, 2019, and no later than the last day of the reporting tax year thereafter. Notification requirements apply both to ultimate parent entities and constituent entities. If an entity provides incorrect information in their CbC report or fails to comply with regulations, they will have three months to submit the correct information, or they will be subject to a penalty of SCR 20,000.
The full text of the CbC regulations can be found here