The TP Range - June 2019
The TP Range - June 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 U.S. has new updates concerning compliance for captive service providers and the transfer pricing examination process. There are some changes on the horizon for intercompany financing compliance with the possible dissolution of LIBOR and the new UN draft chapter concerning those types of transactions. This month also includes updates from Australia, Canada, the Czech Republic, India, Panama, and Peru.
BDO USA’s Transfer Pricing Team
LB&I Campaign Targets Transfer Pricing, Reporting Requirements
On April 16, the IRS’s Large Business and International Division proposed three new compliance campaigns, one of which focuses on transfer pricing for captive service providers. In line with current transfer pricing rules under Section 482 of the IRC, the captive services provider campaign suggests that the prices of intercompany services should be determined based on the functions, assets, and risks of the parties engaged in a transaction. The IRS states in its campaign announcement that the treatment streams for this campaign will be issue-based examinations and soft letters. Two other campaigns were proposed concurrent with the captive services provider campaign, one for offshore private banking and one for loose filed Forms 5471.
Read the IRS’ announcement for the new LB&I campaigns.
IRS Clarifies Transfer Pricing Examination Process
On February 19, 2019, the IRS released a memorandum revising its IRM 4.61.3, which provides audit guidelines for transfer pricing examinations. The material changes to the manual revise and reorganize content to update it in accordance with current practice; adds a new section entitled “Program Scope and Objectives”; revises and renames the former IRM 188.8.131.52, Development of IRC Section 482 Cases to IRM 184.108.40.206, Introduction to IRC 482; revises and retitles an exhibit on audit tools, references, and resources; and adds and removes various subsections and exhibits. As stated in the memorandum’s new scope, the revised IRM incorporates the LB&I’s Transfer Pricing Examination Process in its guidance. The memorandum guidance applies to examinations of LB&I taxpayers, or taxpayers with assets greater than or equal to $10 million, and who are required to file Form 5471 or 5472 with their federal income tax returns.
Read the IRM manual transmittal. The full text of the Transfer Pricing Examination Process can be found online.
Expected Discontinuation of LIBOR Will Have Transfer Pricing Implications for Taxpayers
With the expected discontinuation of LIBOR in 2021, there will be transfer pricing implications for which taxpayers can begin planning now. The upcoming changes to LIBOR and the introduction of new reference rates, such as the SOFR, will lead to changes in transfer pricing policies for existing and future intercompany lending arrangements. MNEs are encouraged to review the pricing of intercompany financing, identify instances where an alternative reference rate is required and evaluate the collateral implications of amending existing arrangements.
Read more on the impact of this change to transfer pricing and our BDO insights in our latest Transfer Pricing alert.
UN transfer pricing manual, new chapter on financial transactions
The UN Subcommittee on Transfer Pricing (under the Committee of Experts on International Cooperation in Tax Matters) has proposed a new Chapter B on Financial Transactions for it’s transfer pricing manual. The new draft discusses intra-group financing transactions and their impact on BEPS. The next subcommittee meeting will be held in Amsterdam on July 2-4, one of the goals being to further progress the update and to work towards finalizing the new financial transactions chapter.
Read the UN updates on the manual revisions.
Australia Reviews Cross Border IP Arrangements
On November 20, 2018, the Australian Taxation Office (ATO) issued Taxpayer Alert TA2018/2, announcing their concerns and review of international arrangements that mischaracterize intangible assets, specifically whether intangible assets are appropriately recognized for Australia tax purposes and whether Australian royalty withholding obligations have been met. For related parties, the ATO specifically points to issues concerning (1) whether the amount deducted for a royalty withholding obligation is arm’s length, and (2) whether the functions performed, assets used, and risks assumed by an Australian entity are compensated at an arm’s-length price. The ATO outlines a typical arrangement, where an Australian entity does not recognize the use of intangible property from a foreign entity and in turn does not recognize or treat such payment as being wholly or partly for the use of IP. Thus, withholding tax owed is not paid to the ATO for use of foreign-held IP. ATO states that it is reviewing these arrangements and engaging with taxpayers with or who are considering such arrangements as it develops its technical position. The ATO encourages taxpayers entered into or considering such arrangements to reach out to them at [email protected]. Penalties may apply to those entered into these arrangements.
Read the full alert from the ATO Alert.
Canada: Transfer Pricing Measures Introduced in 2019 Federal Budget
On March 19, Canada released its 2019 federal budget with proposals for transfer pricing measures. The proposals include measures to: (i) implement an ordering rule to prioritize the enforcement of Part XVI.1 Section 247, of the Income Tax Act (ITA), and (ii) amend the ITA to ensure that “transaction” is defined the same way in both transfer pricing and assessment rules within the ITA. Canada's recent budget also includes an update on its engagement in the prevention of BEPS through the OECD's BEPS initiative. Country-by-country exchanges occurred for the first time in 2018 and the CRA is participating in an OECD review of the reporting standards, expected to be completed in 2020. The CRA is also taking steps to enact the MLI, a multilateral treaty established to end BEPS, into Canadian law.
Czech Republic Considers 3-5 Percent Tax on Digital MNEs
The Czech Republic is working towards a new tax on the advertising income of digital multinationals. This tax would also be imposed on income coming from other services. According to Czech Minister of Finance Alena Schillerova, the tax could range between 3 and 5 percent, with 5 percent being more likely. In line with other digital tax proposals, this tax would mainly target global internet tech giants, such as Google and Facebook, which are seen as generating significant revenue in foreign jurisdictions without paying income taxes on this revenue. The Czech proposal comes several weeks after the EU failed to agree on a digital advertising tax during the ECOFIN’s March 12 meeting.
India Seeks Public Input on Permanent Establishment Profit Attribution
India’s CBDT asked for public input on its proposed formulas, featured in a recently released report on profit attribution to permanent establishments, to calculate profits attributable to mulinational companies’ operations in India. The proposed formula would apportion profits derived from India based on three equally weighted factors: sales, employees, and assets. In the report, the CBDT also addresses the digital tax, proposing a formula akin to those proposed by the UK and other European countries in recent months. The digital tax formula seeks to determine an apportionable profit based on the three previously mentioned factors as well as the number of users of a given digital product. The CBDT is seeking feedback on the proposals within 30 days of the report’s publication.
Read the public consultation notice.
Panama: Addition of the Country-by-Country Reporting within Transfer Pricing Framework
On May 27, Panama released Executive Decree N° 46, which adds CbCR to the country’s transfer pricing regulatory framework. The new decree follows the recommendations set by the Inclusive Framework of the G20 and OECD. The new rules establish the following in Panama:
- Article 2. Obligation: The obligors shall be those parent companies (ultimate parent companies) with consolidated with consolidated income exceeding 750 million euros (or its equivalent in Balboas).
- Article 3. Notification: The Panamanian taxpayer must notify the DGI of the identity, tax residence and the fiscal period used by the informing entity (i.e., the parent company), which has declared the CbC report in its jurisdiction.
- Article 4. Contents of the CbC Report: The general information which must be included is:
- Income, profits (and losses), income taxes paid and accrued, declared capital, retained earnings, number of employees and tangible assets (other than cash) of each of the jurisdictions in which the multinational group operates,
- Identification of each member entity or entity belonging to the multinational group, the jurisdiction to which it belongs, and activities it performs.
- Article 5. Forms and Deadlines: the terms will be established by the DGI, in "XML Schema" format. Temporarily, the obligation shall be from 2018 and shall be submitted within 12 months after the closing of the corresponding fiscal period.
In addition, Article 6 establishes that the DGI “shall ensure the confidentiality of the information contained” and “may not make use of the information contained in the Country-by-Country Report as a conclusive tool by itself for the determination of the transfer pricing adjustments.
This summary was provided by Lucas Rodriguez Gregueli, Transfer Pricing Director, BDO Panama
Peru clarifies general anti-avoidance rule for cross-border transactions
On May 6, the Peruvian government published tax regulations that clarify Peru’s GAAR. This rule enables the Peruvian tax authorities to prevent tax avoidance in relation to cross-border transactions. These updated regulations provide a definition of “Economía de opción,” defined as the reduction or postponement of income tax. Economía de opción is a permitted tax planning only of it is an appropriate legal option and if the transaction has a substantial purpose other than tax savings. The Peruvian tax administration will begin applying economía de opción to crossborder transactions that lack economic purpose or that involve noncooperative tax jurisdictions, or that involve allocations to zero- or low-tax countries. The guidance also assigns a Review Commission that is responsible for reviewing any tax audit related to tax avoidance and ensuring that the GAAR is accurately applied.
Read the announcement in Spanish.