The TP Range - May 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, France and the UK are solidifying digital tax solutions as the OECD continues to work towards a global recommendation.  Meanwhile the IMF released its own policy paper on corporate taxation last month.  This month also includes updates from Barbados, Costa Rica, India, and Saudi Arabia.
 
Sincerely,
BDO USA’s Transfer Pricing Team
 

U.S. News

BDO Offers Insights into IRS APMA Model

Last month, we reported that the IRS’s APMA recently released the Functional Cost Diagnostic model, which is an Excel-based financial model designed to facilitate review and due diligence of certain APA requests.
 
Bob Bowne, Transfer Pricing Senior Manager at BDO USA, notes, “The FCD model is APMA’s most detailed public guidance to date on the application of the RPSM. Though expected to serve as a diagnostic tool in most cases, many taxpayers requesting new or renewal APAs are likely concerned, as the vast majority of APAs do not contemplate application of the RPSM.”
 
BDO discusses the model’s purpose, reviews the specific inputs of the model, and discusses our view on its potential application to APMA’s current APA request inventory in a recent alert.
 

OECD/Global News

France and the UK Push Forward on Digital Tax

France and the UK have been pushing forward with digital tax plans in their respective jurisdictions.  Both countries were poised to tax tech giants like Amazon and Google as early as April.  On March 6, France settled on a 3 percent digital tax in a bill set out by Finance Minister Bruno Le Maire.  After a first reading, the National Assembly adopted a draft bill on April 9. The next step is the senate vote, planned for May 21-22.
 
The UK settled on an interim digital tax solution, in effect on April 1, 2020, which places emphasis on commercialized social networks, search engines, and digital intermediaries.  The UK’s interim solution features a DST of 2 percent on gross revenues of companies meeting at least one of the following thresholds:

1. Worldwide revenues of GBP 500 million; and
2. Local UK gross digital revenues of GBP 25 million. 

The UK, in an attempt to mitigate potential double tax issues associated with the interim solution, has established a DST-specific deduction against general corporate taxes. 
 
With many different unilateral digital tax measures being imposed, companies are apprehensive that compliance will become too complicated.  In response, the OECD is working steadily to reach global consensus on a global minimum tax by the end of 2020. 
 
This summary was provided by Anton Hume, Partner, BDO UK
 

OECD Proposes Digital Platforms for VAT/GST Collection

As a response to the digitalization of the economy, which has changed the nature of distribution channels regarding the sales of goods and services, the OECD has released recommendations to digital tech companies to counter VAT fraud.  The recommendations propose that countries hold digital platforms responsible for assessing, collecting, and remitting VAT or GST from online sales.  The new recommendations aim to address major VAT/GST challenges identified in the 2015 BEPS Action 1 Report: (i) imports of low-value parcels from online sales have been treated as VAT/GST exempt in many jurisdictions, and (ii) there has been strong growth in the trade of remotely delivered services and intangibles on which often no or an inappropriately low amount of VAT/GST is levied, due to the complexity of enforcing VAT/GST payment on such supplies.
 
Global B2C e-commerce sales are projected to increase from USD 2 trillion to USD 4.5 trillion by 2021, with one trillion of that amount being cross-border.  The number of online consumers is expected to increase from 1.6 billion to 2.2 billion by 2022.  The digital platform aims to capture the tax due on sales of purchases made in the online economy, which are growing exponentially.
 
Read the OECD’s VAT/GST recommendations in detail.
 

IMF: Corporation Taxation and Alternatives to the ALP

In March, the IMF released its policy paper on corporate taxation in the global economy. The paper focuses on the need to continue development of the current international tax system in a post-BEPS environment, while proposing potential alternative tax architectures, including alternatives to the arm’s-length standard.  Some of the suggested alternative architectures include various minimum taxes, border-adjusted profit tax, and residual profit allocation schemes.  In addition, the IMF’s policy paper explores the current debate on corporate taxation of the digital economy. Special attention is also given to international tax circumstances of developing countries, whose primary profiting shifting concerns differ from the issues given the most attention in the BEPS package.  

Read more about the IMF policy paper.
 

Country-by-Country News

Barbados: Thin Capitalization Rules in the 2019 Budget Proposal

On March 20, 2019, Barbados’s Minister of Finance presented a 2019 draft budget.  The budget proposes several new tax rules and amendments.  Among the proposals is the introduction of new thin capitalization rules to prevent abuse when a company is funded mainly by debt.  On September 1, 2019, a 1.5-to-1 thin capitalization ratio would take effect so that interest payable on outstanding debts to nonresident related parties would be deductible only to the extent that the total amount of the debt does not exceed 150 percent of the borrower’s equity.  Furthermore, in line with the OECD regulations, the budget proposes new transfer pricing rules for sales of goods and services between legal entities within the same controlled group.  In addition, branch profits earned outside of Barbados would no longer be subject to the current branch profits tax.
 
Read more about Barbados’ proposed budget.
 

Costa Rica: Amendments to CbCR Rules

Following the major tax reform in December, in which the Costa Rican government approved the inclusion of transfer pricing into its income tax laws, the government published Resolution DGT-R-001-2018 to amend their CbCR requirements for MNEs in late March. DGT-R-001-2018 amends the scope of Costa Rica’s CbCR requirements, the associated CbC notification requirements, and the form and deadline CbCR for submission.  Specifically, the new guidelines note the following: 

1. Parent entities resident in Costa Rica or surrogate parents must notify the tax authority of its status as the reporting entity.  The deadline for CbC reporting notification is the last business day of March each year. 
2. If a Costa Rican resident decides to file the CbC report in a foreign tax jurisdiction, it should notify the Costa Rican tax authority and indicate the name of the MNE Group.  The notification should be sent digitally to the General Director of Taxation and should be signed by the entity’s legal representative.
3. CbC Reports must be submitted by December 31 of the year after the FYE.  Failure to submit any of the information required under CbC rules can result in a penalty of 2 percent of the offending taxpayer’s gross income, capped at 100 base salaries.  The minimum is 10 base salaries.

Consistent with prior guidelines, the rules cover companies with global accumulated gross revenues of EUR 750 million, and companies whose ultimate parent entity is a tax resident in Costa Rica or whose surrogate parent is a constituent entity that is tax resident in Costa Rica. Costa Rica’s goal in implementing these amendments is to provide clarification that the CbCR applies only to MNE’s, and not to other companies that strictly operate in Costa Rica.  Prior to the December tax reform, transfer pricing was regulated through administrative resolutions and a decree, but were not part of Costa Rican tax law.

This summary was provided by Randall Madriz, Partner, BDO Costa Rica
 

India and U.S. Sign Agreement for Automatic Exchange of CbCR

On March 27, India and the U.S. signed an agreement to allow the exchange of CbC reports.  By signing the agreement, the U.S. joined Canada, France, Germany, the UK, China, Australia, and Japan, in addition to other major economies to have entered into automatic exchange agreements with India.  This CbCR exchange agreement, along with the already existing BCAA between India and the U.S., enables the automatic exchange of CbC reports filed by the ultimate parent entities of MNEs based in each respective jurisdiction, and also allows the Indian government a detailed look into large U.S. MNEs’ global operations.  The agreement should also reduce the compliance burden on subsidiaries of U.S. or Indian-based MNEs to file in both India and the U.S., because CbC reports filed in either country are now automatically exchanged with the other tax authorities and may not need to be filed locally.  The exchange agreement will apply to CbC reports for tax years starting on or after January 1, 2016.

Read more about the agreement.
 

India Signs Record Number of Bilateral APAs

In other India news, the Indian government announced that it completed 52 APAs in the year ended March 31, 2019, compared to 67 APAs in the year ended March 31, 2018. Of the 52 deals, 11 were bilateral APAs, which is the most bilateral APAs that have ever been negotiated in India in a single year. India negotiated nine bilateral APAs in FY 2017, eight in FY 2016, and two in FY 2015.  India has invested more resources into processing APAs due to concerns over their slow progress. While names of companies entered into these agreements are not disclosed, about 40 percent of companies to enter into APAs operate within the IT, computer hardware, and banking and finance industries. Bob Bowne is a Transfer Pricing Senior Manager at BDO USA who contributed to negotiating the Indian APAs.  “Taxpayers and TP practitioners should be heartened to see an uptick in Indian BAPA completions,” said Bowne. “However, the inventory of Indian BAPA requests continues to grow much faster than completions; this behooves taxpayers requesting BAPAs with India to work with the CBDT to find efficiencies in processing of their case and streamlined application of the proposed transfer pricing method.”
 
Read more about India’s APA history during the 2018 tax year. The 2019 report is expected later in the calendar year.
 

Saudi Arabia: New Guidelines on Intangibles

GAZT recently released guidelines that clarify the application of the arm’s-length standard for transactions involving intangibles. The guidelines define “intangible” or “intangible assets” as property that is not tangible or physical, nor is it physical or financial assets that can be owned or controlled for use in commercial activities, and it would be compensated for in a transfer between independent parties. The guidelines go on to describe the steps necessary to determine the arm’s-length nature of a controlled transaction, i.e., how to abide the new transfer pricing regulations. Entire chapters are devoted to specific guidance on financial transactions, intangibles, and business restructuring.  The intangible transaction guidance makes reference to identifying the development, enhancement, maintenance, protection and exploitation of the intangible, or “DEMPE,” which is a concept first developed by the OECD’s BEPS Action 8.  In the GAZT guidelines, DEMPE is the basis for much of the analysis work described.  The guidelines favor the use of the comparable uncontrolled price method or the profit split method over one-sided methods such as the resale price method or the transactional net margin method.

Read an earlier article from The TP Range on updates to Saudi Arabia’s transfer pricing and CbCR guidelines.