TP Review - August 2018
A Note from BDO’s Transfer Pricing Practice
This issue of the TP Review covers important changes around the world in today’s transfer pricing climate.
This month, many of the topics focus on updated guidance for applying and testing transfer pricing methods. In the United States, the IRS has a new manual for the examination process, and has cautioned taxpayers against use of the profit-split method to price related transactions. The U.S. cost sharing regulations may be up-ended with a reversal of Altera.
In global news, the OECD released clarification on transfer pricing for financial transactions, and the G20 Research Group released a report of progress on BEPS measures. Several country specific updates from India, Germany, Australia, and Canada are also discussed.
BDO USA’s Transfer Pricing Team
On June 29, the United States IRS released a new manual for IRS personnel, the TPEP. The new guidelines, which replace the IRS’s previous “Roadmap,” provide guidance to IRS agents conducting transfer pricing examinations. The TPEP consists of a three-phase process, whereby IRS officials review a taxpayer’s transfer pricing arrangement(s), communicate their findings with the taxpayer, and develop an agreement on the tax treatment of examined issues.
You can read the manual here.
The IRS has warned multinational companies against the consistent use of the profit-split method to price intercompany transactions, a method whereby the allocation of profit or loss attributable to an intercompany transaction is determined to be arm’s-length by reference to the relative value of each multinational group entity’s contribution to that profit or loss. The OECD has stated that the profit-split method should only be used when it is the most appropriate method.
On July 24, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. Tax Court’s decision in Altera v. Commissioner
, and determined that IRS cost sharing regulations on the treatment of stock-based compensation are valid. The court decision will, however, get a fresh look from a three-judge panel at a rehearing. Until the final hearing decision is released, corporate taxpayers may continue to rely on the U.S. Tax Court’s opinion, issued in July 2015, in preparation for the October 2018 filing deadline.
You can read the court opinion here.
On July 3, the OECD released a discussion draft on the determination of arm’s-length prices for financial transactions, including intra-group loan agreements, cash pooling, hedging, guarantees, and captive insurance. The discussion draft explains that two related parties must act in a way that mirrors that of the free market, not only in contractual terms but in their actual economic activity. The draft also mentions regulations surrounding the synergetic benefits within multi-national groups, and the fair division of said benefits amongst multinational group members.
You can read the BEPS discussion draft here.
In July 2017, leaders of the G-20 countries came together at the Hamburg Leaders Summit to pledge to implement the outcomes of the OECD/G-20 BEPS project. On August 5, the G-20 research group, in collaboration with the Center for International Institutions Research, published a report examining each country’s progress on 17 out of the 531 commitments made at the Hamburg Summit. The report found a 100 percent compliance rate among G-20 countries on implementing the BEPS project measures.
You can read the G20 Research Group report here.
The Indian government is developing a new “significant economic presence test” for the taxation of Indian profits made through digital marketplaces. The new rule states that an intercompany transaction of goods, services, or property, including data and digital transactions, carried out by a non-resident digitally constitutes a significant economic presence and is thus taxable by the Indian tax authority.
On July 5, the German finance ministry updated its guidelines on intercompany cost contribution arrangements to comply with Chapter VIII of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Beginning after fiscal year ended 2018, the value of intercompany R&D contracts will be determined by the market price of the R&D, not the expected benefits that the R&D contract may bring about. Unlike prior German transfer pricing guidelines, the OECD guidelines require that taxpayers take into account the distribution of risk between related entities.
You can read the OECD Action VIII Guidelines here.
New legislation passed by the Australian Treasury on July 20 aims to align Australia’s CbC reporting framework with the OECD model requirements. The legislation introduces the concept of notional listed company group, defined as a group of entities that would be required to consolidate for accounting purposes as a single group if one of the members of the group is a listed company and any exception to consolidation (including materiality) is disregarded. The new legislation also redefines a significant global entity as a member of a notional listed company group that meets the AU $1 billion annual global income threshold.
The Australian government has issued updated guidance related to cross-border tax compliance for intercompany financing arrangements. The guidance sets out general principles to be followed by companies engaging in high-risk intercompany transactions, including several specific steps for firms to take when analyzing the risk level of each entity engaging in the intercompany financing arrangement.
You can read it on the ATO’s website here.
The Canadian Revenue Agency released a report revealing reduced completion times of APAs and reduced inventory of in-process cases. Improvements to the APA program have made the program a viable option for Canadian taxpayers looking to prevent transfer pricing issues and determine certainty of appropriate transfer pricing methods for prospective transactions.
You can read the report here.