TP Review - November 2018
TP Review - November 2018
A Note from BDO’s Transfer Pricing Practice
This issue of TP Review covers important changes around the world in today’s transfer pricing climate.
This month, many of the updates focus on updated guidance and increased implementation of the OECD’s BEPS measures. In the United States, U.S. cost sharing regulations remain under scrutiny in the Altera v. Commissioner court case.
BDO USA’s Transfer Pricing Team
Altera v. Commissioner: the Debate Continues over IRS Cost Sharing Regulations
After the U.S. Court of Appeals for the Ninth Circuit overturned the 2015 Tax Court decision in Altera v. Commissioner on July 24, 2108, the rehearing in the Ninth Circuit recommenced in October with a new judge, Susan P. Graber, on the panel. Judge Graber questioned Altera Corporation’s counsel on whether its cost-sharing arrangements involve a license or transfer of intangible property, which may subject them to the commensurate-with-income standard to value assets exchanged between related companies under Section 482 of the U.S. tax code. Cisco Systems, Inc. responded to Judge Graber’s argument in an October 23 follow-up letter, asserting that the U.S. Treasury Regulations only require parties to share research and development costs, and that there is no need to separately value the development of global intangibles. The case is still in the oral argument phase, with a final verdict likely to be issued by the end of this year.
U.S. and Japan Enter into Competent Authority Agreement
In late October, the U.S. Treasury announced that the U.S. and Japan have entered into a CAA to exchange CbC reports on large multinationals. The purpose of the agreement is to reduce tax reporting burdens of large multinationals headquartered in both countries, in addition to increasing transparency between the U.S. and Japan. This is one of the latest developments in the CbC framework, which was established in the 2015 OECD/G20 BEPS agreements.
Read the U.S.-Japan CAA
European Commission Urges for Use of Transfer Pricing Controls
The European Commission has issued a recommendation that European Union member states use all available mechanisms to improve coordination in transfer pricing enforcement. The recommendation, issued through an October 18 paper, recommends the use of transfer pricing controls, similar to the concept of joint audits, to prevent double taxation and double nontaxation. The paper states that coordinated efforts would be most helpful when a domestic audit is unable to provide a full picture of the taxpayers activities.
OECD: Clarified Guidance on MLI
The OECD has released guidance in November to improve taxpayers’ understanding of the OECD’s MLI. The MLI is a super treaty that allows tax authorities to choose from an assortment of provisions, designed to prevent BEPS in a particular tax jurisdiction. The MLI will allow tax authorities, once ratified, to synthesize local treaty language with established tax treaties to create new tax treaties.
Read the OECD’s report
Hong Kong Implements Transfer Pricing Legislation
The Hong Kong government has implemented legislation codifying transfer pricing rules into the country’s domestic tax law. The new transfer pricing rules address key issues arising from the OECD’s BEPS project, including BEPS Action 5 (Harmful Tax Practices), Action 13 (Transfer Pricing Documentation and CbC Reporting), and Action 14 (Dispute Resolution Mechanisms). As such, the new legislation introduces mandatory transfer pricing documentation requirements, expands Hong Kong’s APA program, and implements a penalty regime with possible civil and criminal sanctions. The new transfer pricing rules will apply to Hong Kong taxpayers for the tax years of assessment beginning on or after April 1, 2018.
Read the Hong Kong government’s press release
Ireland to Update Its Transfer Pricing Regulations
Ireland is taking strides to update its current transfer pricing regulations to match the OECD’s 2017 guidelines and concurrently remain an attractive destination for multinational corporations. Irish transfer pricing legislation currently endorses the 2010 version of the OECD guidelines, which allows corporations to locate valuable intellectual property in a tax haven with little substance. Under the new guidelines, multinationals with subsidiaries in Ireland would be required to ensure that profits are allocated to countries where value is actually created. Tax authorities are currently considering whether to apply the new legislation, set to go into effect on January 1, 2020, to terms that were agreed upon before July 1, 2010, and whether the new legislation should include non-trading income.
Middle East, North Africa Adopting BEPS Measures
Egypt, Saudi Arabia, Kuwait, Tunisia, and the United Arab Emirates are recent signatories to the BEPS Inclusive Framework and have committed to adopting the BEPS minimum standards, with Lebanon also expressing interest in signing the MLI. Thus far, Egypt and Qatar have introduced transfer pricing regulations and Saudi Arabia expects to follow suit in the very near future. The adoption of transfer pricing regulations is a significant development for the Middle East and the OECD’s BEPS project, as historically there has been no formal transfer pricing documentation requirements for the majority of Middle Eastern countries. Since Middle East countries are not OECD members, businesses with headquarters in the region have questioned whether transfer pricing documentation should be prepared for Middle East countries. The adoption of the BEPS framework highlights a clear shift in the Middle East’s tax regulatory landscape, as many countries in the region have begun to align their tax regimes with international practices.
Ukraine to Align Tax and Transfer Pricing Laws with OECD BEPS Plan
Ukraine’s Ministry of Finance and the National Bank of Ukraine have introduced a draft amendment to their tax code that will implement the transfer pricing provisions set forth in the OECD BEPS plan. Ukraine has promised to incorporate the minimum standards set forth in the 2015 BEPS agreements, including CbC reporting requirements, as well some of the best practices from the BEPS plan.
Digital Services Tax to be Implemented in the United Kingdom
The UK government has announced that global digital companies operating in the United Kingdom will be subject to a 2 percent digital service tax. Beginning in April of 2020, companies earning consolidated global revenue of U.S. $640 million or more will be subject to the digital service tax. The digital service tax legislation aims to update the international tax system to recognize user-created value as a profit driver for digital businesses, and as a result, will require a change to the OECD’s principles on transfer pricing and permanent establishments.
Read Her Majesty’s Revenue and Customs overview of the new digital service tax
Swedish Transfer Pricing Guidance Identifies Risk Areas
Sweden’s tax administration has identified intangible transfers, transactions with affiliates in low-tax jurisdictions, and complex restructurings as important indicators of transfer pricing risk in its updated guidance on transfer pricing and profit attribution examination procedures. The guidance emphasizes the importance of understanding the overall operations of the local entity and its group for identifying functions, assets, risks, and the pricing model, since the business model usually determines pricing. The guidance also notes that, from a long-term, arm’s-length perspective, undercharging in one year and overcharging in another year can be acceptable, because overcharging in one year can compensate for undercharging in another, and vice versa.