Joint International Developments

Transcription

1 Joint International Developments ABA Tax Section Committees: U.S. Activities of Foreign Taxpayers Foreign Activities of U.S. Taxpayers Transfer Pricing Foreign Lawyers Forum January 21, 2011

2 Panelists Michael J. Miller, Moderator Roberts & Holland, New York, NY Michael Caballero Deputy International Tax Counsel, Washington, DC Ronald Dabrowski Deputy Associate Chief Counsel (International- Technical), Washington, DC John Karasek Ernst & Young LLP, Washington, DC Cynthia Kahl Ernst & Young LLP, San Jose, CA Patrick McCay McCarthy Tetrault LLP, Toronto, Canada 2

3 U.S. Activities of Foreign Taxpayers Agenda Reintroduction of treaty override legislation Proposed legislation adopting managed and controlled test Reporting of bank deposit interest Treaty update 3

4 Failed Treaty Override HR 847, James Zadroga 9/11 Health and Compensation Act of 2010 (the Act ) signed into law on 1/2/11. Prior version included, at section 301, treaty override provision that was removed on 12/22/10. US has later in time rule. Subsequent legislation can override treaties. Treaty override would have prevented US WHT from being reduced under any treaty in the case of any: deductible payment to a related party if the related payee has a foreign parent corporation and the foreign parent corporation would not have been entitled to treaty benefits if it had received the payment directly. 4

5 Illustration of Override Mexican parent corp. satisfies residency and LOB requirements of 1992 US-Mexico Income Tax Treaty by reason of active trade or business in Mexico Royalties are received in connection with such active Mexican business Treaty benefits disallowed for royalties paid by US sub to Mexican parent Legislative history provides absolutely no coherent explanation of why necessary Articulated concerns Treaty shopping by foreign parent. But virtually every US treaty has LOB article to prevent treaty shopping. E.g., why isn t active trade or business in Mexico sufficient to address concern? Foreign parent located in tax-haven. But proposed override applied even if foreign parent located in a hightax country, such as Argentina. Overbroad. Foreign parent engaged in corporate inversion. Even if it were desirable and appropriate to deny treaty benefits to subsidiaries of inverted corporations, overbroad. Argentine Individuals Argentina Mexico US royalties 5

6 It s Ba-aaaaaack!! HR 64, introduced on 1/5/11. Pay-fors never die 6

7 HR 62, International Tax Competitiveness Act of 2011, 2 Would deem certain FCs to be domestic if management and control occurs, directly or indirectly, primarily within the US. In general: means substantially all executive officers & senior management with day-to-day responsibility for decisions involving strategic, financial and operational policies primarily located in the US If FC assets consist primarily of assets managed for investors, test satisfied if investment decisions made in US FC subject to proposed legislation only if Stock of the corporation is regularly traded on an established securities market, or The corporation, or any predecessor, had aggregate gross assets of at least $50,000,000, during the tax year or any prior year Includes assets, directly or indirectly, under management for investors Exception: Cease to satisfy, expect to continue, & IRS grants waiver Exception: CFC has domestic parent w/ substantial business assets Effective: Tax years beginning on or after 2-years after enactment 7

8 Reporting of Bank Deposit Interest 2002 Regulations: US residents NRA who is a Canadian resident 2011 Proposed Regulations Extended to all nonresident aliens, effective after 12/31 of year in which published as final regulations Strengthen US exchange of information program (think FATCA) Prevent tax-avoidance by US persons claiming to be NRAs Reaction by foreign investors? 8

9 Treaty Update Treaties Recently Entered Into Force New Zealand (protocol) November 12, 2010 Provisions relating to withholding at source generally effective 1/1/11 For other purposes, generally effective in US for years beginning on or after 1/1/11 and in NZ for years beginning on or after 4/1/11 Malta November 23, 2010 Provisions relating to withholding at source generally effective 1/1/11 Otherwise, generally effective for years beginning on or after 1/1/11 Signed, But Not Yet Ratified by the Senate Hungary transmitted 11/15/10 Luxembourg (protocol) transmitted 11/15/10 Chile Switzerland (protocol) 9

10 Foreign Activities of U.S. Taxpayers Agenda Notice re: Section 901(l) New Section 901(m) re: Covered Asset Acquisitions Creditability of Puerto Rico Excise Tax LMSB Directive re: Gain Recognition Agreements Rev. Proc re: incorrect CTB elections 10

11 Notice re: Section 901(l) Section 901(l) generally disallows a foreign tax credit for foreign withholding taxes on any item of income (other than dividends) or gain on property if: the recipient of the item has not held the property for more than 15 days (section 901(l)(1)(A)), or the recipient has a duty to make related payments for positions in substantially similar or related property (section 901(l)(1)(B)). Section 901(l)(3) authorizes the Treasury and IRS to issue regulations limiting the application of section 901(l) to property where it is not necessary to carry out the purposes of section 901(l) Notice exempts back-to-back licensing arrangements, and retail distribution arrangements, involving certain types of copyrighted articles from section 901(l)

12 Notice re: Section 901(l) Facts US licenses certain intellectual property pursuant to a master license agreement to A, an unrelated domestic corporation, for the purpose of development, production, exploitation, distribution, or marketing of the intellectual property. A sublicenses the rights to the intellectual property to its affiliates as permitted under the terms and conditions of the master license agreement. Pursuant to the sublicense agreements, sublicensees make payments to A, which may be subject to foreign gross-basis withholding tax. Results under the Notice The Notice s exclusion for back-to-back licensing arrangements from the application of the section 901(l) disallowance rules will permit A to include any withholding taxes paid on sublicense fees from its foreign affiliates in its FTC calculations. US Master license A SUB Sublicense

13 Notice re: Section 901(l) The Notice provides definitions for: Covered intellectual property and copyrighted articles; A back-to-back licensing arrangement with respect to covered intellectual property or a covered copyrighted article; A retail distribution arrangement for covered copyrighted articles; and When a back-to-back licensing arrangement or a retail distribution arrangement is in ordinary course of business The Notice s is effective for amounts paid or accrued after September 23, 2010 and taxpayers may rely on the Notice until Regulations are issued Comments are requested with respect to the exceptions described in the Notice, the scope of the active dealer exception in section 901(l)(2) to persons for whom intangible property or copyrighted articles are described in section 1221(a)(1), as well as the back-toback computer licensing arrangements exception described in Notice

14 Section 901(m) Covered asset acquisitions A portion of foreign income tax attributable to income from foreign assets acquired in a covered asset acquisition is non-creditable Disqualified portion equals lesser of: Aggregate basis differences allocable to such taxable year with respect to all relevant foreign assets Income on which the foreign income tax is determined Amortization related to a covered asset acquisition remains deductible for E&P purposes, as do the non-creditable foreign taxes Sections 275 and 78 do not apply to any noncreditable tax

15 Section 901(m) Covered asset acquisitions Covered asset acquisitions include: Qualified stock purchases to which section 338(a) applies Transactions which are treated as acquisitions of assets for US tax purposes and as acquisitions of stock (or are disregarded) for foreign tax purposes Acquisitions of partnership interests (where the partnership has a section 754 election in effect) Any other similar transaction

16 Section 901(m) Covered asset acquisitions Basis difference means, with respect to any relevant foreign asset, the excess of (1) the adjusted basis of such asset immediately after the covered asset acquisition, over (2) the adjusted basis of such asset immediately before the covered asset acquisition US tax basis Allocate basis difference to a taxable year using the applicable cost recovery method under US tax rules Relevant foreign asset means with respect to any covered asset acquisition, an asset only if any income, deduction, gain, or loss attributable to such asset is taken into account in determining foreign income tax in the relevant jurisdiction

17 Section 901(m) Covered asset acquisitions The JCT Explanation provides as follows: It is the tax basis for US tax purposes that is relevant, and not the basis as determined under the law of the relevant jurisdiction It is anticipated that the Secretary will issue regulations: Identifying those circumstances in which, for purposes of determining the adjusted basis of such assets immediately before the covered asset acquisition, it may be acceptable to utilize the basis of such asset under the law of the relevant jurisdiction or another reasonable method Clarifying, in a covered asset acquisition that involves either (1) both US assets and relevant foreign assets, or (2) assets in multiple relevant jurisdictions, the manner in which any relevant foreign asset (such as intangible assets that may relate to more than one jurisdiction) will be allocated between those jurisdictions Clarifying the extent to which income is considered attributable to a relevant foreign asset, as well as the treatment of an asset that ceases to be taken into account in determining the foreign income tax in the relevant jurisdiction by some mechanism other than a disposition

18 Section 901(m) Covered asset acquisitions Grant of regulatory authority for guidance necessary or appropriate to carry out the purposes of the provision, including exemptions for certain covered asset acquisitions and for relevant foreign assets have de minimis basis difference JCT anticipates regulations may provide exemptions for covered asset acquisitions that are not taxable for U.S. purposes, or in which the basis of the relevant foreign assets is also increased for purposes of the tax laws of the local country

19 Section 901(m) Covered asset acquisitions Applies to covered asset acquisitions after 31 December 2010 Does not apply to any covered asset acquisition involving unrelated parties if such acquisition is: Made pursuant to a written agreement which was binding on 1 January 2011, and at all times thereafter, Described in a ruling request submitted to the IRS on or before 29 July 2010, or Described on or before 1 January 2011 in a public announcement or in an SEC filing

20 Puerto Rico Excise Tax HB 2526 signed into law October 25, 2010, effective January 1, 2011 Targets companies with Puerto Rican manufacturing affiliates Applies to companies with intergroup transactions above certain threshold levels Tax levied on non-resident Puerto Rican corporation Source Rule Portion of income of non-resident Puerto Rican corporation treated as effectively connected income In lieu of Source Rule Excise Tax Applies where Puerto Rican entity has gross receipts in excess of $75 million Tax is equal to percentage of value of purchased Puerto Rican property or services Levied on purchaser; collected and remitted by Puerto Rican seller of goods or services Rate declines over six-year period; after six years, Excise Tax is eliminated

21 Puerto Rico Excise Tax Open Issues Eligibility for US Foreign Tax Credit Unclear whether Excise Tax is creditable under 903 as a tax that is imposed in lieu of an income tax Constitutionality of tax The government of Puerto Rico received an opinion from a US law firm stating that (i) the tax on non-puerto Rican resident should be constitutional; and (ii) that the Excise Tax is a creditable tax

22 LMSB Directive regarding GRAs and Related Filings Provides relief for obtaining reasonable cause in certain circumstances Timely-filed GRA incomplete or inaccurate (e.g., required information indicated as available upon request ) Missed, incomplete or inaccurate filings required to be filed during term of initial, timely-filed GRA (irrespective of whether accurate and complete) E.g., Annual certifications, new GRA, Form 8838, etc. Does not apply to GRA or subsequent required filings if initial GRA not timely-filed

23 LMSB Directive regarding GRAs and Related Filings Incomplete, inaccurate or missed filings cured by: Filing an amended return for taxable year to which failure relates, including: Complete and accurate filing that should have been included with original return for such taxable year Statement Filed pursuant to Directive of Examination Action with respect to Certain Gain Recognition Agreement on first page of amended return Filed with the applicable IRS Service Center with which US transferor filed its original return for such taxable year Filing Form 8838 Extend statute of limitations to later of: Close of eighth full taxable year following taxable year of initial transfer; or Three years from date required information provided to IRS under Directive Complying with certain notice requirements (exam team, IRS Director)

24 LMSB Directive regarding GRAs and Related Filings Taxpayers previously denied reasonable cause relief may utilize Directive Taxpayers with pending reasonable cause relief requests must withdraw request to be eligible for relief under Directive No need to file additional amended return IRS examiners instructed to treat filings subject to Directive as timely-filed, if all requirements satisfied Effective as of 26 July 2010, and until further notice Filing document pursuant to Directive does not establish that it is complete and accurate IRS examiners directed to consider whether document is complete and accurate under normal examination procedures

25 Rev. Proc Incorrect Entity Classification Elections Provides relief to a foreign eligible entity that made an incorrect CTB election based on a mistaken understanding of the number of owners it had as of the effective date of its CTB election If a foreign eligible entity originally made a CTB election to be a partnership assuming that it had more than one owner, however later determined it only had one owner as of the effective date of its CTB election, the Service will treat the original election as a CTB election to be disregarded If a foreign eligible entity originally made a CTB election to be a disregarded entity assuming that it had one owner, however later determined it had more than one owner as of the effective date of its CTB election, the Service will treat the original election as a CTB election to be a partnership The Service s re-characterization of the original elections depends on the qualified entity meeting the requirements and following the procedures of Rev. Proc

26 Foreign Lawyers Forum Agenda Current Developments in Canada: US Resource Energy Trust Group Consolidation Taxable Canadian Property REIT Update PUC Treaty: Art. IV(7)(b) 26

27 US Resource Energy Trust Eagle Energy Trust Restricted to producing resource(s) located in the US Canada Tax EET not subject to Canadian entity level tax, provided: EET distributes all of its income to unitholders EET is not subject to SIFT rules (i.e., must not hold non-portfolio property rely on non-canadian source exception) US Tax EET elects to be treated as a corporation but with no effectively connected income CT elects to be treated as a corporation and subject to US tax -- CT interest expense reduces taxable income (subject to earnings stripping rules) No interest withholding tax (per Canada- US Treaty) public unitholders EET CT EEA LP debt oil/gas property (US location) GP LLC (US) 27 Cdn. USA

28 Group Consolidation Review of group consolidation (or formal loss transfer regime) Finance consultation launched Nov with comment period open to Feb Canada is the only G7 country without such a formal regime Current regime CRA has accommodated loss restructurings to shift attributes within related/affiliated group entities however this ad hoc approach involves cost, delay and some uncertainty Provinces One significant hurdle is provincial consent given provincial impact of net income shifts arising from loss transfers TEI has recommended implementing a federal-only regime, if provincial buy-in cannot be secured 28

29 Group Consolidation (2) Control Group Threshold Finance has commented that consideration will be given to nonwholly owned group companies TEI has suggested a 80-90% ownership threshold to benefit from such rules votes and value (?) Range of solutions 100% (Australia) to 50% (Germany) Non-corporate entities trusts and partnerships may be permitted to access the regime 29

30 Taxable Canadian Property Non-residents disposing of TCP are subject to Canadian tax on income & gains realized thereon (subject to treaty relief) ss.116 tax clearance certificate obligations and withholding from sale proceeds TCP definition amended in 2010 to essentially provide that shares of corporations are TCP only where more than 50% of share value was derived (at any time in the 60 months prior to the disposition) directly/indirectly from Cdn. realty, resource property, timber resource property Cdn. realty, resource property, timber resource property held through an entity the interests in which are not TCP are ignored 30

31 Taxable Canadian Property (2) Concern TCP deeming rules arising from reorganizations undertaken in 60 month period prior to disposition Concern diligence re. derived by buyer comfort level re. ss.116 withholding manufacturers, resource businesses, energy businesses Canada-US Treaty Art. XIII does not exclude realty in which the business of the enterprise is carried on (unlike a variety of other OECD model based conventions to which Canada is party) 31

32 REIT Update REITs are excepted from the SIFT taxation regime SIFT rules result in entity level tax even where SIFT income is fully distributed to unitholders REIT is a Canadian resident trust that meets: property test -- must not hold non-portfolio property other than qualified REIT property passive revenue test -- 95%+ of revenue derived from realty rent, cap. gains from realty, interest, dividends, royalties realty revenue test -- 75%+ of revenue derived from realty rent, cap. gains from realty, mortgage interest realty value test -- 75%+ of its equity value (at all times in the year) is represented by trust property that is realty and certain BA s, bank deposits, government securities 32

33 REIT Update (2) December 16, 2010 Amendments generally effective January 1, 2011 Non-portfolio property (NPP) test REITs will be permitted to hold up to 10% of their NPP as nonqualified REIT property 95% revenue test reduced to 90% revenues clarified to be capital gains (and to exclude proceeds of disposition other than capital gains) Real estate inventory permitted only where such inventory is eligible resale property held in a subsidiary where such inventory parcel is contiguous with realty held as capital property & necessary and incidental test is met 33

34 REIT Update (3) Revenue flow through character of revenue flowing through lower tier entities that are NPP to the REIT should generally retain its realty-based character to the lower tier entity (even where paid as dividend/interest/trust distribution) F/X sourcing rules gains/losses on F/X contracts in relation to dispositions of non- Canadian realty should be characterized as gains from a realty disposition gains/losses on F/X contracts in relation to rental payments should be characterized as rental income REIT listing requirement 34

35 PUC Collins & Aikman (FCA) C&A group is a multinational auto parts company with material Cdn. operations Products (US) Products (US) PUC return US Products transfers CAHL shares (low ACB and PUC) to new Can Holdings for stock (nonrollover), creating PUC in Can Holdings of $167m CAHL continues as an Ontario corp and amalgamates with WCA and Borg CAHL pays $104m dividends to Can Holdings WCA (Canada) CAHL (foreign resid) Borg (Canada) Can Holdings (Canada) CAHL Amalco (Canada) dividends Can Holdings returns $104m PUC to US Products no Cdn. withholding tax 35

36 PUC (2) Collins & Aikman (FCA) GAAR reassessments to impose Cdn. dividend withholding tax on the basis that PUC was the historic nominal amount not the stepped-up PUC FCA largely agrees with Tax Court no misuse or abuse for GAAR no policy that all corporate distributions are taxable unless an exception is relied upon rather the Act provides a regime for taxation of distributions, namely that corporate distributions are taxable only in excess of PUC no misuse of ss since the foreign residency of CAHL occurred decades before the relevant PUC transactions (not part of the series of transactions) no double counting of PUC (unlike Copthorne decision) 36

37 Treaty: Art. IV(7)(b) CRA Interpretation ( ) released 10/27/2010 Article IV(7)(b) applies to deny treaty benefits to US Tax Exempt under Article XXI since the dividends and interest would not have the same US tax treatment if Can ULC was a regarded entity US Tax Exempt Charity 80% LP US Co. 20% GP CRA rejects argument that US Tax Exempt would be exempt from US tax on Canadian source income regardless of whether Can ULC is disregarded or not dividends interest US LP Can ULC Cdn. passive rental income 37

38 Treaty: Art. IV(7)(b) CRA Ruling ( ) released 1/5/2011 Prior to the reorganization, the equity shares of Can ULC were held by US Holdings LLC -- reorganization to distribute such ULC shares to US Pubco to avoid transparent entity issue Reorganization to transfer the loan from US Pubco to US Holdco so not held by the equity holder of Can ULC scenario 1 US Holdco loan US Pubco US Holdings LLC SCENARIO 1: Equity distribution as 2 step PUC distribution Can ULC increases PUC Can ULC Can ULC distributes cash to US Pubco as PUC reduction Rulings that IV(7)(b) and GAAR do not apply 38

39 Treaty: Art. IV(7)(b) CRA Ruling ( ) released 1/5/2011 SCENARIO 2: Equity distribution as stock dividend and consolidation Can ULC declares a stock dividend payable to US Pubco and issues the requisite shares to US Pubco in satisfaction of stock dividend Can ULC adds the amount of the stock dividend to PUC Shares of Can ULC are consolidated to the original no. of shares Can ULC distributes cash to US Pubco as PUC reduction scenario 2 US Holdco loan US Pubco Can ULC US Holdings LLC Rulings that IV(7)(b) and GAAR do not apply 39

40 Current Transfer Pricing Developments Cynthia Kahl Ernst & Young LLP - San Jose, CA ABA 2011 Mid-Year Meeting Boca Raton, FL January 21,

41 Agenda 1) The IRS LB&I Competent Authority Statistics, released 12/27/10 2) CAN-US Memorandum of Understanding (MOU) 3) IRS Action on Decision in Veritas Software Corp. v. Comm r., 133 T.C. No. 14 4) Queen v. General Electric Capital Canada Inc., Federal Court Appeal, No. A-1-10, 12/15/10 5) 2009 China APA Annual Report, released 12/31/2010 6) Newly issued Transfer Pricing Documentation Requirements (Italy, Egypt, France) 41

42 LB&I Competent Authority Statistics, released 12/27/2010 Summary of Year-End Inventory Includes Allocation, Non-Allocation, PE, Limitation on Benefits, APAs Cases received exceeded cases disposed in almost every year In 2009, cases received exceeded cases disposed by 81% Year-end inventory has nearly doubled between 2006 & 2010 (from 430 to 705 cases) 42

43 LB&I Competent Authority Statistics Processing Time on Closed Cases (in days) Does not include APAs Processing time increased for both US and Foreign Initiated Closed Cases In 2006, processing time: 646 US initiated, 756 Foreign (Combined: 732 days - 2 years) In 2010, processing time: 815 US initiated, 886 Foreign (Combined: yrs, 4 months) 43

44 LB&I Competent Authority Statistics Competent Authority Relief (as % of total dollar adjustment) Includes Allocation & Non-Allocation Cases only. Correlative adjustments: Range 54% to 33%, average 42.73% Adjustments withdrawn: Range: 29% to 64%, average 49.19% Partial relief: Range: 4% to 2%, average 2.63% No relief: Range: 13% to 2%, average 5.44% 44

45 LB&I Competent Authority Statistics Inventory Allocation Cases only US Initiated Total: Received 129, Disposed 134 Foreign Initiated Total: Received 480, Disposed 394 Year-End Inventory: 176 in 2006 to 283 in 2010 (61% increase) 45

46 LB&I Competent Authority Statistics Processing Time Closed Allocation (average days) Processing time increased for both US and Foreign Initiated Closed Cases In 2006, processing time: 634 US initiated, 797 Foreign (Combined: years, 1 month) In 2010, processing time: 779 US initiated, 937 Foreign (Combined: years) 46

47 CAN-US MOU Canada-US Memorandum of Understanding, released 11/26/2010 APA years Where tax returns have not been filed for at least 12 months before the arbitration begins - Proposed Resolution or Position Paper Where tax returns have been filed in both countries for at least 12 months before the date arbitration proceedings begin (including accepted rollback years), the arbitration board will determine the amount of income, expense, or tax reportable to either Canada or the US. Two step process for arbitrating PE cases Baseball style arbitration Board s determination based on majority vote Written decision shall not include rationale or analysis Decision will have no precedential value All board members must destroy materials at closing. Eligibility Timing Issues/Commencement Date For MAP cases commencement date is date on which both competent authorities have acknowledged receipt from the taxpayer of sufficient information to undertake substantive consideration for a mutual agreement. For APAs, MOU changes definition of commencement date can result in a potential 4 year time frame before APA is eligible for arbitration. 47

48 IRS Action On Decision in Veritas, IRB No IRS Action on Decision, IRB No (12/6/10) in Veritas Software Corp. v. Commissioner, 133 T.C. No.14 IRS does not acquiesce to result or reasoning, believes Tax Court s factual findings and legal assertions are erroneous. Facts found by Tax Court materially differed from the determinations made by the Service Unnecessary for the Tax Court to make broad assertions about governing law Is opinion largely dicta? Tax Court s assertions could be inappropriately relied on by taxpayers Tax Court misconstrued Treas. Reg (g)(2) Buy-in is for platform rights not make-sell rights valuation methods must take into account future income from pre-existing intangibles Arm s length result is determined under the method, or application of the method, that provides the most reliable measure, under all the facts and circumstances. IRS did not file appeal. Why? 48

49 GE Capital Canada The Queen v. General Electric Capital Canada Inc., Federal Court Appeal, No. A-1-10, 12/15/10 Crown appeals judgment for GE Capital in General Electric Capital Canada Inc v. R., [2010] 2 C.T.C In that case: Tax Court Judge upheld the 1% fee for from GE Capital Canada to GECUS as not exceeding the arm s length price. From , GECUS provided to GE Capital Canada at no cost an explicit guarantee for its debt issuances. In 1996, 1% annual fee was charged. Fees totaled $135.4M. Minister s main argument: Guarantee had no value because it was implicit that GECUS would have supported GE Capital Canada, a core subsidiary. Credit rating of sub would be equalized with that of the parent by reason of affiliation The Tax Court used the yield approach, where benefit = interest cost savings. Tax Court sided with testimony of GE Capital s expert, in concluding that GE Capital Canada would not have maintained its AAA rating without the guarantee, and instead would have had a lower rating, resulting in an interest cost savings of 1.83%. 49

50 Crown s basis for appeal: GE Capital Canada An arm s length party would not have paid the guarantee fee since it provided no value (in the alternative, the Crown plead that the Tax Court Judge was biased). Crown argued that the Tax Court Judge (Judge Hogan) made 4 legal errors: 1) Failed to identify relevant transaction because he took into account the removal of the explicit guarantee. Appeals Court rules that explicit guarantee had to be removed for calculation purposes, but Judge Hogan made an error in actually considering the impact of the removal he should not have recast the transaction. But error is harmless (removal is only 1/12 considerations) 2) Preferred the respondent s expert witnesses testimony, which failed to address 4 significant characteristics. Appeals Court rules that the preference does not mean that Judge Hogan did not consider the 4 factors. 3) Failed to conduct a reasonableness check Appeals Court rules that there is no legal principle that requires such a check, and nevertheless, the reasonableness test proposed by the Crown supported only that 2% was unreasonable. 4) Relied on subjective evidence Appeals Court rules that here is no error because Judge Hogan considered the evidence only after arriving at his conclusion based on objective evidence 50

51 GE Capital Canada Respondent s basis for dismissal 1) The arm s length standard required the Tax Court Judge to situate the parties to the transaction as persons unaffiliated with each other. The Tax Court should not have considered implicit support, because it arises from the familial relationship between the affiliated companies. Appeals Court rules that implicit guarantee must be considered in identifying the arm s length price.» The task is to ascertain price that would have been paid if parties were dealing at arm s length» Requires taking into account all of the circumstances which bear on the price whether they arise from the relationship or not» Statutory objective is to prevent tax avoidance resulting from price distortions arising from the joint interest between related party relationships» Implicit support is a factor in pricing the guarantee under the yield method» Cites OECD and Glaxo decision as supporting this view 2) The Tax Court erred in adopting the yield approach. If the Court had applied the correct arm s length standard, it would have focused on the market price of the guarantee and not on the benefit to the respondent. Appeals Court concluded that there was no error, because the assessment of the benefit was a means to ascertain whether a guarantee fee would have been paid by an arm s length party. CRA has 60 days from Dec. 15 th to appeal the ruling 51

52 2009 China APA Annual Report, released 12/31/10 First annual report ever released, covers China has established bilateral APAs with 10 countries Brief History 1998: First unilateral APA in China 2002: APA program introduced in Article : SAT provides some guidance on APA program 2005: First bilateral APA in China (with Japan) 2007: First North American APA (Wal-mart) 41 unilateral, 12 bilateral APAs signed in 05-09, no multilaterals. Shift from unilateral to bilateral Shift from tangibles to intangibles & services Completed under 1 year: 56% unilateral, 58% bilateral TNMM most commonly used (35 or 60% of signed APAs); 15 full cost, 20 ROS Cost Plus second most popular method (15 or 26% of signed APAs). 52

53 Transfer Pricing Documentation Italy - Regulation No. 2010/ of 29 September 2010, Circular Letter no. 58/E of 15 December 2010 First set of transfer pricing regulations in Italy Does not cover transactions between Italian domestic entities Voluntary, those who comply will avoid civil administrative penalties Egypt - Pursuant to Article No. 30 of Income Tax Law No. 91 and Articles No. 38, 39, 40 of its Executive Regulations, the ETA issued TP Guidelines on 29 November 2010 First part in a series Guidance on arm s length principle, comparability analysis, TP methods, and documentation requirements Must prepare documentation beginning in the 2010 tax year France - Instruction 4 A relative a l obligation documentaire en matiere de prix de transfert, issued on 4 January 2010 Commentary on documentation rules issued 20 December 2009 Documentation required for companies with revenue over $518m USD Must produce documentation within 30 days after tax audit notification 5 % penalty on TP adjustment amount, minimum penalty of 10,