BEPS Transfer Pricing Developments Update. Global Transfer Pricing Services, KPMG November 2016

Transcription

1 BEPS Transfer Pricing Developments Update Global Transfer Pricing Services, KPMG November 2016

2 Agenda 1. OECD s Base Erosion and Profit Shifting ( BEPS ) project 2. BEPS Action 13 Three-tier documentation requirements 3. Implementation and developments around the world on Action Latest BEPS transfer pricing developments in Hong Kong 5. Other transfer pricing related BEPS recommendations and their implications 6. Example: Implications of BEPS 2

3 OECD s BEPS Project

4 BEPS Project Timeline What is the BEPS Action Plans? Developed by OECD and commissioned by G20 15 actions identified perceived to counteract tax avoidance strategies used by global organizations June 2013 OECD released BEPS Action Plan, covering 5 areas with 15 action plans in total October 2015 OECD issued final reports regarding all its Action Plan to address BEPS, together with a plan for follow-up work and a timetable for implementation. July 2016 Release of BEPS discussion drafts on attribution of profits to permanent establishments and revised guidance on profit splits June 2012 G20 Finance Ministers and Central Bank Governors agreed on international cooperation regarding the BEPS project and endorsed OECD on further research September 2014 OECD launched seven deliverables out of 15 action plans and 1 explanatory statement June 2016 OECD issued Guidance on the Implementation of CbyC Reporting 4

5 BEPS Action Plans New Minimum Standards Action 5: Harmful tax practices Action 6: Treaty abuse Article 13: Transfer pricing documentation and CbyC Reporting Reinforced International Standard Article 7: Definition of PE Actions 8 10: Aligning transfer pricing with value creation Article 14: Dispute resolution Common Approaches and Best Practices Action 2: Hybrid mismatch arrangements Action 3: CFC rules Action 4: Interest deductions Governance/Process/Other Action 1: Digital economy Action 11: BEPS data Action 15: Multilateral instrument Action 12: Mandatory disclosure rules 5

6 Latest International effort to curb aggressive tax avoidance (Apple example) The size of the tax demanded for Apple risks further unsettling multinational companies, which face a broader international effort to curb aggressive tax avoidance. 6

7 BEPS Action 13 Three-tier Transfer Pricing Documentation Requirements

8 Background, objectives and approach On 5 October 2015, the OECD released final guidance on Transfer Pricing Documentation and Country-by- Country Reporting. The OECD has developed a three-tiered approach to enable tax authorities to have sufficient information to risk assess. Action 13 Objectives Action 13 Approach Whilst Action 13 refers to a transfer pricing risk assessment, the preface acknowledges this can be used for a BEPS risk analysis and the CbyC Report goes beyond what is required for a transfer pricing risk analysis. Aid tax authorities perform a transfer pricing risk assessment. Ensure taxpayers give appropriate consideration to setting prices consistent with the arm s-length principle. Country by Country (CbyC) Report Master File (MF) Provide information needed for tax authority audit. Local File (LF) These three documents together are a taxpayer s key tools for managing transfer pricing risk. They must be consistent. 8

9 OECD guidance on CbyC implementation The OECD published guidance on the implementation of CbyC reporting. Some of the key information that a Multinational Entity (MNE) should be aware of includes: Which MNEs are required to file a CbyC report MNEs with consolidated group revenue in the preceding fiscal year of 750 million Euros or more Timing of CbyC report MNEs will be allowed one year from the fiscal year end to file the CbyC report File for the fiscal years beginning on or after January 1, 2016 Where filed and mechanisms for exchange File CbyC report in the country of the ultimate parent of the MNE; That country will exchange this information on an automatic basis with jurisdictions in which the MNE operates and that meet the necessary conditions MNE can appoint a surrogate parent entity 9

10 A three-tiered approach for transfer pricing documentation Master file Objective: Require taxpayers to articulate convincing, consistent and coherent transfer pricing positions Approach: Provides an overview of the multinational group and business Local file Objective: Analysis of transfer prices in local jurisdiction Approach: Provides additional detail on the operations and transactions relevant to that jurisdiction Country-by-Country (CbyC) Report Objective: Risk Assessment Approach: Provides summary data by jurisdiction including revenue, income, taxes, and indicators of economic activity 10

11 Master File: why now? Countries are implementing OECD BEPS Action Item 13 for FYE 2016, requiring Master File and Local File TP documentation - Where required, the Master File will be due with the local TP documentation - Some countries may impose penalties for failure to file Master File/Local File - Some countries are adopting Master File requirements with much lower thresholds than the 750 million Euro trigger for CbyC - Those countries not adopting OECD BEPS Action Item 13 may still ask for the Master File 11

12 Master File: Why now? (continued) The time is now to draft the Master File and evaluate Local File implications working backwards from the due date of the first Local File does not leave much time - Uncover and remediate any risks - Determine requirements and timing for approval and sign-off process (e.g. legal or other executive involvement) - Harmonize CbyC with Master File and Local File content - Take advantage of tax planning opportunities where applicable and appropriate 12

13 Master File: What is different? This is not your status quo documentation of the past, it is DIFFERENT Intangibles Strategy Value Creation Supply Chain Financial Activities Contracts, APAs and Other Rulings The Master File requirements warrant considerable thought to develop - Master File is an opportunity for taxpayers to tell their story first and offers a first-mover advantage when dealing with tax authorities - On the other hand, the more information provided in the Master File the more potential issues with consistency with other information and information security There are other stakeholders outside the tax function that will likely need to be included in the development and review of Company s Master File The process of developing the Master File story may uncover potential opportunities (or risks) and connections within a Company it is a more complete organizational picture compared to what has been presented in the past to tax authorities 13

14 Master File requirements The Master File should provide an overview of the MNE group business. The objective is to explain an MNE s transfer pricing policies in the context of its global economic, legal, financial and tax profile. The Master File contains some new information not previously provided to tax authorities. A description of the business including: - Important drivers of business profit. - Description of the supply chain (for five largest plus those that represent more than 5% of turnover). - Description of the main geographies. - Important intra-group services. - Functional analysis describing principal contributions to value creation. - Important business restructurings. - Organisation structure. Intangibles including: - The MNE s strategy for the development of intangibles. - A list of important intangibles. - Agreements relating to intangibles. - Transfer pricing policies related to Research and Development and intangibles. - Important transfers of intangibles. Intra-group financial activity including: - How the MNE is financed. - Identification of central financing companies. - Transfer pricing polices relating to financing. Financial and tax positions including: - Consolidated financial statement. - Unilateral Advanced Pricing Agreements (APAs); and other tax rulings relating to the allocation of income. 14

15 Master File: What is different? OECD Published Content Chart illustrating the MNE s legal and ownership structure and geographical location of operating entities. Important drivers of business profit; Supply Chains for 5 largest products/services & 5% of turnover Main geographic markets for 5 largest products/services Brief functional analysis, including key functions performed, important risks and assets A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including description of capabilities and transfer pricing policies A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year. Typically provided in existing TP documentation Not globally Not globally Not globally Not globally Key issues Treatment of PEs and other definitional issues Consistency across various reports and other documents (e.g., annual reports, APAs, local documentation, other regulatory filings). Consistency with transfer pricing and global profit allocation per CbyC Report Compiling necessary information and presenting it in a timely and organized manner Use of tax technology Determining necessary amount of detail to provide A general description of the MNE s overall plan strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management. A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own intangibles. A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and license agreements. No Not globally No Legal vs. economic ownership Clear delineation of key decision-making functions versus execution functions and consistency with profit allocation per CbyC Report Treatment of ambiguous intangibles such as manufacturing know-how, marketing intangibles, etc. Maintain list of intercompany agreements that include appropriate contractual terms 15

16 Master File: What is different? (cont.) OECD Published Content A general description of the group s transfer pricing policies related to R&D and intangibles. A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved. A general description of how the group is financed, including important financing arrangements with unrelated lenders. The identification of any members of the MNE group that provide a central financing function for the group, including the country under whose laws the entity is organized and the place of effective management of such entities. Typically provided in existing TP documentation Not globally Not globally No Key issues Should be consistent with sections on identification and functional description of intangibles Interaction with other BEPS actions on financing (e.g., hybrid mismatch, interest deduction, and risk and capital) A general description of the MNE's general transfer pricing policies related to financing arrangements between associated enterprises. The MNE s annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes. A list and brief description of the MNE group s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries. Not globally No but typically available No Interaction with other BEPS actions on financing (e.g., hybrid mismatch, interest deduction, and risk and capital) N/A Potential impact on global tax risk profile of disclosures 16

17 Options for structuring a Master File The operating model of the MNE will drive the structure of the Master File. Overall company Business Line Region Master File Chapter: Organisational structure Master File Chapter: Organisational structure Structure Single Master File Master File Chapter: Product 1 Business and intangibles Master File Chapter: Product 2 Business and intangibles Master File Chapter: Product 3 Business and intangibles Master File Chapter: Supply Chain Region 1 Master File Chapter: Supply Chain Region 2 Master File Chapter: Supply Chain Region 3 Master File Chapter: Services and Financing Master File Chapter: Intangibles; Services and Financing Types of group One type of product/activity. Multiple products with a similar business models/supply chains. Multiple products of a similar nature. Integrated supply chain. Multiple products with different business models/supply chains. Multiple, distinct brands with different routes to market. Conglomerate or Joint Ventures. Businesses with separate reporting lines. Recently acquired or un-integrated businesses. Regional variations in supply chain or business model. 17

18 Example Value heat map Procurement Product Central brand Local brand Retail Strategy and supply Manufacturing design management management management chain management Support services 1.1 Store numbers 2.1 Product range concept 3.1 Assessing Business requirements 4.1 Product range selection 5.1 Brand: global marketing strategy 6.1 Local tactical marketing 7.1 Store management and selling to customers 8.1 Finance and treasury services 1.2 Store locations 2.2 Initial feedback on the collection concept 3.2 Sourcing strategy 4.2 Procurement of raw materials 5.2 Store design framework and layouts 6.2 Local advertising and promotion 7.2 In-store stock management 8.2 Human resources services 1.3 Store closures/ rationalisation 2.3 Sketch development 3.3 Supplier selection/ Negotiation and contracts 4.3 Sourcing of manufacturers 5.3 Visual merchandising and sponsorships 6.3 Local market research 7.3 Training of store staff 8.3 Legal and Tax services 1.4 Product mix 2.4 Material sourcing and research 3.4 Post contract and supplier relationship management 4.4 Overseeing the manufacturing 5.4 Legal ownership of brand 6.4 Adapting global framework to local requirements 7.4 After sales customer service 8.4 IT services 1.5 Product pricing 2.5 Product development 3.5 Quality control and assurance 4.5 Production scheduling and managing production assets 5.5 Global marketing framework 7.5 Trade relationship management 8.5 General administrative services 1.6 Store design 2.6 Prototype approval 3.6 Logistics and delivery 4.6 Quality control 7.6 Product range selection for stores 1.7 Store operations strategy 2.7 Samples produced 3.7 Demand planning and forecasting 7.7 Display and positioning of stock 2.8 Design finalised 3.8 Warehouse stock management 7.8 Window display Key: High value Medium value 3.9 Monitoring of stock 7.9 Promotional merchandising Low value 18

19 CbyC reporting requirements CbyC Template Page 1 Revenue Country Related Party Unrelated Party Total Profit (Loss) before Income Tax Income Tax Paid (on a Cash Basis) Income tax Accrued Current Year Stated Capital Accumulated Earnings Number of Employees Tangible Assets Other than Cash and Cash Equivalents Country A Country B Not resident in any tax jurisdiction CbyC Template Page 2 (onwards) Activities Country Constituent Entities Resident in Country Country of Organization or Incorporation if Different from Country of Residence Country A Entity A Country B Entity B CbyC Template Page 3 R&D Hold/manage ip Purchasing & Procurement Manufacturing & Production Sales, Marketing & Distribution Administrative, Management & Support Services External Service Business Internal Group Finance Regulated Financial Services Opportunity to include any further information or explanation considered necessary or that would facilitate the understanding of the compulsory information provided in the CbyC report. Insurance Holding Company Dormant Other Source: Information obtained from Annex III to Chapter V of OECD/G20 Base Erosion and Profit Shifting Project: Guidance on Transfer Pricing Documentation and Country-by Country Reporting. 19

20 What can be done with this information? Red flags raised! Malaysia Information collected from CbyC Report (Simplified example) Revenue Tax Jurisdiction Related Party Unrelated Party Total Activities Profit (Loss) before Income Tax Income Tax Paid Stated Capital Accumulated Earnings Number of Employees Tangible Assets Other than Cash and Cash Equivalents Hong Kong $50m $10m $60m Purchasing and Procurement $40m $1m $10m $100m 3 $2m Cayman Islands $200m $0 $200m Hold/manage IP $200m $0 $1 $800m 0 $1m United States $0 $400m $400m China $0 $100m $100m Malaysia $200m $50m $250m Sales, Marketing & Distribution Sales, Marketing & Distribution Manufacturing & Sales, Marketing & Distribution $8m $3.2m $30m $20m 30 $15m $3m $0.75m $2m $8m 5 $2m ($3m) $0 $20m $1m 25 $80m 20

21 CbyC Reporting Common challenges Common challenges Timing of first CbyC report: US, Canada, Global? Decentralised and fragmented IT systems and processes Large number of potential stakeholders Potential risk areas and best strategy in preparing CbyC report Consistency between CbyC report and TP documentation (master file, local file) Alignment between pre- and post-beps structures Presence in complex tax jurisdictions (e.g. China) Limited time and resources available to core project team Deciding on the right strategy for the source data 21

22 Local File: What is different? OECD Published Content A description of the management structure of the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the country(ies) in which such individuals maintain their principal offices. A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity. A description of the key competitors. A description of the material controlled transactions (e.g., procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, license of intangibles, etc.) and the context in which such transactions take place. The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e., payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payor or recipient. An identification of associated enterprises involved In each category of controlled transactions, and the relationship amongst them. Copies of all material intercompany agreements concluded by the local entity. Typically provided in existing TP documentation No Yes but often not as detailed Yes Yes Yes but often not as detailed No Key issues Explanation of reporting relationships. For example, multiple reporting situations (e.g., regional, product line) Highlights oversight of key functions Narrative needs to be consistent with the Master File and local files for other entities Highlights potential change in businesses due to restructuring/ip transfers Information system support Availability of intercompany agreements 22

23 Local File: What is different? (cont.) OECD Published Content A detailed comparability and functional analysis of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changes compared to prior years. (To the extent this functional analysis duplicates information in the master file, a cross reference to the master file is sufficient.) An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting this method. An indication of which associated enterprise is selected as the tested party, if applicable, and the reasons for this selection. Typically provided in existing TP documentation Yes but often not as detailed Yes Yes Key issues Functional shifts within the group highlighted A summary of the important assumptions made in applying the transfer pricing policy. If relevant, an explanation of the reasons for performing a multiyear analysis. A list and description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information. A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transaction, or both. A description of the reasons for concluding that relevant transactions were priced on an arms-length basis Yes Yes Yes Yes Yes Yes A summary of financial information used in applying the transfer pricing methodology. 23

24 Local File: What is different? (cont.) OECD Published Content A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above. Annual local entity financial accounts for the fiscal year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied. Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained Typically provided in existing TP documentation No No No Yes Key issues What type of ATRs would be related to the controlled transactions with the local entity? Timing of availability of local entity financial statements Information system and financial reporting group support for reconciling discrepancies 24

25 Interaction between the three elements of Action 13 These three elements are designed to provide tax administration with relevant and reliable information to perform a risk assessment. However, the documentation is a tool taxpayers can use to manage tax and transfer pricing risk. Master File The Master File should provide a high-level overview of the MNE group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. Should contain information for the MNE group as a whole but may be presented by line of business. All information should be available to all tax authorities. Content: organisational structure, description of MNE s business, intangibles, intra-group financing activities and financial and tax positions. Strategic split of information based on local or global audience Local File Detailed information relating to specific intra-group transactions. Assuring the tax authority that the local entity has complied with the arm s length principle for its material intra-group transactions in that jurisdiction. Focuses on information relevant to the transfer pricing analysis of a local entity. Similar to the transfer pricing documentation currently prepared. Similar details required for each legal entity (subject to local law). MF puts CbyC Report in global context LF puts CbyC Report in local context CbyC Report Aggregate tax jurisdiction wide information relating to the global allocation of income, taxes paid, and certain indicators of economic activity among the tax jurisdictions in which the MNE operates. Country by country breakdown of financial and tax data. List of all entities, branches and PEs, with relevant activity from a tick list. Assumptions and narrative to support and explain the data. 25

26 Implementation and Developments around the World on Action 13

27 BEPS Action 13: Country implementation summary Canada CbyCR Draft legislation United States CbyCR Final Legislation Mexico CbyCR / MF / LF Final Legislation (as of 4 Nov) Belgium Peru Bermuda CbyCR / MF/LF Intentions CbyCR Intentions CbyCR / MF /LF Final Legislation United Kingdom CbyCR Final Ireland MF / LF Intention CbyCR Final Legislation Luxembourg CbyCR Draft legislation France CbyCR Final Legislation Denmark Netherlands CbyCR / MF / LF Final Legislation CbyCR / MF / LF Final Legislation Iceland CbyCR Final Portugal CbyCR Final Spain Nigeria MF/LF Intention CbyCR / MF / LF Final Legislation MF / LF Intention CbyCR Intentions Norway CbyCR Draft Switzerland CbyCR Draft Italy MF/LF Intention Austria Sweden CbyCR / MF / LF Draft Legislation Poland Israel CbyCR/L F Draft CbyCR / MF / LF Final Legislation CbyCR / MF /LF Final Legislation Germany CbyCR/M F Draft MF / LF Intention CbyCR Draft Legislation LF Intention India CbyCR Final MF Intention Finland Romania CbyCR Intention CbyCR / MF / LF Draft Legislation China MF / LF Draft MF / LF Final CbyCR / MF /LF Final Legislation Indonesia CbyCR / MF / LF Intentions Russia CbyCR / MF / LF Draft Legislation Singapore Japan CbyCR Draft legislation CbyCR / MF /LF Final Legislation Vietnam South Korea CbyCR Draft Hong Kong MF / LF Final CbyCR / MF / LF Public Consultation CbyCR / MF / LF Draft legislation Chile CbyCR / MF/LF Intentions Implemented Draft bills/public discussion draft Intention to Implement Uruguay CbyCR / MF Draft legislation South Africa CbyCR Draft MF / LF Intention Malaysia CbyCR / MF / LF Intentions Australia CbyCR / MF / LF Final Legislation New Zealand CbyCR / MF / LF Intentions 27 Source: KPMG International member firms

28 Latest country implementation update US Sep 2016: Guidance for IRS agents, applying arm s length standard Jun 2016: CbyC reporting final regulations UK Sep 2016: Public CbyC reporting, amendment to Finance Bill 2016 Jun 2016: Proposed secondary adjustment rule for transfer pricing provisions Mar 2016: BEPS items included in Finance (No. 2) Bill 2016 Australia Sep 2016: CbyC reporting exemption guidance published May 2016: CbyC, final local files released Feb 2016: Consultation on BEPS-related transfer pricing recommendations China Oct 2016: New APA administrative guidelines, effective Dec 2016 Jul 2016: Announcement 42, Transfer pricing documentation, related-party reporting guidance from BEPS project May 2016: China entered into agreement for the automatic exchange of CbyC reports 28

29 Latest country implementation update (cont.) Canada Aug 2016: Draft legislation to implement CbyC reporting rules. May 2016: Canada entered into agreement for the automatic exchange of CbyC reports Apr 2016: Procedures for exchange of tax rulings under BEPS rules technical interpretation is issued. Singapore Oct 2016: CbyC reporting guide released by IRAS Jun 2016: Participation in OECD s framework and implementation of CbyC reporting Jan 2016: New, updated transfer pricing guidance Hong Kong Oct 2016: Consultation paper on measures to counter BEPS Jun 2016: Join as an Associate i.e. to participate in OECD s framework and implementation of four minimum standards of BEPS including CbyC reporting France Oct 2016: Decree implementing CbyC reporting Jan 2016: New legislation for CbyC reporting and transfer pricing declaration Nov 2015: Legislative proposals requiring automatic filing of transfer pricing documentation 29

30 BEPS Action 13: Country implementation summary Country Reporting Requirements 1 Effective Date MF Threshold MF LF CbyCR Australia January 1, 2016 Annual global revenue of A$1 billion or more Belgium January 1, 2016 Prepared if one of the following criteria is met: i. sum of operational and financial income of 50 million; ii. balance sheet total larger than 1 billion; iii. Full-time-equivalents exceeding 100. Canada January 1, 2016 N/A China January 1, 2016 Hong Kong Prepared if one of the following criteria is met: i. the cross-border related-party transactions (RPT) and the group to which the enterprise s UHC belongs has already prepared a MF; ii. total annual amount of RPT exceeds RMB 1 billion. Prepared if two of the following criteria are met: i. annual revenue exceeding HK$100 million; ii. assets exceeding HK$100 million; iii. (iii) workforce exceeding 100 employees. 1 Implemented Intention to implement MF Master file Draft bills/public discussion draft No announcements made to date / not required MF, LF, and CbyCR exemption or threshold may apply in some of the jurisdictions. LF Local file CbyCR Country-by-country reporting 30 Source: KPMG International member firms

31 BEPS Action 13: Country implementation summary (cont.) Country Reporting Requirements 1 Effective Date MF Threshold MF LF CbyCR India April 1, 2016 Indonesia Likely 2017 Malaysia New Zealand Expected as of January 1, 2017 N/A Pakistan July 1, 2016 Russia January 1, 2017 RUB 50 million Singapore January 1, 2017 N/A 1 Implemented Intention to implement MF Master file Draft bills/public discussion draft No announcements made to date / not required MF, LF, and CbyCR exemption or threshold may apply in some of the jurisdictions. LF Local file CbyCR Country-by-country reporting 31 Source: KPMG International member firms

32 BEPS Action 13: Country implementation summary (cont.) Country Reporting Requirements MF LF CbyCR Effective Date South Korea January 1, MF Threshold Prepared when two of the following criteria are met: i. net sales greater than KRW 100 billion (approx. $85 million) ii. cross-border related-party transactions exceeding KRW 50 billion (approx. US$42.5 million) per year Taiwan United Kingdom January 1, 2016 United States June 30, Implemented Intention to implement MF Master file Draft bills/public discussion draft No announcements made to date / not required MF, LF, and CbyCR exemption or threshold may apply in some of the jurisdictions. LF Local file CbyCR Country-by-country reporting 32 Source: KPMG International member firms

33 Countries that signed the MCAA on CbyCR Most of the signatories to the Common Reporting Standard Multilateral Competent Authority Agreement (MCAA) have adopted or indicated an intent to adopt CbyCR, but some signatories have not. However, we believe signing the MCAA indicates a general intent to adopt CbyCR. Argentina Finland Jersey Portugal Australia France Korea Senegal Austria Germany Latvia Slovak Republic Belgium Georgia Liechtenstein Slovenia Bermuda Greece Luxembourg South Africa Brazil Guernsey Malaysia Spain Canada Iceland Mexico Sweden Chile India Netherlands Switzerland Costa Rica Ireland New Zealand United Kingdom Curacao Isle of Man Nigeria Uruguay Czech Republic Israel Norway People s Republic Denmark Italy of China Estonia Japan Poland Total 49 countries Last updated: October 21, 2016 Source: OECD, 33

34 Latest BEPS Transfer Pricing Developments in Hong Kong

35 What s happening in Hong Kong? Dec 2009 DIPN 46 Transfer Pricing Guidelines Methodologies and Related Issues Mar 2012 DIPN 48 Advance Pricing Agreement (APA) Jun 2016 Hong Kong has accepted the OCED s invitation to join as an associate and will implement the four minimum standards under the BEPS project Oct 2016 Consultation Paper on measures to counter BEPS Target Mid-2017 Introduce relevant amendment bill(s) for measures to counter BEPS Target 2019 First CbyC reports to be filed to IRD 35

36 Consultation Paper on measures to counter BEPS (published on 26 Oct) Policy Intent Implement the BEPS package, including the four minimum standards, i.e. countering harmful tax practices, preventing treaty abuse, imposing CbyC reporting requirement and improving cross-border dispute resolution mechanism. Priorities for Hong Kong: To put in place the necessary legislative framework (Actions 8 to 10) spontaneous exchange of information ( EOI ) on tax rulings (Action 5) CbyC reporting requirement (Action 13), cross-border dispute resolution mechanism (Action 14) Multilateral instrument ( MLI ) (Action 15) 36

37 Consultation Paper on measures to counter BEPS (published on 26 Oct) (cont.) Transfer pricing rules On the basis of the arm s length principle, the Hong Kong government proposes to provide for the fundamental transfer pricing rule which empowers the Commissioner of Inland Revenue to adjust the profits or losses of an enterprise where the actual provision made or imposed between two persons ( affected persons ) departs from the provision which would have been made between independent persons and has created a tax advantage. The fundamental rule will apply to cases where the affected persons are associated, i.e. one affected person is directly or indirectly participating in the management, control or capital of the other, or a third person is participating in the same of both affected persons. It will also apply to the dealings between different parts of an enterprise, such as between the head office and a PE. The scope of the fundamental rule is sufficiently wide to cover not only transactions of assets and services, but also financial or business arrangements like the making of loans and cost contribution arrangements ( CCA ). The government proposes to put in place a mechanism to provide for corresponding relief resulting from transfer pricing adjustments made by the Commissioner or our CDTA partners. Impact on business Transfer pricing documentation will become a new requirement. The government also proposes exemption for certain enterprises that meet the specified criteria from the documentation requirements to minimise the compliance burden on enterprises. 37

38 Consultation Paper on measures to counter BEPS (published on 26 Oct) (cont.) Transfer Pricing Documentation and CbyC Reporting A three-tiered standardised approach to transfer pricing documentation (i.e. master file, local file and CbyC report) will be adopted. The government proposes to provide exemptions for the preparation of the master and local files, specifically: Enterprises which satisfy any two of the following three conditions are not required to prepare the master and local files (i) total annual revenue not more than HK$100 million (ii) total assets not more than HK$100 million (iii) no more than 100 employees MNEs with annual consolidated group revenue equal to or exceeding EUR750 million (or an equivalent amount in domestic currency as of January 2015, i.e. about HK$6.8 billion) to file CbyC reports. 38

39 Consultation Paper on measures to counter BEPS (published on 26 Oct) (cont.) Time frame MNE groups are required to file CbyC reports within 12 months from the last day of their fiscal year Language The master file, local files and CbyC reports should be prepared in either Chinese or English Penalty Transfer pricing documentation will be a new tax reporting requirement. To ensure compliance, the government proposes to introduce penalty provisions in the IRO to achieve deterrent effect as follows (i) Failure to comply with the requirements relating to master file and local file without reasonable excuse: This will be an offence and the proposed penalty upon conviction is a fine at level 6 (at present, the fine at level 6 is $100,000), which is the same as the penalty for failure to keep proper business records under section 80(1A) of the IRO; and (ii) Failure to submit CbyC reports without reasonable excuse: This will be an offence and the proposed penalty upon conviction is a fine at level 6, which is the same as the proposed penalty for item (c)(i) above. In case of a continuing offence after conviction for failure to comply, a further fine of $500 will be imposed for each day of offence. The proposed penalty is the same as that imposed on financial institutions in the context of automatic exchange of financial account information in tax matters ( AEOI ) under section 80B(4) of the IRO. 39

40 Consultation Paper on measures to counter BEPS (published on 26 Oct) (cont.) Implementation issues of CbyC Reporting Secondary filing mechanism In case the ultimate parent entity of an MNE group is in a jurisdiction that neither requires the filing of CbyC report nor exchanges such report with IRD, the Commissioner will be empowered to mandate a constituent of the group in Hong Kong ( Hong Kong Constituent ) to file the CbyC report. Surrogate filing mechanism Hong Kong has committed to conducting AEOI with appropriate jurisdictions on a bilateral basis and intends to conduct AEOI with all our CDTA and TIEA partners. Modelled on AEOI, our current plan is to rely on CDTAs or TIEAs as the basis for conducting automatic exchange of CbyC reports and to exchange CbyC reports with all our CDTA and TIEA partners on a bilateral basis. The government has no plan to enter into the MCMAA with other jurisdictions at this stage. Target timeline Introduce relevant amendment bill(s) in mid 2017 First CbyC reports filed to IRD in

41 Other TP Related BEPS Recommendations and Their Implications

42 Assure that transfer pricing outcomes are in line with value creation Action 8: Assure that TP outcomes are in line with value creation Intangibles The OECD will develop rules to prevent profit shifting by moving intangibles by: Adopting a broad and clearly delineated definition of intangibles (e.g. goodwill and going concern value should generally be compensable); Ensuring profits are appropriately allocated in accordance with value creation; Creating special guidelines for transfers of hard-to-value intangibles; and Revisiting guidance on cost contribution arrangements ( CCA ). Action 9: Assure that TP outcomes are in line with value creation Risk & capital The OECD will develop rules to prevent profit shifting by transferring risks/allocating capital by: Adopting TP rules so that returns do not accrue to an entity solely because it bears contractual risk or provides capital; and Aligning returns with value creation. 42

43 Assure that transfer pricing outcomes are in line with value creation (cont.) Action 10: Assure that TP outcomes are in line with value creation Other high-risk transactions The OECD will develop rules to prevent profit shifting by entering into transactions that would not/only rarely occur between unrelated parties by: Clarifying circumstances in which transactions can be recharacterised; Clarifying the application of TP methods (in particular profit splits with respect to global value chains); and Providing protection against common types of base eroding payments, such as management fees and head office expenses. 43

44 Example: Implications of BEPS

45 Example Key areas of consideration: Third Party Suppliers Trading Co HK Distributors Europe Third Party Customers Europe Streamline principal structure and profit distribution along group's value chain Align IP ownership with principal structure R&D Co U.S. Manufacturing Co PRC Third Party Agent U.S. Third Party Customers U.S. Research and Development ("R&D") functions Manufacturing activities Key: Trading entity Distribution network Manufacturing entity R&D entity Sales of raw materials PRC manufacturing activities via processing arrangement with HK entities Sales of finished goods R&D services 45

46 KPMG s BEPS-Related TP Services KPMG can provide an array of TP services to help the client understand and prepare for BEPS. These services include but are not limited to: Global TP planning and analysis Risk assessment to identify misalignment of TP strategy post-beps TP policy review and redesign TP business restructuring / conversion analysis and assistance CbyC reporting and global TP documentation (including Master File and Local File) assistance Advanced Pricing Arrangement ( APA ) TP audit defense / controversy management assistance 46

47 Speakers contact details CHEN Lu Global Transfer Pricing Services Partner, KPMG Tax Limited Tel: Fax: William WONG Global Transfer Pricing Services Senior Manager, KPMG Tax Limited Tel: Fax:

48 Thank you

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