Transfer Pricing Alert

Transcription

1 Transfer Pricing Alert EY Han Young newsletter July 2015

2 Transfer Pricing Current issue. OECD BEPS project. Australia. Republic of Korea. 2

3 OECD BEPS project OECD holds final public consultation on BEPS Actions 8-10 on transfer pricing On 6-7 July 2015, the Organisation for Economic Co-operation and Development(OECD) held its final public consultation in connection with the Base Erosion and Profit Shifting (BEPS) project, which was focused on Actions 8-10 on transfer pricing. The meeting focused on the recently published discussion draft on Cost Contribution Arrangements (CCAs) and the discussion draft on Hard-to-Value Intangibles (HTVIs). In addition, the OECD provided an update with respect to the other transfer pricing work streams of the BEPS project. The consultation was the final opportunity for stakeholders to engage directly with the OECD Secretariat and the country delegates who are responsible for the OECD s transfer pricing work. Background Since September 2014, the OECD has released several discussion drafts as part of its ongoing efforts in connection with BEPS Actions 8-10 on transfer pricing, including the discussion draft BEPS Action 8: Revisions to Chapter VIII of the Transfer Pricing Guidelines on Cost Contribution Arrangements and the discussion draft BEPS Action 8: Hard-to-Value Intangibles. The public consultation on 6-7 July 2015 was a dialogue among stakeholders, country tax officials, and the OECD Secretariat on key issues and concerns addressed in those comments. The consultation was hosted by OECD Working Party 6 (WP6), which is responsible for the OECD s work on transfer pricing matters. The first day of the public consultation covered the discussion draft on CCAs(and specifically the aspects of determining participants in a CCA and measuring contributions) and the discussion draft on HTVIs. The second day covered the status of revisions to Chapter I (The Arm s Length Principle) and Chapter VI (Special Considerations for Intangible Property) of the OECD Transfer Pricing Guidelines. Government officials; representatives of multinational businesses, industry bodies and advisors, including EY representatives; and non-governmental organizations participated in the two-day consultation. The consultation was live-streamed by the OECD and a recording is available on the OECD website. 3

4 OECD BEPS project Cost contribution arrangements CCAs are commonly used among business enterprises to share the contributions and risks involved in the joint development, production or acquisition of intangible assets, tangible assets or services. Important elements of the recently released discussion draft are the revised definition of a CCA, the revised requirements for a company to be recognized as a participant, and the proposed new guidance requiring each participant s contribution to be measured at value rather than at cost. A key topic of discussion with respect to CCAs was whether a party whose role is limited to funding the development can be part of a CCA. The views of business and WP6 diverge significantly on this point. The OECD Secretariat asked why it is so important for business that a funding party can be part of a CCA. Business commentators stressed the difference from a legal and economic perspective between a CCA and a series of individual transactions. Based on this, business is of the view that individual participants do not have to be able to control all the risks covered by a CCA. With respect to the proposed new guidance that each participant s contribution should be measured at value rather than at cost, there seemed to be consensus that preexisting intangibles should be valued at market value rather than at cost. Business commentators stressed, however, that ongoing contributions can be valued at cost, which is in line with third party behavior. Business commentators also stressed the importance of practical guidance. CCAs often involve a large number of participants. Transfer pricing adjustments to CCAs would therefore trigger multilateral disputes. Business also urged that existing CCAs be grandfathered. 4

5 OECD BEPS project Hard-to-value intangibles The recently released discussion draft on transfer pricing aspects of HTVIs proposes revisions to the existing guidance for such intangibles. The draft indicates that this approach is intended to protect tax administrations against the negative effects of information asymmetry when specific conditions are met. The Australian delegate began the discussion of HTVIs, stating that the proposed guidance is fully within the arm s length principle and that it should not be considered a special measure outside the arm s length principle. The discussion focused on the definition of HTVIs, which in the view of business commentators is too broad. A question was also raised by some of the country delegates and the OECD Secretariat as to whether the guidance should be applicable to intangibles in general and not limited to HTVIs only. Although a limited number of business commentators seemed to support this idea, the majority did not agree. Commentators also asked for clarity regarding the consequences if the specific conditions on HTVIs are met. In their view, the current draft is unclear as to the exact options a tax authority would have in such circumstances. A large part of the discussion focused on the exemptions and safe harbors for taxpayers and when the valuation applied by taxpayers for HTVIs should be accepted. The OECD Secretariat concluded the discussion with three comments. First, he questioned how any safe harbor range of acceptable deviations between projections and actual results would be applied if it were to be introduced, indicating that this would be an important issue for WP6 to discuss. Second, on the interaction between CCAs and HTVIs, he commented that WP6 is expecting that valuation of pre-existing contributions will mean that these preexisting contributions will be treated as HTVIs. Finally, the Secretariat noted that WP6 will look at implementation of HTVIs as part of the follow up work to the BEPS project and that business input on this would be welcomed. 5

6 OECD BEPS project Status update on BEPS transfer pricing work streams During the second day of the public consultation, the OECD Secretariat gave a full update on the status of the BEPS transfer pricing work streams, based on the current status of the OECD work in progress. The OECD intends that the transfer pricing guidance will be finalized in September 2015 and published shortly before the G20 Finance Ministers meeting on 8 October No further consultation documents will be issued. Although consensus has been reached on important issues, certain elements are still under discussion and therefore there are likely to be further changes and developments with respect to the areas addressed in the update provided by the Secretariat. Transfer pricing work to be continued in 2016 and 2017, after finalization of the reports with respect to the BEPS Actions, includes: Profit splits Financial transactions Profit attribution to permanent establishments Implementation of HTVIs Furthermore, the OECD and other international organizations (e.g., the United Nations, IMF and World Bank) have been given a mandate to develop a toolkit for developing countries on implementation of proposed BEPS transfer pricing measures. Particular aspects that will be dealt with include the lack of comparables, base eroding payments, and transfer pricing documentation. 6

7 OECD BEPS project Next steps WP6 will discuss the remaining BEPS transfer pricing issues during its July 2015 meeting. The CFA is expected to approve the reports on all the BEPS Actions in September, and the OECD Council is expected to approve them in early October. These reports will be discussed during the G20 Finance Ministers Meeting on 8 October Implications The discussion at the consultation underscores the significant progress made on the transfer pricing work streams of the BEPS project. Final reports are expected to be issued shortly before 8 October The status update provided by the OECD Secretariat gives a clear indication of the direction in which the work on the transfer pricing aspects of the BEPS project is moving, in particular with regard to risk and intangibles. Companies should evaluate the implications of the proposed additional guidance on transfer pricing for their intercompany transactions and the documentation thereof. Companies also should watch for the publication of the final reports reflecting revisions to the OECD Transfer Pricing Guidelines and should monitor development with respect to individual countries implementation of the new guidance. Finally, they should monitor the follow up work after issuance of the final BEPS reports in 2016 and

8 Australia Australian Taxation Office says new transfer pricing rules provide a different lens for examining cross-border transactions ATO expectations for Australian subsidiaries of multinational groups Businesses need to take proactive steps to ensure that their transfer pricing documentation and processes are sufficiently robust to withstand the level of scrutiny the Australian Taxation Office (ATO) expects to apply under the new transfer pricing rules. Appearing on 1 July 2015 before the Senate Economics References Committee inquiry into corporate tax avoidance, Commissioner of Taxation Chris Jordan and Deputy Commissioner of Taxation Mark Konza made a number of statements concerning how the new transfer pricing rules enable the ATO to adopt a different approach to scrutinizing taxpayers cross-border transfer pricing arrangements. While the hearing focused on the practices adopted by multinational pharmaceutical companies in relation to transfer pricing compliance in Australia, the observations by the ATO were not limited to that industry and are relevant to all taxpayers engaging in international related party dealings. These include the ATO comments about the responsibilities of executives of Australian subsidiaries of global groups in their understanding of the broader business, under the new law: Any CEO who was running an independent entity in Australia would have regard to whether they were getting a market return here. So if you are not making any inquiries about what a market return might be for the functions you are doing, you are not directing your attention to the law as required. This Alert identifies the expected changes to the ATO s approach under the new transfer pricing rules and recommended actions for taxpayers. 8

9 Australia ATO approach Comments made by the ATO in the recent Senate inquiry suggest the following approach under the new transfer pricing rules: The ATO plans to ask more (and broader) questions of multinational companies in Australia to understand the totality of their cross-border transactions. This includes understanding from an Australian perspective: their functional characterization (e.g., as a distributor) and their contribution to the global value chain; their level of independence in negotiating prices with international related parties; and the factors that determine their profitability. The ATO proposes to adopt this approach to all types of compliance activities, including transfer pricing reviews and audits, and Advance Pricing Arrangements (APAs). The ATO plans to use the Commissioner s reconstruction powers when necessary. This will enable the ATO to reconstruct or disregard a cross-border transaction if it is deemed to be inconsistent with arm s length commercial and financial relations (for example, by reference to comparable third party dealings, or hypothesizing the conditions that an independent third party would enter into in comparable circumstances). Arm s length conditions can then be determined having regard to the reconstructed cross-border transactions. The ATO plans to better understand the global profits of a multinational enterprise when determining the reasonableness of the level of returns achieved by the Australian taxpayer in return for its role in the global value chain (i.e. functions performed, assets employed and risks assumed). The ATO expects the new country-by-country reporting requirements will provide them with additional information that will assist them in future risk profiling and compliance processes. These requirements will see disclosures of further data to the ATO commencing in relation to income of years starting on or after 1 January

10 Australia Recommended actions for taxpayers Transfer Pricing businesses need to anticipate more extensive questioning by the ATO arising from its changed approach to its compliance activities resulting from new transfer pricing rules. It is imperative that taxpayers have transfer pricing documentation that satisfies the requirements of Division 284-E in Schedule 1 of the Taxation Administration Act 1953 and that also addresses the reconstruction provisions in section of the ITAA Taxpayers should also consider their broader transfer pricing compliance processes, including: Whether intercompany agreements align with the economic substance of crossborder transactions The extent of the internal processes and record keeping to support price negotiations with international related parties The alignment of internal policies and procedures with the functional characterization of the Australian business outlined in the transfer pricing documentation The appropriate retention of records regarding the commercial and industry factors impacting financial performance With respect to country-by-country reporting, the ATO noted that the timing of the reports will be (12 months after the first income year commencing after 1 January 2016). Taxpayers should now be discussing with their international colleagues what steps are being taken to prepare for country-by country reporting and other contemplated changes with respect to transfer pricing documentation (e.g., global master files and local country files). The country-by-country reporting will not be public information but will provide details on sales, profits and tax paid in other jurisdictions to the revenue authority. 10

11 Republic of Korea Amendments to the Enforcement Decree of the Adjustment of International Taxes Act ( AITA") Modification to the Submission of Arm s Length Price Computation Method (Article 7 of the Enforcement Decree of the AITA) Amendments to the Enforcement Decree of the Adjustment of International Taxes Act are effective as of 1 January 2015 or as of the date of promulgation. Current Criteria for Exemption of Submission of Arm s Length Price Computation Method Transactions of Goods - Total amount: Less than 5 billion won - Amount of transactions of services: Less than 500 million won Total amount of transactions of goods for each foreign related party - Total amount: Less than 1 billion won - Amount of transactions of services: Less than 100 million won Changes (Same as left) - Amount of transactions of services: Less than 1 billion won (Same as left) - Amount of transactions of services: Less than 200 million won <Reason for Amendment> Reduction of Taxpayers compliance burden. <Application Period> Applicable to the Tax Year beginning or after 11

12 Republic of Korea Applicants Qualified for Advance Adjustment between International Taxes and Customs Taxes (Article 14-7 of the Enforcement Decree of the AITA, Article 31-2 of the Enforcement Decree of the Customs Act) <Amendments to the Law(Article 6-3 of the AITA, Article 37-2 of the Customs Act)> Introduction of the Advance Pricing Adjustment Agreement between the International Taxes and Custom Taxes - Qualification for Application, Application Method and Procedures for Advance Adjustment for Taxes are as determined by Presidential Decree Current <New> Changes Applicants Qualified for Advance Adjustment Under conditions where methods for determining the Arm s Length Price from International Taxes perspective and the Customs Tax rates are similar - (Amr s Length Price from International Taxes perspective) Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method (Article 5 Section 1-1~3 of the AITA) - (Customs Tax rates) Determination of Dutiable Value Based on Transaction Price of Goods of the Same Kind and Quality, Determination of Dutiable Value Based on Transaction Price of Similar Goods, Determination of Dutiable Value Based on Domestic Sale Price, Determination of Dutiable Value Based on Calculated Price (Articles of the Customs Act) Notification of Approval for Advance Adjustment The Tax Authorities will notify the Applicants whether or not the Applicant may proceed with the filing within 90 days from the date of receipt of the pre-application - Applicants who have received rejection for Advance Adjustment must reply to the Tax Authorities within 30 days from the date of receipt of notification on the filing decision of APA and ACVA separately *APA: Advance Pricing Agreement **ACVA: Advance Customs Valuation Arrangement Other Procedures Pre-approval/review methods and procedures correspond to the APA and ACVA <Reason for Amendment> Provisions for Qualification for Application, Application Methods and Procedures of the Advance Adjustments <Application Period> Applicable to Applications filed after the date of promulgation 12

13 Republic of Korea New Definition of Related Parties, including Relatives of Foreign Shareholders (New Article 24-2 of the Enforcement Decree of the AITA) <Amendments to the Law(Article 14, Section 1 of the AITA)> If the sum of borrowings from the foreign controlling shareholder and related parties including the relatives of the related parties exceed the certain multiple (varies by industry) of the amount invested, interest expense on the borrowings exceeded cannot be included as deductible expense - Details including relatives of related parties is delegated to the Decree Current <New> Changes The Range of Foreign Controlling Shareholder s Related Parties subject to borrowings in connection to the taxation on thin capitalization Foreign Controlling Shareholder s Related Parties that apply to the following relations (Related Parties as defined by the Framework Act on National Taxes) 1 Kinship including blood relatives and relatives by marriage* *Kinship within blood-related second cousins, cousins by marriage, spouse (common-law marriage), etc. 2 Economic relations including Employees and Board Members* *Those who make a living on the Board Members, Employees, and/or their own wealth or other assets <Reason for Amendment> New Definition of Related Parties <Application Period> Applicable to the Tax Year beginning or after 13

14 Republic of Korea New Standards for Fines for Negligence of Schedule of International (Related Party) Transactions (Article 51 of the Enforcement Decree of the AITA) <Amendments to the Law(Article 12, Section 1)> Taxpayers who have not submitted the Schedule of International (Related Party) Transactions are also imposed fines in an equivalent matter to those who have been required to submit materials - Matters relating to the fines imposed are delegated to the Decree Current Standards for fines for negligence of Schedule of International (Related Party) Transactions - Various contracts, Statement of Pricing, Table of manufacturing costs, etc.: 50 million won - International Transaction pricing data, Business activities of related parties involved in such transactions, etc.: 30 million won - Negligence of Required Items when filing for Corporate and Income Tax: 70 million won <New> Changes (Same as left) - Schedule of International (Related Party) Transactions: 10 million won <Reason for Amendment> To establish new standards for fines for negligence of Schedule of International (Related Party) Transactions <Application Period> Applicable to the Tax Year beginning or after 14

15 Contacts Transfer Pricing Sang Min Ahn Dong Hoon Ha Director Hoon Seok Chung Director Kyoung Bae Han Director Jae Seong Yun Senior Manager Ki Se Kim Senior Manager Business Tax Service Min Yong Kwon Dong Chul Kim Jae Cheol Kim Won Bo Jung Young Ro Bae Executive Director Song Min Oh Executive Director International Tax Service Jaewon Lee Kyung Tae Ko Yeon Ki Ko Nam Wun Jang Financial Services Organization Jong Yeol Park Transaction Tax Jin Hyun Seok Human Capital Danielle Suh Min Ah Kim Executive Director Transfer Pricing-FSO Stella Kim Director Jeong Hun You Dong Sung Kim

16 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust andconfidence in the capital markets and in economies the world over. Wedevelop outstanding leaders who team to deliver on our promises to allof our stakeholders. In so doing, we play a critical role in building a betterworking world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the memberfirms of Ernst & Young Global Limited, each of which is a separate legalentity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about ourorganization, please visit ey.com Ernst & Young Han Young 2015 Ernst & Young Advisory, Inc. All Rights Reserved. APAC no This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/kr