OECD BEPS Transfer Pricing Action Points Indian Perspective

Transcription

1 OECD BEPS Transfer Pricing Action Points Indian Perspective Mrs. Anuradha Rathod Associate Director, Global Transfer Pricing Services, B S R & Co. LLP The Chambers of Tax Consultants 16 September 2015

2 Impact Impact of of BEPS BEPS Transfer Transfer Pricing Pricing Action Action Points Points for for Indian Indian Companies Companies

3 Areas of discussion 1 OECD BEPS Action Plan 2 India's consent - an important factor in developing a consensus on BEPS 3 Action 13 Transfer Pricing Documentation and country-by-country reporting 4 Action 8 Transfer Pricing aspects of intangibles 5 Action 10 Transfer Pricing aspects low value-adding intra-group services 6 Action 8 Discussion Draft on Hard to Value Intangible (HTVI) 7 Action 8 - Revisions to chapter VIII of TP Guidelines on cost contribution arrangements (CCAs)

4 Organization Organization for for Economic Economic Co-operation Co-operation and and Development Development (OECD) (OECD) BEPS BEPS Action Action Plan Plan

5 OECD BEPS Action Plan In a nutshell BEPS arises because under the existing rules MNEs are often able to artificially separate the allocation of their taxable profits from the jurisdictions in which these profits arise. This can result in income going untaxed anywhere, and significantly reduces the corporate income tax paid by MNEs in the jurisdictions where they operate, thus affecting competition, distorting investment decisions and reducing overall trust in the tax system. OECD Webinar On 19 July 2013 the OECD released an Action Plan on Base Erosion and Profit Shifting (BEPS) which was presented to the meeting of G20 Finance Ministers in Moscow. The purpose of the Action Plan is to prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it. The report indicates that no or low taxation is not per se a cause for concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it. The Action Plan covers 15 specific Actions which are broadly to be achieved within a two year time frame (i.e. by the end of 2015). On 16 September 2014, OECD released its first set of recommendations for 7 out of 15 Action Points. 15 Actions organized around three main pillars The coherence of corporate tax at the international level Realignment of taxation and substance Transparency, coupled with certainty and predictability 5

6 Why should YOU care about BEPS? Multinationals need to be aware of these developments and manage the risk of change in law Changes in tax legislation Political & Public attention Media Fairly negative light Companies reputation at stake : In particular consumer facing brands Tax enforcement environment Tax Administrations closely scrutinize global structures to identify possible abuses What is likely to come out of BEPS project? Changes in Domestic and International Tax Laws and Tax treaties leading to: Increased reporting to promote transparency: In particular country-by-country reporting Need for consensus in mismatches resulting from differences in laws: Addressing Hybrid mismatches Monitoring anti-treaty shopping provisions to avoid inappropriate use of treaties i.e. Treaty abuses and aggressive tax planning 6

7 India's India's consent consent -- an an important important factor factor in in developing developing aa consensus consensus on on BEPS BEPS 7

8 India's consent - an important factor in developing a consensus on BEPS Three tier TP Documentation including CbyC reporting The Indian Government expects that companies should provide information relating to CbyC reporting starting from FY (as per CbyC implementation guidelines, which is also in line with other countries) The Indian TP regulations about Country by Country (CbyC) reporting would be made public (for comments) prior to its implementation in 2016 Other changes in Domestic laws and DTAA s as a result of BEPS recommendations The Indian Government expects that Indian Corporate should be aware of BEPS and proposed changes that may happen and therefore, ignorance may not be a valid excuse Indian Government would follow BEPS recommendations while drafting domestic laws which will be firmed up in 2016 after all BEPS recommendations are released. Development of a multilateral instrument (MLI) is key to amend several DTAA s and India is supporting the same Automatic Exchange of Information (EOI): Revenue department is updating current internal Manual on EOI which will help in informing Revenue officers about how and what information can be sought through. Finance minister of India has stressed on the importance of having common reporting standards on automatic EOI and insisted that every country should implement the same. Source: 1. Minutes of Tax officers offsite organized by Ministry of Finance and CII s presentation at the meeting on 25 November

9 Action Action Transfer Transfer Pricing Pricing Documentation Documentation and and Country-by-Country Country-by-Country (CbyC) (CbyC) reporting reporting 9

10 Guidance on TP Documentation and CbyC Reporting Background On September 16, 2014, the OECD released guidance on transfer pricing documentation and CbyC reporting as one of the initial seven deliverables prepared under the BEPS Action Plan. The OECD is focusing on a three-tiered approach for documentation: Master file Local file CbyC report Objective: Risk Assessment Approach: Provides an overview of the multinational group and business Objective: Appropriate considerations in setting transfer prices Approach: Provides additional detail on the operations and transactions relevant to that jurisdiction Objective: Prioritize Audit Issues Approach: Provides summary data by jurisdiction including revenue, income, taxes, and indicators of economic activity 10

11 TP documentation and CbyC report Three-tier documentation structure proposed for all countries Master file To provide the MNE s blueprint The group s organisational structure A description of the group's business, intangibles, intercompany financial activities, and financial and tax positions. Local file To provide material transfer pricing positions of the local entity/taxpayer with its foreign affiliates Demonstrates arm s length nature of transactions Contains the comparable analysis. Country by Country ( CbyC ) Report To provide jurisdiction-wise information on global allocation of income, taxes paid/accrued, the stated capital, accumulated earnings, number of employees and tangible assets Entity-wise details of main business activities which will portray the value chain of inter-company transactions. 11

12 Country-by-Country reporting template CbyC Template Page 1* Revenue Income tax paid (on a cash basis) Income tax accrued current year Stated capital and accumulat ed earnings Number of employee s Tangible assets other tan cash and cash equivalent s Country Related party Unrelated party Total Profit(loss ) before income tax Country A Country B CbyC Template Page 2* (onwards) Activities Admi nistra Sale Man tive, Purc s, Exter Regu ufact man hasin mark nal lated Holdi uring age g& eting servi finan Insur ng Dorm R&D & ment Other Country of proc & ce cial ance comp ant prod & organisation or urem distri busin servi any uctio supp Constitue incorporation ent butio ess ces n ort nt entities in different n resident in from from annexure country of III to chapter V of OECD/G20 baseservi *Information obtained erosion and profit shifting ces Country country residence Project: Guidance on transfer pricing documentation and Country-by-Country reporting Country Entity A Country B A 12

13 Implementation Guidelines on CbyC Template On February 6, OECD published guidance on the implementation of CbyC reporting. Some key elements are: Which MNEs are required to file a CbyC report Timing of CbyC report Where filed and mechanisms for exchange Necessary Conditions for Obtaining and Using CbyC Report Government-to-Government Mechanisms for Exchange of CbyC report Implementation Package MNEs with consolidated group revenue in the preceding fiscal year of 750 million Euros (INR 5250 crore) or more File for the fiscal years beginning on or after January 1, 2016 MNEs will be allowed one year from the fiscal year end to file the CbyC report 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 described in guidance. Confidentiality, Consistency and Appropriate Use Primary mechanism automatic exchange from MNE parent country Secondary mechanism MNE file the CbyC report locally or with next tier parent country that would automatically exchange Key elements of statutory legislation Agreements based on existing international agreements for the automatic exchange of the CbyC reports between jurisdictions (both bilateral and multilateral) 13

14 India Perspective What do we expect Increased compliance cost and burden on taxpayers Indian Revenue authorities may expect that the Master File and CbyC report for all companies operating in India should be filed locally As per OECD guidance the Master File and CbyC Report should be used only for risk assessment procedures, but there may be a temptation to use it for allocation of revenue and profits based on functions of various group entities rather than only looking at Indian entities functions. Necessary to highlight to the company s management / Audit Committee the importance of implications and meeting the objective of Transparency of BEPS Project. What needs to be done India perspective Companies operating in India especially Indian headquartered companies need to tie up the functional analysis of Indian operations vis-à-vis global operations Have Management discussions to re-align functions and pricing to ensure that profits/income are allocated in accordance with value creation in each jurisdiction Should analyse their internal accounting systems and MIS data, and upgrade the same to enable gathering of information required in Master File and CbyC report Key Considerations: Mechanism for sharing information with tax administrations yet to be formalized Taxpayers concerns about sharing business sensitive data CbyC report ought not be used by tax administrations to propose TP adjustments based on a global formulary apportionment of income. Indian Competent Authority commented Indian Government expects that companies should provide information relating to CbyC reporting starting from FY

15 Countries Implementing CbyC reporting European Union (EU): European Parliament expands scope of CbyC reporting The European Parliament in July 2015 voted in favour of expanding the scope of the current EU CbyC tax reporting requirement to include all listed companies and non-listed firms with more than 500 employees Germany: German government announced plans to incorporate CbyC reporting The German government in July 2015 announced plans to incorporate OECD s BEPS guidance on TP documentation and CbyC reporting into local legislation Spain: Ministry of Finance publishes new transfer pricing regulations The Ministry of Finance in Spain released the Royal Decree 634/2015 in July 2015, approving Corporate Income Tax Regulations that mandates new TP documentation requirements, which now includes CbyC reporting in addition to the existing Master File and Local File requirement. Poland: Introduction of Country-by-country reporting Draft amendments published on 28th April, 2015 on Corporate Income Tax (CIT) acts introduce a number of new transfer pricing (TP) documentation requirements which require more extensive documentation (master file) and if consolidated revenues exceeds EUR 750 million, a further TP documentation obligation will exist compliance with the OECD s CbC reporting requirements. 15

16 Countries Implementing CbyC reporting Luxembourg : Introduction of TP Regulations and adopting CbyC reporting Luxembourg in its budget 2015 introduced a draft legislation which formalises the framework for Luxembourg transfer pricing legislation, and introduces transfer pricing documentation requirements. Luxembourg will expect taxpayers to apply the three-tiered approach to documentation, which will include the Country-by-Country Report obligations. Australia: On 6 August 2015 Australia government in 2015 budget released the two exposure drafts which includes: Introduction of new OECD CbyC reporting requirements Adoption of new OECD standard on TP documentation (i.e. the Master File/Local File approach) Doubling the administrative penalties for multinational entities that are found to have entered into tax avoidance or profit shifting schemes. Korea: Law to implement BEPS-related transfer pricing requirements In August 2015, South Korea s Ministry of Strategy and Finance released draft legislation that would amend existing provisions of Korean law to implement certain OECD BEPS initiatives for TP documentation. US: Congress restrains from implementation of CbyC reporting and Multilateral Instrument U.S. is signaling that it may not be in a hurry to join this movement. The US Congress reacted to OECD legislation for CbyC reporting and plans to take lead of BEPS initiative and not rely upon the Treasury, IRS, or some other foreign tax authorities. For Multilateral Instruments the U.S is not simply walking away from the table, but it seems to be utilizing negotiations over the instrument in order to achieve mandatory arbitration which has been a high priority for the U.S. Christian Aid s survey of FTSE100 companies indicates that only a minority of companies are opposed to public CbyC reporting 16

17 Action Action 88 Transfer Transfer Pricing Pricing aspects aspects of of intangibles intangibles 17

18 Transfer Pricing aspects of intangibles Objective Prevent BEPS that may result from abuse of TP rules related to cross-border relocation of intangibles and other transactions involving use of intangibles To be finalised in 2015 along with other BEPS action points that are closely related (risks and capital, high-risk transactions and hard to value intangibles) Ensure that transfer pricing outcomes are in line with 'Value Creation Key areas covered in the Guidance Detailed guidance on location savings, assembled workforce and MNE group synergies as part of Chapter I of OECD guidelines Ownership of intangibles and entitlement to returns who is entitled to returns from intangibles Relevant considerations for various transactions involving intangibles Broader definition of intangible property (six specific categories of intangibles discussed) Supplementary guidance around determining arm s length conditions involving intangibles considers unique features of intangible transactions 18

19 Transfer Pricing aspects of Intangibles.contd Extent of Intangible Related Returns to be attributed Purchasing Function Funding Function Controlling Function Performing Function 19

20 Transfer Pricing aspects of Intangibles.contd Marketer / Distributor Returns Marketing Intangibles Comparability factors Routine Functions Marketer / Distributor Returns 20

21 Transfer Pricing aspects of Intangibles.contd Who is entitled to return from intangibles? Legal ownership and contractual arrangements to be only the starting point for analysis Next steps, more importantly focus on thorough analysis of FAR and actual conduct of the various entities - Who are the parties performing and controlling the functions related to the development, enhancement, maintenance, protection and exploitation of intangibles? - Who is contributing the assets, including intangibles, physical assets and funding? Only funding without assumption of other risks entitles to only return on funding, not the entire intangible related returns - Confirm the consistency between conduct of the parties and the legal arrangements Recharacterise the transactions as necessary to reflect each party s contributions towards the intangibles Supplementary guidance on arm s length price Options realistically available to each of the parties to the transactions Consideration of the unique features of intangibles (viz. exclusivity, extent and duration of legal protection, useful life, stage of development etc.) Comparable Uncontrolled Price (CUP) and the Profit Split Method are likely to be most useful Other Valuation techniques may also be useful (like income and discounted cash flow techniques) Rule of thumb should not be used The Guidance does not provide a comprehensive summary of valuation techniques available nor does it endorse or reject any valuation standards utilized by valuation professionals Legal ownership by itself is not sufficient to decide the allocation of returns 21

22 India perspective Location savings Even where local comparable are available, specific adjustment on account of location savings are required view of Indian Revenue Authorities (IRA) Various issues included in the Guidance are contemporary, highly debated, and frequently litigated TP issues in India - Indian tax authorities are likely to draw inference and support from OECD guidelines in determining the return from intangibles Marketing intangibles Marketer / distributor should be compensated for enhancing the value of trademarks and other marketing intangibles Delhi High Court decision to consider AMP expense as an international transaction. But AMP activity being closely linked to overall marketing and distribution, can be benchmarked on an aggregate basis. R&D arrangements appropriate compensation for research services will depend on all the facts and circumstances (whether research team possesses unique skills and experience, bears risks, uses its own intangibles etc.) Even before the introduction of the BEPS action plan the IRA authorities issued Circular no. 6 which discusses circumstances in which PSM will apply for determination of compensation in case of R&D centers developing intangibles. India also adopts the Significant Peoples Function as a criteria in allocation of profits relating to intangibles which is in line with OECDs guidance What needs to be done : Companies operating in India need to analyze Legal ownership and contractual arrangements vis-à-vis intangibles to begin with As next steps more importantly focus has to be on thorough analysis of FAR and actual conduct of the various entities 22

23 Action Action Intra-group Intra-group services services Discussion Discussion Draft Draft

24 Intra-group services Discussion Draft Objective Focus on developing rules to prevent BEPS through the use of transactions (management fees, head office expenses etc) which would not, or would only very rarely, occur between independent parties Revision of chapter VII of the OECD guidelines related to Intra-Group Services (IGS) Simplified approach suggested to deal with low valueadding intra-group services (LVIGS) New section D proposed to be added to chapter VII Key areas covered in the Draft guidance Determining whether intra-group services have been actually rendered. Focus areas Benefit Test, Shareholder activities, Duplicative services and Agency services Determination of arm s length price Direct charge methods vs. Indirect charge methods What constitutes LVIGS Clarifying the meaning of shareholder activities and duplicative costs in context of LVIGS Guidance on mark-ups, appropriate cost allocation methodologies, benefit tests and required documentation in context of LVIGS 24

25 Low value-adding Intra-group services LVIGS Definition Services of supportive nature and not a part of core business of the Group* Do not require the use of or lead to the creation of valuable and unique intangibles No assumption, control or creation of substantial or significant risk It is pertinent to understand the nature of the services in order to classify them as LVIGS. The LVIGS should be supportive in nature and should not form part of the core business of the MNE group. The following activities are likely to meet the definition of LVIGS The following activities would not be considered LVIGS Accounting and auditing Services relating to the core business of the Group Processing and management of account receivable and account payable R & D, manufacturing and production services Human resource related activities Sales, marketing and distribution activities Monitoring and compilation of data relating to health, safety, environment etc Financial transactions Information technology services Insurance and reinsurance Internal and external communication and public support services Extraction, exploration or processing of natural resources *Legal business the Group andtonot of the legal entity providing the service servicesof/ activities relating tax obligations / general Services of corporate senior management services of administrative or clerical nature 25

26 Intra-group services LVIGS contd. Documentation and reporting : An MNE group electing for application of the simplified methodology shall prepare the following documentation and make it available upon request to the tax administration A description of the categories of low value adding intra-group services provided and justification that they constitute LVIGS Rationale for the provision of services within the context of the business of the MNE A description of the selected allocation keys and the basis thereof and description of benefits or expected benefits of each category of services Calculations showing the application of the specified allocation keys Confirmation of the mark-up applied Written contracts or agreements for the provision of services and any modifications to those contracts and agreements Calculations showing the determination of the cost pool, in particular, a detailed listing of all categories and amounts of relevant costs, including costs of any services provided solely to one group member Satisfaction of a simplified benefit test : Onerous requirements of the benefit test for LVIGS dispensed with. Simplified documentation and reporting requirements should satisfy the conditions of benefit test for LVIGS. Only one member of the MNE group electing for application of simplified method required to maintain simplified documentation All tax administrations should generally accept the charges on account of such LVIGS, without requiring each entity taxpayers to bear the onerous burden of justifying the benefit tests for such services through extensive documentation. 26

27 India Perspective The draft guidelines will enable the taxpayers and tax administrations to focus their resources on high risk transactions while they can adopt a standard norm for routine LVIGS. For a Captive Shared Service center, certain points such as nature of services outlined as low valueadding, manner of classifying core and non-core business activities, and proposed mark-up in the range in 2 per cent to 5 per cent etc. may be challenged by IRA MNCs need to take cognizance while planning the cross charge for services which might be routine i.e. lowvalue adding or high end. The adoption of simplified approach for LVIGS may be advantageous for both the taxpayers and tax administrations, as it not only reduces the compliance burden of the taxpayers but also reduces disputes between taxpayers and tax administration. For Inbound IGS, it would be interesting to see how India adopts above Guidance, in light of the fact that IRA has been adopting aggressive approach in proposing adjustments and seeking voluminous documentation for such services For Outbound IGS, it remains to be seen how India will adopt the above Guidance, once implemented given the fact that IRA has been claiming much higher markups compared to the recommended range of 2 to 5 percent for certain low end services 27

28 Action Action 88 Discussion Discussion Draft Draft on on hard hard to to value value intangibles intangibles (HTVI) (HTVI) 28

29 Discussion Draft on hard to value intangibles (HTVI) What constitutes HTVI? HTVI are Intangibles or rights in intangibles for which, at the time of their transfer, in a transaction between associated enterprises: no sufficiently reliable comparables exist, and there is a lack of reliable projections of future cashflows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain. Some salient features that HTVI may exhibit: Intangibles that are only partially developed at the time of the transfer; Commercial exploitation of intangible only after several years following the transaction; Intangibles that separately are not HTVI but which are connected with the development or enhancement of other intangibles which fall within the category of HTVI; Intangibles that are anticipated to be exploited in a manner that is novel at the time of the transfer. 29

30 Discussion Draft on hard to value intangibles (HTVI) Year 4 - Date of Assessment Year 1 - Transfer of intangible/right in intangible Ex-ante value Ex-post value Difference attributable to Anticipated reasons Un-anticipated reasons may include, increased demand due to natural disaster, unexpected competitor bankruptcy etc. No No Adjustment to be made Yes Adjustment can be made Pricing adjustments may be made in case of HTVI, except where the taxpayer: provides full details of its ex ante projections used to determine the pricing arrangements; and provides satisfactory evidence that any significant difference between the financial projections and actual outcomes is due to unforeseeable or extraordinary developments or events occurring after the determination of the price 30

31 Action Action Revisions Revisions to to chapter chapter VIII VIII of of TP TP Guidelines Guidelines on on cost cost contribution contribution arrangements arrangements (CCAs) (CCAs) 31

32 Draft Guidance on Cost Contribution Arrangement Definition : A CCA is a contractual arrangement among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create direct benefits for the businesses of each of the participants. -BEPS Action 8 Revision to chapter VIII of the Transfer Pricing Guidelines on CCA Cost Contribution Arrangement An Introduction Two principal types of CCAs Development CCA: Joint development, enhancement, maintenance, protection or exploitation of assets Services CCA: Obtaining services Application of Arm s length Principle Value of participants contributions must be consistent with their proportionate share of the total anticipated benefits they reasonably expect to derive from the arrangement. Contributions must generally be assessed based on their value (rather than their cost) in order to be consistent with the arm s length principle In exceptional cases, where the value (i.e. ALP) of service contributed corresponds to the costs associated e.g. in case of low value added services described in chapter VII, the contributions can be valued at cost. 32

33 Draft Guidance on Cost Contribution Arrangement Balancing Payment Payment made by the participant to top-up the value of contribution when it is lower than their share of expected benefits Balancing payments may also be required by tax administrations where they find contributions to be disproportionate to expected benefits Buy-in Payments Arm s length compensation paid by a new entrant in an existing CCA, for prior CCA activity for transfer of interests by previous participants to the new entrant. Buy-out Payments Arm s length compensation paid by continuing participants of CCA to the outgoing participant at the time of its leaving the CCA and disposing off its interests in the results Tax treatment of contributions and balancing payments Contributions and balancing payments by participants of CCA are to be treated for tax purposes, under general rule of tax system applicable to the participant as if the contribution were made outside a CCA 33

34 India Perspective India s increasing participation in global trade & the increasing importance of intangibles has become the focus of attention with the Indian tax authorities. India is becoming a preferred location for the development of intangibles due to the availability of appropriate skill sets at affordable prices and tax incentives for R&D. End of Sec 10 A tax holiday period for technology companies prompts the migration of intangibles to more tax efficient jurisdictions. Existing TP provisions do not have detailed provisions on CCAs as compared to TP provisions of developed countries. CCAs also cover Specified Domestic Transactions - hence the existing TP Provisions would be upgraded based on the OECD BEPS Recommendations. 34

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