OECD Publishes Guidance on Transfer Pricing Documentation and Country-by-Country Reporting

Transcription

1 17 September 2014 OECD Publishes Guidance on Transfer Pricing Documentation and Country-by-Country Reporting Action 13 On 16 September 2014, the Organization for Economic Co-operation and Development ( OECD ) published its Guidance on Transfer Pricing Documentation and Country-by-Country Reporting. This Guidance will replace the current text of Chapter V of the Transfer Pricing Guidelines. MNEs will be required to prepare a master file and a local file and to report annually and for each jurisdiction in which they do business the amount of revenue, profit before income tax, income tax paid and accrued, total employment, capital, retained earnings and tangible assets. The mechanisms for filing and disseminating of the master file and country-by-country reporting will be further investigated by the OECD in the coming months. The impact on MNEs will be substantial in terms of, on the one hand, additional administrative burden and costs and, on the other hand, expected increase of discussions with tax authorities on profit allocation. The effective date of the new requirements will depend on the implementation by the countries in their domestic legislation, which will likely not be before In July 2013, the OECD published its Base Erosion and Profit Shifting ( BEPS ) Action Plan. The Action Plan recognises that enhancing transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations is an essential part of tackling the BEPS problem (Action 13). According to the OECD, the objectives for requiring transfer pricing documentation are: 1. to ensure that taxpayers give appropriate consideration to transfer pricing requirements; 2. to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and 3. to provide tax administrations with useful information to employ in conducting an appropriately thorough transfer pricing audit.

2 To achieve the objectives, countries should adopt a standardised approach to transfer pricing documentation, defined by the OECD as a three-tiered approach, consisting of: 1. a master file containing standardised information relevant for all MNE group members; 2. a local file referring specifically to material transactions of the local taxpayer; and 3. a country-by-country report containing certain information relating to the global allocation of the MNE s income and taxes paid together with certain indicators of the location of economic activity with the MNE group. The purpose of the master file is to provide a blueprint of the MNE group in order to assist tax administrations in evaluating the presence of significant transfer pricing risks. The high-level overview of the MNE group business should contain relevant information that can be grouped in five categories: a. the MNE group s organisation structure; b. a description of the MNE s business or businesses; c. the MNE s intangibles; d. the MNE s intercompany financial activities; and e. the MNE s financial and tax positions. Annex I to the new Chapter V sets out in detail the items of information to be included in the master file (see annex I). The local file should include relevant financial information regarding the transactions taking place between a local country affiliate and associated enterprises in different countries, a comparability analysis and the selection and application of the most appropriate transfer pricing method for the fiscal year in question. Annex II to Chapter V sets out the information to be included in the local file (see annex II). The country-by-country report should contain the following overview of allocation of income, taxes and business activities by tax jurisdiction (see annex III, Table 1): revenue pre-tax profit cash taxes paid current year tax accruals amount of capital accumulated earnings number of employees value of tangible assets. A list of all the MNE group entities (including permanent establishments) for which the above financial information is reported, including country of incorporation, as well as the nature of the principal business activities is also required (see annex III, Table 2). According to the OECD, the country-by-country report will be helpful for high-level risk assessment purposes and may also be used by tax administrations in evaluating other BEPS related risks, and where appropriate for economic and statistical analysis. The OECD explicitly says that the information should not be used as a substitute for a detailed transfer pricing analysis that is based on a full functional and comparability analysis. Tax administrations would not be able to use the information to propose transfer pricing adjustments based on a formulary apportionment of income. 2

3 Although practices regarding the timing of the preparation of the documentation differ among countries, the OECD holds that the best practice is to require that the local file be finalised no later than the due date for the filing of the tax return for the fiscal year in question. The master file should be updated, if necessary, by the tax return due date for the ultimate parent of the group. The date for completion of the country-by-country report may be extended to one year following the last day of the fiscal year of the ultimate parent of the group. The OECD encourages countries to implement the new guidance in their domestic legislation effectively and consistently. It is the view of the OECD that taxpayers should deliver the local file directly to the relevant tax administrations. As regards filing of the master file and country-by-country report, the OECD will undertake a further analysis during the next several months on their filing process and the mechanisms by which the information is to be made available to tax administrations in all relevant countries. The Guidance will be revisited by countries participating in the BEPS project no later than the end of 2020 with a view to continuously improving the operation of those standards. During the last months, upon the public consultation rounds in preparation to the new wordings of Chapter V, a broad consensus within the OECD and between tax administrations on this subject has been noticed. The reactions of the business community on the previous proposal only has had small impact. It might be expected that many countries will implement the proposal of the OECD into their domestic legislation. It can even not be excluded that certain countries might request additional transactional data regarding related party interest payments, royalty payments and especially related party service fees. Once implemented, the new documentation requirements will certainly increase the administrative burden on taxpayers and lead to additional costs. In particular the country-by-country reporting demands extensive information from taxpayers. As regards confidentiality of sensitive information, the OECD will further look into the concern raised by the business on the occasion of its further analysis of the filing and dissemination mechanisms. It remains to be seen to which extent protection of confidentiality can be guaranteed. As an answer to one of the major concerns of the business, it has now been provided in the final draft of Chapter V that the information in the country-by-country report should not be used as a substitute for a detailed transfer pricing analysis and does not constitute conclusive evidence that transfer prices are or are not appropriate. Although it is explicitly provided that tax administrations should not use the information to propose transfer pricing adjustments based on a global formulary apportionment of income, it cannot be excluded that the information would lead to discussions with local tax administrations in line with the more general tendency of the OECD on people functions as a means or indication to allocate profits of an MNE. The publication by the OECD is available here. If you have any questions, we would be pleased to advise you. We will keep you updated on further developments relating to BEPS. 3

4 Annex I to Chapter V Transfer pricing documentation Master file The following information should be included in the master file: Organisational structure Chart illustrating the MNEs legal and ownership structure and geographical location of operating entities. Description of MNEs business(es) General written description of the MNEs business including: o o Important drivers of business profit; A description of the supply chain for the groups five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram; o A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services; o o A description of the main geographic markets for the groups products and services that are referred to in the second bullet point above; A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks 4

5 assumed, and important assets used; o A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year. MNEs intangibles (as defined in Chapter VI of these Guidelines) A general description of the MNEs overall 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 them. A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and licence agreements. A general description of the groups 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. MNEs intercompany financial activities 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 organised and the place of effective management of such entities. A general description of the MNE's general transfer pricing policies related to financing arrangements between associated enterprises. 5

6 MNEs financial and tax positions The MNEs 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 groups existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries. 6

7 Annex II to Chapter V Transfer pricing documentation Local file The following information should be included in the local file: Local entity 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. Key competitors. Controlled transactions For each material category of controlled transactions in which the entity is involved, provide the following information: A description of the material controlled transactions (e.g. procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licences 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 7

8 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. 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.1 An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method. An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection. A summary of the important assumptions made in applying the transfer pricing methodology. If relevant, an explanation of the reasons for performing a multi-year 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 transactions, or both. A description of the reasons for concluding that relevant transactions were priced on an arms length basis based on the application of the 1 To the extent this functional analysis duplicates information in the master file, a crossreference to the master file is sufficient. 8

9 selected transfer pricing method. A summary of financial information used in applying the transfer pricing methodology. 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. Financial information 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. 9

10 Tax Jurisdiction Annex III to Chapter V A model template for the Country-by-Country Report Table 1. Overview of allocation of income, taxes and business activities by tax jurisdiction Name of the MNE group: Fiscal year concerned: Unrelated Party Revenues Related Party Total Profit (Loss) Before Income Tax Income Tax Paid (on cash basis) Income Tax Accrued Current Year Stated capital Accumulated earnings Number of Employees Tangible Assets other than Cash and Cash Equivalents 10

11 Table 2. List of all the Constituent Entities of the MNE group included in each aggregation per tax jurisdiction Name of the MNE group: Fiscal year concerned: Main business activity(ies) Tax Jurisdiction Constituent Entities resident in the Tax Jurisdiction Research and Development Holding or Managing intellectual property Purchasing or Procurement Manufacturing or Production Sales, Marketing or Distribution Administrative, Management or Support Services Provision of Services to unrelated parties Internal Group Finance Regulated Financial Services Tax Jurisdiction of organisation or incorporation if different from Tax Jurisdiction of Residence Insurance Holding shares or other equity instruments Dormant Other Please specify the nature of the activity of the Constituent Entity in the Additional Information section. 11

12 Table 3. Additional Information Name of the MNE group: Fiscal year concerned: Please include any further brief information or explanation you consider necessary or that would facilitate the understanding of the compulsory information provided in the country-by-country report. 12

13 Disclaimer Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities, partnerships, persons and practices trading under the name Loyens & Loeff, cannot accept any liability for the consequences of making use of this issue without their cooperation. The information provided is intended as general information and cannot be regarded as advice.