EY Han Young newsletter May Transfer Pricing Alert

Transcription

1 EY Han Young newsletter May 2015 Transfer Pricing Alert

2 Transfer Pricing Current issue. CHINA / TAIWAN / EUROPEAN UNION / POLAND Transfer Pricing Alert May2015 2

3 CHINA China issues transfer pricing rules on outbound related party fee payments Subsequent to the tax anti-avoidance investigations launched in late July 2014 on substantial amounts of service fee and royalty payments, China s State Administration of Taxation (SAT) issued SAT Announcement [2015] No.16 (Announcement 16) which is effective as of 18 March 2015, setting forth transfer pricing rules on outbound related party fee payments. The key points of Announcement 16 are summarized as follows: Nondeductible outbound fee payments Fees paid to overseas related parties that do not perform functions, assume risks and do not have substantial operation activities Fees paid for the following services received from overseas related parties as the services do not directly or indirectly benefit the Chinese enterprises: Not related to function, risk and operation of the Chinese enterprises Control, management and supervisory activities to guarantee the interest of the direct or indirect investors The same services have been purchased from a third party or the same function already has been performed by the enterprise itself No specific services provided although the Chinese enterprises received additional benefits due to their affiliations with the multinational group The services have been compensated as part of other related party transactions Other services which could not produce direct or indirect economic benefit to the Chinese enterprises Royalties paid to overseas related parties which merely own the legal rights but have not made contribution to the value creation of the intangible assets Royalties paid for additional benefits to an overseas related party in a jurisdiction where enterprises often establish a holding company or financing company for public listing purposes 3

4 TAIWAN Taiwan proposes amendments to transfer pricing guidelines On 7 January 2015, Taiwan s Ministry of Finance proposed amendments to the transfer pricing guidelines (No ) (Guidelines) and released the draft amendments which was enacted on 4 March There is one new provision pertaining to the application of the arm s length principle in business restructuring as well as revisions to eight existing provisions. The revisions to the eight existing provisions mainly cover the definition of business restructuring, function and risk analysis of business restructuring, application of the profit split method, pre-filing meeting for an advance pricing arrangement (APA), operating margin on total costs and expenses, and assessment of tax pursuant to the deemed profit method. The the key features in the proposed amended Guidelines can be summarized as follows. Application of the arm s length principle in business restructuring Under the Guidelines, the attribution of profits in business restructuring should comply with the arm s length principle. When determining the profit, the following factors would be taken into account: In the business restructuring contract, whether the reallocation of risks among related parties is in conformity with the economic substance Prior to and after the business restructuring, whether the allocation of functions, risks and assets as well as the attribution of profits comply with the arm s length principle Whether the bearer of risks has the capability to control the risks and the financial resources to assume such risks The Guidelines provide that the compensation would be determined in accordance with the following: The business purpose and expected benefit of the business restructuring Prior to and after the business restructuring, the rights and obligations of the parties involved 4

5 TAIWAN Taiwan proposes amendments to transfer pricing guidelines Whether the profit shifting derived from the business restructuring is commensurate with the reallocation of risks Whether the transfer of tangible property, intangible property (IP) and activities in the business restructuring is remunerated properly Whether the parties involved in the business restructuring because of the termination or renegotiation of contracts are compensated appropriately In determining the reasonable compensation or remuneration of controlled transactions after the restructuring, the enterprise would: Analyze comparability of controlled transactions after the business restructuring to determine the proper transfer pricing methods Compare the remunerations of the business restructuring with the considerations of the business operation prior to and after the restructuring Definition of business restructuring Business restructuring is defined as the reorganization of activities carried out by multinational companies with respect to reallocation of functions, assets, risks, termination or renegotiation of terms and conditions of contracts and re-arrangements of organizational structures of related parties. Function and risk analysis of business restructuring The enterprises involved in the business restructuring are required to prepare the function and risk analysis of the current and the preceding years. Application of profit split method The profit split method is also applicable when the parties involved in the controlled transactions made unique and valuable contributions to the controlled transactions. Pre-filing meeting for APA Prior to the filing of an APA, an enterprise is entitled to apply for a pre-filing meeting with the tax authority three months before the fiscal year end by providing the tax authority with the following information for determination of APA application: 5

6 TAIWAN Taiwan proposes amendments to transfer pricing guidelines Period to be covered by the arrangement Global organizational structure of the group Main business activities of the enterprise Related parties involved, the controlled transactions, and the descriptions of functions and risks Reason for the application Other relevant information Operating margin on total costs and expenses The operating margin on total costs and expenses is included as one of the profit level indicators of comparable profit method. Assessment of tax pursuant to deemed profit method The tax authority is authorized to adopt the deemed profit method when a taxpayer failed to provide the transfer pricing (TP) documentation, which relates to the calculation of taxable income, i.e., sales, costs and expenses. Considering the aforementioned amendments on transfer pricing (TP) documentation rules of Taiwan, it is recommended that multinational companies carefully review their pricing policy prior to and after the business restructuring and ensure that the allocation of functions, risks and assets as well as the attribution of profits are in line with the arm s length principle. It may be more beneficial for multinational companies to consider APA applications as a means to mitigate TP risk by applying for pre-filing meetings with the tax authority to discuss significant TP issues and understand expectations associated with an APA. 6

7 EUROPEAN UNION European Union: Automatic Exchange of Information on Tax On 18 March 2015 an initiative was launched to make amendments to European Union Council Directive 2011/16/EU (hereinafter "the Directive"). The main objective of the proposed amendments is to promote effective cooperation between the tax authorities of European Union ("EU") member states and tax transparency by organizing the mandatory automatic exchange of information on advance tax rulings (hereinafter, "tax rulings") and advance pricing arrangements ("APA"). In this respect, the proposed measures would not apply to tax rulings concerning the taxation of individuals. EU member states would be obliged to bring their domestic laws into line with the text of the proposed amendments by 31 December The proposed amendments would take effect on 1 January Presented below are the key points of the proposed amendments. Obligatory Reporting Once the amendments have entered into force, each EU member state will be obliged, each quarter, to report to all the other EU member states and to the European Commission on the tax rulings (and APAs) which they have issued. Content of Information to be Exchanged According to the proposed amendments, the following information would be subject to mandatory exchange: Information on the taxpayer for which a tax ruling (or APA) was issued; The content of a tax ruling (or APA), including a description of the relevant business activities or the transactions or series of transactions covered; The set of criteria used in selecting the method for the determination of transfer prices (in the case of the issue of an APA); A list of the EU member states whose interests are directly or indirectly affected by a tax ruling (or APA); 7

8 EUROPEAN UNION European Union: Automatic Exchange of Information on Tax Identification of persons who are directly or indirectly affected by a tax ruling (or APA), indicating the EU member states in which those persons operate or with which they are connected. Timing Information on tax rulings (and APAs) issued after the entry into force of the Directive must be provided within one month following the quarter in which the tax ruling (or APA) was issued or amended. Retrospective Approach The tax authorities of EU member states are also obliged to provide by 31 December 2016 information on all existing tax rulings (and APAs) issued during the ten years prior to the effective date of the Directive. Obtaining Additional Information Where necessary an EU member state has the right to request additional information on a tax ruling (or APA), including the full text of a ruling (APA) which is issued, from the state which issued that tax ruling (or APA). Common Database The European Commission plans to create a special database to store information on tax rulings (and APAs), which will be accessible to all EU member states. Results Each year EU member states will be obliged to provide statistical data reflecting the results of the automatic exchange of information on tax rulings (and APAs), which will form the basis for evaluating the effectiveness of the proposed measures. Recommended Actions First and foremost we recommend evaluating the extent to which the disclosure of rulings received for the 10 years prior to the effective date of the Ruling may result in tax claims being presented in EU countries or Russia. Particular attention should be paid to: 8

9 EUROPEAN UNION European Union: Automatic Exchange of Information on Tax rulings concerning a lower tax rate and the conditions for the application of that rate; transfer pricing rulings. We also recommend discussing with your tax consultant (given the expected accessibility of all rulings in EU countries) future approaches to obtaining rulings, taking into account the efforts being made by EU countries to protect their tax base. Current practice in tax audits shows that receiving a tax benefit through a ruling in one country may increase the likelihood of a tax claim arising in another country. 9

10 POLAND Poland amends transfer pricing documentation requirement as of 2016 Executive summary On 27 April 2015, Poland published a draft regulation introducing amendments on transfer pricing ( TP ) documentation requirements on the Government Legislation Centre website. The draft regulation aims at implementation of the European Union ( EU ) directive of 27 January 2015 on the prevention of aggressive tax planning and also refers to works of the Organisation for Economic Co-operation and Development ( OECD ) under the Base Erosion and Profit Shifting ( BEPS ) Action 13 initiative. Detailed discussion Key areas of change under the draft regulation include: 1. Modification of the definition of related parties which includes an increased capital relations threshold from 5% to 20%. 2. Liquidation of value thresholds for transactions but providing for an exemption from the documentation requirement for entities with revenues or costs of less than 2 million. 3. Fundamental changes to the scope of the mandatory TP documentation reflecting the guidelines of BEPS, Action 13 as outlined below: Local File and the Master File, requiring the presentation in the TP documentation: Group TP Policy; information on local transactions; justification for the adopted methods of calculating remuneration; confirmation of arm s length character of prices, including benchmarking analyses; detailed financial data showing the impact of the transactions on the P&L and income of the company, organizational and reporting structures, other information, but: 10

11 POLAND Poland amends transfer pricing documentation requirement as of 2016 Benchmarking analyses mandatory for entities with revenues or costs above 10 million Obligation to prepare Master File only for entities with revenues or costs above 20 million Country by Country Reporting ( CbCR ): For capital groups with consolidated revenues or costs above 750 million, the parent company will have to prepare the CbCR report 4. Deadline for preparation of the documentation of no later than the date for filing the annual corporate income tax ( CIT ) return. Fulfilment of the requirement should be confirmed by the board statement attached to the CIT return. 5. Additional obligation to attach simplified report on intragroup transactions to CIT return for entities with revenues or costs over 10 million. 6. Requirement to provide documentation to the tax authorities within seven days from the request. These changes bring the need for fundamental and qualitative change in the approach to the TP documentation, as the expectation of the authors of the draft regulation is to allow taxpayers to provide complete and clear information about their group relations and to ensure that those relations are in line with the arm s length principle. Next steps Taxpayers should consider the following action to prepare for the forthcoming regulation: Review the key areas of intragroup settlements that on the basis of a simplified report attached to the CIT return would identify and raise interest from tax authorities and then strengthen the documentation in those areas. Asses available documentation to determine the scope of the necessary work/expenditures for fulfilment of the revised documentation obligation in an efficient and optimal way. 11

12 POLAND Poland amends transfer pricing documentation requirement as of 2016 Develop new standards for documenting intragroup settlements within the organization, particularly with regard to the inclusion of management in these processes and develop a standard for TP documentation at the time of the transaction realization. 12

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

14 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 ED None 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