A&S. NewsHighlights. February OECD releases updated calendar for BEPS discussion drafts and public consultations

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1 A&S NewsHighlights A&S NewsHighlights - Countries and areas covered in this month s NewsHighlights: OECD & China, Finland, France, Iceland, Netherlands, Serbia, Sweden, United States For more information, please contact your dedicated A&S professional. OECD OECD releases updated calendar for BEPS discussion drafts and public consultations On February 20, 2014 OECD published an updated calendar for planned stakeholders input in relation to BEPS/G20 project, including the dates for upcoming discussion drafts and public consultations. According to the updated calendar, the turn of the month in March and April will be a rather important and busy period for the BEPS project, with the following discussion drafts under way and public consultations to follow: - Tax Treaty Abuse (discussion draft to be published on March 17, 2014; public consultation on April 14-15, 2014) - The Tax Challenges of the Digital Economy (discussion draft on March 24, 2014; public consultation on April 23, 2014) - Hybrid Mismatch Arrangements (discussion draft on April 4, 2014; public consultation on May 15-16, 2014) The latest OECD discussion draft discussing transfer pricing documentation and a template for country-by-country reporting, published on January 30, 2014, will be discussed in a public consultation held at the end of May, after which the OECD Working Party No. 6 will present a final version of the new guidance to the June meeting of the OECD s Committee on Fiscal Affairs. The updated BEPS/G20 project calendar can be found here. OECD Single global standard for automatic exchange of information released by the OECD The OECD released a document (Standard for Automatic Exchange of Financial Account Information) in its latest step towards global automatic exchange of information (AEOI) regarding offshore bank accounts and other financial assets. In the future, AEOI will either be incorporated into a multilateral convention or a bilateral treaty, with a bilateral Competent Authority agreement providing the automatic exchange. The information exchange agreements are envisioned to be reciprocal (whether or not there is desire for reciprocity) and will include common reporting and due diligence rules to be implemented into domestic law. The document is intended to set a minimum standard regarding what countries can request and is not intended to restrict other AEOI, meaning financial institutions may have to report under multiple AEOI regimes. It is also applicable to broad range of institutions other than banks, including certain brokers, investment firms and some insurance companies, as is the US FATCA regime. The OECD is expected to release a commentary shortly to establish a common standard for the implementation and application of the automatic exchange of information. 1

2 China New customs valuation regulations issued in China The General Administration of Customs (GAC) has issued two new regulations on customs valuation, effective from February 1, Order 211 is completely new legislation specifically regarding the valuation of bonded goods sold within China, while Order 213 will replace Order 148 from March Order 211 clarifies certain details and excludes certain expenses that may have been originally dutiable in connection with domestically sold goods, in addition to incorporating traditional customs valuation methodologies as well as the alternative valuation methods included in Order 213. The Order specifically refers to: - Bonded materials or finished goods (including defective substandard goods) sold by a contract manufacturer located within China; - Bonded waste and scrap materials, by-products and residue after accidents sold by a contract manufacturer located within China; - Bonded goods transferred under deep processing and sold by the transferee; - Bonded materials or finished goods sold by a manufacturer located within a customs bonded area; - Bonded scrap, defective or substandard products and by-products sold by a manufacturer located within a customs bonded area; - Bonded goods imported into a customs bonded area for logistics, inspection and exhibition purposes and sold within China; and - Bonded goods for R&D in a customs bonded area and sold within China. The sale of bonded goods to customs in China heavily relies upon customs discretion to devise reasonable methods to determine dutiable value that may help reduce uncertainties in the related duty and tax exposures. The Order therefore aligns the valuation of these goods better with the general valuation methods provided under Order 213, though it does not provide a clear mechanism for resolving valuation disputes arising from the sales it specifically addresses. Order 213 modifies the regulations in Order 148, including: - A simplification of the analysis for Customs when considering the circumstances of a sale in determining the acceptability of a transaction value between related parties; - A clarification of the calculation of international freight for imported goods that is included in the dutiable value, which will now be determined based upon the price actually paid or payable for the international transportation; and - The removal of the provision regarding commissions born by the Seller being separately provided for, and is therefore now included in the declared value of the exported goods. Finland The Finnish Supreme Administrative Court issues ruling on transfer pricing adjustment according to book value; overrules decision regarding tax penalty The Supreme Administrative Court of Finland has issued a ruling on February 18, 2014 in a case (KHO:2014:33) where a Finnish company, which belonged to a Norwegian group, sold its fully owned Finnish subsidiary to a Norwegian company which subsequently sold the shares on the same day by exchange of shares to another Norwegian company which was shortly after listed in the Oslo stock exchange. In the tax audit of the original Finnish seller, the tax authorities considered the sales price of the Finnish subsidiary s shares, calculated based on future cash flow estimates, not to comply with the arm's length principle and adjusted the price according to the book value of the shares. As a result, the taxable income of the Finnish seller was adjusted and a tax penalty imposed. 2

3 In its ruling, the Supreme Administrative Court approved the use of the cash flow calculation as the basis for setting the transfer price but noted that such calculations are highly dependent on the assumptions taken and factors chosen. Therefore and due to several insufficiently justified factors included in the original cash flow calculation, the Court stated that it was justifiable to adjust the transfer price according to the book value of the shares (at the moment of the sale) and also rejected the use of share value at the stock exchange, even though the eventual buyer of the shares was listed in the Oslo stock exchange shortly after the sale. Even though the Court ruled in favor of the tax authorities, the decision regarding the tax penalty was overruled. According to the Court, if the taxpayer has shown to have acted bona fide and within reason tried to arrive with an arm's length price, there is no gross negligence involved and, thus, no tax penalty can be imposed, especially when considering the measures and effort the Finnish seller had taken in the matter and that the issue was unclear and open to interpretation. France New program responsible for APAs and MAPs created in France The French tax authorities have created a new program Mission d expertise juridique et économique internationale (MEJEI) that will handle both APA and MAP processes. Until now, two separate offices have handled these responsibilities and were viewed as not cooperative with each other. Under the new program, MEJEI will combine the programs under one roof and within one team responsibility, benefiting from the efficiency and synergy of dealing with these similar programs together. Taxpayers will also benefit from additional resources in managing existing cases and new requests. France France introduces a new limitation on deductibility of interest paid to a related-party loan Article 22 of the 2014 Finance Act (no , published December 29, 2013) adjusts the provisions of the French Tax Code, introducing a new limitation on the allowed deduction of loan interest paid to a related company. Under the limitation, the interest paid on related-party loan is deductible only if the lender, residing in France or abroad, is subject to tax on profits on the interest received amounting to at least 25% of the tax as determined under French general law for companies domiciled or established in France. Initially enacted to limit the use of hybrid instruments, new limitation completes the existing rules that limit deductions of financial expenses, especially in the case of related-party loan interest. These rules include: - Limitation of interest paid on shareholders loans; - Limitation of maximum leverage through thin-capitalization rules; - Limitation of the deductibility of interest on debt related to the acquisition of shares of a target company; - Limitation of the deductibility of interest expenses related to the financing of the acquisition of shares; and - Limitation of the deductibility of financial expenses (when such amount exceeds 3 million euros). With regard to the limitation of the interest rate paid to a related party, the French legislation states that the interest paid to a related-party loan is deductible within the limit of the maximum legal interest rate (2.79% for 2013) or the market interest rate if higher as applied by independent financial institutions. Iceland Iceland enacts transfer pricing rules Iceland s Parliament has passed legislation that introduces a transfer pricing regime, effective January 1, Up until now, the tax authorities only had access through a general anti-avoidance provision that permitted price adjustments for those transactions that the authorities demonstrated had an abnormal price basis. 3

4 February January 2014 The new rules are generally based on the arm s length principle, and refer to and follow OECD guidelines. The documentation must include: - The nature and extent of transactions with related parties (including subsidiaries or permanent establishments); - The nature of the related-party relationship; and - The basis for the price(s) asserted. Documentation requirements are mandatory for those companies with total revenue or assets (as of the beginning of the year or at year-end) exceeding 1,000 million ISK. The Court was of the opinion that the main legal characteristic of equity is its risk profile. If it ranks lower in priority than any debt and is therefore not repayable at the expense of creditors, as well as qualifies as equity otherwise, then the presence of other debt-like features should not result in a reclassification for tax purposes. In addition, the Court held that refinancing transactions which converted loans into preferred shares were permissible exercises of the taxpayers freedom to choose among methods for obtaining financing, and the taxpayers therefore did not abuse the tax law. Netherlands Netherlands Supreme Court confirms treatment of hybrid instruments for participation exemption purposes The Dutch Supreme Court has issued two decisions regarding the treatment of hybrid instruments for participation exemption purposes, i.e. the distinction between debt and equity for tax purposes. The issue in both cases was whether the participation exemption should apply to the income distributed to the cumulative and redeemable preference shares. The tax authorities claimed that the refinancing transactions should be regarded as tax abusive schemes and either be ignored or reclassified for tax purposes, thereby making the preferred dividends taxable. The Supreme Court rejected the tax authorities position (i.e. a reclassification of an equity instrument as debt instead of as dividends eligible for exemption) and held that, in both cases, an instrument that is considered to be equity from a legal perspective will also be treated as such for purposes of the participation exemption application. This is for the purpose of the participation exemption being to avoid double taxation and therefore, the criteria in determining eligible income should be based on whether it was received as remuneration for contributed share capital. An instrument that is considered share capital for legal purposes should also be considered as such in determining whether the participation exemption applies and thereby classifying it as equity is necessary in fulfilling this criterion. Serbia Rulebook on transfer pricing and arm s length methods amended in Serbia The Ministry of Finance of Serbia has adopted amendments to the Rulebook on Transfer Pricing and Arm s Length Methods Applicable to Determination of Prices in Transactions Between Related Entities. The amendments focus on easing certain transfer pricing requirements and rectifying certain ambiguities and technical errors. In regard to transfer pricing documentation requirements, the amendments have excluded certain intra-group transactions from a detailed analysis if one of these two conditions is met: - The transaction with related party is a one-off transaction and its value does not exceed RSD 8 million (approximately, EUR 68,835); or - The value of all transactions with the related party does not exceed RSD 8 million.obligation to include rulings from foreign tax authorities in the transfer pricing documentation to be disclosed to the tax authorities; The above-described exemption to transfer pricing documentation requirement does not apply to intra-group loans and credits. 4

5 February January 2014 The transfer pricing documentation, if required to be prepared, should include a description of the transaction, the value of the transaction, and the name of the related party (or parties). Taxpayers are, however, no longer required to disclose information related to a planned development of business relationships and / or transfer pricing policies with related parties. In regard to amendments pertaining to the comparable uncontrolled price method, the cost of services or products realized by the taxpayer s related party in a transaction with a non-related party can be considered an internal comparable, as long as the transaction was carried out under comparable conditions. Despite the amendments made, the transfer pricing documentation submission deadline with regard to transactions carried out during the financial year of 2013 has not changed and remains June 30, Sweden Swedish government plans tax hikes and savings measures for Though facing an election in September, the current Swedish government has announced a package of tax hikes and savings measures for to boost public finances. The proposed measures include reducing tax breaks on private pension savings and higher taxes on cars, alcohol and tobacco. Both the current center-right and opposing center-left are planning tax hikes, aiming to tighten fiscal policy and continue economic growth and stability. United States IRS releases Transfer Pricing Audit Roadmap The Transfer Pricing Operations (TPO) of the Large Business and International division of the IRS has released a Transfer Pricing Audit Roadmap. The Roadmap provides the IRS transfer pricing practitioner with audit techniques and tools to aid in the planning, execution and resolution of transfer pricing examinations (over a notional 24-month audit timeline). The IRS is stressing that the Roadmap serve as a toolkit for recommended audit procedures and links to useful reference material, as well as to give the public insight into what to expect during a transfer pricing audit. Alder & Sound is an independent professional advisory firm, providing multinational corporations with extensive range of integrated legal, tax, transfer pricing and financial advisory services. Our ambition is to be a leading cross-disciplinary end-to-end service and solution provider in the global market. We believe in true one-stop-shop experience. From start to finish, we provide turnkey solutions that maximize the benefit and value creation while minimizing the administrative burden. Our extensive, hand-picked partner network covers all corners of the world, ensuring that our clients always receive the best advice and solutions available. For more information, please visit 5