TRANSFER PRICING AND CbC REPORTING: A PRACTICAL GUIDE TO DOCUMENTATION FOR LARGE AND SMALL BUSINESSES Jeremy Capes KPMG
Agenda 1 BEPS: has the world begun to change? 2 What does Action 13 mean for Australia? 3 What about Section 284-E documentation? 4 What do I have to do and when? 5 How will documentation rules evolve? 6 Key Take Aways?
1. BEPS: has the world begun to change? "My message is clear if you do business in Australia, you must pay your fair share of tax on the profits you earn here." (Chris Jordan, Commissioner of Taxation, 3 March 2016) The new Action 13 requirements, should make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments. (TPD and CbC Reporting, Action 13-2015 Final Report)
2. What does Action 13 mean for Australia? Australia has been on a journey for some time in evolving its approach to transfer pricing and international antiavoidance measures: Shift in the approach in TP away from a focus on the price of a transaction to a focus on the conditions of the arrangement Automatically applying reconstruction provisions Multinational Anti-Avoidance Law Proposed Diverted Profits Tax
2. What does Action 13 mean for Australia? Australia was an early adopter of Action 13: Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 amended Subdivision 815-E of the ITAA 1997 Applies to significant global entities (annual global income for the prior period of AUD 1 billion or more) Applies to income years beginning on or after 1 January 2016 Reports required to lodged within 12 months after the close of the financial year
2. What does Action 13 mean for Australia? Action 13 is a transparency measure and risk assessment tool How might the ATO view risk? ATO technical & reputational risk Quadrant C Quadrant B ATO financial risk Quantum Quadrant A Quadrant D Complexity
2. What does Action 13 mean for Australia? CbC reporting requirements: Law Compendium Guidelines, LCG 2015/3 adopted Annex III of the OECD Action 13 Final Report Table 1: Overview of allocation of income, taxes and business activities by tax jurisdiction Name of the MNE group: Fiscal year concerned: Tax jurisdiction 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
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 Insurance Holding shares or other equity instruments Dormant Other 2. What does Action 13 mean for Australia? CbC reporting requirements: Table 2: Overview of allocation of income, taxes and business activities by tax jurisdiction Name of the MNE group: Fiscal year concerned: Main business activity(ies) Tax Jurisdiction Constituent Entities resident in the Tax Jurisdiction Tax Jurisdiction of organisation or incorporation if different from Tax Jurisdiction of Residence 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.
2. What does Action 13 mean for Australia? Master File requirements: LCG 2015/3 adopted Annex I of the OECD Action 13 Final Report Requirements: Organisational structure Description of MNE s business(es) MNE s intangibles (as defined in Chapter VI of the OECD Guidelines) MNE s intercompany financial activities MNE s financial and tax positions
2. What does Action 13 mean for Australia? Local File requirements: Local File High Level Design (HLD) finalised in May 2016 Provides for the completion of a short form Local File or a Local File depending on size and/or type of transactions Short Form: High level qualitative information such as organisation structure, a description of the business and strategies, key competitors and information on business restructures and intangible asset transfers
2. What does Action 13 mean for Australia? Local File requirements: Short Form Local File criteria - no exception list transactions and: Aggregate value of its international related party dealings (IRPDs) is less than $2m Small Taxpayer under Simplified Transfer Pricing Record Keeping (STPRK), e.g., less than $25m turnover, or Immaterial under STPRK, e.g., less than or equal to 2.5% turnover of the Australian economic group
2. What does Action 13 mean for Australia? Local File requirements: Short Form Local File exception list: Derivatives such as swaps, forwards, futures or options in interest, currency, commodities or other assets Legal or equitable assignment of trademark, patent, design, copyright, other IP or similar property or rights, or any part thereof Any licence or other grant of use or right to use a trademark, patent, design, copyright, other IP, secret formula or process or similar property or rights. IRPDs of a capital nature
2. What does Action 13 mean for Australia? Local File requirements: If not eligible for the short form, need summary information above and additional elements: Part A: granular and detailed quantitative information on controlled transactions, including transaction type, transfer pricing method used and level of transfer pricing documentation in place Part B: details around written agreements, rulings and APAs and TP methods used by the counterparty to the transaction for certain types of material transactions
2. What does Action 13 mean for Australia? Local File requirements: Part B exclusions: Agreements relating to transactions that are eligible for STPRK Reimbursement under Employee Secondment Agreements Low Value / Low Risk Service Agreements Low Value/ Low Risk Sale and Purchase Tangible Trading Stock Agreements Issue of ordinary shares
2. What does Action 13 mean for Australia? Local File requirements: Australian Local File is different to the OECD Local File: OECD: more akin to traditional transfer pricing documentation, including a functional analysis, selection of transfer pricing method and the application of that method through comparability analysis and benchmarking Australia: more focused on transactional data and agreements in an electronic form from which it can run data analytics to identify transfer pricing and other BEPS related risks
3. What about Section 284-E documentation? Section 284-E still applies in parallel to Action 13 Reporting (CbC, Master and Local Files): Section 284-E documentation: Documents the Section 815-A D analysis Serves a different purpose (supporting tax return) to Action 13 reporting (transparency and risk assessment) Different focus to OECD in testing the conditions of the arrangement (requires deeper analysis of evidence and behaviours) Includes automatic provisions of reconstruction
3. What about Section 284-E documentation? Simplification Measures: PS LA 2014/3: simplifying transfer pricing record keeping released in 2014 and available: From 29 June 2013 for small taxpayers, distributors, intragroup services and low level loans (inbound) options From 1 July 2015 for materiality, management and administration services, technical services and outbound loan options Applies two broad types of concessions: Whole of business categories IRPD categories
3. What about Section 284-E documentation? Simplification Measures: Whole of business categories (no complex transactions): Materiality: less than or equal to 2.5% turnover of the Australian economic group Small Taxpayer: less than $25m turnover Distributors: less than A$50 million turnover and profit before tax is at least 3% of sales revenue Last two categories: no losses or business restructures and does not apply to financial transactions
3. What about Section 284-E documentation? Simplification Measures: IRPD categories: Intragroup Services (no complex dealings/low tax jurisdictions): General: IRPDs of A$1 million or less, or more than A$1 million but less than 15% of total revenue or expenses of the Australian economic group, priced at or above/below cost plus 7.5% for outbound/inbound (and no losses or business restructures) Management and Administration: cost plus 5% (up to 50% of total IRPDs) Technical: cost plus 10% (up to 50% of total IRPDs)
3. What about Section 284-E documentation? Simplification Measures: IRPD categories: Low-level inbound loans: Combined cross-border loan balance of $50 million or less for the Australian economic group Interest rate is no more than RBA small business indicator rate Funds are in AUD, and associated expenses are paid in AUD No complex dealings, losses or business restructures or IRPDS with low tax jurisdictions
3. What about Section 284-E documentation? Comprehensive transfer pricing documentation: There is a lot of law and guidance on documentation, e.g.: Subsection 284-E Section 815 OECD Guidelines Tax Rulings, practice statements and other guidance What do I focus on? How do I know how much effort to put in and for what?
3. What about Section 284-E documentation? Comprehensive transfer pricing documentation: Some broad tips: Action 13 items are risk selection tools and will be lodged electronically consider what you need to support/explain Section 815 tests the nature of the actual conditions consider commercial rationale, agreements, behaviours and other evidence Comparability is not about TNMM ranges, but how independent parties do or would behave consider CUPs, rejected CUPs comparable behaviour and conditions Remember reconstruction especially when data is thin
4. What do I have to do and when? Transfer pricing documentation preparation: Obligation Existing obligation New (additional) obligation Due date Lodge? Self-assess compliance with Subdivision 815-B/C Prepare contemporaneous Subdivision 284-E transfer pricing documentation (for penalty mitigation purposes) Before lodging the tax return No Lodge Country-by-Country Report, if not available through automatic EOI Lodge Master File Lodge Australian Local File Within 12 months after year end Yes Lodge an International Dealings Schedule with tax return (if Part A of Australian Local File is not lodged with the return) With tax return Yes
4. What do I have to do and when? Are there any efficiencies? There is significant overlap An exemption applies to the IDS if Part A of the Australian Local File is lodged Note the different purposes Centrally prepared materials can be useful but be aware of the Australian requirements and differences Australian Local File (proposed) IDS 284-E documentation/8 15 analysis Master File CbCR
4. What do I have to do and when? Can technology help? Technology can help with the data collation Technology can also help generate data summaries and reports Action 13 is focused on risk assessment Technology cannot fully assess risk and apply judgement Planning is key to data collection Dry runs help to test the systems and identify risks/focal points Action 13 items will be submitted electronically
5. How will documentation rules evolve? Australia is an early mover on TP, BEPS and tax avoidance: Section 815, MAAL, DPT Action 13 transparency items Australia has already deviated (e.g., transfer pricing focus on conditions and Local File requirements) Other countries are only just beginning on this path - e.g.: UK, Germany, Ireland, Netherlands, Luxembourg, Jersey and Switzerland China, India, Japan, Singapore USA, Canada, Mexico, Bermuda,
5. How will documentation rules evolve? ATO has signalled more guidance on Action 13 items: Master File guidance Comprehensive local file instructions Electronic lodgement and reporting obligations in Australia Flexibility of data sources Application of CbC to super funds Exemption categories and exemption process IDS update (and modernisation)? Ongoing project to update transfer pricing tax rulings Simplification measures?
6. Key take aways? Purpose of transfer pricing documentation: Taxpayer: support the filing of tax returns and to meet administrative reporting obligations ATO: assess the risk of non-compliance Taxpayers are already in (or close to) their first reporting period for CbC reporting plan and start early CbC is currently compliance focused but reviews and audits will follow There will always be an element of judgment in preparing transfer pricing documentation stay focused and keep up to date
Capes, Jeremy Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.