The Organization for Economic Cooperation and Development (OECD) issued a discussion draft on November 3, 2014 that proposes modifications to Chapter VII of the OECD Transfer Pricing Guidelines in relation to low-value intra-group services.
In this Edition: OECD Releases Discussion Draft on Low-Value Intercompany Services.
The Organization for Economic Cooperation and Development (OECD) issued a discussion draft on November 3, 2014 that proposes modifications to Chapter VII of the OECD Transfer Pricing Guidelines in relation to low-value intra-group services. The draft addresses item 10 of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS), which seeks to develop rules to prevent base erosion through transactions “which would not, or would only very rarely, occur between third parties.”
The revisions, as assembled by the Working Party No. 6 on the Taxation of Multinational Enterprises (MNE), aim to balance appropriate charges for low-value intra-group services and head office expenses against the interests of payor countries. The revisions allow taxpayers to create a consistent allocation key for a wide category of common intra-group services which command a limited profit mark-up. Early respondents to the discussion draft noted that the revisions would look similar to the treatment of services under Section 482 of the Internal Revenue Code (IRC), whereby some intercompany services are allowed to be charged at cost if they fulfill certain conditions.
The OECD will accept comments on the draft through January 14, 2015. The OECD plans to hold further public discussion on the draft (along with other topics) on March 19-20, 2015, at the OECD Conference Centre in Paris, France. The full discussion draft released by the OECD can be found here.
Public Commentary on Developing Country Data Constraints Published by the OECD
On October 28, 2014, the OECD published the comments it received on its paper “Transfer Pricing Comparability Data and Developing Countries.” For access to the complete set of comments on the OECD’s website, click here. For our overview of this paper refer to Transfer Pricing Times: Volume XI, Issue 3 - OECD Publishes Paper on Data Comparability Issues.
The UK Adopts Country-by-Country Reporting - Duff & Phelps Develops Tools to Assist Multinationals
On September 20, 2014, the Financial Secretary to the UK Treasury (Her Majesty’s Treasury) announced that “[t]he UK has been at the forefront of tackling international tax avoidance. We believe that country-by-country reporting (CBCR) will improve transparency and help identify risks for tax avoidance – that’s why we’re formally committing to it. In time, improved transparency between business and tax authorities will also help developing countries in dealing with compliance, as they often lack the capacity to collect this information themselves.”
Duff & Phelps, LLC has had follow up discussions with HMRC (Her Majesty’s Revenue and Customs) officials following this announcement, who indicate that the adoption of CBCR is likely to take effect in 2015. Multinationals with UK operations will have to report to HMRC where they make profits and pay taxes around the world. Early indications from HMRC are that the CBCR information will be part of UK transfer documentation although a submission to HMRC with tax returns has not been ruled out.
A CBCR template could be used as an effective tax risk management tool for the businesses that have an open dialogue with HMRC and are looking to achieve certainty in the current environment. As a specific CBCR template has not been released by HMRC, Duff & Phelps transfer pricing professionals have generated an extended CBCR template to improve the risk management process and this effort has been met with a positive response from HMRC. (Contact your local Duff & Phelps transfer pricing professional for more information).
Corporate Inversions and their Impact on Transfer Pricing
Corporate inversions by U.S. multinationals have recently received a great deal of attention in the media. In the last year, more than a dozen inversions have been announced or completed by U.S-based firms.1 In a typical inversion, a U.S. company, for example, will buy a foreign target and subsequently adopt the foreign target’s home country as its own (incorporating in a third, unrelated country is also an option). The US company’s change in legal residence as a result of the inversion may allow it to take advantage of lower tax rates on its future income, reduce U.S. and non-U.S. cash taxes through the issuance of intercompany debt, and avoid U.S. tax on its deferred foreign earnings, thereby increasing its competitiveness.
In September 2014, the U.S. Department of Treasury and Internal Revenue Service released IRS Notice 2014-52 – Rules Regarding Inversions and Related Transactions, outlining their intent to issue regulations restricting certain tax benefits for inverted companies and inhibiting future corporate tax inversions, when possible. Specifically, IRS Notice 2014-52 is focused on:
(1) eliminating techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape U.S. taxation; and
(2) making it more difficult for U.S. companies to invert by strengthening the ownership requirements of the former owners of the U.S. company in the new combined foreign entity.2
On October 29, 2015, Brenda Zent of the Treasury’s International Tax Counsel Office indicated that the Treasury has not yet decided upon the specific guidance to follow IRS Notice 2014-52, but that the Treasury is keeping its options open.3
Companies who are still contemplating an inversion or who have recently completed one should note that, just like with any acquisition, the transfer pricing policies of the acquired company as well as the acquiring company need to be re-evaluated in light of the newly integrated structure. This involves identifying where significant functions, risks, and assets will reside within the newly created company and establishing consistent, defensible transfer pricing policies for future intercompany transactions. The review of existing transfer pricing policies should include an analysis of where intellectual property is developed, maintained, utilized, and (potentially after an acquisition) centralized within the organization. This may include valuing intellectual property contributions to existing cost sharing structures as a result of the acquisition and/or licensing arrangements between related companies owning intellectual property and those that will exploit them. The review will also likely require an analysis of headquarter service charges and a reassessment of the entity responsible for bearing stewardship costs or costs for non-beneficial services under the new structure.
Inland Revenue Authority of Singapore Issues Public Consultation on Transfer Pricing Documentation
On September 1, 2014, the Internal Revenue Authority of Singapore (IRAS) issued a public consultation on transfer pricing documentation describing its intention to update Section 4 of its transfer pricing guidelines, which were initially issued on February 23, 2006. The public consultation was released shortly before the release of the first tranche of seven BEPS deliverables, including Action 13, “Guidance on Transfer Pricing Documentation and Country-by-Country Reporting” by the OECD.
The IRAS paper provides detailed guidance on the following topics: objectives of preparing transfer pricing documentation, contemporaneous transfer pricing documentation, types of transfer pricing documentation, extent of transfer pricing documentation, and compliance matters relating to transfer pricing documentation.
Although Singapore is not an OECD member country, it will likely be affected by the recent BEPS deliverables, including those on documentation and country-by-country reporting. Combined with the new Singapore-specific guidance, this should motivate taxpayers to evaluate whether their current transfer pricing documentation in Singapore is adequate to local and international standards.