Inside this Edition: OECD Releases Request for Public Input on BEPS Action Plan Item #11.
On August 4, 2014, the Organization for Economic Cooperation and Development (OECD) issued an invitation for public comments on BEPS (Base Erosion and Profit Shifting) Action Plan Item #11, which relates to establishing methodologies to collect and analyze data on BEPA and the actions to address that data.
In effort to be transparent and inclusive in the consultation process, stakeholders, including business, labor, non-governmental organization, think tanks, and academia are invited to submit comments related to BEPS Action Plan Item #11 by 5:00PM on September 19, 2014.
Additional detail is available in the OECD’s press release found here.
India Ministry of Finance Releases 2014-2015 Union Budget
On July 10, 2014, the Minister of Finance presented the 2014-2015 Indian Union Budget. As part of the budget, the government announced a few key reforms in their transfer pricing regulations:
- Introduction of a “Roll Back” provision in the APA scheme: an APA entered into for future transactions may also be applied to international transactions undertaken in the previous four years in specified circumstances. The prior APA scheme was introduced in 2012 with positive responses. The proposed APA scheme will go into effect on October 1, 2014.
- Introduction of range concept for determination of arm’s length price: if the taxpayer’s result falls within the range of the results of comparables, then it would be arm’s length. The prior arithmetic mean concept will continue to apply when the number of comparables is low. The arithmetic mean concept states that when more than one arm’s length price is determined, the correct arm’s length price would be the arithmetic mean of the given values. The proposed range concept will go into effect starting in assessment year 2015-2016.
- To allow use of multiple year data for comparable analysis: multiple years’ data will be used in order to best determine the arm’s length price. This aligns with global best practice and helps account for uncharacteristic economic circumstances for a given year that would throw off arm’s length pricing.
For further detail, see Minister of Finance Arun Jaitley’s speech regarding the 2014-2015 Indian Union Budget.
EU Reaches Agreement on Key Tax Issues
At a June 20, 2014 meeting in Luxemburg, the European Union’s (EU) Council of Economic and Finance (ECOFIN) ministers reached multiple key agreements regarding the following tax issues. First, the finance ministers unanimously agreed to a revision of the EU’s Parent-Subsidiary Directive, aiming to eliminate the potential for double non-taxation by instituting anti-abuse provisions. The specifics of the anti-abuse measures are to be introduced at a later date; however the amendment aims at neutralizing hybrid mismatches.
- First, the finance ministers unanimously agreed to a revision of the EU’s Parent-Subsidiary Directive, aiming to eliminate the potential for double non-taxation by instituting anti-abuse provisions. The specifics of the anti-abuse measures are to be introduced at a later date; however, the amendment aims at neutralizing hybrid mismatches.
- Second, the finance ministers agreed to allow the European Commission (EC) to begin a general investigation into patent box tax schemes. Various patent box regimes within Europe provide tax incentives designed to attract high-R&D firms, such as those in the technology or pharmaceutical sectors. Concerns have been raised that these regimes go too far in drawing tax revenues away from rightful recipients.
- Finally, the European Commission announced that after more than two years of negotiations, Switzerland has agreed to adopt the rules against unfair corporate taxation set forth in the EU Code of Conduct.
For more information related to the meeting, see the EU’s press release available here.
European Commission Investigates Transfer Pricing Arrangements Large Multinationals
The EC opened investigations on Ireland, the Netherlands, and Luxembourg in order to determine whether their tax treatment of Apple, Starbucks, and Fiat Finance and Trade, respectively, violate EU rules regarding state aid. The current EU state aid rules disallow Member States from permitting specific companies to pay lower taxes than they would have been required to pay had the Member State’s tax codes been applied without bias.
The EC will investigate whether the three Member States in question violated state aid restrictions by issuing tax rulings validating certain transfer pricing arrangements utilized by the three firms in question. According to a press release from the EC, preliminary analysis of each of the firms’ transfer pricing practices have left the EC with concerns that the underlying transfer pricing arrangements arrive at a taxable profit in a manner which allows the firms to pay lower taxes. Luxembourg has also been accused of infringement for not providing the European Commission with the complete information requested.
More information on the EC’s investigations is available in the EC’s press release.
Canadian Tax Court Upholds Transfer Pricing Adjustments in the Marzan Case
There is a growing number of judgments from the Tax Court of Canada on whether intercompany arrangements of multinationals have the economic substance to be arm’s length. Most recently, on June 10, 2014, the Tax Court of Canada upheld the Canadian Revenue Agency’s (CRA) position that Marzen Artistic Aluminum LTD (Marzen), had arrangements in place that did not satisfy the requirement of being arm’s length and therefore ruled to uphold the majority of the CRA’s reassessments of Marzen’s tax structure.
In 1999, Marzen arranged for its Barbados subsidiary to provide marketing and other sales-related services to the firm in return for the greater of $100,000 or 25 percent of sales originated by the Barbados subsidiary. These payments were deducted from the firm’s taxable income in Canada and were instead added to the Barbados subsidiary’s taxable income at the lower Barbados tax rate. Some of the remaining income in Barbados was then returned to Marzen in Canada as a tax free dividend.
The court found that the arrangement did not satisfy the requirement of being at arm’s length, as the subsidiary in reality provided very few marketing and sales services. It further determined that the arrangement benefitted Marzen, the taxpaying firm, in a manner that would not be available for arm’s length parties. As a result, the court agreed with the CRA’s decision to both disallow fees paid by Marzen to its Barbados subsidiary (approximately $7.1M in value) and to impose on Marzen an additional penalty.
A complete copy of the ruling is available here.
Debrief from the NABE Transfer Pricing Symposium
At the 4th Annual National Association of Business Economics (NABE) Transfer Pricing Symposium, a group of leading professionals from business, government, and consulting gathered to discuss and debate some of the most relevant economic topics in the field of transfer pricing. The theme for this year’s symposium was transfer pricing risk and included a diverse array of speakers, panel discussions, and a “quantification of risk challenge” in the 3-day event.
Highlights of Day 1 include a panel discussion exploring various market contexts where useful lives present themselves in transfer pricing and a panel discussion on important tax considerations in the application of the Income Method and Acquisition Price Method when determining platform contribution transaction payments (cost sharing buy-ins), including how prices may be affected by the form of the transaction and whether the transferred intangibles were self-developed or acquired.
Day 2 opened with a keynote speech by Samuel Maruca, past Director of Transfer Pricing Operations (TPO) with the Internal Revenue Service (IRS). Mr. Maruca outlined how the foundation of an IRS transfer pricing practice has been established based on a strategy of improved issue selection in exam, pursuit of changes in government rules to improve administrability, and identification and pursuit of winning cases. Despite his departure, Maruca said he has been assured by the leadership in the Large Business & International (LB&I) division that TPO will continue to have full support, although he acknowledged that a lack of resources focused on international issues and specifically on transfer pricing will continue to present challenges.
Other highlights from Day 2 included an exploration surrounding the transfer of risk, including issues of identification, characterization, valuation and feasibility, and some behind-the-scenes insight into efforts by the OECD’s (Organization for Economic Cooperation and Development) Working Party No. 6 on special measures within the BEPS (Base Erosion and Profit Shifting) project. Andrew Hickman, the new head of the OECD’s transfer pricing unit, provided some thoughts on how the OECD could develop a better analytical framework for understanding risk in a transfer pricing environment, including how a proper risk analysis should take into account not just risks that are easy to identify (e.g., in a contract), but also those risks that are most important to the business. In his speech, Hickman also highlighted the key issue that Working Party No. 6 delegates must consider: Should the tax authorities accept the cards that the taxpayer has dealt them and play that hand accordingly, or should the tax authorities demand a reshuffle of the pack and start from a different point.
The second day of the symposium wrapped up with four teams presenting their thoughts on the “quantification of risk.” Teams were asked to highlight a challenging area of risk quantification in transfer pricing and provide a proposed approach. Three of the four teams presented on limited risk arrangements, while the forth team shared ideas around identification and quantification of risk during various stages of intangibles’ development. The panel of judges included Gary Stone of PricewaterhouseCoopers, Andrew Hickman of the OECD, Michelle Levac of the Canada Revenue Agency, and Roger Grabowski of Duff & Phelps. The panel posed some very tough questions to participants, and reminded the group that pricing risk is often one of the greatest challenges economists face, while there is still much to be learned, much insight can be gained from observation of live financial markets.
This year’s symposium concluded with sessions on the applications of options pricing and the role of bargaining power in transfer pricing analysis, followed by remarks from Robert B. Stack, Deputy Assistant Secretary from International Tax Affairs in the Office of Tax Policy at the U.S. Department of the Treasury. Mr. Stack noted that the U.S. will work hard in 2015 to ensure the current arm’s length standard is clearly articulated and that profits are attributable to the place of economic activity, i.e., where profits, functions, and risks are located.