In this Edition: Government-to-Government Systems for Exchanging CbC Reports.
Working Party No. 6 (WP6) of the Organization for Economic Cooperation and Development’s (OECD) Committee on Fiscal Affairs is expected to approve the Country-by-Country (CbC) reporting (required under the OECD's Base Erosion and Profit Shifting (BEPs) initiative) implementation package this month. In anticipation of the final recommendations, what is possible to predict now about the forthcoming package, the mechanisms for data transmission, and the responsibility for filing?
The systems underpinning secure electronic exchange of information either already have been, or are now being, put in place by participating jurisdictions for the purposes of automatic exchange of bulk information. European Union (EU) Member States have long had the mechanism for exchanging bulk tax information between governments for example the EU Savings Directive but the spur for the most recent systems developments has been the introduction of FATCA (Foreign Accounting Tax Compliance Act) by the United States.
Regarding FATCA, over 50 jurisdictions have signed a Model 1 inter-governmental agreement with the United States that is already in effect, while more than 45 additional jurisdictions have reached agreement in substance to do the same. This will commit the governments themselves to report, directly to the Internal Revenue Service (IRS), specified information about U.S. persons’ accounts maintained by all relevant financial institutions located in the participating jurisdictions. This in turn has necessitated the development of transmission mechanisms through which financial institutions will submit data in a consistent format to their respective authority. The information will then be passed on by foreign governments to the United States securely through the IRS’s International Data Exchange Service (IDES), a secure web-based dropbox-style mechanism. The first FATCA information is to be exchanged with the United States by the end of September this year.
A similar scheme as that for FATCA has been developed by the OECD for financial information to be exchanged automatically between governments under the Common Reporting Standard (CRS). More than 90 jurisdictions have committed to the implementation of CRS, with over 50 jurisdictions having agreed to a timetable whereby the first automatic inter-governmental data exchange will commence in September 2017. The OECD will start working on its own business case for a common transmission system for the inter-governmental transfer of data, accommodating automatic exchange under CRS, through the Forum on Tax Administration.
There is already in place, or under development, for a very significant number of governments, the basic infrastructure, whether for FATCA or for the CRS (or indeed for both), through which future CbC reports could potentially be exchanged. It is anticipated that relatively minor development will be required of existing systems to allow for the collection and exchange of CbC reports. The first CbC reports will need to be submitted by companies by December 31, 2017, and it is currently estimated that governments will most likely have until the end of June 2018 to process and exchange the first reports.
Working Party No. 10 (WP10) of the OECD is understood to be discussing an appropriate mechanism for the CbC report this June, which follows the pattern of approaches taken to ensure consistency in automatic exchange of bulk data between governments. It is not unreasonable to expect development of an approach for electronic filing and dissemination of the data contained in the simple CbC model template (published as Annex III in the BEPS Action 13 2014 Deliverable) to be among the proposed transmission solutions, to be assimilated into existing government-to-government systems well in advance of the first year’s CbC deadlines.
Multiple Points of Filing for CbC Reports?
The question arises as to the number of jurisdictions in which a multi-national group will be required to file the CbC report annually. We already know from previous releases that the reporting entity for a group will be the ultimate parent entity. In a group that has its ultimate entity in a jurisdiction that has adopted the requirement for CbC reporting in its domestic legislation, it is envisaged that only a single submission would be required, assuming a full network of competent authority agreements is in place between the governments of jurisdictions in which the multinational enterprise has operations.
Where exchange of the CbC report would not be possible under such a scenario, such as where the ultimate parent entity is in a jurisdiction that has not adopted the requirement for CbC reporting, or where the necessary competent authority agreements are not in place for exchanging the report, or simply where there has been a failure in practice to exchange the information, current guidance envisages that the reporting obligation will shift to the next tier down (or lower) to a subsidiary entity that is in a jurisdiction that has adopted the requirement for CbC reporting, or with which the necessary agreement is in place.
Alternatively, in the absence of such a solution, it is anticipated that a secondary mechanism proposed by countries participating in the BEPS Project could include a requirement for multiple submissions by the group.
Discussion Draft on Revisions to Chapter VIII of the Transfer Pricing Guidelines
On April 29, 2015, the OECD released the “Discussion Draft on Revisions to Chapter VIII of the OECD Transfer Pricing Guidelines on Cost Contribution Arrangements” (CCAs). This draft responds to the requirement under BEPs Action Item 8 to update the guidance on CCAs and provides proposed text for an updated chapter. Additionally, it takes into account the draft guidance on risk in Chapter 1 of the OECD Transfer Pricing Guidelines, which was released for public comment on December 19, 2014.
The draft begins with a general definition of CCAs and specifically covers two types:
- CCAs established for the joint development, enhancement, maintenance, protection or exploitation of intangible or tangible assets; and
- CCAs established with respect to intercompany services (e.g., administrative, technical, sales and marketing, and financial services).
Major changes or points of emphasis include the following:
- With respect to the determination of any payments that need to be made between the parties to equate the value of contributions and expected benefits, contributions are to be measured based upon their value rather than costs. There is a specific exception on this point noted for low value-added services.
- Changes to Chapter I embedded in the risk and recharacterization draft released in December 2014 are reflected, in some form, here as well. In particular, this discussion draft states that “[t]o qualify as a participant in a CCA, an entity must have the capability and authority to control the risks associated with the risk-bearing opportunity under the CCA in accordance with the definition of control of risks set out in Chapter 1.” The discussion draft notes that it may be appropriate to disregard a CCA in its entirety in accordance with the principles for non-recognition of a delineated transaction set out in Chapter I.
This is further illustrated in Example 5, where a company is determined to have not actually been a participant in the CCA because that company “has no capacity to make decisions to take on or decline the risk-bearing opportunity represented by its participation in the CCA, or to make decisions on whether and how to respond to the risks associated with this opportunity.”
- There are a number of places where the draft includes language that may allow for adjustments on an ex-post basis, particularly when the valuation of contributions or of expected benefits are highly uncertain. This language aligns with similar draft guidance included in the September 2014 deliverable for Action Item 8. The current guidance states, for instance, that “[i]n situations where actual results differ markedly from projections, tax administrations might be prompted to enquire whether the projections made would have been considered acceptable by independent enterprises in comparable circumstances…without using hindsight.” With respect to the determination of expected benefits, the draft guidance states “if unexpected or unforeseeable events materially affect the initial benefit assumptions, consideration should be given as to whether independent enterprises would have provided for an adjustment or renegotiation of the CCA agreement.” Despite the language seemingly discouraging the use of hindsight, the practical impact of the draft seems not very different from the U.S. “commensurate with income” view.
For more information, a complete copy of the draft is available here.
OECD Issues New Draft on Preventing the Artificial Avoidance of Permanent Establishment (PE) Status
On May 15, 2015, the OECD issued a new discussion draft, which includes proposals resulting from its ongoing work on BEPs Action 10, related to preventing artificial avoidance of permanent establishment (PE) status. The draft is a follow-up to the first discussion draft on this topic released by the OECD on October 31, 2013. The original discussion draft enumerated common PE avoidance strategies and made recommendations on how to address them. As a result of comments collected and interactions during the public consultation on January 21, 2015, revisions were made to the first discussion draft. Specifically, the second discussion draft now outlines a preferred approach to addressing each PE avoidance strategy outlined in the first discussion draft.
Comments on the second discussion draft are due by June 12, 2015. For more information, a complete copy of the new draft is available here.
The Australian Treasurer released his second Federal Budget on May 12, 2015, reflecting a deficit of AUD 35.1 billion for fiscal year 2015, or 2.1 percent of GDP. While an improvement relative to prior expectations, the deficit results from a nearly 50 percent reduction in iron ore resource extraction investment which has caused an AUD 20 billion ‘write-off’ of projected tax revenues. Partially in response, new measures have been designed to target multinational corporations (MNCs). These measures include:
- New anti-avoidance law applicable from January 1, 2016 to MNCs with global revenues exceeding AUD 1 billion, where an Australian taxable presence has been artificially avoided;
- Extension of the 10 percent Good and Services Tax to imported ‘digital’ products and services from July 1, 2017;
- Greater penalties for tax avoidance applicable to income years commencing on or after July 1, 2015, to large MNCs. (The new penalty will not apply if a taxpayer has a reasonably arguable position, which can be established in respect of transfer pricing issues through preparation of Australian documentation);
- Implementation of a tax disclosure regime for MNCs applicable from January 1, 2016, including a country-by-country report, the MasterFile, and the local file; and
- Continued work with the OECD and G20 on addressing BEPS.
For more information, click here.
As it happens, prior to the May Budget release, new Australian transfer pricing laws (applying to fiscal years beginning on or after June 29, 2013) has been issues in December of 2014. At that time, the Australian Taxation Office (ATO) released Taxation Ruling 2014/8 on transfer pricing documentation, which was followed by the release of practice statements on penalties (PS LA 2014/2).
The ATO also offered a series of simplification options which taxpayers may leverage. These options are available to small businesses and distributors on some intra-group services and low value loans. While specific criteria apply, once a taxpayer opts for a simplification procedure, with sufficient evidence of eligibility, such activities will not be subject to transfer pricing review. This assurance will be available for a period of three years starting from June 29, 2013.
The simplification procedure is available here.
New Zealand Transfer Pricing Focus Shifts
In April 2015, Inland Revenue New Zealand (the IRD) announced its areas of focus for transfer pricing in 2015 - 2016. The goals of the IRD conform to a context of global tax net tightening, while also seeking to reduce compliance burden where possible.
In New Zealand, 560 companies account for 50 percent of the corporate tax base but only 10 percent of total tax revenues. The IRD has identified these companies, half of which are foreign-owned, as posing a high risk of profit shifting.
The IRD has also indicated that it will seek justification/explanation where foreign-owned wholesale distributors are earning weighted average pre-tax profit margins of below 3 percent (that is, pre-tax profits after interest expenses). Such companies are the most common form of foreign-owned enterprise in New Zealand.
In a move which aligns with the administrative practice of Australia, the IRD has lifted the de minimis threshold for non-core services from NZD 600,000 to NZD 1 million. Qualifying taxpayers, the ranks of which will be reduced by this measure, can rely upon a 7.5 percent safe harbour [cost plus] profit margin, rather than undertaking benchmarking, for non-core charges.
The IRD has further highlighted the following areas of special focus:
- Unexplained tax losses for foreign owned groups;
- Loans in excess of NZD 10 million;
- Guarantee fees;
- Unsustainable royalties and/or service charges to offshore related parties;
- Controlled transactions with entities in no/low tax jurisdictions;
- Supply chain restructures involving shifts of key functions, assets, or risks from New Zealand; and
- Any other unusual transfer pricing arrangements identified in CFC disclosures.
It is also noted that the IRD is actively reviewing all significant international controlled financial transactions.