In this Edition: New Implementation Guidance for Country-by-Country Reporting (Action 13).
On June 8, 2015, the OECD released “Action 13: Country-by-Country Reporting Package.” This package outlines model legislation that countries can use to adopt new rules and/or competent authority agreements to implement cross-border sharing mechanisms as they relate to country-by-country (CbC) reporting. The intent of the package is to facilitate a consistent and swift implementation of new transfer pricing reporting standards as developed under Action 13 of the Base Erosion and Profit Shifting Project. Further, the contents of the proposal aim to balance two goals: enhancing transparency to ensure that tax administrations obtain a complete understanding of the way MNCs structure their operations while at the same time ensuring that the confidentiality of MNC information is not compromised.
The package follows the release of two draft reports from the OECD on related topics: first in September 2014 the agreement of a three-tier global standard transfer pricing approach to documentation, which includes the Masterfile, Local file, and a common template for CbC; and second in February 2015 implementation guidance for CbC reporting.
For a complete copy of the package, click here.
Mexico Transfer Pricing Update
The Mexican tax authority (SAT) has become more focused on transfer pricing and related tax issues in recent months, increasingly challenging supply chain and other tax planning initiatives, certain types of intercompany payments and transfer pricing methods, as well as requiring new information disclosure from taxpayers. Some examples below:
The SAT is taking a strong approach toward structures involving a foreign principal and toll/contract manufacturing or limited risk distribution in Mexico. This could include such operations that were previously set up as full-functioning entities. SAT may require that such structures be unwound, with “excess” profits returned to Mexico. (This is part of a general focus on possible transfers of intangibles out of Mexico, either current/future or as part of an earlier restructuring.)
As many taxpayers have experienced, tax deductibility of pro-rata charges to Mexican subsidiaries for intra-group services (e.g., “head office” services) are often being denied. This typically includes situations where a parent company allocates certain internal costs, with or without a mark-up, to affiliates around the world based on proportionate sales, headcount, or some other metric. The SAT routinely demands proof of specific benefits conferred by the costs/departments in question to the group’s Mexican operations.
On a similar note, in instances where a Mexican entity pays a royalty for marketing intangibles to a foreign affiliate, deductions for advertisement and promotion expenses incurred in Mexico are being denied. Tax authorities are taking the position that these expenses should be borne by the licensor, and are going after many multinational companies on this issue.
In applications of profit-based methods for Mexican operations, the SAT is increasingly arguing for “market-specific adjustments,” under which they would add 100 basis points or more to the target returns for the Mexican affiliate (i.e., if such returns are based on U.S. comparable companies). Arguments for this veer among location savings, country risk, etc., and are not always well-defined.
As for information disclosure, Relevant Transactions Form 76 has been implemented for 2015. Using this form, taxpayers are expected to file, on a quarterly basis, information regarding transactions (not just with related parties) above MX 60 million pesos (about USD $4 million). Relevant transactions include certain financial transactions, related party transactions (including any situation where a Mexican entity makes payments to a foreign affiliate based on a residual CPM calculation), changes in ownership or tax residency, transfers of intangibles, business restructuring and reorganization, and transfer pricing adjustments, among others. It is not clear what specific transactions the SAT will consider “relevant,” so the conservative position would be to report all transactions above the threshold, including the transfer pricing methods applied. Information relevant to 2014 is due by the end of 2015, but before that the quarterly reporting schedule for 2015 applies (first quarter information was due May 31, 2015; second quarter is due August 31, 2015; etc.).
Thin capitalization rules are being applied more broadly in the Energy sector. There used to be an exemption for companies engaged in productive infrastructure projects. Now, only “upstream” activities are exempted; mid-stream and downstream activities will have to adhere to a 3:1 debt to equity ratio.
For now, these initiatives and others are mostly unilateral on the part of the SAT. There is not much judicial history on most of them, but some cases are coming down the pike that may shed light on how these rules will be applied in practice going forward.
Release of and Comments on Revised Draft on Intangibles (Action 8)
On June 4, 2015, the OECD released a revised discussion draft on hard-to-value intangibles (HVI). The revised discussion draft attempts to explain the difficulties tax administrations face in verifying the arm’s length prices employed by taxpayers for specific types of transactions associated with certain intangibles. Specifically, the revised discussion draft proposes an approach based on the determination of arrangements between unrelated parties, including any contingent pricing arrangements that would have been made at the time of the transaction. This approach is applied when specific conditions are met and it is intended to protect tax administrations against the negative effects of information asymmetry.
Interested parties were invited to provide commentary by June 18, 2015. Comments received are published here. A complete copy of the draft is also available here.
OECD Update on BEPS Multilateral Instrument
One May 28, 2015, the OECD released a formal statement confirming that the development of a Multilateral Instrument to implement the tax treaty-related BEPs Action plan had been initiated. The day prior, representatives from 80 countries met in Paris to kick -off the project. With procedures now in place, substantive work is expected to begin in November 2015.
More information is available on the OECD’s website here.