Transfer Pricing Update: Fourth Quarter 2015 (article)
Taxing authorities worldwide are evaluating how to move forward with OECD’s final BEPS project recommendations made October 5, 2015. The recommendations represented a multi-year focus on international tax policy aimed at curbing tax avoidance by multinational enterprises and included more than 1,600 pages covering 15 action points. Several countries, including the U.S., have begun to issue new guidance in the wake of these recommendations.
United States Transfer Pricing Updates
On December 23, 2015, the IRS and the Treasury Department released proposed regulations that would require annual country-by-country (CbC) reporting by United States persons that are the ultimate parent entity of a multinational enterprise (MNE) group. These proposed regulations affect U.S. persons that are the ultimate parent entity of an MNE group with annual revenue for the preceding annual accounting period of $850 million or more. The proposed regulations include a template of the form that will be used for the CbC report and describe the information that will be required to be filed. This information includes constituent entity information and financial and employee information. The categories of information required to be reported on the U.S. CbC report were developed in coordination with other member countries of the Group of Twenty (G20) and the Organisation for Economic Co-operation and Development (OECD).
It is expected that CbC reports filed by both U.S. MNE groups and foreign MNE groups will help the IRS perform high-level transfer pricing risk identification and assessment. The information in a CbC report, however, will not itself constitute conclusive evidence that transfer pricing practices are or are not consistent with the arm's length standard. Accordingly, the information in a CbC report will not be used as a substitute for an appropriate transfer pricing documentation based on a best method analysis as required by the regulations under section 482 (including a full comparability analysis of factors such as functions performed, resources employed, and risks assumed). Transfer pricing adjustments will not be based solely on a CbC report. A CbC report may be used, however, as the basis for making further inquiries into transfer pricing practices or other tax matters in the course of an examination of a member of an MNE group, and adjustments may be based on additional information developed through those inquiries in accordance with applicable law.
Foreign Country Transfer Pricing Updates
The following highlights a few examples of countries that have also recently issued updates concerning transfer pricing documentation and CbC reporting:
On December 11, 2015, the Australian Parliament passed laws that will increase penalties on adjustments relating to anti-avoidance or transfer pricing in relation to years beginning on or after July 1, 2015, and CbC reporting, master file, and local file transfer pricing documentation requirements beginning on or after January 1, 2016. These laws will affect Australian and foreign multinationals with global income of more than AUD 1 billion.
In October, the Indian Central Board of Direct Taxes (CBDT) replaced Instruction No. 3/2003 with Instruction No. 15/2015. Instruction No.3/2003 was issued on May 20, 2003, to provide guidance to the Transfer Pricing Officers and Assessing Officers, operationalize the transfer pricing provisions and have procedural uniformity. Due to a number of legislative, procedural and structural changes carried out over the last few years, Instruction No.2/2003 is being replaced with Instruction No. 5/2015, which provides updated and adequate guidance on the transfer pricing provisions pertaining to international transactions. The issuance of the instruction, in theory, will help control the volume of disputes, better use the revenue’s resources and enhance international perception and investor confidence in the Indian Government.
On October 20, 2015, the CBDT also issued the final rules in order to place in effect the multiple year data and range concept, which was introduced in April 2014 through the Finance (No.2) Act, 2014. The rules allow for introduction of a “range concept” for determination of the arm’s length price and “use of multiple year data” for undertaking comparability analysis in transfer pricing cases. The use of the range concept, being a statistical tool, enhances the reliability of analysis undertaken for computation of arm’s length price. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. The transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. Also, the use of multiple year data allows for yearly variations to be averaged out and would therefore add value to the transfer pricing analysis.
Denmark’s current transfer pricing documentation requirements will be replaced by the OECD’s BEPS transfer pricing documentation action that includes the standard of Master File, Local Files, and CbC report on or after January 1, 2016. A MNE with total group revenue above EUR 750 million is required to file a CbC report. Before the implementation by the Danish Ministry of Taxation on September 18, 2015, the Danish transfer pricing documentation rules only included the information required to be included in transfer pricing documentation.
For more information, or to discuss any transfer pricing issues within your company, contact your local CBIZ MHM tax professional.
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