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October 27, 2016

Canada and China Consider BEPS Recommendations and Other Transfer Pricing Updates from the Third Quarter of 2016

Countries continue to draft legislation or issue regulations implementing the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) recommendations. In this quarterly transfer pricing update, we discuss a recent U.S. House of Representatives bill that would require additional tax and country-by-country reporting disclosures for SEC filers. We also review recent BEPS reporting developments in Canada and China.

Corporate Transparency and Accountability Act

On September 22, 2016, H.R. 6126 (Corporate Transparency and Accountability Act) was introduced in the House of Representatives and referred to the House Committee on Financial Services. H.R. 6126 would amend the Securities Exchange Act of 1934, Section 13, requiring the disclosures of total corporate taxes paid by a corporation and country-by-country reporting (CbCR) information.

If H.R. 6126 is adopted, the following corporate tax disclosures would be required in both annual and quarterly reports:

  • Total pre-tax profit of the issuer during the period covered by the report;
  • Total amount paid by the issuer in state taxes during the period covered by the report;
  • Total amount paid by the issuer in federal taxes during the period covered by the report; and
  • Total amount paid by the issuer in foreign taxes during the period covered by the report.

Additionally, the following disclosures regarding CbCR would be required:

  • Revenues generated from transactions with other constituent entities;
  • Revenues not generated from transactions with other constituent entities;
  • Profit or loss before income tax;
  • Total income tax paid on a cash basis to all tax jurisdictions;
  • Total accrued tax expense recorded on taxable profits or losses;
  • Stated capital;
  • Total accumulated earnings;
  • Total number of employees on full time equivalent basis; and
  • Net book value of tangible assets.

The information would be filed with the SEC through the Commission’s website, where it would be easily searchable, sortable and downloadable.

Canada Transfer Pricing Update

On July 29, 2016, Canada's Department of Finance released draft legislation in its Budget 2016, addressing certain International tax measures including BEPS and CbCR.

Canada and other members of the G20 and the OECD have worked together to develop recommendations aimed at addressing BEPS.  In general, this refers to international tax planning arrangements undertaken by multinational enterprises (MNE) to inappropriately minimize their taxes, for example, by shifting taxable profits away from the jurisdiction where the underlying economic activity has taken place.

As part of its commitment to protect the integrity of the Canadian tax base, Canada's Department of Finance is acting on certain recommendations of the BEPS project:

  • Budget 2016 proposes new legislation to strengthen transfer pricing documentation by introducing CbCR for large MNEs;
  • The Canada Revenue Agency is applying revised international guidance on transfer pricing by MNEs, which provides an improved interpretation of the arm’s length principle; and
  • Canada is participating in international work to develop a multilateral instrument to streamline the implementation of treaty-related BEPS recommendations, including addressing treaty abuse.

The Canada Revenue Agency will also undertake the spontaneous exchange with other tax administrations of tax rulings that could potentially give rise to BEPS concerns.

Consistent with the recommendations of the BEPS project, Budget 2016 proposes implementing CbCR. This measure will apply only to MNEs with total annual consolidated group revenue of €750 million (~$840 million) or more. Where such a MNE has an ultimate parent entity that is resident in Canada (or a Canadian resident subsidiary in the circumstances set out above), it will be required to file a CbCR with the Canada Revenue Agency within one year of the fiscal year end to which the report relates. First exchanges between jurisdictions of CbCRs are expected to occur by June 2018. Before any exchange with another jurisdiction, the Canada Revenue Agency will formalize an exchange arrangement with the other jurisdiction and will ensure that it has appropriate safeguards in place to protect the confidentiality of the reports.

China Transfer Pricing Update

On June 29, 2016, China's State Administration of Taxation (SAT) released new regulations to refine the filing of related party transactions and the administration of contemporaneous transfer pricing documentation contained in Public Notice of the State Administration of Taxation (2016) 42 (Public Notice 42). Public Notice 42 addresses issues such as the recognition of related party relationships and transactions, reporting of related party transactions and contemporaneous documentation.

The contemporaneous documentation is similar to the OECD BEPS project in that China adopts the three-tiered approach that includes a master file, local file and special issues file. Also, the forms required in the CbCR have increased from nine information tables to 22 information tables. CbCR forms are required if the Chinese resident enterprise of the group has consolidated group revenue of more than 5.5 billion RMB (~$825 million).

Public Notice 42 states that the master file shall be completed within 12 months of the fiscal year end of the ultimate holding company of the enterprise group. Both the local file and special issues file should be completed by June 30th of the year following the year in which the related party transactions occurred. Contemporaneous documentation shall be prepared in Chinese and be submitted 30 days after receiving a request from the tax administration.

Any enterprise that meets one of the following criteria during the fiscal year will be required to prepare a local file:

  • The annual related party transfer of ownership of tangible assets exceeds 200 million RMB (~$30.0 million) (for toll manufacturing transaction, the amount iscalculated using the import/export customs declaration prices).
  • The annual related party transfer of financial assets exceeds 100 million RMB (~$15.0 million).
  • The annual related party transfer of ownership of intangibles exceeds 100 million RMB (~$15.0 million).
  • The annual total amount of other related party transactions exceeds 40 million RMB (~$6.0 million).

The local file discloses detailed information on the related party transactions including the following:

  • Overview of the enterprise.
  • Related party relationship.
  • Related party transactions.
  • Comparability analysis.
  • Selection and application of transfer pricing method.

Please contact your local CBIZ MHM tax professional with any questions on how these developments may impact your company.

Copyright © 2016, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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