Countries are moving closer to adopting a multinational tax framework that would reduce cross-border profit shifting. Cross-border tax collaboration is one of the hallmarks of the Organisation of Economic Co-Operation and Development (OECD) and the G20 Countries’ Base Erosion and Profit Shifting Project (BEPS). The initiative is designed to help local countries capture profits from multinational organizations and limit practices that aggressively move profits into lower tax jurisdictions.
Aside from progress with the BEPS initiative, developments during the first quarter of 2017 included the release of an international transfer pricing toolkit and updates to both the United Kingdom’s and Luxembourg’s transfer pricing regulations.
United Nations Collaboration Releases Comparable Data Toolkit
On Jan. 24, 2017, the International Monetary Fund, the OECD, the United Nations and the World Group’s Platform for Collaboration on Tax compiled a draft toolkit of data for scenarios where comparable market information may be limited.
One of the key components of a transfer pricing analysis involves the establishment of “arm’s length” prices for related party transactions. Arm’s length pricing can be challenging when the local markets do not have comparable data for the goods or services being provided. Designed for developing countries, the toolkit provides guidance for how countries can work around limited availability of comparable data, while still ensuring that intercompany transactions meet transfer pricing regulations. A draft of the toolkit was circulated and the comment period ended on Apr.7, 2017.
United Kingdom Updates Cash Pooling Guidance
On Feb. 6, 2017, the HMRC (the U.K.’s Revenue and Customs) published transfer pricing guidance for cash pooling arrangements. The new language addresses recent BEPS guidance and describes differences between notional and zero-balancing pooling arrangements, risks associated with cross guarantees, how to allocate benefits within cash pooling arrangements (including the cost plus remuneration for the cash pool leader), and how short- and long-term balances within a cash pooling arrangement may impact transfer pricing analyses.
Additional guidance is also provided for scenarios where U.K. companies are long-term cash pool depositors or borrowers.
Luxembourg Financial Transactions
On Dec. 27, 2016, Luxembourg issued new guidance on the treatment for intra-group financial transactions. The changes bring Luxembourg’s transfer pricing guidelines in line with the arm’s length principle outlined by the OECD.
The guidance establishes compensation guidelines for interrelated entities that perform pure intermediary financial and treasury functions. Organizations operating within Luxembourg should carefully consider how the new guidance affects their planned or existing structures, as the updates to compensation arrangements may not align with contractual and legal language.
The new guidance also excludes a rule to determine the equity at risk in related party transactions. Instead, the substance of the functions performed and the risks relative to those functions will be used to determine the appropriate level of equity at risk.
Multilateral Instrument Agreement
During the Pacific Rim Tax Conference held in March 2017, the Deputy Director for the OECD Centre for Tax Policy and Administration, Grace Perez-Navarro, shared an update on a BEPS project initiative. Navarro said the OECD expects 60 nations to sign a multilateral tax agreement at a ceremony that will be held in June 2017. The multilateral tax agreement is a key element of the BEPS initiative to counter treaty abuse.
Nevertheless, an exception from the multilateral agreement’s expanded definition of permanent establishment is provided already. Countries can adopt the BEPS tax agreement’s expanded permanent establishment provision without directly changing the permanent establishment definition contained in their existing tax treaties. The U.K. has already stated that it will not be adopting the expanded permanent establishment definition.
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