States Crack Down on Transfer Pricing and Other Developments from Q3 2017 (article)
Transfer pricing is increasingly becoming a focal point for domestic and international regulators. Some states are pursuing transfer pricing compliance in a similar way that they monitor unclaimed property compliance, by using contingent fee auditors to examine related party arrangements. Abroad, the European Union (EU) is considering a proposal that would significantly impact companies with subsidiaries located in the EU, and the Organisation for Economic Co-Operation and Development (OECD) has updated its transfer pricing guidelines to reflect initiatives from the BEPS project.
State Transfer Pricing Developments
The Mississippi Department of Revenue is looking for contingent fee contractors to prepare transfer pricing analyses and reports that will assist the state in identifying profit shifting through intercompany transactions. In April, the state approved the budget for an initiative that will target underreported cash sales and profit shifting in intercompany transactions. The state later released a request for proposal (RFP) for third party contractors with transfer pricing expertise. Responses to the RFP were due by Aug. 25, 2017. Companies that are planning to have operations (or that are presently operating) in Mississippi should ensure their intercompany transactions are properly set.
Contingent-fee auditors have been used for transfer pricing issues in other parts of the U.S. as well. In 2010, the District of Colombia sought to collect additional taxes of $2.7 million plus interest and penalties from Microsoft related to the pricing of its intercompany transactions, and Microsoft successfully appealed the assertion that it had improperly priced its intercompany transactions. Similarly, See’s Candies in Utah won a lower court ruling over a transfer pricing issue uncovered by the Utah Tax Commission involving the transfer of intangible property between See’s Candies and its related company, Columbia Insurance. The Utah Tax Commission argued that the transfer, which involved the payment of royalties by See’s Candies to Columbia Insurance, did not meet the arm’s length standard. The Utah Tax Commission is appealing the ruling to the state’s Supreme Court.
Country-by-Country Reporting Update
As part of an effort to simplify reporting for multinational companies, many countries are adopting recommendations from the OECD and G20 countries’ Base Erosion and Profit Shifting (BEPS) project. One of the recommendations from the BEPS project was the Country-by-Country (CbC) reporting model, which provides a template for multinational companies to report their financial information in countries where they operate. Countries that implement the CbC reporting model will then share the reported information with other countries by establishing Competent Authority Arrangements. The intention of the arrangements is that a company would only need to file a single CbC report to be shared amongst countries in which the company has operations, so long as those countries have Competent Authority Agreements with the company’s home country.
In the U.S., CbC reporting applies to multinational companies that earn $850 million or more in revenue in a given tax year. The U.S. recently renegotiated several of its Competent Authority Arrangements with countries including: Australia, Belgium, Brazil, Canada, Ireland, New Zealand, the United Kingdom and South Korea. Agreements are currently being negotiated with France, Germany, India, Spain and Portugal. A full list and status of the U.S. Competent Authority Agreements can be found here.
European Union Considers Making CbC Reports Publicly Available
The European Parliament submitted a proposal to the EU Council that would make CbC reports publicly available. Foreign companies with subsidiaries in the EU and turnover of more than €750 million per year would be subject to the requirement.
Due to the potential inclusion of commercially sensitive information in a CbC report, and to protect the privacy of companies submitting the reports, past financial information would be presented as an average rather than in full. The proposal suggests that companies could apply annually for exemption periods for reporting the sensitive information. Companies that are granted an exemption would be published on a list maintained by the EU.
Multinational companies with headquarters outside of the EU should monitor the developments closely to ensure that if the proposal were to be implemented, they are taking advantage of the exemptions to protect their commercially sensitive information.
OECD Updates Transfer Pricing Guidelines
The OECD released its 2017 edition of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the Guidelines) on Oct. 7, 2017. Changes incorporated in the Guidelines reflect some of the initiatives from the BEPS project. Substantial updates were made to bring transfer pricing outcomes in line with value creation. The Guidelines also include more detail about transfer pricing documentation for CbC reporting and revisions to guidance on safe harbors and business restructurings.
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