Transfer pricing is increasingly becoming a focal point for domestic and international regulators. Authorities have felt the pressure to take action to increase transparency and close the pay gap. Governments worldwide have made updates to create a better tax control framework and avoid non-compliance, evasion, tax avoidance, fraud, and non-collection. In the following quarterly Transfer Pricing update, we outline the updates that you need to be aware of so you can manage the potential challenges that may come with them.
Updates on Country-by-Country Reporting, Master File, and Local File Requirements
On March 09, 2017, the Canada Revenue Agency (CRA) published guidance on Country-by-Country (CbC) reporting in Canada. The guidance specifies the reporting requirements using form RC4649, which is required to be filed by companies for fiscal years beginning on or after January 1, 2016, for multinational entity (MNE) groups meeting a consolidated group revenue threshold of €750 million. Currently the CRA does not have a master file and local file requirement in place that is similar to the OECD’s “three-tiered documentation approach.” In a written response, the CRA indicated that the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13 has been addressed through its requirement of CbC reporting. Based on the CRA’s response, Canadian taxpayers can assume that they will not likely have a requirement to prepare a master file and local file in the near future. However, the transfer pricing documentation requirements under Section 247 of the Canadian income tax act would still apply.
On October 6, 2017, the CBDT, Ministry of Finance, and Government of India released draft rules in relation to master file and CbC reporting, and sought recommendations from relevant stakeholders. The final rules were then released on October 31, 2017, as follows:
- Rule 10DA delineates the threshold for applicability, timelines, requirements, and procedures in relation to the master file requirements, which is required to be filed in forms 3CEAA and 3CEAB.
- Rule 10DB notes the requisite details and procedures for CbC reporting, which is required to be filed in Forms 3CEAC, 3CEAD, and 3CEAE.
The requirements of Rule 10DA and 10DB are largely consistent with the OECD’s BEPS Action Plan 13. However, there are a few key differences, which are noted below:
- A description of the functional analysis of all of the constituent entities that contribute at least 10 percent of the revenues, assets, or profits of the group.
- A detailed description of the financial arrangement of the group with the names and addresses of the top ten unrelated lenders.
- A list of all of the international group entities engaged in the development and management of intangible property and their addresses.
On October 11, 2017, Mexico’s Tax Administration Service (SAT) published format guidelines for the presentation of the master file, local file, and CbC report. The requirements set out by the SAT are largely consistent with the OECD’s BEPS Action Plan 13 and note the following thresholds:
- Companies that enter into transactions with related parties in Mexico or abroad with annual revenue equivalent to ₱645 million are required to file a master file and a local file.
- Mexican MNE groups with annual revenue equal to or higher than ₱12 billion must file a CbC report.
Following the publishing of the format guidelines, the Mexican government published a resolution in the Official Gazette that amends the aggregate information required in CbC reports with respect to permanent establishments on Nov. 14, 2017. The amendments clarify the way in which certain permanent establishment information is included in the CbC report, and brings the requirements in line with the OECD guidelines. The areas amended with respect to permanent establishments include accumulated earnings, stated capital, and tangible assets other than cash and cash equivalents.
BEPS Tax Bill Introduced in New Zealand to Prevent Multinationals from Achieving Tax Advantages
On Dec. 6, 2017, the New Zealand Government introduced a taxation bill into Parliament to address BEPS concerns. The taxation bill is intended to prevent BEPS by multinational companies and will apply to income years starting on or after July 1, 2018.
- Interest Limitation Rules – The new interest limitation rules will prescribe a restricted transfer pricing approach to pricing related party loans between a non-resident lender and a resident borrower for borrowings greater than $10 million. The restricted transfer pricing approach requires companies to apply a credit rating that is one notch below the parent company’s credit rating to determine the appropriate interest rate. A credit rating of BBB- is used if a parent company is not identifiable.
- Permanent Establishment Rules – The new permanent establishment (PE) rules will target large multinationals that structure arrangements to avoid establishing a PE in New Zealand. The new PE rules state that a non-resident entity must have PE in New Zealand if a related party is conducting sales activity in that country for the purpose of avoiding taxes. These rules attribute activities for the related party to the permanent establishment. It is important to note that these rules have been explicitly designed to apply regardless of any contrary positions under New Zealand’s Double Tax Agreements (DTAs), unless that DTA incorporates the OECD’s latest permanent establishment article (Article 12(1) of the Multilateral Convention).
- Transfer Pricing Rules - The taxation bill includes changes to New Zealand’s transfer pricing rules in order to become more robust and achieve greater alignment with Australia’s transfer pricing rules. The notable changes include:
- Shifting the burden of proof from the Commissioner to the taxpayer (consistent with the approach for other tax matters);
- Permitting the Inland Revenue to disregard or replace transfer pricing arrangements that are not commercially rational and reassess transfer pricing positions from four years to seven years; and
- Extending the application of the transfer pricing rules to transactions where non-resident investors are “acting in concert” to effectively control a New Zealand entity.
- CbC Reporting and Hybrid and Branch Mismatch Rules – The taxation bill will require New Zealand headquartered multinational groups with annual consolidated group revenue of €750 million or more to prepare and file a CbC report. In addition, the taxation bill includes a comprehensive adoption of the OECD hybrid recommendations with modification for context in New Zealand.
The next steps are for the taxation bill to be read in Parliament, after which it will be referred to the Finance and Expenditure Committee who should then call for public submissions on the taxation bill. Due to the complex nature of the taxation bill, it will take considerable effort to determine the impact for taxpayers and businesses.
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