Q3 Transfer Pricing Updates: Checking in with France, China, Peru, and Poland (article)
Several countries updated guidance for their transfer pricing regulations during the second half of 2018. A summary of major developments follows. Companies with business activities in these jurisdictions should carefully review the changes to ensure they are meeting their transfer pricing requirements.
France Publishes Instructions on New Master and Local File Transfer Pricing Documentation Requirement
In July 2018, France published instructions on Decree No. 2018-554 in the Official Gazette. Decree No. 2018-554 outlines transfer pricing documentation requirements for the Master File and Local File and the instructions confirm that they apply for fiscal years beginning on or after Jan. 1, 2018. Decree No. 2018-554 specifies the following thresholds should be applied to determine whether multinational companies are required to provide documentation in electronic format upon request, which is typically at the start of an audit:
- Companies whose turnover or gross assets appearing in the balance sheet is greater than or equal to €400 million (approximately $459 million);
- Companies that hold more than 50 percent or are more than 50 percent held by a company meeting the asset/turnover test; or
- Companies that belong to a consolidated group with a member meeting the asset/turnover test.
The Master File should include the following five standard sections:
- Organizational structure of the group
- The business or businesses of the group
- Intangible asset of the group
- Group intercompany financial activities
- Group financial and tax situation
The Local File should include the following three standard sections:
- Details of the local French entity
- Details of controlled transactions
- Financial information
If a controlled transaction’s total value exceeds €100,000 (approximately $115,000) per year per transaction category (specified in the Decree No. 2018-554), it should be included in the Local File.
Hong Kong Publishes Ordinance Implementing BEPS Measures: Master and Local File Requirements and CbC Reporting
Hong Kong published the Inland Revenue (Amendment) (No.6) Ordinance in July 2018 in the Official Gazette. The Ordinance includes requirements for Master File and Local File and Country-by-Country (CbC) Reporting, which are summarized below.
Master and Local File
The Master File and Local File requirements apply for accounting periods beginning on or after April 1, 2018 and must be prepared within nine months following an accounting period (in English or Chinese). The requirements also outline that the documentation should be kept for at least seven years. Unless taxpayers engaging in controlled transactions meet one of the exemptions listed below, they will generally be required to prepare Master File and Local File documentation.
- Specified domestic transactions between associated enterprises, subject to certain conditions, are not required to be covered in the Local File, and such transactions are not included in the below controlled transaction amount exemptions.
- If an entity satisfies any two of the three conditions listed below, it will not be required to prepare a Master File or Local File:
- Total revenue during the accounting period is not more than ¥400 million (approximately $51 million);
- Total assets at the end of the period is not more than ¥300 million (approximately $38 million);
- The average number of employees during the period is not more than 100 employees;
- If the amount of a category of controlled transactions for the accounting period does not meet the thresholds listed below, the taxpayer will be exempt from preparing a Local File for that particular category of controlled transactions (the taxpayer will also be exempt from preparing a Master File if the threshold is not met for all categories of controlled transactions)
- Transfers of property (whether moveable or immovable but excluding financial assets and intangibles) is not more than ¥220 million (approximately $28 million);
- Transactions in respect of financial assets is not more than ¥110 million (approximately $14 million);
- Transfer of intangibles is not more than ¥110 million (approximately $14 million);
- Other transactions (e.g. service income and royalty income) are not more than ¥44 million (approximately $5.6 million)
The CbC reporting requirements apply to accounting periods beginning on or after Jan. 1, 2018. If the ultimate parent resides in Hong Kong and the consolidated group revenue is above ¥6.8 billion (approximately $868 million), the entity is subject to the CbC reporting requirements. If the ultimate parent resides outside of Hong Kong, the CbC reporting requirements will apply based on thresholds specified by the ultimate parent’s jurisdiction or the €750 million equivalent of the ultimate parent’s local currency as of January 2015. All group entities residing in Hong Kong must file a notification within three months after the end of the accounting period and must include details on whether the entity is a parent, surrogate, or otherwise required to file a CbC report. The contents of the CbC report are in line with the OECD guidelines, filed electronically, and given a deadline of 12 months after the accounting period. The records should be kept for six years.
Poland Publishes Draft Legislation Amending Transfer Pricing Rules
With the goal of improving the taxation of large multinational enterprises (MNEs) and simplifying the requirements, Poland published draft legislation that would amend the country’s transfer pricing rules. See below for a few of the main changes:
- An increase in the thresholds that require documentation, including set thresholds of zł10 million (approximately $2.7 million) or zł2 million (approximately $500,000). These amounts are based on the category of a controlled transaction.
- The deadline to submit the statement on the preparation of the Local File will be extended. It was previously to be submitted three months after the end of the year, but will be extended to nine months post year-end. Similarly, the deadline to submit Master File documentation will also be extended to 12 months post year-end.
- The new threshold to submit a Master File is a consolidated group revenue of zł200 million (approximately $54 million).
The changes are to apply beginning Jan. 1, 2019, subject to approval.
Peru Publishes Resolution on Submission of Master File and CbC Report
On June 27, 2018, Peru published Resolution No. 163-2018/SUNAT in the Official Gazette, which outlines the requirements for the Master File and CbC reporting. These requirements are to apply for reporting fiscal years beginning on or after Jan. 1, 2017.
The following thresholds would require taxpayers to submit a Master file:
- Sum of the year’s income greater than 20,000 tax units (approximately $25 million for 2017)
- Sum of related-party transactions amount to 400 tax units (approximately $500,000 for 2017) or more
To submit the Master File, taxpayers must complete Virtual Form No. 3561 through SUNAT Virtual. The Master file should be attached in PDF format.
The CbC reporting requirements apply to all parent entity residents in Peru and designated surrogate entities with consolidated group revenue of S/2.7 billion or more (approximately $810 million). It also applies to non-parent entities if local conditions are met.
If an entity is filing as a surrogate parent or filing because local conditions are met, the entity must provide notification to SUNAT by the last day of the month prior to the month the report is due. This is provided via email (firstname.lastname@example.org) in the format included in Annex II of the Resolution.
To submit the CbC report, taxpayers should submit Virtual Form No.3562 through SUNAT Virtual with the required XML files attached.
The deadline to submit the Master File and the CbC report is the monthly advance tax payment corresponding to the month of September of the fiscal year following the reporting fiscal year. In respect to the 2017 fiscal year, the Resolution extends the deadline to be between Nov. 15 and Nov. 22, 2018 (depending on the RUC number).
Treasury and IRS Propose to Remove the Section 385 Documentation Regulations
In September, both the Treasury and the IRS proposed regulations that would repeal rules under Section 385 regulations. The following gives a timeline of the Section 385 documentation rules.
- April 4, 2016: Treasury originally proposed Section 385 regulations.
- Oct. 21, 2016: Proposed final regulations with documentation rules that would apply to interests issued on or after Jan. 1, 2018.
- July 28, 2017: Notice 2017-36 was issued by the IRS. This notice delayed application of rules to interests issued to on or after Jan. 1, 2019.
- Oct. 4, 2017: The announcement came to withdraw documentation rules under Treas. Reg. sec. 1.385-2. The rules would be replaced with more efficient documentation rules.
As mentioned above, there has been a proposition to repeal rules under Section 385. Further guidance is anticipated.
For More Information
We will continue to monitor developments that affect transfer pricing requirements. If you have any specific questions related to transfer pricing and multinational tax reporting, please contact us.
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