Transfer Pricing Trends in 2019: A Snapshot of Q1 Developments
New laws that affect transfer pricing went into effect in 2018 that will have an effect on 2019 financial reporting. Countries with activities in Denmark, Argentina, Brazil, Saudia Arabia, and Great Britain should be aware of these recent transfer pricing developments.
Denmark Adopts Contemporaneous Transfer Pricing Documentation Legislation
On Oct. 4, 2017, Folketinget (Danish parliament) adopted a revision designed to tighten the Tax Control Act that was to be set in motion Jan. 1, 2019. The law sets forth new deadline requirements for preparing transfer pricing documentation. Companies should complete the documentation at the time of the tax return filing. The new rule applies to companies with financial years beginning Jan. 1, 2018.
Argentina Provides New Transfer Pricing Rules
On Dec. 27, 2018, the Argentine government enacted the regulatory decree (RD) to the reformed income tax law (ITL). The RD is effective for fiscal years beginning Jan. 1, 2018. The RD provides information and regulation on the following topics:
International Intermediaries – Substance Test
The decree announced guidance for the imported/exported goods information that is now required for taxpayers to provide when there is an international intermediary involved. The information requirements apply when the international intermediary is a related party to the Argentine taxpayer, or the foreign importer/exporter is a related party. Section 21.19 states that if the earnings for the international intermediary exceed what independent companies would agree upon, the excess would be considered as higher income of the Argentine source.
Exports of Commodities – Registration of Agreements
Further guidance was released regarding the rules for the valuation of the exports of commodities. Taxpayers must now register their agreements for commodities export transactions electronically with the AFIP.
List of Assumptions to Define ‘Related Parties’ and Guidance on Low or Nil Tax Jurisdictions
The decree included a new list of assumptions that would classify two parties as “related” and therefore make the relationship subject to transfer pricing rules. Countries that have a maximum corporate tax rate lower than 60% of the Argentine corporate income tax rate (25%) are considered to have low or nil tax jurisdictions.
Compliance: Transfer Pricing Documentation and Materiality Threshold
New transfer pricing documentation requirements were introduced in regards to what materials need to be documented in the Master File, the Local File, and the Country-by-Country (CbC) Report. Further details should be provided by AFIP. Companies carrying out intercompany transactions less than ARS 3,000,000 (total) or ARS 300,000 (individual amounts) will not be subject to the Master File and Local File documentation obligations.
Comparability Analysis, Risk Assessment, and Transfer Pricing Method Consideration
The decree introduces the necessary documentation of the comparability analysis, risk assessment analysis, and consideration for transfer pricing methods. The decree states that taxpayers could conduct a nine-step approach, similar to the OECD approach for the comparability analysis. For the risk assessment analysis, an approach similar to the OECD six-step approach is suggested. Transfer pricing analyses must be performed on a stand-alone basis for individual transactions and use current tax period information. The decree introduces the residual profit split method and allows for using “other methods” in certain situations when the recognized methods cannot be applied.
Restriction on Interest Deduction
A new BEPS-based rule caps the deduction on interest expense with local and foreign related parties to 30% of the taxable income before interest, foreign exchange losses, and depreciation (EBITDA). The 30% does not apply to interest subject to withholding tax.
Intending to capture profits generated by the permanent establishment (PE), the tax reform introduced a detailed definition of PE in the ITL and a list of scenarios that would be considered a dependent agent status.
Brazil Changes Transfer Pricing Rules on Import Transactions and Commodities
On Jan. 29, 2019, the Brazilian Federal Revenue Department (RFB) published Normative Instruction amending NI 1312/12 (effective as of 2019). The amendments were in regards to the application of the transfer pricing methods for import transactions and commodities. The changes should be evaluated by companies to avoid the possibility of double taxation.
Saudi Arabia Publishes Draft Transfer Pricing By-Laws
On Dec. 10, 2018, The General Authority of Zakat and Tax (GAZT) in the Kingdom of Saudi Arabia (KSA) published draft Transfer Pricing By-Laws (By-Laws). The By-Laws introduce transfer pricing requirements that are consistent with OECD principles and the OECD’s three-tiered documentation approach. Below is a summary of the transfer pricing documentation requirements presented, including the relevant deadlines and thresholds.
- Disclosure Form – To be submitted within 120 days following the end of the fiscal year.
- Local File and Master File – Effective Dec. 31, 2018, the implied deadline for the local file and master file is 120 days following the end of the fiscal year. At the earliest, the Local File must be submitted within seven days upon request by GAZT and the Master File must be provided within 30 days upon request by GAZT. The threshold for preparation of the Local File and Master File is available to natural persons, taxpayers that do not enter into related party transactions, and companies with arm’s length controlled transactions that do not exceed SAR 6m during any 12-month period.
- CbC Notification and CbC Report– The deadline for submitting the CbC notification is within 120 days of the year-end to which the CbC report relates, and the CbC report must be filed within 12 months of the year-end to which the report relates. The first report should be prepared for the group’s fiscal year ending Dec. 31, 2018. The notification and reporting requirements apply to companies with consolidated group revenue exceeding SAR 3.2bn
Though the By-Laws only represent the first draft of Transfer Pricing Guidelines, it is important that taxpayers begin to take a look at their businesses in order to be ready for upcoming requirements.
The UK changes the definition of permanent establishment
On February 12, the UK Finance Act 2019 became law and expanded the definition of Permanent Establishments (PE), which should result in more PEs arising. In reviewing the PE threshold, it seemed that taxpayers were attempting to avoid having a PE by setting up various arrangements. A few of the changes include the Fixed Place of Business PE definition and the Dependent Agent PE definition.
There will be changes to double tax treaties and also to domestic laws via the Multilateral Instrument (MLI). The new legislation is effective as of Jan. 1, 2019, and the first grouping affected by the MLI will begin April 1, 2019. Though the UK’s definition of PE is closely related to the MLI wording, the exception is that the UK definition of “closely related enterprise” seems to cover a much wider audience than does the OECD MLI working.
Don’t hesitate to reach out to the author, Josh Finfrock, for more information. You can reach Josh at email@example.com or (949) 783-1839. You can check out Josh’s library of articles on Transfer Pricing here – including Top Transfer Pricing Considerations for Manufacturers.
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