The third quarter of 2019 was relatively quiet for transfer pricing rule changes domestically, but other countries made some noteworthy modifications. International businesses, particularly with locations in Ireland, should review the following updates to ensure they are in compliance with new requirements.
Ireland: Proposed Transfer Pricing Regime Changes
Nine years after its introduction, Ireland’s transfer pricing regime will implement changes beginning Jan. 1, 2020. The final changes will not be revealed until the Finance Bill is published this November, but it is believed that the transfer pricing laws will be updated to reflect new international standards set by the OECD and address concerns regarding perceived tax avoidance by international corporations.
In February 2019, the government initiated a consultation on Irish transfer pricing rules, covering the following aspects:
- Adoption of the 2017 OECD Transfer Pricing Guidelines to set arm’s length prices;
- Introduction of documentation standards in-line with the OECD Master and Local file framework;
- Removal of the grandfathering exemption for arrangements in place before 2010;
- Removal of the exemption for small and medium-sized enterprises (SMEs); and
- Extension of transfer pricing rules to non-trading and capital transactions.
Government officials continue to consult with and receive advice from stakeholders, so the likelihood of changes the government will enact this year range from the guaranteed to the unpredictable.
The adoption of the 2017 OECD Guidelines, the introduction of documentation standards, and the removal of the grandfathering exemption are all likely to be implemented, while the removal of the transfer pricing exemption for SMEs remains questionable. The extension to cover non-trading transactions is fairly unpredictable at this point.
Given the tax reforms already implemented by the government, many businesses in Ireland have been evaluating the impact of these potential changes to the transfer pricing regime in anticipation of the November Finance Bill.
Puerto Rico Now Requires Transfer Pricing Study
The Puerto Rican government adopted significant amendments to its income tax code on Dec. 10, 2018. In particular, the new law requires taxpayers to submit a transfer pricing study with their Puerto Rico income tax returns in order to avoid the 51% disallowance on expenses or fees accrued or paid to non-resident related parties who are not engaged in trade or business in Puerto Rico.
In order to avoid the 51% disallowance, the following must now occur:
- The taxpayer must submit the required transfer pricing study – covering the transactions otherwise subject to such disallowance;
- The transfer pricing study must be prepared pursuant to the provisions of the Internal Revenue Code Section 482 (as amended); and
- If the taxpayer does not have operations in the U.S., a transfer pricing study prepared under the principles of the OECD will be accepted
The transfer pricing study relief is effective for tax years beginning after Dec. 31, 2018, so for calendar-year taxpayers, the relief will be available for the tax year ending Dec. 31, 2019. Taxpayers with significant cross-border intercompany transactions may be able to use the transfer pricing study relief to benefit from the 51% cross-border intercompany expense disallowance for reduced or improved effective tax rates. In order to do so, it will be important to comply with the requirements associated with the transfer pricing study relief for the 2019 tax year and plan in advance to alleviate future compliance burdens.
Hong Kong Issues DIPN 58: Transfer Pricing Documentation and CbC Report
The Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Notes No. 58 (DIPN 58) on July 19, 2019. The DIPN 58 specifies the IRD’s views and practices on the three-tiered standardized transfer pricing documentation requirements in Hong Kong, which includes the Master File, Local File, and Country-by-Country (CbC) Report. It also includes examples of the applicability of exemption thresholds, administrative procedures, and required content.
Key observations in the DIPN 58 include:
- The IRD’s view is that it would be difficult for a Hong Kong entity to prove that the related party transaction amount stated in its tax returns is arms-length if it does not prepare the proper transfer pricing documentation.
- Hong Kong entities that do not exceed the exemption thresholds for transfer pricing documentation requirements are also encouraged to keep proper transfer pricing documentation to mitigate penalty exposure.
- Transactions in which the income or profits are sourced outside of Hong Kong should still be covered in the Local File.
- Specified domestic transactions and grandfathered transactions can be excluded from the Local File, however, the burden of proof is still on the Hong Kong taxpayer to substantiate that they have not been entered into for tax avoidance purposes.
- Hong Kong enterprises which may not have exceeded the thresholds regarding related-party transactions amount could have exceeded the threshold on a deemed arm’s-length basis and are encouraged to conduct a review to make that determination.
- Both the loan principal and the interest portion would be considered as transactions in respect of financial assets in determining loan transactions that exceed the exemption threshold.
The new requirements apply to accounting periods beginning on or after April 1, 2018, and there are specific Master File, Local File, and CbC Report requirements and exemptions. It is important to enlist the help of a skilled transfer pricing professional to effectively mitigate penalty exposure moving forward.
Hong Kong Issues DIPN 59: Transfer Pricing Between Associated Persons
The Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Notes No. 59 (DIPN 59) on July 19, 2019. DIPN 59 explains the arm’s-length principle, its application, and certain exemptions to be adopted by the IRD. Clarification has also been provided that the territorial source principle of taxation will not be impacted by the introduction of the BEPS and TP Ordinance, which requires the computation of income or profits from transactions with associated persons on an arm’s-length basis before the territorial source principle is applied to determine chargeability of income or profits to Hong Kong tax.
DIPN 59 does not provide much guidance on the application of the new Section 15F, but indicates that the Commissioner will generally follow the OECD Transfer Pricing Guidelines.
Insights moving forward:
- There is now greater tax transparency and an increased focus on transfer pricing in Hong Kong.
- Related-party transactions that were not challenged by the IRD in the past will receive more scrutiny by the IRD in the future.
- Going forward, the IRD can initiate a transfer pricing adjustment on a taxpayer’s profit or loss without seeking to apply the anti-avoidance provision.
- The burden of proof that a taxpayer’s income or loss on its tax return is arm’s-length will lie with the taxpayer. If taxpayers fall within the exemption threshold for preparing the Local File and Master File, they will still be expected to retain relevant documentation to demonstrate that their transfer pricing arrangements comply with the arm’s-length principle.
- More importantly, the taxpayer is expected to demonstrate that they made reasonable efforts to determine the arm’s length amount in order to avoid penalty exposure.
DIPN 59 provides a number of definitions, conditions, and illustrated examples to clarify the new guidance and rules. Considering the implementation of transfer pricing rules and a more stringent transfer pricing environment, Hong Kong taxpayers should assess whether their existing operations and transfer pricing models are appropriate to have the supporting transfer pricing analysis readily available.
Portugal Amends Transfer Pricing Legislation
A new bill was published in Portugal on Sept. 18, 2019 to introduce changes to various tax codes, including significant amendments to current transfer pricing legislation. The new legislation took effect on Oct. 1, 2019 and impacts the use of transfer pricing methods, documentation requirements, and Advance Pricing Agreements.
Changes to the transfer pricing legislation include the following:
- Taxpayers monitored by the Large Tax Payers Unit are not required to submit transfer pricing documentation.
- The definition of transactions subject to transfer pricing rules was broadened to include transactions with related entities within the scope of business restructuring activities.
- Portuguese transfer pricing legislation is now aligned with the guidance included in the 2017 version of the OECD transfer pricing guidelines for multinational enterprises and tax administrations.
- In cases where transfer pricing methods cannot be used due to unique transactions or lack of comparable data, other methods or techniques of analysis have been introduced.
- A fine has been introduced for noncompliance of CbC Reporting notification requirements.
- The Advanced Pricing Agreements term has been extended to four years.
These amendments highlight the importance that the Portuguese Tax Authorities are placing on transfer pricing, namely by making transfer pricing documentation mandatory for its largest taxpayers. Taxpayers in Portugal should review their transfer pricing obligations with a professional to make sure they remain compliant with the new legislation.
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