Transfer pricing regulations tend to be ever-changing, and as part of our ongoing efforts to assist you with compliance, we have provided a round-up of the developments from the second quarter of 2019 that could have an impact on your compliance requirements. From a LIBOR update to a court ruling, the following are some of the top stories that multinational enterprises and other businesses with international operations should have on their radar.
Discontinuance of LIBOR Will Affect Transfer Pricing
Although it may seem like we have plenty of time until 2021, it is important to start preparing for the discontinuance of the London Inter-Bank Offered Rate (LIBOR). The loss of LIBOR will require an effective transition plan because the interest rate average is the benchmark for an estimated $370 trillion worth of worldwide financial transactions. Multinational enterprises (MNEs) with financing tied to the LIBOR should be aware of the five key ways their transfer pricing may be affected by the discontinuance of LIBOR.
- Intercompany Loans: Companies that use LIBOR as a base rate for their intercompany loans that mature after 2021 will need to amend their language with their agreements set in place.
- Arm’s Length Policies: MNEs may need to adjust their transfer pricing policies in order to produce arm’s length results.
- Debt: MNEs may need to re-establish the debt nature of their loans to demonstrate the borrower could have obtained the debt at arm’s length under the conditions at the time of issuance. It is important to document this so that it can remain true in the current market environment.
- Hedging: MNEs often have in-house financing and use hedging contracts to manage their foreign currency exchange risks. Since LIBOR is commonly used as a reference rate for hedging contracts, MNEs should plan for this change and learn how it will affect their current financing structures.
- Intercompany Interest Rates: Many companies have systems in place for calculating intercompany interest rates. The systems will need to be updated to take into consideration the discontinuance of LIBOR.
Ninth Circuit Upholds Cost-Sharing Regulations in Altera
In a recent 2-1 decision regarding Altera Corp. v. Commissioner, the Ninth Circuit Court of Appeals reversed the U.S. Tax Court’s decision and sided with the Treasury Regulation that says stock-based compensation costs (SBCs) must be included in costs shared in a cost-sharing agreement (CSA). The decision to require the costs to be included was originally thought to be issued July 2018, but was taken back on Aug. 7, 2018 when one of the judges passed away before the formal decision was stated. Altera’s belief was that including SBCs did not meet the arm’s length principle requirements.
Once the judge who passed away was replaced, a new decision was released on June 7, 2019. The Ninth Circuit overturned the earlier Tax Court decision because it was found that the Treasury did clearly outline the SBC regulations through the Administration Procedures Act.
Any company who has related-party CSAs will be affected by this decision and should review how they handle SBC Costs under their CSAs. The IRS will also begin adjusting on prior years.
Argentina Introduces Materiality Thresholds and Modifications to Transfer Pricing Informative Returns
On May 27, 2019, General Resolution 4496 (GR 4496) was published in Argentina’s Official Gazette. The Resolution modified the previously released General Resolution 1122. See below for the key amendments.
Materiality Thresholds in Transfer Pricing Obligations
Companies will now only be required to file the Transfer Pricing Report and Form 743 if the transactions during the fiscal year meet the materiality thresholds set forth. The filing is only required if the transactions during the fiscal year individually considered exceed the amount of 300,000 Argentine pesos or as a whole exceed 3 million Argentine pesos.
Transactions with Unrelated Parties – New Materiality Thresholds
GR 4496 also updated the threshold for filing Form 867. Form 867 mandates the disclosure of profit margins obtained from importing and exporting goods. The filing will now only be required if the transactions during the fiscal year exceed the amount of 10 million Argentine pesos. The previous threshold was 1 million Argentine pesos. The taxpayer must also be able to provide working papers that contain the calculated profit levels.
Harmonization of Due Dates; Elimination of Form 969
Form 969, one of the annual transfer pricing forms, will now have a new due date set forth by GR 4496. All of the forms set forth by 1122 must now be filed by the eighth month after the closing of the fiscal year.
There will be other important aspects that are expected to be regulated such as Master File, Commodity Transaction Filings, and International Intermediaries.
New Zealand’s Revised International Tax and Transfer Pricing Guidance
New Zealand Inland Revenue (IR) published international tax and transfer pricing guidance on April 29, 2019 that will be effective as of July 1, 2018 and will strategically align the OECD base erosion and profit sharing actions with New Zealand law.
Interest Limits on Controlled Inbound Financing
The Income Tax Act of 2007 now has new sections that will require a step-test that will identify the interest rate that applies to inbound financing transactions. Key changes include:
- Prescribed approach to borrower credit rating assessment
- Extension of the rules to foreign lenders
- Disregard of certain features for pricing purposes
Transfer Pricing Guidance
Section GC 13 of the Income Tax Act has also been modified. Some of the changes include:
- Properly indicate the position of the tested transaction alongside the arm’s length conditions
- The IR will now have the power to amend tax assessments when the transactions do not line up properly with the arm’s length transaction
- Extension to 7 years of the time bar period on transfer pricing
There have also been a series of administrative changes to the Tax Administration Act 1994 such as:
- New Zealand Inland Revenue (IR) can collect from taxpayers on behalf of their multinational associated parties
- IR can request info on all members of a multinational group
- IR able to further enforce guidelines and boundaries in requesting information
- If a large multinational group does not co-operate with IR, the penalty has risen to 100,000 New Zealand Dollars
IRS LB&I Announces Captive Services Providers Campaign
The IRS Large Business and International Division (LB&I) recently released the announcement of three new compliance campaigns, one of which will specifically target foreign captive services providers for a U.S.-based service recipient. A captive services provider exists for the purpose of providing services for another member in the same multinational group (i.e. intercompany). The goal for the Captive Services Campaign is to eliminate U.S. tax base erosion. The IRS will be completing “issue-based examinations” and sending “soft letters” out to serve as a warning if any non-compliance is suspected.
Taxpayers will have to be vigilant in their documentation and ability to support the service fees paid to foreign captive subsidiaries. To ensure consistency with the arm’s-length standard, taxpayers will often be able to apply the comparable profits method or transactional net margin method.
U.S. taxpayers with service payments to foreign captive services providers should take a look at their transfer pricing policies to make sure they have proper support and documentation for their intercompany transactions.
The final point is that under the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA), the Global Intangible Low Tax Income now has a minimum U.S. tax on the U.S. parent above a certain return on assets. Also, the TCJA also enforces a Base Erosion Anti-Avoidance Tax on intercompany payments from a U.S. group above a certain amount for large U.S. companies.
For More Information
For comments, questions, or concerns about transfer pricing, please contact a member of our team.