Transfer Pricing Newsletter

Argentina

Transfer Pricing Requirements- Transfer pricing requirements also apply to transactions carried out with individuals or legal entities located, organized or established in low or no tax jurisdictions. Transactions between local enterprises and persons or entities incorporated or domiciled in low-tax jurisdictions are considered not to be carried out at arm’s length. A white list has been published of jurisdictions that are not regarded as low tax jurisdictions for the purposes of the application of the transfer pricing rules.

Australia                  

Financial Services– On 16 December 2013 the ATO issued a discussion paper on aspects of the operation of the arm’s length debt test contained in the thin capitalization regime.

 Belgium                   

Audits Process– Likely high-risk targets for audits are highly leveraged companies, those with large tax losses carried forward, and those with fluctuating profits. Belgium has increased the number of transfer pricing audits and expanded the team of transfer pricing audit staff. In response to the OECD action plan on base erosion and profit shifting there is a program of targeted transfer pricing audits.

 Switzerland             

Financial Services-No specific provision but the arm’s length principle applies. Safe Harbour-Rule-Safe harbor rules apply to intragroup interest rates.

Safe Harbour Interest Rates-Under a Circular of 30 January 2014 the safe harbor interest rate on loans received by shareholders or related parties denominated in CHF are 1.5% on loans financed through equity, or for loans financed through debt the safe harbor rate is the interest incurred on that debt plus 0.5% on amounts up to CHF 10 million; or plus 0.25% on amounts above CHF 10 million; provided that the interest rate is at least 1.5%. For loans made by shareholders or related parties the safe harbor interest rates are 1.5% to 2.75% on real estate loans (the amount depending on the type and level of debt finance); 3.75% on operational loans received by a Swiss trading or production company; or 3.25% on loans received by a Swiss holding or administration company. Other safe harbors apply for loans denominated in foreign currencies. On loans given to related parties or shareholders and financed from equity the safe harbor rates are 2.0% for EUR and 2.25% for USD denominated loans, but in all cases the rate must be at least 1.5%. For loans given to shareholders and related parties financed through debt the rate is the interest incurred plus 0.5%, but must be at least 2.0% for EUR loans and 2.25% for USD loans. The same safe harbor rates apply to foreign currency denominated loans received from shareholders or related parties, but higher interest rates may apply to these if they are justified by a business purpose.

Colombia                 

Financial Services-Under the thin capitalization provisions interest is fully deductible up to a debt to equity ratio of 3:1. This applies to domestic and foreign loans from related or unrelated parties.

 Greece                      

Control-The definition of associated persons extends to legal persons, individuals or other bodies of persons where one of them directly or indirectly holds shares, parts or quotas in the other amounting to at least 33% on the basis of total value or number, profit participation or voting rights; or where a person participates in one or more other persons.

Intangible Property-The concept of business restructurings has been included in the transfer pricing rules applying the arm’s length principle in respect of transfers of intangible assets, functions and risks between related parties, generally along the lines of the 2010 update of the OECD transfer pricing guidelines.

Financial Services– No specific provision but financial services must conform to the arm’s length principle. It should also be noted that interest is deductible only to the extent that the net interest does not exceed 25% of the earnings before interest, tax, depreciation and amortization. Any excess interest may however be carried forward for up to five years. The interest is however deductible in full if a company is not part of a group and the net interest is less than EUR 1 million per year.

Availability of Advance Pricing Agreement (APA)-Applications for an APA may be made in relation to cross-border intra group transactions in financial years from 1 January 2014 onwards. Unilateral applications may be made for a unilateral APA with the Directorate of Tax Audits. An informal preliminary consultation may be requested with the tax office. Under Bilateral APAs Tax Procedures Code and Decree of 31 December 2013 the APA request may include a request for competent authority negotiation for the conclusion of a bilateral APA involving another country with which Greece has concluded a double tax treaty. A similar request should be filed with the competent authority in the other country.

 Indonesia

Financial Services-In examining intra group loans Circular SE-50/PJ/2013 indicates that tax auditors should look at the question of whether the lending was necessary, taking into account the purpose of the loan, the market conditions, the repayment period and the recipient’s need for the loan. The tax auditors should also test the arm’s length nature of the interest rate and look at the reasonableness of the taxpayer’s debt to equity ratio by comparing it to similar companies.

 Iceland         

Transfer Pricing Requirements-With effect from 1 January 2014 clearly defined transfer pricing rules have been enacted to require taxpayers to apply the arm’s length principle to related party transactions. The rules are generally in line with the provisions of the OECD transfer pricing guidelines. Control-Parties are related if there is direct or indirect majority ownership of legal entities or individuals related by financial or family ties.

Documentation-Requirement-Companies with total revenue or assets at the beginning or end of the year exceeding 1,000 million ISK must maintain transfer pricing documentation. The documentation must contain details of the nature and extent of transactions with related parties, the nature of the related party relationship and the basis on which the transfer prices were computed. The documentation requirements refer to the OECD transfer pricing guidelines.

 Luxembourg                       

Transfer Pricing Requirements-The fiscal plan for the years from 2014 onwards includes the introduction of comprehensive transfer pricing legislation in line with international standards and a uniform framework for tax clearances.

Control-Legislation applies in respect of a profit transfer between a Luxembourg company and a non-resident company having a special economic relationship, as well as hidden profit distributions to shareholders or interested persons.

 Mexico                      

Specific Transfer Pricing compliance-Maquiladora enterprises must either use certain specified safe harbor regimes or apply for an advance pricing agreement in respect of the relevant transfer prices.

 Portugal                   

Control-Special relations between two entities exist where one entity has or may have, directly or indirectly, a significant influence in the management of the other entity. This may occur where there is a shareholding of at least 20% (10% for periods to 31 December 2013) or where management and supervision is exercised by the same persons in both entities.

Main corporate income tax rate-From 1 January 2014 the corporate tax rate is 23%. Small enterprises with income up to EUR 15,000 are subject to a simplified regime are taxed at a rate of 17%. Under the corporate income tax reform proposals for 2014 the main corporate tax rate would be reduced in stages to a rate of 17% to 19% in 2016 depending on the economic situation at the time.

Russia

Transfer Pricing Requirements-Further clarification of the income thresholds for controlled transactions and how the income is to be computed is contained in Letter 03-01-18/53941 of 10 December 2013.

 United States                      

Financial Services– The IRS in July 2013 requested public comments on the proposed regulations for global trading of financial instruments. The proposed regulations adapt the comparability analysis, arm’s length range, and transfer pricing methods to the particular conditions of global trading. They give guidance on determining the income from global trading, treatment of foreign currency transactions and hedging transactions. They also provide rules for determining whether global trading income is effectively connected to a US business and therefore subject to net basis US income taxation. Under the proposed regulations taxpayers must maintain documentation on transactions covered by the regulations and the IRS can use this documentation to establish whether the taxpayer has dealt at arm’s length.

Audits Process-The IRS has issued a transfer pricing audit roadmap outlining guidance for tax auditors on the procedures to be followed on transfer pricing audits.