Transfer Pricing Newsletter

Australia

Tax assessment-The taxpayer should have a reasonably argued position on all transfer pricing issues to support the self-assessment return. This involves consideration of the substance as well as the form of transactions.

Transfer pricing rule-TR 2014/D3 gives guidance on factors relevant for identifying the substance of commercial or financial relations.

Documentation requirement-The transfer pricing rules require documentation to be prepared by the time of lodging the relevant tax return. Guidance in TR 2014/D4 clarifies that documentation must be brought into existence by the date of the tax return. Documentation prepared overseas must be prepared according to Australian rules and must be accessible to the Australian taxpayer. The ATO encourages a risk assessment approach to the documentation. The draft ruling outlines what needs to be included in the documentation if the taxpayer is to meet the standard of a “reasonably arguable position” and avoid penalties, and sets out a five step process for preparation of documentation.

Penalty for documentation failure-Where a taxpayer has maintained adequate documentation and has established a reasonably arguable position any penalties may be reduced to 10% of the tax shortfall or they could be wholly or partly remitted at the discretion of the Commissioner.

Reduction of penalties-This would depend on the preparation of adequate documentation to establish the reasonably arguable position.

Primary adjustment – A primary adjustment is possible subject to the time limit laid down in the statute of limitations.

Chile

Main corporate income tax rate-The business tax rate is 21% in 2014; and under a tax bill introduced in April 2014 the proposed future tax rates are 22.5% in 2015; 24% in 2016 and 25% from 2017 onward.

China

Control-However, a related party is defined in relation to control of one party by another. Intra-group services-In a letter to the UN in relation to the Practical Manual on Transfer Pricing the SAT has stated that a service fee should not be charged just because the service benefits the recipient but that the benefit test should be performed from the perspective of both the service provider and the recipient. An analysis should also be done in respect of whether the recipient needed the service. Certain types of management fees are likely to be for either duplicative activities or shareholder services and should therefore not be charged to the subsidiary.

Spain

Audits process-The General Plan for Tax and Customs Control 2014 indicates that areas of special interest include complex corporate restructuring transactions, intragroup services, cost contribution arrangements and transactions involving intangible assets.

France

Main corporate income tax rate-Under proposals announced in April 2014 the corporate tax surcharge would be abolished from 2016 and the main corporate tax rate would be reduced in two stages from 33 1/3% to 28% by 2020.

Financial services-Draft guidelines on the provisions, issued for consultation in April 2014, clarify that the relevant foreign tax rate would be computed by applying the foreign tax rate to the lender’s foreign base income, and comparing this to the French income tax that would have applied had the lender been a French resident. The draft guidelines also contain provisions on timing issues. 

United Kingdom

Main corporate income tax rate-The corporation tax rate is 23% from 1 April 2013; to 21% from 1 April 2014 and to 20% from 1 April 2015. From 1 April 2012 the small profits rate is reduced to 20%.

India

Intangible property– Under the ITA the definition of intangible assets is wide and includes intellectual property (IP) related to human capital, such as a trained and organized workforce; contract related IP such as favorable suppliers and non-competition agreements; and customer related IP such as customer relationships and purchase orders. The draft Direct Tax Code, as revised in 2013, contains an inclusive definition of an intangible asset as any asset that derives its value from intellectual content rather than physical attributes.

Iceland

Transfer pricing rule– The tax authorities are empowered to adjust the price and the contractual terms of transactions between related enterprises if the terms are not the same as those that would be entered into by unrelated enterprises. This also applies to transactions between enterprises and their permanent establishments.

Japan

Transfer pricing rule– Japan adopts the arm’s-length principle for related party transactions. The transfer pricing rules also cover transactions between a permanent establishment and other parts of the same legal entity. Japan has adopted the authorized OECD approach in relation to the attribution of profits to permanent establishments.

Nigeria

Documentation requirement-The documentation must be submitted along with annual tax returns although the FIRS expect the documentation to be prepared at the time the transactions take place. The FIRS transfer pricing division is also requesting transfer pricing policy documents in relation to group and domestic transfer pricing policy and this should be updated as policies change. An annual transfer pricing return must be submitted at the time of filing the tax return, including the transfer pricing disclosure form, and in the first year of submission the transfer pricing declaration and transfer pricing policy documents must also be submitted. The FIRS has published guidance on how to complete these forms.

Peru

APAs rules– The intention to negotiate an APA should be expressed in writing to SUNAT which must reply within 15 days. Preliminary meetings may be held or alternatively the final proposal for an APA may be sent directly to SUNAT. SUNAT has 24 months to accept or reject the APA proposal but may extend this period by a further 12 months. The APA may cover the year of acceptance and three further years.(Chapter XIX of the of the Peruvian Income Tax Regulations, Resolution 377/2013.) The taxpayer may exit the preliminary meetings by giving notice in writing. SUNAT may take the decision to reject the application at any time within the 24 month time limit.

Poland

Intangible property– Guidelines on business restructurings between related parties were issued on 3 March 2014 on the tax authority website. They are based on chapter 9 of the OECD Guidelines and look at the restructuring concept, the application of the arm’s length principle to restructurings, the allocation of risks and post-restructuring controlled transactions.

APAs– Draft legislation has been introduced to expand the scope of APAs to more transactions including cost contribution arrangements. Proposed legislation would remove the list of items that must be included in the final APA agreement, thereby introducing more flexibility into the APA process.  The tax authorities may withdraw from the APA process before completion of the agreement but under proposed legislation the tax authorities would need to outline in writing the obstacles encountered during the negotiation process. 

Portugal

Transfer pricing rule-The transfer pricing rules apply to transactions with foreign related parties, transactions between a permanent establishment and other parts of the same entity and to transactions between related parties within Portugal.

Saudi Arabia

Transfer pricing rule-Ministerial Resolution 1776 of 19 March 2014 provides for the Department of Zakat and Income Tax (DZIT) to issue rules for determining the fair value or arm’s length value of related party transactions according to international standards.

Slovak Republic

Transfer pricing methods-It is not necessary to show why other methods were not used but the taxpayer must show why the transfer pricing method used was appropriate. There is no hierarchy of transfer pricing methods. However if the use of a traditional method and use of a profit method are equally reliable the traditional method is preferred.

United States

Audits process– The Multistate Tax Commission is currently considering the introduction of state transfer pricing audits to identify domestic transfer pricing issues.

Financial services– In addition to the transfer pricing rules the earnings stripping rules also apply to transactions with foreign related parties or debt guaranteed by a foreign related party. Under these rules if the taxpayer’s debt to equity ratio exceeds 1.5 to 1 the interest deduction is restricted to 50% of the adjusted taxable income. The disallowed interest may be carried forward for three years. Proposals in the 2015 budget would introduce an interest restriction for an entity that is a member of a group filing consolidated financial statements and would limit the US expenses deduction to the US member’s interest income plus its proportionate share of the group’s net interest expense computed under US tax principles.