Transfer Pricing Newsletter

Australia

Transfer Pricing Documentation Requirement-Draft practice statement PS LA 3673 sets out the responsibilities in respect of transfer pricing under self-assessment and sets out the steps to be taken in preparation of documentation.

Penalty in cases of adjustments- Draft practice statement PS LA 3672 confirms that taxpayers with no supporting transfer pricing documentation at the time of filing the tax return are liable to an automatic penalty of 25% and there is little prospect of mitigation of this penalty.

 Chile

Intangible property-Amendments passed in September 2014 confirm that transfer pricing rules will apply where Chilean activities are moved to another country as part of reorganization.

 China

Audits Process-Under Tax Office General Fa (2014) No 146 local tax offices are looking at service fees and royalties paid by Chinese companies to foreign parent companies. The tax authorities are also looking at location specific advantages. Where Chinese subsidiaries are considered to have benefited from location specific advantages a deemed profit is computed by the SAT on the basis of the profit split method.

Rules on Transfer Pricing Requirements- SAT General Office Circular (2014) 78 emphasizes the need for tax offices to apply anti-avoidance rules to increase tax collection and SAT General Office Circular (2014) 146 indicates that royalties and service fees are to be particularly scrutinized by tax offices.

Intangible property-SAT General Office Circular (2014) 146 indicates that particular attention is being given to royalty payments to entities in tax havens, royalty payments to entities with little or no real function, large royalties paid for use of intellectual property to which the taxpayer has made a significant contribution or royalties paid for IP whose value has declined.

Intra-group services-SAT General Office Circular (2014) 146 indicates that particular attention is being given to service fees paid for group and supervision activities, management service fees, services not relevant to the business functions or risks of the taxpayer, services fees where the services have already been included in the payment for another transaction, or fees for services which the taxpayer has the capacity to perform itself.

Colombia

Specific Transfer Pricing Compliance-Under Administrative Regulation 161 of 2014 taxpayers must electronically file Form 1125 containing relevant information and after approval of this form they may submit form 120 electronically. The submission of the transfer pricing informative return is only complete when both Forms 1125 and 120 have been sent in.

Requirements of Transfer Pricing Documentation-Under Administrative Regulation 160 effective from 20 August 2014 Form 1729 V-3 containing the transfer pricing report must be filed electronically and the report must include an executive summary, functional analysis, market analysis and economic analysis.

Egypt

Corporate Income Tax Rate-From 19 May 2013 a 25% tax rate applies. For three tax years from 2014 the corporate tax rate is 30% on profits over EGP 1 million but remains at 25% for profits below that threshold.

France

Financial Services-Under final guidelines issued on 5 August 2014 there is no deduction for interest paid to a related party if that party is paying tax on the income amounting to less than 25% of the French corporate income tax that would be payable on that income if received by a French resident, taking into account both the tax base and the tax rate.

Specific Transfer pricing Compliance-The abridged documentation report (“Declaration de la politique de prix de transfert”) must be sent in using Form 2257-SD. This should be sent to the tax authorities within six months from the tax return filing date (and for 2014 the form should be submitted by 20 November 2014). The information required includes general information about the multinational entity and information on transactions with related entities exceeding EUR 100,000.

Italy

Main Corporate Income Tax – Companies also pay the regional tax on productive activities (IRAP) at a standard rate of 3.5% (or 3.9% in periods before financial year 2014). The rate is 4.2% for banks and financial institutions and 5.3% for insurance companies.

Korea

Documentation Thresholds-Under proposed changes to the reporting requirements from 1 January 2015 the thresholds for services would be raised to 1 billion KRW in the case of aggregate services and KRW 200 million for services with each related party.

Penalty in Cases of Adjustments-Under proposed legislation to be introduced from 1 January 2015 a 60% penalty would apply for non-filing or under reporting of information on related party transactions.

Financial Services-Thin capitalization rules apply to restrict the tax deduction for interest where the debt to equity ratio exceeds 3 to 1. Under proposed legislation this would be reduced to a ratio of 2 to 1.

 Philippines

Main Corporate Income Tax – Under draft legislation currently under review the tax rate would be reduced in stages from 30% to 25%.

Poland

Rules on Transfer Pricing Requirement- From 1 January 2015 transfer pricing adjustments may be applied to transactions between domestic related parties, a non-resident and its permanent establishment in Poland and a Polish taxpayer and its foreign permanent establishment.

Transfer Pricing Documentation Requirement-With effect from 1 January 2015 the documentation requirements apply to partnerships and joint ventures, and to certain transactions between a taxpayer and its permanent establishment.

Singapore

Transfer Pricing Documentation Requirement-On 1 September 2014 a consultation paper on transfer pricing documentation was released for discussion. The proposed documentation changes aim to improve compliance and comply with the changes likely to be introduced in connection with the OECD action plan on base erosion and profit shifting. The draft guidance indicates that the contemporaneous documentation should be prepared by the time of submission of the tax return and should be adequate in view of the taxpayer’s level of transfer pricing risk. The guidance includes a list of items that should be included in the documentation.  There would be an exemption from documentation requirements for SMEs in certain conditions and an exemption for taxpayers complying with safe harbors on eligible routine services.

Slovenia

Transfer Pricing Rules- Under the Financial Administration Law, as amended, The Tax Procedure Act effective from 2007 introduced a system of tax rulings. From 1 August 2014 Unilateral, bilateral and multilateral advance pricing agreements may be concluded for transfer pricing purposes. The authority for APA is Financial Authorities.

Slovak Republic

Exemption from Transfer Pricing Documentation Requirements-Taxpayers not obliged to prepare full documentation (generally those who are not large taxpayers using IFRS and do not have transactions with entities in non-treaty countries) may prepare basic documentation. Micro enterprises are only required to prepare abbreviated documentation.

Transfer Pricing Documentation Format-Similar controlled transactions with the same related party may be grouped together for purposes of the documentation.

Transfer Pricing Documentation Thresholds – As per the Guidance MF/8120/2012-721, taxpayers not obliged to prepare full documentation (generally those who are not large taxpayers using IFRS and do not have transactions with entities in non-treaty countries) may prepare basic documentation. This must include information on functions and risks within the taxpayer’s group; a description of the taxpayer’s business, industry and functions and risks; a description of transactions with related parties and the volume of those transactions; and details of transfer pricing methods applied. Micro enterprises are only required to prepare abbreviated documentation, which equates to the disclosure of related party transactions in the notes to the financial statements. Full documentation is however required when taxpayers are applying for advance pricing agreements or seeking secondary adjustments.

OECD

Intangible property-The OECD Guidelines emphasize that the transfer or licensing of intangibles to related parties must be at arm’s length. Further guidance drawn up by the OECD under the BEPS action plan clarify the definition of intangibles; give guidance on the identification of transactions involving intangibles; and give guidance on arm’s length conditions including local market features, assembled workforce and corporate synergies. Further work is to be done in 2015 in respect of intangibles that are hard to measure.

Transfer Pricing Documentation Requirement-The OECD Guidelines suggest that accurate record keeping and timely production of documents helps to maintain the taxpayer’s credibility with the tax administration. Documentation guidance issued by the OECD provides for a three-tiered approach.

Transfer Pricing Documentation Format-Under documentation guidance issued in connection with the BEPS action plan the OECD recommends a three-tiered approach involving a masterfile with an overview of the whole group; a local file with information on operations and transactions in the country in which the taxpayer is located; and a country by country report with details of the group’s revenue, profit before tax, taxes, capital (including retained profits), employee numbers and tangible assets in each jurisdiction.