Transfer Pricing Newsletter

Austria

Intangible property-From 1 March 2014 interest and royalty payments to certain related parties are not deductible for tax purposes if the recipient corporation is not subject to tax due to an exemption; is subject to a nominal or specific tax rate of less than 10% on the interest or royalty income; or is subject to an effective tax rate of less than 10% due to a specific tax regime.

Financial services-From 1 March 2014 interest and royalty payments to certain related parties are not deductible for tax purposes if the recipient corporation is not subject to tax due to an exemption; is subject to a nominal or specific tax rate of less than 10% on the interest or royalty income; or is subject to an effective tax rate of less than 10% due to a specific tax regime. An exception applies for payments to entities meeting the EU law privileges for risk capital measures.

Bulgaria

Documentation Requirement-Commencing with the tax return for 2013 an Appendix 4 has been added to the return, to be used by taxpayers to report related party transactions nd transactions with entities situated in a jurisdiction with a preferential tax regime.

Canada

Transfer Pricing Rule- The Budget for 2014 included the announcement of a consultation on international tax planning by multinational enterprises as input into Canada’s participation in the action plan on base erosion and profit shifting (BEPS) announced by the OECD. A consultation on tax treaty shopping was also announced.

Financial services- The Budget measures for 2014 include an extension of the thin capitalization rules more broadly to cover back to back loan arrangements where an intermediary is imposed between the Canadian resident and foreign related parties.

Audit Rules- To initiate the audit process the CRA files a written request for contemporaneous documentation. Within three months the taxpayer must submit the documentation showing that a reasonable effort has been made to provide documentation of the relevant transactions. The audit focuses on the role of the transaction in the taxpayer’s value chain and the use of the most appropriate transfer pricing method and comparables.

Colombia

Control– Under Regulatory Decree 3030 of December 2013, there is an economic link between the parties if the transaction is between a branch and home office, a transaction involving a permanent establishments, a related party transaction made between third parties, a transaction between related parties through a joint venture agreement or other collaborative agreement, or a transaction between a taxpayer and a party situated in a free trade zone in Colombia.

Intra-group Services– When services are received from a related party abroad the Colombian party must demonstrate that the services were actually received and that there was a benefit for the Colombian entity.

Cost Contribution Arrangements-Cost contributions or cost sharing arrangements must comply with the arm’s length principle.

Segmented Data Required-Segmented data may be used but if this is used it must be certified by an independent accountant, auditor or the equivalent.

Comparable Data Range– Taxpayers may however use other statistical measures, including the whole range, to determine the arm’s length price. If the interquartile range is used this must be justified in the transfer pricing documentation.

Documentation Thresholds -Transactions exceeding 32,000 UVT by type of transaction are subject to transfer pricing analysis only if the total amount of the transactions exceeds 61,000 TVU. Documentation is not required for transactions within a fiscal year that do not exceed 500 MMW (10,000 UVT). In the case of transactions with persons or entities resident or domiciled in low tax jurisdictions the normal thresholds do not apply and transfer pricing documentation must be prepared if the amount of the transactions exceeds 10,000 UVT.

Reduction of Penalties-Where the taxpayer corrects errors or inconsistencies in the return before the tax authority issues a penalty the penalty is reduced to 50% of the amount determined in the official assessment.

Validity of Advance Pricing Agreement-Under the tax law, APA may be effective for the year in which it is concluded, the prior year and three years following the year of the agreement. The TP regulations permit an APA to be concluded for five years including a rollback of one year.

United Kingdom

Databases– A numbers of commercial databases of company information are suitable for use in connection with searches for comparable data and transfer pricing reports.

Main Corporate income Tax Rate-The rate is reduced to 21% from 1 April 2014.

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 natural or legal 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.

Advance Pricing Agreement-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. Bilateral-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. An annual compliance report must be submitted by the taxpayer during the term of the APA. Validity-The APA cannot continue for a term of more than four years and cannot apply to any fiscal year preceding the APA application. Fees-The fee for the submission of an application for a preliminary consultation is EUR 1,000; and for submission of an APA application the fee is EUR 5,000. If a request is made for consultation with foreign tax authorities a fee of EUR 10,000 must be paid for each country involved in the APA application. Relevant office-General Directorate of Tax Audits and Revenue Collection.

Iceland

Control-Parties are related if they are part of a group under Art.2 Act 3/2006; the majority of shares is owned, directly or indirectly, by two or more legal entities within the group or they are controlled by two or more legal entities within the group; one legal entity directly or indirectly owns the majority of share capital of another entity; or the majority of the share capital is directly or indirectly owned by individuals who are related or entities under the control of individuals who are related or who share financial ties through mutual trade and investments.

Documentation-Documentation must be submitted to the tax authorities within 45 days after receiving a request.

India

Transfer Pricing Rule-The transfer pricing rules were extended from 31 March 2013 to cover certain specified domestic transactions between related parties. These include payments made to a Director or a relative of a Director; an entity (including a company or director) that has a voting interest of more than 20%, individually or through relatives; a transaction that involves the claiming of deductions available through the Income Tax Act; certain transfers of goods and services relating to industrial undertakings, telecoms service providers or producers and distributors of power where one entity is located in a tax holiday area and the other is outside the area, if they are linked by the same management structure; or transfers of goods at a non-arm’s length price between an entity in a SEZ, free trade zone or export oriented unit and another entity outside the zone with the same owner.

Italy

Transfer Pricing Rule-Law 147/2013 clarified that adjustments for transfer pricing purposes also affect the regional tax (IRAP). This applies retrospectively for periods from 1 January 2008, though penalties in this connection would not be charged until periods ending after 31 December 2012.

PLI used-Italian entities involved in online advertising and related activities for a foreign related entity must use a profit level indicator (PLI) that is not related to the costs incurred.

MAP-Taxpayers may also claim relief in respect of the regional tax (IRAP) where a transfer pricing adjustment has been made to profits of a related party in another jurisdiction.

Advance Pricing Agreement– Taxpayers may also obtain an advance ruling in respect of whether they have a permanent establishment in Italy.

Nigeria

Documentation-Taxpayers have also been requested by the tax authorities to submit transfer pricing documentation in relation to the group to which they belong.

Poland

Audit Process-The annual objectives of the tax control offices have been amended to include transfer pricing as a specific area of focus. If a taxpayer has related party transactions the tax audit is very likely to include an examination of transfer pricing.

Portugal

Financial Services-Net financial costs are only deductible up to the higher of EUR 1 million (EUR 3 million before 1 January 2014) or 30% of profit before depreciation, net financing expenses and tax, subject to transitional provisions. The restriction applies to net financing expenses relating to bank financing and intragroup loans, and includes both domestic and foreign financing. Net financing expenses exceeding the threshold may be carried forward for five years.

Romania

Audit Process-For late payment of tax relating to liabilities that arise after 1 March 2014 the late payment penalty is 0.03% per day of delay in addition to the payment of interest at the applicable rate.

Russia

Transfer Pricing Rule-The Ministry of Finance has clarified that certain domestic transactions are regarded as controlled transactions for transfer pricing, including transactions where one party is taxed under the Unified Tax on Imputed Income regime and the other party is not subject to that regime.

Financial Services-Interest that is not disallowed under the transfer pricing rules may be subject to the thin capitalization provisions. Certain specialized provisions may apply where one of the parties to a transaction is a bank.

Ukraine

Main corporate income tax rate-The tax rate is 18% in 2014; 17% from 1 January 2015 and 16 % from 1 January 2016.

United States

Intra-group Services-The Treasury and IRS final intercompany service regulations were issued on 31 July 2009. Some permitted transfer pricing methods for services are similar to the OECD methods but the services cost method and shared services arrangements are also included in the Regulations. The fee for certain types of service known as covered services may be arrived at by the apportionment of costs that are recharged to other group companies without a mark-up. Covered services are specified routine services such as payroll, administration, accounting and legal services. The taxpayer must apply the business judgment rule to determine that the services do not make a significant contribution to the competitive advantage, core capabilities or fundamental risk of success or failure of the group. Shared services arrangements are another method for allocating centralized services among members of the group in a reasonable manner using a suitable allocation key.

Audit Process-The transfer pricing audit roadmap provides audit techniques and tools for assistance with planning, execution and resolution of transfer pricing examinations. The roadmap emphasizes the importance of up-front planning to auditors and covers the opening conference with the taxpayer, information gathering and requests for further information, risk analysis and establishing the audit timeline. The roadmap also covers resolution of the audit by discussing findings with the taxpayer, assessing the strength of positions, and consideration of pre-appeal resolution opportunities.

South Africa

Adjustments-Secondary adjustments can take place where the primary adjusted amount is deemed to be a dividend subject to tax or a deemed capital contribution, depending on the circumstances. Provisions for the primary amount to be deemed as a loan are to be removed, under proposals in the 2014 budget announcements.

Financial Services-A restriction applies from 1 July 2013 to interest on debt that is related to acquisitions and reorganizations under which the deduction is limited to 40% of the adjusted taxable income of the target company. Under proposals in the 2014 budget this 40% limit will be flexible and adjusted for interest rate changes. Under proposals in the Tax Laws Amendment Bill 2013 relief from transfer pricing provisions would apply to certain related party loans with equity features where the creditor is a South African resident company with a shareholding of at least 10% in the debtor.

OECD

Transfer Pricing Rule-In addition to the Guidelines the OECD in 2013 formulated the action plan in respect of base erosion and profit shifting (BEPS) which contains measures in respect of transfer pricing among other issues. This followed a request for action on international tax issues by the G20 group of countries. Some of these measures will take the form of recommendations and guidance for domestic tax laws while some issues will lead to revisions of the transfer pricing guidelines. In 2013 the OECD also issued for consultation a draft Practical Handbook on Transfer Pricing Risk Assessment. Comments on this draft Handbook were received in September 2013 and were published on the OECD website.

Intangible Property– The OECD has been undertaking a project concerned with aspects of intangibles such as the definition and valuation of intangible assets. Although this project commenced some time ago it is closely related to the OECD’s work on base erosion and profit shifting. The action plan also aims to develop transfer pricing rules to ensure that the transfer of risks between entities in a group or the allocation of excessive capital does not result in base erosion. Profits would need to be allocated in line with value creation by entities in the group. Rules would also ensure that profit shifting cannot take place as a result of transactions that would never take place between independent parties. The work is to include a further examination of circumstances in which characterization of transactions could take place.

Financial Services-The OECD’s action plan on base erosion and profit shifting aims to evaluate transfer pricing measures that can be applied to financial arrangements including financial and performance guarantees, derivatives, captive insurance companies and other insurance arrangements. Recommendations for domestic arrangements would be produced by September 2015 and amendments to the transfer pricing guidelines for these measures are to be finalized by December 2015.

Useful Databases– A report on transfer pricing comparability data and developing countries was published by the OECD in March 2014.

PLI used-The transfer pricing guidelines indicate that when using the transactional net margin method (TNMM) the net profit indicator should be consistent with the comparability (including the functional analysis) of the controlled transaction and reflect the allocation of risk between the parties. The denominator should be reasonably independent of the controlled transactions, to ensure objectivity.

Documentation-On July 30, 2013 the OECD published its White Paper on Transfer Pricing Documentation. The paper sets out the objectives of such documentation and makes suggestions as to how transfer pricing documentation rules may be improved to offer increased transparency for the tax authorities while also allowing for lower compliance costs on the taxpayer side.

Documentation Thresholds-The OECD transfer pricing guidelines recognize that small and medium enterprises are entering into more cross-border transactions than was the case in the past and that consideration needs to be given to minimizing the transfer pricing compliance burden on these enterprises. The guidelines suggest that pragmatic solutions should be found to this issue. Some national tax laws provide an exemption for these enterprises from the transfer pricing rules or from the detailed rules on documentation requirements.

MAP-Dispute resolution mechanisms are being examined as part of the action plan on base erosion and profit shifting. The action plan includes the consideration of measures dealing with problems of access to the mutual agreement procedure and measures to overcome the lack of arbitration provisions in most tax treaties.

Advance Pricing Agreement-The OECD Guidelines encourage bilateral or multilateral APAs. These are agreed by the competent authorities of two or more countries based on the provisions of double taxation agreements. The OECD Guidelines encourage bilateral or multilateral APAs. These are agreed by the competent authorities of two or more countries based on the provisions of double taxation agreements. According to the Guidelines the objective of the APA process is to facilitate principled, practical and cooperative negotiations to resolve transfer pricing issues expeditiously and prospectively, to use the resources of the taxpayer and tax administration more efficiently, and to provide a measure of predictability for the taxpayer.  The Guidelines suggest that an APA may be revoked if there was a misrepresentation, mistake or omission through neglect, carelessness or willful default of a taxpayer when filing the APA request, the annual report, or other supporting documentation. The Guidelines suggest that the duration of an APA may depend on the Industry, transactions and economic climate. Experience to date suggests that an APA may last for between three and five years.