Monday, 16 July 2018

CJEU finds that German Anti-Treaty/Directive Shopping Rules violate EU law

After finding that the previous version of the German Anti-Treaty/Directive Shopping Rules (the Rules) were not in line with EU law ( Deister Holding – C-504/16 and Juhler Holding – C 613/16), the Court of Justice of the European Union (CJEU) ruled that the current version of the Rules, effective from 2012, also does not comply with EU law.  Taxpayers should consider whether they can benefit from this decision, which was issued June 14, 2018 (C-440/17).
Source & more info: PwC

Friday, 13 July 2018

CJEU annuls EC decision holding German ‘restructuring clause’ to be State aid

The Court of Justice of the European Union (CJEU) on June 28, 2018, issued its judgment in Andres (on behalf of Heitkamp BauHolding) v Commission (C-203/16 P). The CJEU decision annulled a European Commission (EC) decision that had held a provision of German tax law enacted after the 2009 financial crisis to be unlawful State aid.

Source & more info: PwC

Friday, 6 July 2018

OECD non-consensus discussion draft on the transfer pricing aspects of financial transactions: no longer just about contractual risk

One of the last missing pieces of the OECD BEPS project, is the development of transfer pricing guidance on financial transactions. While the OECD had pushed back the publication several times, on 3 July it published a first discussion draft (the Draft).
The complexity of the topics and disparate regional approaches has led to the publication of a nonconsensus document, within which there are many areas where the OECD is seeking input from
commentators. The Draft sets outs various approaches that may be appropriate for the covered topics,
without giving explicit guidance.
PwC provides a brief summary of the Draft in this Tax Insight.

Thursday, 5 July 2018

EU Commission treats certain Luxembourg tax rulings as ‘State aid'

On June 20, the European Commission (EC) issued a press release concerning its final decision in the State aid investigation into tax rulings granted by the Luxembourg tax authorities to GDF Suez group (now Engie) (the Group), in relation to the treatment of certain financing transactions. The EC considered that the Group received an undue advantage and requested recovery of up to EUR 120 million of tax. The EC has not yet made public the text of the final decision.
Source & more info: PwC

Wednesday, 4 July 2018

Luxembourg draft bill reveals proposed ATAD measures

The EU Anti-tax Avoidance Directive ('ATAD 1') was published in July 2016. EU Member States have until December 31, 2018 to incorporate ATAD 1 into their domestic laws.

On June 19, 2018, the Luxembourg government introduced a draft Bill (n°7318) (the Draft Law) before the Luxembourg Parliament (Chambre des Députés) that would implement ATAD 1 as Luxembourg domestic law. This Draft Law still needs to go through the Luxembourg legislative process, and may be subject to amendments before the final vote by the Luxembourg Parliament.

In some areas, ATAD 1 gives EU Member States different options and choices for incorporating. The Draft Law reveals the Luxembourg government’s choices.

Source & more info: PwC

Tuesday, 3 July 2018

CJEU rules against Danish withholding tax on dividend payments to non-resident investment funds

The Court of Justice of the European Union (CJEU) issued its judgment in Fidelity Funds (C-480/16) on June 21, 2018. The case’s underlying question was whether, in accordance with the free movement of capital, non-resident investment funds are subject to withholding tax on dividends received from their Danish portfolio investments, while resident investment funds are exempt from withholding tax on such dividend payments. In its ruling, the court concluded that the Danish rules were in breach of EU law.
Source & more info: PwC

Monday, 2 July 2018

Israeli Supreme Court rules ESOP expenses should be included in cost-plus compensation

The Israeli Supreme Court has upheld two recent District Court decisions requiring a US-parented Israeli subsidiary that provided R&D services to the US parent company to include in its costs in determining its revenue, under a cost-plus formula, option expenses relating to US parent company options granted to the Israeli company's employees (Kontera Technologies Ltd v. Tel Aviv 3 Assessing Officer and Finisar Israel Ltd v. Rehovot Assessing Officer, April 22, 2018).
Source & more info: PwC

Germany expected to change RETT rules for share deals

After much debate, the Ministers of Finance of the Federal States agreed on June 21 on several measures that would tighten the German real estate transfer tax (RETT) rules. Although no formal draft document has been issued, we expect changes regarding German RETT rules for share deals in the near future. Investors should monitor the legislative process.
Source & more info: PwC

Sunday, 1 July 2018

Slovakia's MOF issues guidance on digital PE rules

The Slovakian Ministry of Finance issued guidance on 28 March 2018 that addresses the rules on permanent establishments (PEs) on digital platforms that became effective on 1 January 2018. The legislation was introduced in response to the new forms of business carried out in Slovakia via digital platforms without the physical presence of an operator, and is based on action 7 of the OECD BEPS project. The guidance includes additional clarifications on when a PE is created and the penalties for failure to register in Slovakia, as well as the obligations of Slovak persons using a digital platform.
Under the rules, nonresident operators that regularly facilitate the conclusion of contracts for providing transportation and accommodation services via a digital platform can result in the nonresident being deemed to be carrying on activities through a fixed place of business in Slovakia and, therefore creating a PE (regardless of whether Slovakia has concluded a tax treaty with the home country of the nonresident).
Foreign operators of digital platforms are required to register as taxpayers in Slovakia and pay Slovak tax on the PE’s income at a rate of 21%. Otherwise, the Slovak resident that uses the platform will be required to deduct a 35% tax from the payment made to the foreign operator of the digital platform until the PE is registered (the rate of withholding is reduced to 19% where a treaty applies between Slovakia and the foreign operator’s country of residence). According to the new guidance, Slovak taxpayers that provide transportation or accommodation services will not have to withhold tax if the PE is registered.
The rules do not apply to transportation and accommodation services facilitated before 1 January 2018, even if the relevant payment was made in 2018.
Source: Deloitte

European Commission Digital Tax Package: Potential impacts on financial services

The European Commission’s attempt to isolate and tax digital activities are not specifically aimed at banks or other financial service intermediaries. However, as the banking and broader financial services (FS)  industry become more digital in delivering services, the industry may find itself being subject to collateral damage and getting swept up in proposals not originally intended to impact them. This alert highlights the two proposals, both the interim and long term measure, and then analyzes the potential impact to banks and other FS taxpayers.
Source & more info: PwC

Saturday, 30 June 2018

MLI to first enter into force on 1 July 2018

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) will enter into force on 1 July 2018 for the first five jurisdictions that deposited their ratification instruments with the OECD. These countries are: Austria, the Isle of Man, Jersey, Poland and Slovenia.
The MLI, first released on 24 November 2016, was developed by the OECD with around 100 other countries to modify existing tax treaties with a view to implementing the BEPS action 6 minimum standard globally in a consistent manner and within a reasonable timeframe. Among other BEPS actions, the MLI introduces changes to the definition of a permanent establishment (action 7), and rules on hybrid mismatches (action 2) and dispute resolution (action 14). To date, 78 jurisdictions have signed the MLI, which will affect more than 1,200 tax treaties.
According to the terms of the convention, the individual signatories have to ratify the MLI in line with their domestic rules and deposit their ratification instruments with the OECD, and at least five jurisdictions must deposit their ratification instruments before the MLI first enters into force. Following a period of three months after the date of deposit by the fifth state, the MLI will enter into force for those first five jurisdictions at the start of the subsequent calendar month. Five jurisdictions deposited their instruments by 22 March 2018 – Austria (22 September 2017), the Isle of Man (19 October 2017), Jersey (15 December 2017), Poland (23 January 2018) and Slovenia (22 March 2018), so the MLI will enter into force for those jurisdictions on 1 July 2018. For other jurisdictions, the convention will enter into force three months after the jurisdictions deposit their instruments of ratification with the OECD. Serbia became the sixth jurisdiction to deposit its instrument of ratification on 5 June 2018, and the MLI will enter into force for Serbia on 1 October 2018.
The MLI will enter into effect for withholding taxes on the first calendar year after the MLI enters into force (i.e. 1 January 2019). With respect to other taxes, the MLI will enter into effect six months after the MLI enters into force for both ratifying jurisdictions.
In addition, the following countries have taken steps to ratify the MLI:

  • Australia: A bill was introduced to parliament on 28 March 2018 that would amend domestic legislation to give force of law to the MLI.
  • Canada: A motion was introduced in the House of Commons on 28 May 2018 formalizing the government’s intent to introduce legislation that would enact the MLI into Canadian law.
  • Czech Republic: The interim government has approved the MLI and it is scheduled for a parliamentary vote in August 2018.
  • France: The Senate approved the MLI on 19 April 2018; the proposal is now before the National Assembly.
  • Lithuania: Parliament approved a draft bill to ratify the MLI on 14 June 2018; the bill still must be signed by the president, which is expected imminently.
  • Luxembourg: On 15 June 2018, the Council of Ministers approved the MLI for ratification. The draft law ratifying the MLI still must be approved by parliament, and it currently is unclear when this will take place.
  • Malta: The government ratified the MLI under domestic law on 28 April 2018, but has not yet deposited its instruments of ratification with the OECD.
  • New Zealand: The law giving effect to the MLI came into force on 14 June 2018, following ratification by the government on 14 May 2018. However, New Zealand has not yet deposited its instruments of ratification with the OECD.
  • Sweden: The parliament approved ratification of the MLI on 16 May 2018. However, the instruments of ratification have not been deposited with the OECD.
  • UK: The MLI was ratified on 23 May 2018, but has not deposited its instruments of ratification with the OECD.
  • Uruguay: A bill to ratify the MLI was submitted to parliament on 4 June 2018. 

Source: Deloitte

Italian Revenue Agency allows for unilateral transfer pricing correlative adjustments

The Italian Revenue Agency has issued rules allowing Italian resident companies and permanent establishments in Italy — of any foreign company — to obtain a transfer pricing adjustment decreasing the Italian taxable base for corporate income tax purposes, as a consequence of a final transfer pricing adjustment abroad shown to be consistent with the arm’s-length principle.
Source & more info: PwC

Thursday, 21 June 2018

Finland makes significant changes to transfer pricing disclosure requirements

Following consultations with various stakeholders, the Finnish Tax Administration (FTA) has made significant changes to Form 78, Explanation of Transfer Prices, which is filed with the income tax return. The amended disclosure rules apply for the first time in 2018.

Who is affected by the expanded disclosure requirements?
As before the changes, the requirement to file the transfer pricing form applies to companies that are required to prepare transfer pricing documentation. A legal entity that belongs to a group of companies must prepare transfer pricing documentation if at least one of the following criteria applies:

  • The group has 250 or more employees;
  • The group’s consolidated net sales reach EUR 50 million, and its consolidated balance sheet total exceeds EUR 43 million; or
  • The group cannot be regarded as a small or medium-sized enterprise, or SME, as defined in Recommendation no 2003/361/EC of the EU Commission.

Required information
The following information regarding the activities of the local Finnish entity is required in the first section of the form:

  • Business Activities: The local entity must choose the category or categories of industrial classifications (such as sales, manufacturing, research, services, finance, and other) that describe accurately enough the actual business operations performed. Additionally, the following information is required to be reported:
  1. Whether a minimum level of profitability was determined for the local entity through arrangements made with related party/parties;
  2. Whether the local entity is a party to a cost sharing agreement;
  3. Whether there have been changes to the cost sharing agreement during the accounting period;
  4. Whether the local entity has transferred any business activities it had previously engaged in (such as income from a certain market sector) to a related party; and
  5. Whether there have been any changes in agreements concerning the local entity’s business activities resulting in the realization of income and allocation of risks to another related party.

  •  The local entity must disclose the total marketing and R&D expenses for the accounting period (including expenses paid to related and external parties) and the compensation paid by a related party to cover these expenses (including a potential mark-up).

In the second section of the form, taxpayers are required to provide information regarding the profitability of the local Finnish entity and of the entire group based on the consolidated financials. Both EBIT and ROI-level information should be provided.
In section 3 of the form, taxpayers must report the volume of their intragroup cross-border transactions by category. The new form makes some changes to the categories, for example, regarding hedging-related income and expenses, as well as accounts receivable and accounts payable.
Section 4 covers changes in ownership of intangible property. Any intangible assets transferred as part of an asset deal must be reported in this section.
In section 5, the group’s three largest loans at the end of the accounting period with at least EUR 0.5 million in interest expenses must be declared. Correspondingly, in section 6 the group’s three largest receivables at the end of the accounting period amounting to at least EUR 10 million must be reported. However, accounts receivables and accounts payables are excluded in sections 5 and 6.

The Finnish transfer pricing penalty regime is a complex set of interconnected rules. Should the FTA determine that the intercompany prices are not in accordance with the arm’s length principle, and a transfer pricing adjustment is made, an additional tax increase of up to 30 percent of the added income plus penalty interest may be imposed. Additionally, a penalty of up to EUR 25,000 may be imposed if the taxpayer has not prepared sufficient transfer pricing documentation for the fiscal year in accordance with the regulations. At the moment, noncompliance with the Transfer Pricing Form 78 disclosure requirement is subject to a nominal EUR 150 tax increase, but it should be noted that the FTA links the Transfer Pricing Form related disclosure to overall transfer pricing compliance, and any inaccuracies in the disclosure increase the risk of higher transfer pricing adjustment-related penalties.

Source: Deloitte

Poland’s MOF discusses simplified APA procedure during first Transfer Pricing Forum

Poland’s first Transfer Pricing Forum, a conference organized by the Ministry of Finance to provide a platform for discussion of transfer pricing issues for both the tax administration and business representatives, took place on April 12, 2018.
Benchmarking analyses were the principal subject of the first forum meeting. The MOF’s ongoing transfer pricing work, especially the ministry’s work regarding a simplified advance pricing agreement (sAPA) procedure, was also presented.
Interested parties may participate freely in upcoming forum meetings, which will be held quarterly.

Benchmarking analyses
For the conversation on benchmarking analyses, the EU’s Joint Transfer Pricing Forum’s Report on the Use of Comparables in the EU constituted the basis for discussion.
The discussion was divided into subareas, corresponding to the eight JTPF recommendations regarding comparability analysis, including:

  • Comparable search strategies;
  • Use of internal and external comparables;
  • Adjustments that increase the comparability of data; and
  • Use of regional (local) and foreign (non-domestic) data.

During the meeting, the requirement to prepare a comparability analysis for low-value-added services was discussed. In the MOF’s opinion, due to the current regulations concerning preparation of transfer pricing documentation, replacement of the benchmarking analysis with a simplified description of compliance prepared on the basis of relevant JTPF work cannot be deemed to fulfill the formal documentation requirements. The ministry also announced that introduction of the “safe harbor” concept into Polish legislation is being considered.

Simplified APA procedure
The ministry announced that a draft amendment to the Tax Ordinance Act introducing a simplified APA procedure has been submitted for internal consultations.
The goal of the sAPA is to confirm the transfer pricing methodology applied in the intragroup transactions concerning selected transaction types listed in art. 15e of the Corporate Income Tax Act. That article limits the tax deductibility of expenses related to intangible services (such as management fees) and intangible assets (such as trademark royalties) received from related entities. The limitation of the cost deduction does not apply to transactions covered by a sAPA.
Under the sAPA procedure, the taxpayer would be obligated to submit a standardized application including a descriptive section, as well as information on selected financial data and ratios. The application would not include financial forecast data (which is crucial for the standard APA procedure).
An sAPA would be issued for a three-year period (with the possibility to extend it), compared to standard APAs, which are issued for a five-year period.

The fee for an sAPA fee is expected to be significantly lower than the fee for the standard APA, and will not depend on the value of the transactions covered by the application.
Introduction of the sAPA to the Tax Ordinance Act is expected in June.

Other issues
As part of the process for the implementation of the simplified APA procedure into the Tax Ordinance Act, the ministry is also planning to introduce some amendments to the standard APA procedure. Specifically, the ministry may modify the rules so that a standard APA might be effective starting from the beginning of the year in which the standard APA application was submitted (limited rollback). Under the current legislation, an APA may cover the period starting from the time of submission of the standard APA application.
The ministry also announced plans to amend the legislation to allow taxpayers (with some limitations) to apply for an APA for transactions that are the subject of a tax audit or proceedings before administrative courts at the time of application. Currently, the APA path is unavailable in such cases.
Finally, the ministry confirmed plans to publish additional explanations – “frequently asked questions,” or FAQs – regarding the CIT-TP and PIT-TP forms (simplified transfer pricing statements attached to the tax return for the given fiscal year).

Source: Deloitte

Wednesday, 20 June 2018

Irish Revenue release details on monitoring compliance with transfer pricing rules

The Irish Revenue on 28 May 2018 released a Tax and Duty Manual – “Monitoring Compliance with Transfer Pricing Rules” – that contains information regarding Irish Revenue’s approach to monitoring compliance with domestic transfer pricing law in Ireland.
The manual outlines details relating to the two programs used to monitor compliance with Irish domestic transfer pricing law:

  • The Transfer Pricing Compliance Review program (TPCR); and
  • The transfer pricing audit program.

Main Features of TPCR Program: The Irish Revenue originally introduced the TPCR program in November 2012, in advance of a formal transfer pricing audit program within Irish Revenue.
The TPCR program allows authorized officers from the Irish Revenue to send out notifications to selected taxpayers inviting them to self-review their transfer pricing and report back within three months. The review covers a specific accounting period.
The report to be provided to the Irish Revenue based on this self-review addresses:

  • The group structure;
  • Details of transactions by type and associated companies involved;
  • Pricing and transfer pricing method for each transaction or group of transactions;
  • Functions, assets, and risks of the parties involved;
  • List of documentation available or reviewed by the taxpayer; and
  • The basis for establishing if the arm’s length standard has been satisfied.

In most circumstances, an existing transfer pricing study should suffice, as it is likely to include all the relevant points required.
The manual emphasizes that a TPCR is not a transfer pricing audit, and the information collated from the review is used by Irish Revenue in its risk assessment process for taxpayers. In certain circumstances, a case selected for a TPCR may be escalated to a formal audit. The manual cites two examples when this may occur – when the company declines to complete a self-review or when the output from the review and follow-up queries indicates that the arm’s length principle is not adhered to.
Because the TPCR process is not a formal tax audit, a company retains the right to make an unprompted qualifying disclosure under the Code of Practice for Revenue Audit & Other Compliance Interventions at any time throughout or after the review concludes (and up to the point before the Irish Revenue provide notification of a formal audit).

Transfer Pricing Audit Program: A separate transfer pricing audit team was constituted within Irish Revenue in the Large Cases Division (LCD) in 2015. Transfer pricing audits in Ireland are undertaken in compliance with the Code of Practice for Revenue Audit & Other Compliance Interventions. The code provides an opportunity for companies to make unprompted qualifying disclosures before an audit notification letter is issued.
Irish Revenue have a standard schedule of information they normally request on the commencement of a formal transfer pricing audit, including:

  • A corporate chart outlining the group structure and shareholdings of each group company;
  • Organizational chart outlining the different functional areas, employee titles, and reporting lines;
  • Details of relevant related-party transactions, including a brief description of each transaction, together with the name of each counterparty and a summary of the material terms and conditions of each transaction;
  • A summary of the functions, assets, and risks of the relevant parties in relation to each related-party transaction or transaction class;
  • The pricing structure and transfer pricing methodology used in relation to each related-party transaction or transaction class;
  • Details of the basis on which it has been established that the arm’s length principle is satisfied for each transaction or transaction class identified; and
  • A financial analysis supporting the conclusions reached on the arm’s length nature of each transaction or transaction class.

Typically, 30 days’ notice is given in the first audit letter to provide the information requested. It is not uncommon for additional letters with further detailed queries to be issued by the auditors after the initial information request outlined above.

Source: Deloitte

Tuesday, 19 June 2018

Indonesia launches CbCr portal

Indonesia’s Directorate General of Taxes (DGT) launched a web portal in April 2018 that seeks to consolidate country-by-country (CbC) reporting-related information in one place. The consolidated information includes CbC reporting-related provisions originally introduced by the Ministry of Finance through a regulation (PMK-213) issued in December 2016, followed by guidance on the administrative aspects of CbC reporting provided by the DGT through a regulation (PER-29) issued in December 2017. The portal also provides additional information and clarifications relating to CbC reporting, and the DGT has activated the online filing mechanism for CbC reporting notifications and CbC reports through “e-CbCR” features in the “DGP Online” platform.
The launch of the portal is timely, given the deadline of 30 April 2018 for the first cycle of CbC report/notification filings for the fiscal year ended on 31 December 2016. The clarifications provided by the DGT on the CbC reporting-related compliance requirements to date, the creation of the new CbC reporting portal, and the enabling of the online filing platform indicate a commitment on the part of the DGT to enforce compliance by taxpayers by the stipulated deadline.

The CbC reporting portal includes information on the following matters:

  • List of partner countries or jurisdictions that have concluded “international agreements” (as described below) with Indonesia;
  • List of partner countries or jurisdictions that have concluded qualifying competent authority agreements (QCAAs) with Indonesia (agreements between the competent authorities of Indonesia and the partner country/jurisdiction that require the automatic exchange of CbC reports between the parties);
  • List of partner countries or jurisdictions that have concluded QCAAs with Indonesia, but where the CbC report cannot be obtained (due to systemic failure);
  • The CbC report filing mechanism; and
  • Penalties in the case of noncompliance.

Indonesia’s CbC reporting requirements are broadly aligned with the requirements and implementing guidelines prescribed by the OECD in action 13 of the BEPS project, as well as the subsequent guidance issued by the OECD on CbC reporting.
An Indonesian parent entity of a business group that has consolidated gross revenue of IDR 11 trillion or more is required to prepare and file a CbC report. An Indonesian company whose parent entity is located in another country may be required to file a CbC report if specific criteria set forth in PER-29 are fulfilled. PER-29 also introduced a requirement for Indonesian constituent entities to complete a CbC reporting notification form and submit the form to the DGT; the form requires the local taxpayer to provide a statement on whether it is obligated to submit a CbC report.
Both the notification form and the CbC report (along with “working papers” for the CbC report, which are required in certain cases) must be filed within 16 months after the end of the fiscal year for FY 2016, and within 12 months after the end of the fiscal year for FY 2017 and thereafter.

Consolidated information on CbC reporting-related compliance requirements
The CbC reporting portal provides consolidated information in relation to the compliance obligation associated with the CbC report filing requirements in Indonesia, as originally set forth in PMK-213 and PER-29. More specifically, the topics covered on the CbC reporting portal include:

  • Introduction to CbC reporting;
  • Introduction to QCAAs;
  • Information to be included in the CbC report;
  • Entities to be reported on in the CbC report;
  • Local taxpayers that are obliged to file a CbC report or notification;
  • Documents to be prepared and submitted as part of CbC report filing; and
  • Deadlines for CbC report filing.

List of partner countries or jurisdictions that have international agreements with Indonesia
The list covers countries that have concluded tax treaties with Indonesia, signatory countries to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCAA) and countries that have concluded tax information exchange agreements (TIEAs) with Indonesia. As of 11 April 2018, the list provided that there are 67 countries that have tax treaties with Indonesia, 115 signatory countries to the MCAA, and four countries that have TIEAs with Indonesia. The list is expected to be updated periodically.

List of partner countries or jurisdictions that have QCAAs with Indonesia
Indonesia has signed QCAAs with 52 countries, as provided in the CbC reporting portal; however, not all of the QCAAs may be effective from FY 2016. The CbC reporting portal breaks down the list based on QCAAs effective from FY 2016, FY 2017, and FY 2018. As of 11 April 2018, the list provided that there are 43 countries that have QCAAs effective from FY 2016, six countries that have QCAAs effective from FY 2017, and three countries that have QCAAs effective from FY 2018. The list is expected to be updated periodically.
The OECD also maintains a database of activated exchange relationships for CbC reports among countries. Now that Indonesia has its own localized database, it could be an alternate (and possibly more up-to-date) source of information on Indonesia’s activated exchange relationships.

List of partner countries or jurisdictions that have QCAAs with Indonesia but the CbC report cannot be obtained
The CbC reporting portal also covers countries that have concluded QCAAs with Indonesia, but where the CbC report cannot/could not be obtained due to systemic failure. No countries have been included on this list yet, but it is expected that the list will be updated periodically.

CbC report filing mechanism
The CbC reporting portal specifically highlights that the CbC report must be filed together with the notification through DJP Online, or manually if DJP Online cannot be used.
DJP Online is a platform developed by the DGT to allow online filing of tax returns via e-filing. To access the DJP Online platform, the taxpayer must register and activate a DJP Online account. The registration requires the taxpayer to obtain an electronic filing identification number (EFIN) from the tax office.
It is pertinent to note that the CbC reporting portal explicitly mentions the requirement to file the CbC report in a “soft copy” version, i.e., using the standardized electronic format of the Extensible Mark-up Language (XML) schema. Further, it notes that the CbC report cannot be filed in a “hard copy” form or any extension file other than the XML file. However, should DJP Online not be functioning, taxpayers may file the report manually. The CbC reporting portal refers to the XML Schema Definition (XSD) file developed by the OECD in preparing the CbC reporting XML Schema, and to the OECD document “Country-by-Country Reporting XML Schema: User Guide for Tax Administrations and Taxpayers.” The user guide explains the information required to be included in each data element to be reported. It also contains guidance on how to make corrections to data elements within a file. The CbC reporting portal provides a sample CbC report in the XML Schema, as well as additional guidance on filing the CbC report in the XML Schema format. The submitted XML file will be reviewed and validated by the DGT.
The CbC reporting portal provides the XSD file for the working papers for taxpayers that are required to file CbC reporting working papers, and sample working papers in the XML Schema.
As of 12 April 2018, DJP Online has been updated and now allows for online filing of the CbC reporting notification and CbC report through the e-CbCR electronic filing platform. To enable access to e-CbCR, taxpayers must update their user profiles in DJP Online and add access to e-CbCR. Subsequently, the taxpayer’s DJP Online homepage will be updated with the e-CbCR option and the taxpayer will be able to access e-CbCR.
While using e-CbCR, the taxpayer will have to go through the “Notification” stage first, in which taxpayers are required to answer certain questions that are aligned with the information required in the notification form attached to PER-29.
The CbC reporting portal confirms that the receipt generated from filing the CbC reporting notification and/or CbC reporting forms must be attached to the annual corporate income tax return for the following year.

Penalties for noncompliance
The CbC reporting portal provides detailed information on the potential penalties if the taxpayer fails to file a CbC reporting notification and/or CbC report, or fails to attach the relevant filing receipt to the corporate income tax return. The CbC reporting portal confirms that the corporate income tax return may be considered incomplete and as not being filed in such cases, and the taxpayer will be subject to a late filing penalty of IDR 1 million. In the event the taxpayer fails to file CbC reporting-related documents after being reprimanded in writing, a tax audit may be initiated. If the audit results in an adjustment, an underpaid tax assessment notice will be issued and penalties will be imposed, equal to 50 percent of the underpaid tax.

Source: Deloitte

Zambia issues amended transfer pricing regulations

Following extensive consultations with various stakeholders in 2017, the government of the Republic of Zambia has issued amended transfer pricing regulations through a government gazette dated 6 April 2018.
The issuance of these regulations – Statutory Instrument No. 24 of 2018, the Income Tax (Transfer Pricing) (Amendment) Regulations, 2018 – is in line with the global trend whereby various countries are taking legal steps to adopt the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit shifting (BEPS) final recommendations.
The amendment seeks to enhance the existing transfer pricing regulations, issued in 1999/2000, by providing detailed guidance on the application of the arm’s length principle and Zambia’s transfer pricing documentation requirements. The new regulations, read together with the Transfer Pricing (Regulations), 2000, are hereinafter referred to as the transfer pricing regulations.

Who is affected by the regulations?
The transfer pricing regulations apply to both domestic and cross-border transactions between associated persons. According to the Income Tax Act, two persons are associated if one person participates directly or indirectly in the management, control, or capital of the other or both of them.
The application of transfer pricing regulations to domestic transactions between associated persons within Zambia is not a unique development, as many countries in the region have adopted similar rules; however, most transfer pricing rules focus on cross-border transactions when the parties are located in different tax jurisdictions, thereby creating a potential for shifting profits from one country to the other. This development may impose a compliance burden on taxpayers even when there is no significant risk of erosion of the Zambian tax base.

Recognition of OECD guidelines and United Nations practical manual
The transfer pricing regulations recognize the application of the OECD transfer pricing guidelines and the United Nations Practical Manual on Transfer Pricing for Developing Countries. However, the regulations and the Zambian Income Tax Act (ITA) will prevail in case of any inconsistencies.

Determination of arm’s length price
The transfer pricing regulations are largely consistent with the OECD guidelines/UN transfer pricing manual, and similarly provide five methods to be applied in the determination of the arm’s length price in transactions between associated persons (“controlled transactions”). These methods are the traditional transaction methods – the comparable uncontrolled price (CUP) method, the resale price method, and the cost plus method) – and the transactional profit methods – the transactional net margin method and the profit split method.
The transfer pricing regulations provide for the application of the most appropriate method, and allow taxpayers to apply to the Commissioner-General for approval of any other method, if the taxpayer can establish that none of the provided methods can reasonably be applied to the transaction.

Documentation requirements
Affected taxpayers should prepare contemporaneous documentation evidencing the arm’s length nature of the controlled transactions for the relevant charge year. Documentation must be prepared on an annual basis, and maintained for six years. Documentation would be considered contemporaneous if it is in place by the due date of the annual income tax return, and should be submitted within 30 days upon request by the ZRA.
The regulations exempt persons who are not members of a multinational enterprise and whose turnover does not exceed ZMK 20 million (approximately USD 2 million) in any charge year from the transfer pricing documentation requirement. However, taxpayers would still be required to comply with the arm’s length principle on their associated-party transactions.

Comparability analysis
The regulations provide general and specific guidance on comparability analyses to be performed by the taxpayer with respect to controlled transactions. The concept of comparability analysis is used in the selection of the most appropriate transfer pricing method, as well as to arrive at an arm’s length price or financial indicator (or range of prices or financial indicators) and thus plays a central role in the overall application of the arm’s length principle. The regulations provide five comparability factors that require consideration with respect to a controlled transaction, as follows:

  1. Characteristics of the property or services: Differences in the specific characteristics of property or services often account, at least in part, for differences in their value in the open market. Therefore, comparisons of these features may be useful in determining the comparability of controlled and uncontrolled transactions.
  2. Functions undertaken, assets used, and risks assumed: In transactions between two independent enterprises, compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrolled transactions or entities are comparable, a functional, assets, and risk analysis is necessary.
  3. Contractual terms: In arm’s length transactions, the contractual terms of a transaction generally define explicitly or implicitly how the responsibilities, risks, and benefits are to be divided between the parties. As such, an analysis of contractual terms should be a part of the functional, assets, and risk analysis discussed above.
  4. Economic circumstances: Arm’s length prices may vary across different markets even for transactions involving the same property or services; therefore, achieving comparability requires that the markets in which the independent and associated enterprises operate do not have differences that have a material effect on price or that appropriate adjustments can be made.
  5. Business strategies: Business strategies must also be examined in determining comparability for transfer pricing purposes. Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labor laws, duration of arrangements, and other factors bearing upon the daily conduct of business. Such business strategies may need to be taken into account when determining the comparability of controlled and uncontrolled transactions and enterprises.

In addition to the general guidance discussed above, the regulations stipulate specific comparability considerations for the following associated-party transactions:

  • Acquisition of assets: When used or new assets are acquired from nonresident associated persons, the taxpayer will provide the invoice payment, proof of date of acquisition of the asset from an independent third party, and delivery note. When the asset is sold in a state other than the state of purchase, or there is no third-party invoice, or the asset is built or assembled using different components of different invoices, a technical appraisal may be required.
  • Intragroup services: The regulations stipulate that in justifying the arm’s length nature of intragroup services, the taxpayer must demonstrate that the services were actually rendered and a benefit was conferred and/or the economic or commercial value enhanced the taxpayer’s commercial position. Further, charges will be considered inconsistent with the arm’s length principle if they relate to shareholder costs or activities, or are considered duplicative activities.
  • Low-value-adding services: In line with the OECD guidelines, the regulations provide for a simplified approach to low-value-adding intragroup services, and consider the application of cost plus 5 percent mark-up as arm’s length.
  • Intangible property: Transactions involving the license, sale, or other transfer of intangible property should consider special factors of comparability, such as expected benefits of the intangible property, any geographical limitations on the exercise rights, exclusive or non-exclusive character of rights transferred, and the transferee’s right to participate in further development of the intangible property.
Taxpayers will be required to take the above into account when setting or reviewing their transfer pricing policies for their controlled transactions.

Arm’s length range
The transfer pricing regulations provide for the use of the interquartile range when the results include a sizeable number of observations and the taxpayer has made reasonable efforts to exclude points of lesser degree of comparability. When a taxpayer’s results fall outside the arm’s length range, the ZRA’s Commissioner-General may adjust the taxpayer’s results to the median. However, the regulations are silent on whether a downward adjustment to the median may be allowed when the taxpayer’s income from a transaction falls above the interquartile range of the full results of benchmarking studies.

Corresponding adjustments
To eliminate economic double taxation arising from transfer pricing adjustments made in the counterparty’s jurisdiction with respect to a controlled transaction, the regulations allow taxpayers to apply for a corresponding adjustment.

Noncompliance with the regulations may result in an offense and liability upon conviction to penalties specified under the Income Tax Act.

Source: Deloitte 

South Africa clarifies penalties for failure to submit CbC report, master file, and local file

The South African Revenue Service issued a notice on 11 May 2018 regarding the consequences for failing to submit a country-by-country (CbC) report and related transfer pricing documentation when required to do so.
The SARS notice clarifies that the fixed amount penalties provided in sections 210 and 211 of the Tax Administration Act, 2011, will be applicable. These penalties are prescribed amounts that escalate according to the taxpayer’s assessed loss or taxable income. The minimum applicable penalty is ZAR 250 per month (approximately USD 20) for entities with an assessed loss or taxable income not exceeding ZAR 250,000 (approx. USD 20,000) and the maximum is ZAR 16 000 (approx. USD 13,000) per month for entities with a taxable income exceeding ZAR 50 million (approx. USD 4 million).
The documentation covered by the notice includes not only the CbC report itself, but also the other elements of transfer pricing documentation – the master file and the local file. Presumably, the fixed amount penalty will apply separately to each of the three elements, to the extent any of them are outstanding.
This notice applies only to entities with a CbC report filing obligation. As this stage, it is not yet clear whether the same penalties will apply to taxpayers that are obligated to submit transfer pricing documentation (that is, the master file and local file) but not a CbC report.

Source: Deloitte

Monday, 18 June 2018

Panama’s tax authorities announced on 9 April 2018 that the transfer pricing information form (Form 930) that must be submitted by taxpayers that engage in transactions with foreign related parties has been reformatted and updated. A resolution (No. 201-1937) published in the country’s official gazette on the same date modifies the format for filing the return and contains a new version of the form (Form 930 V2.0) that requires additional information. The new resolution repeals previous resolutions dating from 2012.
Form 930 V2.0 is effective from 9 April (the date the resolution entered into effect), and will be required for fiscal years beginning on or after 1 January 2018. The form must be filed within six months after the end of the fiscal year. For fiscal years beginning before 1 January 2018, the former version of Form 930 remains applicable.
The new version of the form was issued as a result of a 2016 decree that amended Panama’s transfer pricing rules to bring them in line with the local file recommendations under action 13 of the OECD/G20 BEPS project. The new decree requires more information to be included in the transfer pricing study (the local file), and Resolution No. 201-1937 aligns the template for the presentation of the transfer pricing report with these changes.
The new version of the form also seeks to streamline administrative processes and taxpayer supervision by the tax authorities, since it requests information on the comparable transactions selected for the transfer pricing study. Form No. 930 V2.0 must be submitted online through the “e-tax 2” website.
With the new format of the transfer pricing report, the tax authorities will have access to the economic information included as part of the transfer pricing study without having to make a specific request and wait for up to 45 business days (the period provided by law for taxpayers to respond to a request for the study). The additional economic information on the taxpayer and the selected comparable transactions will allow the tax authorities to make preliminary calculations of potential adjustments to the taxpayer’s income tax base, and focus their audit efforts on taxpayers that are most likely to be in noncompliance with the arm’s length principle.
Taxpayers should note that, due to the detailed information that must be reported regarding comparable transactions (see below), it will be necessary to prepare the transfer pricing study (or at least a draft) before filing Form No. 930 V2.0. Since the transfer pricing study must be filed only upon request, taxpayers generally have prepared the former version of Form 930 prior to the transfer pricing study.
Accompanying the new resolution are instructions for taxpayers regarding the information that must be included in the form. It is not possible to amend Form 930 V2.0. If a taxpayer submits a form containing an error, its only option is to request a cancellation of the form from the General Director of Income, which has the discretion to grant or deny the request. If the request is granted, the taxpayer may submit a new report before the deadline for filing the form. The tax authorities are expected to issue additional guidance to clarify certain issues relating to the filing rules (for example, whether a taxpayer that discovers an error after the deadline for filing the form has any way of correcting the inaccurate information).

Specific changes to transfer pricing report
The following information now must be included in the transfer pricing reporting form:

  • An economic analysis of each transaction carried out with foreign related parties (transactions may be grouped together in certain cases);
  • The selected profitability ratio for each analysis;
  • The taxpayer’s profit or loss without adjustments, along with the value of the profitability ratio (expressed as a percentage); and
  • If adjustments have been made to the profitability ratio, the taxpayer’s adjusted profit or loss, as well as the value of the adjusted ratio.

Additionally, the form will include two annexes:

1. An annex for reporting on intangible asset transactions, which must include the following:

  • The number of transactions involving intangibles, which include licenses for use, purchase, and/or sale;
  • The “operation code” indicating whether the item is an income or expense item;
  • The type of transaction, that is, whether it corresponds to royalties or the purchase or sale of an intangible; and
  • The type of intangible analyzed (for example, a brand, patent, know-how, software, intellectual property or “other”).

2. An annex for reporting on comparables, which must include information related to the companies selected as comparable, when this is required under the method selected for the analysis. The information to be disclosed includes the following:

  • Name of the comparable company;
  • Type of comparable (internal or external);
  • Location (local or foreign);
  • Country of residence of the comparable company;
  • Profitability ratio used for the comparable company, with the options being gross margin on costs or sales, operating margin on costs and expenses, operating margin on sales, return on assets, return on capital employed, or Berry ratio;
  • Fiscal year of the comparable company (start and end date);
  • Sales used to calculate the profit ratio;
  • Cost of sales used to calculate the profit ratio;
  • Profit or loss resulting from the net of the two previous items;
  • Operating expenses used to calculate the profit ratio; and
  • Operating profit or loss resulting from the difference between operating expenses and gross profit.

Both annexes can be imported into the electronic reporting template by using Excel files in a “tab-delimited text” (.txt) format, through the use of the nomenclature specifically detailed in the form’s instructions.
In addition to the above, the taxpayer must answer questions in the transfer pricing form regarding itself and its business group:

1. Regarding the taxpayer:

  • Whether it benefits from a special tax regime in Panama;
  • Whether it has been part of any corporate restructuring during the year that is the subject of the report;
  • Details of transfers of intangibles (if any);
  • Whether comparability adjustments were applied; and
  • Whether any companies selected as comparable had operating losses and/or were involved in certain business transactions (such as a restructuring or merger).

2. Regarding the business group:

  • Whether the group has carried out a corporate restructuring during the year that is the subject of the report;
  • Whether a foreign related party is the subject of a transfer pricing audit;
  • Whether any foreign related party is or has been subject to a transfer pricing inspection;
  • The country of tax residence of the parent company;
  • The group’s consolidated income, in the currency of the country where the parent is resident, and the year to which this income corresponds;
  • The currency in which the group’s income is consolidated; and
  • Consolidated group income in US dollars, and the date of the exchange rate used for the conversion.
As in the previous version of the report, the name of the taxpayer’s legal representative and his/her personal identification number must be indicated.

Source: Deloitte

New Dutch transfer pricing decree incorporates BEPS guidance

The Dutch tax authorities on 11 May 2018 published a new transfer pricing decree in the official gazette that provides additional background and guidance on the domestic interpretation of the OECD transfer pricing guidelines, and adopts recent updates resulting from the OECD’s BEPS project.
The new transfer pricing decree – Decree no. 2018-6865 of 22 April 2018 – replaces the transfer pricing decree of November 14, 2013. Most notably, the decree provides additional guidance regarding the application of the arm’s length principle that aligns with the updated 2017 OECD transfer pricing guidelines, provides examples for determining the appropriate cost base, adopts the OECD’s simplified approach for low-value-added services, and provides additional guidance and views regarding intangible assets and business restructurings.

Application of the arm’s length principleThe decree confirms the detailed risk analysis introduced in the recent update to the OECD transfer pricing guidelines. Contractual agreements entered into by the parties are the starting point for the analysis of intercompany transactions; however, the decree emphasizes that if the parties’ actual conduct is not in line with the contractual arrangement, the actual conduct will be considered the leading factor.
According to the Dutch authorities, arrangements whereby all risks are contractually assigned to one party may not be deemed to be arm’s length if that party provides only a minimal contribution to the risk control function. Therefore, if multiple parties contribute to the control of economically significant risks, the profit split method could be an appropriate transfer pricing method.

Cost base
The functions performed, assets used, and risk assumed by the tested party are the basis of determining an appropriate cost base when using the transactional net margin method (TNMM) with a cost-based profit level indicator. As a specific example, the operating costs, excluding the raw materials, could be considered an appropriate cost base for a manufacturing entity that does not run risks in relation to the raw materials, based on its functional profile.

Low-value-adding services
The decree aligns with the OECD transfer pricing guidelines and allows a simplified approach for the determination of an arm’s length remuneration for low-value-adding services, by applying a mark-up of 5 percent on costs. The application of the simplified approach assumes that appropriate allocation keys are used, and that substantiation in the form of documentation is prepared. As in the previous decree, the Dutch authorities, under certain conditions (described in Paragraphs 7.37 and 7.43 – 7.65 of the OECD transfer pricing guidelines) will allow a recharge of the relevant costs without a mark-up.
Intangible assets and business restructurings
The decree provides that the tax authorities will evaluate critically the use of databases that list royalty amounts of comparable transactions to determine the appropriate remuneration for the use of intangible assets. Instead, a residual profit approach could be more appropriate to determine the value of the use of intangible assets, assuming all other relevant functions, risks, and assets are appropriately remunerated.
Transfers of intangible assets can be considered to take place under arm’s length conditions only when the assets are expected to increase the combined profit of the parties involved, requiring certain functionality of the intangible assets’ buyer. The decree indicates that a transfer of intangible assets to a party that does not have the required functionality to contribute value to those intangible assets will be ignored for tax purposes.
For hard-to-value intangibles, under the new decree the tax administration may use actual results to challenge the original transfer value of intangible assets in cases of substantial deviation (defined as deviations of more than 20 percent in the first five years of the IP’s commercialization) between the projected results used in the valuation of the intangible assets (there is no reference to value deviation as used in the OECD transfer pricing guidelines).
In addition, the decree expresses the Dutch tax authorities’ view regarding specific considerations in relation to a business restructuring following the purchase of shares in an unrelated entity. The acquisition file is considered an essential component of transfer pricing documentation regarding the price of transferred intangibles in relation to the business restructuring. Other attention points include the relevance of the relation between the purchase price and the value of the intangible assets for the acquirer of the shares, the tax on capital gains upon transfer, and the limited time horizon when valuing routine functions.

Source: Deloitte