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OECD - BEPS-related transfer pricing documentation, country-by-country reporting draft guidance
OECD - BEPS-related transfer pricing documentation, country-by-country reporting draft guidance
OECD - BEPS-related transfer pricing documentation, country-by-country reporting draft guidance
OECD - BEPS-related transfer pricing documentation, country-by-country reporting draft guidance
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OECD - BEPS-related transfer pricing documentation, country-by-country reporting draft guidance

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The Organisation for Economic Co-operation and Development (OECD) has released an initial draft of revised guidance on Transfer Pricing (TP) documentation and country-by-country reporting pursuant to …

The Organisation for Economic Co-operation and Development (OECD) has released an initial draft of revised guidance on Transfer Pricing (TP) documentation and country-by-country reporting pursuant to Action 13 under the Base Erosion and Profit Shifting (BEPS) Action Plan (The revised guidance).

In July 2013 under the BEPS Action Plan the OECD was directed to develop rules regarding TP documentation to enhance transparency for tax administration, taking into account the compliance costs for business. The Rules to be developed were to include a requirement that Multinational Enterprises provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

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  1. KPMG FLASH NEWS KPMG IN INDIA OECD - BEPS-related transfer pricing documentation, country-by-country reporting draft guidance 5 February 2014 Background The Organisation for Economic Co-operation and Development (OECD) has released an initial draft of revised guidance on Transfer Pricing (TP) documentation and country-by-country reporting pursuant to Action 13 under the Base Erosion and Profit Shifting (BEPS) Action Plan (The revised guidance). In July 2013 under the BEPS Action Plan, the OECD was directed to develop rules regarding TP documentation to enhance transparency for tax administration, taking into account the compliance costs for business. The Rules to be developed were to include a requirement that Multinational Enterprises (MNE’s) provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. Overview The revised guidance is proposed as a replacement of Chapter V of the OECD TP Guidelines. The revised guidance envisages contemporaneous, enhanced and standardised reporting requirements regarding multinational entities’ global allocation of income, economic activity, and payment of taxes for the countries in which they operate. OECD recognises that an important overarching consideration in developing documentation rules is to balance the usefulness of the data to tax administrators for initial risk assessment and other purposes with any increased compliance burdens placed on taxpayers. It is therefore noted, that clearly and widely adopted documentation rules can reduce compliance costs which would otherwise arise in a transfer pricing dispute. Three objectives for requiring transfer pricing documentation are: 1 To provide the tax administration with adequate information for the conduct of informed transfer pricing risk assessment. It is important for the tax administrations to accurately evaluate, at the very outset of a possible audit, whether a taxpayer’s TP arrangements warrant in-depth review and a commitment of significant tax enforcement resources. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  2. 2 To ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in preparing their tax returns. 3 To provide tax administrations with the information that they require in order to conduct an appropriately thorough audit of the TP practices of entities subject to tax in their jurisdictions. The OECD seeks comment as to whether there are other standard forms and questionnaires that need to be developed in accordance with BEPS Action 13 (Transfer Pricing Documentation). Also, the OECD requests comments as to when it might be appropriate for tax authorities to share their risk assessment with taxpayers. A two-tiered structure        The local file, by contrast, would document the material transfer pricing positions of the local taxpayer with its foreign affiliates, with the goal of demonstrating the arm’s length nature of the those positions. The local file would contain the comparable analysis. Compliance issues  Contemporaneous documentation: The taxpayer is expected to ordinarily give consideration to whether its TP is appropriate for tax purposes before the pricing is established and should confirm the arms length nature of its financial results at the time of filing its tax return. OECD suggests that the taxpayers should not be expected to incur disproportionately high costs and burdens in producing documentation.  Timing: OECD recommends that a best practice is to require that both the master file and the local file be prepared not later than the due date for the filing of the tax return for the fiscal year in question. The date for completion of the countryby-country reporting would extend to one year following the last day of the fiscal year of the ultimate parent entity of the MNE group as such information may not be finalized until after the due date for tax returns in some countries for a given fiscal year.  Materiality: Tax administrations have an interest in seeing the most important information, therefore materiality should be the basis of the TP documentation. The revised guidance states that such materiality thresholds take into account factors such as the size and nature of the local economy, the group’s relative importance to the local economy, and the size and nature of the local operating entities, in addition to the overall size and nature of the group. The revised guidance recommends the implementation of a two-tiered reporting regime that would present a comprehensive picture of the global operations of a multinational entity, as well the local operations of the taxpayer through the preparation of a master file and local file. Under the OECD’s suggested approach, a single master file consisting of the MNE’s blueprint, would be prepared for the multinational group. The substance of the master file would include:  The group’s organisational structure  A description of the group's business, intangibles, intercompany financial activities, and financial and tax positions Among the information to be reported under a description of the business would be the title and country of the principal officers of each of the 25 most highly compensated employees in the business line. The revised guidance states that the section on the group’s financial and tax positions would include country-by-country reporting of information regarding the group’s global allocation of profits, taxes paid, and other indicators of the location of the group’s economic activity among countries in which the group operates. The revised guidance lists these indicators of economic activity as follows:      Income taxes paid to all other countries Withholding taxes paid Stated capital and accumulated earnings Number of employees Total employee expenses Tangible assets Intercompany payments of royalties, interest, and service fees Place of effective management Business activity Revenue Earnings before tax Income taxes paid to country of organisation © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3.  Document retention: The revised guidance suggests that documentation be retained for a “reasonable period of time” consistent with the requirements of domestic law at either the parent company or local entity level.  Frequency of updates: The revised guidance suggests that the master file and local file should be reviewed and updated annually. However, to reduce and simplify compliance burdens, documentation rules can specify that until there is a change in the operating conditions, comparable sets supporting part of the local file should be refreshed every 3 years although the financial data should be updated annually in order to apply the arm’s length principle reliably.  Language requirements: To avoid hardship and outweighing costs, OECD recommends, the master file should be prepared in English and the local file and relevant parts of the master file in the local language.  Penalties: The revised guidance suggests the general use of civil monetary document related penalty regimes. But at the same time suggest a lenient approach towards taxpayers who in good faith demonstrate reasonable efforts or produce reliable documentation to support that there controlled transactions satisfy the arm’s length principle.  The draft recommends that country-by-country reporting be provided as part of the master file document directly to each country, and requests comments as to whether this information instead would be filed by the parent company and then shared through the treaty network for exchange of information. The resolution of these alternatives will be a key to the practical implementation of country-bycountry reporting. Confidentiality: Public disclosure of trade secrets, scientific secrets, or other confidential information filed during audits should be avoided and wherever the disclosure is essentially required, efforts should be made to disclose only to the extent required.  Suggestion of lenient approach towards taxpayers for penalty, in case of missing documentation, is encouraging for the taxpayers to make all reasonable efforts to obtain relevant documentation. Such a recommendation coupled with the idea of designing compliance incentives such as penalty protection or a shift in the burden of proof to the tax administration, where the taxpayer meets the documentation requirement and submits it in a timely manner would encourage taxpayers to fulfil TP documentation requirements. Benchmarking: The revised guidance suggests that reliance on the selection of comparables has to be placed on the “most reliable information”. The OECD provides that the local comparables, when available are preferable against the regional comparables. Our comments The draft covers wide ranging aspects relating to documentation which will assist the taxpayers to be better prepared for the TP audits. The draft recommends the master file to be prepared in English, rationalising the process of documentation, since preparing documentation in multiple languages could be very time-consuming and costly. The recommendation about the comparable sets being refreshed every three years for companies with stable operating conditions and annual updating of the comparable financials only is one welcome and economical suggestion, which would reduce the consumption of time, cost and resources to a great extent. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  4. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata – 700091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. ©2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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