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Transfer Pricing and BEPS

Prices charged between associated enterprises established in different countries may not reflect an independent market price, which is called transfer pricing. This is a major concern for tax authorities, who worry that MNEs may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction. This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue. While there were too much gaps and frictions in the combination of domestic tax rules and the OECD guidelines, the OECD issued its BEPS Action Plan.

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Transfer Pricing and BEPS

  1. 1. TRANSFER PRICING AND BEPS 19 November 2016 Dirk De Wolf
  2. 2. BACKGROUND  Globalization and also the rise of multinational enterprises (MNEs) make transfer pricing one of the most important themes on international taxes  Tax planners are continuously identifying and exploiting the legal arbitrage opportunities and boundaries of acceptable tax planning to minimize tax burden  In doing so, BEPS concern arises. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non taxation or less than single taxation  It also relates to arrangements that achieve no or low taxation by shifting profits away from jurisdictions where the activities creating those profits take place
  3. 3. CONTENT  Transfer Pricing ○ What is Transfer Pricing? ○ OECD Transfer Pricing Guidelines ◦ Statement of the arm’s length principle  BEPS ○ What is BEPS? ○ BEPS Concerns ○ BEPS Action Plan ◦ Action Plan 8 – 10 ◦ Action Plan 13
  4. 4. TRANSFER PRICING
  5. 5. WHAT IS TRANSFER PRICING?  Pricing the transfers between the related parties  Unrelated: demand and supply  Related: scope to influence  Different tax jurisdiction: incentive to fix the price with ulterior motive  Impacts government revenu for developmental needs  A tug of war between the tax administrations and assessees on the point of what should be the price for the intragroup transactions which would decide the tax liability of the assessee  Double taxation of the same income
  6. 6. OECD TRANSFER PRICING GUIDELINES  Originally approved by the OECD Council in 1995  In 2010, substantial revisions of the 1995 guidelines were approved by the OECD Council  These Guidelines are not binding, there is an expectation that they will be implemented accordingly by countries that are part of the consensus
  7. 7. STATEMENT OF THE ARM’S LENGTH PRINCIPLE  The authoritative statement of the arm’s length principle is found in article 9 § 1 of the OECD Model Tax  The arm’s length standard implicates that related party transactions between associated companies should be based on what independent parties have done or would have done under the same or similar circumstances. The second paragraph notices the corresponding adjustment
  8. 8. STATEMENT OF THE ARM’S LENGTH PRINCIPLE  The following example clarifies the arm’s length principle: A Belgian central company has a French subsidiary. The Belgian central company also carries out transactions with other companies, company A and B. When the Belgian central company sells to the French subsidiary, the price of the goods must be based on the conditions that would have been made between the central company and an independent party, like company A and B. The price must be at arm’s length principle.  What happens if the Belgian central company transact with the French subsidiary without following these conditions?
  9. 9. STATEMENT OF THE ARM’S LENGTH PRINCIPLE ◦ The Belgian central company makes a product which costs the company € 5. It sells it to the subsidiary for € 8. However, the price for which the Belgian company sells to company A or B is € 10. This implicates that the selling price is not at arm’s length. This means that there needs to be an adjustment on a profit level. ◦ The Belgian central company makes a profit of € 3, however when she had followed the conditions made between her and company A or B, the profit would have been € 5 (€ 10 - € 5). The Belgian tax authorities will make an appropriate adjustment to the amount of profits to € 5. This is the adjustment discussed in art. 9 § 1 MTC. Still, a corresponding adjustment is necessary. ◦ The French subsidiary sells the goods to consumers for € 12. This implicates a profit of € 4 for the French subsidiary (€ 12- € 8). However, if the Belgian central company had used an arm’s length price (€ 10) in her transaction with the French subsidiary, the French subsidiary would have made a profit of € 2 (€ 12 - € 10). The French State will also have to make an adjustment in order to avoid double taxation. This is the adjustment according to art. 9 § 2 MTC.
  10. 10. BEPS
  11. 11. WHAT IS BEPS?  Shifting of profits /income to low-tax jurisdictions or other locations enabling a more favorable tax treatment  Arrangements involving double non-taxation or less than single taxation  Transfer of intangibles to favorable tax jurisdictions  Stripping legal entities of business functions, assets and risks  Use of intermediary companies/ jurisdictions in investment and financing structures  Use of hybrid arrangements to exploit mismatches in tax treatment
  12. 12. BEPS CONCERNS  Harm to Governments ◦ Loss of substantial corporate tax revenues ◦ High cost of tax administration ◦ Undermines integrity of tax system ◦ Tax fairness issue ◦ Critical under-funding of public investment  Harm to individual tax payers ◦ To bear a greater share of tax burden  Harm to business ◦ Significant reputational risk for MNEs whose effective tax rate is low ◦ Competitive disadvantage for domestic businesses ◦ Risk of unilateral actions by certain tax jurisdictions
  13. 13. BEPS Pillar Actions BEPS ACTION PLAN Coherence Substance Transparency 1. Digital economy 2. Hybrids 3. CFC rules 4. Interest deductions 5. Harmful tax practices 6. Abuse of tax treaties 7. Permanent establishment 8 – 10 : Transfer Pricing 11. Data collection on profit shifting 12. Disclosure of tax planning arrangements 13. TP Documentation 14. Arbitration 15. Multilateral Instrument
  14. 14. BEPS ACTION PLAN  On October 5th 2015, the OECD released its final 2015 reports under its Action Plan on BEPS.  The Action Plan aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.  The OECD report on BEPS: - Identifies actions needed to address BEPS; - Sets deadlines to implement these actions and; - Identifies the resources needed and the methodology to implement these actions.
  15. 15. ACTION PLAN 8 - 10  The OECD has included its updated transfer pricing guidance in one report under Actions 8-10, covering ◦ Amended guidance on applying the arm's length principle, notably providing guidance on the identification of the actual transaction undertaken, on what is meant by control of a risk and on the circumstances in which the actual transaction undertaken may be disregarded for transfer pricing purposes; ◦ Guidance on comparability factors in transfer pricing, including location savings, assembled workforce, and MNE group synergies; ◦ New guidance on transfer pricing for commodity transactions; ◦ A new version of chapter VI of the OECD Transfer Pricing Guidelines addressing intangibles;
  16. 16. ACTION PLAN 8 - 10 ◦ New guidance on low-value adding intragroup services (revisions to chapter VII of the OECD Transfer Pricing Guidelines); ◦ An entirely new version of chapter VIII of the OECD Transfer Pricing Guidelines, covering cost contribution arrangements.  The work under Actions 8-10 of the BEPS Action Plan will ensure that transfer pricing outcomes better align with value creation of the MNE group. Moreover, the holistic nature of the BEPS Action Plan will ensure that the role of capital-rich, low functioning entities in BEPS planning will become less relevant.
  17. 17. ACTION PLAN 13  The Action 13 of the BEPS Action Plan requires the development of rules regarding transfer pricing documentation to enhance transparency for tax administration, taking in to consideration the compliance costs for business. The rules include a requirement that MNE price all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid.  In response to this requirement, a three- tiered standardised approach to transfer pricing documentation has been developed:
  18. 18. ACTION PLAN 13 ◦ MNE must provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a master file that is to be available to all relevant tax administrations; ◦ MNE must provide detailed transactional transfer pricing documentation in a local file, specific to each country, where material related party transactions are identified, the amounts involved in those transactions and the company’s analysis of the transfer pricing determinations that they have made with regard to those transaction; ◦ Large MNE are required to file a Country-by-Country Report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before tax income and income tax based and accrued. It also requires MNEs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages.
  19. 19. THANK YOU FOR YOUR ATTENTION Dirk De Wolf @dewolf_dirk (https://twitter.com/dewolf_dirk) dewolfdirk7@gmail.com +32 (0)472 551 540

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