Defending transfer pricing policies for multinational entities (“MNE’s”) is a high priority in an environment where countries compete to collect their fair share of global income tax. Over 70 countries have adopted transfer pricing documentation and/or penalty rules as of 2014. Documentation in accordance with multiple local country tax regulations creates a complex task for MNE’s.
Currently, the Internal Revenue Code and Regulations provide the requirements for supporting transfer pricing and avoiding penalties in the United States. Similarly, the Organization for Economic Cooperation and Development (“OECD”) Guidelines provide the documentation requirements to support transfer pricing for MNE’s in over 30 countries.
All of that is about to change, however, as a result of the Base Erosion and Profit Shifting (“BEPS”) project initiated by the OECD in 2012.
WHAT IS THE BEPS PROJECT?
The BEPS project arose in response to the perception that international tax planning by MNE’s allowed firms to pay less than a fair share of taxes on global income. The OECD developed a list of action items to deal with this perceived global tax base erosion and profit shifting. The project aims to minimize these tax revenue losses by closing existing “loopholes” and realigning taxation with “real economic activity.”
The BEPS project encompasses 15 Action Items that cover the digital economy, treaty abuse, transfer pricing documentation and more. The most significant Action Item completed to date is Action Item 13: the Re-examination of Transfer Pricing Documentation.
WHAT ARE THE PROPOSED CHANGES TO TRANSFER PRICING DOCUMENTATION?
Under Action Item 13, the OECD published revised standards for transfer pricing documentation including country by country (“CbC”) reporting in September 2014 and Implementation Guidance in February 2015.
The OECD report is in the form of a revised chapter of the OECD Transfer Pricing Guidelines. It sets forth a three-tier approach for transfer pricing documentation that includes a framework for a master file, a local file and a CbC report which incorporates a template. The master file would provide an overview of the MNE. The local file would include a detailed transfer pricing study, a group organization chart, as well as the taxpayer’s financial statements. The CbC report is designed to specify basic items of financial data in each country where an MNE is organized. The CbC template requires MNE’s to provide information on revenues, profits and taxes accrued and paid, in addition to other activity indicators such as the number of employees by jurisdiction.
All of the information will be filed in the MNE’s primary country of residence and will be automatically exchanged with countries meeting certain conditions, in particular confidentiality and proper use of information.
THRESHOLD REPORTING AND TIMING OF IMPLEMENTATION
The new reporting package will be required of MNE’s with global revenues in excess of 750 million euro ($840 million). It is anticipated this will exclude approximately 85-90% of MNE’s from the CbC reporting requirements. However, the guidance indicates that it is the intention of countries participating in the BEPS project to reconsider the appropriateness of this revenue threshold in connection with a planned 2020 review of the CbC reporting standard.
The Implementation Guidance indicates that countries participating in the OECD BEPS project agree that they will not require filing of CbC reports based on the new template for fiscal years beginning prior to January 1, 2016. Given the political pressure in relation to the CbC information in particular, a start date much beyond 2016 seems unlikely.
Some countries have already taken the lead in order to enact the CbC practices of Action Item 13. Spain issued a Royal Decree confirming the introduction of CbC reporting rules for January 1, 2016. In December 2014, the United Kingdom government advanced its proposals to introduce CbC reporting in the UK. The Australian Government, on August 6, 2015, released exposure drafts and explanatory materials to implement CbC reporting.
Based upon comments made by an attorney-advisor in Treasury’s Office of International Tax Counsel, the United States will implement the OECD’s CbC reporting template using the 750 million euro ($840 million) threshold outlined in the OECD’s Implementation Guidance. The first template would be required to be filed for 2016 by December 31, 2017.
HOW WILL THIS IMPACT TAXPAYERS?
Upon implementation of the new OECD Guidelines, there will be a fundamental change to the global tax regulatory landscape. As robust and consistent tax documentation becomes a requirement, clients will want to ensure that current practices minimize risk. Penalties for non-compliance will become more costly, burdensome and time consuming. There will be a need to implement new procedures to locate, collect, store, validate and assemble the information. The increase in transparency and the greater need for global consistency will require some businesses to increase the resources devoted to transfer pricing compliance, and the collection of data for the CbC template.
While the new OECD Guidelines will only affect large taxpayers with revenues over the threshold amount, the threshold will be revisited, and it is likely the general concepts will ultimately be applied to more MNE’s.
HOW CAN MARCUM HELP?
Marcum LLP provides transfer pricing services to clients in multiple industries and jurisdictions. Currently, the services provided are in accordance with existing laws and regulations including:
- Planning - assistance in developing economically supportable transfer pricing policies and executing sustainable tax planning with effective tax rate benefits.
- Documentation and Compliance.
- Implementation - providing advice on developing and implementing policies, procedures and systems for setting, monitoring and documenting intercompany transactions.
- Dispute resolution.
For international organizations engaged in transfer pricing, the best defense is to perform adequate research and build a strategy early to anticipate and manage new regulations. Marcum LLP can provide insight to the changing requirements such as those resulting from the new OECD Guidelines arising from the BEPS project.