I was recently invited to participate in a global transfer pricing round table discussion with fellow Alliott Group member firms from the EMEA, Americas and Asia Pacific regions. Our discussions revealed that transfer pricing rules vary significantly around the world and that implementation of the OECD BEPS Project recommendations targeting the avoidance of tax by international businesses, is likely to be uneven and take time.
The report by Corporate Livewire which was compiled following our discussions provides a comparison of evolving transfer pricing legislation, trends and compliance requirements, and an update on how national tax authorities are responding to the OECD/G20 led Base Erosion & Profit Shifting (BEPS) project in countries such as the UK, Australia, USA, Belgium, Mexico, UAE, Netherlands, Brazil, Italy, Colombia and Spain. It also provides useful information on what multinational corporations can do to avoid double taxation in these countries.
Here are highlights from each country, and in some cases different regions, that came out of our discussions:
United Arab Emirates and MENA region
While there are currently no transfer pricing guidelines in the UAE, Dr Hadi Shahid of Alliott Hadi Shahid Chartered Accountants comments that the UAE is “in the process of developing its tax regulations and policies, and multinational companies in the UAE must prepare and plan their operations for taxation purposes in response to the developing and evolving needs of the market and the economy.”
Shahid also states that changes to the global tax landscape are expected to have a direct impact on countries in the MENA region, “especially those that are known for having low taxes.”
The Netherlands is an early adopter of transfer pricing rules, having been adopted into Dutch law as far back as 2001. According to Maarten Borrie, partner at Borrie Accountants, “Transfer pricing is a key issue in any tax audit.” Borrie adds: “Dutch regulations follow the OECD guidelines with the incorporation of the arm’s length principle in the Dutch Corporate Income Tax Act. In 2013, a new transfer pricing decree was issued by the Dutch State Secretary of Finance which apart from a general outline of the arm’s length principle, focuses on intra-group services (headquarter) services, financial services transactions activities (including loans and guarantees), centralised procurement and intangible transactions.”
Borrie remarks that the Netherlands tax authorities have taken “an active role in the development of the BEPS recommendations,” adding that “Specific regulations of the BEPS Action Plan have already been introduced.”
In the USA, transfer pricing rules have remained largely unchanged in recent years and continue to be centred on the arm’s length principle as the standard for evaluating transactions among related parties. Hunter Norton, Tax Director at Farkouh, Furman & Faccio LLP in New York, explains that “the arm’s length principle is a common element among the Treasury regulations and the OECD Transfer Pricing Guidelines for Multinational Enterprises & Tax Administrations (used by OECD countries other than the U.S.).”
However, Norton emphasises that the Inland Revenue Service (IRS) is upping the ante by significantly increasing the resources dedicated to examining transfer pricing cases: “The IRS now has a dedicated Transfer Pricing Group staffed with a substantial number of revenue agents and economists.”
In terms of implementation of the BEPS Action Plan, Norton offers that by proposing regulations that would mandate Country-by-Country reporting by U.S. persons that are the parent of a multinational enterprise (MNE) group with annual revenues of over $850 million, the IRS is seeking greater transparency of the operations and tax positions taken by a U.S. MNE: “This information would enable the IRS to identify those taxpayers who have earned substantial profits through tax haven or tax preferred countries, and to make a more informed decision as to whether certain taxpayers should be targeted for additional scrutiny.”
Mexico and Latin America
In Mexico, according to Adrian J. Romero, Managing Partner at Grupo Consultor EFE, there have been major changes to transfer pricing legislation including action points from the BEPS initiative such as Country-by-Country reporting. On the situation in the wider Latin America region, Romero comments: “Legislation has been recently introduced in countries such as Guatemala, Honduras and Bolivia. In other LATAM jurisdictions, even though TP law has been around for some years now, it has just started to be enforced by local tax authorities. Penalties for non-compliance are high and audits are complex, so taxpayers are immediately pushed towards compliance.”
With Mexico’s 2014 Tax Reform being motivated by the BEPS project (which was still under development at the time), Mexico is well ahead of its Latin American neighbours who, according to Romero, “are still some way from implementing BEPS regulations.”
Romero comments that this lag is due to Mexico and Chile being the only OECD members at the time and because tax authorities and tax payers in the rest of region are new to TP law.
Transfer pricing legislation is well established in Belgium, with the tax authorities having recommended since the late 1990s that corporates should prepare adequate transfer pricing documentation which is largely based on the BEPS principles.
Marie-Lise Swinne, partner at Belgian accounting firm Tax Consult, comments that the tax authorities’ transfer pricing auditing department is growing fast and is very active. Things are progressing fast in Belgium, with Swinne adding: “The Belgian Government submitted a Draft Program Act to Parliament, which if enacted, will introduce BEPS Action Point 13 into Belgian law, specifically statutory transfer pricing documentation requirements and country-by-country reporting for certain taxpayers from assessment year 2017.”
Australia and Asia Pacific
According to Jamie Towers, partner at Hanrick Curran and Alliott Group’s Asia Pacific Chairman, over the last five years, Australia has refreshed it laws to ensure it has some of the strictest transfer pricing rules in the world and consistency with OECD recommendations: “The Australian Taxation Office (ATO) facilitates a proactive dialogue with business to provide certainty by entering into Advanced Pricing Agreements. The ATO has also been updating taxpayers on its views by publishing taxation rulings on its expectation of compliance requirements.”
While Australia has already started implementing the BEPS recommendations, including country-by-country reporting, Towers comments that “many other Asian countries, while generally accepting the OECD’s recommendations, are adopting different approaches and at different times.”
And finally of course, the UK
While the impact of Brexit is still unknown, on leaving the EU, the UK will no longer be party to the European Parent Subsidiary Directive or the Interest & Royalties Directive, which could potentially see withholding taxes being levied on cross border payments. Equally, there is more exposure to CFC rules when the EU exemption is removed. This is still some time away and we await the outcome of negotiations.
The planned reduction of corporation tax to 17% by 2020 will nevertheless continue to make the UK an attractive place to set up and accrue profits. It is worth pointing out that the traditional areas of product based transfer pricing are perhaps less sensitive in the UK with the main focus now being on the digital economy and licensing and trademark royalties.
UK has been an enthusiastic supporter of the BEPS projects and has already taken steps to incorporate early proposals into domestic law.
To read the 2016 Transfer Pricing Round Table report in full, please click here If you have any questions on trading overseas or any related issues please contact me.