In this third article in our Looming Transfer Pricing Exams & IRS Preparedness Measures series, we highlight and summarize the essential aspects of the IRS’s Transfer Pricing Examination Process (TPEP) Execution Phase.
The Execution Phase immediately follows the opening conference and consists of continued risk assessment, fact finding, information gathering, and issue development. Stages of issue development include determining the facts, applying the law to those facts, and understanding the various tax implications of the issue. The issue team is advised to make every effort to resolve factual differences with the taxpayer.
In this second article in our Looming Transfer Pricing Exams & IRS Preparedness Measures series, we highlight and summarize the essential aspects of the IRS’s Transfer Pricing Examination Process (TPEP) Planning Phase.
The Planning Phase determines the scope and issues of the transfer pricing examination. The TPEP states, “Issues selected for examination should have the broadest impact on achieving compliance regardless of the size or type of entity.” Important steps in the Planning Phase are: 1) the Initial Transfer Pricing Risk Assessment, 2) issuance of the Initial Transfer Pricing Information Document Request (IDR), 3) IRS internal planning meetings, 4) development of the exam plan, timelines and milestones, and 5) the opening conference, which is the final step of the Planning Phase and marks the transition to the Execution Phase.
In February 2019 the OECD released a public consultation document draft titled “Addressing the Tax Challenges of the Digitalisation of the Economy”. The draft notes that back in 2015 the 2015 BEPS Action 1 Report on Addressing the Tax Challenges of the Digital Economy initially cited the challenges for international taxation which stemmed from the digital economy and that much of this consultation draft was to address these issues. It is in the February 2019 document in which the two pillar approach for addressing the digital economy was first introduced.
Pillar One focuses on the allocation of taxing rights and considers profit allocation and nexus rules. At this time three proposals for Pillar One were discussed:
1. User participation proposal: The proposal would modify current profit allocation rules to allocate profit based on where businesses’ active and participatory user bases are located, irrespective of whether those businesses have a local physical presence. The proposal notes that user participation is highly relevant for social media platforms, search engines and online marketplaces.
2. Marketing Intangible Proposal: This proposal would segment profit based on marketing intangibles in market jurisdictions. Marketing intangibles are defined as intangibles that aid in the commercial exploitation of a product or service and/or have an important promotional value for the product concerned. Some marketing intangibles it lists are brand, trade name, customer data, customer relationships and customer lists.
Under the mandate of the Report on Actions 8-10 of the BEPS Action Plan (“Aligning Transfer Pricing Outcomes with Value Creation”), Working Party No. 6 (“WP6”) has produced a non-consensus discussion draft on financial transactions.
The first part of the discussion draft provides guidance on the application of the principles contained in Section D.1 of Chapter I of the Transfer Pricing Guidelines to financial transactions.
In particular, Section B.1 of the discussion draft elaborates on how
the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. The discussion draft clarifies that the guidance included in this section does not prevent countries from implementing approaches to address capital
structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions.
The second part of the discussion draft, contained in sections C, D and E, addresses specific issues related to the pricing of financial transactions such as treasury function, intra-group loans, cash pooling, hedging, guarantees and captive insurance.The discussion draft also includes a number of questions to commentators on which inputs from stakeholders will be particularly relevant to WP6 to further its work and prepare another discussion draft after considering the input received.
The Council Of The European Union came to a political agreement to the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. All delegations in the Commission “agree on the principle that disclosure of potentially aggressive tax planning arrangements of a cross-border dimension can contribute effectively to an environment of fair taxation in the internal market and that tax authorities share the disclosed information with their peers in other Member States.”
“The Commission presented the legislative proposal with the main purpose of this initiative is to strengthen tax transparency and fight against aggressive tax planning by including into the existing Council Directive on administrative cooperation in the field of taxation (DAC) new provisions, which would require Member States to:
– lay down rules for mandatory disclosure to national competent authorities of potentially aggressive tax planning schemes with a cross-border element (“arrangements”) by the “intermediaries” (e. g. tax advisers or other actors that are usually involved in designing, marketing, organizing or managing the implementation of such “arrangements”); and ensure that national tax authorities automatically exchange this information with the tax authorities of other Member States by using the mechanism provided for in DAC.
On June 7, 2017, over 70 Ministers and other high-level representatives participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”).
Signatories include jurisdictions from all continents and all levels of development. A number of jurisdictions have also expressed their intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards signature.
Mahess Rawoteea of the Ministry of Finance and Economic Development of Mauritius, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) in the presence of Douglas Frantz, OECD Deputy Secretary-General.
Based on expressed reservations at this point in time, 23 tax treaties would be impacted by this signing. Read More
As part of continuing efforts to boost transparency by multinational enterprises (MNEs), Gabon, Hungary, Indonesia, Lithuania, Malta, Mauritius and the Russian Federation have now signed the Multilateral Competent Authority Agreement for Country-by-Country Reporting (CbC MCAA), bringing the total number of signatories to 57. Lithuania and Hungary joined the Agreement in October and December 2016 respectively.
The 2015 Report on BEPS Action 4 established a common approach which directly links an entity’s net interest deductions to its level of economic activity, based on taxable EBITDA. Further work on two aspects of the common approach was completed in 2016 and this is included in this update.
Following the first meeting of the Inclusive Framework on BEPS in Japan, on 30 June – 1 July, and recent regional meetings, more countries and jurisdictions are joining the framework. The Inclusive Framework on BEPS recently welcomed Peru bringing to 91 the total number of countries and jurisdictions participating on an equal footing in the Project.
Monaco today deposited its instrument of ratification for the Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”). By doing so, Monaco underlines its commitment to fighting tax evasion and avoidance and takes another important step in implementing the Standard for Automatic Exchange of Financial Account Information in Tax Matters developed by the OECD and G20 countries as well as automatic exchange of Country-by-Country Reports under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
The issue of transfer pricing has never been a bigger issue than now. With news of the IRS auditing U.S. corporations who operate outside of the country, the Organization for Economic Cooperation and Development (OECD) latest action plans under the Base Erosion Profit Sharing (BEPS) project, and the U.K. voting to leave the European Union (Brexit), the effects with be seen by U.S. multinationals. You have the opportunity to learn from top tax experts who will discuss and analyze the transfer pricing market.