It goes without saying that the COVID-19 pandemic is the major concern of nearly all multinational enterprises (MNEs) at the moment. Radical containment measures continue to be put in place by governments around the world in efforts to slow the spread of the virus. Many of these measures center on the concept of ‘social distancing’ and have included closing businesses and organizations, cancelling events, prohibiting international and domestic travel, and quarantining cities and even regions. COVID-19 containment measures have disrupted business as usual, from manufacturing plant shutdowns to creating information inefficiencies and collaboration challenges at MNE headquarters and across global entities. These business disruptions create challenges for effectively managing transfer pricing information and workflows.
Tag Archive for transfer pricing
Christodoulos Damianou, together with colleagues Christos Theophilou and Demis Ioannou of Taxand Cyprus present a case study of how the Cypriot tax authorities use safe harbour rules in determining arm’s-length interest rates.
Transfer pricing has always been a challenging exercise, in particular in regard to intra-group financial transactions. It was not until February 2020 that the OECD eventually published specific guidance on financial transactions, namely the “Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8-10”.
In the context of intra-group loans, to provide administrative simplicity for both the taxpayers and the tax authorities, safe harbour (or safe haven) rules are often used by tax authorities in determining arm’s-length interest rates. Such rules are usually optional (i.e. the taxpayer can elect to either apply the safe harbour rule or follow the country’s domestic transfer pricing guidelines).
Looming Transfer Pricing Exams & IRS Preparedness Measures (Part 3 of Series): “TPEP Execution Phase”
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.
Looming Transfer Pricing Exams & IRS Preparedness Measures (Part 2 of Series): “TPEP Planning Phase”
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.
The IRS guidance, Transfer Pricing Examination Process, Publication 5300 (TPEP), released in June 2018, is more relevant now than ever before. There is a broad consensus among transfer pricing and international tax practitioners that tax authorities around the globe will step up transfer pricing audit activity within the next year as a means to recoup lost tax revenue resulting from the pandemic-induced recession. Fortunately, for US-based entities in multinational enterprise (MNE) groups, the IRS has in recent years issued taxpayer guidance on how to prepare for transfer pricing examinations. This series of blog articles is structured to help tax executives quickly get up to speed with the IRS’s guidance on transfer pricing examinations and its expectations on documentation.
In this first installment we introduce the TPEP. The next three installments of this series highlight and summarize the essential aspects of the three TPEP Phases: Planning, Execution, and Resolution. Subsequent installments examine how the TPEP diverges from the Transfer Pricing Audit Roadmap, its predecessor guidance, and provide TPEP insights in the form of useful takeaways. Saving the best for last, the concluding article of this series will focus on the IRS’s most recent transfer pricing guidance, FAQs re Transfer Pricing Documentation Best Practices.
IRS transfer pricing examinations can be unpleasant experiences for taxpayers. Chances are, an international business in the U.S. – whether it is headquartered in the U.S., or a subsidiary of a foreign parent – is going to have its transfer pricing examined by the IRS at some point. Transfer pricing has been cited by IRS officials for years as one of their most important enforcement priorities. But as a direct result of the OECD’s Base Erosion and Profit Shifting (BEPS)1 project, tax authorities around the world are actively engaged in the process of revising and tightening their expectations and requirements with respect to transfer pricing. The prospect of thorough and detailed examinations of taxpayers’ transfer pricing positions is growing every day.
COVID-19 necessitates a reassessment of the existing transfer pricing paradigms of Multinational Enterprises (MNEs). Supply chain disruptions and changes in consumer demand resulting from the COVID-19 pandemic and global recession are impacting virtually all major industries. These disruptions erode profits and will require MNEs to adjust transfer pricing approaches. MNEs also face challenges such as government restrictions on travel and enabling personnel to work remotely.
Three points are well illustrated by Will James in the 16-Mar-2020 BKD, LLP Thoughtware® article Transfer Pricing in the Wake of COVID-19: 1) Transfer pricing audits are anticipated to increase for 2020 and future tax years for MNEs with adversely affected profitability; 2) MNEs need to start preparing for audits now by documenting the arm’s length nature of their transfer pricing arrangements and including evidence and analysis of extraordinary COVID-19 business disruptions that result in lower profitability or losses; 3) Documentation of lower profitability or losses that result from COVID-19 and the recession is particularly important for reduced-profit or loss-making MNE entities subject to profit-based methods guaranteeing minimum returns (e.g., Transactional Net Margin Method).
The following is a checklist to consider:
Transfer Pricing – the practice of charging prices for the supply of goods or services to a related entity (usually wholly owned) in such a way as to repatriate profits or affect tax or duty bills in your favor.
Generally, international transfer pricing and tax planning experience has been obtained from working for major financial institutions while assigned to large multinational corporations.
You can rely on a credible transfer pricing study for the following:
• The U.S. transfer pricing regulations, under IRS §482 of the Internal Revenue Code, require that inter-company transactions be priced under the same terms that would have existed had the transactions taken place between unrelated entities. Similar regulations now exist in virtually every developed nation around the world.
• Any business entity operating in more than one country likely has inter-company transactions involving the exchange of tangible property, intangible property or services.
The Importance of Transfer Pricing
In the Netherlands it is possible to discuss your specific tax position with the Dutch tax authorities and mutually agree on the tax consequences thereof. The Dutch tax authorities and the taxpayer are bound by the agreement they make. The agreement has to be regarding the interpretation and qualification of facts. The ruling has to be in conformity with the Dutch tax legislation. In other words the agreement cannot be in conflict with the Dutch tax legislation (contra legem). In August 2004, the Dutch ruling policy was formalized in an advance tax ruling (ATR) policy and an advance pricing agreement (APA) policy.
Dutch advance pricing agreement (APA)
An APA covers the agreement on an at arms’ length remuneration or on the transfer pricing methodology. The basis for an APA is a transfer pricing study. The Dutch tax authorities and the tax payer agree that the outcome of the transfer-pricing study would form the basis for the determination of the income for Dutch corporate income tax purposes.
Transfer Pricing And BEPS – Important Announcement From President Of The Council Of The European Union
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.
Responsibilities involve a wide range of international tax matters including transfer pricing, international aspects of consolidated income tax provision, and international elements of US tax compliance. Coordinate with international finance organization regarding international audits, income tax and transaction tax compliance. Role is responsible for providing technical tax leadership, with an emphasis on transfer pricing and international tax. Position is responsible for transfer pricing and international tax matters for the Americas consolidated group including preparation and/or review of international portions of the consolidated tax provision, preparation and/or review of international reporting requirements for the US consolidated return. Read more
This is part of the series of interviews I am conducting of highly respected tax experts and luminaries in Silicon Valley. Many of them will be speaking at the 2017 TEI – High Tech Tax Institute Conference in November. Eric Ryan is one such Silicon Valley tax luminary who was also responsible for receiving the world’s first Bilateral Advanced Pricing Agreement (U.S. – Australia). I know of Eric Ryan’s professional accomplishments since Apple Computer retained me to find him many years ago. Eric Ryan was formerly the Head of Tax at Apple Computer, a National Tax Partner/Transfer Pricing with PWC and is an international Tax Lawyer with DLA Piper, Palo Alto, CA. He understands the world of tax from all perspectives.