TRANSFER PRICING AND CbC REPORTING: A ......Proposed Diverted Profits Tax Australia was an early...

TRANSFER PRICING AND CbC

REPORTING: A PRACTICAL GUIDE

TO DOCUMENTATION FOR LARGE

AND SMALL BUSINESSES

Jeremy Capes

KPMG

1 BEPS: has the world begun to change?

2 What does Action 13 mean for Australia?

3 What about Section 284-E documentation?

4 What do I have to do and when?

5 How will documentation rules evolve?

6 Key Take Aways?

Agenda

1. BEPS: has the world begun to change?

"My message is clear – if you do business in Australia,

you must pay your fair share of tax on the profits you earn

here." (Chris Jordan, Commissioner of Taxation, 3 March

2016)

The new Action 13 requirements, “…should make it easier

for tax administrations to identify whether companies have

engaged in transfer pricing and other practices that have

the effect of artificially shifting substantial amounts of

income into tax-advantaged environments.” (TPD and

CbC Reporting, Action 13 - 2015 Final Report)

2. What does Action 13 mean for Australia?

Australia has been on a journey for some time in evolving

its approach to transfer pricing and international anti-

avoidance measures:

Shift in the approach in TP away from a focus on the price

of a transaction to a focus on the conditions of the

arrangement

Automatically applying reconstruction provisions

Multinational Anti-Avoidance Law

Proposed Diverted Profits Tax

Australia was an early adopter of Action 13:

Tax Laws Amendment (Combating Multinational Tax

Avoidance) Act 2015 amended Subdivision 815-E of the

ITAA 1997

Applies to significant global entities (annual global income

for the prior period of AUD 1 billion or more)

Applies to income years beginning on or after 1 January

2016

Reports required to lodged within 12 months after the close

of the financial year



Action 13 is a transparency measure and risk assessment

tool

How might the ATO view risk?

ATO financial risk

ATO technical &

reputational risk

Quantum

Complexity

Quadrant A Quadrant D

Quadrant BQuadrant C


CbC reporting requirements:

Law Compendium Guidelines, LCG 2015/3 adopted

Annex III of the OECD Action 13 Final Report

Table 1: Overview of allocation of income, taxes and

business activities by tax jurisdiction

Name of the MNE group:

Fiscal year concerned:

Tax

jurisdiction

Revenues Profit

(Loss)

Before

Income

Tax

Income

Tax Paid

(on cash

basis)

Income

Tax

Accrued –

Current

Year

Stated

capital

Accumulated

earnings

Number of

Employees

Tangible

Assets other

than Cash and

Cash

Equivalents

Unrelated

party

Related

partyTotal


CbC reporting requirements:

Table 2: Overview of allocation of income, taxes and

business activities by tax jurisdictionName of the MNE group:

Fiscal year concerned:

Tax

Jurisdiction

Constituent

Entities resident

in the Tax

Jurisdiction

Tax Jurisdiction of

organisation or

incorporation if

different from Tax

Jurisdiction of

Residence

Main business activity(ies)

Re

se

arc

h a

nd

Deve

lop

me

nt

Ho

ldin

g o

r M

an

ag

ing

inte

llectu

al p

rop

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y

Pu

rch

asin

g o

r P

rocu

rem

en

t

Ma

nu

factu

rin

g o

r P

rod

uctio

n

Sa

les, M

ark

etin

g o

r

Dis

trib

utio

n

Ad

min

istr

ative

, M

an

ag

em

en

t

or

Su

pp

ort

Se

rvic

es

Pro

vis

ion

of S

erv

ice

s to

un

rela

ted

pa

rtie

s

Inte

rna

l G

rou

p F

ina

nce

Re

gu

late

d F

ina

ncia

l Se

rvic

es

Insu

ran

ce

Ho

ldin

g s

ha

res o

r o

the

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qu

ity

instr

um

en

ts

Do

rma

nt

Oth

er

Include any further brief information or explanation you consider necessary or that would facilitate the understanding of the compulsory information

provided in the country-by-country report.


Master File requirements:

LCG 2015/3 adopted Annex I of the OECD Action 13 Final

Report

Requirements:

Organisational structure

Description of MNE’s business(es)

MNE’s intangibles (as defined in Chapter VI of the OECD

Guidelines)

MNE’s intercompany financial activities

MNE’s financial and tax positions


Local File requirements:

Local File High Level Design (HLD) finalised in May 2016

Provides for the completion of a ‘short form’ Local File or a

Local File depending on size and/or type of transactions

Short Form: High level qualitative information such as

organisation structure, a description of the business and

strategies, key competitors and information on business

restructures and intangible asset transfers



Short Form Local File criteria - no exception list

transactions and:

Aggregate value of its international related party dealings

(IRPDs) is less than $2m

‘Small Taxpayer’ under Simplified Transfer Pricing Record

Keeping (STPRK), e.g., less than $25m turnover, or

Immaterial under STPRK, e.g., less than or equal to 2.5%

turnover of the Australian economic group



Short Form Local File exception list:

Derivatives such as swaps, forwards, futures or options in

interest, currency, commodities or other assets

Legal or equitable assignment of trademark, patent,

design, copyright, other IP or similar property or rights, or

any part thereof

Any licence or other grant of use or right to use a

trademark, patent, design, copyright, other IP, secret

formula or process or similar property or rights.

IRPDs of a capital nature



If not eligible for the short form, need summary information

above and additional elements:

Part A: granular and detailed quantitative information on

controlled transactions, including transaction type, transfer

pricing method used and level of transfer pricing

documentation in place

Part B: details around written agreements, rulings and

APAs and TP methods used by the counterparty to the

transaction for certain types of ‘material’ transactions



Part B exclusions:

Agreements relating to transactions that are eligible for

STPRK

Reimbursement under Employee Secondment Agreements

Low Value / Low Risk Service Agreements

Low Value/ Low Risk Sale and Purchase Tangible Trading

Stock Agreements

Issue of ordinary shares



Australian Local File is different to the OECD Local File:

OECD: more akin to traditional transfer pricing

documentation, including a functional analysis, selection of

transfer pricing method and the application of that method

through comparability analysis and benchmarking

Australia: more focused on transactional data and

agreements in an electronic form from which it can run

data analytics to identify transfer pricing and other BEPS

related risks

3. What about Section 284-E documentation?

Section 284-E still applies in parallel to Action 13

Reporting (CbC, Master and Local Files):

Section 284-E documentation:

Documents the Section 815-A – D analysis

Serves a different purpose (supporting tax return) to Action

13 reporting (transparency and risk assessment)

Different focus to OECD in testing the conditions of the

arrangement (requires deeper analysis of evidence and

behaviours)

Includes automatic provisions of reconstruction


Simplification Measures:

PS LA 2014/3: simplifying transfer pricing record keeping

released in 2014 and available:

From 29 June 2013 for small taxpayers, distributors, intra-

group services and low level loans (inbound) options

From 1 July 2015 for materiality, management and

administration services, technical services and outbound

loan options

Applies two broad types of concessions:

Whole of business categories

IRPD categories



Whole of business categories (no complex transactions):

Materiality: less than or equal to 2.5% turnover of the

Australian economic group

Small Taxpayer: less than $25m turnover

Distributors: less than A$50 million turnover and profit

before tax is at least 3% of sales revenue

Last two categories: no losses or business restructures

and does not apply to financial transactions



IRPD categories:

Intragroup Services (no complex dealings/low tax

jurisdictions):

General: IRPDs of A$1 million or less, or more than A$1

million but less than 15% of total revenue or expenses of the

Australian economic group, priced at or above/below cost plus

7.5% for outbound/inbound (and no losses or business

restructures)

Management and Administration: cost plus 5% (up to 50% of

total IRPDs)

Technical: cost plus 10% (up to 50% of total IRPDs)



IRPD categories:

Low-level inbound loans:

Combined cross-border loan balance of $50 million or less for

the Australian economic group

Interest rate is no more than RBA small business indicator rate

Funds are in AUD, and associated expenses are paid in AUD

No complex dealings, losses or business restructures or

IRPDS with low tax jurisdictions


Comprehensive transfer pricing documentation:

There is a lot of law and guidance on documentation, e.g.:

Subsection 284-E

Section 815

OECD Guidelines

Tax Rulings, practice statements and other guidance

What do I focus on?

How do I know how much effort to put in and for what?


Comprehensive transfer pricing documentation:

Some broad tips:

Action 13 items are risk selection tools and will be lodged

electronically – consider what you need to support/explain

Section 815 tests the nature of the actual conditions –

consider commercial rationale, agreements, behaviours

and other evidence

Comparability is not about TNMM ranges, but how

independent parties do or would behave – consider CUPs,

rejected CUPs comparable behaviour and conditions

Remember reconstruction – especially when data is thin

4. What do I have to do and when?

Transfer pricing documentation preparation:

ObligationExisting

obligation

New

(additional)

obligation

Due

dateLodge?

Self-assess compliance with

Subdivision 815-B/C

Before

lodging

the tax

return

NoPrepare contemporaneous

Subdivision 284-E transfer pricing

documentation (for penalty

mitigation purposes)

Lodge Country-by-Country Report,

if not available through automatic

EOI

Within

12

months

after

year

end

YesLodge Master File

Lodge Australian Local File

Lodge an International Dealings

Schedule with tax return (if Part A

of Australian Local File is not

lodged with the return)

With tax

return Yes


Are there any efficiencies?

There is significant overlap

An exemption applies to the

IDS if Part A of the Australian

Local File is lodged

Note the different purposes

Centrally prepared materials

can be useful but be aware of

the Australian requirements

and differences

Australian Local File (proposed)

284-E documentation/8

15 analysis

Master File

IDS

CbCR


Can technology help?

Technology can help with the data collation

Technology can also help generate data summaries and

reports

Action 13 is focused on risk assessment

Technology cannot fully assess risk and apply judgement

Planning is key to data collection

Dry runs help to test the systems and identify risks/focal

points

Action 13 items will be submitted electronically

5. How will documentation rules evolve?

Australia is an early mover on TP, BEPS and tax

avoidance:

Section 815, MAAL, DPT

Action 13 transparency items

Australia has already deviated (e.g., transfer pricing focus

on conditions and Local File requirements)

Other countries are only just beginning on this path - e.g.:

UK, Germany, Ireland, Netherlands, Luxembourg, Jersey

and Switzerland

China, India, Japan, Singapore

USA, Canada, Mexico, Bermuda,

5. How will documentation rules evolve?

ATO has signalled more guidance on Action 13 items:

Master File guidance

Comprehensive local file instructions

Electronic lodgement and reporting obligations in Australia

Flexibility of data sources

Application of CbC to super funds

Exemption categories and exemption process

IDS update (and modernisation)?

Ongoing project to update transfer pricing tax rulings

Simplification measures?

6. Key take aways?

Purpose of transfer pricing documentation:

Taxpayer: support the filing of tax returns and to meet

administrative reporting obligations

ATO: assess the risk of non-compliance

Taxpayers are already in (or close to) their first reporting period

for CbC reporting – plan and start early

CbC is currently compliance focused but reviews and audits will

follow

There will always be an element of judgment in preparing

transfer pricing documentation – stay focused and keep up to

date

© Capes, Jeremy

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax

Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and

opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries

in making any decisions concerning their own interests.

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