The OECD agreed at its recent Global Forum on Transfer Pricing that transfer pricing rules should be ‘simplified and strengthened’ in order to benefit developing as well as developed countries, and businesses. More countries introduce advance pricing agreement programmes, including developments in Russia, Malaysia, Hong Kong and, perhaps most notably, India. Australia introduces legislation bringing the transfer pricing articles in double tax treaties into Australian domestic law, and a new requirement for consistency with OECD principles. The law will apply with retroactive effect from 1 July 2004 and will have most effect on businesses with ongoing Australian transfer pricing audits.
OECD ‘to simplify transfer pricing rules’The Organisation for Economic Cooperation and Development (OECD) has long been the leading authority on transfer pricing matters following its work on the model double tax treaty and, in particular, since its extensive work on its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration. The OECD is made up of a membership comprising 34 countries with, in the main, developed economies and has in the past been labelled a ‘rich man’s club’. Transfer pricing rules have been adopted by many countries globally, including OECD members and non-members, and the OECD is keen to establish the relevance of its transfer pricing approach for emerging economies as well as for its members.
At the OECD’s first Global Forum on Transfer Pricing, tax officials agreed on the need to:
(Intangible assets are already the subject of an OECD working party project, preparing a new draft chapter 6 of the Transfer Pricing Guidelines.)
The Director of the OECD’s Centre for Tax Policy Administration, Pascal Saint-Amans, commented: ‘It is essential to simplify and strengthen the transfer pricing rules for the benefit of both developed and developing economies, as well as for businesses.’
The reference to developing economies is of particular interest, as the OECD is keen to ensure that transfer pricing is fair and manageable as a global mechanism for cross-border allocation of taxing rights, including for countries that do not currently have the infrastructure, experience and resources to administer the complexities of transfer pricing efficiently.
The Global Forum’s specific work for 2012/13 will include carrying out a transfer pricing risk assessment, developing a manual which will establish good practices for governments when they assess transfer pricing risk at the beginning of an audit. This is familiar territory for those who are used to HMRC’s approach to risk assessment of transfer pricing enquiries in the UK, and could be a welcome move in ensuring that taxpayers do not spend years under audit in situations where there is unlikely to be an adjustment.
Why it matters: Given the significant burden that complying with transfer pricing rules places on taxpayers, and the costs to tax authorities in administering transfer pricing, any progress in simplifying the transfer pricing rules would be very welcome, particularly if this assists tax authorities in poor and developing countries with the fair collection of tax revenues. The challenge, as ever, for the OECD will be in getting consensus from members as to how such simplification should be achieved.
The UK has had an advance pricing agreement (APA) programme for a number of years, with benefits for both taxpayers and HMRC including certainty and, often, real-time discussion of the issues. An APA is an agreement between a taxpayer and a tax authority which determines a method for resolving transfer pricing issues in advance of a tax return being filed. There are broadly three types of APA available on a voluntary basis to UK taxpayers – unilateral (provided for in UK legislation), bilateral and multilateral (accessed via double tax treaties). A unilateral APA provides assurance to a taxpayer that the treatment of some or all of the taxpayer’s transfer pricing issues will be accepted by HMRC for the period covered by the agreement – provided of course that the facts and circumstances agreed upon as part of the APA process remain relevant and complete. The most common form of unilateral APA in the UK is in relation to debt (Advance Thin Capitalisation Agreements).
Given the cross-border nature of many transfer pricing disputes, a unilateral APA may not give a business sufficient certainty on a transfer pricing matter. A bilateral APA will provide additional assurance in respect of the tax authorities dealing with the entity at the other end of the transaction, but a bilateral APA requires a double tax treaty with a mutual agreement procedure article between the UK and the country of the other party to the transaction. Similarly, multilateral APAs covering transactions involving more than two jurisdictions require appropriate double tax treaties (a multilateral APA is, in reality, a series of bilateral APAs).
In line with the expansion of transfer pricing legislation and documentation requirements globally, more countries are introducing new APA regimes into their domestic legislation – and recently these include Russia, Hong Kong, Malaysia and India. Although APA programmes are modelled on the OECD’s guidelines, all programmes have subtle differences in terms of scope, timing and eligibility. Russia, for example, has introduced an APA regime covering unilateral, bilateral and multilateral APAs, as part of the new transfer pricing law effective from 1 January 2012. Malaysia has introduced a new APA regime covering unilateral, bilateral and multilateral APAs that applies with retrospective effect from 1 January 2009. Hong Kong’s regime was rolled out on 2 April 2012, and will cover primarily bilateral and multilateral APAs (with a fall-back option of unilateral APAs under limited circumstances). Also as an example, Hong Kong’s procedure includes, in common with many APA programmes, thresholds for the minimum size of transactions that are eligible:
Such thresholds are important for tax authorities that need to be able to resource the APA programme that is being offered, but do mean that on occasion a transaction eligible for an APA in one country will not be eligible for a bilateral APA in another.
Pascal Saint-Amans
The announcement in the Indian Budget that an APA programme will be introduced in India is of particular interest to multinational companies that are dealing with the complexities of the transfer pricing requirements in India and the high likelihood of challenge by the Indian tax authorities. The Budget announcement says that a domestic enabling provision will be introduced into Indian law – as for the UK – and it is expected (but not certain) that this will be extended under double tax treaties to offer bilateral APAs. The details of the APA framework are expected to be announced shortly, and taxpayers will be keen to understand whether this will include involvement of the Indian Competent Authority or whether APAs will be dealt with by local auditors. One positive note is that Mutual Agreement Procedures with India under double tax treaties, guided by the Indian Competent Authority, have proved recently to be a very useful alternative to going through the Indian courts process. If a bilateral APA process is able to add to this success, then this will be a welcome relief for many companies.
Why it matters: The complexities of transfer pricing under OECD principles and local tax law, combined with the cross-border nature of the issues, means that a bilateral or multilateral APA can be a useful (and cost-effective) approach for taxpayers seeking certainty when it comes to filing their tax returns, and the avoidance of lengthy tax audits. For taxpayers operating in countries that are stepping up their transfer pricing regimes or that have a record of years of transfer pricing disputes, such as Russia and India, there are even greater levels of uncertainty, and taxpayers should welcome the opportunity to choose whether to confront this uncertainty in advance of filing a tax return.
The Australian government is in the process of reforming Australia’s transfer pricing rules, in response to the judgments in transfer pricing cases decided in favour of the taxpayer (notably Federal Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] ATC 20-265). The latest development is the introduction into Parliament of legislation to retroactively incorporate the transfer pricing articles in Australia’s double tax treaties into Australian domestic law. The objectives of the proposed legislation are (i) to ensure that the associated enterprises (transfer pricing) and business profits (attribution of profits to a permanent establishment) articles in double tax treaties can be applied as an ‘assessment power’; and (ii) to require that the arm’s-length principle is interpreted consistently with relevant OECD guidance. The new legislation will apply to income years beginning on or after 1 July 2004.
The proposed amendments are the first stage of the Australian government’s reforms, which will include (prospective) rewritten domestic transfer pricing rules and are likely to bring Australia’s permanent establishment profit attribution rules fully into line with the OECD-endorsed approach.
UK legislation specialists will be interested to note the introduction of a requirement for consistency with the OECD’s model treaty and Transfer Pricing Guidelines, which has been part of the UK’s domestic legislation on transfer pricing since its introduction in 1998. In UK cases, we have always been clear that the phrase ‘best secures consistency’ (as expressed in UK law) means that OECD principles cannot be ignored when considering how to price a transaction, and that UK domestic legislation does not extend beyond the principles and requirements set out by the OECD in the Transfer Pricing Guidelines. It will be interesting to see how this extension in Australian domestic law plays out in future taxpayer/tax authority disputes.
Why it matters: Taxpayers with ongoing transfer pricing audits and disputes are likely to be most affected. The UK/Australian tax treaty contains Associated Enterprises and Business Profits articles, and the proposals highlight the importance of taking account of all relevant OECD guidance in pricing UK/Australian related party transactions and permanent establishment profit attribution for Australian tax purposes.
Alison Lobb, International Tax Director, Deloitte
Clive Tietjen, Partner, Deloitte
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