Transfer Pricing Times: Volume XIII, Issue 4

Inside this edition: IRS Releases APA Statistics for 2015.

IRS Releases APA Statistics for 2015

On March 31, 2016, the IRS released its annual “Announcement and Report Concerning Advance Pricing Agreements” containing summary information related to advance pricing agreements (“APAs”) filed and executed under the IRS’s Advance Pricing and Mutual Agreement Program (“APMA Program”). The report contains background information on the APMA Program as well as statistical information (e.g., types of transactions covered, transfer pricing methods used, and completion time) on the APAs filed and executed in 2015.

The following are a few notable results contained in the report (all pertaining to 2015, unless otherwise specified):

• 110 APAs were executed (out of 183 APA filed applications). Executed APAs include those that were either renewed or finalized.
• 30 were unilateral and 80 were bilateral. No multilateral APAs were executed.
• The majority of bilateral APAs were executed with Japan (46%) and Canada (23%).
• The IRS executed its first APA with Italy in 2015.
• 44 APAs were within manufacturing, the highest of any industry. 39 were within wholesale/retail trade, followed by 12 within the services sector.
• The average APA term length was 7 years.
• The median time required to complete APAs decreased to 31.9 months from 35.3 months in 2014.

In addition, the report appendices contain a model APA agreement, which was last significantly revised in 2009 and is currently under review for future changes. Furthermore, a list of APMA contacts is included as well.

The full report can be viewed here.

U.S. Treasury Proposes Sweeping New Rules on Intercompany Debt

On April 4th, the U.S. Treasury made headlines in mainstream media after releasing temporary regulations intended to stifle tax inversions whereby a U.S. company offshores its tax residency by combining with a foreign company. In addition to the temporary regulations on inversions, Treasury also released proposed regulations that have a sweeping impact on the use of intercompany debt by U.S. taxpayers.

To read Duff & Phelps full summary of the proposed regulations on intercompany debt click here.

Switzerland and Russia Release Draft Legislation on Country-by-Country Reporting for Consultation

Switzerland

On April 13, 2016, the Swiss Federal Council entered into the official consultation phase towards implementing legislation on the multilateral agreement on the exchange of Country-by-Country (“CbC”) reports. The initial consultation phase ends on July 13, 2016 at which point the legislation will be submitted to the Swiss Parliament for approval. At this point, if the new legislation is approved, the new law is subject to a facultative referendum. If no such referendum is called, Switzerland’s new CbC reporting legislation is expected to enter into force for all tax years beginning on or after January 1, 2018.

The draft legislation generally follows the recommendations for CbC reporting set out by the Organization for Economic Cooperation and Development (“OECD”) in its final report on Action Item 13, Transfer Pricing Documentation and Country-by-Country Reporting. The draft bill does not follow the OECD’s three-tiered approach whereby in addition to CbC reporting, a Master file and Local file transfer pricing documentation report are required. Instead, the bill only requires CbC filing for Swiss multinationals (“MNEs”) with consolidated group revenues above CHF 900m (approximately USD $925m). While the proposed effective date won’t occur until 2018, the Swiss Federal Tax Administration is expected to accept CbC reports filed for fiscal years 2016 and 2017 for exchange purposes on a voluntary basis.

Russia

On April 8, 2016, the Ministry of Finance of the Russian Federation presented a draft law which addresses the preparation and submission of CbC reports by Russian MNEs. The draft legislation is in line with the recommendations set forth by the OECD’s Action Item 13 recommendations. The Russian draft law is expected to enter into force for all tax years beginning on or after January 1, 2017, with CbC reports required to be submitted by Russian MNEs, with consolidated group revenues above RUB 50 billion (approximately USD $680m as of April 26, 2016), within 12 months from the end of the company’s relevant financial year.

Unlike many other countries that have released legislation around CbC reporting, Russia’s draft law includes details on penalties for failure to submit or submitting false information. For such a violation, the taxpayer could incur a minor monetary penalty. These penalties will not apply to violations identified in 2017 – 2019.

Bermuda Agrees to Automatic Exchange of CbC Reports

On April 20, 2016, Bermuda became the 33rd jurisdiction to sign the Multilateral Competent Authority Agreement (MCAA), which provides for an automatic exchange of CbC reports across tax jurisdictions.^[1] The MCAA was created in to coordinate the sharing of CbC reports as called for by the OECD’s Base Erosion and Profit Shifting Project. The aim of the MCAA is to increase transparency and help tax administrations gain a better understanding of how MNEs operate. The information will be collected by the country of residence of the ultimate parent of the MNE group, and will then be exchanged in accordance with the MCAA. Under the MCAA, the first exchange of information is slated to start in 2017 covering 2016 results.

For more information, please reference the OECD’s press release available here.

EU Likely to Require Public CbC Reporting

On April 12, 2016, the European Commission proposed a new Directive which would require any MNE which is active in the EU to make the European portion of their CbC reports available online to the public. The public reporting requirements apply to MNE’s with group turnover in excess of EUR 750 million. Specifically the proposal would require the pubic CbC filing to be broken out into three key areas as follows:

1. European Operations: The report would be broken out separately for each EU country in which the MNE operates.
2. Tax Havens: The report would be broken out for each separate jurisdiction which does not comply with tax good governance standards (so-called tax havens).
3. Rest of World: For jurisdictions which are not deemed tax havens and are not EU member states the CbC report will be required to present those jurisdictions’ results in aggregate.

Because the European Commission used its authority under Article 50 of the Treaty on the Functioning of the Union which covers areas of corporate law and accounting, only a simple majority of EU member states are required to make the proposed rules final. Tax Directives, on the other hand, require unanimous agreement. As a result, many practitioners and other stakeholders expect this proposal to be made final.

The European Commission’s Fact Sheet is available online here. 

^1.The jurisdictions that have signed the MCAA are Australia, Austria, Belgium, Bermuda, Chile, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, Netherlands, Nigeria, Norway, Poland, Portugal, Senegal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland and United Kingdom. Bermuda is the most recent country to sign.