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In this issue: The Tax Court of Canada rules in favor of Cameco Corporation in a transfer pricing dispute with the Canada Revenue Agency; the OECD released its report on MAP Statistics for 2017, using the framework agreed upon through Action 14 of the BEPS initiative; the Cambodian Ministry of Economy and Finance introduced the arm’s-length principle into the Cambodia transfer pricing rules; the National Legislative Assembly of Thailand introduced specific transfer pricing provisions and documentation requirements to the Thai Revenue Code; and Duff & Phelps will host the 2018 IP Value Summit at The Lodge at Torrey Pines in La Jolla, California on November 28-29, 2018.
On September 26, 2018, the Tax Court of Canada (the “Tax Court”) released its decision in Cameco Corporation (“Cameco”) v. Her Majesty the Queen (the “Crown”), 2018 TCC 195, ruling in favor of Cameco. On October 26, 2018, Cameco announced that the Crown had filed an appeal with the Federal Court of Appeal.
The dispute relates to the pricing of uranium sales between Cameco, its foreign subsidiaries and third parties during the 2003, 2005 and 2006 taxation years (the “audit period”). Cameco’s foreign subsidiaries were established to sell and trade uranium, and often did so under long-term supply contracts.
The Crown argued that:
The total adjustment to Cameco’s income made by the Canada Revenue Agency (“CRA”) exceeded CAD 483 million, across the three tax years.
The Crown’s expert witnesses applied a variety of transfer pricing methods, most of which analyzed the returns (gross margin or operating profit) earned by the foreign subsidiaries, by comparison to arm’s length trading companies or routine distributors. One expert also applied the cost plus method to one of the transaction streams, by comparing the markups earned by Cameco on sales of mined uranium to its foreign subsidiary to the markups earned under long-term supply contracts with other customers.
Cameco argued that the transactions were not a sham, the transfer pricing recharacterization rule does not apply, and that the existing transactions already used arm’s length prices. Cameco’s expert witness relied primarily on the comparable uncontrolled price method (“CUP”) to establish uranium prices, with various adjustments to account for market price differences between products and over time. Cameco also called expert witnesses to testify as to the behavior of multinational enterprises, and the types of sales contracts used between arm’s length parties in the uranium industry.
The Tax Court sided with Cameco on each point. It found that:
The CRA has appealed the transfer pricing decisions, but not the decision that the sham doctrine does not apply. Cameco expects the resulting Federal Court of Appeal case on the transfer pricing matters will take about two years.
Many taxpayers have initiated Mutual Agreement Procedures (“MAP”) in order to resolve double tax matters that arise when tax authorities come to inconsistent positions on the allocation of income between related entities in different tax jurisdictions. Through MAPs, the relevant taxing authorities (operating under the provisions of tax treaties between the countries involved) are supposed to arrive at a joint agreement regarding the allocation of profits between tax jurisdictions. On October 10, 2018, the OECD released its report on the MAP Statistics for 2017, using the framework agreed upon through Action 14 of the Base Erosion and Profit Shifting (“BEPS”) initiative. Under Action 14, OECD member countries submit reports on their local MAP activity each year, which allows the OECD to publish statistics regarding the number and average length of MAP cases undertaken in any given year. The publication of these statistics is intended to improve transparency regarding MAP activities and place a particular focus on tracking the successes of international tax dispute resolution, as well as identifying areas for procedural improvement.
The new MAP Statistics Reporting Framework makes a distinction between the cases received before Action 14 (i.e., before January 1, 2016 or January 1 of the year of joining the BEPS inclusive framework) and after Action 14 implementation (i.e., cases received on or after January 1, 2016 or January 1 of the year of joining the BEPS inclusive framework).
The key takeaways from the 2017 MAP Statistics include the following:
Additional information concerning the Mutual Agreement Procedure Statistics for 2017, as published by the OECD, can be found here.
On October 10, 2017, the Cambodian Ministry of Economy and Finance issued Prakas No. 986. MEF.P. ("Prakas 986"), which effectively introduced the arm’s-length principle into the Cambodia transfer pricing rules, to address perceived transfer pricing driven tax erosion to the Cambodian tax base through the treatment of related party loans. Notably, the arm’s-length concept in the new guidelines appeared to contradict Cambodia’s existing Instruction No. 151, as previously issued by the General Department of Taxation’s (“GDT”), which permitted the implementation of interest-free loans between related parties if these loan agreements were registered with the GDT within 30 days.
To clarify the above confusion, the GDT issued Instruction No. 11946 on August 21, 2018, which requires that Cambodian enterprises entering into loan transactions with their related parties adhere to the following:
Therefore, Cambodian taxpayers engaged in the provision / receipt of interest-free related party loans should consider the following:
The GDT’s updated guidance around pricing intercompany loans may appear unconventional from a transfer pricing viewpoint. For instance, it may be favorable for the Cambodian tax authorities to accept existing interest free loan arrangements for Cambodian borrowing entities, as there would be no tax benefit or incentive to impose an additional deductible arm’s-length interest expense. However, increased interest expenses for a Cambodian borrowing entity also generate increased withholding tax, which provides a more immediate revenue stream for the Cambodian tax authorities and is not dependent on overall profitability, tax incentives, or other factors. Thus, the key consideration for taxpayers will be to strike a balance between the transfer pricing considerations brought about by the updated regulations and the withholding tax impact of such an imputed interest expense.
On September 27, 2018, the National Legislative Assembly of Thailand passed the long-awaited Revenue Code Amendment Act (the “Act”), introducing specific transfer pricing provisions and documentation requirements to the Thai Revenue Code.
Key provisions contained in the Act include:
Notwithstanding the above, the Act currently does not contain specific implementation details, which are expected once the Revenue Department updates the current transfer pricing legislation (i.e. Departmental Instruction No. Paw. 113/2545). These are expected to contain additional clarifications, including guidance on the exemption conditions, requirements of the transfer pricing documentation and disclosure forms, timeframes and procedures of transfer pricing assessments and the basis for the imposition of penalties. Taxpayers are recommended to stay abreast of continuing developments in Thailand’s transfer pricing regulatory environment.
Duff & Phelps will be hosting the 2018 IP Value Summit at The Lodge at Torrey Pines in La Jolla, California on November 28-29, 2018. The IP Value Summit conference, held annually since 2013, aims to provide colleagues and peers with a forum to discuss current events, best practices, and the challenges and opportunities in valuing, managing, monetizing, and protecting intellectual property assets in today’s dynamic environment. The conference is designed for IP and Licensing Professionals, General Counsel, Attorneys, Tax Professionals, CEOs, CFOs, Controllers, M&A Heads, and other industry professionals, and is organized around three different topic tracks: (1) Valuation and M&A, (2) Tax and Transfer Pricing and (3) Licensing and Litigation.
For those dealing with and/or interested in transfer pricing issues and strategies, Duff & Phelps panelists and speakers will discuss optimizing intellectual property across multiple disciplines.
The following three presentations are part of the Tax and Transfer Pricing track:
For more information, please visit: IP Value Summit
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