Transfer Pricing Times: Volume XIII, Issue 7

In this edition: European Commission targets Apple, House and Senate lawmakers urge Treasury to rewrite proposed 385 debt/equity rules, the UK may require country-by-country reports to be made public, and Vietnam signals preparations for transfer pricing Safe Harbor rules.  

European Commission Targets Apple: Company Ordered to Pay €13 Billion in Unpaid Tax to Ireland

On September 7^th, the European Commission (“EC”) issued its largest transfer pricing related state aid ruling against a U.S. multinational yet ordering Apple to pay €13 billion in taxes to Ireland. With interest the amount owed by the company could be as high as €14.5 billion. The EC’s decision focused on two advanced pricing agreements (“APAs”) between Apple and Ireland forged in 1991 and 2007. In these APAs, the Irish government had agreed to an acceptable net profit margin to be earned by Apple’s Irish branches. As part of its investigation, the EC determined that the agreements reached between the Irish government and Apple did not achieve a “market based outcome”.

The EC’s decision comes on the heels of several other high profile investigations into US multinationals doing business in the EU. On May 23^rd of this year, four U.S. senators from the Senate Finance Committee wrote a letter to the U.S. Secretary of the Treasury to raise concerns over the EC's transfer pricing related state aid investigations of U.S. multinational companies (a summary of this letter is available in the May edition of the Transfer Pricing Times). Other U.S. multinationals that have been targeted by the EC in the past over transfer pricing rulings with member states include Starbucks in the Netherlands and McDonald’s in Luxembourg.

The main concern raised by U.S. stakeholders is that these investigations into the transfer pricing agreements reached between multinationals and their host countries violate international legal norms. In essence, the EC is asserting itself as a supra-national tax authority with the ability to override taxation practices within each member state. Furthermore, U.S. stakeholders, including the US Treasury, are concerned that the EC is unfairly targeting U.S. multinationals in order to shift tax penalty payments to the EU at the expense of non-EU jurisdictions. For example, in the case of Apple if the penalty paid to Ireland is deemed a tax payment then the company can claim that penalty as a foreign tax credit in the U.S., effectively lowering its U.S. tax bill while increasing taxes paid in Ireland. Interestingly, Ireland has voiced its agreement with the U.S. Treasury and has decided to appeal the EC’s decision.

The European Commission’s press release on the Apple decision can be found here.

Treasury Secretary Lew’s letter from February concerning these investigations is available here.

Treasury Secretary Lew’s op-ed in the Wall Street Journal on the Apple case can be found here.

House and Senate Lawmakers Urge Treasury to Rewrite Proposed 385 Debt/Equity Rules

The House Ways and Means Committee Republicans and Senate Finance Committee Chairman Orrin Hatch (R-Utah) have both issued formal letters to Treasury Secretary Jacob Lew with an appeal to rewrite and provide greater transparency into the controversial proposed rules on intercompany debt arrangements under Section 385.

Both letters, dated August 22^nd, strongly criticize the Department of the Treasury for rushing the proposed regulation process and failing to follow basic protocol when reviewing proposed changes and commentary. In support of these claims, Senator Hatch noted that a hearing to discuss changes was scheduled merely a week after the commentary period had ended. Hatch commented, “[…] it is hard to see how the oral comments at the public hearing could be well understood if there was not adequate time to read and reflect upon the written comments beforehand. Given the thousands of pages of comments you have received in response to the proposed regulations, it is clear that the consideration of these comments should not be rushed”. Hatch then continued to cite that previous 501(r) regulations in June of 2012 were given approximately 72 days for commentary review.

Following this argument, Hatch continued that in the regulation review process, the Congressional Review Act (“CRA”) of 1996 has largely been ignored. The CRA states that a reasonable and detailed cost-benefit analysis should be given to the Office of Management and Budget’s Office of Information and Regulatory Affairs (“OIRA”) in order to determine the relative impact of a proposed regulation. The detailed analysis would then be disseminated to the public for review and transparency. Hatch criticized that the Department of the Treasury “[…] has long taken the position that tax regulations are exempt from these transparency requirements because of a secret agreement between the Treasury Department and the OIRA”. Hatch believes that the “Treasury’s special rule[s] work against the goals of transparency and accountability”.  

The House Ways and Means Committee supported Hatch with similar comments about the proposed regulations. Specifically, the committee commented how the cost burden analysis that the Treasury provided had “woefully [understated] the actual compliance burden the documentation requirement would impose on affected businesses […]”. In the end, both tax-writers suggested increased time, dialogue, and coordination concerning the regulations. Both strongly believe that a more thorough analysis is necessary in order to forecast the potential effects of the proposed regulations on the U.S. economy. Secretary Lew did not issue any comments on the letters, nor is it known if any direct address will be given in the future.

The earnings-stripping regulations can be found here for further review.

The letter from Chairman Hatch can be found here.

The letter from the House Ways and Means Committee can be found here.

UK May Require Country-by-Country Reports to be Made Public

On September 5^th, the House of Commons approved an amendment to the 2016 Finance Bill that would enable the inclusion of public country-by-country (“CbC”) reports in companies’ published tax strategies. The UK is the first country to propose enabling legislation allowing the possibility for a future requirement on multinationals publicly to reveal where they earn revenue and how much tax they pay. The government’s acceptance of the proposal to include CbC reporting in the published tax strategy took some observers by surprise, as the UK was not expected to embrace measures that might risk putting its business at a competitive disadvantage following the vote in favor of leaving the EU. However, the government has made clear that the introduction of public CbC reporting is dependent on its adoption on an effective multilateral basis. The amendment, which originated with a cross-party group of politicians from eight separate parties led by opposition Labour member Caroline Flint, follows widespread lobbying for increased tax transparency.

Public CbC reporting was introduced as part of broader legislation requiring multinational groups to publish their tax strategies. The broader tax strategy legislation requires companies with turnover above £200 million or a balance sheet over £2 billion to publish a document explaining their company’s tax arrangements. This does not include amounts or commercially sensitive information. There remains a lack of clarity on how far the amendment with respect to CbC reporting could be made to bind multinationals that are not UK-headquartered.

Making CbC reports public goes beyond the recommendations that the Organization for Economic Cooperation and Development (“OECD”) set out in Action Point 13 of its BEPS plan. The OECD’s approach recognizes concerns of multinationals around the confidentiality of sensitive information, but the UK’s steps follow the path already set by the European Commission, which is also demanding public CbC reporting in EU Member States. However, while the UK’s recent actions may come as a surprise to some taxpayers and practitioners, there are few immediate consequences for business. No date has been set for introduction of public CbC reporting regulations in the UK and no unilateral action is to be expected. Earlier in April, the European Commission proposed an EU Directive that would require public CbC reporting, but no further progress has come from the proposition.

A copy of the amended bill is available here.

Vietnam Signals Preparations for Transfer Pricing Safe Harbor Rules

Vietnam, has begun the process of creating Safe Harbor rules. The proposal currently includes an undefined price ceiling that establishes which transactions are small enough to avoid standard transfer pricing documentation. Other requirements, such as transaction type, are likely to be added in as the proposal takes shape in the coming months. The OECD cautions that special attention should be given to safe harbor requirements in order to avoid corporations that could exploit them to go “safe harbor shopping” and lower their taxes. Although specific details about requirements aren’t currently in place, local tax authorities believe that the rules will be finalized by the end of 2016.

The Vietnamese General Department of Taxation’s article about safe harbors can be found here.

The OECD’s policy on safe harbors can be found here.