The Internal Revenue Service (IRS) and US Treasury Department released Notice 2012-39 under section 367(d) of the Internal Revenue Code to provide guidance to US domestic companies on handling the transfer of intangible property such as patents to a related foreign corporation or subsidiary (section 361 of the U.S. Tax Code). The new rule provides for a transfer of intangibles to a foreign corporation to be treated as a sale and any gain from it to be is taxed, either in the year of the transaction or over time.
The overarching goal is to address the repatriation of earnings from foreign corporations without appropriately recognizing income in the domestic entities. The IRS illustrates its point in the Notice using several examples. The guidance will be issued in the form of regulations and will apply to outbound transfers on or after July 13, 2012. Prior to the issue of the regulations the IRS has invited public comment on an aspect relating to qualified successors.
(a) Internal Revenue Service
(c) Ernst & Young – T Magazine
(d) Crowell Moring
(e) Accounting Today
The Danish government passed a new Act on June 13, 2012 to strengthen its hold on multinational enterprises by increasing fines for transfer pricing non-compliance or insufficient transfer pricing documentation. The Act includes new rules for calculating fines for incorrect reporting, based either on annual turnover or on the number of employees in the company, whichever is higher. Insufficient TP documentation can result in a minimum fine of DKK 250,000 per tax year with a penalty of 10 percent of any upward income adjustments. The Act also allows the Danish Tax Authorities to require companies that have suffered an overall operating loss over four years to produce an independent auditor’s certificate on transfer pricing documentation. The rule also applies to companies that have carried out transactions with related companies outside the EU/EEC that have no double tax treaty with Denmark.
(b) Bloomberg BNA
The Italian Tax Administration recently issued its first official document pertaining to MAPs. Circular 21/E provides guidance to local tax offices on the application of the two different types of MAP (those under a DTC and those under the Arbitration Convention) when resolving disputes with taxpayers under Italian law.
(b) JD Supra
The OECD has released a discussion draft clarifying issues specific to intangibles involving multinational enterprises after 18 months since initiating the project in late 2010. The OECD issued the interim draft after consulting with the business community, in order to invite public comment from all stakeholders involved. The discussion draft was prepared by OECD Working Party No. 6 and contains proposed revisions to Chapter VI of the OECD Transfer Pricing Guidelines and to the corresponding illustrative examples that appear in the Annex to Chapter VI.
The overarching goal of this discussion draft is to address major issues not covered in the previous guidelines, in addition to soliciting input from stakeholders. The interim draft is divided into four sections:
1. Definition of intangibles
2. Identification of parties entitled to intangible-related returns
3. Transactions involving the use or transfer of intangibles
4. Determining arm’s length conditions or prices in transactions involving intangibles
Written comments on the discussion draft are requested by September 14, 2012.
(c) International tax review
Guatemala has passed transfer pricing legislation, effective January 1, 2013, which will govern related-party transactions involving goods, services or intangible assets. The new rules, included in the country’s Tax Legislation Update Law (TLUL), generally adhere to the OECD’s guidelines by establishing the arm’s length principle and related parties, regulating the criteria each taxpayer must follow in performing a comparability analysis, and specifying acceptable transfer pricing methods. Taxpayers will be required to document their transactions with related parties on an annual basis and must submit transfer pricing documentation within 20 days of the tax authority’s request. Advance Pricing Agreements (APAs) can be requested on an ongoing basis, for a maximum of four years.
(c) Ernst & Young – Tax Alert
The Hong Kong Inland Revenue Department (“IRD”) has taken a significant step in its transfer pricing compliance enforcement by formalizing the Advance Pricing Arrangement (“APA”) program through the Departmental Interpretation and Practice Notes No. 48 (“DIPN 48”), which were effective as of April 2, 2012. The APA program provides an opportunity for Hong Kong taxpayers to enter into agreements with the IRD and one or more tax authorities from other jurisdictions regarding acceptable transfer pricing methodology for a set of related-party transactions over a fixed period of time. To be considered for the APA program, the transaction should be at least HKD 80 million per year for purchase and sale of goods, HKD 40 million per year for provision of services, and HKD 20 million per year for the use of intangible assets.
The authority and administrative power of the IRD to negotiate an APA with the tax authorities of another jurisdiction are prescribed under the Mutual Agreement Procedure (MAP) article in the double tax agreements between Hong Kong and the DTA countries. At this stage, only bilateral and multilateral APAs will be considered. The IRD may also consider implementing unilateral APAs with Hong Kong taxpayers under limited circumstances, such as the failure to secure a mutual agreement for a bilateral APA. APAs will usually cover a period of three to five years, with a streamlined option to renew the APA for another period of three to five years. To take advantage of the renewal option, taxpayers must apply at least six months before the expiration of the original APA. DIPN 48 estimates it will take about 18 months to conclude an APA.
(a) Inland Revenue Department – Hong Kong
The Australian government has released an Exposure Draft outlining the proposed retrospective amendments that will be implemented during the first stage of reform to the country’s transfer pricing regime. The piecemeal approach to reform will include a second stage involving a fundamental rewrite of the transfer pricing rules. The rewrite is currently underway, with the new rules for future transfer pricing expected to be released soon. The rules governing such transactions have not been materially amended for 30 years, since their first introduction in 1982.
According to the government, an overarching goal of the first stage of reform is to provide clarity and certainty regarding the applicability of transfer pricing articles in Australia’s tax treaties, with authority independent from Division 13 of the Income Tax Act 1936. Furthermore, the government will seek to require consistent interpretation of the arm’s length principle, with relevant Organization for Economic Cooperation and Development (OECD) guidance. These amendments will apply to income years commencing on or after July 1, 2004.
(a) Bloomberg BNA – Transfer Pricing Watch
(b) Australian Government – The Treasury
(c) PWC – Tax
The Brazilian government made extensive changes to the existing transfer pricing regulations that will come into effect starting in 2013. These modifications, found in the Provisional Measure (“PM”), address several issues including adjustments to the resale price method and commodity transaction methods and interest on related-party loans.
In Brazil, the resale price method requires a 20 percent mark-up except when sectors involved in the manufacture of pharma-chemical and pharmaceutical products, tobacco products, optical equipment and instruments, and photographic and cinematographic equipment; machinery, apparatus, and equipment used for dental, medical, and hospital use; oil extraction and the production of natural gas and the manufacture of oil-derivative products. In these instances, the required mark-up is 40 percent. Additional, a 30 percent markup is required with respect to sectors involved in the manufacture of chemicals; glass and glass products; pulp, paper, and paper product; and metallurgy. If taxpayers meet more than one of these criteria, then the industry sector for which the goods were destined determines the mark-up percentage.
New transfer pricing methods will apply to commodities transactions. Under these new regulations, the “safe harbor” benefit will be eliminated. The quotation price on imports method (PCI) applies for inbound transactions, and is based on the average daily price of goods or rights as recognized on an international futures and commodities exchange. Also, the quotation price on exports method (PCEX) applies for outbound transactions, and is based on the average daily price of goods or rights as recognized on an international futures and commodity exchange.
These new regulations also limit and specify the amount of interest payments or credits in related party loans that are deductible for corporate income tax purposes.
(a) PWC – Pricing Knowledge Network
(b) KPMG – TaxNewsFlash
El Salvador joined other Central American nations, including the Dominican Republic and Aruba, in adapting transfer pricing rules that comply with the OECD guidelines. El Salvador implemented formal transfer pricing documentation requirement which incorporate the OECD’s five specified transfer pricing methods. With the implementation of these new regulations found in the “Guía de Orientación N° DG 001/2012,” local tax authorities aim to increase the efficacy of tax collection and to facilitate the auditing process.
The new regulations affect related party transactions and parties domiciled in tax havens. The tax regulations stipulate the documentation required by the local tax authorities and establish firm filing dates for annual transfer pricing reports. Taxpayers are recommended to file the informative return by the deadline of April 10, 2012 to avoid penalties. Transfer pricing documentation will need to be prepared by May 31, 2012.
(a) PWC – Pricing Knowledge Network
(b) Inter-American Center of Tax Administrations
(c) Quorum Consulting Group
The Cameroon Ministry of Finance announced significant changes to the country’s transfer pricing documentation requirement in its 2012 Finance Law. The revised rules will require Large Taxpayer Units to automatically produce documentation at the beginning of a tax audit. A Large Taxpayer Unit is any company with total turnover greater than XAF 1 billion at the close of its fiscal year. The revision will not affect other taxpayers, currently obliged to produce such documentation only upon request. The automatic obligation will only be enforced for companies registered as Large Taxpayer Units at the end of the fiscal year and only if the company has either 25 percent above its capital or voting rights held directly or indirectly by an entity outside Cameroon, or holds directly or indirectly more than 25 percent of the capital or voting rights of entity outside Cameroon.
Additionally, the 2012 Finance Law extends the time limit for tax audits from three to six months, where transfer pricing issues are concerned. Those business transactions involving payment with intangible assets, cost allocation, cost sharing arrangements, and financial transactions are more likely to come under scrutiny.
(a) TP – Week
(b) PWC – Pricing Knowledge Network