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.

Related Links:

(a) Inland Revenue Department – Hong Kong
(b) Deloitte
(c) KPMG
(d) PWC

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.

Related Links:

(a) Bloomberg BNA – Transfer Pricing Watch
(b) Australian Government – The Treasury
Exposure Draft
Explanatory Material
(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.

Related Links:
(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.

Related Links:
(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.

Related Links:
(a) TP – Week
(b) PWC – Pricing Knowledge Network

The finance ministry of Germany drafted a bill in March to amend the transfer pricing provision of the country’s Foreign Tax Act. The principal goal of the amendment is to align transfer pricing rules with the OECD Guidelines by including transactions between permanent establishments, partnerships, and partners within the scope of the arm’s length pricing requirement.

Under the new approach, permanent establishments will be legally recognized as independent entities. As a result, a portion of the assets, functions, and risks of the enterprise in question must be allocated to the permanent establishment. Likewise, transfer pricing methods would apply based on this allocation. The new rule refers to any economic transaction instead of focusing on the parties involved in a transaction. All economic transactions fall under the law of obligations, unless a taxpayer proves such a stipulation would not hold in an uncontrolled situation, in which case the burden of proof would shift to the taxpayer.

Related Links:
(a) PWC – Pricing Knowledge Network
(b) International Tax Review

The Belgian tax authorities are expected to increase focus on transfer pricing in 2012. Since establishing a special transfer pricing audit department in 2004, the number of tax officials assigned to this department has quadrupled. Further growth is expected in 2012 with the number of officials dedicated to the special transfer pricing audit department increasing to 20.

Several issues are expected to trigger transfer pricing audits, including consistent losses and business restructuring, an issue that transfer pricing inspectors focused on during 2011. In a new attempt to address double taxation resulting from restructuring, the Belgian tax authorities have begun to utilize mutual agreement procedures or European Arbitration Convention to reallocate cost of restructuring to the beneficiaries and away from the business undergoing restructuring.

Related Links:
(a) KPMG: Tax News Flash
(b) TP Week: International Tax Review

Although Chile first introduced transfer pricing rules in 1997 and the rules generally follow the OECD Guidelines, no major upgrades or clarification in the regulations have been made since that time, making it difficult even for experts to choose approved methods and determine the extent to which the OECD Guidelines are applicable.

Recently, Chile’s tax authority has been conducting transfer pricing audits and assessments based on the OECD Guidelines yet to be implemented as law, indicating the possibility that the tax authority may delineate new rules based on discussions with transfer pricing practitioners and other stakeholders. The new regulations will likely include the best method rule, yearly documentation requirements, the use of correlative adjustments, and endorsement of the five transfer pricing methods specified in the OECD Guidelines.

Related Links:
(a) Bloomberg BNA: Tax and accounting center
(b) Corporate livewire
(c) International Tax Review

Vietnam’s General Department of Taxation (GDT) has adjusted the amount of tax losses reported by foreign-invested companies, and recovered over VND 2 trillion (US $ 100 million) of tax liabilities, including tax arrears and administrative penalties, mostly from audits of 107 multinationals for the tax years 2008-2010. In order to curb further losses, the GDT under the Ministry of Finance has petitioned the National Assembly to strengthen the advance pricing agreement (APA) mechanism.

Under the revised APA program, multinational taxpayers in Vietnam must suggest pricing measures or the price level when conducting business with controlled entities before declaring taxes. Tax agencies could monitor the price suggested by enterprises, either alone or in coordination with foreign tax agencies that have double taxation avoidance agreements with Vietnam.

Related Links:
(a) Tuoitrenew.vn
(b) KPMG: Tax News Flash
(c) KPMG: Tax News Flash

The Lithuanian Tax Authority adopted procedural guidelines, effective January 1, 2012, pertaining to advance pricing agreements (APAs). Based on the new rules, an application for an APA may be submitted only by a Lithuanian taxable person (a company or an individual) or its representative. An APA application, which initiates the negotiation, should include justification for the agreement and background information about the transactions covered, in addition to details about each entity’s business strategy, risk assumed, and assets employed. The taxpayer must also describe the chosen transfer pricing method, explain the comparable analysis and critical assumptions used in the application of the selected transfer pricing method, as well as demonstrate compliance with the arm’s length standard. Tax authorities are required to review and issue a decision on the APA request within 60 to 120 calendar days.

Related Links:
(a) PKN Alert
(b) T Magazine