Worldwide: Transfer Pricing Times: OECD Requests Public Comments On Scope Of Future Changes To Guidance On Chapters IV And VII Of The Transfer Pricing Guidelines

In this edition: The OECD has invited public comments on scoping the future revision of Chapter IV and Chapter VII of the Transfer Pricing Guidelines; the IRS and Coca-Cola Company transfer pricing trial has concluded; the IRS released an updated template to be utilized by taxpayers when applying for an advance pricing agreement; the German Federal Fiscal Court ruled in favor of the taxpayer in a preliminary injunction case; the Italian Ministry of Economy and Finance provided additional guidance concerning the application of certain transfer pricing provisions; and the Australian Government published its 2018 Federal Budget.

OECD Requests Public Comments on Scope of Future Changes to Guidance on Chapters IV and VII of the Transfer Pricing Guidelines

In a move to complete the overhaul of the original Transfer Pricing Guidelines, the OECD has invited public comments on scoping the future revision of Chapter IV (administrative approaches to avoiding and resolving transfer pricing disputes) and Chapter VII (special considerations for intra-group services).

Since the introduction of the original Transfer Pricing Guidelines by the OECD in 1995, there has been an intermittent program of revision. Chapters I to III were updated in 2010, when Chapter IX on Business Restructuring was also added, and chapters V, VI and VIII were overhauled in 2015 under the recent BEPS project.

Although Chapters IV and VII have incorporated limited revisions since the original 1995 edition of the Transfer Pricing Guidelines (the revision of the section of Chapter IV on safe harbors in 2013 and the addition of the section on a simplified approach to determine the arm's length charges for low-value adding services to Chapter VII as part of the BEPS revisions), they remain largely unchanged since the 1995 Guidelines.

The OECD has indicated that additional work could be done to update the guidance in Chapter IV in relation to examination practices and to mechanisms to prevent and resolve tax disputes, and potentially to include guidance on risk assessment. The OECD published a Draft Handbook on Transfer Pricing Risk Assessment in April 2013 and sought comments at the time but this project has been in abeyance ever since.

Although comments are invited on safe harbors and arbitration, there are apparently no plans to revise the guidance in this respect. Topics on which views are particularly welcomed include aspects or mechanisms to minimize the risk of transfer pricing disputes that could be included as part of the guidance on transfer pricing compliance practices, how to minimize the risk of double taxation on corresponding and/or secondary adjustments, observations on improving the use of APAs and views on other mechanisms for administering transfer pricing or preventing or resolving transfer pricing disputes that could be included in Chapter IV.

The OECD has indicated that the future revision of Chapter VII could be focused on aligning the guidance with the chapters already revised under the BEPS Project, particularly Chapter I but also Chapters VI and VIII, as well as considering whether, and if so, how to incorporate the ongoing work on the use of profit split methods and financial transactions.

To inform the Chapter VII scoping exercise, views are invited on how the guidance could be revised or supplemented to address issues related to the practical implementation of the Guidelines in the context of intra-group services, thus increasing tax certainty for taxpayers and preventing double taxation. Some of the practical challenges identified include demonstrating the rendering or benefits of a service, distinguishing between services that benefit local affiliates or that result from group membership and identification of an appropriate allocation key for intra-group services.

Interested parties are invited to send their comments in Word format no later than June 20, 2018 to TransferPricing@oecd.org. The OECD aims to finalize this scoping exercise by the end of 2018.

The invitation from the OECD to comments can be found in Chapter IV here and Chapter VII here.

The U.S. Tax Court Transfer Pricing Trial for Coca-Cola Wraps Up

The February edition of Transfer Pricing Times contains an article " IRS and Coca-Cola Getting Ready for Trial", which outlined the transfer pricing issue at dispute, the transfer pricing methods applied by each of the IRS and Coca-Cola Company ("Coca-Cola"), as well as each party's key arguments to support their respective positions. This article continues reviewing the case and summarizes the eight-week trial that was wrapped up in May 2018.

The case is Coca-Cola Co. v. Commissioner, T.C., No. 31183-15, which involves a $9.4 billion transfer pricing adjustment made by the IRS for the tax years 2007 to 2009, which would have yielded $3.3 billion in additional income tax for the company. The IRS applied a comparable profits method ("CPM") by arguing that the foreign affiliated licensees are comparable in terms of functions and risks to independent bottlers that engage in packaging and distribution functions. Coca-Cola's approach is based on a 10-50-50 method, under which each foreign affiliated licensee retains 10 percent of gross sales, with the residual operating profit, after adjustment, split 50-50 between the licensees and Coca-Cola. Coca-Cola's argument derived from the position that licensees make substantial non-routine contributions to value through the development of the brand in their local markets through marketing and other investments. The difference between the IRS and taxpayer positions boiled down to a debate on the role played by each of the U.S. headquarters of Coca-Cola, the foreign affiliated licensees (also referred to as "Supply Points" or "Business Units" during the trial) and the independent bottlers.

The trial started on March 5, 2018, which lasted eight weeks (with a two-week extension after the originally scheduled six-week trial), and wrapped up on May 11, 2018.

In the first segment of the trial, fact witnesses, who were (former) executives at various positions within Coca-Cola or with the bottlers, were called to provide their testimony. The testimony and cross-examinations largely focused on the following areas: (1) the interactions among the entities; (2) the decision-making and approval protocols for marketing and R&D projects; (3) local marketing and advertising activities and the involvement of these entities; (4) trademark management; and (5) business plans and concentrate pricing arrangements made between the foreign affiliated licensees/Supply Points/Business Units and the bottlers.

In the second segment of the trial, expert witnesses presented their testimonies. The IRS and Coca-Cola called for experts in the field of marketing to present their analysis of Coca-Cola's marketing intangibles, with a particular focus on the role of the global brand vs. localized marketing campaigns. In addition, transfer pricing experts from both sides testified on their expert reports, providing their opinions on Coca-Cola's business model and arguments for why their respectively selected transfer pricing method is most reliable.

In addition to the information presented to the court in these two segments, there were also discussions about the relevance of a 1996 royalty closing agreement entered between Coca-Cola and the IRS, which established the "10-50-50 method" and of certain historical factual discussions and analysis the company had prepared in association with the pursuit of an APA with Japan in 2001.1

The originally scheduled six-week trial was extended to eight weeks and concluded on May 11, 2018. Opening briefs are due on October 19, 2018 and the simultaneous reply briefs will be due on February 15, 2019. Duff & Phelps will continue to monitor this case and will alert our readers when significant developments occur.

IRS Releases Updated Advanced Pricing Agreement Template

On May 11, 2018, the U.S. Internal Revenue Service ("IRS") released an updated template to be utilized by taxpayers when applying for an advance pricing agreement ("APA") under Rev. Proc. 2015-41. This new options-based template is meant to lessen burdens on taxpayers in the program and to provide additional guidance to taxpayers when drafting and applying for an APA.

In September 2017, the IRS released a proposed version of the template and invited comments from taxpayers and practitioners. Based on the comments received, the IRS made the following changes prior to releasing the final APA template:

  • Addition of a de minimis exception for intercompany payables to be excluded from calculation of indebtedness under Code Section 956 so long as the intercompany payable is satisfied within 90 days of the close of the APA tax year, in which the intercompany payable is established;
  • Reiteration of the IRS' relatively expansive definition of the term "Tested Party" in Section 4 of Appendix A to lessen any confusion around the term's intended meaning; and
  • Removal of Section 7 of Appendix A, which "addressed whether a covered method should be re-applied to take into account certain adjustments between an APA-covered entity and a non-APA-covered entity, and any results competent authority resolution, that would affect the testing of financial results under the covered method."

The IRS recommends that taxpayers with pending APA requests contact their IRS Advance Pricing and Mutual Agreement Program team leader for guidance in updating their submission, if necessary.

The IRS's announcement of the new APA template, as well as instructions for requesting the template and associated materials, can be found on its website here.

German Federal Fiscal Court Determines Interest on Tax Arrears Excessive

On April 25, 2018, the German Federal Fiscal Court ("BFH"), Germany's highest tax court, ruled in favor of the taxpayer in a preliminary injunction case (BUNDESFINANZHOF Beschluss vom 25.4.2018, IX B 21/18). In this case, the taxpayer had argued that the six percent per annum interest rate, which the German tax authorities charge on tax arrears, is excessive. The original rate of six percent per annum was based upon the assumption that a taxpayer that pays tax at a later date has an advantage (in the form of its cash flow) over taxpayers that pay their taxes on time, thus violating the principle of equal treatment in German law. This rate has been challenged and upheld several times prior to this ruling. For example, a few months earlier, a different panel of the BFH ruled against the taxpayer and did not find the six percent interest rate to be unconstitutional (BUNDESFINANZHOF Urteil vom 9.11.2017, III R 10/16).

However, in the most recent opinion of the BFH, the interest rate of six percent may be too high, particularly in times of low interest rates, when the currently applied interest rate of six percent has the effect of an unjustified surcharge on the tax assessment. Furthermore, there are serious doubts as to whether the interest rate is in line with the rule of law principle of Article 20 of the German Constitution ("Grundgesetz").

While the ruling is good news for taxpayers, there is still a case pending (1 BvR 2237/14, 1 BvR 2422/17) at the federal constitutional court ("BVerfG") which will rule over the question of whether the six percent interest rate is unconstitutional. The court aims to issue a judgment on this matter before the end of this year.

In the meantime, companies facing interest charges from the German tax authorities due to an income adjustment may consider appealing against these charges. This would keep the cases open until the BVerfG judgement is issued, allowing taxpayers to benefit from a potentially favorable outcome of the pending court case.

New Decree Provides Updated Guidelines Concerning Italian Transfer Pricing Provisions

On May 14, 2018, The Italian Ministry of Economy and Finance provided additional guidance concerning the application of certain transfer pricing provisions, as codified under article 110, paragraph 7, of the Italian Income Tax Code. This code had previously been amended in 2017 as a result of changes made to the OECD Guidelines during the BEPS initiative.

The amendments to the Italian Income Tax Code are generally in line with the OECD Guidelines and it appears that the transfer pricing regulations in Italy are now more in alignment with the OECD Guidelines than they have been in the past. Key provisions of the most recent decree on this matter include:

  • Confirmation of the Italian tax administration's approach that requires verifying both the legal and economic control prior to applying the transfer pricing regulations (i.e., determination of related party status).
  • Adoption of "comparability" standards that are consistent with the OECD Guidelines.
  • Adoption of a "best method" standard, rather than a reliance on a hierarchy of methods.
  • Provisions holding that tax inspectors should not disregard the transfer pricing method that the taxpayer applied where taxpayer complied with the Italian regulations and selected a reasonable transfer pricing method. In these circumstances, inspectors should rather verify (and potentially challenge) the correct application of this method.
  • Introduction of safe harbors for "low value-adding services" in which a simplified approach can be adopted. This approach allows for a five percent mark-up on total costs related to the provision of services for which are considered supportive/administrative in nature (similar to the low-margin services provision in the OECD Guidelines).

With the changes to the Italian Income Tax Code, taxpayers operating in Italy would do well to examine their current transfer pricing support to ensure they are fully in compliance with the new guidelines in the Italian Income Tax Code.

Australian Government Releases 2018-2019 Budget Measures Pertaining to Multinational Tax Integrity

The Australian Government published its 2018 Federal Budget on May 8, 2018. The Australian Government proposed the following measures that may impact multinational companies and non-resident investors:

Expanding the Definition of Significant Global Entities

Effective from July 1, 2018, the definition of 'Significant Global Entity' will be expanded to include large multinational businesses that are ultimately owned by private companies, trusts and partnerships, or investment entities (e.g. real estate funds and private equity funds). This will ensure that these businesses are subject to the application of tax integrity rules such as the Diverted Profits Tax, Multinational Anti-Avoidance Law, and-Country-by-Country reporting obligations.

Ensuring Taxation of Digital Businesses

In an effort to ensure digital businesses pay an appropriate level of Australian taxes, the government proposed extending the Goods and Services Tax ("GST") to be assessed on transactions made through offshore sellers starting July 1, 2019. This is in addition to previously enacted measures to apply GST to digital products and services imported by Australian consumers after July 1, 2017. The Government has also indicated that in the coming weeks it will be releasing a discussion paper on options for taxing digital businesses in Australia.

Tightening Australia's Thin Capitalization Rules

The Government will limit the amount of interest deductions multinational entities can claim in Australia under the thin capitalization rules. In particular, entities will now be required to rely on asset values reported on their financial statements for debt capacity analysis. Also, foreign controlled Australian consolidated groups and multiple-entry consolidated groups that control a foreign entity will now be treated as both inward and outward investors under the thin capitalization rules. This will ensure that these taxpayers will not be eligible for tests that were only intended to apply to outward investors. These changes will apply for tax years commencing on or after July 1, 2019.

Tightening Stapled Structure Concessions for Foreign Investors

The Government announced it is releasing measures to address the perceived tax integrity risks posed by "stapled structures". The Government will no longer allow foreign investors to convert active trading income of an operating company taxed at 30 percent into passive income (e.g. rent) of a managed investment trust ("MIT") that was taxed concessionally at 15 percent or less. The Government released draft legislation for remarks by independent tax experts and the business community. The draft legislation includes the imposition of a 30 percent MIT withholding tax on distributions to non-resident investors. There is an exclusion for cross-staple rental payments that are funded by third-party rent. Examples of these structures include student accommodation and manufactured home-estate staples. Hotel staples however will be impacted by these new measures as they generate income from third parties through license fees instead of rental income. These changes will apply from July 1, 2019 with a transitional period of at least seven years for leases that existed before March 27, 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions