Tax

Significant Transfer Pricing Documentation Changes

2016
Author:  Elizabeth Hazzard

Elizabeth Hazzard

Director

International Tax Services

Manufacturing & Distribution

One Metropolitan Square
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St. Louis, MO 63102-2733

St. Louis
314.231.5544

In October 2015, the Organisation for Economic Co-operation and Development (OECD) released the remaining draft action items for its base erosion and profit shifting (BEPS) initiative.  The G20 Finance Ministers commissioned the BEPS initiative to combat perceived multinational enterprise (MNE) tax abuse through an agreeable and possible-to-implement manner for participating countries—and other countries that use the OECD transfer pricing guidelines for their transfer pricing requirements.  Action Item 13, Transfer Pricing Documentation and Country-by-Country Reporting, substantially changed the historical transfer pricing documentation requirements of most countries—resulting in a three-tiered approach to documentation:

  • Country-by-Country (CbC) Reporting Template
  • Master File (MF)
  • Local Country File (LCF)

The documentation changes are guidelines, and each country isn’t required to implement them.

The CbC template requests certain financial information by tax jurisdiction, including stateless income and losses, and other types of information by legal entity.  Examples of required CbC report information include profits or losses before income tax, income tax paid, stated capital and accumulated earnings.  Examples of requested entity information include the main operational purpose(s) of an entity, e.g., research and development, insurance, internal group financing, manufacturing and sales and distribution.  Action Item 13 recommends MNEs with consolidated revenues of more than €750 million be required to prepare the CbC report.

The MF and LCF formats generally are new to countries outside the European Union.  The MF provides a high-level picture of the MNE as a whole—or by distinct business and reporting unit if it’s operationally broad.  The MF is expected to explain why the intercompany transactions and transfer prices are at their given point with the MNE’s particular fact pattern.  Broadly, the MF contains the MNE’s organizational structure, business description, intangible property, intercompany financial activities and financial and tax positions.  The LCF describes in depth the functions performed by an entity or entities in that particular country and the selection of the most appropriate transfer pricing method. It also contains the economic analysis for the intercompany transaction(s) involving the legal entity or entities in that country.  The MF is a broad document to be reviewed by any country, whereas the LCF serves as a detailed document for each country.

United States

U.S.-headquartered MNEs with global revenues exceeding $850 million will need to prepare and file the Action Item 13 CbC report for tax years beginning on or after June 30, 2016. The CbC will be included in the U.S. federal tax return as Form 8975. Many U.S.-headquartered MNEs will have reporting differences among the countries where they’re located, i.e., they will be expected to prepare a CbC report by their foreign location’s jurisdiction, but the IRS doesn’t require it yet. This creates a disparity in reporting requirements. The U.S. Treasury Department has stated the IRS will accept voluntary CbC reports for tax years beginning before June 30, 2016, allowing U.S.-headquartered MNEs to meet foreign CbC report filing requirements and avoid having to file the global, and potentially sensitive, information with a foreign tax jurisdiction. The Treasury Department is expected to release voluntary CbC report filing guidance (to eliminate any CbC reporting disparity) and instructions on completing Form 8975 in late 2016 or early 2017.

As of November 2016, the IRS hasn’t modified the Treasury Regulations to incorporate the MF and LCF documentation format. If an MNE’s transfer pricing documentation meets the IRS’s 10 transfer pricing documentation requirements, it won’t meet the MF and LCF requirements. If an MNE U.S. subsidiary has an LCF, it will meet and exceed the IRS’s 10 transfer pricing documentation requirements when combined with the MF.

Australia

  • CbC Report – It adopted the CbC report outlined in Action Item 13 for MNEs with consolidated revenues greater than A$1 billion.  The CbC report is due within one year of the fiscal year’s (FY) end.  It’s effective for years beginning on or after January 1, 2016.
  • MF – It adopted the Action Item 13 MF format for MNEs with consolidated revenues of more than A$1 billion.  The MF is due within one year of the FY end and effective for years beginning on or after January 1, 2016.
  • LCF – It adopted the Action Item 13 LCF format for MNEs.  Australia also allows MNEs with less than A$2 million of intercompany transactions (aggregated) to prepare the Short Form Local File.  There are exceptions when determining whether an MNE can file the Short Form Local File instead of Action Item 13’s LCF format.  The CbC report is due within one year of the FY end.  It’s effective for years beginning on or after January 1, 2016.

Comments

MNEs headquartered in a country that doesn’t require a CbC report or MF for years beginning in 2016 may request an exemption from the Australian Taxation Office for submitting the CbC and MF for 2016.

Canada

  • CbC – The CbC report will be required for MNEs with consolidated revenues in excess of €750 million.
  • MF – Not yet adopted.
  • LCF – Not yet adopted.

Comments

Pre-BEPS transfer pricing documentation requirements still need to be met.

China

  • CbC – The CbC report should be submitted when a China-based MNE’s consolidated revenues are greater than RMB 5.5 billion, or if the MNE isn’t headquartered in China but wishes to file its CbC report with the tax authority as the designated jurisdiction.  The CbC report should be filed by May 31 of the following year.
  • MF – The MF is required for MNEs when related-party transactions total RMB 1 billion or more or if the MNE operates in another jurisdiction that requires an MF.  The tax authority expects an MF to be available within one year of the FY’s end.
  • LCF – An LCF is required if when aggregated:
    • Tangible good transfers exceed RMB 200 million
    • Financial asset transfers exceed RMB 100 million
    • Transfer of ownership of intangible assets exceeds RMB 100 million
    • Any other intercompany transaction, e.g., services, exceeds RMB 40 million

Comments

Pre-BEPS transfer pricing documentation requirements still need to be met if consolidated revenues are below the threshold.

Germany

  • CbC – Germany-based MNEs with consolidated revenues of more than €750 million will be required to complete a CbC report with the tax authority.
  • MF – MNEs with consolidated revenues of €100 million or more are obligated to prepare an MF.
  • LCF – MNEs are obligated to prepare an LCF to maintain proper transfer pricing documentation.

Comments

Pre-BEPS transfer pricing documentation requirements still need to be met if consolidated revenues are below the threshold.

India

  • CbC – The CbC report will be required for MNEs with consolidated revenues in excess of €750 million.
  • MF – The MF will be required for MNEs, but it’s still to be determined if the tax authority will implement a financial threshold.
  • LCF – An LCF is required as standard transfer pricing documentation for Indian entities with intercompany transactions.

Comments

It’s anticipated that India will fully implement Action Item 13, as legislation has been put forth.  Pre-BEPS transfer pricing documentation requirements still need to be met.

Japan

  • CbC – The CbC report will need to be completed by MNEs that have more than ¥100 billion in consolidated revenue.  This is for years beginning on or after April 1, 2016, of the MNE.  It should be prepared in English.
  • MF – An MF is required for MNEs with more than ¥100 billion in consolidated revenue.  This is for years beginning on or after April 1, 2016, of the MNE.  It may be prepared in English or Japanese.
  • LCF – An LCF is required.  It’s for years beginning on or after April 1, 2017, for the Japanese entity.  It’s due at the time the tax return is filed.

Comments

Per the 2016 tax reform, contemporaneous transfer pricing documentation doesn’t need to be maintained when the total related-party transactions don’t exceed ¥5 billion.  If the related parties’ transactions attributed to intangible property are more than ¥300 million, transfer pricing documentation needs to be prepared.  The tax authority reserves the right to request transfer pricing documentation, no matter the amount of intercompany transactions.

Mexico

  • CbC – MNEs with consolidated revenues exceeding MXN 12 billion are required to submit a CbC report.
  • MF – MNEs with consolidated revenues exceeding MXN 644,599,005 will need to have an MF prepared for transfer pricing documentation purposes.
  • LCF – MNEs with consolidated revenues exceeding MXN 644,599,005 will need to have an LCF prepared for transfer pricing documentation purposes.

Comments

Pre-BEPS transfer pricing documentation requirements still need to be met if consolidated revenues are below the threshold.

United Kingdom

  • CbC – The CbC report will be required for MNEs with consolidated revenues in excess of €750 million.
  • MF – Not yet adopted.
  • LCF – Not yet adopted.

Comments

Pre-BEPS transfer pricing documentation requirements still need to be met.



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