Our survey of 50 jurisdictions across the Americas, Asia-Pacific and Europe, confirms that transfer pricing continues to be front of mind for tax authorities and multinationals.
2014 Global Transfer Pricing Tax Authority Survey
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We’ll help you navigate the global tax landscape
The business and tax landscapes have changed dramatically, and the pace and complexity of change continues to increase. Governments are tempering the need for revenue with increased competition for labor and capital. Tax authorities are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. Companies are balancing competing priorities, ensuring they maintain compliance while adding value.
We can assist you with these critical issues in today's tax environment, including:
Building a tax manifesto for manufacturing 658K, August 2014
- Midweek Tax News
A weekly update on tax matters to 13 January 2015
Midweek Tax News provides you with a succinct overview of the key tax developments that have occurred each week to allow you to stay up-to-date on tax issues that may have an impact on your business. If you would like to discuss an article in more detail, please speak to the relevant contact listed at the end of this issue or to your usual EY contact.
Diverted profits tax (DPT): HMRC open day and Westminster Hall debate
As part of the consultation on DPT, HMRC held an open day on 8 January. At the meeting, HMRC said it is intended that the new tax will be enacted before Parliament is dissolved on 30 March. This means that legislation (a draft of which was released on 10 December 2014) must be effectively final by the time the Finance Bill is published in the wake of the Budget on 18 March.
HMRC explained that it considers DPT to have three purposes. It is intended, firstly, to deal with permanent establishment avoidance cases; secondly to provide for adjustments, including re-characterisation, in the case of tax mismatches where there is insufficient economic substance; and thirdly to provide strong incentives for taxpayers to commit to full transfer pricing disclosure and early engagement in high risk cases.
Areas where HMRC is open to finessing the legislation include the definition of excluded loan relationships, the notification requirements and the interaction with CFC rules. There are no plans for a clearance system for DPT because each group's position is likely to be highly fact-specific. HMRC also expects that the option to apply a 30% disallowance of expenses in the provisional estimated charge will be widely used in cases where there is not complete transparency of the value chain. However, this disallowance should not apply where there is an advance pricing agreement with HMRC in place for the provision in question.
HMRC's remarks on BEPS, tax treaties and EU law at the open day echoed those by the Economic Secretary to the Treasury, Andrea Leadsom, during a Westminster Hall debate on 7 January. She confirmed the Government's view that DPT is compliant with EU law and should not be subject to a treaty override. She also reiterated the Government's support for the overriding base erosion and profit shifting agenda.
Groups may wish to prepare for the introduction of DPT, which comes into force for accounting periods beginning on or after 1 April 2015, and, in particular, for their notification requirements and the possible need to supply additional information to HMRC. Our web seminar on 28 January will consider the mechanics and implications of DPT. Please click here to register.
Devolution of corporation tax to Northern Ireland
The Corporation Tax (Northern Ireland) Bill was published on 8 January. It provides for the devolution of tax setting powers to the Northern Ireland Assembly and should allow Northern Ireland to set its own corporation tax rate from April 2017. The Government is aiming to pass the bill before the general election in May. However, progress of the bill is dependent on the Northern Ireland political parties delivering on their commitments in the Stormont House Agreement of 23 December 2014. Any fall in receipts from a cut in corporation tax would be clawed back through a reduction in the block grant allocated to Northern Ireland by HM Treasury.
The Assembly will have the power to set the corporation tax rate over most trading profits, excluding property businesses. However certain profits and activities are excluded. The main exclusion is for profits from financial trading including lending, investing activities, asset management, finance leasing, long-term insurance, and reinsurance. The UK's oil and gas tax regime will not be part of the Northern Ireland regime. Power over the corporation tax base, including reliefs and allowances, will also remain with the UK Parliament.
The bill treats a business establishment in Northern Ireland as a separate enterprise for the purposes of corporation tax, although there are some restrictions on charging interest and expenses to the rest of the company. The bill also contains specific rules on the treatment of capital allowances, research and development credits and other tax reliefs. These rules seek to ensure the reliefs are worth as much in Northern Ireland as they are in the rest of the UK. In general, losses made by the Northern Ireland business establishment must be used, in the first instance, against profits from the same entity. Where losses are relieved in the rest of the UK, adjustments are made to reflect any lower corporation tax rate in Northern Ireland.
The Government is holding question and answer sessions in London and Belfast on 21 and 22 January respectively. Given the complexity of the new regime, there are likely to be significant compliance issues. Companies with businesses in Northern Ireland may wish to consider how best to deal with the opportunities and challenges that would arise from this change.
Please see our tax alert for further details.
Web seminar on Scotland's Changing Landscape
Following on from our series of successful Scotland's Changing Landscape web seminars, EY will be hosting a web seminar on 30 January 2015 on the proposals outlined in the Smith Commission Agreement. Draft legislation is due for release on Burns Night, 25 January 2015. Our panel of industry expert speakers will provide an overview of the draft legislation and how these will impact businesses in Scotland. Key themes include:
• The 2015 UK and Scotland economic outlook
• A summary of the Smith Commission draft clauses
• Changes to income tax
• Changes to the VAT regime
Please click here to register yourself for the web seminar.
In addition, for further information on Scotland's Changing Landscape, please visit our website.
HMRC meeting on reform of loan relationship and derivative contract rules
As part of the consultations on draft legislation relating to the loan relationship and derivative contract reforms, HMRC held a working group meeting on 12 January. With the exception of the new corporate rescue exemption (discussed below), HMRC expects these changes will not be enacted until after the general election.
At the meeting, HMRC confirmed that the Regulatory Capital Securities Regulations 2013 would be updated this year to extend their scope to insurers and to make it clear that deductions are still available where a regulatory capital instrument is accounted for as equity and its coupons are recognised as debits to equity.
HMRC said it is still considering whether to exclude perpetual debt from the scope of the loan relationships regime such that coupons would not be deductible even if they were accounted for as interest. It will also draft regulations later this year to deal with various matters of detail such as the scope of the derivative contract regime; foreign exchange matching to ensure rules work more effectively; changes to deal with hybrid instruments; and a few consequential amendments required as a result of the proposed changes to the primary legislation. HMRC's other priorities for 2015 are to issue updated guidance on hedge accounting, transitional adjustments and the new anti-avoidance rules.
Other UK developments
Introduction of mandatory charge on single-use plastic carrier bags in England
On 5 October 2015 (subject to Parliamentary approval), the Government will introduce a mandatory charge of five pence for single-use plastic carrier bags in England. A similar charge has already been introduced in Wales, Scotland and Northern Ireland.
Small and medium-sized businesses (defined as those businesses with fewer than 250 employees), certain bags (eg, bags for life) and bags distributed in places of transit (eg, boats, trains and airports) are expected to be exempt from the charge. The Government does not have the legal power to take the proceeds of the charge (as happens in Northern Ireland), nor to determine where the proceeds of the charge go. However, there is an expectation that retailers will donate the net proceeds (after deducting reasonable costs) to good causes.
Court rules on capital gains treatment of contingent payments on sale of shares
In the case of Sir Fraser Morrison, the Scottish Court of Session has overturned the decision made by the Upper Tribunal (which had itself overturned the previous decision of the First-tier Tribunal) and allowed the taxpayer's appeal. The Court held that representations made by the taxpayer gave rise to a contingent liability. Payments made subsequently in settlement of that liability could reduce the chargeable gain made on the sale of shares by the taxpayer.
The Upper Tribunal had held that the taxpayer's liability in respect of representations (which turned out to be inaccurate) made by him as chairman of the company being sold was distinct from the consideration received by him for his shares. Although the settlement payment was a contingent liability, the representations were made by the taxpayer in his capacity as chairman of the company rather than as a shareholder. Thus, they were not directly related to the value of the consideration he received.
The Court decided that the contingent liability did not have to be directly related to the value of the consideration. Even if it did have to be, the Court found that the requirement was met in this case. Accordingly, it allowed the taxpayer's appeal, though remitted the matter back to the First-tier Tribunal to agree the quantum of the adjustment (as the settlement payment in question covered a number of matters).
Draft HMRC guidance on the new corporate rescue exemption published
On 10 December 2014 the Government published draft legislation reforming the loan relationship and derivative contract rules. This included a new exemption from tax where a loan is released or modified in certain circumstances where a company is unable to pay its debts. The new sections will apply to the release, modification or replacement of a debt of a company on or after 1 January 2015. We understand the Government intends to include this aspect of the draft legislation in the pre-election Finance Bill.
Draft guidance on the new legislation, which will form part of the Corporate Finance Manual, has been published by HMRC for comment.
Responses to base erosion and profit shifting (BEPS) consultations
The OECD has published the comments it has received from interested parties, including EY, on its discussion drafts covering BEPS Action 6 (preventing treaty abuse) and BEPS Action 7 (preventing artificial avoidance of PE status). The OECD has simply published the comments, which are substantial, at this stage. It has not addressed any of the points raised, in advance of the public consultations to be held on 21 January (Action 7) and 22 January (Action 6).
A public consultation will also be held on 23 January on Action 14 (dispute resolution mechanisms) and there are a number of working groups taking forward the issues raised in the other OECD discussion drafts published before Christmas.
Switzerland adopts EU regulations on multi-state workers
The Swiss have now formally adopted regulations on employees, including directors, with multiple employers working in different Member states (‘multi state workers’) and aircrew.
Under the new regulations, an employee, with employers in different Member States, will only be subject to social security legislation in their country of residence if they work substantially in that country, which is defined as working at least 25% of working time. If no substantial activity is performed in the country of residence, then the social security legislation that will apply is usually that of the country in which the employer is located.
The new regulations also introduce a ‘home base’ principle for aircrew where previously they fell under the general rules for multi-state workers. Activity undertaken in respect of the employment of flight or cabin crew will now be deemed to be pursued in the Member State where the ‘home base’ is located. This is the place from where the crew or cabin member starts and ends a period of duty.
The new regulations are effective from 1 January 2015 with transitional arrangements applying for ten years. Employers with multi-state workers and / or aircrew involving Switzerland may wish to review their current employment arrangements to assess the impact of these changes.
Please see our international tax alert for more details.
Japan publishes its tax reform outline featuring cuts in corporate taxes
A finance bill is to be submitted to the Diet for enactment by the end of March 2015. It will include a reduction of the national corporate tax rate by 1.6% to 23.9% for taxable years beginning on or after 1 April 2015. The combined national and local effective corporate tax rate will be reduced from 34.62% to 32.11%, with a further cut in 2016 to bring the combined rate down to 31.33%. The Government is planning to lower the combined effective tax rate to below 30% in future years.
The maximum permitted deduction of net operating losses (NOLs) brought forward will drop from 80% to 65% in 2015 and to 50% in 2017. The time limit for losses will be increased from nine to ten years. Small and medium sized enterprises will continue to enjoy a 100% NOL deduction. There are also changes to the taxation of domestic dividends; the local enterprise tax; and research and development tax credits. The participation exemption for foreign dividends will be denied where a tax deduction is available for the company paying the dividend.
The previously announced increase in consumption tax from 8% to 10% has been postponed until 1 April 2017.
Please see our international tax alert for further details.
Norwegian Government requests comments on far-reaching tax reform proposals
On 5 January, Norway's Ministry of Finance asked for comments on the Scheel Committee proposal for tax reform. The Scheel Committee was set up by the Norwegian Government in March 2013 to assess whether the Norwegian corporate income tax system meets the challenge of increased cross-border investments and ownership. Comments must be submitted by 5 April 2015.
The Committee delivered its report on 2 December 2014. The main recommendations include reducing Norwegian corporate income tax rate from 27% to 20% while introducing an interest cap and lowering tax depreciation rates. Withholding tax is proposed on interest, royalties and dividends while the dividend exemption is tightened up. In addition, increases to VAT and changes to the taxation of individuals have been proposed. However, it is anticipated that several parts of the report will not be implemented and that any implementation will take place in 2016 at the earliest.
Our international tax alert has more details.
European Court hearing on VAT recovery by holding companies and restriction of VAT grouping to legal persons
On 7 January, the Court of Justice of the European Union (CJEU) hearing took place in two German referrals concerning the appropriate level of VAT recovery for a holding company which procures services in order to obtain finance for the purchase of shares in subsidiary companies, in circumstances where the holding company intends to, and does subsequently, provide taxable management services to those subsidiaries. These referrals also ask whether entities which are not legal persons (ie, entities other than companies, such as partnerships) are eligible for VAT grouping under EU law.
EY attended the hearing. It is interesting to note that the European Commission supported the taxpayers' position on both questions. We understand that the Advocate General's opinion in these joined cases is due to be delivered on 18 March 2015.
These cases will be of particular interest in the UK. In September 2014, HMRC published revised guidance concerning the VAT recovery position of holding companies following the litigation in the case of BAA Ltd. At the time, HMRC acknowledged that the CJEU judgment in these German referrals would most likely be relevant to this guidance. HMRC will review its policy in the light of the CJEU judgment. Also, under UK law, only ‘bodies corporate’ are eligible for VAT grouping.
European Commission publishes reports on cross border taxation
EY has been working closely with the European Commission on reports on ‘Compliance Costs Related to Cross-Border Activity’ and ‘Removing Cross-border Tax Obstacles’. For the first report, the European Commission asked EY to estimate the average tax-related compliance costs arising from individual cross-border activities in comparison to a purely domestic general tax compliance case without any cross border implications. The latter is based on a questionnaire on tax obstacles and best practice completed by EY Global Mobility professionals in all 28 Member States. It is complemented by information from a number of companies who contributed to this study.
Other international tax alerts
Please see links to a selection of our international tax alerts in respect of the following developments. Additional articles are available in our Global tax alert library.
United States: The IRS Office of Chief Counsel has advised that a fund was engaged in a US trade or business as a result of activities undertaken by its agent, a US-based management company.
Singapore: The Inland Revenue Authority of Singapore has released revised transfer pricing guidelines, consolidating previous guidance and increasing documentation requirements.
Ecuador: A tax reform has been enacted which includes an extraordinary corporate tax rate for some avoidance scenarios, withholding tax on non-commercial loans and removal of the corporate income tax exemption.
Colombia: A new tax reform bill has been enacted introducing a wealth tax and making the surtax permanent, among other changes.
Canada: The Quebec Finance Minister gave an update containing several tax measures that will affect Quebec employer payroll taxes and employees' personal taxes.
Italy: Parliament has approved the regulations for the long awaited Voluntary Tax Disclosure Program which may be used by taxpayers to declare previously undisclosed assets and funds.
Please speak to your usual EY contact, or email us at email@example.com, if you would like to receive a copy of our regular indirect tax newsletter, or information about our other publications.
If you would like to discuss any of the articles in this week's edition of Midweek Tax News, please contact the individuals listed below, Claire Hooper (+ 44 20 7951 2486), or your usual EY contact.
Diverted profits tax: HMRC open day and Westminster Hall debate
+ 44 20 7951 2486
Devolution of corporation tax to Northern Ireland
+ 44 28 9044 3523
Web seminar on Scotland's Changing Landscape
+ 44 131 777 2822
HMRC meeting on reform of loan relationship and derivative contract rules
+ 44 20 7951 3913
For other queries or comments please email firstname.lastname@example.org.
- Operating in a shifting tax landscape
The global tax landscape continues to change in a dramatic fashion, with near-constant news hitting the headlines regarding shifting tax policy, increasing levels of enforcement and the growing potential of reputational risk.
Multinational companies now have to balance more competing priorities than ever before, ensuring they protect their business by monitoring and responding to changes in policy, legislation and tax enforcement, while at the same time ensuring they not only maintain the highest levels of compliance but also add value from the tax function.
Governments work to secure each tax dollar they're due
From a policy perspective, all governments want their country to be viewed as an attractive place to do business, to attract jobs and capital in an increasingly competitive globalized arena.
At the same time, they want to increase the amount of revenue they bring in. Governments are treading a fine line, constantly assessing how to secure the tax revenues they see as rightly theirs, while at the same time being in direct competition with other nations, making sure they do not scare off mobile capital.
Tax administrations for their part are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. They are working to ensure that their resources are being applied to the right issues and taxpayers. They share more leading practices and taxpayer information with their foreign counterparts, to help them collect every dollar due.
Disputes are on the rise
The result has been more frequent, complex and higher value disputes between taxpayers and taxing authorities — a trend that is only increasing as countries collaborate together and as emerging markets gain in stature and influence, taking a more sophisticated approach to taxation. Penalties are becoming more stringent and the threat of reputational risk has risen significantly in recent months.
We can help you to navigate a route through this complex landscape.
We can help you monitor and react to quickly-changing tax policy and assess the economic and fiscal impact.
Where tax policies might create an impediment to your business that is unintended by policy makers, we can help you to collaborate – either solely, or as part of a broader grouping of companies who share a common objective – with government to:
- Explain the impediment
- Develop alternative policy choices which are logical and well thought out
- Model the potential outcomes
- Deliver an alternative choice to the government in a form with which policy makers can comfortably work
We also help you address your global tax controversy, enforcement and disclosure needs.
We focus on pre-filing controversy management to help you properly and consistently file your returns and prepare the relevant back-up documentation.
Where a controversy has already occurred, our professionals leverage the network's collective knowledge of how tax authorities operate, and increasingly work together, to help resolve difficult or sensitive tax disputes. To ensure that continuous performance improvements are instigated after a controversy, we work with EY's other tax professionals to ensure that similar events are less likely to occur.
Below you can access our views and analysis of some of the substantial policy and enforcement trends and issues at play today.
- Seizing the opportunity in Global Compliance and Reporting
Global Compliance and Reporting (GCR) is at a tipping point, with risks on the rise. Many companies distribute responsibility for GCR processes throughout their organization, creating a patchwork. Local jurisdictions are rewriting regulations, focusing more intently on the collection of tax revenues and sharing more taxpayer information across borders.
Due to the combination of evolving business models, transforming finance functions and an increasingly complex regulatory landscape, there are new opportunities to better optimize efficiency, control and value, to help mitigate risk and improve performance.
What is Global Compliance and Reporting?
GCR comprises the key elements of a company's finance and tax processes that prepare statutory financial and tax filings as required in countries around the world. These duties include:
- Statutory accounting and reporting
- Tax accounting and provisions
- Income tax compliance
- Indirect tax compliance
- Governance and control of the above processes
GCR activities reside in the middle of a broader set of record-to-report (R2R) processes. R2R is the intersection between any company's finance and tax departments and is used to capture, process and store information that is essential to statutory accounting, tax compliance and reporting. Any change to R2R processes, information, finance systems, roles and responsibilities will have a direct impact on GCR processes.
Helping you meet the new GCR demands
Fast changing compliance and reporting requirements are more demanding on tax and finance functions today than ever before. So how do you improve control and quality, manage risk, create efficiency and drive value?
Our market-leading approach combines standard and efficient processes, highly effective tools and an extensive network of local tax and accounting subject matter professionals.
- Building effective supply chains
As multinational companies seek to reach new markets and compete more effectively in mature markets, they are adapting and differentiating their supply chains. Companies’ operating models need to cater for efficiency and scale in mature markets, while having the flexibility and local ability to support growth in emerging markets. Consequently, driving true shareholder value requires an operating model that combines global and regionally differentiated processes, and integrates these with local striking power and operational excellence.
Leading companies recognize the need for integrating tax in their business planning and decision processes
Whether companies seek to enter new markets or drive efficiencies in mature markets, leading companies understand the complexities of the international tax systems. The impact of both direct taxes and indirect taxes needs to be carefully considered and integrated to drive the effectiveness of the operating model while complying with all applicable local and international tax laws and effectively manage all tax risks. Operating model effectiveness is becoming one of the cornerstones of successful competition and differentiation.
The EY TESCM offering helps ensure you do just that. Our advisory and tax professionals operate as one team to assist our clients with developing and implementing operating model optimization where business needs and requirements are the driver while making sure that tax is an integrated part of the design of the operating model architecture.
- Managing mobile workforce risk
In today's globally integrated, tightly regulated and increasingly competitive business environment, one critical success factor stands out: people. It’s no wonder that leading companies are focusing their efforts on:
- Attracting and retaining the right people
- Global talent deployment and mobility
- HR and payroll effectiveness
- Risk, governance and compliance
Managing the risks of mobile employees
While optimizing the competitive advantage of your people has long been a core objective, a more recent set of trends in the tax landscape means that large companies with an internationally mobile workforce are at a higher risk of tax noncompliance and resulting controversy than ever before.
Fortunately, an increasing number of organizations are currently either planning or embracing a wider process of change for their mobility teams.
Unintended tax compliance obligations
These travelers are increasingly creating unintended tax compliance obligations, and the resulting risks are not just personal. They are felt at the corporate level, with the corporate tax function often unaware of the extent of the spreading problem. Tax administrations are becoming increasingly aware of the issue, however, and are very effectively using new technology to identify where a tax obligation has arisen. In a rising tax enforcement landscape, this issue has significant potential to grow.
Managing these risks should be a burning platform issue for multinational companies.
Will your tax risks prompt a tax audit?
What may start as a relatively simple personal income tax compliance issue can quickly create a ripple effect, with risks such as the creation of a permanent establishment, an employment tax audit or the payment of a significant related penalty all occurring at the corporate level.
Companies, recognizing the spectrum of reputational, personal and financial risks related to tax, are making strong efforts to be compliant. There is an increasing acceptance that such issues are becoming increasingly urgent from both a reputational and a financial perspective.
How we are helping companies
Our Human Capital network embeds processes and technology that will help companies to identify and manage short-term business traveler-related risks before they occur. Where controversy has already arisen, our global Tax Controversy network can use our insights into the culture and processes and relationships with each key tax administration to remediate issues. With prior year issues being rapidly unearthed, and with tax administrations focusing on this issue more than ever before, the time to act is now.
Connect with us
Stay connected with us through social media, email alerts or webcasts. Or download our EY Insights app for mobile devices.
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Watch our Finance Act webcasts for insight and interpretation around the impact of this year's UK Finance Act from some of our leading tax professionals.
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Building a tax manifesto for manufacturing
The global re-shoring trend is creating new opportunities for the UK, but our report shows it has limited time to set itself up for future high quality manufacturing (658K, August 2014).