BEPS Action Plan 8: Transfer pricing of intangibles

Last week, we discussed the revised set of standards for Transfer Pricing (TP) documentation and a template for country-by-country reporting (CBCR) of income, earnings, taxes paid and certain measures of economic activity as contained in Action Plan 13 of the Base Erosion and Profit Shifting (BEPS) Project. The CBCR provides a list of all the constituent entities for which financial information is reported. It includes details such as the individual entity’s tax jurisdiction, revenue, profit (loss) before income tax, income tax paid and accrued, stated capital, main business activities, and accumulated earnings, among others. A constituent entity is any separate business unit of the multinational enterprise (MNE) group that is included in the consolidated group for financial reporting purposes.

Given the sensitivity of the information required to be disclosed in the CBCR, there will be questions on whether tax administrations will consider such information conclusive enough to determine if transfer prices between and among members of the MNE group comply with the arm’s length standard. Also, since some of the financial information required in the CBCR becomes available only after filing the income tax returns by members of the MNE group, questions are bound to arise on what would be the deadline for submitting the CBCR.

The OECD recently issued guidance to shed light on potential issues that may arise from the implementation of the CBCR requirement — issues such as:

• Timing of preparation and filing of the CBCR;

• Which MNE groups should be required to file the CBCR;

• The necessary conditions to be observed by tax administrations for the use of the CBCR; and

• The framework for government-to-government exchange of CBCRs.

In terms of timing, the recommendation is that the first CBCR should cover fiscal years beginning on or after Jan. 1, 2016. Since MNEs are given one year from the close of their fiscal year to prepare and file the CBCR, this means that the first CBCR will cover calendar year 2016 and should be filed by Dec. 31, 2017. This is based on the agreement between the countries participating in the BEPS Project that they will not require the filing of a CBCR based on the new template for fiscal years prior to Jan. 1, 2016.

All MNE groups are required to file the CBCR annually, except those with annual consolidated group revenue in the immediately preceding fiscal year of less than €750 million or a near equivalent amount in domestic currency. Using the current Peso-Euro exchange rate, this amount would be equivalent to around P38 billion. Thus, an MNE that has €625 million in consolidated group revenue for its 2015 calendar year would not be required to file the CBCR in any country with respect to its fiscal year ending Dec. 31, 2016.

The guidance also imposes the following conditions that have to be met by the tax administrations on the actual use of the CBCR:

• Confidentiality — jurisdictions should have legal safeguards in place to preserve the confidential information contained in the CBCR.

• Consistency — jurisdictions should exert best efforts to make it a legal obligation of the MNE groups’ ultimate parent to prepare and file the CBCR. In addition, these jurisdictions should strictly follow the format of the standard templates contained in the annexes of the revised chapter on documentation and to require only the information contained in the template.

• Appropriate Use — jurisdictions should commit to the use of the CBCR for the sole purpose of assessing high-level TP and BEPS-related risks, and not to propose TP adjustments on the basis of an income allocation formula based on the data from the CBCR.

Countries participating in the BEPS Project have agreed to develop a mechanism for government-to-government exchange of CBCRs. Specifically, key elements of domestic legislation requiring the ultimate parent of an MNE group to file the CBCR in its jurisdiction of residence should be developed. International agreements will be entered into regarding the automatic exchange of the CBCRs, taking into consideration the necessary conditions on the appropriate use of the CBCR, as discussed above.

With the introduction of the revised standards on TP documentation and a CBCR template, one can expect a dramatic change in the TP regulatory landscape of tax administrations around the world, including the Philippines. These new rules on documentation will definitely equate to additional compliance costs on the part of MNEs, but, on the other hand, will equip the tax administrations with the necessary tools to conduct an effective TP risk assessment as a way of addressing the BEPS issue.