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Transfer Pricing AlertEY Han Young newsletterNovember 2016
2Transfer Pricing Alert November 2016
Transfer PricingCurrent issue.Singapore, China
3Transfer Pricing Alert November 2016
TP동향
Singapore releases tax guide on Coun-try-by-Country reportingOn 10 October 2016, the Inland Revenue Authority of Singapore (the IRAS) re-leased an e-Tax Guide with details on the implementation of Country-by-Country (CbC) reporting for Singaporean multinational enterprise (MNE) groups (the CbCR Guidance). The CbCR Guidance follows to a large extent the guidelines recommend-ed by the Organisation for Economic Co-operation and Development in the final Base Erosion and Profit Shifting (BEPS) Action 13 implementation package issued in October 2015.
The release of the CbCR Guidance follows Singapore’s participation as an Associate in the BEPS project, which was announced in June 2016.
The CbC reporting requirements apply to Singaporean MNE groups with consolidat-ed revenue exceeding S$1,125m (US$800k) and are effective from financial year (FY) 2017.
The CbC reports will be shared with the relevant jurisdictions only if Singapore has an agreement with the given jurisdiction covering the exchange of CbC reporting information.
Singapore will be introducing legislation for CbC reporting, which is expected to be enacted later this year.
China’s SAT issues new guidance on ad-ministration of advance pricing agree-mentsOn 18 October 2016, China’s State Administration of Taxation (SAT) issued SAT Bulletin Gonggao [2016] No. 64 (Bulletin on Issues Related to Improving the Ad-ministration of Advance Pricing Arrangements) (Bulletin 64). Effective from 1 De-cember 2016, Bulletin 64 governs the administration of advance pricing agree-ments (APAs) in China. Bulletin 64 supersedes and replaces Chapter 6 of Circular Guoshuifa [2009] No. 2 (Implementation Measures for Special Tax Adjustments (Trial Implementation)) (Circular 2).
An APA is an agreement between a taxpayer and one or more tax authorities re-garding how transfer prices will be calculated in the future.
Transfer Pricing Alert
[Executive Summary]
Singapore
China
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Filing obligationsCbC reporting requirements are applicable for an MNE group if:
• The ultimate parent entity (UPE) of the MNE group is a tax resident in Singapore for the FY for which the CbC Report is prepared
• The consolidated group revenue in the preceding financial year (i.e., FY2016 revenue for FY2017 filing purposes) is at least S$1,125m
• The MNE group has subsidiaries or operations in at least one foreign jurisdiction
Filing deadlineThe UPE of the Singapore MNE group will be required to submit a CbC report to the IRAS within 12 months from the FY end.
The earliest CbC report would be due to the IRAS by 31 December 2018 (for MNEs with an FY ending on 31 December 2017).
Format and submission of CbC ReportsThe template for the information to be submitted in the CbC report consists of three tables,3 which are in line with the BEPS Action 13 recommendation.
No details on the submission mechanism of the CbC reports have been provided al-though the IRAS states that it is currently developing e-services for receiving and send-ing CbC reports with a sufficient level of encryption.
Secondary mechanismCbC reporting requirements in Singapore are only applicable to Singaporean MNE groups and the IRAS will not accept the CbC report filing of foreign MNE groups under a surrogate filing basis.
Exchange of CbC reportsThe IRAS will provide a Singaporean MNE group’s CbC report to the tax authorities of the identified jurisdictions that have implemented CbC reporting, if there is an agree-ment for the automatic exchange of CbC reporting information with the relevant tax authority.
Singapore is currently not a signatory to the Multilateral Competent Authority Agree-ment on the Exchange of CbC reports which sets out the rules and procedures for the automatic exchange of CbC reports among jurisdictions.
The IRAS will enter into agreement with jurisdictions to exchange CbC reporting infor-mation only after establishing that the jurisdictions have a strong rule of law and are
Singapore releases tax guide on Country-by-Country reporting
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able to ensure confidentiality of the information exchanged and prevent its unauthor-ized use. It is unclear whether the IRAS will enter into exchange of CbC reporting infor-mation agreements only with jurisdictions where they have tax treaties or information exchange agreements.
PenaltiesPenalties may be imposed on taxpayers for failure to submit the CbC report before the required deadline or for submission of incorrect information. The maximum penalty is S$10,000 (US$7,000), and/or imprisonment of not exceeding two years.
Exemption and voluntary filingThe IRAS does not provide any exemption from preparing the CbC reports to Singapore-an MNE groups that meet the CbC reporting requirements.
Master file and local fileAlthough the IRAS has not adopted the BEPS Action 13 master file and local file pro-visions, the existing guidance on transfer pricing documentation expects taxpayers to include group level and entity level information in their Singaporean transfer pricing documentation.
The CbCR Guidance states that the information in the CbC report should not be used as a substitute for a detailed transfer pricing analysis that is based on full functional and comparability analysis. The transfer pricing documentation would remain the key document to present such detailed analysis providing conclusive evidence of whether transfer prices are appropriate or not.
ImplicationsCbC reporting is a key component of the global trend towards greater tax transparency by MNE groups. Singaporean MNE groups should identify if they have to file CbC reports based on the threshold announced by the IRAS.
Taxpayers should bear in mind that CbC reports will be used by tax authorities to assess transfer pricing and other BEPS–related risks. There are a number of strategic decisions to be made when completing the CbC reports. These should be considered in light of how tax authorities are likely to interpret the data and what is supportable in the trans-fer pricing documentation (i.e., master file and local file).
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China’s APA program history By way of history, Chinese local tax authorities entered into the first unilateral APA in 1998, while the APA program was formalized in 2005. The most recent APA Annual Report issued by the SAT covered APA experience from 2005 through 2014.
Between 2005 and 2014, a cumulative total of 113 APAs were concluded (70 unilateral and 43 bilateral). Bilateral APAs were concluded with 16 partner countries or regions. As of 31 December 2014, there were 90 APA requests that were in the pre-acceptance stage and another 39 that were in process. There are a significant number of new re-quests each year. By contrast, between 2005 and 2014, the most APAs concluded in a single year were 19 in 2013; in 2014, only nine were concluded. There is a clear trend toward bilateral APAs and the certainty with regard to double taxation that comes with them; of the 90 APA requests in the pre-acceptance stage, 83 were bilateral APA re-quests and only seven were unilateral.
On 18 October 2016, China’s State Administration of Taxation (SAT) issued SAT Bulletin Gonggao [2016] No. 64 (Bulletin on Issues Related to Improving the Administration of Advance Pricing Arrangements) (Bulletin 64). Effective from 1 December 2016, Bul-letin 64 governs the administration of advance pricing agreements (APAs) in China. Bulletin 64 supersedes and replaces Chapter 6 of Circular Guoshuifa [2009] No. 2 (Im-plementation Measures for Special Tax Adjustments (Trial Implementation)) (Circular 2).
As recommended in OECD BEPS Action 14, as a member of G20, China has agreed to put attentional focus on its MAP and APA processes. In this regard, the SAT recently added a new anti-avoidance division under the international tax department. It is an-ticipated that this division may recruit a significant number of new transfer pricing spe-cialists, which could even double the combined headcount of the existing two divisions. Moreover, significant further increases are expected by the end of 2017. One major task of this new division is to support the MAP and APA programs.
Another minimum standard in the BEPS project is associated with Action 5, which is focused on combatting harmful tax practices by tax jurisdictions. Under this minimum standard, tax jurisdictions agree to a “spontaneous exchange” of information on certain tax rulings, including all unilateral APAs. Article 20 of Bulletin 64 puts taxpayers on notice that their unilateral APAs will be subject to information exchange under Action 5.
APA processIn order to apply for an APA, article 4 of Bulletin 64 provides that a taxpayer generally should have had related party transactions in excess of RMB40 million for each of the past three years. This is somewhat more restrictive than under Circular 2, which also set a RMB40 million threshold but did not specify that the transactions should be con-
China’s SAT issues new guidance on administration of advance pricing agreements
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tinuous for three years.
In brief, the six steps in APA process as follows:
Pre-filing meeting: All taxpayers considering an APA must have a pre-filing meeting first. The pre-filing meeting cannot be anonymous.
• Intention discussion: If the tax authority and the taxpayer reach a conclusion in the pre-filing meeting, the taxpayer would then file a letter of intention and a draft APA application. The tax authority may reject the letter of intention or may proceed to analyze and evaluate the draft application.
• Analysis and evaluation: If the tax authority proceeds with the case, it may discuss the draft application with the taxpayer, may conduct on-site interviews, and may ne-gotiate with the taxpayer to amend the application.
• Formal application: If the tax authority is satisfied with the draft application, it will no-tify the taxpayer that it can submit a formal APA application. Again, the tax authority may reject the application or may proceed to negotiate the APA.
• Negotiation and conclusion: In a unilateral APA case, the tax authority will negotiate with the taxpayer on the final terms of the APA. In a bilateral APA case, the SAT will negotiate with the other jurisdiction’s competent authority.If agreements are reached, all parties will sign the APA.
• Execution monitoring: The taxpayer must file an annual report with the tax authori-ties while the APA is in force.The tax authority will monitor compliance with the APA’s terms. If there are substantial changes in the operation of the taxpayer, the APA may be terminated or renegotiated.
Value chain analysis and location specific advantages (LSAs)Bulletin 64 makes numerous references to analysis of the value chain and of LSAs, such as location savings and market premium. This is in keeping with the contemporaneous documentation requirements the SAT put in place on 29 June 2016 for taxpayers with significant related party transactions.
Bulletin 64 provides that the role of LSAs is one of the topics for discussion at pre-filing meetings. Both value chain analysis and analysis of LSAs are required elements of the draft application materials submitted prior to intention discussions. Article 16 makes clear that the quality of the value chain and LSA analyses is a key factor in the SAT’s decision whether to prioritize the taxpayer’s APA application.
The SAT has not defined what a value chain is or how it may differ from a supply chain. Nor has the SAT provided any specific guidance on how to undertake a value chain analysis. However, it is clear that the SAT wants information on how profits are allocated among the related parties who participate in the value chain, including disclosure of how much profit each participant has earned.
The SAT has provided some guidance on how adjustments might be made for location savings in its contribution to the United Nations Practical Manual on Transfer Pricing for Developing Countries (UN Manual), published in 2013. China’s contribution to the UN Manual outlined a six step process for adjusting comparable benchmarks to account for
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Chinese location savings.
Prioritization of APAs by the SATGiven the large backlog of APA applications, the SAT’s criteria for prioritizing the appli-cations are a matter of some significance. The SAT lays out the criteria in article 16 of the Bulletin 42. As noted, the quality of the taxpayer’s value chain and LSA analyses is an important factor.
Another important criterion is whether the taxpayer has an A rating under the SAT’s taxpayer credit rating system. This system has also been used by the SAT in recent years in determining whether to launch a tax investigation against particular taxpayers.
The criteria also include:
• Whether the taxpayer’s related party transaction reporting (with its tax returns) and its contemporaneous documentation are complete and reasonable with sufficient disclosure
• Whether a transfer pricing investigation has been made by tax authorities and wheth-er the case has been closed
• Whether the application is a renewal and whether the relevant facts and circumstanc-es have changed since the prior APA
• Whether the taxpayer pro-actively cooperates with tax authorities with respect to the APA
• Whether the other tax authority involved in a bilateral or multilateral APA has a strong will for negotiation and attaches high importance to the application
Use of interquartile range and adjustment tothe median Although article 12 provides that the interquartile range will be respected in APA cases, there is a strong preference for results at or above the median. If the taxpayer’s results fall outside the interquartile range, the adjustment will be made to the median of the range. Moreover, if the taxpayer’s weighted average results over the entire APA period fall below the median (after any adjustment), article 12 provides that the tax authority will not accept any renewal application.
This provision may lead treaty partners to seek adjustment to the median in all cases to avoid being disadvantaged.
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Contacts
Transfer Pricing
Sang Min Ahn Partner 02.3787.4602 [email protected]
Sung Han Park Partner 02.3787.6355 [email protected]
Dong Hoon Ha Partner 02.3770.0936 [email protected]
Hoon Seok Chung Director (Singapore) +65.6718.1072 [email protected]
Jae Seong Yun Director 02.3787.4265 [email protected]
Ki Se Kim Director 02.3770.0918 [email protected]
Kyoung Bae Han Director (Vietnam,Ho Chi Minh ) +84 8 3824 5252 (ext. 8305) [email protected]
Transfer Pricing-Financial Services Organization(FSO)
Stella Kim Director 02.3770.0980 [email protected]
Business Tax Service
Min Yong Kwon Partner 02.3770.0934 [email protected]
Dong Chul Kim Partner 02.3770.0903 [email protected]
Jae Cheol Kim Partner 02.3770.0961 [email protected]
Young Ro Bae Executive Director 02.3770.0936 [email protected]
Song Min Oh Executive Director 02.3770.0983 [email protected]
International Tax Service
Kyung Tae Ko Partner 02.3770.0921 [email protected]
Yeon Ki Ko Partner 02.3787.4637 [email protected]
Nam Wun Jang Partner 02.3787.4539 [email protected]
Financial Services Organization
Jong Yeol Park Partner 02.3770.0904 [email protected]
Jeong Hun You Partner 02.3770.0972 [email protected]
Dong Sung Kim Partner 02.3787.4238 [email protected]
Transaction Tax
Jin Hyun Seok Partner 02.3770.0932 [email protected]
Human Capital
Danielle Suh Partner 02.3770.0902
Min Ah Kim Executive Director 02.3770.1019 [email protected]
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