Transfer Pricing - EY Pricing Alert January 2015 3 TP Current Issues OECD BEPS, Action Plan 10 OECD OECD releases Discussion Draft on cross-border commod-ity …

EY Han Young newsletterJanuary 2015

Transfer Pricing Alert

2Transfer Pricing Alert January 2015

Transfer PricingCurrent issue.OECD. CHINA. AUSTRALIA


TP Current Issues

OECD BEPS, Action Plan 10

OECD

OECD releases Discussion Draft on cross-border commod-ity transactions under BEPS Action 10

Executive summary

On 16 December 2014, the Organisation for Economic Co-operation and Develop-ment (OECD) released a Discussion Draft in connection with Action 10 on trans-fer pricing for other high risk transactions under its Action Plan on Base Erosion and Profit Shifting (BEPS). The document, titled BEPS Action 10: Discussion Draft on the Transfer Pricing Aspects of Cross-Border Commodity Transactions (the Dis-cussion Draft or the Draft) proposes additional guidance in Chapter II of the OECD Transfer Pricing Guidelines addressing cross-border commodity transactions. Spe-cifically, the document states that the aim of the proposed guidance is to ensure that pricing of commodity transactions reflects value creation, thereby protecting the tax base of commodity dependent countries.

Key features of the additional guidance include:

▶ The comparable uncontrolled price (CUP) method can be an appropriate trans-fer pricing method for commodity transactions between associated enterprises (controlled commodity transactions)

▶ Under the CUP method, quoted or publicly available prices can be used as a refer-ence to determine the arm’s length price for controlled commodity transactions

▶ Guidance is provided regarding the adoption of a deemed pricing date for con-trolled commodity transactions in the absence of evidence of the actual pricing date agreed by the parties to the transactions

The Discussion Draft notes that the views and proposals in the Draft do not rep-resent a consensus view of the OECD, but were released in draft form in order to provide an opportunity for public comments. Written comments on the Discussion Draft are due by 6 February 2015. The OECD intends to hold a public consultation on the Discussion Draft and other topics on 19 - 20 March 2015.


TP Current Issues


OECD

Detailed discussion

Background

The Discussion Draft consists of a brief introduction and proposed additions to Chapter II of the OECD Transfer Pricing Guidelines. The current OECD Transfer Pric-ing Guidelines contain limited guidance on transfer pricing for commodities.

The introduction to the Discussion Draft states that the “commodity sector provides the major source of economic activity for many countries, especially developing countries.” The Draft notes that countries have reported the following key transfer pricing issues that may lead to BEPS in cross-border commodity transactions:

▶ The use of pricing date conventions that seem to aid the use by the taxpayer of the most advantageous quoted price

▶ Significant adjustments to the quoted price or the charging of significant fees to the taxpayer in the commodity producing country by other group companies in the supply chain (e.g., processing, transportation, distribution, marketing)

▶ The participation in the supply chain of entities with seemingly limited function-ality that may be located in tax jurisdictions with nil or low taxation

The Discussion Draft states that some countries have issued domestic approaches to price commodity transactions (e.g., the so-called sixth method in the Latin Amer-ica region) in response to the aforementioned issues. The Discussion Draft states the intention to provide a consistent set of rules to determine the arm’s length price for commodity transactions in order to decrease the opportunities for BEPS and to reduce cases of double taxation.

Key areas of additional guidance

The use of the CUP method for pricing commodity transactions and the use of quot-ed prices in applying the CUP method

The Discussion Draft proposes clarifying that the CUP method would generally be


TP Current Issues


OECD

the most appropriate transfer pricing method for determining the arm’s length price for controlled commodity transactions, and that, under the CUP method, the arm’s length price for the controlled commodity transaction can be determined, not only by reference to comparable uncontrolled transactions, but also by reference to a quoted price.

The Draft states that quoted or public prices can be used, provided the conditions of the controlled transactions are comparable to the conditions of the quoted prices. The Draft states that a relevant factor in determining the appropriateness of using quoted prices is the extent to which such price is widely and routinely used in the industry to negotiate prices between third parties. According to the Draft, “com-modities” refers to physical products for which a quoted price is used by independ-ent parties in the industry to set prices in uncontrolled transactions.

Examples of sources for quoted prices listed in the Discussion Draft are:

▶ International or domestic commodity exchange market (e.g., London Metal Ex-change, Chicago Board of Trade, Tokyo Grain Exchange)

▶ Recognized and transparent price reporting or statistical agencies (e.g., Platts, Argus or Bloomberg)

▶ Governmental price-setting agencies

The Discussion Draft states that the CUP method can only be applied if there are no material differences between the commodity in the uncontrolled transaction repre-sented by the quotation and the commodity in the controlled transaction, in terms of the physical features, quality, volumes traded, timing and terms of delivery of the commodity.

If there are material differences between the conditions of the controlled commod-ity transaction and the conditions determining the quoted price for the commodity, the Draft states that the CUP method can only be applied if reasonably accurate adjustments can be made. Differences may include the following:


TP Current Issues


OECD

▶ Differences between the commodity in the controlled transaction and the com-modity in the uncontrolled transaction or in the comparable arrangements relat-ing to the quoted price;

▶ Different contractual terms (e.g., volumes traded and the timing and terms of delivery);

▶ Different specificities of the commodity (e.g. premiums for quality or availability of the commodity);

▶ Different processing functions performed or required; and/or

▶ Additional costs incurred for transportation, insurance or foreign currency terms.

Deemed pricing date for commodity transactions

The Discussion Draft notes that when using quotations to price the commodity transaction, the pricing date is particularly relevant. The Draft defines “pricing date” as the specific date or time period s elected (e.g., a specified range of dates over which an average price is determined) by the parties to determine the price for the commodity transactions. As such, the Draft states that taxpayers should docu-ment the actual pricing date agreed by the associated enterprises to price their commodity transaction. The Draft notes that verifying the pricing date is a chal-lenge faced by tax administrations.

The Discussion Draft proposes that if the pricing date agreed by associated enter-prises is inconsistent with other facts of the case, tax authorities may impute an actual pricing date consistent with the evidence provided by those other facts.

In the absence of reliable evidence of the actual pricing date agreed by the associ-ated enterprises, the Draft suggests that tax administrations may deem the pricing date for the commodity transaction to be the date of shipment as evidenced by the bill of lading or equivalent document.


TP Current Issues


OECD

Potential guidance on comparability adjustments to the quoted price

In situations where adjustments or differentials are applied to quoted prices in ap-plying the CUP method, the Discussion Draft notes that those adjustments or dif-ferentials may reflect physical differences in the product, different specifications required, freight, further processing costs and other features of the particular transaction. The Draft states that consideration should also be given to how un-related parties use the quoted price as a reference price and make adjustments to reflect the position in the supply chain of the parties to the transaction.

Implications

This Discussion Draft is part of a series of documents released by the OECD with respect to Action 10 of the BEPS Project. The other documents released in the con-text of Action 10 include a discussion draft on low value-adding intra-group services and a discussion draft on the use of profit splits in the context of global value chains.

The release of the Discussion Draft may contribute to an increased focus by tax authorities around the world on transactions involving commodities. Global busi-nesses will want to evaluate their transfer pricing policy for commodities and the relating documentation, and to continue monitoring developments with respect to this Action 10. Finally, businesses may want to consider participating in the discus-sion by providing input to the OECD on the Discussion Draft.

8

TP Current Issues

Transfer Pricing Alert January 2015

China issues administrative guidance on general anti-avoidance rules

Executive summary

On 2 December 2014, China’s State Administration of Taxation (SAT) issued administra-tive guidance on general anti-avoidance rules (Guidance). The Guidance is intended to provide internal procedural guidelines in conjunction with the tax authorities’ special tax adjustments for tax avoidance arrangements.

Coverage

The Guidance is intended to provide internal procedural guidelines in conjunction with the tax authorities’ special tax adjustments for tax avoidance arrangements pursuant to Article 471 of the Corporate Income Tax (CIT) law and Article 1202 of the Implementa-tion Regulation of the CIT Law. The Guidance will apply to the tax avoidance arrange-ments carried out on or after 1 February 2015 and to cases that are not settled by 31 January 2015.

The Guidance specifies that the main characteristics of tax avoidance arrangements are:

▶ The sole purpose or main purpose is “to obtain tax benefits”

▶ The form of the arrangements, but not their economic substance, complies with tax laws

The Guidance does not cover:

▶ Arrangements not related to cross-border transactions or payments

▶ Illegal tax transactions, such as tax evasion, fraud and non-payment of required taxes

China Transfer Pricing Regulations

CHINA

9

TP Current Issues

Transfer Pricing Alert January 2015

Methods adopted for special tax adjustments

Under the Guidance, special tax adjustments would be made pursuant to the substance over form principle by comparing a transaction with similar arrangements that con-tain reasonable commercial purposes and economic substance. Special tax adjustments may be made through:

▶ Re-characterization of all or part of the nature of the transactions

▶ Disregarding a counterparty to a transaction for tax purposes or treating parties to the transaction as a single entity

▶ Recasting the nature of items of income, deductions, beneficial tax treatments or reallocation of these items among all parties of the transaction

▶ Any other reasonable methods

Endnotes

1. Under Article 47 of the CIT law, if an enterprise carries out any business ar-rangements without reasonable commercial purposes, which results in lowering taxable income, the tax authorities are authorized to make adjustments using reasonable methods.

2. Article 120 of the Implementation Regulation of the CIT law defines the phrase “without reasonable commercial purposes” as reducing, avoiding or deferring tax payments as primary purposes.

CHINA

China Transfer Pricing Regulations


TP Current Issues

Australia Transfer Pricing Regulations

AUSTRALIA

Australian Tax Authority issues final transfer pricing rul-ings on documentation and penalties

Executive summary

On 17 December 2014, the Australian Taxation Office (ATO) released crucial guid-ance on what the ATO expects taxpayers to prepare in order to comply with the

transfer pricing laws and manage associated risks.

Companies with 30 June year ends are currently completing their first year of income tax returns under self-assessed transfer pricing for filing by 15 January

2015.

Detailed discussion

Overview

In April 2014, the ATO released in draft TR 2014/8 and Practice Statement PS LA

2014/2 relating to transfer pricing documentation and penalties. The documents

describe the ATO expectations and interpretation of the transfer pricing law.

A new PS LA 2014/3 Simplifying Transfer Pricing Record Keeping refers to an ATO

online guidance publication that is still being finalized and its release is expected

pre-Christmas. It appears that existing options available in relation to loans; ser-vices; distributors; and small taxpayers will remain the same, although the eligibil-ity criteria may change.

This guidance comes out against the background of a vigorous global debate on

base erosion and profit shifting (BEPS), which is a driver of heightened ATO and

multinational risk awareness.

The key impact of these publications, in conjunction with the 2010 Organization

for Economic Co-operation and Development (OECD) Guidelines, will depend upon

the taxpayer’s transfer pricing risk profile and the quality of existing documenta-


TP Current Issues

AUSTRALIA

tion. The ”sweet spot” for taxpayers will be where their existing documentation is

of good quality, and they do not have unusual transfer pricing risks.

▶ For taxpayers with what may be considered a high risk transfer pricing profile the transfer pricing documentation will be significantly more difficult even where the taxpayer currently has high quality transfer pricing documentation relative to existing requirements. A high risk transfer pricing profile may include one or more of the following features:

▶ Significant international dealings that create losses or low levels of profitability

▶ Significant or ”aggressive” financing arrangements including hybrid securities or

structures

▶ Business restructures involving low tax jurisdictions and/or the transfer of intangibles

or risks

▶ For taxpayers that do not have a high risk profile, and have good quality docu-mentation from prior years, the new transfer pricing requirements should not involve a significant increase in the level and/or quality of documentation that is required. TR 2014/8 notes that documentation should be approached with a practical and commercially realistic sense of what entities can reasonably be expected to include in their records.

▶ However, for taxpayers that do not currently have good quality transfer pricing documentation or are relying on the assurances of their overseas parent that such documentation exists, a change in approach will be required if the taxpayer hopes to mitigate potential penalties by having an arguable position. This is the case even where the apparent transfer pricing risk profile is not high.

The transfer pricing rules require that documentation be kept by an entity in order to be able to establish a Reasonably Arguable Position (RAP). The ATO has stated

its position that this goes beyond merely relying on assurances from global affili-ates, even where there is supporting documentation created prior to the time of



TP Current Issues

AUSTRALIA

filing in Australia. In practice, taxpayers should ensure they can demonstrate they

have had access to, and a real understanding of, any globally prepared documen-tation.

Important to note, the ATO states at paragraph 122 of TR 2014/8 that of the

many conditions and features outlined “an entity should document only those fea-tures that apply to its facts and circumstances.”

Tax Penalty approaches to transfer pricing adjustments

PSLA 2014/2 sets out a process for ATO officers to follow when determining

whether a tax penalty should apply in the event of a transfer pricing adjustment. Consistent with the draft practice statement, if a taxpayer’s dominant purpose for entering into a scheme is to obtain a transfer pricing benefit, penalties of up to

50% apply. Where it is determined that this was not the case, penalties of up to

25% apply. Lower rates apply where the taxpayer can establish a RAP, potentially

reducing penalties to 10%.

Action required

Given most taxpayers with a 30 June year end will be well advanced in the prepa-ration of their transfer pricing records, there is a realistic limit on the extent to

which the basis of filing will reflect this new guidance. Where taxpayers have a

lower transfer pricing risk profile, many will be primarily relying on the draft ver-sions of the ATO guidance issued in April this year.

Each taxpayer needs to reflect on its own facts and circumstances, take advice as

appropriate and then determine a course of action.

For taxpayers with 15 January filing deadlines, this is particularly urgent, as tax-payers can expect that the ATO compliance activities will see these issues being

raised. Taxpayers with December balance dates should start considering the im-pact on their documentation that needs to be ready by 15 July 2015.



Sang Min Ahn Partner02.3787.4602 [email protected]

Stella Kim Director 02.3770.0980 [email protected]

Dong Hoon Ha Director 02.3770.0936 [email protected]

Kyoung Bae Han Director 02.3770.0970 [email protected]

Kenny Sung Director 02.3770.0917 [email protected]

Hoon Seok Chung Director 02.3770.0924 [email protected]

Jae Seong Yun Senior Manager 02.3787.4265 [email protected]

Ki Se Kim Senior Manager 02.3770.0918 [email protected]

Transfer Pricing Business Tax Service

Dong Chul Kim Partner02.3770.0903 [email protected]

Min Yong Kwon Partner 02.3770.0934 [email protected]

Jae Cheol Kim Partner 02.3770.0961 [email protected]

Chanyeon Hwang Partner 02.3770.0971 [email protected]

Won Bo Jung Partner 02.3770.0945 [email protected]

Young Ro Bae Executive Director 02.3770.0951 [email protected]

Song Min Oh Executive Director 02.3770.0983 [email protected]

Transaction Tax

Jin Hyun Seok Partner 02.3770.0932 [email protected]

International Tax Service

Jaewon Lee Partner 02.3787.4601 [email protected]

Kyung Tae Ko Partner 02.3770.0921 [email protected]

Yeonki Ko 02.3787.4637 [email protected]

Nam-wun Jang 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]

Human Capital

Danielle Suh Partner 02.3770.0902 [email protected]

Min Ah Kim Executive Director 02.3770.1019 [email protected]

Contacts

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust andconfidence in the capital markets and in economies the world over. Wedevelop outstanding leaders who team to deliver on our promises to allof our stakeholders. In so doing, we play a critical role in building a betterworking world for our people, for our clients and for our communities.

EY refers to the global organization and may refer to one or more of the memberfirms of Ernst & Young Global Limited, each of which is a separate legalentity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about ourorganization, please visit ey.com.

© 2015 Ernst & Young Han Young © 2015Ernst & Young Advisory, Inc. All Rights Reserved.

APAC No. 05000194 ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/kr

Documents

Transfer Pricing - EY Pricing Alert January 2015 3 TP Current Issues OECD BEPS, Action Plan 10 OECD OECD releases Discussion Draft on cross-border commod-ity …