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Transfer Pricing News

Welcome to the third edition of TransferPricing News.

Transfer Pricing News No. 3: March 2013 1

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2 Australia

4 Chile

5 China

8 India

10 Japan

11 Netherlands

13 Romania

14 Russia

15 South Africa

19 United Kingdom

22 United States

24 Who’s who

This issue contains transfer pricingupdates from a number of countriesacross the globe – a necessity in theglobal economy we all now inhabit. So if you want to know about newdevelopments in transfer pricing aroundthe world this is the place to look.

To find out more about the topicsfeatured in Transfer Pricing News do not hesitate to get in touch with theGrant Thornton transfer pricing team.Their contact details are included on thelast page of this newsletter.

This information has been provided by member firms withinGrant Thornton International Ltd, and is for informationalpurposes only. Neither the respective member firm norGrant Thornton International Ltd can guarantee theaccuracy, timeliness or completeness of the data containedherein. As such, you should not act on the informationwithout first seeking professional tax advice.

Welcome Australia Chile China India Romania Russia South Africa UnitedKingdom

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Who’s whoJapan Netherlands


Australia

Australia releases new transferpricing rules

On 22 November 2012,the Australian treasuryreleased an exposure

draft for the Tax Laws Amendment(cross-border transfer pricing) Bill 2013:Modernisation of transfer pricing rules(new transfer pricing rules), whichproposes to overhaul Australia’sdomestic transfer pricing regime andmore closely align it with theOrganisation for EconomicCooperation and Development(OECD) transfer pricing guidelines formultinational enterprises (MNEs) andtax administrations (OECD guidelines).

The proposed changes in the newtransfer pricing rules represent thesecond round of transfer pricinglegislative reform. Phase one of thetransfer pricing rules became law inSeptember 2012 but will become non-operative when the new transfer pricingrules are enacted. Highlights of the newrules are discussed in this article.

The positives:• the alignment of the new transfer

pricing rules with the OECDguidelines, which requires cross-border dealings to be conductedunder arm’s length conditions

• the introduction of an eight yeartime limit on when the AustralianTax Office (ATO) can make transferpricing amendments, with theexception on ‘consequentialadjustments’. This rule replaces thecurrent unlimited time period formaking transfer pricing amendments

• the proposal of thresholds foradministrative penalties arising fromarm’s length principle uponsatisfying certain criteria

• the availability of ‘consequentialadjustments’, which grants the ATOthe power to make a determinationon the consequential adjustmentamount for the ‘disadvantagedentity’ in cross-border dealings.

The key impacts:• the ability to apply the new transfer

pricing rules to all cross-bordertransactions, including transactionsbetween third parties. This meansthat all cross-border dealings will besubject to the arm’s length principle

• the application of significantpenalties to transfer pricingadjustments where the companydoes not maintain contemporaneoustransfer pricing documentation

• aligns the existing transfer pricingregime to the self-assessmenttaxation system operative inAustralia, placing the responsibilityon the company’s public officer fordetermining the company’s overalltax position arising from all cross-border dealings

• the introduction of specific rulesprovides the ATO the reconstructionpowers to disregard the actualtransaction and arrangements, wherethe actual economic substance of thetransaction differs from the legalform

• the allowance for the use of ‘acombination of methods’ to identifythe arm’s length conditions thatoperate between entities dealingcross-border

• the introduction of permanentestablishment (PE) rules, governingboth foreign PEs operating inAustralia and Australian PEsoperating offshore, whichspecifically deals with the attributionof profits with reference made toarticle seven of double taxationagreements.


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What does this mean for thetaxpayer?• increased responsibility on the

public officer to ensure that all cross-border dealings appropriately applythe arm’s length principle

• increasing complexity anduncertainty for all businesses withcross-border dealings

• the imminent need to preparecontemporaneous transfer pricingdocumentation to avoid potentialsubstantial penalties

• the need to review all transfer pricingprocesses and outcomes, bothprospectively and retrospectively.

It is unclear whether the government hasestimated the full impact that thesechanges will have on both the Australianand international business community.

Grant Thornton Australia haspresented a submission to theAustralian treasury outlining its viewson the new transfer pricing rules.However, judging from pastexperience, no significant changes areexpected to be made to the proposedlegislation before it is passed into law.

MNEs operating in Australia need tobe prepared.

If you would like to discuss any issues raised in thisarticle please contact:Jason CasasGrant Thornton AustraliaE [email protected]


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mailto:[email protected]


Chile

Transfer pricing is oneof the items contained inthe recent amendments

to Chilean tax law. The Chileanauthority decided to use the OECDrules for transfer pricing matters, toregulate transactions with relatedparties.

The transfer pricing methods thatare taken into consideration are:comparable uncontrolled price, resaleprice method, cost plus method, profitsplit method and the transactional netmargin method.

In order to clarify the meaning ofrelated parties, the law established thefollowing definitions:• one party that participates directly

or indirectly in the management,control, equity, benefits, or incomesof the other party

• person or persons that participatedirectly or indirectly in themanagement, control, equity,benefits or incomes of both parties,with the understanding that all ofthem are interrelated.

PEs are considered to be related withtheir headquarters, or with any otherestablishments of the same headquarters.Transfer pricing studies can be used bythe taxpayer in order to justifyexpenses, but in any such case thetaxpayer must have the originaldocuments with which the method hasbeen applied or the studies developed ifthe Chilean internal revenues servicerequires them.

The Chilean internal revenuesservice can refuse prices, values andprofit when they do not correspond tomarket prices and apply a tax of 35%on the difference as well as a fine of5% of said difference.

The amendment of the Chilean taxlaw also allows taxpayers to enter intoadvance pricing agreements (APAs).These agreements last three years andare renewable. The taxpayer and theinternal revenues service can withdrawwithout effecting the agreement, whenthe circumstances taken into accountto make these arrangements havechanged.

If you would like to discuss any issues raised in thisarticle please contact:Alfonso IbanezGrant Thornton ChileE [email protected]


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China

2011 APA annual report issuedOn 26 December 2012,the State Administrationof Taxation of China

(SAT) issued the China advance pricingarrangement annual report (2011) (the2011 annual report). As the third APAannual report released by the SAT, itfollows the framework of the 2009 and2010 reports while updating thestatistics through 31 December 2011.Other additions include statisticsrelated to ‘APA renewals signed in2011’ and ‘industries covered by signedAPAs’, revisions which list the factorsthat the tax authorities might prioritisein an APA request, and the newlyincluded chapter ‘SAT contacts (byprovince) for APA requests’ intendedto facilitate taxpayers in the submissionof APA requests.

New contents in the 2011 annualreportNew development of the China APAprogrammeIn 2011, the Chinese tax authoritiesconcluded and signed eight unilateralAPAs (including four renewals) and fourbilateral APAs. From 1 January 2005 to31 December 2011, the Chinese taxauthorities received 99 written requestsor formal applications for bilateral APAs(including 21 agreed APAs). There are15 countries involved including Japan,Korea, the United States, Denmark andSingapore. In addition, the SAT hasreceived numerous enquiries on bilateralAPAs from enterprises. It is expectedthat the number of APA applicationswill continue to increase.

Numbers and processing times ofrenewalsAmong the eight unilateral APAs signedin 2011, four of them were renewals.The processing time for renewals hasbeen shortened and most of them werecompleted within one year.

Industries covered by signed APAsThe report illustrates industries coveredby signed APAs in 2005 through 2011.APAs from manufacturing industries arestill the majority of the total signedAPAs, accounting for 88% with theother industries only accounting for12%.

Priority of APAs requestDue to the high number of APAapplications, in addition to the overallprinciple of ‘first come, first served’, theSAT will also consider other factorswhen making a decision as to whether toprioritise an APA request or not. Suchfactors mainly include the quality of therequest submission, the appropriatenessof the transfer pricing method appliedand the calculation. Enterprises usuallyget their application to the SAT rejecteddue to the insufficient or inaccurateinformation provided. In addition,whether the applying taxpayer is in aspecific industry or located in a specificregion that merits prioritised attention isalso a factor to be considered.


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SAT contacts (by province) for APArequestsComparing with reports issued in 2009and 2010, an important addition worthnoting in the 2011 report is the SATcontacts by province for APA requests.The report clarifies that in reviewingAPAs, the SAT has a strongcommitment to mobilise local humancapacity and expertise in caseexamination and analysis. Localpersonnel are engaged in the APA teamfor each APA case. The list of contactinformation further demonstrates theSAT’s determination to enhancetransparency for the application of APAas well as to serve the taxpayers in amore convenient way.

StatisticsThe report proclaims the officialstatistics on in-process and signed APAsfor the period from 1 January 2005 tothe end of 2011. The following trendsare reflected from the data:• as an effective way to avoid

international double taxation, abilateral APA is more and morepopular among taxpayers

• the number of APAs related tointangible assets or services orfinance is increasing rapidly

• the processing time of most signedAPAs is less than two years, theefficiency is expected to increasegradually in the future

• more than half of the signed APAsapplied the transactional net marginmethod (TNMM), but theapplication of other reasonablemethods is encouraged by the SAT.

Implications for taxpayersWith the rapid development ofeconomic globalisation and MNEs inrecent years, the transfer pricingarrangement between related parties isbecoming more and more complicatedin both amount and transaction type. Asa result, more tax certainty onintercompany transactions is called forby enterprises. These enterprises includemulti-national groups investing in Chinaas well as more and more Chineseenterprises which are making overseasinvestment. As an innovative win-winsystem for the tax authority andenterprises, APAs are an effective wayfor enterprises to obtain more legalcertainty as well as a powerful tool fortax authorities to have a stable revenue in the future.

The issuance of the 2011 annualreport indicates that the SAT attachesimportance to the work of APAs andholds a positive supporting attitudetoward future development.

As pointed out by the SAT deputy commissioner WangLi in the preface, the SAT seeks to explore and developprofit allocation concepts which recognise and rightlyreflect the contribution of capital and technology importingcountries, and applying them in China’s transfer pricing andAPA practice. Certainty is the highest level of tax servicesthat tax authorities could offer to taxpayers and APAs areaimed at providing the taxpayer with certainty on itstransfer pricing.

In addition, the disclosure of SAT contacts for APArequests not only enhances the transparency of the work,but also improves the convenience for application of APAs. Currently the overall administration of APAs is still centralised in the SAT, however, due to seriousunderstaffing, the SAT is actively utilising the resourcesfrom local tax authorities. With an effort to enhance theexpertise of personnel and the awareness of APAs, the SATdevotes a large amount of resources to training activitiesincluding national training, information and experiencesharing. With the enhancement of the APA process, it isanticipated that enterprises will be more encouraged andassisted in the application of APAs.


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For a taxpayer, all the applicationdocuments provided should satisfy therequirements of quality and sufficiency toensure acceptance and to reduce theprocessing time. If necessary, the agentcould be involved at the initial stage. Thisis to ensure that the APAs applied for willbe accepted as a priority by the SAT.

Since 2005, through the issuance ofadministration laws and regulations,China has gradually improved its APAsystem, thus enhancing APA negotiationsand allowing increasing numbers ofenterprises to apply for the APA. TheAPA annual report represents one of thekey measures the SAT takes to increasethe transparency of the APA programme.The SAT hopes it will provide usefulguidance to taxpayers to have a goodunderstanding of developments andfuture trends of China’s APA practice,which will be of great importance forenterprises to apply for the APAs in thecorrect and appropriate manner.

Observations and recommendationsIn recent years, the SAT has obtained animportant position on the global stage ofinternational anti-tax avoidance. Theannouncement of the ‘China CountryPractices’ as part of ‘Practical Manual onTransfer Pricing for DevelopingCountries’ (draft version) by the UnitedNations (UN) indicates a great leap inthe transfer pricing administration of the SAT. Meanwhile, this initiativebroadcasts the transfer pricing issueswith Chinese characteristics to a wideraudience.

While endorsing the arm’s lengthprinciple, the SAT will retain its uniqueapproach such as comparabilityadjustment and the adoption of non-traditional transfer pricing methods.The SAT initially proposed newconcepts and methods, i.e., holisticapproach and contribution analysis. Assuch, it could be predicted that in theforeseeable future, the SAT and taxauthorities at all levels will prefer toadopt such concepts and methods.

However, these concepts and methodsare considered to be potentiallycontroversial between tax authoritiesand enterprises.

The industries (such as automotive,retail and luxury goods), R&Denterprises, and high and newtechnology enterprises, are highlycorrelative to the concepts of locationsavings, market premium, locationadvantages and local marketingintangibles. The tax authorities arefocusing on the transfer pricingpractice of the above industries andenterprises, e.g., the tax authoritieshave already had interviews with theenterprises after obtaining theirtransfer pricing documentations toexplore location savings, marketpremium, location advantages, localmarketing intangibles etc. Managementof the above enterprises should reviewthe transfer pricing policies of theenterprises and ensure that thearrangements are in line with the

development of China practices. In thecontext of stringent transfer pricingadministration, enterprises in Chinashould consider the views of the SATand its potential impact on thearrangements of the enterprises. Thiswill enable them to adopt prompt andeffective measures with the aim tomitigate the transfer pricing risks inChina.

If you would like to discuss any issues raised in thisarticle please contact:Rose ZhouGrant Thornton ChinaE [email protected]


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Indian transfer pricing audit issues The transfer pricing auditcycle in India began in2004 and since then the

issues debated between the income taxdepartment of India (tax authority),which is responsible for the enforcementof transfer pricing rules, and taxpayershave moved from a fairly crude level(mainly based on comparability andnumbers) to more difficult issues, themajor being marketing intangibles andvaluation of shares. This article examinessignificant audit issues emerging inIndia.

Marketing intangiblesThe transfer pricing aspect of marketingintangibles have been the focus of theIndian transfer authorities over the lastcouple of years. The issue has been takenup zealously and aggressively by the taxauthorities; as a result, many Indiantaxpayers have witnessed large transferpricing adjustments across a number ofyears on the basis of advertisement,marketing and promotion (AMP)expenditure being asserted to be outsidea permissible arm’s length range. Thecommon questions raised in all the casesare – ‘whether the promotional effortsundertaken by an Indian entity (licenseeof trademark) enhance the value of atrademark which is legally owned by anassociated enterprise (AE)? Whether theAE should compensate the Indian entityfor the excessive AMP expenditure thatis attributable to developing a trademarkowned by it?’ In this aspect, the recentcase of LG Electronics considered by aspecial bench of the tribunal is relevantfor discussion. The bench recently gave

its verdict and the majority ruling isprimarily in favour of the tax authority.

LG Electronics India Pvt. Ltd. (thetaxpayer) is a wholly owned subsidiaryof LG Electronics Inc. (LGK). LGKallowed the taxpayer to use its brandname and trademark on productsmanufactured in India. The taxauthorities alleged that the Indian entityincurred excessive marketing expensesrelative to comparable companies andthe excess amount should be treated asbrand promotion on behalf of LGK,entitling the taxpayer to be compensatedfor these expenses with a mark-up. Thetax authorities identified the excessiveportion of AMP expenses using ‘brightline’ test. The bright line is determinedby comparing the AMP expenses as aratio of sales of the taxpayer with asimilar ratio of AMP expenses ofcomparable uncontrolled companies.The majority bench endorsed thisapproach, however referred theparticular matter back forredetermination on technical grounds.

The relevance of this case outsideIndia will be apparent to readers in othercountries who have heard tax auditorstry to assert similar positions. The issuerequires a proactive analysis, planningand documentation which can help thetaxpayer in assessing and managing thisrisk.

Share valuationThe concept of 'share valuation' hasgained high interest in India for thefollowing reasons:• transfer pricing aspects of share

valuation have received renewed andperhaps a more intense focus in arecent round of transfer pricingaudits

• guidance in the Indian regulations, aswell as in the OCED is not verydetailed

• The Indian regulatory authoritieshave issued different guidelinesregarding the valuation of shares.

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In association with the above, recent notices issued by the Income tax department on multi-nationalcompanies (MNCs) in India, providesome insights into the approachesadopted by the tax authorities on ‘sharevaluation’. The Indian arms of Vodafoneand Shell are some of the big names thathave been slammed notices by taxauthorities with massive tax demands.

The Indian tax authorities allegedthat the shares were issued to theassociated enterprise at a price lowerthan the arm’s length price andconsequently lower issue price warrantsfor an adjustment.

Another controversial issueupturned is the treatment ofsubscription of shares as an unsecuredloan by tax authorities, thereby taxingthe imputed interest on the undervaluedamount.

APA regimeOne other beacon of hope is the APAmechanism that has opened its doorsfrom FY 2013-14 onwards and certainlybeing accessed increasingly bycorporates as the due date for filing thefirst set of APA applications nears, 31March 2013. The key features of theAPA scheme in India are:

Eligibility: any person who hasundertaken an internationaltransaction, or is contemplating toundertake an international transaction,will be eligible to apply for an APA.

Threshold: no threshold limit has beenprescribed in the APA rules. All thetaxpayers entering or proposing toenter into an international transactionhave an option to enter into an APA.

Pre filing consultation: the mainobjective of pre filing consultation is todetermine the scope of APA, identifytransfer pricing issues, determine thesuitability of the international transaction

for the agreement and to discuss broadterms of the agreement. Pre-filing ismandatory in India. The option toconduct pre-filing consultationanonymously is also available.Following the pre-filing consultation,and depending on the outcome, anAPA application can be filed.

Types of APAs available: the APAscheme has enabled companies to notonly opt for unilateral APA, but alsofor bilateral and multilateral APAs.

Application for APA: the application isto be filed with the director general ofinternational taxation for unilateralAPA and with competent authority(CA) of India for bilateral andmultilateral APAs. The number ofyears can be proposed by the applicantbut this cannot exceed five years assuggested in the Finance Act 2012.

The rules also provide flexibility to thetaxpayer to withdraw an application ifdesired.

There are a few areas that requireconsiderations such as provision forconfidentiality (firewall provisions) androllback provisions.

The APA authorities have so farshown a positive approach inunderstanding the concerns of theinvestors, attempting to share frequentlyasked questions, conducting publicdiscussions and providing adequatecomfort to ensure fair treatment toachieve a mutually agreeable position forboth the tax authority and the tax payerin India. A number of pre-filingmeetings are currently taking place,which are very positive and transparentand thereby consequently increasing thehope of MNCs to achieve some amountof certainty in a highly litigiousenvironment. Only time will tell oncethe APAs are concluded to determinethe success of the programme.

If you would like to discuss any issues raised in thisarticle please contact:Karishma Phatarphekar Grant Thornton IndiaE [email protected]


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Japan’s new transfer pricing checklist Japan’s National TaxAgency (NTA) hasrecently been increasing

its focus on internal corporategovernance for tax-related matters. Inlight of this trend, the NTA beganissuing questionnaires on generalinternal risk policies to large corporatetaxpayers. This questionnaire isgenerally issued by the NTA whenvisiting relevant companies, and containsquestions on internal tax and accountingrisk management policies.

The NTA’s recent motivation in thisarea stems from recent activity at theOECD including the release of the 2011OECD guidelines, which stressed theimportance of taxpayer compliance, andthe topics raised at the OECD forum ontax administration held in Buenos Airesin January 2012, which emphasised thedevelopment of the relationship betweentax administrations and large businesstaxpayers. It is apparent that the NTA isfocusing its efforts now to implementmore effective tax administration basedon these recent developments at theOECD.

The survey recently prepared by theNTA, which is entitled the ‘check sheetfor confirmation of efforts andachievements on transfer pricing’ (thechecklist), is intended to evaluate howlarge taxpayers are managing theirtransfer pricing and how they arecomplying with the Japanese transferpricing rules. The NTA hopes that theutilisation of the checklist will help toraise awareness of the transfer pricingrequirements in Japan, which in turn,will motivate taxpayers to make effortsto voluntarily comply with therequirements. The checklist contains 31questions on the company’s knowledgeof, and internal management andcompliance with, the rules. Thecompany is required to self-assess itsawareness of each point on a scale of one(unaware) to four (high level ofawareness). The checklist is divided intothe following seven areas:

1. Understanding of Japan’s transferpricing rules

2. The involvement of the company’stop management in transfer pricingmatters

3. Identification or knowledge of issuesrelating to foreign relatedtransactions

4. The establishment of a globaltransfer pricing policy

5. The arm’s-length nature of thecompany’s intercompanytransactions with foreign relatedparties

6. The parent company’s involvementin transfer pricing issues involvingforeign related parties

7. Level of communication with the taxauthorities.

If you would like to discuss any issues raised in thisarticle please contact:Toshiya KimuraGrant Thornton JapanE [email protected]

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The Dutch transferpricing landscape wasrather stable in 2012,

with increasing transfer pricing auditactivity by the Dutch tax authorities.

With respect to tax audits andlitigation, there has been an increasingfocus on:• business restructurings and risk

allocation• off-shoring intellectual property

developed in the Netherlands • shifting profit away from the

Netherlands to captive insurancecompanies

• arm’s length review of the amount ofdebt financing

• pricing of financial transactions(loans, guarantees, cash pools).

Substance Substance issues and the policy of theDutch tax authorities in this respect didhave the attention of the Dutchparliament in 2012. The conclusion is anincreasing focus on ‘substance overform’.

OECD developments As the OECD transfer pricingguidelines are basically followed by theDutch tax authorities, the OECDinitiatives on intangibles, safe harboursand timing issues will be of criticalimportance to the Dutch transfer pricinglandscape. The following internationaldevelopments will impact theNetherlands: • the OECD issued a discussion draft

on the transfer pricing aspects ofintangibles in June 2012. Businesses(including Grant Thornton memberfirms) provided comments to this,which were discussed during a

public consultation held in Paris bythe OECD on 12-14 November2012. The discussion draft deals withthe following four issues:1. What constitutes an intangible? 2. Which parties are entitled to

intangible property relatedreturn?

3. How to characterise transactionsinvolving the use or transfer ofintangible property?

4. What is an arm’s length value foruse or transfer of intangibleproperty?

It is anticipated that a revised version ofthe discussion draft will be publishedthis year. In this respect, the second issueregarding which parties are entitled tointangible property related return isexpected to be significantly revised.During the public consultation the draftguidance on safe harbours and timingissues were also discussed:

• the draft guidance on safe harboursis more positive in regards to the useof safe harbours. The OECD intendsto work on safe harbours for lowvalue services in the future.

• the draft guidance on timing issuesaddresses the two differentapproaches in applying the arm’slength principle:– determining prices ex-ante based

on information that wasreasonably available at the timeof transaction

– determining prices on an ex-postbasis testing the actual outcome.

It is expected that the revised guidanceon safe harbours and timing issues willbe finalised in 2013.

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European joint transfer pricing forum The EU joint transfer pricing forumadopted the report on cost contributionarrangements on services not creatingintangible property on 7 June 2012. Thisreport discusses the concept of a CostContribution Arrangement (CCA) onservices and distinguishes it from intra-group services. It elaborates on thegeneral features for assessing whetherthe arm’s length principle has beenapplied to CCAs on services notcreating intangible property. It isexpected that this report will also impactthe transfer pricing policy of the Dutchtax authorities.

UNFurthermore, in 2012 the UN issued itstransfer pricing manual for developingcountries. One of the objectives of themanual is that it reflects the realities fordeveloping countries at their relevantstages of development. It is of relevancethat the drafters of the manual have notfound it necessary, or helpful, for it totake a position on wider debates aboutother possible standards than the arm’slength principle.

Although the manual is basicallyaligned with the OECD guidelines, thediscussion of location savings andlocation specific advantages in chapterfive could be considered as deviatingfrom the views presented in the OECDguidelines. In this respect the chapter alsodiscusses that a split of these advantages isenvisaged. These views may prove veryrelevant for the Dutch transfer pricinglandscape for MNEs transacting withrelated parties in developing countries.

Dutch interest deduction limitationsNew Dutch interest deductionlimitation rules will come into effect forbook years starting on or after 1 January2013. Furthermore, the thincapitalisation rules will be abolished asof 2013. Both developments will beimportant for the Dutch financialtransfer pricing practice.

If you would like to discuss any issues raised in thisarticle please contact:Michiel van den BergGrant Thornton NetherlandsE [email protected]


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Romania opted toimplement provisions ofarticle 80 of the council

directive 2006/112/EC (28 November2006) on the common VAT system ofthe VAT Directive (anti-fraud measure)for establishing the taxable amount foroperations carried out between relatedparties. These provisions indicate thecircumstances for using the market value for the VAT taxable base and are applicable in Romania startingFebruary 2013.

Although in practice there have beencases in the past in which the taxauthorities adjusted the VAT tax base asa result of transfer pricing adjustments,in general the taxpayers have appealedsuccessfully the respective adjustmentssince the VAT provisions in Romaniadid not provide for the possibility ofmodifying the VAT taxable base oftransactions between related parties.

The transfer pricing rules inRomania are still developing, thereforethe tax authorities are trying to alignwith the European provisions in orderto ease the transfer pricing approach totransactions performed between relatedparties from the EU. In this respect, theRomanian government issued anemergency ordinance on 23 January2013 that amends the fiscal code startingFebruary 2013. Until now, theadjustments performed by theRomanian tax authorities ontransactions between related parties, hadan impact only for corporate income taxpurposes, however the tax authorities’February 2013 adjustments will have animpact both on the corporate income taxas well as on the VAT corresponding totransactions between related parties.

According to these recent legislativechanges, if the supplier or thebeneficiary does not have a fulldeduction right, then the taxable amountwill be considered at the market value.

The market value will be used as thetaxable amount for supplies of goods orservices between related parties, where:• the consideration is lower than the

market value and the recipient of thesupply does not have full VATdeduction right

• the consideration is lower than themarket value, the supplier does nothave full VAT deduction right andthe supply is VAT exempt withoutdeduction right

• the consideration is higher than themarket value and the supplier doesnot have a full VAT deduction right.

According to these recent legislativechanges, for the purposes of the aboveVAT provisions, ‘market value’represents the total amount that, inorder to obtain the goods or services inquestion at that time, a customer at thesame marketing stage at which thesupply of goods or services takes place,would have to pay, under conditions of

fair competition, to a non-related supplier within the territoryof the member state in which the supply is subject to tax.

Where no comparable supply of goods or services can beascertained, ‘market value’ means the following:• in respect of goods – an amount that is not less than the

purchase price of the goods or of similar goods or, in theabsence of a purchase price, the cost price, determined atthe time of supply

• in respect of services – an amount that is not less than thefull cost to the taxable person of providing the service.

Considering the above, entities carrying out transactions thatare VAT exempt without credit (e.g. insurance companies,credit institutions and other entities) with their related partieswill be impacted by these legislative changes.

If you would like to discuss any issues raised in this article please contact:Emilia MoiseGrant Thornton RomaniaE [email protected]

Violeta DumitracheGrant Thornton RomaniaE [email protected]

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More than a year haspassed since the newRussian transfer pricing

regulations became effective on 1January 2012, following federal law#227-FZ dated 18 July 2012.

It should be noted that in thebeginning of 2012 taxpayers had lots ofquestions regarding certain transferpricing provisions due to difficultieswith understanding the law as well as alack of clarification from the Russian taxauthorities. Several months later thesituation has changed a little bit.

In 2012 the Ministry of Financeissued guidance on the application of thelegislation. The guidance included thefollowing points:• calculation of the threshold for

control• correlation of thin capitalisation

rules and transfer pricing regulations• sources of information for CUP

• antimonopoly and transfer pricingrules

• interest free loans• guidance on the content of transfer

pricing documentation.

A form of notification on the controlledtransactions, as well as, instructions onits drafting and submission weredeveloped and approved by the federaltax service decree dated 27 July 2012. Inparticular, the notification shall containthe following information:• the calendar year for which the

information on the controlledtransactions is provided

• the subjects of transactions• information on a transaction

participants• revenues (expenses) received

(incurred) under the transactions.

Taxpayers are obliged to submit anotification on the controlledtransactions performed during 2012, nolater than 20 May 2013. However thepossibility to shift the deadline to a laterdate is now being discussed by theRussian government. It should be notedthat the transitional period allowscompanies with controlled transactionsunder RUR 100million (approx. EUR2.5million) for the year 2012 and RUR80million (approx. EUR 1.8million) forthe year 2013 to enjoy exemption forfiling notification and preparing transferpricing documentation.

Although generally the Russiantransfer pricing rules are in line with theOECD principles, there are a lot ofsignificant provisions which still requirefurther development and clarification. Inparticular a possibility of grouping oftransactions according to the Russiantransfer pricing legislation isquestionable. Pursuant to Russianlegislation, the transfer price should be

tested transaction by transaction, and grouping is only allowedfor transactions which are ‘homogeneous’, which implies thatgoods should be interchangeable. For a company with a widerange of products, a transfer pricing analysis of division bydivision or product by product basis requires tracking of ahigh level of financial information and is sometimes impossibledue excessive complexity.

There are other disputable issues that could be mentioned,such as uncertainty in interaction of Russian transfer pricingregulations with other taxes (such as VAT and customs duties),absence of cost sharing or cost contribution legislation andthus practical difficulties in applying indirect chargingmethods and difficulties in assessing intellectual propertycharges amongst others.

Therefore the new transfer pricing legislation, whichbrings the Russian transfer pricing practice in-line withinternational standards, can be viewed as an importantindicator of the positive development of Russian tax practices.However further steps need to be taken in order for Russiantransfer pricing requirements to become less burdensome,more transparent and easier to comply with.

If you would like to discuss any issues raised in this article please contact:Alexander SidorenkoGrant Thornton RussiaE [email protected]

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The challenges faced by today’sMNEs in Africa

Due to the uncertainnature of the economicenvironment, there is

pressure on MNEs to decrease theiroperating costs in order to maintain theprofit margins that their shareholdersexpect. In efforts to minimise theiroperational costs, MNEs areconsistently seeking to optimise theirorganisational structures by locatingtheir primary manufacturing anddistributing activities in low-costjurisdictions.

In certain cases, these efforts extendto placing their operations and valuableintellectual property in jurisdictionswith lower rates of corporate tax orfavourable tax exemptions.

From a tax perspective, providedthat there is actual substance in thelower tax jurisdictions (i.e. employees,registered office, functions, risks andcost assumption), this may be adefensible corporate strategy. Theproblem exists however that certainMNEs create structures whereby highlyvalued intangibles are transferred toartificial entities or goods/services aredistributed via artificial entities whichexist in terms of ‘form’ but havenegligible economic substance. MNEsmay also manipulate their pricingpolicies in order to move profits tolower tax jurisdictions or jurisdictions inwhich associated enterprise haveassessed losses. In the past, MNEs havemanaged to significantly decrease theirglobal tax burdens by adopting theseschemes. However, more recently, withmuch emphasis being placed on transferpricing by revenue authoritiesworldwide, it is vital that MNEs managethe balance between improving theiroperating efficiencies and ensuring thatthey achieve a defensible global tax rate.

The fiscal demands on thegovernments of developed and emergingcountries to raise revenue and preventtax base erosion have led to a surge oftransfer pricing audits and disputesaround the world. With the increasingfocus of tax authorities on transferpricing, MNEs must consider theviability of their organisationalstructures from an economic and taxperspective as current tax cases havestressed the ‘substance over form’concept. South African transfer pricinglegislation was amended for financialyears starting on or after 1 April 2012.The effect of these changes is likely toinclude closer attention by the SouthAfrican Revenue Service (SARS) to theentire business arrangement, includingwhich entity actually manages thelimited risks. An arrangement which isconsidered to be artificial, for example,because the South African entityactually manages the risks even thoughthey are limited by agreement, it is likelyto fall foul of the new rules. It is

therefore important for affected SouthAfrican companies to carefully considerall aspects of such arrangements andhave policy documentation in place tosubstantiate their business operationsand international transactions. AcrossAfrica, there is a similar trend bringingin new legislation including compulsorydocumentation requirements in somecountries.

Tax authorities throughout Africaare starting to coordinate their efforts intransfer pricing audits and arecooperating as never before to exchangeinformation regarding taxpayers and theindustries in which they operate. Taxauthorities are assisting each other withinformation requests, multinationalaudits and simultaneous examinations.This creates an extra burden on MNEsto ensure that their transfer pricingpolicies are in line with the legislation ofthe jurisdictions in which they operate.

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Improving tax systems throughoutAfricaThe OECD and the African TaxAdministration Forum (ATAF) haverecently signed a memorandum of co-operation, agreeing to work together toimprove tax systems throughout Africa.

ATAF have expressed theircommitment to help African countriesbuild strong, effective and efficient taxsystems and counter erosion of their taxbases and with the assistance of theOECD, will gain much aid and supportin the area of transfer pricing. As therevenue authorities gain further trainingand support and increase theirefficiencies, so the number of transferpricing enquires will increase.

In addition to the pressure placed onMNEs by tax authorities, globalorganisations such as the ‘Tax justicenetwork’ and ‘Action aid’ haveemphasised that the corporate socialresponsibility initiatives of MNEsshould incorporate efforts to makecertain that a fair share of taxation ispaid. These organisations areconsistently lobbying for a change inreporting standards to require MNEs toreport their tax affairs in much moredetail in their audited accounts,essentially a profit and loss account,assets and tax charge for every countrywhere they operate, known as country-by-country reporting. The campaignersbelieve this would give greatertransparency to tax avoidance andalleged profit shifting by multinationals,particularly out of developing countries.

A new era of penaltiesA final consideration for MNEs is thenew era of penalty regimes whichMNEs will face should they fail tocomply with the transfer pricingregulations. Throughout Africa, transferpricing provisions are steadily beingintroduced into fiscal legislation andwhere countries have set transfer pricinglegislation and penalty regimes, these aregenerally harsh. In Namibia, forexample, the penalty levied is 200% onunderpaid tax and 20% per annuminterest on unpaid tax. MNEs mustconsider investing in the development oftransfer pricing policy documentation inorder to substantiate their intergrouptransactions and avoid the harshconsequences of a transfer pricing audit,which could result in an adjustment thatwill lead to an increased tax burden.

Due to the increased scrutiny of taxauthorities, several transfer pricing courtcases throughout Africa are expectedover the next few years. It is vital thatcompanies operating in Africa prioritisethe development and maintenance ofadequate transfer pricing documentationto reduce their exposure to transferpricing risk. The table following thisarticle summarises the transfer pricingrules and regulations of the majorAfrican countries.

If you would like to discuss any issues raised in thisarticle please contact:Tarryn Spearman Grant Thornton South AfricaE [email protected]


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County Regulations County Regulations


Ghana

Kenya

Lesotho

Madagascar

Malawi

Mauritius

Morocco

Transfer pricing regulations 2012 (L.I. 2188) document the transfer pricinglegislation. All taxpayers who engage in transactions with controlled parties arerequired to maintain documentation of the transaction for that period. Thecommissioner general of the Ghana revenue authority may make a request forinformation upon which a taxpayer must provide contemporaneousdocumentation relating to the transactions under investigation.

Legal notice no. 67 of 2006 and section 18(3) of the income tax act containsthe rules relating to transfer pricing. There is no statutory requirement fortaxpayers to include copies of their transfer pricing documentation whensubmitting their annual tax returns. However, such documentation should beprovided within 30 days upon request by the Kenya revenue authority.

In Lesotho, there is a specific section (section 113 of the income tax order of1993, titled ‘Transfer pricing’) that provides the commissioner with widediscretionary powers to re-characterise transactions between related parties forLesotho tax purposes. In practice, this section has rarely been used by theLesotho tax authority and transfer pricing does not appear to be a prominentissue in Lesotho.

There are no formal transfer pricing regulations in Madagascar. Broad anti-avoidance rules apply to prevent related parties from pricing transactions in amanner which could manipulate profits.

Transfer pricing rules are contained in chapter 41:01 of the income taxation act:‘Taxation transfer pricing regulations 2009’. There is no formal requirement tosubmit transfer pricing documentation but account books or any otherdocumentation relevant to the calculation of transfer prices must be providedpromptly upon request by the commissioner of taxes.

There is no formal transfer pricing legislation in Mauritius. However, alltransactions should be undertaken at arm’s length.

There is no formal transfer pricing legislation in Morocco, but transactionsbetween related parties should be at arm’s length. Two methodologies aregenerally applied by the tax authorities in determining the reasonableness oftransfer prices, the comparable uncontrolled price method and directassessment based on available information

Algeria

Angola

Botswana

Cameroon

Egypt

Transfer pricing legislation is contained in the 2010 ‘Additional’ Finance Act. The2010 LFC institutes, for companies operating under the ‘Direction des GrandesEnterprises’ (major company directorate), a requirement to make available alldocumentation relating to the transfer pricing policies used in respect oftransactions with affiliated companies. For all other taxpayers, it isrecommended that transfer pricing documentation be available as the taxauthorities may, during the carrying out of an audit, request such documentation(no specific documentation guidance is given).

Transfer pricing legislation is contained in the statute of big taxpayers. Thetransfer pricing rules will only apply to ‘Group A’ corporate income taxpayers tobe included in a list to be published by ministerial order of the minister offinance. The transfer pricing rules stipulate a mandatory requirement for affectedtaxpayers to prepare a dossier for each fiscal year where total turnover exceeds300 million UCFs. The dossier must characterise the relationships and pricesestablished by the taxpayer with the companies with which they have ‘specialrelations’. The transfer pricing dossier must be sent to the tax administrationwithin six months of the date of closing of the fiscal year.

Botswana currently has no transfer pricing rules in place. However, in terms ofdomestic law, the commissioner of taxes has the power to adjust the liability ofthe taxpayer where he is of the opinion that a transaction, scheme or operationhas not been entered into or carried out by persons dealing at arm’s length, withthe effect of avoiding, reducing or postponing tax liability.

The 2012 finance law provided some modification to the general tax law relatingto transfer pricing in Cameroon. Transfer pricing legislation now includes anautomatic obligation to produce documentation at the beginning of a tax auditfor companies registered with the large taxpayer unit. This obligation only appliesif the company has 25% of its capital/voting rights held directly/indirectly by anentity outside Cameroon.

Transfer pricing legislation is contained in article 30 of the income tax law. It is astatutory requirement to disclose the transfer pricing methodologies adopted bythe taxpayer involved in controlled transactions and justify the applicationthereof. Taxpayers are required to maintain supporting documentation, whichcan be requested during a tax audit.


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County Regulations County Regulations

Swaziland

Tanzania

Uganda

Zambia

Zimbabwe

There are no formal transfer pricing regulations in Swaziland. However anti-avoidance legislation empowers the commissioner of taxes to adjust the liabilityof the taxpayer where the commissioner is of the opinion that a transaction,operation or scheme has not been entered into or carried out by personsdealing at arm’s length with the aim of avoiding, reducing or postponing taxliability.

Section 33 of the income tax act in Tanzania contains transfer pricingregulations. Parties engaging in controlled transactions are required to preparedisclosures detailing the terms and conditions of the transactions. A summarythereof is required to be submitted alongside the annual tax return. There is nolegal requirement to prepare full and complete transfer pricing documentation.However, upon request by the Tanzanian revenue authorities, this must besubmitted promptly.

Transfer pricing regulations became effective in Uganda as of 1 July 2011. Theregulations are modelled on the OECD guidelines. Multinational businesses inUganda are now required to determine their income and expenditures arisingfrom transactions with related parties in a manner that reflects the arms’ lengthprinciple. Documentation showing the evidence of the arms’ length principleshould be in place at the time of filing the company’s income tax return for theyear in which the transactions were conducted. The revenue authority hashowever not yet issued guidelines on what documentation should be put in place.

Zambian transfer pricing rules require that transactions between related partiesbe undertaken at arm’s length. Should the tax authorities determine that atransaction has not taken place under arm’s length conditions, they may replacethe actual conditions with arm’s length conditions for commercial and financialtransactions between related parties.

There are no formal transfer pricing regulations in Zimbabwe. For all tradingtransactions, there is general anti-avoidance legislation which require transactionsbetween related parties to be undertaken under arm’s length conditions.

Mozambique

Namibia

Nigeria

South Africa

There are no formal transfer pricing regulations in Mozambique. However, thereare anti-avoidance rules in place which stipulate that the arm’s length principlemust apply to all transactions entered into between related parties. The taxauthorities examine payments made to lower tax jurisdictions to ensure that theyare genuine and reasonable.

Transfer pricing legislation is contained in section 95A to the Namibian income taxact. Practice note two of 2006 contains guidance on the application of transferpricing legislation. There is currently no statutory rule requiring transfer pricingdocumentation to be submitted to the receiver as part of the income tax return.However it is advised that taxpayers prepare and maintain a comprehensive transferpricing policy document as this may be requested upon a transfer pricing audit.

The 2012 income tax (transfer pricing) regulation number one relates to transferpricing for Nigeria. According to transfer pricing regulations, all parties who haveentered into controlled transactions must record, in writing or on any otherelectronic device or medium, sufficient information or data and an analysisthereof to verify that transactions meet the arm’s length requirement. For eachyear of assessment a connected taxable person must disclose related partytransactions on a transfer pricing disclosure form. This form must be filed alongwith the income tax returns for each year of assessment.

Section 31 of the income tax act and practice note seven relates to transferpricing for South Africa. There is no statutory requirement to file transfer pricingdocumentation. However, the annual income tax return requires disclosurerelating to transactions with related parties. It is advised that transfer pricingdocumentation, together with justification for the pricing of transactions, shouldbe prepared and available to SARS on request. Transfer pricing documentationmust be submitted on request and must be contemporaneous. SARS may granta 30-day period for submission however there is no fixed time period prescribedin the transfer pricing regulations. Time limits may vary based on thetransactions under review and applications for extended periods may besubmitted to SARS.


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HMRC and UK tax avoidance The Chancellor of theExchequer and ChiefSecretary to the Treasury,

announced new action to clamp downon tax dodgers and pledged £77millionto Her Majesty’s Revenue and Customs(HMRC) to ‘expand their anti-avoidanceand evasion activity, specifically thosefocusing on offshore evasion andavoidance by wealthy individuals and bymultinationals’. The announcementcomes after a string of tax avoidancestories in the UK’s press. Starbucks,Apple, Amazon and Google, amongothers, are all being scrutinised for theirlow corporate tax payments in the UK,despite their assertion that their actionsare perfectly legal.

The chancellor’s autumn statementoutlined that HMRC should be seen tochallenge the use of transfer pricing,royalty payments, intellectual propertypricing and interest payments to preventabuse, and also criticised HMRC forbeing too passive in tackling the tax gap.The government estimates this will bringin an additional £2 billion of tax peryear.

As a result of HMRC’s new stance, itis expected that MNCs are likely to facean increase in tax audits and assessmentsin the UK, and managing transferpricing risk will feature high on MNC’sagendas.

Grant Thornton is running aworkshop on managing transfer pricingrisk and dispute avoidance at the ‘2013IBC International Transfer PricingSummit’ and has also written a chapteron this subject, published in Tolley’sbook, ‘UK Transfer Pricing 2012-13’.

Controlled Foreign Companies (CFCs) The new CFC legislation came intoeffect for companies with accountingperiods starting on or after 1 January2013. The measures represent a changein approach and the transfer pricingconcept of significant people functions(SPFs) are now central to the new rules.Taxpayers may be required to establishif SPFs are carried out in the UK inrelation to the CFC business.

The concept of SPFs was introducedin the OECD 2010 report on attributionof profits to PEs. SPFs are not definedfurther within the CFC legislation, soreliance is placed on the definitions inthe 2010 report.

SPFs are people who conductfundamental business functions that leadto the assumption of risk, the ownershipof assets or the on-going management ofthose assets and risks.

Broadly, under the new rules, anynon-UK resident company that iscontrolled by a UK company will be aCFC. However, there are a number ofexemptions that may apply. If none ofthe exemptions apply and if there areSPFs carried out in the UK, which relateto the business conducted by the CFC,it may be necessary to treat the SPF ofthe CFC as if it is a UK branch of theCFC and attribute profits of the CFC tothe ‘branch’.

Therefore it is important todetermine what a SPF is and then howto attribute profits to the hypothesisedbranch, as prescribed in the OECD 2010report.

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General Anti Avoidance Rule (GAAR) The chancellor’s autumn statementconfirmed the introduction of a GAAR,aimed at targeting abusive tax avoidanceschemes, in the ‘Finance Bill 2013’. It isintended to counteract the tax advantagethat would otherwise be obtained fromsuch schemes.

Tax arrangements, defined by a mainpurpose test, are deemed abusive if thedouble reasonableness test is also met,whereby the arrangements cannotreasonably be regarded as a reasonablecourse of action in relation to therelevant tax provisions.

The double reasonableness test wasrefined to attempt to make sure that theGAAR only applied to its intendedtargets. This has led to the doublereasonableness test being updated toclarify the circumstances considered inestablishing if arrangements are abusive.Arrangements are not consideredabusive if they are in accordance withHMRC accepted practice.

The GAAR provides anothermechanism to HMRC in tackling taxavoidance, which can be used withexisting legislative targeted anti-avoidance rules (TAAR), such as the UKtransfer pricing and thin capitalisationregime. HMRC’s draft guidance says theGAAR will apply when other taxmeasures, such as TAARs, do notprevent a tax advantage from abusivearrangements, although they do nothave to be applied in this order.

The draft GAAR clauses of the ‘2013Finance Bill’ state that the GAARoverrides any priority rules, forexample, section 6 of the Taxation(International and Other Provisions)Act (TIOPA) 2010, which gives effect tothe UK’s double tax agreements (DTAs).In theory, this may allow HMRC toinvoke the GAAR rather than challengea taxpayer under the transfer pricingregime, denying the taxpayer reliefunder a DTA, but this is unlikely inpractice.

Patent boxThe ‘Patent box’ is a new regimeeffective after 1 April 2013. This enablescompanies to benefit from a 10%corporate tax rate on profits ofqualifying intellectual property (IP).Qualifying IP includes patents grantedby the UK and European patent offices.

The UK regime extends further thanmost other countries. As well as patentroyalties received, the UK regimeincludes profits from products whichhave a patented item, as well as part ofthe profit from patented processes andservices.

A number of steps must beperformed to arrive at the qualifyingpatent box profit, to which a 10%corporate tax rate can be applied. Indetermining the qualifying patent boxprofit, it may be necessary to establishwhat an arm’s length royalty (notional

marketing royalty) would be for the‘brand’ element or marketing assetswithin the business i.e. the returnattributable to non-technology IP. Thisis particularly relevant for consumerbusinesses, where the ‘brand’ isconsidered to be important for the saleof goods.

The greater the reward for marketingintangible assets (the higher the arm’slength notional marketing royalty), thelower the IP that relates to patentedproduct technology IP, so less of thecompany’s profits would qualify for the10% corporate tax rate under the patentbox regime.

The notional marketing royaltyshould be considered under transferpricing principles, and the comparableuncontrolled price and profit splitmethods are mentioned in HMRCguidance.


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OECD transfer pricing consultation onintangibles Categorising intangible assets was at thecentre of discussion at the OECD’smeetings in Paris last November, whereWendy Nicholls spoke on behalf ofGrant Thornton UK.

One area of debate was around thestipulation in the discussion draft that‘the entity claiming entitlement tointangible related returns will physicallyperform, through its own employees,the important functions related to thedevelopment, enhancement,maintenance and protection of theintangibles’. There had been concernthat the outsourcing of functions wouldbreak this ‘rule’.

Joe Andrus, head of the OECD’stransfer pricing unit clarified thestatement, commenting that thecontrolling or managing of anoutsourced function was akin to theperformance of the function. Anexample of this would be a contractresearch organisation, where the IPowner sets out the terms under whichresearch services are to be provided, butthe service provider acts independentlywhen undertaking these services.

The definition of the term‘intangible’ as well as the question ofwho is entitled to ‘intangible relatedreturns’ remain contentious issues wheredifferences of opinion exist betweenbusinesses/advisers and the authorities.The authorities would generally prefer awide net to provide them with theability to eliminate potentially abusivebehaviour. Businesses/advisers on theother hand have a preference for cleardefinitions providing certainty and toassist in preventing double taxation.However, businesses very muchwelcomed the fact that the OECD’s‘working party 6’ has issued a discussiondraft and invited debate at a much earlierstage in its work than in previousprojects.

If you would like to discuss any issues raised in thisarticle please contact:Wendy NichollsGrant Thornton UKE [email protected]


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Most of the presentactivity in US transferpricing can be

characterised either as anticipatedguidance, or public comments byInternal Revenue Service (IRS) officialson various transfer pricing matters. On apositive note, the US APA programmeof the IRS reorganised itself internally,about a year ago. In that reorganisation,the APA programme became theAdvance Pricing and Mutual AgreementAPMA program. This means that thefunctions of APA and competentauthority (CA) negotiations are nowcombined into one office, under thesingle management of the APMAdirector. The immediate result has been

positive. The APMA programme closed140 cases in 2012, a historic high andmore than triple the number ofagreements approved the year before(only 43 APAs were executed in 2011).The improved case statistics, accordingto the APMA director, are attributableat least in part to increases in staffingthat have helped reduce averageworkloads and allowed APA teamleaders and other employees to workmore efficiently. Further, the APMAdirector has stated that his next goal is tobring down the processing times fromthe current average of between 41 and 42months, putting the ‘A’ back in APA.

The news is not so favourable on theUS-India APA front. The Indiangovernment issued new APA guidelineslast year, including provisions forbilateral cases. Recently, however, a topIRS official stated that the agency wouldno longer accept bilateral APA cases.The official noted his frustration with(1) the large number of cases thatremained unresolved, and (2) thenegotiating position of the Indian CA,wherein India expresses a preference forprofit splits rather than cost-plusmethods. A number of high-profiletaxpayers have cases pending in the US-India negotiating process; only timewill tell the fallout from the new IRSreticence concerning APAs forcontrolled US-India transactions.

In any event, new guidance isanticipated in the form of newadministrative procedures (calledRevenue Procedures or “Rev. Proc.” forshort) governing APAs and CA (i.e.,double-tax) cases. These new guidelinesand procedures are highly anticipated,but not yet published. As the IRS worksto revise its APA and CA guidance, theagency has also stated that it is revisitinga concept that it historically had rejected– that of permitting self-initiatedadjustments in competent authoritycases. Typically in a CA case, some formof government (rather than taxpayer)action is necessary in order for theUSCA to accept a case; the mostcommon example of course is an auditadjustment by the US or a US treatypartner, thus creating the possibility of

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economic double taxation. Typically,however, the IRS has not accepted forCA consideration any case where thetaxpayer has requested double-tax reliefin their favour, after the taxpayer itselftook some step in another jurisdiction topay more taxes. The IRS’s typical fearhere concerns some ‘hindsight’ or ‘taxplanning’ angle, in which a taxpayertakes the step in order to obtain betterresults in the US by first approaching atreaty partner to propose an upwardadjustment in their foreign tax base. Butaccording to recent public comments,the IRS is apparently rethinking itslongstanding ‘hard line’ approach, toconsider cases where double-tax reliefcould at least be discussed by thecompetent authorities.

Finally, a large section of taxpayerrequests has called for publishedguidance on transfer pricing forguarantees. The adoption of servicesregulations several years ago, coupledwith recent high-profile court cases,have increased the urgency for newguidance on related-party guaranteefees. Already, the American BarAssociation published an extensivewhite paper, in which it not onlyexplained and analysed all issuesconcerning the multitude of guaranteetransactions, but also suggested transferpricing methods for addressing thosetransactions. As with the APA and CAguidance, the IRS has not yet publishednew guidance – but such guidance isanticipated (hopefully) in the very nearfuture.

If you would like to discuss any issues raised in thisarticle please contact:David BowenGrant Thornton USE [email protected]


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Who’s whoContributors

Jason CasasGrant Thornton AustraliaE [email protected]

Alfonso IbanezGrant Thornton ChileE [email protected]

Rose ZhouGrant Thornton ChinaE [email protected]

Karishma Phatarphekar Grant Thornton IndiaE [email protected]

Toshiya Kimura Grant Thornton JapanE [email protected]

Michiel van den BergGrant Thornton NetherlandsE [email protected]

Emilia MoiseGrant Thornton RomaniaE [email protected]

Violeta DumitracheGrant Thornton RomaniaE [email protected]

Alexander SidorenkoGrant Thornton RussiaE [email protected]

Tarryn Spearman Grant Thornton South AfricaE [email protected]

Wendy NichollsGrant Thornton UKE [email protected]

David BowenGrant Thornton USE [email protected]

© 2013 Grant ThorntonInternational Ltd. All rightsreserved.

This information has beenprovided by member firmswithin Grant ThorntonInternational Ltd, and is for informational purposesonly. Neither the respectivemember firm nor GrantThornton International Ltd can guarantee theaccuracy, timeliness orcompleteness of the datacontained herein. As such,you should not act on theinformation without firstseeking professional taxadvice.

Grant Thornton InternationalLtd (Grant ThorntonInternational) and themember firms are not a worldwide partnership.Services are deliveredindependently by themember firms.


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