Could your transfer pricing narrative save the day in APAC countries?29th September 2021
Could your transfer pricing narrative save the day in APAC countries?
Tax transparency and the sharing of information (thank you, country-by-country reports) has changed transfer pricing forever. Scrutiny is on the rise globally, partly because there is just so much data to scrutinize. APAC countries—of course, that’s 13 countries in the Asia Pacific region, including China, Australia, India, and Indonesia—are no exception, as transfer pricing examinations continue to increase there, some say, more than anywhere else in the world. What’s worse is transfer pricing investigations often shed light on other issues for taxpayers, like questions over withholding taxes and customs duties. How can you protect your company? Many experts are advising taxpayers to put more thought into the narrative part of transfer pricing documentation and make sure it’s telling a story that your data supports. Years ago, only a taxpayer had access to its own data, but now tax authorities (and soon maybe the general public) have access to it, too. Given that tax authorities have access to so much data about a multinational group, it’s easy for them to create narratives of their own—about your company. But if your narrative is well thought out, and you have the data to back it up, then you’re already ahead of the game.
Public Country-by-Country Reports Inch Closer in the EU
The United States isn’t the only country discussing the benefits of public country-by-country reporting. It’s a high-priority discussion in the EU, as well. And from the looks of things, talks are moving right along. In fact, signs are showing that public country-by-country reports will be required in the EU—for certain companies anyway—in the near future. A draft directive on the initiative has been ratified by 21 of the EU’s 27 member states. How will it work? Assuming it passes a final vote in the EU Parliament, beginning in 2024 or 2025 and depending on when EU countries actually adopt the law into domestic legislation, companies with more than €750 million ($876 million) in global revenue—the OECD’s recommended threshold for country-by-country reports—will have to disclose their most private business secrets: earnings, profits or losses, the number of employees in each EU country, and of course, the amount paid in taxes. And if an MNE is doing any business in a jurisdiction that the EU considers a tax haven, well, that information needs to be front and center, too. What does this mean for taxpayers and transfer pricing? First, as always, all of your documentation must be consistent—red flags will be easier to spot with public information. And certainly, you can expect more scrutiny from tax authorities as well as the general public, who may or may not know how to analyze the information on display.
DEMPE Troubles for Belgium
It’s time to get our heads out of the past and get back… to the future! Or so the Court of Appeal of Ghent, Belgium, is telling Belgian tax authorities when it comes to applying DEMPE approaches to intercompany transactions that were made before DEMPE was even a thing. DEMPE—short for development, enhancement, maintenance, protection, and exploitation—is a way of valuing intangible assets. The OECD entered DEMPE into transfer pricing guidelines in 2017. But that didn’t stop Belgian Tax Authorities from applying DEMPE functions and analysis to transactions made in 2009. (Do they have a time machine?) The Court of Appeal said, “Not so fast,” noting that the specific OECD transfer pricing guidelines (that’s Actions 8-10) actually say DEMPE should only be applied to intercompany transactions dated after January 1st, 2018. Now, of course, OECD transfer pricing guidelines aren’t laws themselves, they’re just recommendations for laws. The court also ruled in favor of the taxpayer given the precedent stemming from a case where the European Commission used 2010 transfer pricing guidelines to assess the arm’s length transactions Amazon made in 2003. The Belgian tax authorities may not be thrilled, but taxpayers and shareholders? Oh, they are going to love it.
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