Transfer Pricing · transfer pricing at University of Medellin in Colombia. She has been working in transfer pricing for over nine years, focusing on compliance, strategic planning,

Published in association with:

Deloitte Tohmatsu TaxDuff & PhelpsFenwick & WestKPMG SwedenMathesonPwC

T A X R E F E R E N C E L I B R A R Y N O 1 1 4

Transfer Pricing 19th edition

W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 1

3 ChileChile on the front lines of country-by-country reportingChile is among the first countries requiring multinational companies to file a country-by-countryreport, explain Roberto Carlos Rivas and María Carolina Camargo of PwC.

7 IrelandTax disputes post-BEPS: A perfect stormBEPS will inevitably lead to an increase in international tax disputes, write Joe Duffy andTomás Bailey of Matheson.

12 JapanHow Japan’s new documentation requirements workBEPS has well and truly reached Japan’s shores. Timothy O’Brien, Takuma McNie and LukeTanner of Deloitte Tohmatsu Tax look at the ins and outs of the new documentation require-ments.

16 SwedenWhen, where and how to use OECD materials to interpret Swedish tax lawFollowing international cooperation in the area of taxation, for example within the OECD, anumber of non-binding materials (soft law instruments) have been generated. These documentscontain information and considerations that may be of interest for interpretation of domestic taxrules, writes Johan Rick of KPMG Sweden.

20 UKUncertain times for the UKShiv Mahalingham of Duff & Phelps provides a roundup of the key changes to the UK transferpricing landscape in recent months.

24 USStateside developmentsDavid Forst and Larissa Neumann of Fenwick & West provide a roundup of recent transferpricing developments in the US.

Transfer Pricing

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2 W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M

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I t used to be when one talked about country-by-country reporting (CbCR) and tax trans-parency, people would look at you like you

were some kind of beret-wearing, fist-raising,Trotskyist from Tooting shouting “power tothe people!”Returning to the world of tax and transfer

pricing after nearly three years editing a currentaffairs magazine, I can see how much thingshave changed. With the OECD’s BEPS projectin full swing, CbCR is about as mainstream asEd Sheeran. And just as no fewer than 16 of hissongs find themselves dominating the UK Top

20, it is hardly surprising that this year’s Transfer Pricing guide is domi-nated by the rollout of BEPS Actions worldwide.As Roberto Carlos Rivas and María Carolina Camargo and of PwC

explain, Chile is on the front lines of CbCR as it is among the first coun-tries to require multinationals to file a country-by-country report.The increased transparency brought by such BEPS measures will

inevitably lead to more tax disputes, argue Joe Duffy and Tomás Baileyof Matheson as they survey the Irish landscape.In Japan, Timothy O’Brien, Takuma McNie and Luke Tanner of

Deloitte Tohmatsu Tax explore the ins and outs of the new documenta-tion requirements. In Sweden, we have Johan Rick of KPMG looking at how OECD

materials can be used to interpret local law. Meanwhile, David Forst and Larissa Neumann of Fenwick & West

look at all the latest transfer pricing developments to come out of the US,while Shiv Mahalingham of Duff & Phelps rounds up UK changes.I hope you find this guide useful.

The Ed Sheeranof transfer pricing

Salman ShaheenManaging editorTPWeek.com

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Chile on the front lines ofcountry-by-country reporting

Chile is among the firstcountries requiringmultinationalcompanies to file acountry-by-countryreport, explainRoberto Carlos Rivasand María CarolinaCamargo of PwC.

I n its strong commitment to be aligned with the new OECD guidelines– BEPS Action 13, the Chilean tax authority has issued new internallegislative and administrative regulations allowing it to go ahead with

the international objective of mutual administrative support and trans-parence in fiscal matters. Also, Chile will be one of the first jurisdictionsto receive the filing of the CbC report in June 2017.

Convention on Mutual Administrative Assistance in Tax MattersThe Convention on Mutual Administrative Assistance in Tax matterswas signed by Chile in October 2013. The purpose of this conventionhas been that the contracting parties take measures for internationalcooperation taking into account the protection to confidentiality ofinformation and privacy of personal data flow. Such instrument wasinternally enacted through Decree No. 104 of the Ministry of ForeignAffairs on July 20 2016, with Chile becoming the 59th country to signthe agreement at that time.According to the convention, the signatory states can have access to

every kind of mutual assistance such as: exchange of information uponrequest, spontaneous exchange of information, tax audits abroad, simul-taneous tax audits and assistance on tax collection, while the taxpayerrights are protected. Likewise, it makes it possible to perform automaticexchange of information while an agreement between the parties ininterest is required. The convention’s regulation will take effect for the administrative

assistance relating to tax years starting on or from the year following thatin which the agreement comes into force. Thus, in the particular case ofChile, the information exchange will begin in the commercial year 2017(tax year 2018).The signatory states can exchange any information expected to be

relevant for the tax administration or application of their internal legis-lation with regard to the taxes comprised in the agreement. In theChilean case, these will comprise the income tax, VAT and tax on inher-itance and donations.

Multilateral Competent Authority Agreement on Exchange ofCountry-by-Country Reports over global operations of multinationalenterprises The states signatory to the above convention have signed two mutualagreements to implement the automatic exchange of information:

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i) The Multilateral Competent Authority Agreement onAutomatic Exchange of Financial Account Information(CRS MCAA), which establishes a common standard ofautomatic exchange of financial information; and

ii) The Multilateral Competent Authority Agreement onCountry-by-Country Reporting (CbCR MCAA), whichestablishes the way in which the competent signatoryauthorities will perform the exchange of country-by-country reports presented by the parent entities of multi-national groups in their jurisdiction. Chile has signed both agreements. In particular, on

January 2016, Chile subscribed to the MultilateralAgreement between Competent Authorities for the CbCRand, on December 2016, the Chilean IRS issued ResolutionNo. 126, establishing in detail the obligation of filing a newannual transfer pricing return (Form No. 1937) containingthe CbCR for MNE based in our country.

The actual filing of the CbCR in ChileResolution No. 126 introduces new regulations setting outTransfer Pricing Return No. 1937, which contains CbCreporting. The obligation to submit the annual transfer pric-ing return applies to the parent or controlling company of amultinational enterprise (MNE) group with residence in

Chile for tax purposes, with a consolidated turnover of€750 million ($799 million) or more in the previous 12months. Surrogate parent entity of the MNE group with resi-

dence in Chile for tax purposes that has been appointed bythe parent for the controlled entity of the group, as a solesubstitute in order to file the annual transfer pricing return. Surprisingly, according to the new regulation, the new

CbCR (Form 1937) must be submitted to the ChileanIRS before June 30 2017, with respect to informationregarding commercial year 2016. Such deadline can beextended once for a period of three months. As such,Chile will be among the first countries requiring a coun-try-by-country report.The new resolution applies penalties for non-compli-

ance for both transfer pricing returns, ranging from 10 to50 annual tax units (approximately $10,000-$50,000)without exceeding the upper limit of between 15% of thetaxpayer’s equity or 5% of the effective capital, whicheveris greater.The information in the new annual transfer pricing return

regarding CbCR is mostly analogous to the BEPS modeltemplate and requires the following financial and tax ele-ments for each entity of the MNE group:

María Carolina CamargoPwC

Tel: +56 2 [email protected]/cl

María Carolina Camargo has a degree in public accountingfrom the National University of Colombia with postgraduatestudies in economic law and taxation law from the PontificalXavierian University. María Carolina has taken transfer pricingcourses in International Bureau of Fiscal Documentation (IBFD)in the Netherlands and a course of international taxation at theUniversity of Castilla-La Mancha in Spain. She was professor intransfer pricing at University of Medellin in Colombia.She has been working in transfer pricing for over nine years,

focusing on compliance, strategic planning, consulting in trans-fer pricing disputes and competent authorities procedures.María Carolina has rendered services to a wide range of

industries over the years that include: energy, pharmaceuticals,consumer goods, IT, and telecommunications.

Roberto Carlos RivasPwC

Tel: +56 2 [email protected]/cl

During 2001 and 2002 Roberto Carlos Rivas obtained a mas-ter’s in law degree in international taxation at Leiden University,the Netherlands.During years 2002 and 2003 he was attached on a second-

ment to the International Taxation Department ofPricewaterhouseCoopers, Rotterdam, the Netherlands, takingactive part in international tax planning projects concerninginvestments between Europe and Latin America.Roberto joined PricewaterhouseCoopers in April 1993 and he

has also been assigned to PwC Buenos Aires until May 2004.He is a transfer pricing expert.He is member of the International Fiscal Association in Chile

and he has written many articles on international tax matters.He has been lecturer in international tax seminars taking placein Rotterdam, Amsterdam, Barcelona, Buenos Aires, Punta delEste and Santiago.

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• The gross income of the MNE’s groups differentiatingbetween that earned via related entities and that earnedvia unrelated parties;

• Profit (loss) before income tax or taxes; • Income tax paid (on cash basis), including withholdingtaxes incurred;

• Income tax accrued (current year), excluding deferredtaxes or unrealised tax accruals;

• Statutory paid-in capital;• Accumulated earnings;

• Number of employees; • Tangible assets, other than cash and cash equivalents;• List of resident entities, including permanent establish-ments and core activities carried out by each entity; and

• Other information considered relevant and an explana-tion, if warranted, of the data included.At the moment, the Chilean IRS has not issued any reg-

ulation related to master file and local file, notwithstanding,the taxpayers must be alert in case further regulations wouldeventually be issued.

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Tax disputes post-BEPS:A perfect storm

BEPS will inevitablylead to an increase ininternational taxdisputes, writeJoe Duffy andTomás Bailey ofMatheson.

T he international tax landscape has changed dramatically since theOECD’s Action Plan on Base Erosion and Profit Shifting was pub-lished in 2013. The BEPS Project has been both a vehicle and a cat-

alyst for change. Taxpayers with cross-border operations now face aperfect storm of untested international tax rules, inconsistent implemen-tation and interpretation in different jurisdictions, increased informationsharing and a drive to raise tax revenues. An increase in international taxdisputes seems inevitable.

This article will consider the primary causes for the increase in dis-putes, focussing on the implementation of international measures inIreland to highlight the risk of disputes arising from inconsistencies inimplementation. This article will also consider the steps taxpayers cantake to mitigate the risk of disputes and to ensure that tax structures arefully defensible in the event of a challenge.

Batten down the hatchesTo fully appreciate a taxpayer’s position in the current international taxclimate, the perfect storm must be contextualised in the current inter-national economic environment. Many countries are becoming increas-ingly reliant on enforcement of tax law as a revenue raising measure toaddress budgetary deficits without introducing measures, which couldnegatively impact on the ability to attract foreign direct investment. Thishas resulted in many countries, like Ireland, enhancing domestic rev-enue collection powers and resources.

It is imperative that international taxpayers adapt to the new interna-tional tax environment and implement a proactive and coordinatedapproach to tax policy and governance. In particular, taxpayers shouldensure that operations and structures align in all respects to produce arobust and fully defensible position in the event of challenge.

It is equally important for a country like Ireland with an open, out-ward-facing economy that all domestic efforts are taken to promote cer-tainty in taxation and to ensure that the appropriate infrastructure is inplace to enable international taxpayers resolve disputes in an efficientand principled manner.

Fertile ground for disputes: The BEPS effectIt is unquestionable that the OECD BEPS Project has had a significantreformative impact on international tax principles and policy. Thisimpact has been two-pronged. Firstly, the proposals emanating from the

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final BEPS reports are being transposed into national andsupranational law. Secondly, many countries and institu-tions have sought to leverage the reformative impetus sur-rounding the BEPS Project to unilaterally drivedevelopments beyond the boundaries of the BEPS reports.

The inevitable uncertainty arising from such large-scalereform together with a lack of uniformity in implementa-tion in an environment of enhanced cooperation betweentax authorities make it unsurprising that significant increas-es in international tax disputes are anticipated. The increasein tax disputes, both from an Irish and an international per-spective, will largely emanate from the following sources:• The disjointed domestic implementation, interpretation

and enforcement of supranationally developed measures;and

• The increased transparency and enhanced cooperationbetween tax authorities internationally.Ireland has traditionally operated a self-assessment based

cooperative system of tax compliance for corporate taxpay-ers. By virtue of the changes to the international tax land-scape, taxpayers located in Ireland with cross-borderoperations will experience an increase in tax disputes overthe coming years. The Irish Revenue Commissioners have,like many tax authorities internationally, enhanced theresources allocated to its international tax, transfer pricingand competent authority divisions in order to increasedomestic tax revenues and to defend the Irish tax base.Therefore, in addition to an increase in disputes, it is likelythat taxpayers in Ireland will encounter more interactionsgenerally with the Irish Revenue Commissioners, which areincreasingly formal and adversarial in many instances.

Disjointed domestic implementation, interpretationand enforcementThe measures proposed in the final BEPS reports areundergoing multi-speed domestic implementation. There isan obvious risk of inconsistency in implementation whichcould be caused by an à la carte uptake of BEPS measuresor the adoption of alternative domestic interpretations ofBEPS measures, for example. Any divergence or unilateralaction on implementation is likely to impact significantly ontaxpayer’s with global operations. Such action would ulti-mately increase uncertainty, undermine the BEPS Projectand result in a lack of taxpayer engagement in the reforma-tive process.

The measures proposed in Action 7 for example areselective by design. Countries can choose whether or notto adopt the updated treaty provisions and commentarywhen ratifying the multilateral instrument (MLI).Although this selectivity should not directly result in anincrease in disputes, it may do so indirectly by increasingthe instances in which treaty relief is claimed by a residentof a treaty country that has not adopted the new lower

threshold of taxation provided for under Action 7. Forexample, where a country which adopts the Action 7 pro-posal when ratifying the MLI (Country A) extends thenew understanding of permanent establishment intodomestic law. In such circumstances, non-resident enter-prises would exceed the threshold for taxation underdomestic law in Country A more frequently which couldresult in greater reliance on the existing (pre-BEPS) per-manent establishment provisions.

Another possible source of disparity is the domesticapplication of the updated OECD Transfer PricingGuidelines contained in the final report on Actions 8-10. Itappears that some taxing authorities have adopted a viewthat the updated guidelines are clarificatory in nature and assuch apply with retroactive effect. There is no evidence tosuggest that the Irish tax authorities have adopted such anapproach to the application of the updated guidelines. Infact, the updated guidelines have not been implementedinto domestic Irish law to date and therefore currentlyapply only in a double tax treaty context.

The diverging approaches to the application of theupdated guidelines could give rise to significant disputeswhereby taxpayers would be required to apply differentstandards to the two sides of the same intra-group transac-tion. Furthermore, there is also a risk that tax authorities insource jurisdictions, applying the updated guidelines, mayseek to enhance the profits attributable to a local entity byattributing additional value to the functionality of that localentity based on a comparison with the overall group func-tions, where the group functions have been determinedbased on the pre-BEPS guidelines.

Empirical evidence suggests that tax authorities are alsoadopting a more aggressive approach to audits and investi-gations, particularly in a transfer pricing context where arevised tax assessment can involve substantial sums.Recourse to the criminal legal infrastructure, or at leastthreats thereof, is becoming increasingly commonplace.There is no evidence to suggest that the Irish RevenueCommissioners have adopted a similar approach.

Increased transparency and cooperationA number of initiatives in recent years have led to a signifi-cant increase in the information tax authorities will have attheir disposal concerning a taxpayer’s business operationsand tax infrastructure. For example, in Ireland certain rul-ings relating to cross-border transactions issued sinceJanuary 1 2010, including APAs, are within the remit of aretroactive spontaneous exchange of information regimepursuant to the OECD framework, as proposed by BEPSAction 5, and Council Directive (EU) 2015/2376. In addi-tion, Ireland has implemented domestic legislation provid-ing for the filing and exchange of country-by-countryreports pursuant to BEPS Action 13.

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Tax authorities globally will be in possession of more rel-evant information concerning a taxpayer’s tax affairs beforethe initiation of an audit or investigation. In addition, thisinformation will in many instances have multi-jurisdictionalrelevance. Therefore, tax authorities will be in a relativelynovel position of being able to undertake a multi-jurisdic-tional review and consideration of a taxpayer’s global struc-ture before engaging with the relevant taxpayer. While thesedevelopments strengthen the artillery of tax authoritiesinternationally in combating aggressive tax structures, thereis a real danger that, without appropriate controls, taxpayerswill be prejudiced. For example, a taxpayer’s position couldbe severely undermined where a disproportionate weight isattributed to information which favours a tax authority’sposition and which is ultimately considered without thebenefit of the relevant underlying knowledge.

Dispute resolution frameworkThe taxpayer’s invidious position in the current internation-al tax environment is compounded by the international taxdispute resolution framework which has failed to provide theefficiency and certainty required by international business todate. It is generally accepted that the mutual agreement pro-cedure (MAP) framework is not fit for purpose, in its cur-rent guise at least. The system is undermined by:

• The lack of compulsion on parties to engage in theprocess;

• The absence of an obligation on the parties to resolve thedispute; and

• The lack of a time limit on negotiations. As a result of these shortcomings, international tax dis-

putes often remain outstanding and unresolved indefinitely,particularly where the views of the contracting states are dia-metrically opposed.

BEPS Action 14 seeks primarily to make international taxdispute resolution more effective. The Action 14 final reportproposes a number of initiatives to enhance the MAP frame-work as a dispute resolution mechanism including a peerreview of the implementation of minimum standards andthe introduction of mandatory binding arbitration (MBA).

It is submitted that the introduction of MBA will providea mechanism for resolving disputes in a decisive and efficientmanner which will be crucial for taxpayers to achieve somelevel of certainty in the coming years. The certainty and effi-ciency achievable through MBA will be vital to protectenterprises with cross-border operations from double taxa-tion and to promote confidence and engagement among thebusiness community in the evolving international tax land-scape. It is anticipated that Ireland will adopt MBA whenimplementing the MLI.

Joe DuffyMatheson

DublinTel: +353 1 232 2688 [email protected]

Joe Duffy is a partner in the Tax Group at Matheson. Joe hasextensive experience in corporate tax law and advises on inter-national restructurings, mergers and acquisitions, tax controver-sy and transfer pricing.

Joe speaks regularly on international tax matters in Irelandand abroad. He has also written on international tax matters,transfer pricing and tax controversy for publishers includingIBFD, Kluwer, and Thompson Reuters. Joe is the Ireland editorof the Bloomberg Double Tax Treaty Series. Joe has been anactive participant in the American Chamber of Commerce taxworking group for many years.

Joe is a qualified solicitor, chartered accountant and taxadviser in Ireland and has qualified as an attorney in New York.Joe has previously worked in a Big 4 accountancy practice andas in-house tax counsel for a US multinational.

Tomás BaileyMatheson

DublinTel: +353 1 232 [email protected]

Tomás Bailey is an associate in the Tax Group at Matheson.Tomás advises clients on corporate and international tax andtransfer pricing, with a particular focus on intangible propertystructuring. Tomás advises Irish and multinational companies inrelation to tax-effective structures for inbound and outboundinvestment and has advised on cross border restructures.Tomás also advises on the development and implementationof transfer pricing policies, IP management and tax alignedsupply chain strategies and R&D financing.

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Staying afloat in turbulent watersTaxpayers with cross-border operations can take a number ofsteps to adapt to the changing environment by developingrobust internal policies and procedures to manage and min-imise international tax disputes. In particular, a globallyfocussed strategy should be developed to ensure that tax dis-pute risks are managed across the tax function in a pro-active,coordinated and consistent manner in order to minimise anypotential disruptive impact on business operations. Thedetails of any such strategy will be determined by the taxpay-er’s business model and the relevant perceived risks.

In anticipation of increased challenges and audits, taxpay-ers should undertake a detailed self-assessment of currenttax practices, policies and structures to identify potentialareas of weakness. Where weaknesses are identified, a con-certed effort should be adopted to strengthen the positionand to clarify relevant underlying technical support.

The proliferation of information is likely to have a signif-icant impact on the approach adopted by tax authorities tothe assessment of risk and to the conduct of audits andinvestigations. On this basis, the proactive management ofinformation by taxpayers will be increasingly detrimental inpreventing and settling disputes. Taxpayers should under-take a detailed review of all information available to tax

authorities (including information available on publicforums and social or professional media platforms) to ensurethat there is nothing which contradicts or casts doubt on thetaxpayer’s factual matrix. Such a review will enable the tax-payer to manage risk, to anticipate possible avenues for chal-lenge by authorities and to exercise greater control of theweight attributable to unhelpful information.

Early engagement with tax authorities is crucial to man-aging tax disputes. Taxpayers should seek to identify the dis-puted issue as early as possible with a view to narrowing thescope of the disputed issue as quickly as possible. It is impor-tant to bear in mind that a tax authority’s resources are notendless and that they will typically be receptive to proactiveattempts to minimise the duration of a particular dispute. Itis important to identify opportunities to settle the disputewhere appropriate to avoid a prolonged engagement withthe authorities or litigation. Taxpayers should howeverremain mindful of the importance of preserving confiden-tiality and privilege of information in all engagements withtax authorities in case litigation becomes inevitable.

Although tax disputes will be unavoidable for many inthe coming years, by adopting a proactive tailored approachto managing tax risks taxpayers should be well equipped toweather the storm.

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How Japan’s newdocumentation requirementsworkBEPS has well andtruly reached Japan’sshores. TimothyO’Brien, TakumaMcNie and LukeTanner of DeloitteTohmatsu Tax look atthe ins and outs of thenew documentationrequirements.

J apan’s implementation of new transfer pricing documentation rules(including country-by-country reporting, master file and local file)applies for fiscal years beginning on or after April 1 2016 (for country-

by-country reports and master files) and fiscal years beginning on or afterApril 1, 2017 (for local files). In addition, a Notification for UltimateParent Entity must be submitted to the Japanese authorities for fiscalyears beginning on or after April 1 2016. • Notification for Ultimate Parent Entity: The notification is the first

document required to be filed under the new system, and must besubmitted by the last day of the ultimate parent’s fiscal year. Thisdeadline is earlier than those for the country-by-country report andthe master file. Entities with a March year end will need to submitthe document by March 31 2017 (via the “e-Tax” system). AllJapanese companies (or foreign companies with a permanent estab-lishment in Japan) that are constituent entities of a multinationalenterprise are required to submit the notification. However, thereis an exemption for groups with more than one Japanese company(or foreign companies with PEs in Japan). In these cases, one com-pany can submit the notification, along with the details of all othercompanies.

The notification contains basic information including: the name of theultimate or surrogate parent entity; the location of its head or princi-pal office; its corporate number; and the name of its representative.

Japanese language instructions on how to submit the notification inthe “e-tax” system were published on Japan’s National Tax Agency(NTA) website in late January 2017.

• Country-by-country reporting: Japanese companies that are the ulti-mate parents of multinational groups and meet the filing threshold ofgroup revenue of ¥100 billion ($885 million) in the previous yearmust file a country-by-country report. The report must be filed elec-tronically within one year after the end of the group’s fiscal year. Incertain cases, a Japanese subsidiary of a multinational group or aJapanese permanent establishment of a non-Japanese group companyin which the ultimate parent is not a Japanese company is required tofile the country-by-country report if the report has not been receivedfrom the applicable government.

• Master file: Japanese companies or permanent establishments thatare members of a multinational group that meets the filing thresh-old of group revenue of ¥100 billion in the previous year must file

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a master file. The master file must be filed electronical-ly with the Japanese tax authorities and is due withinone year after the year end of the ultimate parent com-pany.

• Local file: Existing Japanese legislation which set outrequirements to demonstrate related party transac-tions’ compliance with the arm’s-length standard wasrevised to make it more consistent with Action 13(however, some differences remain). Based on therevised Japanese legislation, the local file should beprepared by the time the entity’s income tax return isfiled (subject to certain thresholds). In practice, thelocal file must be readily available to the tax authoritiesif requested (e.g. under audit) and while there arethreshold requirements for contemporaneous docu-mentation, all companies with foreign related partytransactions should be prepared to submit documentsconsistent with the local file rules at the time of audit.Failure to provide the local file to the tax authoritieswhen requested may lead the authorities to apply pre-

sumptive taxation (which could include audits of thirdparties whose business operations are deemed to becomparable to that of the taxpayer). The period inwhich the requested files must be submitted is deter-mined by the auditor but cannot exceed 45 days or 60days, depending on transaction size thresholds and thenature of the questions (e.g., primary documentationor additional supporting information). As Japanese companies move into the period covered

by the new rules (e.g. for March year end companies,country-by-country reports, master file and the notifica-tion for ultimate parent entity are required for the yearended March 31 2017) , the NTA has issued guidance andclarification of the new rules. Included in this guidance is:(i) the Outline of the Revision of the Transfer PricingDocumentation, which was issued in Japanese andEnglish; (ii) the Documents Recognised as Necessary forCalculating Arm’s-Length Prices which was issued only inJapanese; (iii) Transfer Pricing Documentation FAQwhich was issued only in Japanese.

Timothy O’BrienDeloitte Tohmatsu Tax Co.

Tokyo, JapanTel: +81 (3) 6213 [email protected]/jp/tax-co

Timothy O’Brien is partner in Deloitte Tohmatsu Tax Co.’s Tokyo-based Transfer Pricing Consulting Services team. Timothy has more than 20 years’ experience in transfer pric-

ing matters and has worked in Deloitte’s Tokyo office sinceAugust 2000. He supports Japan-inbound companies with theircross border tax and transfer pricing issues and also assistsJapan-based multinationals with global planning. He has a longhistory developing and negotiating pricing methodologies forAdvance Pricing Agreements (APAs) and for settling audit caseswith the local and Regional Taxation Bureaus. His recently con-cluded Japanese bi-lateral APAs have involved the USA,Singapore and Switzerland. Timothy serves a number of foreign-based multinational

companies, primarily in the technology, media, & telecommu-nications (TMT) and life-sciences industries. Specific experi-ence includes assisting a foreign based multinationalintegrate full-function Japanese operations into a Singaporesupply hub structure and assisting a company move certainIP offshore in conjunction with implementation of a costsharing arrangement (CSA).

Takuma McNieDeloitte Tohmatsu Tax Co.


Takuma focuses on foreign multinationals with Japanese opera-tions primarily in the life science and high technology indus-tries. In this capacity Takuma has assisted clients in bothplanning and controversy. Successful planning projects includemultilateral cost-sharing arrangements, sales of local intangiblesand post-transaction structuring. Controversy projects includeboth audit defense (in Japan, US and Canada) and advancepricing arrangements (involving Japan, US, Singapore, andCanada).Takuma has also led the preparation of technology-enabled

global OECD Action 13-compliant transfer pricing documentationand developed and implemented centralised global transferpricing policies for multinational headquarters. Furthermore,Takuma has also provided guidance on debt capacity and pric-ing in this role.Takuma is a Chartered Accountant (Canada).

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Outline of the revision of the transfer pricingdocumentation The official outline is in the Japanese language, however theJapanese authorities also released an unofficial English trans-lation as a reference. The outline explains at a high level thedifferent documents which need to be prepared or submit-ted under the new rules including: content of each docu-ment, under what circumstances preparation or submissionis required, formats, timing and deadlines, exceptions, lan-guage and penalty information. The outline also providesseveral examples showing the circumstances under whichthe various documents are required, and displays the addi-tional requirements under the new local file rules, in com-parison to the existing documentation rules.

Documents recognised as necessary for calculatingarm’s-length prices The NTA released an additional paper containing a collec-tion of illustrative examples of the kind of documents thatthe tax authorities consider relevant when preparing localfiles. The document reproduces each of the requirements ofthe revised Japanese law, and explains each requirement, andprovides examples of information and documents that, fromthe tax authorities’ view, could satisfy each requirement.

This local file guidance is useful for taxpayers as it clarifiesthe tax authorities’ view of some of the more vaguely word-ed items of the Japanese law, as well as providing an under-standing of what the Japanese authorities may expect fromtaxpayers’ local file documentation. Based on the local fileguidance, it appears the Japanese authorities expect taxpay-ers to prepare and maintain highly detailed information. It isworth noting that the guidance represents the tax authori-ties’ interpretation of the Japanese law, and a taxpayer maytake a different view of what satisfies each item. Whether ornot it is necessary to closely follow the guidance in preparingan adequate local file, it can be expected that the tax author-ities may request information consistent with the items cov-ered by this guidance during an audit.

Transfer pricing documentation FAQIn late 2016, a Transfer Pricing Documentation FAQ wasalso issued by the NTA in Japanese. The FAQ provides theNTA’s responses to an extensive list of questions theauthorities commonly receive or have identified as itemsthat need additional clarification (97 questions and answersspanning 36 pages in Japanese language). The FAQ coversgeneral questions (e.g. outline of the rules, reasons for revi-sion, taxpayers subject to filing requirements) as well as spe-cific questions and answers on each of the filingrequirements under the new documentation rules listedabove (i.e. notification for ultimate parent entity, country-by-country report, master file and local file). Although noEnglish language translation has been made available by theauthorities, the FAQ is nevertheless a useful resource forboth Japanese and foreign multinationals that are subject tothe new documentation rules.

Luke TannerDeloitte Tohmatsu Tax Co.


Luke is a transfer pricing manager with Deloitte Japan. Lukehas over 10 years’ tax experience, five in an international taxrole and five in transfer pricing. In his role as an international tax manager, Luke was based

in Australia and assisted Australian and foreign multinationalswith inbound and outbound investments, including cross-bor-der M&A transactions. As a transfer pricing manager, Luke focuses on the financial

services and life sciences industries. Luke assists clients in bothplanning and controversy, including advance pricing arrange-ments involving Japan, the US and the UK. Luke holds a master of laws from the University of

Melbourne and is qualified as a lawyer (Supreme Court ofVictoria).

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When, where and how to useOECD materials to interpretSwedish tax lawFollowing internationalcooperation in the areaof taxation, forexample within theOECD, a number ofnon-binding materials(soft law instruments)have been generated.These documentscontain informationand considerations thatmay be of interest forinterpretation ofdomestic tax rules,writes Johan Rick ofKPMG Sweden.

T here is reason to believe that the interest in these types of documentsmay increase further due to the recent focus on tax issues in generaland, specifically, the BEPS Project. The following is stated in the

OECD discussion draft dated July 28 2016, about interest deductions:

“International tax issues have never been higher on the politicalagenda. The integration of national economies and markets hasincreased substantially in recent years, putting a strain on interna-tional tax rules which were designed more than a century ago.Weaknesses in existing rules create opportunities for base erosionand profit shifting (BEPS), requiring bold moves by policy makersto restore confidence in the system and ensure that profits are taxedwhere economic activities take place and value is created.”

The objective of this article is to present thoughts and reflections on howto use reports from the OECD to interpret Swedish tax law, specificallyfollowing the judgment from the Supreme Administrative Court, HFD2016 ref. 23. The main focus of this article will be on when and how theuse of OECD reports is acceptable. Specifically, since tax issues are higheron the international political agenda, pressure may increase on taxauthorities and courts to achieve certain political aims. In the long runthis may lead to an increased tendency towards using sources in whichfiscal political goals are expressed for interpretation of domestic tax rules.

The OECD reports and the Swedish source of law practice For interpretation of Swedish domestic legislation as well as tax law, theassumed source of law practice is as follows: law, precedents, legislativehistory, and doctrine. This means that the primary source for interpreta-tion is the text of the law. Second, precedents are used to determinewhether the Supreme Administrative Court has issued a ruling on how aparticular point is to be interpreted. In the absence of such a clarificationwhen the legal text leaves room for interpretation, then as a third instancethe legislative history of the law should be consulted. The fourth sourceis guidance that can be sought in various relevant literature.Materials from the OECD do not specifically fit into any of the cate-

gories of this generally accepted model. The closest fit is perhaps toregard OECD materials as a form of doctrine when used for interpreta-tion of Swedish domestic tax law. Nonetheless, OECD materials, at leastin some regard, are treated differently to traditional doctrinal sources.

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There is an air of authority to materials from the OECD,which implies that such material sometimes seems to betreated more like legislative history than doctrine. Thus, theplacement of OECD materials in the Swedish legal traditionis ambiguous, and the explanation for this, to a certainextent, may be that within the Swedish legal system (andwithin tax law in particular), the use of soft law instrumentsis limited. There is no natural place for such materials withinthe accepted hierarchy of sources of law. Therefore, it is dif-ficult to really know where the materials ‘fit in’ (if they do atall) to the interpretation of Swedish domestic law.In the following passages, on the basis of the ruling HFD

2016 ref 23, certain reasoning and thoughts with regard tothe use of materials from the OECD for interpretation ofSwedish domestic law are detailed.

HFD 2016 ref. 23On the April 12 2016, the HFD announced rulings in thecase numbers 4594-14 and 4595-14. The rulings became aprecedent with number HFD 2016 ref. 23.The primary issue of the rulings was if remuneration

according to certain sponsorship agreements should beregarded to be such remuneration for a sporting activity inSweden which is taxable according to the Act on specialincome tax for foreign resident artists (1991:591) (the artisttax law).Henceforth, the HFD asserts that no direct guidance for

the judgment of this issue can be found from the legislativehistory but that Kammarrätten has considered that guid-ance can be sought from the OECD’s Model TaxConvention and its Commentary.The HFD then states that “The Commentary on the

Model Tax Convention is primarily of importance for theinterpretation of tax treaties which are based on the ModelTax Convention; however, it may also be used for guidancefor the application of Swedish domestic legislation (see RÅ2009 ref. 91). This assumes that the internal legislation isbased on the same principles [emphasis added] as the ModelTax Convention (se prop. 1986/87:30 s. 42).”In their deliberation of whether the artist tax law is based

on the same principles corresponding to rules in theConvention (article 17), the HFD commences by compar-ing the wordings of the provisions.Furthermore, HFD notes in their deliberation that hav-

ing observed obvious similarities in the wordings theConvention has been of great importance for the prepara-tion of the artist tax law. Furthermore, it appears natural,according to HFD that the domestic legislation has beenshaped in such a way that it does not derogate the right totax which is afforded to Sweden according to the tax treatieswhich are based on the Convention. Consequently, HFDconsiders the Commentary to article 17 to be possible touse for interpretation of the artist tax law.

HFD’s announcement in the case with regards to whenand how the Commentary can be used for interpretation ofdomestic legislation should be generally applicable to theextent that they should also include the use of other types ofnon-binding assertions from the OECD. However, thequestion remains as to whether there is a limit to what typesof material can be used. For example, one may considerwhether materials are required to reach a certain status withthe OECD in order to qualify as relevant interpretativematerial. Hopefully, these questions will be answeredthrough precedence in due course.With regards to rule of law and predictability aspects, the

HFD however does make some statements in the case whichshould restrict the use of OECD material in some respects.The HFD notes that the Convention did not contain anystatements which gave guidance for the question up for inter-pretation in the case. Such statements are first found in theupdated Commentary which was approved in 1992 and whichwas based on an OECD report from 1987. The HFD statesthat from the legislative history to the artist tax law it is clearthat this report was considered during the preparation of thelaw and that the Commentary regarding advertising and spon-sorship, which was included, was meant to clarify how article17 should be interpreted and not to change the meaning ofthe article. The HFD therefore considers the Commentaryalthough it was approved after the emergence of the artist taxlaw, to be usable for the interpretation of the law.At this point a comparison should be made with case

Johan RickKPMG

Stockholm, SwedenMobile: +46 706 79 97 [email protected]

Johan Rick is head of KPMG Sweden’s Tax Dispute Resolutionand Controversy practice and specialises in tax litigations. Hehas a master of laws from Uppsala University. Johan joinedKPMG in 2015 and has a background as a judge at theAdministrative Court in Stockholm and as a Legal Clerk at theAdministrative Court of Appeal in Stockholm with particular spe-cialisation in tax cases. Johan has also worked a number ofyears as a lawyer at a large Swedish law firm. Johan is a well-recognised tax litigation expert and is representing both nation-al and international clients in a number of tax disputes. Johanhas wide sector experience including real estate, construction,oil and gas, financial services and the manufacturing industry.

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HFD 2016 ref. 57 (Riverdance). The case considers theinterpretation of tax treaties and a change to theCommentary to article 17 which has led the scope of appli-cation to be expanded (and thereby changed the meaning ofthe article). The change in question was considered to meana change of the article’s meaning and that this change hadoccurred after the signing of the treaty. Under those circum-stances, according to the HFD the change should be disre-garded when interpreting the common intentions of theparties to the treaty.

More or less unambiguous cases of principalagreementFrom the case presented above (HFD 2016 ref. 23), it isclear that OECD materials as a general rule can be used forinterpreting Swedish domestic legislation in cases wherethere is an agreement regarding the principles which bearthe respective regulations. HFD shows in the case wheresuch a judgment may be conducted in individual cases.The case at hand, however, may be seen as being quite

clear with regards to the admissibility of OECD materials forinterpretation of domestic law. In other cases the connectionmay not be as clear. For example, it is possible to imaginecases where the wording may well match, but where the leg-islative history or precedence make it clear that the domesticlaw rests partially on other principles than those upon whichthe OECD rules are built. Furthermore, it is possible toimagine cases where the wording matches and the legislativehistory doesn’t make any mentions of corresponding OECDregulations. In these latter cases the question may arise ofwhether there is a presumption that the internal regulationsshould be regarded as resting on the same principles as theequivalent OECD rules unless otherwise explicitly indicat-ed. Furthermore, one may imagine cases where the wordingdoes not match but where the legislative history more or lessindicates that the domestic law rests on the same principlesas equivalent OECD regulations. Here the question mayarise of how far the wording of the domestic law can bestretched through interpretation with reference to OECDmaterials. There may also arise situations where solely thesystematics of the rules suggests that the rules are to beregarded as resting on the same principles. In those cases thequestion arises of how much weight should be placed on

this grounds for interpretation alone when wordings andlegislative history don’t give any direct guidance or aren’tunequivocal.Thus there may be cases where in practice it is far more

difficult to ascertain whether the domestic legislation restson the same principles as the equivalent OECD regulations.

InterpretationThe purpose of this article has been to put forth thoughtswith regard to the use of materials from the OECD for theinterpretation of Swedish domestic legislation. The HFDhas stated in case 2016 ref. 23 that the Commentary canalso can be used as guidance for the application of domesticlaw – albeit under the condition that the domestic legisla-tion also rests on the same principles as the Convention.The HFD’s statement with regards to when and how

the Commentary can be used for interpretation of domes-tic legislation should, as mentioned above, be consideredto be generally applicable to the extent that it should alsoinclude the use of other types of non-binding statementsfrom the OECD.The HFD makes a few statements in the case with

regards to the rule of law and predictability aspects whichshould be borne in mind in this context. This can be com-pared with the case HFD 2016 ref. 57, where closely relatedissues are subject to consideration.The case which this article has considered; HFD 2016

ref. 23, may be regarded as a relatively simple case withregards to the admissibility of interpretation based onOECD material. The wording matched well and there wereclear indications in the legislative history that OECD regu-lations had been taken into consideration in the authoringthe domestic legislation. Furthermore, there were strongsystematic reasons which supported a uniform interpretationof the domestic law and equivalent OECD regulations.There may however, as noted above, be cases where the

method used by HFD is not as easily applicable and as suchit is far more difficult to ascertain whether the domestic leg-islation rests on the same principles as the equivalent OECDregulations. Therefore, it is important that the question isnoted in cases where it arises, leading to a certain amount ofconsideration with regards to the use of OECD materials forthe interpretation of Swedish domestic legislation.

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Uncertain times for the UK

Shiv Mahalingham ofDuff & Phelpsprovides a roundup ofthe key changes to theUK transfer pricinglandscape in recentmonths.

In recent months, there have been some important changes to the UKtransfer pricing governance process: 1) Revised HMRC inspector guidance confirming that where a transferpricing issue is neither suitable for an advance pricing agreement(APA), nor does it warrant an enquiry, inspectors should not engagewith the customer in discussions on that issue; and

2) Revised APA statement of practice confirming the preference for mul-tilateral APAs in most situations. Initial experience of this revised process has shown that it is hampering

the ability for businesses operating in the UK to obtain transfer pricingcertainty and that it is leading to escalating transfer pricing compliancecosts – particularly at year-end audit sign-off. In examining the above changes and the impact on UK businesses, it

is worthwhile revisiting some of the external factors that have broughtabout the changes:• The European Commission has challenged several transactions inwhich ‘aid’ may have been granted (by a tax administration or min-istry of Finance) in a member state. Many of these challenges examinewhether transfer pricing policy is in line with arm’s-length standards.These challenges and the subsequent negative press surrounding themhave created a preference amongst tax administrations to move awayfrom unilateral APAs (that may be subject to challenge) and towardmultilateral agreements in which all relevant tax administrations reachan agreement on transfer pricing;

• Media pressure accusing tax administrations of ‘sweetheart deals’ withbusinesses (reference Google agreeing to pay £130 million ($158 mil-lion) in back tax to HMRC in January 2016 for the 10 years to 2015,saying this was “full tax due in law”) has also created a preference torein in any practices that may be construed to be informal deals asopposed to statutory rulings; and

• Commitment to transparency and exchange information with treatypartners – the OECD global implementation of automatic exchangeof information (AEOI) is “an essential step for stimulating the devel-opment of a global level playing field”; in other words, global imple-mentation is essential to effectively tackle evasion as well as to ensurejurisdictions are on an even footing. Many jurisdictions have alreadyannounced their plan to implement the new standard (around 50jurisdictions will work towards having their first exchanges bySeptember 2017 with more to follow in 2018).

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The transfer pricing governance process revisitedThe three stage ‘gate’ processHMRC has a Transfer Pricing Group (TPG) to review eachenquiry (or potential enquiry) in alignment with a threestage or ‘gate’ process: • Making sure the selection of a case is appropriate;• Ensuring there is effective progress in a case; and• Reaching the appropriate conclusion in a case.The TPG includes specialists within HMRC who moni-

tor transfer pricing and thin capitalisation enquiries. Thesepersonnel are drawn from the following directorates withinHMRC: CTIAA Business International, Large BusinessService, Local Compliance, Specialist Investigations,Knowledge Analysis and Intelligence.The selection stage requires a business case file (in a

specific and predetermined format) to be prepared andapproved before an enquiry is commenced andINTM481030 confirms that “each directorate will decidethe best method for checking effective progress withintheir business area. This will allow each directorate to tai-lor the progression stage to its own systems. The progres-sion reports, in the system adopted, should continue to besubmitted to the TP Panels as previously”. It remains pos-sible for businesses to engage in a regular dialogue withcustomer relationship managers (CRM) about transferpricing policy to ensure that the process does not reachstage one.

Business case files where there is no enquiryStages two and three will require the preparation of a busi-ness case file. If the conclusion at stage one is that anenquiry is not justified, there is no requirement on theHMRC case team to prepare a business case. However, it isrecommended practice in the inspector guidance to recordthe results of the research carried out and the conclusionreached to inform future risk assessments. It may be possiblefor businesses to request sight of these business case files asthese may include important information on the differentlevels of risk associated with transactions (e.g. a transactionmay be flagged in one financial year but not pursued until itbecomes more material in later years, but an early indicationof this would be useful in stopping the enquiry process).This risk assessment process will be important for businessesin assessing year end provisions for potential transfer pricingadjustments in current and future years (or to support thefact that no such provisions are necessary).

Revised inspector guidance INTM480540Informal discussions and agreements with CRMs have beenuseful in the past to provide taxpayers with certainty andprotect them from overselling/overengineering in the mar-ket place. We have revisited a number of informal agree-ments in the past few months and the common theme is that

Shiv MahalinghamDuff & Phelps

LondonTel: (44) 20 7089 [email protected]

Shiv Mahalingham is a managing director in the newly estab-lished Duff & Phelps European Transfer Pricing Team. Shiv worksacross all industries and has built a strong reputation for the pro-vision of measured and practical economic transfer pricingadvice. He has been called as an independent expert witness ininternational transfer pricing cases, and has concluded disputeresolutions and APAs in jurisdictions including the US, UK, Japan,China, Australia, Singapore, France, the Netherlands and Germany.Prior to joining Duff & Phelps, Shiv was a founding partner

and the head of transfer pricing at Alvarez & Marsal Taxand UKand before that with Ernst & Young, where he led projects toinclude business restructurings for FTSE 100 groups; thin capi-talisation studies for large private equity backed buyouts; andtransfer pricing risk/opportunity assessments for FTSE midcapand fledgling groups. Shiv also spent two years with a fortune500 company, establishing in-house transfer pricing risk con-trols, systems and planning structures.Shiv brings a mix of academic skills, having studied econom-

ics and then taxation law before qualifying as a charteredaccountant and a chartered tax adviser. He is a regular speakerat international transfer pricing conferences and has publishedwell over 100 articles in international journals (including theInternational Tax Review, BNA Transfer Pricing, Taxation, TaxAdviser, Tax Journal, Tax Business, Tolleys Practical Tax, FinanceDirector, World Finance, and a case study in the HarvardBusiness Review). In addition, Shiv meets with UK tax authori-ties on a regular basis to consult on transfer pricing issues.Shiv is often quoted on transfer pricing in the UK press,

including mentions in the Financial Times, the Guardian, theObserver, the Times, the Telegraph, the Dow Jones Newswireand Accountancy Age. Some years ago, at the age of 26, Shivwas accepted as one of the youngest fellows in the history ofthe UK’s Chartered Institute of Taxation (CIOT) for his thesis onmodernising UK tax legislation, while maintaining the competi-tiveness of the UK economy.Before embarking on a career in transfer pricing, Shiv played

three seasons of professional basketball with the EnglishBasketball League.Duff & Phelps is the premier global valuation and corporate

finance adviser with expertise in complex valuation, transferpricing, dispute consulting, M&A and restructuring.

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they all apply a practical and commercial risk-based approachto transfer pricing policy. It is important to note that the HMRC CRM will still

engage with businesses about a wide range of potentialtransfer pricing risks and policies to inform the annual riskreview processes – however, informal agreements on transferpricing matters will no longer be provided (and more impor-tantly, existing agreements may no longer be relevant). Asdiscussed in the above governance section, businesses willstill be able to manage risk with transparency and communi-cation with the CRMs – it is recommended that all meetingsand discussions with CRMs be documented by businesses asaudit evidence and risk management. However, businessesare faced with having to undertake onerous transfer pricingreviews to appease financial auditors when an existing andvalid CRM agreement may already be in place.

Changes to the APA statement of practiceThe (November 2016) revised statement of practice con-firms that:“HMRC expects that APA applications are bilateral

rather than unilateral except where:• The other party to the transaction is resident in a jurisdic-tion with which HMRC has no treaty or where HMRCis aware that the treaty partner has no APA process; or

• HMRC considers there is little extra to be gained byseeking a bilateral agreement. For example, where theUK is at the hub of arrangements with associated enter-prises in many different countries and where the tradeflows involved with any one particular country are rela-tively modest in scale”.The statement of practice further confirms that unilateral

APAs are considered to be of less value to both HMRC andpotential applicants and provide less transparency – there-fore, applications for unilateral APAs are less likely to beaccepted into the APA programme and recent experiencehas shown that this is very much the case. Businesses areaware that a multilateral process will be a three-year timecommitment and significant resource drain and are less will-ing to utilise this process than may have been the case forunilateral APAs which could be agreed in a shorter

timescale. The commitment to a multilateral APA is a three-year one (compared with unilateral rulings that could beobtained within three to six months) and that is not palat-able to most businesses with limited tax spend budgets inthe current climate.The expression of interest (EoI) stage may still be consid-

ered by businesses looking for certainty of transfer pricingtreatment – HMRC prefers that such discussions are on anamed basis to maximise the benefit of discussions. The out-come of such a discussion may be that the transactions arenot considered to be high risk and a documentation of thatdiscussion may be a helpful risk management tool.

Compliance burdenIt is unfortunate that the above changes are alreadyincreasing the compliance burden on businesses at a timewhen more transfer pricing certainty is required althoughthe political and media backdrop discussed at the outset ofthis article provides the author with sympathy as to whythe changes have been implemented. The ability to enter adialogue with HMRC inspectors on transfer pricing mat-ters (formally and informally) once put the UK above mosttax jurisdictions in terms of transparency and managementof business resource; however, the above changes andexperience in recent months has seen this ebb away toleave businesses with reduced certainty options unless theyare prepared to spend a number of years engaged in discus-sions with multiple tax authorities at significant cost. Thechanges are already leading to an increase in audit andadvisory fees for many businesses who can no longer relyupon a valid CRM agreement and they are likely to lead toa decline in APAs being submitted in the UK (HMRC hasnot released APA statistics since 2014) as businesses optfor preparing robust documentation in alignment with therevised OECD transfer pricing guidance instead of engag-ing with HMRC. However, having discussed this trend with a handful of

CRMs, it is clear that a regular and transparent risk assess-ment discussion or process with the CRM should still helpto stave off a transfer pricing enquiry in the early gate stagesrather than having to reinvent the wheel on documentation.

ARPASTRANCNEDFICON

.ST.UTRought, so an’t be bSome things c

Clients have relied on Duff & Phelp e deliver objective adv . W We deliver objective advice in the areas of valuation, dispute consulting,a centuryate, restructuring, and M&A, real est

hnical skills with deep in proven tec

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al ideals for nearly ps to help protect these fundament vice in the areas of valuation, dispute consulting,

alancing d compliance and regulatory consulting. B ndustry expertise we help our clients address their

hnical skills with deep industry expertise, we help our clients address theirproven tecmost complex financial and business needs. Learn more at .duffandphelps.com www. or

act:cont

Danny Beeton, LondonManaging Director

+44 (0) 20 7089 [email protected]

Shiv Mahalingham, LondonManaging Director


d NewbyharRic, ParisManaging Director


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Stateside developments

David Forst andLarissa Neumann ofFenwick & Westprovide a roundup ofrecent transfer pricingdevelopments in theUS.

T he Treasury and the IRS finalised without any substantive changesthe § 367 regulations that, as they relate to transfer pricing, changethe rules governing the outbound transfer of intangibles in particu-

lar regarding foreign goodwill and going concern value. The final regu-lations retain the proposed regulation’s effective date so that the newrules apply to transfers on or after September 14 2015. In finalising theregulations the Treasury ignored the very clear legislative history, the rel-evant statutory language, virtually all written commentary and testimonyat the hearings.

In the preamble to the final regulations, the Treasury and the IRS dis-cuss and reject virtually every taxpayer comment or suggestion regardingthe proposed regulations with one exception that deals with useful lifeand which is discussed below.

The new regulations specify the categories of property that are eligiblefor the active trade or business exception. Intangible property, includingforeign goodwill and going concern value, is not included and thus can-not qualify for the exception. This is the opposite of the prior rules. Underthe 1986 temporary regulations, all property was eligible for the activetrade or business exception, subject only to five narrowly tailored excep-tions. While § 367(d) intangibles did not qualify (because they are subjectto § 367(d)), foreign goodwill and going concern value did qualify underthe prior rules if they were used in an active foreign trade or business.

However, the new regulations nonetheless require taxpayers to elect toapply § 367(d)’s periodic royalty rules to a transfer of foreign goodwill orgoing concern value to a foreign corporation to avoid being taxed on thefair market value of those assets in the year of the transfer. This effectivelytreats them as § 367(d)/§ 936(h)(3)(B) assets contrary to the statute.

The proposed regulations would have eliminated the long-standing20-year cap on the useful life of § 367(d) intangible property. The finalregulations effectively do the same thing. The final regulations providethat taxpayers may, in the year of transfer, choose (elect) to take intoaccount § 367(d) inclusions only during the 20-year period beginningwith the first year in which the US transferor takes into account incomepursuant to § 367(d). However, they state that this limitation should notaffect the present value of all amounts included by the taxpayer under§ 367(d).

Accordingly, the regulations require a taxpayer that elects to limit§ 367(d) inclusions to a 20-year period to include, during that period,amounts that reasonably reflect amounts that, in the absence of the

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20-year limitation, would be included over the useful life ofthe transferred property following the end of that 20-yearperiod. Thus, a higher-than-arm’s-length amount wouldneed to be included in income in each of the first 20 years.

For purposes of determining whether income inclusionsduring the 20-year period are commensurate with the incomeattributable to the transferred property, and whether adjust-ments should be made for taxable years during that periodwhile the statute of limitations for those taxable years is stillopen, the IRS may take into account information with respectto taxable years after that period, such as the income attribut-able to the transferred property during those later years.

The regulations also revise the definition of useful life toprovide that it includes the entire period during whichexploitation of the transferred intangible property is reason-ably anticipated to affect the determination of taxableincome in order to appropriately account for the fact thatexploitation of intangible property can result in both rev-enue increases and cost decreases.

The Treasury and the IRS believe that the value of manytypes of intangible property is derived not only from the useof the intangible property in its present form, but also fromits use in further development of the next generation of thatintangible and other property.

The Treasury and the IRS believe that if the software hasvalue in developing a future generation of products, thesoftware developer would not ignore the value of the use ofthe software in future research and development and handover those rights free of charge, and an uncontrolled pur-chaser would be willing to compensate the developer toobtain such rights. This obviously ignores the likely substan-tially reduced value most intangibles will have over time –perhaps a short time – when viewed from the perspective ofan on-going arm’s-length charge.

Consistent valuation of controlled transactionsThe significance of the § 367(d) regulations discussed abovecould have further reaching consequences, given new IRScoordination regulations under § 482. Section 482 authoris-es the Treasury and the IRS to adjust the results of controlledtransactions to clearly reflect the income of commonly con-trolled taxpayers in accordance with the arm’s-length stan-dard and, in the case of transfers of intangible property(within the meaning of § 936(h)(3)(B)), so as to be com-mensurate with the income attributable to the intangible.

While the determinations of arm’s-length prices for con-trolled transactions is governed by § 482, the tax treatment ofcontrolled transactions is also governed by other code and reg-ulatory rules applicable to both controlled and uncontrolledtransactions. Controlled transactions always remain subject to§ 482 in addition to these generally applicable provisions.

The new temporary regulations provide for the coordina-tion of § 482 with those other code and regulatory provisions.

The new coordination rules thus apply to controlled trans-actions including controlled transactions that are subject inwhole or in part to §§ 367 and 482. Transfers of propertysubject to § 367 that occur between controlled taxpayersrequire a consistent and coordinated application of both sec-tions to the controlled transfer of property. The controlledtransactions may include transfers of property subject to§ 367(a) or (e), transfers of intangible property subject to§ 367(d) or (e), and the provision of services that contributesignificantly to maintaining, exploiting or further develop-ing the transferred properties.

The Treasury and the IRS say the consistent analysis andvaluation of transactions subject to multiple code and regu-latory provisions is required under the best method ruledescribed in Treas. Reg. § 1.482-1(c). A best method analy-sis under § 482 begins with a consideration of the facts and

David ForstFenwick & West

Tel: +1 650 335 7254Fax: +1 650 938 [email protected]

David Forst is the practice group leader of the tax group ofFenwick & West. He is included in Euromoney’s Guide to theWorld’s Leading Tax Advisers. He is also included in Law andBusiness Research’s International Who’s Who of Corporate TaxLawyers (for the last six years). David was named one of thetop tax advisers in the western US by International Tax Review,is listed in Chambers USA America’s Leading Lawyers forBusiness (2011-2016), and has been named a NorthernCalifornia Super Lawyer in Tax by San Francisco Magazine.David’s practice focuses on international corporate and part-

nership taxation. He is a lecturer at Stanford Law School oninternational taxation. He is an editor of and regular contributorto the Journal of Taxation, where his publications have includedarticles on international joint ventures, international tax aspectsof M&A, the dual consolidated loss regulations, and foreigncurrency issues. He is a regular contributor to the Journal ofPassthrough Entities, where he writes a column on internation-al issues. David is a frequent chair and speaker at tax confer-ences, including the NYU Tax Institute, the Tax ExecutivesInstitute, and the International Fiscal Association.David graduated with an AB, cum laude, Phi Beta Kappa,

from Princeton University’s Woodrow Wilson School of Publicand International Affairs, and received his JD, with distinction,from Stanford Law School.

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circumstances related to the functions performed, theresources employed, and the risks assumed in the actual trans-action or transactions among the controlled taxpayers, as wellas in any uncontrolled transactions used as comparables.

For example, states the preamble, if consideration of thefacts and circumstances reveals synergies among interrelatedtransactions, an aggregate evaluation under § 482 may pro-vide a more reliable measure of an arm’s-length result thana separate valuation of the transactions. In contrast, aninconsistent or uncoordinated application of § 482 to inter-related controlled transactions that are subject to tax underdifferent code and regulatory provisions may lead to inap-propriate conclusions.

The best method rule requires the determination of thearm’s-length result on controlled transactions under themethod, and particular application of that method, thatprovides the most reliable measure of an arm’s-lengthresult. The preamble also refers to the “realistic alternativetransactions” rule and states that “on a risk-adjusted basis”this may provide the basis for application of unspecifiedmethods to determining the most reliable measure of anarm’s-length result.

Additional features of new § 482 tegulationsNew Temp. Treas. Reg. § 1.482-1T(f)(2)(i)(A) providesthat arm’s-length compensation must be consistent with,and must account for all of, the value provided betweenparties in a controlled transaction, without regard to theform or character of the transaction. For this purpose, it isnecessary to consider the entire arrangement between theparties, as determined by the contractual terms, whetherwritten or imputed in accordance with the economic sub-stance of the arrangement, in light of the actual conduct ofthe parties.

The preamble says this requirement is consistent with theprinciples underlying the arm’s-length standard, whichrequire that arm’s-length compensation in controlled trans-actions equal the compensation that would have occurred ifa similar transaction had occurred between similarly situateduncontrolled taxpayers; however, this appears to take a moreBEPS-friendly approach than the IRS advocates in interna-tional settings.

Temp. Treas. Reg. § 1.482-1T(f)(2)(i)(B) “clarifies”Treas. Reg. § 1.482-1(f)(2)(i)(A), which provided that thecombined effect of two or more separate transactions(whether before, during, or after the year under review)may be considered if the transactions, taken as a whole, areso interrelated that an aggregate analysis of these transac-tions provides the most reliable measure of an arm’s-length result determined under the best method rule ofTreas. Reg. § 1.482-1(c).

Specifically, a new clause was added to provide that thisaggregation principle also applies for purposes of an analysis

Larissa NeumannFenwick & West

Tel: +1 650 335 [email protected]

Larissa Neumann focuses her practice on US tax planning and taxcontroversy with an emphasis on international transactions. Shehas broad experience advising clients on acquisitions, restructuringsand transfer pricing issues. She has successfully represented clientsin federal tax controversies at the audit level, in appeals and in court.Larissa appears in International Tax Review’s World’s Tax

Controversy Leaders and in Euromoney’s World’s Leading TaxAdvisers. Euromoney selected Larissa for inclusion in the AmericasWomen in Business Law Awards shortlist for Best in Tax DisputeResolution in 2014 and she was named the 2015 Rising Star: Tax.She was also named to the Silicon Valley Business Journal’s 40 Under40. In 2016, Larissa was named a Rising Star in tax by Law360.Larissa frequently speaks at conferences for professional tax

groups, including TEI, IFA, Pacific Rim Tax Institute, Bloomberg,and the ABA. She is the ABA International Law Tax Liaison.Larissa has published several articles, including recently:

• US Tax Overview, Euromoney’s LMG Rising Stars 2015• US transfer pricing litigation update, International Tax Review(March 2015)

• Areas of TP Scrutiny in a pre- and post-BEPS World,International Tax Review (February 2015)

• US International Tax Developments, The EuromoneyCorporate Tax Handbook 2015

• US Transfer Pricing Developments, International Tax Review (2014)• US Tax Developments, International Tax Review(December/January 2013)

• Character and Source of Income from Internet BusinessActivities, The Contemporary Tax Journal (July 2011)

• The Application of the Branch Rule to Partnerships,International Tax Journal (July – August 2010)Fenwick has one of the World’s Top Tax Planning and Tax

Transactional Practices, according to International Tax Review, andis first tier in tax, according to World Tax. International Tax Review gaveFenwick its San Francisco Tax Firm Award a total of seven times andits US Tax Litigation Firm Award a total of three times. International TaxReview has also named Fenwick Americas M&A Tax Firm of the Year.Larissa is a leader on Fenwick’s Pro Bono Review Committee

and regularly provides pro bono services to various non-profitorganisations. Fenwick was recognised by The National LawJournal Pro Bono Hot List (2014) and Larissa’s non-profit work ispointed to as exemplary in the profile.

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under multiple provisions of the code or regulations. A newsentence also elaborates on the aggregation principle by not-ing that consideration of the combined effect of two or moretransactions may be appropriate to determine whether theoverall compensation is consistent with the value provided,including any synergies among items and services provided.

The temporary regulation does not retain the statementin Treas. Reg. § 1.482-1(f)(2)(i)(A) that transactions gener-ally will be aggregated only when they involve “relatedproducts or services”.

Temp. Treas. Reg. § 1.482-1T(f)(2)(i)(C) provides that,for one or more controlled transactions governed by one ormore provision of the code and regulations, a coordinatedbest method analysis and evaluation of the transactions maybe necessary to ensure that the overall value provided (includ-ing any synergies) is properly taken into account. A coordinat-ed best method analysis of the transactions includes aconsistent consideration of the facts and circumstances of thefunctions performed, resources employed, and risks assumed,and a consistent measure of the arm’s-length results, for pur-poses of all relevant code and regulatory provisions.

Analog devices: Section 482Analog Devices, Inc. (ADI) repatriated cash dividends fromone of its foreign subsidiaries, a controlled foreign corpora-tion, (CFC) and claimed an 85% § 965 dividends receiveddeduction for 2005. ADI reported no related party indebt-edness during its testing period pursuant to § 965(b)(3).

The IRS determined that the annual 2% royalty receivedby ADI from CFC should be increased to 6% for 2001 –2005. ADI agreed with the proposed adjustment. In 2009,ADI and the IRS executed a closing agreement pursuant toRev. Proc. 99-32, 1999-2 C.B. 296, to effect the secondaryadjustments required after a primary § 482 allocation. Theclosing agreement established accounts receivable pursuantto the revenue procedure and deemed them created as ofthe last day of the taxable year to which they relate. The IRSsubsequently determined that the accounts receivable con-stituted an increase in related party indebtedness under§ 965(b)(3) during ADI’s testing period, which the IRSdetermined decreased ADI’s § 965 DRD.

The Tax Court held that the parties did not reach an agree-ment in the closing agreement regarding the treatment of theaccounts receivable under § 965. The court further held a§ 965(b)(3) does not provide that the accounts receivable con-stituted related party indebtedness arising during ADI’s testingperiod. Thus, the accounts receivable did not increase CFC’srelated party indebtedness during the testing period.

Previously, the Tax Court had determined in BMCSoftware Inc. v. Commissioner, 141 T.C. 224 (2013), (BMCI) that in such a situation taxpayer’s DRD was reduced. TheFifth Circuit reversed at 780 F.3d 669 (5th Cir. 2015)(BMC II). The Tax Court stated that BMC II is not binding

in the instant case in which an appeal would lie to the FirstCircuit. However, the Tax Court stated that given the rever-sal and the parties’ arguments, the instant case required thecourt to revisit its analysis in BMC I.

The court concluded that the important goals of staredecisis to ensure that “evenhanded, predictable, and consis-tent development of legal principles” and to “foster relianceon judicial decisions” are not served by the court’s contin-ued adherence to its previous opinion. The court statedthere has been no predictable or consistent development ofthe legal principles affecting the current case.

On balance, the Tax Court concluded that the impor-tance of reaching the right result in ADI outweighed theimportance of following the court’s precedent. The decisionin favour of ADI was “reviewed by the court” with thejudges voting 13-4 to reverse BMC I.

The parties entered into a closing agreement against thebackdrop of longstanding case law holding that “a courtmay not include as part of the agreement matters other thanthe matters specifically agreed upon and mentioned in theclosing agreement”.

A caption taken verbatim from the IRS’s pattern agree-ment regarding Rev. Proc. 99-32 is not a matter to whichthe parties specifically agreed. It is not a determined clausethat binds the parties, but rather an introductory clause thatsignals the transition from the recitals to the determinedclauses. Therefore, giving the phrase “for all federal incometax purposes” a literal application would be to ignore thecourt’s mandate to interpret a contract in context and wouldbroaden the scope of the closing agreement beyond thatwhich the parties intended.

That the closing agreement provided in a recital that itapplied “for all federal income tax purposes” was the focus ofthe four dissenting judges who felt that this language meantthat § 965 was included within the parties’ agreement.

The majority, however, held that when the parties signedthe closing agreement they did not manifest an intent withrespect to § 965(b)(3). The court’s opinion states that thedissent would have the court give the phrase “for all federalincome tax purposes” a literal interpretation and ignore theintent of the parties. The parties signed a closing agreementthat enumerated specific tax consequences, and § 965 wasnot specifically enumerated. A literal interpretation of theboilerplate “for all federal income tax purposes” would ren-der surplusage the provisions of the closing agreement thatlisted the transaction’s tax implications in considerable detail.

The court also read the holding in Schering Corp. v.Commissioner, 69 T.C. 579 (1978), to be consistent with itsholding in ADI. In Schering, read the disputed phrase in aRev. Proc. 65-17 closing agreement in context rather thanapplying a literal interpretation that would expand the clos-ing agreement past its intended scope. This is the sameapproach the court took in ADI.