1 / 35

Cross-border adjustments in transfer pricing cases

Cross-border adjustments in transfer pricing cases. Stella Raventos-Calvo 22 April 2010 Moscow. An important difference. Member States of the European Union have their own rules: On dispute solution: the Arbitration Convention (1990)

rio
Télécharger la présentation

Cross-border adjustments in transfer pricing cases

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Cross-border adjustments in transfer pricing cases Stella Raventos-Calvo 22 April 2010 Moscow

  2. An important difference • Member States of the European Union have their own rules: • On dispute solution: the Arbitration Convention (1990) • On documentation: the Code of conduct (2004) established by the Joint Transfer Pricing Forum (2002) and revised in 2009 (working on the OECD TP GL on ALP). • Non Member States follow the OECD guidelines (i.e. Russia, Japan, the US, China …)

  3. Index (I) • Rules for non EU MS: • The Transfer Pricing Guidelines • The OECD Model Tax Convention (articles 9 and 25). • Types of adjustment • Primary (art. 9.1) • Corresponding (art. 9.2). • Secondary

  4. Index (II) • Use of MAP: • Mutual Agreement Procedure under Article 25.1 and 2 OECD Model. • Arbitration under Article 25.5 OECD Model

  5. 1. THE RULES

  6. Transfer Pricing Guidelines (“TPG”) (1) • Transfer Pricing and Multinational Enterprises (the “1979 Report”) • Transfer Pricing and Multinational Enterprises- Three Taxation Issues (the “1984 Report”) • Thin Capitalization (the “1987 Report”) • Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “1995 Report”)

  7. Transfer Pricing Guidelines (“TPG”) (2) • Proposed revision of Chapters I-III of the TPG (ALP -Arm’s length principle-, transfer pricing methods and comparability) analysis (released September 2009) • Manual on Effective Mutual Agreement Procedures (MEMAP 2007) • New draft on Permanent Establishments

  8. 2. TYPES OF ADJUSTMENTS

  9. Adjustments (I) • Primary adjustment (Art. 9.1 OECD Model) • Corresponding adjustment (Art. 9.2.) • Secondary adjustment

  10. Adjustments (II) • Definition of primary adjustment (glossary): An adjustment that a tax administration in a first jurisdiction (State) makes to a company's taxable profits as a result of applying the arm's length principle to transactions involving an associated enterprise in a second jurisdiction (State).

  11. Adjustments (III) • Primary adjustment (Art. 9.1.OECD Model): Where (…) and conditions are made or imposed (…) which differ from those which would be made between independent enterprises, then any profits which would have accrued to one of the enterprises (…) may be included in the profits of that enterprise and taxed accordingly (1963 Draft Convention).

  12. Adjustments (IV) • Definition of corresponding adjustment (glossary): An adjustment to the tax liability of the associated enterprise in a second State made by the tax administration of that State, corresponding to a primary adjustment made by the tax administration in a first State, so that the allocation of profits by the two States is consistent and there is no double taxation on the same profits.

  13. Adjustments (V) • Corresponding adjustment (Art. 9.2.OECD Model): Where a Contracting State includes in the profits of an enterprise of that State –and taxes accordingly- profits on which an enterprise of the other Contracting State has been charged to tax in that other State (…) then that other State shall make an appropriate adjustment to the amount of tax charged therein on those profits (Added by the 1977 Model Convention).

  14. Adjustments (VI) • Corresponding adjustment • A corresponding adjustment may be made by a CS either: • by recalculating the profits subject to tax for the associated enterprise in that country using the relevant revised price (at the level of the tax base itself) or • by letting the calculation stand and giving the associated enterprise reliefagainst its own tax paid in that State for the additional tax charged to the associated enterprise by the adjusting State as a consequence of the revised transfer price (at the level of the tax liability). • The former method is by far the most common among OECD Member countries (TPG Para.4.34 and Commentary on Article 9 Para.7).

  15. Adjustments (VII) • But: Corresponding adjustments are not mandatory: a tax administration should make a corresponding adjustment only insofar as it considers the primary adjustment to be justified in both principle and in amount (TPG Para. 4.35, and Commentary on Article 9 Para. 6).

  16. Adjustments (VIII) What if there is no Article 9(2) in a treaty? “When the bilateral convention does not contain rules similar to those of paragraph 2 of Article 9…the mere fact that Contracting States inserted in the convention the text of Article 9, as limited to the text of paragraph 1.indicates that the intention was to have economic double taxation covered by the Convention. As a result, most Member countries consider that economic double taxation resulting from adjustments made to profits by reason of transfer pricing is not in accordance with at least – the spirit of the convention and falls within the scope of the mutual agreement procedure set up under Article 25.” (Commentary on Article 25 Para. 11)

  17. Adjustments (IX) What if there is no Article 9(2) in a treaty? • “Whilst the mutual agreement procedure has a clear role in dealing with issues arising as to the sorts of adjustments referred to in paragraph 2 of Article 9, it follows that even in the absence of such a provision, States should be seeking to avoid double taxation, including by giving corresponding adjustments in cases of the type contemplated in paragraph 2.” (Commentary on Article 25 Para. 12)

  18. Adjustments (X) • Definition of Secondary adjustment (glossary): An adjustment that arises from imposing tax on a secondary transaction. Not dealt with by Article 9.2 Many hypothetical transactions may be created May result in double taxation To sum it up: not encouraged by OECD (Para.4.72 TPG) An alternative: the repatriation of profits (Para. 4.73 TPG)

  19. Adjustments (XI) • Definition of Secondary transaction: A constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment. It may take the form of constructive dividends (the secondary adjustment would be a withholding tax), constructive equity contributions or constructive loans.

  20. 3. MUTUAL AGREEMENT PROCEDURES (MAP)

  21. MAP (I) • “…corresponding adjustments to be made in pursuance of paragraph 2 of (Article 9) fall within the scope of the mutual agreement procedure, both as concerns assessing, whether they are well-founded and for determining their amount.” (Commentary on Article 25 Para. 10).

  22. MAP (II) Article 25.1 OECD Model – Right to request MAP • “1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is resident (…). The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention.”

  23. MAP (III) Article 25.2 OECD Model – State's obligation • “2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any Agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States”.

  24. Summing up: MAP (IV) • When: when the taxpayer knows that a double taxation may occur as a result of transfer pricing procedures • Time-limit: three years (not to be confused with the national statute of limitations. Guarantee for the TA but to be interpreted favourably to the taxpayer – Para. 20 and 21) • Compatible with domestic appeals • No obligation to reach an agreement

  25. Summing up: MAP (V) • Applicable regardless of the domestic statute of limitations (important to take timely protective measures) but not all countries adopt that • Taxpayer does not participate in the process • Result: exchange of letters • Compatibility with domestic judgments? It depends on the country

  26. Article 25.5 OECD Model – Arbitration (I) • “5. Where, • under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention, and • the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the competent authority of the other Contracting State, any unresolved issues arising from the case shall be submitted to arbitration if the person so requests…”

  27. Article 25.5 OECD Model – Arbitration (II) • These unresolved issues shall not, however, be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative tribunal of either State. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limit in the domestic laws of these States. The competent authorities of the Contracting States shall my mutual agreement settle the mode of application of this paragraph”. (Added in the 2008 Convention).

  28. Summing up: Arbitration (III) • It is another phase of the MAP and not an independent procedure • It is only possible in the cases under Para.1 (taxation not in accordance with the convention) • When there has not been an agreement (if it has been, even if there is double taxation, no arbitration is possible) • It is important to determine when the two-year period starts (when the two TA have the necessary documentation) • Not compatible with the decision of a national court (possibility of the States to request the taxpayer to give up the national proceedings) • The outcome of the arbitration is binding for the States but not for the taxpayer

  29. Summing up: Arbitration (IV) • It is not always possible for all States (domestic law) • If there is: • Renegotiation of the existing convention or a new convention • Exchange of letters • The two MS must agree on a way to effectively implement the arbitration (e.g. Art. 25 of the new Netherlands-UK convention: “The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph”) • The outcome of the arbitration is binding for the States but not for the taxpayer

  30. 4. THE BURDEN OF PROOF

  31. The burden of proof (I) • TPG Paras. 4.11 to 4.17 TPG • No mandatory rule. Thus practices differ: • At the level of the assessment • At the level of litigation • Practices differ: • The tax administration bears the burden although in some cases it may be shifted, allowing the TA to estimate taxable income if the taxpayer has not acted in good faith (not complying with the documentation requests, or by filing false tax returns • In some countries the taxpayers have a duty to cooperate with the TA imposed by law. In the event that a taxpayer fails to

  32. The burden of proof (II) • cooperate, the tax administration may be given the authority to estimate the taxpayer’s income and to assume relevant facts based on experience. In these cases, tax administrations should not seek to impose such a high level of cooperation that would make it too difficult for reasonable taxpayers to comply (Para. 4.12) • In jurisdictions where the burden of proof in on the taxpayer, tax administrations are generally not at liberty to raise assessments against taxpayers which are not soundly based in law (Para. 4.13) • When transfer pricing issues are present, the divergent rules on burden of proof among OECD member countries may present serious problems if the strict legal rights implied by those rules are used as a guide for an appropriate behaviour (proof on taxpayer in Country A and proof on tax administration in Country B). • A tax administration should be prepared to make a good faith showing that its determination of transfer pricing is consistent with the ALP, even where the burden of proof is on the taxpayer, and taxpayers should be prepared to make a good faith showing that their transfer pricing is consistent with the ALP regardless of where the burden of proof lies (Para. 4.16).

  33. The burden of proof (III) • Mandatory rule at the level of the corresponding adjustment –the second State- (P. 4.17): “The State from which a corresponding is requested should comply with the request only if that State “considers that the figure of the adjusted profits correctly reflects what the profits would have been if the transaction had been at arm’s length”. Therefore, “the State that has proposed the primary adjustment bears the burden of demonstrating to the other State that the adjustment is justified both in principle and as regards the amount”. Cooperative approach?

  34. Penalties • For non compliance: For not providing necessary information/filing returns (P.4.18) • For the tax liability (P. 4.18 to 4.28): • Non-committal (difficult comparisons)

  35. Bear in mind… In a difficult transfer pricing case, because of the complexity of the facts to be evaluated, even the best-intentioned taxpayer can make an honest mistake. Moreover, even the best-intentioned tax examiner may draw the wrong conclusion from the facts. Tax administrations are encouraged to take this observation into account in conducting their transfer pricing examinations (by being flexible in their approach and in not demanding from taxpayers a precisions that is unrealistic under all the facts and circumstances (Para. 4.9 TPG). 35

More Related