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transfer pricing

Tax collection from transfer pricing audits has become more common in Africa, with little sign that it will abate in the near future.

The transfer pricing policies of many multinational companies have attracted widespread attention in the recent past, to the extent that it is considered the “criminal child of tax”.

Transfer pricing is the way a company prices goods and services supplied to a company within the same group. The price should be aligned to a price that the company would offer to a third party.

Nishana Gosai, senior transfer pricing executive at Baker McKenzie, and former head of the transfer pricing unit at the South African Revenue Service (SARS), says that despite having transfer policies in place, most large multinational companies find it difficult to control every aspect of its business. There is a rising perception that transfer-pricing transgressions are criminal and should be met with criminal sanction.

In Tanzania, failure to keep transfer pricing documentation is considered an offence. The punishment is a fine of $30,000 or six months’ imprisonment, or both.

In SA, the revenue authority settled a transfer-pricing dispute with a subsidiary of Kumba Iron Ore to the tune of R2.5bn in 2016. The initial assessment was R6.5bn.

In Tanzania, a large mining company recently received a $190bn tax assessment.

Transfer pricing has been regarded as the major culprit in base erosion and profit shifting (Beps) in which profits are shifted from high-tax jurisdictions to lower tax jurisdictions to limit a global group’s tax exposure.

Gosai emphasises that transfer pricing is not an exact science. It requires judgment and discretion. No one can define the exact price. Finding middle ground requires pragmatism. Information is important in any transfer-pricing dispute, but it seems the burden of proof is becoming insurmountable, she says.

“We are moving into a space where tax administrations are demanding documented proof and evidence to substantiate routine commercial realities,” Gosai says.

Andrew Wellsted, head of the tax team at Norton Rose Fulbright, says that if a company’s affairs or record-keeping are not up to scratch, it faces a long, time-consuming process of getting what the revenue authorities require.

If taxpayers have followed incorrect practices, knowingly or otherwise, it will expose them to tax liabilities and potential disputes. Irrespective of any actual legislative changes, 93% of respondents believe that tax authorities will increase tax audit assessments as a result of proposed Beps initiatives.

“If the audit is conducted in an aggressive fashion, it can be very disruptive to the day-to-day operations of the taxpayer. This needs to be carefully managed by taxpayers and the authorities,” says Wellsted.

Deloitte recently published its survey on the views of multinational companies regarding the greater interest in “responsible tax” and Beps among the media, and political and activist groups.

In the 2017 survey, 460 people in 38 countries responded. The results show that respondents are expecting a major effect on their compliance requirements due to the additional reporting requirements arising from the Beps action plans developed and published by the Organisation for Economic Co-operation and Development (OECD).

The survey shows that 94% of the respondents believe that the additional transfer-pricing reporting requirements will substantially increase their compliance burden when it comes to corporate tax.

More than 90% of the respondents agree that tax structures are under greater scrutiny by tax administrations than a year ago.

“Irrespective of any actual legislative changes, 93% of respondents believe that tax authorities will increase tax audit assessments as a result of proposed Beps initiatives,” Deloitte’s survey found.

Gosai says many multinationals make the mistake of not fully understanding what they are submitting to a revenue authority, the context of such submissions, the potential ways that it could be interpreted by a revenue official and, most importantly, that once submitted, such disclosures cannot be retracted.

Companies tend to over-comply when faced with a request for information from SARS, especially if it is not specific about its scope. There is a danger that information offered by the taxpayer that is not relevant to the question asked may lead to further questions or may create the wrong impression.

Most tax disputes turn either on a legal interpretation of legislation, or a factual issue. The dispute is often centred on whether or not an arm’s-length price (the price offered to an unconnected third party) has been charged.

“This involves complex and detailed economic analysis and is invariably very subjective,” Wellsted says.

“Thus finding the objectively right answer as to what an arm’s-length price could be, is almost impossible,” he says.

Source: Originally published in Business Day, Visser. A, published as “Multinationals face quandary over transfer pricing”, September 6, 2017.

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Fighting BEPs in Africa

Thanks to Peter Draper and team for this policy briefing and discussion documents on Country-by-Country reporting.

Multinational enterprises (MNEs) can shift profits away from jurisdictions with comparatively high tax rates to jurisdictions with lower to no tax rates, and so avoid paying their fair share of taxes without breaking any single jurisdiction’s laws. This is in part possible owing to the restricted exchange of information between national tax authorities, which limits these authorities’ capacity to conduct accurate MNE audits.

The implementation package on Country-by-Country Reporting for Action 13 of the BEPS project, published on 8 June 2015, foresees that tax authorities will automatically exchange key indicators (such as profits, taxes paid, employees and assets of each entity) of Multinational Enterprise Groups with each other, therewith allowing tax authorities to make risk assessments as to the transfer pricing arrangements and BEPS-related risks, which may then serve as a basis for initiating a tax audit.  OECD Automatic Exchange portal.

By creating standard reporting templates and model legislation to collect MNEs’ relevant business information, Action 13 of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting Action Plan – Transfer Pricing Documentation and Country-By-Country Reporting – is seen as part of the solution to addressing MNE tax evasion. While representing a substantial step forward, the proposed set of recommendations has a limited scope and is technically onerous to implement in poor developing countries, where revenue authorities are severely resource-constrained. These issues are reviewed in relation to African resource mobilisation needs, and with an eye to the 2020 review of country-by-country reporting (CbCR) implementation.

To view/download the policy paper click here!

To view/download the discussion paper click here!

Source: Tutwa Consulting Newsletter June 2017

customs-taxThe “Guidelines for strengthening cooperation and exchange of information between Customs and Tax authorities at the national level” have been formulated with the support of WCO Members and development partners, especially the Organisation for Economic Co-operation and Development (OECD) and the International Chamber of Commerce (ICC). The Guidelines aim to provide reference guidance to Customs and Tax authorities who wish to go further in their cooperation and develop operational models which enable agencies to work together to their mutual benefit.

Although there is no limit to the ways in which these two agencies can work together, and countries should consider new and innovative methods based on their organizational structure, needs and operational requirements, the Guidelines highlight some overarching principles and associated benefits concerning enhancement of Customs-Tax cooperation.

The WCO Guidelines for Strengthening Cooperation and the Exchange Of Information between Customs and Tax Authorities at the National Level are intended to supplement the ongoing initiatives in this domain. The aim is to provide general, overarching principles for cooperation which take account of operational considerations, bearing in mind the different organizational structures and national requirements of countries. It is expected that these Guidelines will be useful to Member Customs administrations in developing a sustainable cooperation mechanism (including a MoU where needed) tailored to their unique situation, in close cooperation with their respective Tax authorities

In particular, the Guidelines provide a comprehensive overview of the enablers for mutual cooperation and the exchange of information, address the scope and remit of information exchange, cover different information exchange mechanisms, list the type of activities that Customs and Tax authorities may undertake together, and provide key principles and points to consider when developing a Memorandum of Understanding/Agreement (MOU/MOA). Source: WCO

Transcript of video
Todd Smith, principal in KPMG LLP’s Trade & Customs practice: We had over 350 people attend the webinar on Base Erosion and Profit Sharing (BEPS) from a Customs Perspective. I think the reason is because there hasn’t been a lot of discussion on how BEPS will impact customs.

I read all of the action items that the OECD published in October to identify where there would be crossover or an overlap on customs as it relates to BEPS. There clearly is going to be quite an impact.

For one thing, there is a lot of transparency that is being created overall by the BEPS initiatives, and customs auditors around the world are increasingly cooperating with the tax administrations around the world, so there will be a treasure trove of information for the customs auditors found within the Master File, the Local File and the CbC report, and just as tax administrators will use that information because of the information sharing, customs auditors will also use that information to identify targets for audits.

It will tell them, for example, where there is a related party transaction where they may not have had that information previously.

One of the big areas that we feel the customs function will be impacted by BEPS is where you have a situation where a company may need to convert a commissionaire to a buy-sell. When this happens, the importer of record could change, and more importantly the value that’s declared to customs under a commissionaire structure oftentimes is the third-party customer price. And when that entity converts to a buy-sell entity, the new buy-sell entity becomes the importer of record. It needs to achieve a margin, and the only way really to do that is to import that same product at a lower price.

And so the challenge is to convince the customs administration that the new price with the limited-risk distributor, for example, which is lower in its related party price, is still considered arm’s length, even though it’s less than the previous import value at the 3rd party customer price. Source: KPMG

Recommended reading

New WCO InstrumentAn important new instrument was finalised at the 42nd Session of the Technical Committee on Customs Valuation which took place in Brussels from 18 to 22 April 2016 under the Chairmanship of Ms. Yuliya Gulis of the United States.

The instrument contains a case study illustrating a scenario where Customs took into account transfer pricing information in the course of verifying the Customs value.

The WTO Valuation Agreement sets out the methodology for establishing the Customs value, used as the basis for calculating Customs duties. The Agreement foresees that Customs may examine transactions between related parties where they have doubts that the price has been influenced by the relationship.

The Organisation for Economic Cooperation and Development (OECD) has developed Guidelines for establishing the transfer price, that is the price for goods and services sold between controlled or related legal entities, in order to determine business profit taxes where businesses are related.

Over recent years, the similar objectives but different methodologies of transfer pricing and Customs valuation have been noted, and it has been recognised that business documentation developed for transfer pricing purposes may contain useful information for Customs. An earlier instrument of the Technical Committee, Commentary 23.1, confirmed this principle.

The new case study provides an example of Customs making use of transfer pricing information based on the transactional net margin method. On the basis of this information, Customs accepted that the sale price in question had not been influenced by the relationship.

The OECD has provided valuable input to the Technical Committee discussions in the development of the new instrument which provides helpful guidance to both Customs administrations and the business community.

Both the WCO and the OECD advocate closer cooperation between Customs and tax administrations in order to strengthen governments’ ability to identify the correct tax and duties legally due and enhance trade facilitation for the compliant business sector.

WCO Secretary General, Mr. Kunio Mikuriya, has congratulated the Technical Committee on the work achieved : “This new instrument is an important step for the WCO and demonstrates its relevance by providing guidance on the management of Customs valuation in an increasingly complex trade landscape, whilst maintaining consistency and strengthening cooperation with Tax authorities.”

The case study (Case Study 14.1) will be made available in the WCO Valuation Compendium, subject to approval by the WCO Council in July 2016.

Further information on this topic can be found in the WCO Guide to Customs Valuation and Transfer Pricing, available via this link

cut-red-tape“Simplifying trade documentation”; “automating border procedures”; “streamlining border controls” – all cliche’s of the modern customs and international trade scene, but just how attainable are they? Beyond the pleasantries, and fanfare of ribbon cutting ceremonies, very little seems to happen at the cold face. Sovereign states are inward-looking and jealously wish to preserve their ‘sovereign domains’.

A major World Trade Organization deal on streamlining global customs rules could cut international trade costs by between 12.5 percent and 17.5 percent, a study by the Organization for Economic Co-Operation and Development showed on Thursday.

A deal between India and the United States on the Trade Facilitation Agreement last year, which needs to be backed by all 160 WTO members, had resurrected hopes that the trade body could push through such reforms to cut red tape.

“There are very practical measures that we’ve identified that offer significant benefits,” Ken Ash, the OECD director for Trade and Agriculture, told media.

“Things like simplifying the required trade documentation. Automating border procedures, or streamlining border controls.”
Economists say the Trade Facilitation Agreement could save $1 trillion. Ash declined to endorse this figure, only saying the Paris-based body expected each 1 percent reduction in worldwide trade costs to bring $40 billion in savings.

Australia was to formally accept the agreement later on Thursday, Steven Ciobo, parliamentary secretary to the minister of foreign affairs, said at the news briefing in Paris, making Australia the seventh WTO member to adopt the agreement.