Global Transfer Pricing Review

Recent developments fromCzech around Republic the world

kpmg.com/gtps

TAX Contents

Introduction 3

Country Overviews 4

Country Snapshots 306

Glossary of Terms 308

Find Out More 310

The Organisation for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting (BEPS) 15 Point Action Plan is a primary focus for tax authorities around the world and businesses with global operations. Transfer pricing is of utmost importance and central in not only the BEPS Action Plan, but many other changes in international tax rules.

This 2015 edition of KPMG International’s Global Transfer Pricing Review provides a wealth of transfer pricing information from 86 countries, including: documentation requirements, deadlines, transfer pricing methods, penalties, special considerations, advance pricing arrangements, and competent authority matters.

Visit www.kpmg.com/gtps for additional transfer pricing news and updates.

Andorra

KPMG observation

The corporate income tax and transfer pricing rules are applicable to Andorran taxpayers for fiscal years started on or after 1 January 2012. It is not yet clear how the Andorran tax authorities will address transfer pricing matters, interpret the new regulations or engage in tax audits. The transfer pricing regulations do not establish documentation requirements for Andorran taxpayers, although they refer to the arm’s length principle as the standard to price controlled transactions.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information or indirectly, manage, hold an equity What is the statute of limitations investment or otherwise control Tax authority name on assessment of transfer pricing both entities. adjustments? Tax Administration (Administració The Andorran tax regulations Three years following the final date to tributària). specifically state that the following file the tax return. Citation for transfer pricing rules relationships trigger the consideration Legislation: Article 16 of the corporate of related parties: Transfer pricing income tax law (CITL) (Legislative • an entity and its shareholders (for disclosure overview Decree dated 29 April 2015 unifying non-publicly traded entities, when Are disclosures related to transfer Law 95/2010, dated 29 December 2010, they hold a participation of 15 percent pricing required to be submitted to and its amendments). Regulations or more; for publicly-traded entities, the revenue authority on an annual developing CITL: Decree, dated when the participation is equal or basis (e.g. with the tax return)? 13 June 2012. greater than three percent) No. The corporate income tax return Effective date of transfer pricing rules • an entity and its board members, does not require the disclosure of as well as the relatives of the board The transfer pricing rules are applicable controlled transactions, although a members up to the third-degree to taxpayers on fiscal years started on or schedule requires the identification after 1 January 2012. • an entity that holds an indirect of the taxpayer’s participation and/or participation equal to, or greater than, ownership of other legal entities as of What is the relationship threshold 25 percent of another entity for transfer pricing rules to apply fiscal year-end. between parties? • two entities that are part of a group; What types of transfer pricing and Generally, two entities are considered information must be disclosed? • an entity and its permanent related parties when the same Not applicable. individuals or legal entities, directly establishments.

What are the consequences of Andorran courts. Dispute resolutions Special considerations will depend on treaties to be signed in failure to submit disclosures? Are secret comparables used by tax the future. Not applicable. authorities? If an adjustment is sustained, can No experience yet, but it is anticipated penalties be assessed? If so, what Transfer pricing study that secret comparables will not be rates are applied and under what used. overview conditions? Can documentation be filed in Is there a preference, or Penalties are only referred to in the a language other than the local requirement, by the tax authorities General Tax Code and may range language? If yes, which ones? for local comparables in a from 50 percent to 150 percent of benchmarking set? Not applicable. the additional tax base that arises No experience. When a transfer pricing study is from the adjustment. The percentage prepared, should its content follow of the penalty may be determined Do tax authorities have Chapter V of the Organisation by the tax authorities considering requirements or preferences for Economic Co-operation and the following circumstances of the regarding databases for Development (OECD) Guidelines? taxpayer: good faith, economic capacity, comparables? prior infringements of tax regulations, Not applicable. obstruction to the tax audit process, No experience. Does the tax authority require an spontaneous compliance by the Does the tax authority generally advisor/tax practitioner to have taxpayer, the taxpayer’s agreement to focus on the interquartile range in a specific designation in order to the proposed adjustment, relevance TNMM analysis? prepare or submit a transfer of the infringement and adjustment Not applicable. pricing study? amount. Does the tax authority have other No. There is no specific reference on how penalties would be applied in the case of preferences in benchmarking? If so, a transfer pricing adjustment and there please describe. Transfer pricing methods is no experience. There are reasons No experience. Does your country follow the to think that unless the adjustment is transfer pricing methods outlined in based on tax evasion, tax authorities What level of interaction do tax Chapter II of the OECD Guidelines? might take the view that the adjustment authorities have with customs If exceptions apply, please describe. does not levy penalties based on authorities? the nature of the transfer pricing Yes. The regulations refer to the OECD No experience. adjustment. Guidelines regarding transfer pricing Are there limitations on deductibility methods. To what extent are transfer pricing of management fees beyond the penalties enforced? arm’s length principle? Transfer pricing audit and At this time, Andorran tax authorities No. penalties have only just initiated limited audits of local taxpayers (as far as we know, Are management fees subject to When the tax authority requests withholding? a taxpayer’s transfer pricing the audits did not involve related party documentation, are there timing transactions). Not applicable. requirements for a taxpayer to What defenses are available with Are there limitations on the submit its documentation? And if respect to penalties? deductibility of royalties beyond the so, how many days? Transfer pricing documentation. arm’s length principle? No. Advance Pricing Agreements (APAs) are Not applicable. also available. When the tax authority requests Are royalties subject to a taxpayer’s transfer pricing What trends are being observed withholding? documentation, are there timing currently? requirements for a taxpayer to submit Not applicable. its documentation? Please explain. The Andorran tax authority is in the process of developing its capacity and Are taxpayers allowed to file tax Not applicable. skill set to adapt to the new tax regime. return numbers that differ from book numbers? If an adjustment is proposed by The Andorran tax authorities have only the tax authority, what dispute started performing some limited scope Yes. Although there is no experience resolution options are available? audits, as the corporate income tax was yet, the legislation does not prohibit only applicable to fiscal years starting on year-end adjustments. The taxpayer may appeal against or after 1 January 2012. the proposed adjustment before the

Other unique attributes? If extensive, is the competent Are there any difficulties or authority effective in obtaining limitations on the availability or The Andorran CITL includes special double tax relief? effectiveness of APAs? regimes applicable to Andorran entities that engage in certain cross-border, No experience. Yes. The Andorran tax administration intercompany transactions: is still in the process of developing When may a taxpayer submit an its capacity. Hence, the lack of • regime for entities engaged in the adjustment to competent authority? experience in negotiating APAs limits cross-border license of intangible No experience. the effectiveness of potential APA assets and/or provision of cross- submissions. border, intercompany services May a taxpayer go to competent authority before paying tax? • regime for entities engaged in intercompany financing activities. No experience. Both special regimes require prior approval from the tax authorities, and Advance pricing provide for an 80 percent reduction of agreements the relevant tax base. In both instances, What APA options are available, the approval from the tax authorities is if any? required (we expect that this process will be similar to that of rulings in other Unilateral, bilateral. jurisdictions) and thus, we anticipate Is there a filing fee for APAs? that the transfer prices will need to be set at arm’s length and tested under one Not applicable. The regulations do not of the OECD transfer pricing methods. explicitly mention an application fee. However, there is no experience to date Tax treaty/double tax with APAs in Andorra. resolution Does the tax authority publish APA data either in the form of an annual What is the extent of the double tax report or through the disclosure of treaty network? data in public forums? Minimal. The tax treaties signed so far No. refer to the exchange of information. Tax treaties with France and Spain are being negotiated.

KPMG in Andorra

Montserrat Trapé Tel: +34 93 253 29 36 Email: [email protected]

Elisenda Monforte Tel: +34 93 254 23 11 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Angola

KPMG observation

Tax reform in Angola continues to be ongoing. Presidential Decree no. 147/13 was published in the National Gazette in October 2013, introducing into the Angolan tax framework the Major Taxpayers Statute, which includes both the tax group relief regime and the transfer pricing regime. The new transfer pricing rules are applicable to all domestic and cross-border commercial and financial transactions established between the taxpayer and its related entities beginning or occurring on or after 1 January 2013. Transfer pricing documentation is required in Angola for those taxpayers on the Major Taxpayers List, according to Order no. 599/14, published in the National Gazette on 24 March 2014. Additionally, all financial, oil and gas, diamond and telecommunication companies are subject to transfer pricing obligations in Angola. The transfer pricing documentation must be prepared and submitted to the National Directory of Taxes by the end of the sixth month after the fiscal year’s closing date.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Submission to tax Thresholds Not applicable Applicable contemporaneous authority required apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold • when the majority of the members on the Board of Directors or Tax authority name for transfer pricing rules to apply between parties? management are the same persons Autoridade Geral Tributária (AGT). or, being different persons, are related For Angolan transfer pricing purposes, by marriage, non-marital partnership Citation for transfer pricing rules there is a special relationship when one or direct kinship Presidential Decree (Decreto Presidencial) entity has the power to exercise, directly • when the entities are bound by a no. 147/13 of 1 October 2013, Order no. or indirectly, a significant influence in subordination contract 472/14 of 28 February 2014 and Order no. the management of the other, namely in 599/14 of 24 March. the following situations: • when the entities are in a relationship of domination or reciprocal participation Effective date of transfer pricing rules • when the directors or management of a company, as well as their spouses, relationships, as well as bound by 1 January 2013. ascendants or descendants, hold subordination or parity group contracts directly or indirectly a participation not or any equivalent effect under the less to 10 percent of the capital, or Commercial Companies Law the voting rights in the other entity

• when commercial relations between • In case of late submission/omission When the tax authority requests two entities represent more than of the transfer pricing documentation a taxpayer’s transfer pricing 80 percent of one of the entities’ the taxpayer is subject to a penalty documentation, are there timing total volume of transactions; and between 200 US dollars (USD) and requirements for a taxpayer to submit • when one entity finances other in USD1,000 its documentation? Please explain. over 80 percent of its credit portfolio. • If the taxpayer refuses to deliver Transfer pricing studies need to be the transfer pricing file, a fine from What is the statute of limitations submitted to the tax authorities by the USD1,500 to USD30,000 is applicable. on assessment of transfer pricing end of the six month after the fiscal adjustments? year-end for certain taxpayers. If any Transfer pricing study further related information is requested Generally, five years from the last day of overview the taxpayer should submit until 10 the tax year-end. working days. Can documentation be filed in a language other than the local If an adjustment is proposed by Transfer pricing language? If yes, which ones? the tax authority, what dispute disclosure overview resolution options are available? No. Are disclosures related to transfer General tax provisions: administrative pricing required to be submitted to When a transfer pricing study is and/or court procedures. the revenue authority on an annual prepared, should its content follow basis (e.g. with the tax return)? Chapter V of the Organisation If an adjustment is sustained, can for Economic Co-operation and penalties be assessed? If so, what Yes. Under the Angolan transfer pricing Development (OECD) Guidelines? rates are applied and under what regime, the following taxpayers are conditions? subject to mandatory transfer pricing No. Although the Angolan transfer compliance obligations: pricing regime requirements do not Transfer pricing adjustments that result follow OECD Guidelines, the transfer in tax due is subject to a penalty up to 35 • taxpayers include in the Major pricing contents are similar to those of percent of the value due. Compensatory Taxpayers List; and Chapter V OECD. interest is accrued at a one percent • taxpayers developing activities in monthly rate for late payment. Does the tax authority require an the following sectors: financial, advisor/tax practitioner to have To what extent are transfer pricing oil and Gas, diamond and specific designation in order to penalties enforced? telecommunications. prepare or submit a transfer pricing With the recent introduction of the transfer Transfer pricing documentation should study? pricing regime in Angola, transfer pricing be submitted to AGT by the end of the No. audits and, consequently, an enforcement six month after the fiscal year-end. of transfer pricing penalties are expected What types of transfer pricing Transfer pricing methods to begin shortly. information must be disclosed? Does your country follow the What defenses are available with Transfer pricing study containing the transfer pricing methods outlined in respect to penalties? following information: Chapter II of the OECD Guidelines? Documentation is the basis for penalty • summary If exceptions apply, please describe. protection. A taxpayer is expected to capture all justification in the transfer • macroeconomic overview No. The transfer pricing regime in Angola only foresees the possibility of pricing documentation in order to • company activity and financial demonstrate the arm’s length nature of performance analysis application of the traditional transactional methods to determine the arm’s prices agreed in special relationship. • functional analysis length principle, namely, (i) comparable What trends are being observed • identification of related party uncontrolled price method; (ii) resale currently? transactions; and price method, and (iii) cost-plus method. Since the transfer pricing regime in • economic analyses of the related- Angola is new, the National Directory party transactions. Transfer pricing audit and of Taxes is investing significantly What are the consequences of penalties in the development of human and failure to submit disclosures? When the tax authority requests technical resources and skills to ensure No specific penalties have been a taxpayer’s transfer pricing enforcement of the new rules. published for transfer pricing documentation, are there timing Moreover, the publication of the Major infringements. However, the taxpayer requirements for a taxpayer to Taxpayers List is one of the indicators will be subject to the administrative submit its documentation? And if that the National Directory of Taxes penalties established by General Regime so, how many days? wants to focus its efforts in specific for Tax Infringements, as follows: Yes, 10 days. groups of companies, namely those

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 10 | Global Transfer Pricing Review included in financial, oil and gas, diamond Are management fees subject to Advance pricing and telecommunication sectors. withholding? agreements Yes. Special considerations What APA options are available, Are there limitations on the if any? Are secret comparables used by tax deductibility of royalties beyond the None. authorities? arm’s length principle? No evidence. Is there a filing fee for APAs? Yes. If AGT considers the royalty fees Is there a preference, or are in excess, discretionary adjustments Not applicable. APAs are not foreseen in requirement, by the tax authorities can take place. the law. for local comparables in a Royalty payments made abroad Does the tax authority publish APA benchmarking set? are subject to specific registration/ data either in the form of an annual No. Comparable data of Angolan disclosure next to the Central Bank/ report or through the disclosure of companies is not publicly available. Governmental offices. data in public forums? Do tax authorities have requirements Are royalties subject to Not applicable. or preferences regarding databases withholding? Are there any difficulties or for comparables? Yes. limitations on the availability or effectiveness of APAs? Orbis and/or Amadeus databases are Are taxpayers allowed to file tax expected to be licensed by local tax return numbers that differ from Not applicable. authorities. book numbers? Does the tax authority generally No. focus on the interquartile range in a TNMM analysis? Other unique attributes? No. None. Does the tax authority have other preferences in benchmarking? If so, Tax treaty/double tax please describe. resolution No experience yet. What is the extent of the double tax treaty network? What level of interaction do tax authorities have with customs None. authorities? If extensive, is the competent Moderate. With the new transfer pricing authority effective in obtaining regime it is expected to increase. double tax relief? Are there limitations on Not applicable. deductibility of management fees When may a taxpayer submit beyond the arm’s length principle? an adjustment to competent Yes, some. If AGT considers the authority? management fees are in excess, Not applicable. discretionary adjustments can take place. May a taxpayer go to competent Management fees payments made authority before paying tax? abroad are subject to specific Not applicable. registration/disclosure next to the KPMG in Angola Central Bank/Governmental offices. Luis Magalhães Tel: +244 227 280 101 +351 210 102 087 Email: [email protected]

Susana Miguel Pinto Tel: +244 227 280 101 +351 212 487 391 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Argentina

KPMG observation

When documenting transfer pricing in Argentina, careful consideration must be given to the tested party rule, since the local tax legislation – the Administración Federal de Ingresos Públicos (AFIP) General Resolution (RG 1122) – requires that the tested party always be the Argentinean entity. In terms of audits and transfer pricing scrutiny, there is an increasing tendency for the AFIP to challenge transfer prices for taxpayers that present systematic losses beyond a specific fiscal year, mainly among resellers. There are no particular types of transactions under scrutiny and AFIP has initiated audits in different industries. The AFIP does pay special attention to the analysis criteria applied to the different fiscal years, mainly with respect to the use of multi-year periods for the tested party. They also require that financial information used in the analysis of comparables is checked against the relevant data sources. Lack of supporting information may cause the exclusion of the comparable from the analysis by the AFIP. KPMG in Argentina believes the AFIP requirements vis-à-vis the transfer pricing annual returns have increased the burden of proof on the taxpayer. The information that must be included in the annual form (F969) is complementary to that required by the transfer pricing annual form (Form F743). Both annual forms are mandatory, the first includes a specific detail of the intercompany transactions and the second adds the transfer pricing methodology used in the analysis of the transactions. Even though Argentina is not an Organisation for Economic Co-operation and Development (OECD) member, the local transfer pricing rules are based on the main concepts of OECD Guidelines. Nevertheless, to date there have been no specific comments from the Argentinean Tax Authorities with respect to the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules Effective date of transfer pricing rules Tax authority name Income Taxes Act Articles 14–15 and supplementary regulations. December 1998. Administración Federal de Ingresos Públicos (AFIP).

What is the relationship threshold In this sense, taxpayer will prepare the comparable companies. Rejection for transfer pricing rules to apply transfer prices return – F. 4501 for filing matrix with criteria followed to reject between parties? the transfer pricing study and the CPA companies as comparables and the Certification, which shall bear three conclusions obtained. Based on voting power, share capital digital signatures (i) the taxpayer (ii) the or other. The rules do not discriminate What are the consequences of CPA involved and (iii) the representative among different thresholds; rather they failure to submit disclosures? of the professional association where apply equally to all levels of ownership. the CPA has been licensed. The taxpayer is subject to penalties Furthermore, and beyond the company imposed by the tax authorities in case of capital interest, under the Local Income Additionally, prior to fiscal year-end, failure to file the transfer pricing report Tax Law, there are several other taxpayers must file with the tax and the corresponding transfer pricing relationships to which the transfer pricing authorities a transfer pricing mid-term returns. rules apply, such as functional or other form (Form F742). kinds, whether contractual or otherwise, On 15 June 2011, the Argentine tax that influence the decision-making Transfer pricing study authorities published a new resolution power to direct or define the activities that established the need to file an overview of the operations. Also, transactions additional annual transfer pricing return Can documentation be filed in with countries or territories that are containing data about transactions with a language other than the local not included on the white list – i.e., related parties abroad (Form F969). language? If yes, which ones? jurisdictions considered to be tax havens – The deadline for filing this form is are subject to transfer pricing scrutiny. No. 15 running days after the income tax The AFIP has provided the white list of return deadline. This is applicable for When a transfer pricing study is cooperating jurisdictions. fiscal years ended from 31 December prepared, should its content follow 2010 onwards. Chapter V of the Organisation What is the statute of limitations for Economic Co-operation and on assessment of transfer pricing In addition to the above obligations Development (OECD) Guidelines? adjustments? regarding transactions with related parties abroad, taxpayers must also Yes, for certain transactions. Even Five years from 1 January of the year disclose on an annual basis (Form F867) though Argentina is neither an OECD after the filing date. Law 26.476 states information involving the import from, member nor do its regulations make that for fiscal years 2003 to 2007 the and export to, unrelated parties abroad explicit reference to the OECD statute of limitations is six years from of tangible goods, with the exception of Guidelines, the content of the transfer 1 January of the year after the filing date. commodities, with non-related parties, pricing study to be prepared for local provided that the amount exceeds one purposes mostly includes those items Transfer pricing million Argentine pesos (ARS) during mentioned in Chapter V of the OECD disclosure overview the fiscal year. In the case of the import Guidelines. Are disclosures related to transfer from, and export to, unrelated parties Does the tax authority require an pricing required to be submitted to abroad, of commodities, companies advisor/tax practitioner to have the revenue authority on an annual must file a mid-term form (Form F741) specific designation in order basis (e.g. with the tax return)? per each semester, taking account of to prepare or submit a transfer the fiscal year-ended. pricing study? Yes. Transfer pricing documentation is What types of transfer pricing required to be submitted. Yes. information must be disclosed? The transfer pricing study, the Certified Business description/overview; Public Accountant (CPA) Certification, Transfer pricing methods functional analysis; risk analysis; the transfer pricing return (Form F743) Does your country follow the description of controlled transactions; and a copy of the Statutory Financial transfer pricing methods outlined in method selection; rejection of Statement of the fiscal year under Chapter II of the OECD Guidelines? alternative methods; identification analysis must be filed with the fiscal If exceptions apply, please describe. of comparables; economic analysis; authorities within 14 days of the eighth identification of the foreign counterparty Yes. The local transfer pricing rules month subsequent to year-end. with whom the transactions had been are based on the main concepts of General Resolution was published on conducted. Determination of the OECD Guidelines. Additionally, the 10 April 2013 introducing certain changes median and the interquartile range. local transfer pricing regulations in the transfer pricing compliance rules, Transcription of the statement of prescribe a specific method for export of establishing the formalities and other income of the comparable companies commodities. requirements that must be complied corresponding to the fiscal years It is important to mention that the local with by those taxpayers subject to necessary for the comparability analysis, transfer pricing rules require that, no transfer pricing regulations. It is noted with an indication of the sources of matter what the circumstances, the that this Resolution will be effective for such information. Description of the tested party used in the analysis should filing obligations corresponding to fiscal corporate activity and the characteristics always be the Argentinian entity. years ended from 31 December 2012. of the business carried out by the

Transfer pricing audit What defenses are available with Are there limitations on respect to penalties? deductibility of management fees and penalties beyond the arm’s length principle? When the tax authority requests The filing of transfer pricing a taxpayer’s transfer pricing documentation required by the tax Yes, Three percent of sales or five documentation, are there timing authorities, as described in the Transfer percent of investment for technical requirements for a taxpayer to Pricing Disclosure Overview. services in absence of tax treaty and they must be paid. submit its documentation? And if What trends are being observed so, how many days? currently? Additionally, the Argentine entity must show that the management fees were Yes, 15 days. An increase in the activities of the AFIP carried out in order to obtain, maintain, in terms of transfer pricing scrutiny is When the tax authority requests and preserve profits assessed by being observed. There is a tendency by a taxpayer’s transfer pricing Argentine tax. In addition, there should the AFIP toward increasing audits in all documentation, are there timing be sufficient proof that such expenses industries (as opposed to the initially- requirements for a taxpayer to submit relate to the Argentine entity’s targeted industries like the automobile, its documentation? Please explain. operations. In this regard, the company pharmaceutical and agribusiness). Documentation to be provided in the should obtain a certificate supporting course of a Tax Authority audit are its expenses or a detailed report of the normally expected to be responded Special considerations imputed amount providing a level of to within 15 days of the request. Tax Are secret comparables used by tax accuracy sufficient to determine the authorities might extend such timeframe authorities? local expenses. for an additional 15 day period. No. Are management fees subject to withholding? If an adjustment is proposed by Is there a preference, or the tax authority, what dispute requirement, by the tax authorities Yes. resolution options are available? for local comparables in a Are there limitations on the benchmarking set? The taxpayer can appeal to different deductibility of royalties beyond the Justice Court instances. The order of No. As a consequence of the absence arm’s length principle? appeal for an adjustment proposed by of local comparables, the tax authorities Yes, 20 percent of trademark royalties the tax authorities is as follows: have accepted the use of foreign paid abroad are not deductible. • first level: National Tax Court comparables mainly from the American market. In this sense, it is important Are royalties subject to • second level: National Court of Appeals to have the support of the relevant withholding? • third level: Supreme Court of Justice. documentation. Additionally, in some Yes. If an adjustment is sustained, can cases, European or Asian comparables Are taxpayers allowed to file tax penalties be assessed? If so, what might be used; however, the lack of return numbers that differ from rates are applied and under what supporting information about these book numbers? conditions? comparables may cause their exclusion by the tax authorities. Yes. Under an evaluation of the transfer Compliance penalties: Taxpayer’s pricing policy the taxpayer could apply failure to file the required returns Do tax authorities have an adjustment. However, it should and documentation in a timely way, requirements or preferences take into account the impact of the is subject to a fine of ARS10,000 regarding databases for adjustment on other taxes, particularly (approximately 1,250 US dollars (USD)), comparables? those related to custom issues. which increases to a fine of ARS20,000 No preferences in the use of databases (approximately USD2,500) for foreign- are observed by the tax authorities. Other unique attributes? owned entities. Does the tax authority generally An additional method included in the Material penalties: The transfer pricing focus on the interquartile range in a Local Income Tax Law establishes that tax adjustment is subject to a fine that TNMM analysis? in case of exports to related parties ranges from one to four times the of commodities and, in general, any Yes, always. unpaid tax amount. To determine the fine assets having a known quotation in within such range, the tax authorities Does the tax authority have other transparent markets, involving an will take into account the taxpayer’s preferences in benchmarking? If so, international broker who will not be compliance with transfer pricing returns please describe. the effective receiver of the goods, it and documentation. In case of fraud the shall be deemed as the best method Not applicable. penalties will increase from two-to-ten for the purpose of determining the times the unpaid tax amount. What level of interaction do tax export’s Argentine-source income, authorities have with customs the highest of the good’s quotation in To what extent are transfer pricing authorities? the transparent market on the date of penalties enforced? shipment or the price that would have Medium. Often. been agreed with the international

KPMG in Argentina

Marcelo A. Castillo Tel: +54 11 4316 5834 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Australia

KPMG observation

The transfer pricing landscape in Australia continues to be one of evolution, if not revolution. Notwithstanding the recent introduction of new and far reaching transfer pricing laws based on self-assessing ‘transfer pricing benefits’ by reference to ‘arm’s length conditions’ (Subdivision 815) and the concurrent introduction of new transfer pricing record keeping rules (Subdivision 284-E), the government has announced further legislative changes aimed at keeping Australia at the forefront of jurisdictions seeking to tackle erosion of their tax base and non-arm’s length profit shifting. The government has announced a series of measures that would, if enacted, apply to large businesses (i.e. multinational enterprises (MNEs) with global sales of more than 1 billion Australian dollars (AUD)): • amendments to Australia’s general anti-avoidance rules to apply where the structure put in place is such that a foreign resident connected with a low or no corporate tax jurisdiction avoids income being attributed to an Australian permanent establishment and taxed in Australia • a doubling of penalties in relation to transfer pricing adjustments and the operation of the proposed anti-avoidance provision where a reasonably arguable position has not been established • implementation of the Organisation for Economic Co-operation and Development’s (OECD’s) Country-by-Country reporting requirements; and • implementation of the OECD’s Master File/Local File approach for transfer pricing documentation. Most of the above measures would apply for years of income commencing on or after 1 January 2016. Australia continues to be a strong supporter of the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative and the BEPS project has clearly influenced the above legislative proposals. Further, the Senate Economics References Committee ‘Corporate Tax Avoidance’ inquiry which began public hearings in April 2015 continues to grab headlines about the tax practices of foreign-based and Australian-based MNEs. The Committee has heard evidence from MNEs operating in a range of industries including information technology, mining, pharmaceutical and oil and gas. The committee was originally due to report by June 2015, however, its reporting date has been extended. A range of tax transparency measures are designed to provide the Australian public with information about the amount of tax paid in Australia by large companies. Some of these are already on the statute books, and are expected to generate significant public interest. For example, under current law, the Commissioner is required to disclose annually the following information on a public website for companies with turnover greater than AUD100 million: accounting income, taxable income, and tax paid. The first information (relating to the 2013–14 income year) is expected to be released in the final quarter of 2015. The government has also begun working with businesses to develop a voluntary code on public disclosure of greater tax information by large corporates and has requested the Board of Taxation to lead the development of the new transparency code.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Subdivision 815-A applies to years of have international related party dealings income commencing on or after 1 July of more than two million Australian Tax authority name 2004 and for all subsequent years up to dollars (AUD) per year or any cross- Australian Taxation Office (ATO). years of income commencing before border intragroup dealings involving Citation for transfer pricing rules 29 June 2013. foreign branches of Australian entities or Australian branches of foreign entities Effective date of transfer pricing record Current rules (i.e. there is no minimum threshold for keeping rules Subdivisions 815-B to D of the Income cross-border intra-group dealings). The Tax Assessment Act 1997 (ITAA 1997). Years of income commencing on or after IDS is used as a risk assessment tool 29 June 2013. by the ATO to better target its transfer Subdivision 815-B applies to cross- What is the relationship threshold pricing and other international tax border dealings between separate legal compliance activities. entities that are not undertaken on an for transfer pricing rules to apply arm’s length basis. Subdivision 815-C between parties? Under the ATO’s Advance Pricing Agreement (APA) program, a taxpayer applies to cross-border dealings within There is no relationship threshold. The with an APA is required to prepare a single legal entity (e.g. between an relevant test is whether conditions and submit an Annual Compliance Australian permanent establishment (PE) operate between the entity and Report to the ATO disclosing the of a non-resident entity and its overseas another entity in connection with their covered transactions, according to the head office, between a foreign PE of commercial or financial relations that requirements of Practice Statement an Australian resident entity and the differ from arm’s length conditions (i.e. Law Administration PS LA 2015/4. Australian head office). Subdivision 815-D conditions that might be expected to makes Subdivisions 815-B and 815-C operate between independent entities There is no formal requirement for applicable to trusts and partnerships. dealing wholly independently with one taxpayers to provide their transfer another in comparable circumstances). Previous rules pricing documentation to the ATO with the tax return. Division 13 of Part III of the Income Tax What is the statute of limitations Assessment Act 1936 (ITAA 1936). on assessment of transfer pricing What types of transfer pricing adjustments? information must be disclosed? Subdivision 815-A of the ITAA 1997. Current rules The IDS requires detailed disclosures Citation for transfer pricing record about international related party Within seven years of the notice of keeping rules dealings including: description assessment for a particular year. Subdivision 284-E of Schedule 1 to and amounts of related party the Taxation Administration Act 1953 Previous rules transactions, disclosures related (Subdivision 284-E). No time limit for amendment although to transactions of special interest cannot be applied prior to effective date. to the tax authority (e.g. business Effective date of transfer pricing rules restructures), disclosures relating to Current rules arm’s length transfer pricing methods Transfer pricing used and whether transfer pricing Years of income commencing on or after disclosure overview documentation has been prepared in 29 June 2013. Are disclosures related to transfer relation to the various related party Previous rules pricing required to be submitted to transactions disclosed. Division 13 applies to assessments the revenue authority on an annual What are the consequences of in respect of the year of income in basis (e.g. with the tax return)? failure to submit disclosures? which 28 May 1981 occurred and for Yes. An International Dealings Schedule An administrative penalty may apply for all subsequent years up to its date of (IDS) needs to be lodged with the failure to prepare or submit the IDS. repeal on 29 June 2013. income tax return where taxpayers

Transfer pricing study Transfer pricing audit of TAA 1953 and under the general penalty provisions in Subdivision 284-B overview and penalties of TAA 1953. Can documentation be filed in When the tax authority requests a language other than the local a taxpayer’s transfer pricing Scheme (transfer pricing) penalty language? If yes, which ones? documentation, are there timing provisions requirements for a taxpayer to No. The standard shortfall penalty rate is submit its documentation? And if 25 percent of the tax avoided where When a transfer pricing study is so, how many days? the sole or dominant purpose was not prepared, should its content follow Yes, 28 days. to avoid tax and the taxpayer does not Chapter V of the Organisation have a reasonably arguable position for Economic Co-operation and When the tax authority requests (RAP). Where the sole or dominant Development (OECD) Guidelines? a taxpayer’s transfer pricing purpose was to avoid tax, the shortfall documentation, are there timing Yes, for all transactions. To satisfy penalty amount is 50 percent of the tax requirements for a taxpayer to Subdivision 284-E, the transfer pricing avoided where the taxpayer does not submit its documentation? Please documentation must satisfy each of have a RAP. Where the taxpayer meets explain. the matters set out in section 284–255 the RAP standard, the shortfall penalty of the ITAA 1997. In broad terms, the Historically, ATO practice has been to rate is 10 percent of the tax avoided matters to be covered include those expect documentation to be supplied where the sole or dominant purpose that Chapter V of the OECD Guidelines within 28 days of request, however, was not to avoid tax. Where the sole or recommends be covered, however, we have seen a number of examples dominant purpose was to avoid tax, the there are nevertheless a number of recently where the ATO is requiring shortfall penalty amount is 25 percent additional matters from both a technical documentation to be supplied within a of the tax avoided. and a process perspective that need shorter time period. General penalty provisions to be covered. For example, from a If an adjustment is proposed by technical perspective, the records There are a number of penalties that the tax authority, what dispute must show whether the reconstruction can be applied under Subdivision resolution options are available? provisions in section 815–130 apply (the 284-B. Of most relevance are those reconstruction provisions apply where Taxpayers have domestic tax law rights which apply where there is a shortfall the form of the relations between the to object and appeal against amended amount. In this case, the penalty rate parties is different to the substance assessments. Objections are dealt with is 25 percent where a taxpayer has not of those arrangements and where by the ATO. Appeals may go to either taken reasonable care. Penalties can be independent parties would have entered the Administrative Appeals Tribunal or to remitted to nil where a taxpayer has a into different arrangements to those the Federal Court. RAP. Where a taxpayer does not have a that were entered into). From a process RAP, penalties can be increased to With a view to reducing the number perspective, records must be kept in 50 percent due to recklessness on the of cases that go to objection, the ATO English or be readily accessible and part of the taxpayer as to the operation has introduced an internal Independent convertible into English and the records of a taxation law and to 75 percent due Review process which involves review must be prepared prior to lodgment of to intentional disregard on the part of of the case by a reviewer who has had the annual income tax return. the taxpayer of a taxation law. no prior involvement in the audit. The ATO has set out its views on the The standard rates can be increased The ATO also uses Alternative Dispute documentation that taxpayers should or decreased depending on a range of Resolution (ADR) conducted by private keep to satisfy Subdivision 284-E in factors. The Commissioner also has ADR practitioners (including former Taxation Ruling TR 2014/8. the power to remit some or all of the Federal and High Court judges) in penalties that would otherwise be Does the tax authority require an complex disputes involving large imposed. advisor/tax practitioner to have market taxpayers. specific designation in order Interest For tax treaty countries, taxpayers to prepare or submit a transfer may invoke the Mutual Agreement In addition a Shortfall Interest Charge pricing study? Procedure (MAP) provisions in (SIC) and General Interest Charge No. Australia’s comprehensive Double (GIC) may also be applied to tax Taxation Agreements (DTAs). and penalties. For a more detailed description of these charges and the Transfer pricing methods If an adjustment is sustained, can circumstances under which they are Does your country follow the penalties be assessed? If so, what levied visit http://www.ato.gov.au. transfer pricing methods outlined in rates are applied and under what Chapter II of the OECD Guidelines? conditions? To what extent are transfer pricing penalties enforced? If exceptions apply, please describe. Yes. Penalties can be applied under Often. Yes. both the scheme (transfer pricing) penalty provisions in Subdivision 284-C

What defenses are available with in an Australian benchmarking study, length principle and general income respect to penalties? the ATO generally prefers Australian tax deductibility requirements comparable companies during review are met. Maintaining documentation that or audit. Where a regional set is used satisfies the requirements in Subdivision Are management fees subject to for Australian purposes, the ATO will 284-E; commercial realism analysis; withholding? focus on the Australian comparables cooperation with the ATO in providing and their relative position in the No. the information requested; and, set. Where necessary, the ATO will voluntary disclosure, preferably before Are there limitations on the conduct its own analysis to identify the audit notification. deductibility of royalties beyond the Australian comparable companies for arm’s length principle? What trends are being observed benchmarking purposes. currently? Yes. Royalties will generally be Do tax authorities have deductible provided the quantum In recent years, the ATO has been requirements or preferences is consistent with the arm’s length very active in scrutinizing taxpayers’ regarding databases for principle and general income tax transfer pricing practices with a view to comparables? deductibility requirements are met. protecting Australia’s revenue base. The No. ATO has increased its transfer pricing Are royalties subject to capability through external recruitment Does the tax authority generally withholding? focus on the interquartile range in a and maintains an annual transfer pricing Yes. program of risk reviews and audits. TNMM analysis? In late 2013, the ATO commenced its Are taxpayers allowed to file tax Yes, sometimes. International Structuring and Profit return numbers that differ from Shifting (ISAPS) program. This is in Does the tax authority have other book numbers? preferences in benchmarking? If so, addition to its annual compliance Yes. activities which includes its existing please describe. For Australian subsidiaries of foreign- transfer pricing review work and its The ATO has not published detailed based multinational enterprises Advance Pricing Agreement (APA) guidance on how benchmarking (MNEs) program. The areas covered by the ISAPS analyses should be undertaken for program are broader than just transfer purposes of Subdivisions 815-B and Year-end adjustments are generally pricing and include other corporate 815-C (particularly when using the allowed where a written agreement income tax areas such as permanent TNMM). Nevertheless, Subdivisions exists between the parties which establishments, thin capitalization, 815-B and 815-C require arm’s length crystallizes the obligation on the controlled foreign companies (CFC), conditions to be determined so as best part of one party to make a year-end particularly focusing on offshore trading to achieve consistency with amongst adjustment to the other party, where hubs and business restructuring. other things the OECD Guidelines. It a benchmarking study has been From a transfer pricing perspective, is therefore implicit that benchmarking undertaken, and where the year- transactions with respect to related party analyses are undertaken in a way which end adjustment is required in order loans and guarantee arrangements, best achieves consistency with the to achieve arm’s length conditions royalty arrangements, business guidance on benchmarking analyses between the foreign parent and its restructuring, the transfer of intellectual contained in the OECD Guidelines. Australian subsidiary. However, year- end adjustments have the potential to property and the mining, pharmaceutical Historically, the ATO has had a general increase risk especially where there is and motor vehicle industries continue to preference for benchmarking analyses an unclear transfer pricing policy, the receive scrutiny by the ATO. Furthermore, to be based on multi-year analyses adjustments are applied inconsistently periods of prolonged losses or low (ordinarily five years), to use publicly or the characterization of the adjustment profitability continue to be a focus of the listed companies (rather than private is unclear. ATO (regardless of whether there are companies) as comparables and for material related party transactions or not). Australian comparables rather than For foreign subsidiaries of Australian- foreign comparables. based MNEs Special considerations What level of interaction do tax The same as above, with the following Are secret comparables used by tax authorities have with customs additional requirement. A year-end authorities? authorities? adjustment made by an Australian parent to its foreign subsidiary may not No. High. be deductible to the Australian parent Is there a preference, or Are there limitations on (i.e. the payment will be considered requirement, by the tax authorities deductibility of management fees to be a capital payment) unless it is for local comparables in a beyond the arm’s length principle? possible to identify assets or services benchmarking set? which have a price and which are being Yes, some. Management fees will re-priced TD 2014/4. Yes. Although there is no formal generally be deductible provided the requirement to use local comparables quantum is consistent with the arm’s

Other unique attributes? When may a taxpayer submit an the possible application of Australia’s adjustment to competent authority? general anti-avoidance provision in The new transfer pricing rules are relation to the cross-border dealings to self-assessed After an adjustment is proposed to the be covered by the proposed APA). taxpayer. This will usually be in the form The new transfer pricing legislation of a position paper. Notwithstanding the change in approach is aligned with the more general in PS LA 2015/4, in practice, APAs are policy intent of self-assessment. May a taxpayer go to competent still able to be concluded with the ATO Consequently the new rules are self- authority before paying tax? where documentation submitted to the executing and therefore place a higher Yes. ATO during the APA process shows that burden on taxpayers, and particularly profit outcomes in Australia reflect the on public officers, who must form a true economic contribution made by the view prior to the time of lodgment of Advance pricing Australian-based enterprise. the income tax return that cross-border agreements related party transactions have been What APA options are available, structured and priced on an arm’s length if any? basis for tax purposes, for which they may be held accountable. Unilateral, bilateral, multilateral. Apply to independent parties as well as Is there a filing fee for APAs? to related parties No. As with Australia’s previous transfer Does the tax authority publish APA pricing rules, the new provisions capture data either in the form of an annual non-arm’s length dealings between both report or through the disclosure of related and unrelated parties. data in public forums? Include specific reconstruction provisions Yes. The new transfer pricing rules contain Are there any difficulties or a specific provision that enables limitations on the availability or transactions to be reconstructed for tax effectiveness of APAs? purposes (Section 815–130) in situations where there is (i) inconsistency between No. Following a further review of its APA the form and substance of a particular program, the ATO recently issued PS LA arrangement; or (ii) situations where 2015/4 setting out its revised practice the arrangement is not one that would and procedures in dealing with requests have been entered into by independent from taxpayers to enter into an APA. parties acting at arm’s length. While Amongst other things, PS LA 2015/4 section 815–130 was intended to be formalizes use of the ATO’s new ‘triage’ consistent with the reconstruction process in its APA program. Triage assists provisions described in paragraph 1.65 of the ATO’s new APA/MAP and Competent the OECD’s transfer pricing Guidelines, Authority Practice Management Unit section 815–130 does not include an (PMU) in determining whether an ‘exceptional circumstances’ requirement, APA request can and should proceed and the ATO has confirmed that the further. Triage identifies whether there potential application of the reconstruction are material impediments to the ATO provisions needs to be considered in entering into an APA with the taxpayer all cases. The ATO intends to use the by examining the information supplied by reconstruction provisions in section the taxpayer and the APA team. 815–130 to pursue its BEPS agenda and implement the ISAPS program. PS LA 2015/4 states that the ATO is less likely to enter into an APA where one or more of the following indicators Tax treaty/double tax are present: resolution • where the arrangements that are the What is the extent of the double tax subject of the proposed APA appear KPMG in Australia treaty network? to lack commerciality or be primarily Extensive. tax driven; or Frank Putrino • collateral issues affect the ATO’s Tel: +61 3 9838 4269 If extensive, is the competent Email: [email protected] authority effective in obtaining ability to enter into the proposed APA double tax relief? (collateral issues include carried forward losses being available to a taxpayer and As email addresses and phone numbers Almost always. change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Austria

KPMG observation

On 28 October 2010, the Austrian Federal Ministry of Finance published the Austrian Transfer Pricing Guidelines (TPG). These Guidelines show the importance that the Austrian tax administration is placing on transfer pricing issues and seen in nearly every tax audit. The guidelines state that their purpose is to ensure the uniform application of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. For Austrian taxpayers, it will be important to monitor how major amendments to the OECD Guidelines, reflecting the outcome of the Base Erosion and Profit Shifting (BEPS) initiative, will be considered by the Austrian Federal Ministry of Finance going forward.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold tax returns. The tax administration, however, is of the opinion that Tax authority name for transfer pricing rules to apply between parties? documentation must be prepared Bundesministerium für Finanzen contemporaneously and be ready Ownership of greater than 25 percent. (Federal Ministry of Finance). when the tax return is filed. What is the statute of limitations Citation for transfer pricing rules What types of transfer pricing on assessment of transfer pricing information must be disclosed? Austrian Transfer Pricing Guidelines adjustments? (Austrian TPG) 2010 published as Please see transfer pricing study Generally, in practice a six year limitation administrative guidelines (BMF-GZ overview. from the tax year-end applies. This 010221/2522-IV/4/2010, 28 October 2010). period is extended under certain What are the consequences of OECD Guidelines adopted as circumstances. failure to submit disclosures? administrative guidelines (translated There is no specific penalty for failure into German; published in Fiscal register to prepare transfer pricing disclosures. of the Austrian fiscal authority (AÖF Transfer pricing Please see discussion under transfer Nos. 114/1996, 122/1997, 155/1998 and disclosure overview pricing study overview. 171/2000). Are disclosures related to transfer pricing required to be submitted to Effective date of transfer pricing rules the revenue authority on an annual Date of publication of each of the basis (e.g. with the tax return)? rules: 1 August 1996, 22 May 1997, 10 No. There is no requirement to file September 1998, and 28 October 2010. transfer pricing disclosures with the

Transfer pricing study to respond to requests. As there is a taxpayer. A specific focus is currently publicly available opinion issued by the on the automotive, consumer products, overview Ministry of Finance that documentation pharmaceutical and high-tech industries, Can documentation be filed in must be ready when filing the tax return, as well as intra-group financing a language other than the local 14 days could be sufficient. In practice, transactions in general (including language? If yes, which ones? we see longer time periods and justified guarantee fees). prolongations are possible. Yes, English. In a 2012 court decision (30.07.2012, When a transfer pricing study is If an adjustment is proposed by RV/2515-W/09), the court of first prepared, should its content follow the tax authority, what dispute instance ruled on specific questions Chapter V of the Organisation resolution options are available? relating to the use of, and the minimum requirements for, benchmarking studies for Economic Co-operation and Taxpayers can dispute proposed and the entitlement of the tax authorities Development (OECD) Guidelines? adjustments according to Austrian for adjustments. The specific question appeals procedures, through Mutual Yes, for all transactions. In addition, ruled was whether adjustments of the Agreement Procedures (MAPs), and the Austrian TPG also declare that tax authorities would be to the median, under the EU Arbitration Convention. documentation prepared in accordance to the interquartile range or to the total with the European Union (EU) Code of If an adjustment is sustained, can range of the benchmarking study if the Conduct on transfer pricing documentation penalties be assessed? If so, what actual results achieved by the taxpayer for associated enterprises in the EU rates are applied and under what fell out of the range deemed acceptable (EU Masterfile concept) fulfils the conditions? by the tax authorities during a tax audit. documentation requirements in Austria. While the circumstances of the case No. However, transfer pricing For management fees, the taxpayer must were specific, we anticipate the Austrian adjustments have a direct effect on be able to provide a specific, detailed basis tax authorities to seek to adjust to the the corporate income tax base and the for all charges imposed by foreign group median during future tax audits. This case actual tax burden levied. As with late companies for services rendered (case also shows the importance of submitting payments of corporate tax, interest will law) and a detailed contract should be high quality benchmarking studies both in be levied on any additional prior year‘s prepared and signed. terms of comparability criteria (qualitative corporate income tax. The interest is search) and documentation. Does the tax authority require an levied for a period starting from October advisor/tax practitioner to have following the assessment year and Generally, we observed that the Austrian a specific designation in order lasting for a maximum of 48 months. tax administration’s willingness to start to prepare or submit a transfer The interest rate is two percent above procedures according to the Fiscal Penal pricing study? the base interest rate. Code has increased. Yes. To what extent are transfer pricing penalties enforced? Special considerations Transfer pricing methods In cases of tax fraud and willful and Are secret comparables used by tax Does your country follow the abusive tax evasion according to Fiscal authorities? transfer pricing methods outlined in Penal Code. Sometimes they are used in practice, Chapter II of the OECD Guidelines? but formally they are not allowed If exceptions apply, please describe. What defenses are available with respect to penalties? because the tax authorities are barred Yes. from publishing such data. Penalties can be enforced in cases where there is found to be tax fraud and/or willful Is there a preference, or Transfer pricing audit and and abusive tax evasion. Appropriate requirement, by the tax authorities penalties documentation can also help the taxpayer for local comparables in a benchmarking set? When the tax authority requests to defend against proceedings according a taxpayer’s transfer pricing to the Fiscal Penal Code. No, there is no such requirement due documentation, are there timing What trends are being observed to the size of the Austrian market requirements for a taxpayer to currently? and missing publicly available data in submit its documentation? And if the past, often no comparables are so, how many days? As previously noted, transfer pricing is a available – a fact that is recognized by focus area of the tax authorities. KPMG the Austrian tax authorities. Yes, 14 days. in Austria observes a variety of factors being taken into account in determining Do tax authorities have When the tax authority requests requirements or preferences a taxpayer’s transfer pricing which taxpayers to audit and on what areas during the audits. This can include regarding databases for documentation, are there timing comparables? requirements for a taxpayer to submit the existence or evidence of business its documentation? Please explain. restructurings, the profitability of the The tax authority uses Orbis. local taxpayer, the nature and volume Nevertheless, any publicly available The tax authorities must give the of related party transactions, and database can be used. taxpayer a “reasonable” time period findings from previous audits of the

Does the tax authority generally Are royalties subject to Is there a filing fee for APAs? focus on the interquartile range in a withholding? Yes, for the formalized advance ruling TNMM analysis? Yes. procedure that became effective Yes, always. in January 2011. Depending on the Are taxpayers allowed to file tax taxpayers´ sales, the filing fee is Does the tax authority have other return numbers that differ from between 1,500 and 20,000 euros preferences in benchmarking? If so, book numbers? (EUR). For groups of companies that are please describe. Yes, under certain circumstances. required to file consolidated accounts, Multiple year average; independence Generally, retroactive agreements the fee of EUR20,000 always applies. thresholds for comparables; EU are not accepted in tax law. Although Does the tax authority publish APA (enlarged) comparables; no average loss neither Austrian tax law nor Austrian data either in the form of an annual or losses in more than two years; no TPG specifically regulate year-end report or through the disclosure of start-up entities. adjustments, there is a tendency for data in public forums? the Austrian tax authorities to only What level of interaction do tax accept year-end adjustments if they are No. authorities have with customs common practice amongst third parties. authorities? Are there any difficulties or A clear written agreement concluded limitations on the availability or Low. Customs and tax authorities before the respective fiscal year starts is effectiveness of APAs? communicate for VAT purposes. For a prerequisite for acceptance. transfer pricing, there is no interaction No. In general, the APA program is Other unique attributes? known at this time. considered successful. Due to the None. lack of publicly available data we Are there limitations on have no indication that there is a deductibility of management fees geographic preference or reluctance. beyond the arm’s length principle? Tax treaty/double tax Practically, shortages in personnel at Yes. Management fees are deductible resolution the Austrian tax administration can lead if a payee can prove benefits from What is the extent of the double tax to an increase in the duration of such the services and that the fee is at treaty network? procedures. arm’s length. It should be noted that a Extensive. detailed management service contract and comprehensive documentation is If extensive, is the competent required. authority effective in obtaining double tax relief? Are management fees subject to withholding? Frequently. No. When may a taxpayer submit an adjustment to competent authority? Are there limitations on the deductibility of royalties beyond the Generally after (revised) assessment arm’s length principle? notes on tax audit findings are issued. Yes. Royalties beyond the arm’s May a taxpayer go to competent length principle are regarded as authority before paying tax? hidden distribution, and hence non- Yes. deductible. Please note that as from 2014, under Advance pricing certain circumstances arm’s length royalties can also be found non- agreements deductible, in particular if paid to a What APA options are available, foreign recipient subject to a tax rate of if any? less than 10 percent. Unilateral.

KPMG in Austria

Sabine Bernegger Tel: +43 1 313 32 286 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Azerbaijan

KPMG observation

Transfer pricing rules were enacted in Azerbaijan with effect from 1 January 2001 (although there were some basic principles before). Since then they were amended slightly several times. The rules mainly focus on the determination of prices on the sale of goods/ services, and establish the arm’s length principle as the guiding rule for pricing related party transactions. In practice, the Azerbaijan tax authorities mainly make adjustments to taxpayers’ revenues, by challenging interest rates or the mark-up on goods/services. Currently, the Azerbaijan tax authorities are in the process of developing new transfer pricing rules that are expected to leverage the Organisation for Economic Co-operation and Development (OECD) Guidelines.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • barter transactions the other entity, or in an entity that actually controls both entities Tax authority name • import/export operations • if one individual is subordinate to the The Ministry of Taxes of the Republic of • transactions between related other with regard to official position Azerbaijan (MT). persons • if persons are under the direct or Citation for transfer pricing rules • transactions in which the prices within 30 days deviate by more than 30 percent indirect control of a third person Articles 14 and 142.1 of the Tax Code. either way from the prices set by the • if persons have a direct or indirect Effective date of transfer pricing taxpayer for similar or homogeneous control over a third person. goods/works/services; and rules What is the statute of limitations 1 January 2001. • an insured property of a person for on assessment of transfer pricing the amount exceeding net book value adjustments? What is the relationship threshold of such property. for transfer pricing rules to apply The tax authorities can audit three between parties? Persons are considered “related” in the years preceding the year in which the following cases: decision to conduct tax audit was taken. These following conditions apply for when • if a person holds, directly or indirectly, However, in case of initiation of tax audit the tax authorities may apply transfer due to criminal investigation, the statue pricing tests and recalculate taxes 20 percent or more of the value or number of shares or voting rights in of limitation is increased to seven years.

Transfer pricing When the tax authority requests Special considerations disclosure overview a taxpayer’s transfer pricing Are secret comparables used by documentation, are there timing tax authorities? Are disclosures related to transfer requirements for a taxpayer to pricing required to be submitted to submit its documentation? Please Yes. the revenue authority on an annual explain. basis (e.g. with the tax return)? Is there a preference, or The taxpayer must provide the transfer requirement, by the tax authorities No. pricing documentation to the tax for local comparables in a What types of transfer pricing authorities within five working days benchmarking set? information must be disclosed? from the date of the tax authorities’ No. request. Not applicable. Do tax authorities have requirements If an adjustment is proposed by What are the consequences of or preferences regarding databases the tax authority, what dispute for comparables? failure to submit disclosures? resolution options are available? Not applicable. The tax authorities maintain their Upon completion of the audit, the tax internal database and it is not available authorities issue an act summarizing for taxpayers. Transfer pricing study the audit results. The taxpayer is able to overview appeal this act. Then, the tax authorities Does the tax authority generally take the decision on the tax audit. If focus on the interquartile range in a Can documentation be filed in the taxpayer does not agree with the TNMM analysis? a language other than the local decision, it may appeal to the higher language? If yes, which ones? No. tax authority, Appeal Committee or No. Azerbaijan court system. Does the tax authority have other preferences in benchmarking? If so, When a transfer pricing study is If an adjustment is sustained, can please describe. prepared, should its content follow penalties be assessed? If so, what Chapter V of the Organisation rates are applied and under what The Tax Code states that comparables for Economic Co-operation and conditions? for the determination of MP are to be Development (OECD) Guidelines? taken only from “official and open” • Financial sanction of 50 percent of information sources. The Tax Code does No. underpaid taxes; and not define what sources are considered Does the tax authority require an • Interest of 0.1 percent per day (but “official and open”, but gives examples advisor/tax practitioner to have not exceeding one year). of such possible sources, databases of authorities in the specific market, specific designation in order to To what extent are transfer pricing information submitted by taxpayers to prepare or submit a transfer penalties enforced? pricing study? tax authorities, or, advertisements. Penalties are generally enforced in What level of interaction do tax No. practice. authorities have with customs What defenses are available with authorities? Transfer pricing methods respect to penalties? Does your country follow the The tax authorities may obtain transfer pricing methods outlined in Not applicable. information from the customs authorities easily and vice versa. Chapter II of the OECD Guidelines? What trends are being observed If exceptions apply, please describe. currently? Are there limitations on deductibility of management fees Yes. Azerbaijan tax authorities have started beyond the arm’s length principle? to pay more attention to transfer Transfer pricing audit pricing issues, specifically transactions Yes. Proper proof (such as primary between multinational companies, accounting documents, various and penalties provision of work/services or recharges documentation proving provision When the tax authority requests from related entities, etc. In addition, of such services (such as reports, a taxpayer’s transfer pricing Azerbaijan tax authorities are monitoring e-mails, correspondences, letters, documentation, are there timing BEPS Actions as well as in the process notes of meetings, etc.)) of provision of requirements for a taxpayer to of developing more detailed transfer management services shall be available. submit its documentation? And if pricing rules based on OECD transfer In addition, documents shall prove that so, how many days? pricing rules. an Azerbaijan taxpayer received the Yes, five days. economic benefit from such services.

Are management fees subject to When may a taxpayer submit an withholding? adjustment to competent authority? Yes. No formal rules exist in this area. Are there limitations on the May a taxpayer go to competent deductibility of royalties beyond the authority before paying tax? arm’s length principle? No. Yes. Proper proof (such as primary accounting documents, etc.) shall be Advance pricing available as well as there should be economic justification of the royalty agreements payment. What APA options are available, if any? Are royalties subject to withholding? None. Yes. Is there a filing fee for APAs? Are taxpayers allowed to file tax Not applicable. return numbers that differ from Does the tax authority publish APA book numbers? data either in the form of an annual Yes. If a company underestimated its report or through the disclosure of tax base due to non-arm’s length prices data in public forums? and confirm this during preparation of Yes. transfer pricing documentation, the company is required to make a self- Are there any difficulties or adjustment in the tax return. limitations on the availability or effectiveness of APAs? Other unique attributes? Not applicable. None.

Tax treaty/double tax resolution What is the extent of the double tax treaty network? Extensive. If extensive, is the competent authority effective in obtaining double tax relief? No.

KPMG in Azerbaijan

Mushfig Aliyev Tel: +99412 404 8910 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Bangladesh

KPMG observation

Tax authorities around the world increasingly consider that international transactions provide scope for revenue leakage. As a result, National Board of Revenue (NBR) of Bangladesh introduced new regulation on transfer pricing in Bangladesh tax laws for the first time through Finance Act 2012 which has become effective from 1 July 2014. Bangladesh transfer pricing regulation targets international transactions between two associated entities, either or both of whom are non-residents; hence transfer pricing regulation will mostly affect multinational companies or foreign companies having direct or indirect transactions with their subsidiaries, associates or other legal form of entities (e.g. branch office, agent, etc.) in Bangladesh. Bangladesh transfer pricing regulation is broadly in line with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 and Transfer Pricing Legislation – A Suggested Approach 2011 issued by OECD. In addition to necessary documentation on international transactions, Bangladesh transfer pricing regulation requires companies/enterprises to submit a statement of international transactions in a prescribed manner, and also a report from Chartered Accountants on the statement of international transactions if the aggregate value of such transactions exceeds 30 million Bangladeshi taka (BDT) during any income year. Given that transfer pricing regulation is very new to Bangladesh, it remains to be seen how the tax administration will implement this in practice.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Submission to tax authority required Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Statutory Regulatory Order (SRO) 161/ Effective date of transfer pricing Act/Income Tax/2014. Tax authority name rules Rules 70 to 75A of Income Tax Rules, Effective from 1 July 2014 National Board of Revenue (NBR). 1984. (corresponding assessment year Citation for transfer pricing rules 2015-2016). Income Tax Paripatra 2014 (i.e. Chapter XIA, and sections 94 and 173 interpretation issued by NBR). of Income Tax Ordinance (ITO), 1984.

What is the relationship threshold made after the expiry of three years exceeding two percent of value of for transfer pricing rules to apply from the end of assessment year in each international transaction. between parties? which the income was first assessable • For failure to keep, maintain or provide (except in cases involving fraud, etc.). Bangladesh transfer pricing regulation information, documents or records as incorporates a very wide definition For example, if the accounting year required by transfer pricing regulation, of associated enterprises to include ends on 31 December 2014, the first a penalty not exceeding one percent direct and indirect (e.g. through one or assessable assessment year would be of the value of each international more intermediaries) participation in 2015–2016. Hence no assessment of transaction. the management or control or capital transfer pricing adjustment will be made • For failure to comply with the notice as well as certain conditions wherein after 30 June 2019. issued by the Deputy Commissioner two enterprises are “deemed” to be of Taxes regarding transfer pricing associated enterprises. Enterprises Transfer pricing information, documents and under direct or indirect common control disclosure overview records, a penalty of not exceeding of any person(s)/enterprises are also one percent of the value of each deemed to be associated enterprises. Are disclosures related to transfer international transaction. pricing required to be submitted to Certain conditions include: the revenue authority on an annual • For failure to furnish a report from • direct/indirect shareholding giving basis (e.g. with the tax return)? Chartered Accountants, a penalty not more than 25 percent of voting power, exceeding BDT300,000. Yes. Every person who has entered into or for each of the enterprises, more • In the absence of appropriate, reliable an international transaction shall provide than 25 percent voting power owned and correct documentation and a statement of international transactions by the same person(s); or records on international transactions, as per rule 75A (i.e. transfer pricing the Deputy Commissioner of Taxes • more than 50 percent of the board of return) to the tax authority along with can determine arm’s length price of directors/members of the governing the return of income on annual basis. board appointed by the other international transaction on the basis Furthermore, a report from Chartered enterprise or more than 50 percent of information or documents or other Accountants shall be submitted, as of the board of directors/members evidence available to them. may be specified in the noticed issued of the governing board of each of the by tax authority, if aggregate value of enterprises appointed by the same Transfer pricing study international transactions exceeds person(s); or BDT30 million during an income year. overview • any executive director /executive Can documentation be filed in governing member of one enterprise What types of transfer pricing language other than the local appointed by the other enterprise or information must be disclosed? language? If yes, which ones? any executive director/member of • The following information is to be Yes. Not specified in the transfer pricing each of the enterprises appointed by disclosed in the transfer pricing regulations. However, English language the same person(s) or any common return: is well accepted by the tax authority. executive director/ member for each – item wise total expense and of the enterprises; or When a transfer pricing study is total revenue of the international prepared, should its content follow • dependency relating to borrowings: transactions Chapter V of the Organisation – cumulative borrowings – more than – total value of international for Economic Co-operation and 50 percent of the book value of transactions Development (OECD) Guidelines? total assets; or – nature of the transactions Bangladesh is not a member of OECD, – cumulative guarantees – more than – transfer Pricing Method (TPM) for so it is not mandatory to follow content 10 percent of the book value of the determining arm’s length price; and of transfer pricing study as per Chapter total borrowings; or V of the OECD Guidelines. However, – percentage of international – practical ability to control the the taxpayers can follow the OECD transactions under each item decision of the other enterprise by Guidelines to support principles found compared to total value of one enterprise; or in the Bangladesh transfer pricing international transactions for that regulation. The Bangladesh transfer – bonded relationship of mutual category (e.g. revenue transactions, pricing regulation should be relied upon interest between two enterprises service related transactions, where there are differences from the as may be prescribed by NBR. financial transactions, etc.). OECD Guidelines. What is the statute of limitations What are the consequences of on assessment of transfer pricing failure to submit disclosures? United Nations Practical Manual adjustments? on Transfer Pricing for Developing • For failure to provide a statement of Countries issued in 2013 can also be No order of assessment regarding international transaction (transfer followed. transfer pricing adjustment under pricing return), a penalty not section 107C of the ITO 1984 shall be

Does the tax authority require an period of eight years from the end of Special considerations the relevant assessment year. Transfer advisor/tax practitioner to have Are secret comparables used by tax pricing audit can be initiated by the tax specific designation in order to authorities? prepare or submit a transfer pricing authority within three years from the study? end of usual assessment year. Unknown. No. If an adjustment is proposed by Is there a preference, or requirement, the tax authority, what dispute by the tax authorities for local Transfer pricing methods resolution options are available? comparables in a benchmarking set? Does your country follow the The taxpayer has the right to appeal Unknown. transfer pricing methods outlined in against a transfer pricing adjustment to Do tax authorities have Chapter II of the OECD Guidelines? the following authorities: requirements or preferences If exceptions apply, please describe. • Commissioner of Taxes (Appeal) regarding databases for comparables? Yes. The following transfer pricing • Tribunal methods mentioned in Bangladesh • High Court So far there are no legal requirements to transfer pricing regulation are in line use any particular database. with the OECD Guidelines: There is now an additional option of trying to resolve the dispute called Does the tax authority generally • comparable uncontrolled price Alternative Dispute Resolution (ADR) focus on the interquartile range in a method to avoid the appeal going at any TNMM analysis? • resale price method authorities mentioned above. Not applicable. • cost plus method If an adjustment is sustained, can Does the tax authority have other • profit split method penalties be assessed? If so, what preferences in benchmarking? If so, rates are applied and under what • transactional net margin method please describe. conditions? (TNMM); and No. Transfer pricing regulation has been • any other method, if defensible. Under the general penalty regime, a made effective from 1 July 2014. Tax transfer pricing adjustment may lead authority has not yet started transfer Transfer pricing audit to a penalty based on a percentage of pricing audit or assessment. Hence, it actual tax loss not exceeding 10 percent. is very difficult to comment whether tax and penalties Furthermore, interest at 10 percent p.a. authority will focus on the interquartile When the tax authority requests on additional tax arising from transfer range in a TNMM analysis or they have a taxpayer’s transfer pricing pricing adjustments following tax audit, any preferences in benchmarking. documentation, are there timing can be added to the tax demand. What level of interaction do tax requirements for a taxpayer to authorities have with customs submit its documentation? And if To what extent are transfer pricing authorities? so, how many days? penalties enforced? Low level of interaction with customs Yes, 30 days. The imposition of penalties is discretionary and depends upon the authorities. When the tax authority requests facts and circumstances of each Are there limitations on a taxpayer’s transfer pricing individual case. deductibility of management fees documentation, are there timing beyond the arm’s length principle? requirements for a taxpayer to What defenses are available with submit its documentation? Please respect to penalties? Yes. Head office expenses in the branch explain. Transfer pricing documentation office in Bangladesh are permitted up to 10 percent of branch profit as per The notice of transfer pricing tax audit represents the first line of defense audited accounts subject to double (if initiated by the tax authority) shall against transfer pricing audits and is taxation avoidance agreement. specify the period within which the crucial for mitigating transfer pricing risk. taxpayer will be required to furnish Penalties may also be mitigated Are management fees subject to information as specified in the notice. In through cooperation with tax withholding? our experience, tax authority normally authorities. Yes. allows 30 days to submit documents as mentioned in the notice. What trends are being observed Are there limitations on the currently? deductibility of royalties beyond the The transfer pricing documentation arm’s length principle? should be prepared on a Not yet available since transfer pricing contemporaneous basis, and should regulation has been made effective in Yes. For both company and branch be maintained by the taxpayer for a Bangladesh from 1 July 2014. office, if management expenses allf

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Bangladesh | 29 under the broad definitions of royalty, Advance pricing technical services fee, technical assistance fee and technical know-how agreements fee, such expenses are permitted up What APA options are available, if to eight percent of the profit as per any? audited accounts. None. Are royalties subject to Is there a filing fee for APAs? withholding? Not applicable. Yes. Does the tax authority publish APA Are taxpayers allowed to file tax data either in the form of an annual return numbers that differ from report or through the disclosure of book numbers? data in public forums? Yes. Tax computation is an integral part Not applicable. of tax return. In the tax computation, profit before tax should mention as Are there any difficulties or per audited accounts. If there is any limitations on the availability or upward transfer pricing adjustment, it effectiveness of APAs? can be adjusted in the tax computation Not applicable. and tax return without making relevant entry in the accounting records. Other unique attributes? None.

Tax treaty/double tax resolution What is the extent of the double tax treaty network? Bangladesh has a wide range of tax treaty network and has entered into comprehensive tax treaties with 32 countries. Bangladesh is also party to a series of treaties under negotiation. If extensive, is the competent authority effective in obtaining double tax relief? Sometimes. When may a taxpayer submit an adjustment to competent authority? No formal rules exist in this area. May a taxpayer go to competent authority before paying tax? Taxpayer can go to the Commissioner (Appeal) and ADR without paying the tax. For other authorities (e.g. tribunal and High Court) certain amount of tax is required to be paid first. KPMG in Bangladesh

Mehedi Hasan Tel: +880 2 988 6450 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at transferpricing@ kpmg.com if you are unable to contact us via the information noted above.

Belgium

KPMG observation

Multinational groups with subsidiaries or permanent establishments in Belgium should make sufficient efforts to support and document the arm’s length nature of the pricing of their intra-group transactions. Being prepared for a transfer pricing audit with all intra-group transactions mapped and documented has become of key importance, as the Belgian special transfer pricing audit department has become increasingly aggressive in recent years. As an example of this, a new wave of approximately 300 transfer pricing audits was launched at the beginning of 2015 after the Belgian transfer pricing audit team doubled in size during 2013. Transfer pricing documentation plays a critical role in tax planning in Belgium. When implementing structures that seek deductions for notional interest or patent income, for example, setting the correct transfer price is essential.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Article 344, Section 2 BITC Effective date of transfer pricing rules Tax authority name • Circular of 28 June 1999 Effective July 2004. Reporting obligations (Administrative Transfer Pricing in the annual accounts apply to financial Federale Overheidsdienst Financiën; Circular) years starting on or after 1 September Service Public Fédéral Finances (Belgian 2008. New reporting obligations regarding Tax Authorities). • Circular of 7 July 2000 and 25 May 2003 (Administrative Circular on the certain payments to tax havens came into Citation for transfer pricing rules European Arbitration Convention) effect 1 January 2010. Domestic law provisions in relation to • Circular of 14 November 2006 What is the relationship threshold transfer pricing: (Administrative Circular on Transfer for transfer pricing rules to apply • Article 26 Belgian Income Tax Pricing Documentation and Transfer between parties? Code (BITC) Pricing Audits) reporting obligation Not specified in Belgian tax law. Article 26 of certain material non-arm’s length • Article 49 BITC of the BITC being one of the main transfer intra-group transactions in their pricing articles refers to “a company • Article 54-56 BITC annual accounts (Royal Decree dated which is situated directly or indirectly • Article 79 BITC 10 August 2009) reporting obligation in any situation of mutual dependency”. for direct and indirect payments to tax • Article 185, Section 2 BITC In order to assess whether entities are havens (Article 307 BITC). dependent, not only will legal criteria be • Article 207 BITC

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Belgium | 31 relevant, but factual elements such as havens must be reported in an appendix Transfer pricing methods common management and control are to the tax return, insofar as they amount Does your country follow the also likely to be considered. to at least 100,000 euros (EUR) and are transfer pricing methods outlined in made to persons located in tax havens The Royal Decree of 10 August 2009, Chapter II of the OECD Guidelines? as defined in Royal Decree of 7 May 2010 which requires corporations to report If exceptions apply, please describe. and Administrative Circular of non-arm’s length transactions with 30 November 2010. Yes. related parties, makes reference to the International Accounting Standard 24 for What are the consequences of the definition of related parties. failure to submit disclosures? Transfer pricing audit What is the statute of limitations Payments to tax havens which have and penalties on assessment of transfer pricing not been reported or, if they have been When the tax authority requests adjustments? reported, for which the taxpayer does not a taxpayer’s transfer pricing prove that they are made in the context documentation, are there timing Three years from the year-end. In the case of genuine and bona fide transactions requirements for a taxpayer to of fraud, seven years from the year-end, and outside of artificial constructions, submit its documentation? And if longer if a company is incurring losses are non-deductible business expenses. so, how many days? (deferral to momentum losses being Genuine and bona fide transactions used). Yes, 30 days. are transactions that really satisfy an industrial, commercial or financial need When the tax authority requests Transfer pricing disclosure and that normally find or must find a taxpayer’s transfer pricing overview compensation in the whole of the activity documentation, are there timing requirements for a taxpayer to Are disclosures related to transfer of the company. An artificial construction submit its documentation? Please pricing required to be submitted to has no link with economic reality explain. the revenue authority on an annual (development of a real activity) and is basis (e.g. with the tax return)? meant to evade the tax due in Belgium. When requested by the Belgian Tax Authorities, supporting information No. Tax return disclosures on transfer In the context of an investigation of the and documentation must be submitted pricing are not required. However, certain payments concerned, a transfer pricing within 30 days of the request. However, intra-group transactions must be reported investigation by the Belgian Tax Authorities in justified cases an extension can be in the company’s annual accounts. These is always possible and the general requested. The administrative circular annual accounts must be included with conditions for the deduction of expenses of 14 November 2006 recognizes that the tax return. Furthermore certain (mentioned in Article 49 and 54 BITC) 30 days is a short period for the request payments to tax havens also must be remain applicable. of transfer pricing information and that reported in a specific document (form For payments to tax havens the granting an extension may be appropriate. 275F) and enclosed with the tax return. simultaneous application of the tax on If an adjustment is proposed by What types of transfer pricing secret commissions (51,5 percent if the tax authority, what dispute information must be disclosed? paid to companies; 103 percent if paid to individuals) is also possible. resolution options are available? Certain material non-arm’s length intra- Yes. Domestic procedures are available group transactions and off-balance sheet enabling the taxpayer to challenge the arrangements must be disclosed in the Transfer pricing study adjustment. annual accounts following the provisions overview of Royal Decree dated 10 August 2009. Can documentation be filed in If an adjustment is sustained, can This reporting obligation applies to the a language other than the local penalties be assessed? If so, what following corporations those listed on a language? If yes, which ones? rates are applied and under what stock exchange whose shares are traded conditions? Yes, English. on a multilateral trading facility and those Yes. General tax penalties apply. Penalties that meet more than one of the criteria to When a transfer pricing study is range from 10 percent to 200 percent of be considered a large group as defined in prepared, should its content follow the additional tax assessed. the Belgian Companies Code. Chapter V of the Organisation for Economic Co-operation and To what extent are transfer pricing These corporations must report all non- Development (OECD) Guidelines? penalties enforced? arm’s length transactions with related parties in the annual accounts and provide Yes, for all transactions. Frequently. amounts, the nature of the relationship Does the tax authority require an What defenses are available with and all other information needed to advisor/tax practitioner to have respect to penalties? ensure an accurate view of the financial specific designation in order to position of the corporation. Transactions In case sound arguments are available, prepare or submit a transfer involving wholly owned subsidiaries are domestic procedures exist to (try to) pricing study? excluded from this reporting obligation. reduce or remit the fines. All direct and indirect payments to tax No.

What trends are being observed Is there a preference, or Are taxpayers allowed to file tax currently? requirement, by the tax authorities return numbers that differ from for local comparables in a book numbers? The tax officers of the special transfer benchmarking set? pricing audit department (of which the Yes, transfer pricing adjustments are numbers doubled in 2013) have been No. The Belgian Tax Authorities accept the generally permitted in practice, although very active in their sphere of operations, use of pan-European comparables. there is little specific guidance on making and have manifested themselves very these adjustments. Consideration should Do tax authorities have actively within their client base with the also be given to potential customs requirements or preferences help of data mining tools. They use more implications arising from these year-end regarding databases for or less standardized, lengthy requests for adjustments. comparables? information, through which they solicit Other unique attributes? detailed input from the taxpayer on all Any comparables which pass the sorts of intra-group transactions and comparability test can be used. In No. on any other information (e.g. legal and practice, however, often Amadeus and operational structure, business trends, Belfirst (a local database) are used. Tax treaty/double tax etc.) that may be relevant to assess Does the tax authority generally resolution whether the taxpayer respects the focus on the interquartile range in a What is the extent of the double tax arm’s length principle. A wide variety of TNMM analysis? industries (e.g. companies incurring long treaty network? Yes, always. start-up losses, undergoing business Extensive. restructurings, showing fluctuating Does the tax authority have other If extensive, is the competent key performance indicators, hosting preferences in benchmarking? If so, authority effective in obtaining intra-group financing or cash pooling please describe. arrangements) have in the meantime double tax relief? No other preferences besides a certain been selected for a thorough transfer Almost always. pricing audit. Experience from these sensitivity for the presence or absence audits shows that it pays to be well (rejection criteria) of Belgian comparables When may a taxpayer submit an prepared and to proactively map all intra- during transfer pricing audits. adjustment to competent authority? group transactions and support the arm’s What level of interaction do tax An application for a Mutual Agreement length nature of the transfer prices being authorities have with customs Procedure (MAP) should be filed within applied. Also adherence to the provisions authorities? two or three years (or a shorter period and conditions laid down in intra-group depending on the relevant treaty Low. agreements should be monitored with provisions) as from the first notification great care. Indeed, by not complying with Are there limitations on of the proposed transfer pricing the provisions of their own agreements, deductibility of management fees adjustment communicated to the taxpayers are quite often a sitting duck beyond the arm’s length principle? taxpayer in writing. For cases of double for the special transfer pricing audit taxation within the EU, relief may be Yes, in addition to being at arm’s length, department of the Belgian Tax Authorities. obtained by calling upon the European the management fees should relate Arbitration Convention. There is still a clear focus on loss-making to management services effectively companies and groups in Belgium rendered/received and related directly May a taxpayer go to competent which have undergone a business to the business, that enable the Belgian authority before paying tax? restructuring. The deductibility of losses taxpayer to obtain or retain taxable Yes. As long as the MAP is pending and restructuring costs are challenged if it income. appears that they are not supported by the usually suspension of tax collection function and risk profile of the taxpayer. Are management fees subject to is granted. Furthermore, the Belgian Tax Authorities withholding? are also focusing on the correct No. Advance pricing application of the transfer pricing policy in agreements the operational transfer prices at business Are there limitations on the line, product group or product level. deductibility of royalties beyond the What APA options are available, arm’s length principle? if any? Special considerations No. Unilateral, bilateral, multilateral. Are secret comparables used by tax Are royalties subject to Is there a filing fee for APAs? authorities? withholding? No. No. Yes.

Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? Yes. Are there any difficulties or limitations on the availability or effectiveness of APAs? No. Both the multi and bilateral ruling program (Service International Agreements of the Central Tax Authorities) and the unilateral ruling program (Service for Advanced Decisions in Tax Matters, or the Ruling Commission) of the Belgian Tax Authorities are very successful. APAs in Belgium are therefore seen as a very workable and suitable tool to obtain certainty for the taxpayer over a given period.

KPMG in Belgium

Dirk Van Stappen Tel: +32 3 821 19 18 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Bosnia and Herzegovina

KPMG observation

Bosnia and Herzegovina (BiH) consists of two territorial and administrative entities: the Federation of Bosnia and Herzegovina (FBiH) and the Republic of Srpska (RS), as well as the District of Brcko (BD). Corporate Profit Tax legislation is enacted on the level of the FBiH, the RS and the BD. Companies doing business in BiH should be aware that different transfer pricing rules apply in the FBiH and in the RS. The main difference is the range of acceptable methods. Whereas only the Comparable Uncontrolled Price (CUP) Method and Cost Plus Method (CPLM) are acceptable in the FBiH, all of the Organisation for Economic Co-operation and Development (OECD) methods (CUP, CPLM, Resale Price Method, Profit Split Method, and Transactional Net Margin Method) are acceptable in the RS.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold What is the statute of limitations Tax authority name for transfer pricing rules to apply on assessment of transfer pricing between parties? adjustments? In the FBiH, Federalno Ministarstvo The definition of ‘related parties’ is very In the FBiH, statute of limitations is five finansija, Porezna uprava FBiH (Federal broad and includes, inter alia, a physical or years and it commences from the end Ministry of Finance, Tax Authority of the legal entity which has significant influence of the year in which the tax return should FBiH) and in the RS, Ministarstvo finansija or control on business decisions or holds have been submitted (e.g. for the tax year RS, Porezna uprava RS (Ministry of more 10 percent of share capital. It is 2014, for which the tax return is filed at Finance of the RS, Tax Authority of the RS). considered that significant influence or 30 March 2015, the statute of limitations Citation for transfer pricing rules control on business decisions exists expires at 31 December 2020). where a physical or legal person owns Articles 45 to 48 of the FBiH Corporate In the RS, statute of limitation is five years more than half of shares or is the single Profit Tax Law (CPT Law) and Article 9 of and it commences from the date when largest shareholder in a company. A the RS CPT Law. Arm’s length principle the tax return was submitted or from the mutually large amount of turnover applies. date when the tax liability arose, counting between parties and a technological from the date that comes later (e.g. for Effective date of transfer pricing rules dependence also constitutes a significant the tax year 2015, for which the tax return influence. Applies to transactions between In the FBiH, 1 January 2008 and in the is filed at 31 March 2015, the statute of residents and non-residents. RS, 1 January 2007. limitations expires at 31 December 2020).

Transfer pricing Transfer pricing methods does not postpone the execution of the results of the tax audit. disclosure overview Does your country follow the Are disclosures related to transfer transfer pricing methods outlined in An adjustment is proposed following pricing required to be submitted to Chapter II of the OECD Guidelines? a tax audit or the basis of a tax the revenue authority on an annual If exceptions apply, please describe. assessment issued by the RS Tax Authority. The taxpayer can appeal basis (e.g. with the tax return)? Yes. In accordance with the FBiH CPT against the tax assessment to the RS Law, the only transfer pricing methods Yes. The FBiH and the RS CPT Law Ministry of Finance. In the case of acceptable are the CUP and CPM while requires a taxpayer to disclose on the a negative ruling by the RS Ministry the RS CPT Law prescribes all five annual tax return the difference between of Finance the taxpayer can initiate methods. market and transfer prices which are administrative dispute proceedings not at arm’s length, and the tax base before the appropriate District Court. should be adjusted accordingly. There Transfer pricing audit and Should the District Court issue a is no guidance on how market prices penalties negative ruling, an appeal before the should be determined (information on When the tax authority requests Supreme Court of the RS is available. available methods follows), and there is no a taxpayer’s transfer pricing Please note that in general, an appeal developed practice on which to rely. documentation, are there timing does not postpone the execution of the Apart from disclosures on the tax return, requirements for a taxpayer to results of the tax audit. no other requirements to disclose are submit its documentation? And if If an adjustment is sustained, can prescribed. so, how many days? penalties be assessed? If so, what What types of transfer pricing No. rates are applied and under what information must be disclosed? conditions? When the tax authority requests See transfer pricing disclosure overview a taxpayer’s transfer pricing Additional taxable income assessed is above. documentation, are there timing subject to the standard corporate profit requirements for a taxpayer to tax rate of 10 percent increased by the What are the consequences of penalty interest of 0.04 percent (the failure to submit disclosures? submit its documentation? Please explain. FBiH) and 0.03 percent (the RS) per day Failure to prepare and submit disclosure of default in payment. may result in the FBiH and the RS Tax There are no provisions that require preparation of transfer pricing To what extent are transfer pricing Authority challenging transactions penalties enforced? between related parties. documentation (other than information prescribed by the CPT Law) or a To a medium extent. deadline for the submission of Transfer pricing study such documentation. Although the What defenses are available with respect to penalties? overview preparation of a transfer pricing study Can documentation be filed in is not required by the legislation, best Timely prepared transfer pricing a language other than the local practice would prescribe that the documentation. documentation be available immediately language? If yes, which ones? What trends are being observed upon request. No. currently? If an adjustment is proposed by Tax Authorities have only started When a transfer pricing study is the tax authority, what dispute scrutinizing transfer prices recently. prepared, should its content follow resolution options are available? Chapter V of the Organisation for Economic Co-operation and An adjustment is proposed following Special considerations Development (OECD) Guidelines? a tax audit or the basis of a tax assessment issued by the FBiH tax Are secret comparables used by tax Yes, for all transactions. Please note authority. The taxpayer can appeal authorities? that there are no official guidelines or against the tax assessment to an Not applicable. developed practice on this subject. independent second degree body Is there a preference, or However, OECD Guidelines are within the FBiH Ministry of Finance. requirement, by the tax authorities commonly used as an underlying In the case of a negative ruling by the for local comparables in a template for the preparation of the independent second degree body the benchmarking set? transfer pricing study. taxpayer can initiate administrative Does the tax authority require an dispute proceedings before the No. Cantonal Court. Should the Cantonal advisor/tax practitioner to have Do tax authorities have requirements Court issue a negative ruling, an appeal specific designation in order to or preferences regarding databases before the Supreme Court of the FBiH is prepare or submit a transfer for comparables? pricing study? available, if certain conditions are met. Please note that in general, an appeal No. No.

Does the tax authority generally Other unique attributes? focus on the interquartile range in a No. TNMM analysis? No. Tax treaty/double tax Does the tax authority have other resolution preferences in benchmarking? If so, What is the extent of the double tax please describe. treaty network? No. Treaties are negotiated on the level of What level of interaction do tax BiH, but are applicable to both entities. authorities have with customs A number of tax treaties signed by the authorities? former Socialist Federal Republic of Yugoslavia apply. New treaties are being Low to moderate. signed by BiH. Are there limitations on If extensive, is the competent deductibility of management fees authority effective in obtaining beyond the arm’s length principle? double tax relief? Yes. Assuming documentary support Yes. exists and economic benefit can be proven. Transfer pricing documentation When may a taxpayer submit an should also be available to support the adjustment to competent authority? level of charges. No formal rules exist in this area. Are management fees subject to May a taxpayer go to competent withholding? authority before paying tax? Yes. No formal rules exist in this area. Are there limitations on the deductibility of royalties beyond the Advance pricing arm’s length principle? agreements Yes. Assuming documentary support What APA options are available, exists and economic benefit can be if any? proven. Transfer pricing documentation should also be available to support the None. level of charges. Is there a filing fee for APAs? Are royalties subject to Not applicable. withholding? Does the tax authority publish APA Yes. data either in the form of an annual Are taxpayers allowed to file tax report or through the disclosure of return numbers that differ from data in public forums? book numbers? Not applicable. Yes. In accordance with the CPT Law of Are there any difficulties or the FBiH and the RS, adjustments for limitations on the availability or transfer prices should be made in the effectiveness of APAs? CPT return at the end of the tax year. Not applicable.

KPMG in Bosnia and Herzegovina

Manal Becirbegovic Tel: +387 33 941 500 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Brazil

KPMG observation

As member of the G20, Brazil has been part of the discussions in the Base Erosion and Profit Shifting (BEPS) action plan. Even though no actions have been taken to incorporate BEPS into Brazilian legislation yet, adoption is expected eventually. Among the BEPS actions, the country-by-country (CbyC) report will likely be adopted first, as it will not require changes to the Brazilian transfer pricing rules. Brazilian audits have recently been focusing on the biggest multinational industrial companies, although an increase in audits on services activities and commodities traders is expected for the following years.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations What types of transfer pricing Tax authority name on assessment of transfer pricing information must be disclosed? adjustments? A summary of related party transactions Receita Federal do Brasil. Five years from the tax return filing date. and transfer pricing calculations must Citation for transfer pricing rules be disclosed in the annual tax return. Law n. 12.715/12, Normative Instructions Transfer pricing This includes identification of the RFB 1.037/10, 1.312/12 and 1.322/12. related parties, the amount involved per disclosure overview transaction (goods, services and rights), Effective date of transfer pricing rules Are disclosures related to transfer and if any, the methodologies used for January 1997. pricing required to be submitted to testing and the adjustments made. the revenue authority on an annual What are the consequences of What is the relationship threshold basis (e.g. with the tax return)? for transfer pricing rules to apply failure to submit disclosures? Yes, taxpayers must provide between parties? There are no specific penalties for intercompany transaction amounts not preparing or submitting transfer Companies are deemed to be related and demonstrate the methodology pricing information within the tax when they are under common control applied for each imported/exported return. However, the submission of the or one of them is located in a low- tax part number. jurisdiction or privileged tax regime. complete tax return is mandatory and a penalty is applied for not presenting it.

Transfer pricing study If an adjustment is proposed by Do tax authorities have requirements the tax authority, what dispute or preferences regarding databases overview resolution options are available? for comparables? Can documentation be filed in a language other than the local Tax court and administrative disputes. No. language? If yes, which ones? If an adjustment is sustained, can Does the tax authority generally No. penalties be assessed? If so, what focus on the interquartile range in a rates are applied and under what TNMM analysis? When a transfer pricing study is conditions? prepared, should its content follow Not applicable. No specific penalties for not presenting Chapter V of the Organisation Does the tax authority have other the transfer pricing documentation. for Economic Co-operation and preferences in benchmarking? If so, General tax penalty is applied on Development (OECD) Guidelines? please describe. corporate tax due. No. Not applicable. To what extent are transfer pricing Does the tax authority require an penalties enforced? What level of interaction do tax advisor/tax practitioner to have authorities have with customs Only when the adjustment made by tax specific designation in order authorities? to prepare or submit a transfer authority triggers corporate tax. Low. pricing study? What defenses are available with No. respect to penalties? Are there limitations on deductibility of management fees The following defenses are available: beyond the arm’s length principle? Transfer pricing methods • adjustment miscalculated by the Not applicable. Management fees Does your country follow the tax authority; and transfer pricing methods outlined in should follow general deductibility and • misinterpretation of law or facts by Chapter II of the OECD Guidelines? transfer pricing rules. the tax authority. If exceptions apply, please describe. Are management fees subject to What trends are being observed withholding? No. Although the ratios used are similar, currently? (i.e. Comparable Uncontrolled Price Yes. (CUP) method, resale price, and cost Given the changes brought by Law Are there limitations on the plus) their application often deviates 12,715, the tax authorities will be deductibility of royalties beyond the from the OECD Guidelines because focusing the audits on commodities arm’s length principle? some methods require the application of traders. Now, any import/export a fixed margin, as set out by law. transactions of commodities with Yes. Royalties are subject of specific related parties must be compared with regulations, and its deductibility is Transfer pricing audit and quotations of internationally recognized basically an application of specific futures and commodities exchanges. percentage over the revenue. penalties Before the new regulation, commodities Are royalties subject to When the tax authority requests were subject to the general rules. withholding? a taxpayer’s transfer pricing documentation, are there timing Special considerations Yes. requirements for a taxpayer to Are taxpayers allowed to file tax submit its documentation? And if Are secret comparables used by tax return numbers that differ from so, how many days? authorities? book numbers? Yes, 20 days. Yes, in a few cases. No. Year-end adjustments are not Is there a preference, or When the tax authority requests regulated. In some cases, debit/credit requirement, by the tax authorities a taxpayer’s transfer pricing notes may be issued to adjust import/ for local comparables in a documentation, are there timing export prices. Impacts on indirect benchmarking set? requirements for a taxpayer to submit taxes and deductibility for corporate its documentation? Please explain. No. Public comparables are not available tax purposes should be analyzed on a case-by-case basis. Within 20 days of request, after which in Brazil. Fixed margins/safe harbors are an extension may be negotiated with used; therefore comparables are not the tax authority, depending on the really relevant. complexity of documentation required.

Other unique attributes? May a taxpayer go to competent authority before paying tax? The rules allow for some flexibility on the application of methods and in the No formal rules exist in this area. ability to change the method used on a yearly basis. Safe harbors and Advance pricing materiality thresholds are available only for exporters. agreements What APA options are available, Tax treaty/double tax if any? resolution None. What is the extent of the double tax Is there a filing fee for APAs? treaty network? Not applicable. Extensive. Does the tax authority publish APA If extensive, is the competent data either in the form of an annual authority effective in obtaining report or through the disclosure of double tax relief? data in public forums? No experience. Not applicable. When may a taxpayer submit Are there any difficulties or an adjustment to competent limitations on the availability or authority? effectiveness of APAs? No formal rules exist in this area. Not applicable.

KPMG in Brazil

Eliete Ribeiro Tel: +55 11 3940-3288 Email: [email protected]

Henrique De Conti Tel: +55 11 3940-3278 Email: [email protected]

Edson Costa Tel: +55 11 3940-5313 Email:[email protected]

Evandro Tiba Tel: +55 11 3940-1824 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at transferpricing@ kpmg.com if you are unable to contact us via the information noted above.

Bulgaria

KPMG observation

Tax authorities are showing increased interest in transfer pricing and in recent years, KPMG in Bulgaria has observed several material tax audit assessments related to transfer pricing. Bulgarian taxpayers increasingly seek to prepare transfer pricing documentation or localize their group-level master files in order to mitigate the tax risk associated with related party transactions. The Bulgarian tax authorities currently do not have access to the Amadeus database. Their transfer pricing efforts are mainly focused on: • scrutinizing available transfer pricing documentation • exploring potential internal comparables • obtaining comparable data from competitors of the taxpayer; and • assigning transfer pricing analysis of related party transactions to external valuation specialists. These valuators may not have access to Amadeus and their approach may be discretional sometimes. The preparation of transfer pricing documentation therefore provides the taxpayer with a relatively strong defense for the price levels of its related party transactions.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules • Ordinance N-9 of 14.08.2006 on the application of transfer pricing Tax authority name The transfer pricing legislation in methods. Bulgaria is contained in: The tax authority in Bulgaria is the Under the rules set out in the legislation, National Revenue Agency at the • Article 15 of the Corporate Income if related parties perform transactions at Ministry of Finance. The National Tax Act prices different from market levels, the Revenue Agency reviews transfer • Article 27, paragraph 3 of the VAT Act taxable base may be adjusted to market pricing issues in the course of ordinary prices. This applies for corporate income tax audits. • Article 116 of the Tax and Social Security Procedure Code (TSSPC) tax and, in limited cases, for VAT purposes. As a result of these adjustments, an

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Bulgaria | 41 additional 10 percent corporate income tax submitted. The FY 2015 return has not Transfer pricing methods and in certain cases, a negative VAT effect been published yet and it is not clear Does your country follow of 20 percent may apply. whether this disclosure and its form the transfer pricing methods would be preserved. Further, the difference between related outlined in Chapter II of the OECD party transaction prices and market levels What types of transfer pricing Guidelines? If exceptions apply, may be classified as hidden distribution information must be disclosed? please describe. of profits. In such cases, a 20 percent Total value of revenue and costs from No. The hierarchy of TP methods is still administrative penalty and five percent related party transactions and separately applicable in Bulgaria. withholding tax may be applied. from transactions with low-tax Taxpayers have the burden to prove to jurisdiction entities. Transfer pricing audit and the authorities that their transactions are Outstanding receivables and liabilities to performed under market conditions. If they penalties related parties and to entities from low- are unable to do so, the tax authorities are When the tax authority requests tax jurisdictions. allowed to establish an appropriate market a taxpayer’s transfer pricing price and adjust the taxable base to it. Please consider this information was documentation, are there timing already changed for the FY 2014 tax requirements for a taxpayer to In 2010 a transfer pricing manual (Manual) return as compared to the FY2013. Thus, submit its documentation? And if was published by the tax authorities, it may change for the purposes of the FY so, how many days? containing guidance on transfer pricing 2015 tax return again. issues. The Manual is generally based Yes. 14 days. on the 2009 Organisation for Economic What are the consequences of When the tax authority requests Co-operation and Development (OECD) failure to submit disclosures? a taxpayer’s transfer pricing Guidelines and the European Union (EU) There is still ongoing debate regarding documentation, are there timing Transfer Pricing Code of Conduct. the mandatory nature of the disclosure requirements for a taxpayer to Effective date of transfer pricing rules included in the tax return. Thus, explicit submit its documentation? Please penalties have not been introduced explain. Detailed transfer pricing rules were first regarding failure to submit this disclosure. introduced through Ordinance N-9 of Usually, the tax authorities submit a However, our experience shows that 14 August 2006. request for provision of documents a conservative approach would usually and the taxpayer has 14 or 15 days to involve submitting the disclosure. What is the relationship threshold comply. However, this deadline may be for transfer pricing rules to apply extended or the tax audit procedure may between parties? Transfer pricing study be suspended for up to three months. The Tax and Social Security Procedure overview If the taxpayer does not submit the Code (TSSPC) sets a threshold of direct Can documentation be filed in documentation within the required ownership of five percent of the capital a language other than the local deadline, the tax authorities may of a company. Other criteria for related language? If yes, which ones? assume that no documentation is parties also apply, including common available and may perform a transfer directors, ability to exercise control, etc. No. pricing analysis of their own. When a transfer pricing study is What is the statute of limitations If an adjustment is proposed by prepared, should its content follow on assessment of transfer pricing the tax authority, what dispute Chapter V of the Organisation adjustments? resolution options are available? for Economic Co-operation and The general statute of limitations for tax Development (OECD) Guidelines? The decision of the tax authorities may liabilities is five years from 1 January of be appealed at the administrative level the year following the year when the tax Generally yes, although Bulgaria is not an (before a regional appeal directorate) was payable (i.e. when the corporate OECD member and the OECD Guidelines and subsequently at the judiciary level tax return was filed). For example, the are not mandatory for taxpayers and (before a court). statute of limitations for 2009 expires at the tax authorities. However, the tax the end of 2015. authorities usually accept the principles If an adjustment is sustained, can outlined in the OECD Guidelines. penalties be assessed? If so, what rates are applied and under what The Manual of the tax authorities also Transfer pricing conditions? disclosure overview refers to the EU Transfer Pricing Code of Conduct as a source for the content of An administrative penalty of 20 percent Are disclosures related to transfer transfer pricing documentation. may be applied where an expense pricing required to be submitted to charged by a related party is deemed to the revenue authority on an annual Does the tax authority require an be hidden distribution of profits. basis (e.g. with the tax return)? advisor/tax practitioner to have specific designation in order To what extent are transfer pricing Yes. Part of the FY 2014 tax return to prepare or submit a transfer penalties enforced? required information regarding related pricing study? party transactions and transactions The extent of enforcement cannot be with low-tax jurisdiction entities to be No. monitored in detail as tax proceedings

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 42 | Global Transfer Pricing Review are not public until the court appeal Do tax authorities have requirements If extensive, is the competent phase. Nevertheless, in recent years or preferences regarding databases authority effective in obtaining KPMG in Bulgaria have observed a for comparables? double tax relief? significant increase in the number and No. However, Amadeus is generally With respect to the usual application of materiality of transfer pricing issues accepted. tax treaties – frequently. being identified by tax authorities. Does the tax authority generally With respect to Mutual Agreement Recently, for the purpose of performing focus on the interquartile range in a Procedures (MAPs) – only one MAP transfer pricing adjustments, the TNMM analysis? has been initiated so far and is not yet authorities have been assigning transfer complete, noting that it was initiated by pricing studies to valuation specialists Yes, sometimes. a foreign tax administration. from their “List of independent experts”. Does the tax authority have other Although these experts may not have When may a taxpayer submit an preferences in benchmarking? If so, access to Amadeus and their transfer adjustment to competent authority? please describe. pricing experience may be sometimes Not applicable. limited, their studies may be used by the Not applicable. May a taxpayer go to competent authorities and possibly accepted in the What level of interaction do tax authority before paying tax? process of court appeals. authorities have with customs What defenses are available with authorities? There are no formal rules. A taxpayer may submit a request for guidance respect to penalties? Moderate, however, currently from the tax authorities on specific The established way of substantiating increasing. issues. However, receiving an answer related party transactions is by the Are there limitations on from the tax authorities does not preparation of a local transfer pricing file deductibility of management fees guarantee consistent treatment of the covering the Bulgarian market. beyond the arm’s length principle? issues in future. In a limited number of cases, transfer Yes, subject to proper documentation prices may be defended by building up and benefit for the recipient. Advance pricing arguments based on pricing policies, cost allocation methodologies, market Are management fees subject to agreements analyses etc. withholding? What APA options are available, if any? However, such an approach highly Yes. None. depends on the specific circumstances Are there limitations on the of the case and its success may not be deductibility of royalties beyond the Is there a filing fee for APAs? guaranteed. arm’s length principle? Not applicable. What trends are being observed Yes. Royalties may not be deductible if Does the tax authority publish APA currently? the licensing transaction is classified by data either in the form of an annual the authorities as artificial and aimed at As noted, there is an increasing interest report or through the disclosure of tax evasion. Arguments for this may be in transfer pricing issues by both data in public forums? taxpayers and the tax administration. It lack of actual benefit for the local entity has been noted in transactions involving from the transaction. Not applicable. goods that the authorities generally Are royalties subject to withholding? Are there any difficulties or seek price adjustments, however, in limitations on the availability or Yes. services transactions they tend to focus effectiveness of APAs? on the actual provision of the services. Are taxpayers allowed to file tax Not applicable. return numbers that differ from Special considerations book numbers? Are secret comparables used by tax Yes, subject to substantiation with authorities? documents, budgets and a transfer Tax authorities have indicated in informal pricing study. discussions that they may use secret Other unique attributes? comparables. However, the feasibility of this approach is not yet certain. None. KPMG in Bulgaria Is there a preference, or Tax treaty/double tax Kalin Hadjidimov requirement, by the tax authorities Tel: +35929697700 for local comparables in a resolution Email: [email protected] benchmarking set? What is the extent of the double tax Yes, the authorities require a treaty network? As email addresses and phone numbers change frequently, please email us at benchmarking study to start the initial Extensive. About 70 tax treaties are [email protected] if you are unable to search from the Bulgarian market. in force. contact us via the information noted above.

Canada

KPMG observation

The Canada Revenue Agency continues to focus significant resources on transfer pricing audits, and is perceived as one of the most active tax authorities in transfer pricing. Canada’s first Supreme Court decision in a transfer pricing case was delivered during 2012, marking a significant milestone in the judicial interpretation of transfer pricing.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Thresholds Not applicable Applicable contemporaneous apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information be non-arm’s length even where there What types of transfer pricing is less than 50 percent ownership Tax authority name information must be disclosed? (de facto control or the absence of A form called the T106 must be Canada Revenue Agency (CRA). independent interests). completed. The T106 requires detailed Citation for transfer pricing rules What is the statute of limitations information about transactions Section 247 of the Income Tax Act of on assessment of transfer pricing with non-arm’s length non-resident Canada, RSC 1985, and Chapter 1 and 2 adjustments? entities, including types and quantum of transactions, transfer pricing (Fifth Supplement), as amended. Generally, seven years (six years methodologies used, whether there in specific cases) from the date of Effective date of transfer pricing rules has been a change in methodology, issuance of the notice of original whether the methodology is based on In general, section 247 is applicable assessment. The notice of original an Advance Pricing Agreement (APA) for taxation years beginning after 1997. assessment is generally received three with another tax authority and whether However, the transfer pricing penalties to six months after the filing of the tax contemporaneous documentation (pursuant to subsection 247(3)) are return. applicable for taxation years beginning exists with respect to such transactions. after 1998. A T106 form is required if the amount Transfer pricing of the total reportable transactions For taxation years prior to 1998, there were disclosure overview for all the non-residents combined is different transfer pricing provisions of the Are disclosures related to transfer more than one million Canadian dollars Income Tax Act that were applicable. pricing required to be submitted to (CAD). Where a reporting person’s total What is the relationship threshold the revenue authority on an annual amount of transactions with a particular for transfer pricing rules to apply basis (e.g. with the tax return)? non-resident during the taxation year is between parties? below CAD25,000, certain information Yes. Provided that related party is not required. Ownership of more than 50 percent; transactions are above a certain dollar however, parties may still be found to threshold.

What are the consequences of 6. the assumptions, strategies and use arm’s length pricing. The penalty failure to submit disclosures? policies, if any, that influenced the equals 10 percent of the net amount determination of the transfer prices or of adjustments made in a tax year, A late filing penalty or multiple late filing the allocations of profits or losses or but only where the net adjustments penalties for more than one T106 form contributions to costs, as the case may exceed the lesser of 10 percent of the may be assessed if the T106 is filed after be, in respect of the transaction. taxpayer’s gross revenue for the year the due date. The penalty is equal to the or CAD5 million. The net amount of the greater of 100 Canadian dollars (CAD) Does the tax authority require an adjustment is based on: and CAD25 per day, up to a maximum of advisor/tax practitioner to have 100 days. specific designation in order to • upward adjustments relating prepare or submit a transfer pricing to transactions for which the A failure-to-file penalty may be assessed study? taxpayer does not have adequate where the reporting persons knowingly documentation; and fail to file T106 documentation. The No. minimum penalty is CAD500 per month, • downward adjustments relating to to a maximum of CAD12,000 for each Transfer pricing methods transactions for which the taxpayer has adequate documentation. failure to comply. The failure-to-file Does your country follow the penalty is reduced by any late filing transfer pricing methods outlined in To what extent are transfer pricing penalties assessed. Chapter II of the OECD Guidelines? penalties enforced? If exceptions apply, please describe. Transfer pricing penalties are enforced Transfer pricing study Yes. aggressively. overview What defenses are available with Can documentation be filed in Transfer pricing audit and respect to penalties? a language other than the local language? If yes, which ones? penalties Penalties may be avoided where a When the tax authority requests taxpayer has made ‘reasonable efforts’ No. a taxpayer’s transfer pricing to comply with the dual obligation to When a transfer pricing study is documentation, are there timing determine and use arm’s length prices prepared, should its content follow requirements for a taxpayer to pursuant to subsection 247(4) of the Chapter V of the Organisation submit its documentation? And if Income Tax Act and CRA’s TPM-09 for Economic Co-operation and so, how many days? (reasonable efforts under section 247 Development (OECD) Guidelines? of the Income Tax Act). To demonstrate Yes, 3 months. that a reasonable effort has been made, No. While it uses the Organisation When the tax authority requests complete and accurate documentation for Economic Co-operation and a taxpayer’s transfer pricing must be prepared and updated on an Development (OECD) Guidelines as documentation, are there timing annual basis. Penalties may be reduced the basis for the information required, requirements for a taxpayer to or eliminated based on subsequent section 247(4)(a) sets out six required submit its documentation? Please competent authority settlements. elements: explain. What trends are being observed 1. the property or services to which the See prior question. currently? transaction relates If an adjustment is proposed by Canada continues to be a jurisdiction 2. the terms and conditions of the the tax authority, what dispute where transfer pricing enforcement is a transaction and their relationship, resolution options are available? high priority. The probability of a transfer if any, to the terms and conditions pricing audit and adjustment remain of each other transaction entered Aside from requesting Competent higher than in many other jurisdictions. into between the participants in the Authority (CA) assistance, taxpayers In recent years, the CRA has started transaction can also file a notice of objection with to apply a risk-based approach to the Appeals division of the CRA and, if 3. the identity of the participants in the evaluating and selecting taxpayers for necessary, can pursue an appeal before transaction and their relationship to transfer pricing audits. This approach the Tax Court of Canada. each other at the time the transaction is based on a number of factors was entered into If an adjustment is sustained, can including the type and amount of non 4. the functions performed, the property penalties be assessed? If so, what arm’s length transactions, prior audit used or contributed and the risks rates are applied and under what history, continuing losses as well as the assumed, in respect of the transaction, conditions? existence of restructuring transactions. by the participants in the transaction Yes. The legislation provides for the 5. the data and methods considered and imposition of a penalty equal to Special considerations the analysis performed to determine 10 percent of the total transfer pricing Are secret comparables used by tax the transfer prices or the allocations adjustment, in certain cases. The authorities? of profits or losses or contributions to penalty is intended to be compliance- Yes, but very rarely. costs, and the case may be, in respect related, focusing on the efforts that of the transaction a taxpayer makes to determine and

Is there a preference, or reviewing and truing-up pricing on a Advance pricing requirement, by the tax authorities periodic basis during the year. for local comparables in a agreements To the extent that such adjustments are benchmarking set? What APA options are available, required, they may be made as follows: if any? Yes. Generally the CRA prefers the use • before the books are closed for the of local comparables, but accepts the Unilateral, bilateral, multilateral. year, by making an adjustment in the use of North American comparables. books Is there a filing fee for APAs? Do tax authorities have • after the books are closed, but before Yes, out-of-pocket expenses for the CRA requirements or preferences the financial statements are finalized, in negotiating the APA. regarding databases for by making an adjusting journal entry comparables? Does the tax authority publish APA to the financial statements; and data either in the form of an annual Taxpayers are free to use a database of • after the financial statements report or through the disclosure of their choice. The CRA uses the Standard have been finalized, yb making an data in public forums? and Poor’s Capital IQ database. adjustment on Schedule 1 of the Yes. Does the tax authority generally corporate tax return. focus on the interquartile range in a To the extent that year-end adjustments Are there any difficulties or TNMM analysis? relate to tangible products imported limitations on the availability or effectiveness of APAs? No. into Canada, such adjustments will have Customs implications. Yes. While currently experiencing Does the tax authority have other Other unique attributes? resourcing constraints, Canada has a preferences in benchmarking? If so, long established and generally well- please describe. Generally, the CRA does not support the functioning APA program. Increased Not applicable. use of multi-year averaging. In an audit early stage due diligence on proposed setting, results are evaluated on a year- APAs by the CRA has created some What level of interaction do tax by-year basis. delays. In total, since the inception of authorities have with customs the APA program, there have only been authorities? Use of the interquartile range is not supported by the CRA. four instances in which the CRA has Low. been unable to conclude an agreement with a taxpayer and/or a foreign tax Are there limitations on deductibility Tax treaty/double tax administration. The current average of management fees beyond the resolution time to conclude a bilateral APA is arm’s length principle? What is the extent of the double tax approximately 48 months. The CRA will Yes. The CRA has issued guidance in treaty network? not negotiate APAs concerning business its TPM 15 whereby it actually looks restructuring transactions. Extensive. There are currently through a management fee charge 92 treaties in force. to establish whether any underlying expense item is in fact deductible under If extensive, is the competent the Canadian Income Tax Act. authority effective in obtaining double tax relief? Are management fees subject to withholding? Almost always. Effective in more than 90 percent of cases. Yes. When may a taxpayer submit an Are there limitations on the adjustment to competent authority? deductibility of royalties beyond the arm’s length principle? Generally after receipt of a notice of reassessment from the CRA. No. May a taxpayer go to competent Are royalties subject to authority before paying tax? withholding? Yes. However, in most cases, the Yes. taxpayer will have to either post KPMG in Canada Are taxpayers allowed to file tax security or pay half the amount of return numbers that differ from the tax payable once a reassessment David L Francescucci book numbers? is issued. Tel: +1 514 840 2395 Yes. Year-end adjustments may be made. Email:[email protected] Taxpayers are, however, encouraged to minimize or avoid year-end adjustments As email addresses and phone numbers where possible, for example by change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Chile

KPMG observation

The 2012 Chilean tax reform was enacted with the objective of aligning local rules with Organisation for Economic Co-operation and Development (OECD) Guidelines. Accordingly, the Chilean tax authority is closely following the OECD’s Base Erosion and Profit Shifting (BEPS) action plan and, although no actions have been taken in Chile yet, actions are expected when BEPS concludes. Aside from BEPS, it is very important to highlight that cross-border intercompany transaction-related expenses, incurred from 2015 onwards, and subject to withholding tax (WHT) according to article 59 of the Chilean Income Tax Law (royalties, interest, services, etc.), will only be deductible as an expense in the year in which the expense has been paid and the WHT has been declared and paid to the Treasury, provided that general requirements to be considered as an expense necessary to produce income are met. While a transfer pricing study is not mandatory per se, taxpayers are required to keep all documentation deemed necessary to support the arm’s length nature of intra-group transactions. It must be noted that in recent audit procedures, the information required by Chilean tax authorities has been similar to that commonly included within a transfer pricing study. Furthermore, taking into consideration deadlines applied in audit procedures, it has been observed that those taxpayers already possessing a transfer pricing study prior to the start of the audit tend to be able to better cope with its demands and obtain a favorable outcome.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Not applicable Applicable contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Effective date of transfer pricing rules party in management, control, capital, profits or income of the other party. It Tax authority name 1 January 1998 and 27 September 2012 is presumed parties are related when for changes incorporated by the latest Servicio de Impuestos Internos (Chilean they enter into exclusive or joint action tax reform act. Internal Revenue Service, or SII). agreements, preferential treatment Citation for transfer pricing rules What is the relationship threshold or the parties are economically or for transfer pricing rules to apply financially dependent. Also any kind Article 41 E of the Chilean Income Tax between parties? of agency, branch or permanent Law, contained in Decree Law No. 824 establishment of any entity of the group Parties are related when there is as amended. is considered a related party with its participation (direct or indirect) from one

head office as well as with any other • information regarding financial method is used, the taxpayer has to group member entity. transactions, intra-group services, justify its use. royalties and commissions, among Similarly, it follows that when a party others performs one or more transactions Transfer pricing audit and with a third party which, in turn, carries • information informing any business penalties out, directly or indirectly, identical or restructuring of the taxpayer’s When the tax authority requests similar transactions to those performed operation in Chile. a taxpayer’s transfer pricing with the first party all the parties are The deadline for filling this Transfer documentation, are there timing considered related. Entities located Pricing Affidavit is the last business day requirements for a taxpayer to in a jurisdiction listed as a tax haven of June. submit its documentation? And if are presumed related where there are so, how many days? transactions. What are the consequences of failure to submit disclosures? Yes, 30 days. What is the statute of limitations on assessment of transfer pricing Fines for filing the sworn return in When the tax authority requests adjustments? an untimely, incorrect or incomplete a taxpayer’s transfer pricing manner may range from 10 to 50 annual documentation, are there timing The applicable general rule for the tax units UTA1 (one UTA is equivalent to requirements for a taxpayer to statute of limitation is three years, approximately 980 US dollars (USD)). submit its documentation? Please starting from the latest date at which explain. the tax should have been paid. Transfer pricing study One month (or two if extended) from Regarding taxes for which returns must the date the taxpayer receives legal be filed, this period extends to six years, overview notice of commencement of a tax audit. in the case when a return has not been Can documentation be filed in presented, or in cases of tax fraud. a language other than the local If an adjustment is proposed by language? If yes, which ones? the tax authority, what dispute Transfer pricing No. resolution options are available? disclosure overview When a transfer pricing study is In the case of transfer pricing adjustments, taxpayers are entitled to Are disclosures related to transfer prepared, should its content follow submit a tax claim on the charges and to pricing required to be submitted to Chapter V of the Organisation start the regular litigation procedure. the revenue authority on an annual for Economic Co-operation and basis (e.g. with the tax return)? Development (OECD) Guidelines? If an adjustment is sustained, can penalties be assessed? If so, what Yes. The obligation to annually (in form No. There is no specific requirement. rates are applied and under what and time) file a sworn statement is However, it should at least include a conditions? incorporated in Article 41 E of the functional analysis, industry analysis, Chilean Income Tax Law, where the company overview, and support for Yes. In the case of adjustment, a taxpayer, subject to transfer pricing selection of method and a description 35 percent penalty tax is applicable in rules, must itemize the transactions of comparables, as well as a list of all lieu of income taxes on the adjustment, conducted with its related parties. supporting documentation. plus inflation adjustments, interest and a five percent penalty over the amount What types of transfer pricing Does the tax authority require an adjusted. information must be disclosed? advisor/tax practitioner to have specific designation in order To what extent are transfer pricing On 31 January 2013, the SII released to prepare or submit a transfer penalties enforced? an official pronouncement specifying pricing study? the filling instructions. The required The application of penalties has information includes: No. increased in recent years. Considering the growth in the number of transfer • the methods used for calculating pricing audits and the recent tax reform, prices, profitability rates or returns Transfer pricing methods it is expected the application of penalties Does your country follow the • the features of such transactions will intensify in future. (for example, amounts, type of transfer pricing methods outlined in What defenses are available with transaction, currency used) Chapter II of the OECD Guidelines? If exceptions apply, please describe. respect to penalties? • related party information (for example, address and taxpayer Yes. It must be noted that the usage During a transfer pricing audit, the tax identity number) of additional (residual) methods is authority requests relevant documents permitted only when none of the from the taxpayer, which the taxpayer • general information on the corporate transactional or profit based methods has the obligation to provide. At this group are applicable. Where an alternative stage, it is highly recommended to

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 48 | Global Transfer Pricing Review also present a transfer pricing study, amount of all purchases or sales, What level of interaction do tax as evidence to demonstrate the currency used, type of products, authorities have with customs compliance with the arm’s length incoterm used, credit days and if the authorities? principle of the intra-group transactions company is a related or a third party Increasing. Many of the recent transfer under review. • corporate structure of the group pricing audits have been supported If a taxpayer does not agree with the to which the company belongs with information provided to the tax determination of tax due, the taxpayer to, internal organization charts of authority by the customs authority. may ask the Chilean IRS to reconsider the company, audited financial Furthermore, new APA regulations (via the administrative process) the statements and all contracts with support the simultaneous involvement determination. If a reconsideration related parties of the Chilean IRS and the customs request is presented and rejected, the • segmented financial statements for authorities in the case of APAs covering taxpayer may interpose a claim before multi-business entities merchandise imports. the Tax Court. • sworn return for all transactions with Are there limitations on If no reconsideration or appeal is related parties deductibility of management fees presented, the tax authority issues a beyond the arm’s length principle? • sworn return regarding the functions payment order, which is the amount performed and risks assumed by the No. Management fees can be deducted of outstanding taxes, inflation-linked company in its operations if these comply with the general adjustments, interest, and fines and requirements of the Income Tax Law. issues an order to pay. • detailed information on any form of intra-group financing arrangements or Are management fees subject to Taxpayers can exercise the right to structures. withholding? appeal when they are in disagreement with the determinations of tax due and From 2013 onwards, the Chilean IRS Yes. other administrative determinations is able to use an extensive database Are there limitations on the made by the tax authority. containing all of the relevant taxpayers´ information as submitted automatically deductibility of royalties beyond the However, because the 35 percent by the taxpayer through the online arm’s length principle? penalty tax applies in lieu of income submission of transfer pricing returns. Yes. The payments made abroad for taxes on the transfer pricing adjustment, royalties are deductible as an expense having a transfer pricing study, necessary to produce income when contemporaneous documentation or Special considerations related to the line of business up to a other mechanisms does not provide Are secret comparables used by tax maximum of four percent of net income protection against the application of this authorities? for sales or services of the line of penalty. Not officially, but secret comparables business, during the respective year. This What trends are being observed have been used in some transfer pricing would apply, if the country of domicile currently? audits. of the beneficiary of the income, the income is taxed at the income tax rate The strategy followed by the tax Is there a preference, or equal to or greater than 30 percent. authority in the audit process is to notify requirement, by the tax authorities the four or five leading companies of an for local comparables in a Are royalties subject to industry, to make a selection following benchmarking set? withholding? a comparison among them for transfer To date there is insufficient evidence Yes. pricing contingencies and then conduct to determine whether there is any a deeper review. It is important to Are taxpayers allowed to file tax preference by the tax authority. note that many of the transfer pricing return numbers that differ from audits have been targeted at symbolic Do tax authorities have book numbers? requirements or preferences companies (with important global Yes. brands). Even when a transfer pricing regarding databases for study is not a formal requirement, the comparables? Other unique attributes? level and detail of information required The tax authority has not issued an None. by tax authorities in legal notifications is official position on this matter. basically the content of a transfer pricing study, including information such as: Does the tax authority generally Tax treaty/double tax focus on the interquartile range in a resolution • description of the main business units TNMM analysis? of the company, specifying if these What is the extent of the double tax products are manufactured or just Yes, sometimes. treaty network? distributed by the company Does the tax authority have other Chile has signed 25 tax treaties that • list of the principal suppliers and preferences in benchmarking? If so, are currently in effect and three signed clients specifying for each supplier please describe. treaties waiting for Congressional and client information such as name ratification. There are no stated preferences. of the company, country of residence,

If extensive, is the competent Advance pricing authority effective in obtaining double tax relief? agreements What APA options are available, No experience. if any? When may a taxpayer submit an Unilateral, bilateral, multilateral. adjustment to competent authority? Is there a filing fee for APAs? Taxpayers may, with the authorization of the tax authorities, both on the nature Not applicable. Tax authorities have and the amount of the adjustment, stated that all the detailed procedures correct the price, value or profitability of the APA program will be released of the transactions carried out with in subsequent regulations. These related parties, on the basis that transfer regulations should specify whether a pricing adjustments have been made filing fee will be required. in the other country, with which Chile Does the tax authority publish APA has entered into an agreement for data either in the form of an annual the avoidance of double taxation that report or through the disclosure of does not prohibit such adjustments. data in public forums? An application for rectification shall be filed, accompanied by all documents Yes. supporting the adjustments, including Are there any difficulties or evidence the adjustment was made by limitations on the availability or the other country, within five years from effectiveness of APAs? the expiration of the statutory period in which the country should declare the Not applicable. So far, there is no transactions whose prices, values or evidence on how successful the APA profits are intended to be rectified. program is. However, tax authorities are very optimistic regarding the success of May a taxpayer go to competent the program. authority before paying tax? Unclear.

KPMG in Chile

Juan Pablo Guerrero Tel: +56 2 2798 1412 Email: [email protected]

Rodrigo Stein Tel: +56 2 2798 1401 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

China

KPMG observation

With nearly 30 years of history in enforcing transfer pricing compliance, China has been actively broadening and deepening its transfer pricing regime. Following the issuance of a set of revamped transfer pricing regulations (Circular 2) in 2009, the State Administration of Taxation (SAT) issued many transfer pricing related regulations and rules addressing issues such as contemporaneous documentation administration, intra-group services transactions, license royalty treatment and single function entities, amongst others. The SAT is expected to release an updated and expanded replacement of Circular 2 in the near future. The Chinese authorities run an aggressive transfer pricing audit program, a maturing Advance Pricing Agreement (APA) program and have recently put more emphasis on the day-to-day administration, or ex-ante management of taxpayers’ transfer pricing issues. The ex-ante focus has led to pre-audit informal assessments by tax authorities, for which the taxpayer can elect to make adjustments to its taxable income, which would be ineligible for any double tax relief. While Chinese tax authorities leverage experiences of other countries, they are also focused on developing and putting forward their own positions on a number of key transfer pricing technical issues. Having actively participated in the United Nation’s (UN) initiative on developing practical guidance for transfer pricing implementation, China formally pronounced its view on location specific advantages (LSAs), translating into lower costs and higher demand, arguing for additional taxable profit in China. As a member of the G20 and an observer at the Organisation for Economic Co-operation and Development (OECD), China is actively involved in the Base Erosion and Profit Shifting (BEPS) Action Plan. For the year of 2014, a notable development in the macro economy, which could have a profound impact on China’s taxation policy, is that the country’s outbound direct investment (ODI) as confirmed by the Ministry of Commerce has, for the first time in history overtaken the foreign direct investment (FDI) into China, making China a net capital exporter. Accordingly, BEPS-related tax law changes (including changes to transfer pricing regulations) affecting both inbound and outbound investment are envisaged in the SAT’s work program in the coming years. As an example of this, in the area of transfer pricing, the BEPS country-by-country reporting requirement, in particular, is expected to result in further requirements on taxpayers beyond the currently required disclosures and the highly anticipated revised Circular 2 is expected to reflect such further requirements. Furthermore, the revisions to the OECD Guidelines with respect to a more broadly encompassing definition of intangibles, the recognition of LSAs and other market specific features as comparability factors, as well as the emphasis on actual key functions performed and actual bearing/control of risks in relation to the development and maintenance of intangibles, as opposed to the historical focus on mere legal ownership, are all welcome by the SAT and are likely to be reflected in the revised Circular 2 as well. The Chinese tax authorities have long been known for their inclination to question the value add/benefit obtained by Chinese entities from intra-group services or licenses provided by overseas related parties. Such challenges in the past have often led to denying of corporate income tax deductions for outbound services/royalties payments made by Chinese entities in MNE groups. Leveraging off the BEPS Action Plan’s emphasis on aligning taxation and

value creation, the SAT issued Directive 146 in July 2014, instructing local tax authorities to survey substantial payments of service fees and royalties made to overseas by Chinese entities between 2004 and 2013, with a view to launching extensive audits, placing particular focus on payments to low tax jurisdictions and on cases where foreign related parties conduct only limited, simple functions. This was followed by the issuance of Circular 16 in March 2015, which introduced additional requirements that need to be met before the Chinese tax authorities will allow income tax deductions for payments to overseas affiliates. In particular, Circular 16 puts great emphasis on the commercial substance of the overseas affiliate receiving the service fees and the beneficial nature of the services being rendered for the intra-group services transactions. For intra-group license transactions, this circular looks beyond legal ownership while focusing on all relevant parties’ contribution to the economic value in connection with the subject intangibles. With Chinese tax authorities becoming increasingly sophisticated in transfer pricing and their stepping up of enforcement efforts supported by a more comprehensive and refined regulations framework, taxpayers need to properly manage the balance between the needs for global consistency in transfer pricing policies and attention to the specific circumstances in China.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Submission to tax Thresholds Applicable contemporaneous authority required apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold Transfer pricing Tax authority name for transfer pricing rules to apply between parties? disclosure overview The State Administration of Taxation Are disclosures related to transfer Twenty-five percent, be it direct or (SAT) at the central level and various pricing required to be submitted to indirect ownership, or control. This state tax and local tax bureaus under its the revenue authority on an annual applies whether one party owns another administration. basis (e.g. with the tax return)? or two parties are owned by a common Citation for transfer pricing rules party. The formula for calculating indirect Yes. Disclosure of related party shareholding percentage is worthy of transactions must be submitted to the tax Corporate Income Tax Law (CIT Law) authority along with the annual corporate (2007), Implementation Rules for the note: if there is 25 percent or greater ownership in a higher tier subsidiary, it is income tax return. The deadline to file the CIT Law (2007), Circular Guoshuifa annual income tax return is 31 May. [2009] No. 2, Implementation Measures counted as 100 percent when multiplying of Special Tax Adjustments (Provisional) the shareholding percentage of each What types of transfer pricing (Circular 2) (2009). lower level of indirect shareholdings. information must be disclosed? Other criteria including loans, control of Effective date of transfer management, or other types of control The following information must be pricing rules can also be taken into account. disclosed on nine prescribed forms: On 1 January 2008, the comprehensive What is the statute of limitations • Description and amounts of transfer pricing regulation, Circular on assessment of transfer pricing related party and non-related party 2, came into force. Prior to that there adjustments? transactions broken down by type had been various transfer pricing rules (purchases, sales, services, intangible since 1991 but none took a systematic Ten years from the year in which the assets, tangible assets) as well as approach. related party transaction occurs. by counterparty location (domestic

or overseas). For tangible assets and Transfer pricing methods requirements, the five percent extra intangible assets, the information charge may be dropped. Does your country follow the must be further broken down into transfer pricing methods outlined in To what extent are transfer pricing several sub-categories. Chapter II of the OECD Guidelines? penalties enforced? • Information on financing received If exceptions apply, please describe. As noted, there are no penalties as from related parties including time Yes. such on transfer pricing adjustments. period, interest rate and expenses, However, the punitive interest surcharge and guarantor information such as in the absence of a transfer pricing guarantee fee and fee rate. Transfer pricing audit documentation is generally enforced. • A full list of all related parties as well and penalties as the address, taxpayer number, When the tax authority requests What defenses are available with legal representative and type of a taxpayer’s transfer pricing respect to penalties? related party relationship. documentation, are there timing Not applicable. requirements for a taxpayer to • Extensive information on outbound What trends are being observed submit its documentation? And if investment (outbound from China) currently? including information on the invested so, how many days? With a traditional focus on inbound enterprise, such as its profit level, Yes, 20 days. income tax payable, effective tax rate multinational taxpayers, the Chinese and shareholders. When the tax authority requests tax authorities are expanding their work a taxpayer’s transfer pricing to include domestic enterprises and • Information on outbound payments documentation, are there timing outbound investment. There is also to related and unrelated parties requirements for a taxpayer to a stronger focus on examining intra- broken into 17 subcategories, along submit its documentation? Please group intangible assets transactions, with information on taxation of these explain. equity transfer, thin capitalization payments. and other ’new’ transfer pricing The transfer pricing documentation issues. Automotive, pharmaceutical, What are the consequences of study must be prepared within five electronics, real estate and distribution failure to submit disclosures? months after the end of the calendar sector companies have received Penalties up to 10,000 Renminbi (RMB) year and must be submitted within particular scrutiny. The tax authorities and negative impact on reputation. 20 days upon request by the tax have also been conducting joint authority in charge. investigations on certain industries and Transfer pricing study If an adjustment is proposed by across-region investigations on certain overview the tax authority, what dispute intra-group companies. resolution options are available? Can documentation be filed in a language other than the local Apart from direct discussion/negotiation Special considerations language? If yes, which ones? with the tax authorities, the taxpayers Are secret comparables used by tax are, in principle, allowed the options No. The document can only be filed in authorities? of administrative appeal and litigation. Chinese. However, such proceedings have strong Yes. Use of secret comparables When a transfer pricing study is procedural focus and are thus not likely is specifically sanctioned by prepared, should its content follow viable in practice. Circular 2, however, in most cases, Chinese authorities rely on public Chapter V of the Organisation If an adjustment is sustained, can for Economic Co-operation and company data derived from commercial penalties be assessed? If so, what databases and other sources. Development (OECD) Guidelines? rates are applied and under what Yes, for all transactions. In addition, conditions? Is there a preference, or China requires transfer pricing studies requirement, by the tax authorities Although there are no penalties as to contain certain additional information for local comparables in a such on transfer pricing adjustments, and completed forms. In particular, one benchmarking set? an interest surcharge may be imposed form requires the segmentation of the on tax underpayments if the taxpayer Preference for local comparables is taxpayer’s income statement into four does not comply with documentation observed but a broader geographic set categories of transactions (i.e. related- preparation and production is also acceptable, depending on the party transactions vs. non-related requirements. Interest may be imposed circumstances. party transactions, within China vs. on tax adjustments which relate to Do tax authorities have transnational). transaction taking place on or after requirements or preferences Does the tax authority require an 1 January 2008. This interest rate shall regarding databases for advisor/tax practitioner to have be equal to the People’s Bank lending comparables? specific designation in order to rate plus five percentage points. This prepare or submit a transfer interest is non-deductible for corporate The Chinese transfer pricing regulations pricing study? income tax purposes. However, if the do not dictate the choice of database company complies with documentation for benchmarking purposes. However, No.

KPMG in China’s experience shows Are royalties subject to standard. Additionally, going that the Chinese tax authorities have withholding? forward, the additional five percent subscribed to a few databases such as interest as stipulated in Circular Yes. Bureau van Dijk’s Osiris database, and 2 will not be charged on self Standard and Poor’s Research Insight Are taxpayers allowed to file tax adjustments, provided that the database. Both databases are used by return numbers that differ from transfer pricing documentation the Chinese tax authorities. book numbers? is provided as prescribed by law; however, interest should still be Does the tax authority generally Yes. Taxpayers are allowed to adjust paid as stipulated in Circular 2 for focus on the interquartile range in a taxable income in China upward through tax adjustments. TNMM analysis? a special declaration in the annual tax return, which may lead to the difference – To the taxpayers, performing Yes, sometimes. of numbers in the tax return and the a self-adjustment may lead to Does the tax authority have other book. However, the taxpayer would still double taxation, which is not preferences in benchmarking? If so, not be permitted to remit the money eligible for treaty relief. Yet such please describe. into China. self adjustment does not provide the taxpayer with full protection Preference for local comparables is Other unique attributes? from audit, since the China tax observed but a broader geographic set • Circular Caishui [2008] No. authorities still retain the right to is also acceptable, depending on the 121 focuses on the issue of thin conduct any transfer pricing audits, circumstances. capitalization. An enterprise can even with self adjustment. What level of interaction do tax deduct its interest expense actually • Other recent developments: authorities have with customs paid to its related parties up to the authorities? debt-to-equity ratio of 5:1 for financial – China played an important institutions, and 2:1 for non-financial consultative role in determining Low. enterprises, unless the enterprise the outcomes of the first set of Are there limitations on can provide relevant supporting BEPS deliverables, which are deductibility of management fees documents to the tax authority expected to reinforce the trend beyond the arm’s length principle? to prove that the transactions are of recent years towards firmer enforcement of transfer pricing Not applicable. The Chinese corporate conducted at arm’s length, or that the effective tax rate of the enterprise rules. Such intention is manifested income tax law does not permit the in the issuance of Directive 146 deduction of management fees. paying interest expenses to a domestic related party is not higher and Circular 16, putting into effect While not clearly defined in the law, the promised greater scrutiny the Chinese concept of management than that of the domestic related party. of cross-border services/license fees can generally be interpreted as transactions within an MNE group. remuneration for shareholder activities. • Circular Guoshuihan [2009] No. 363 Efforts have also been stepped In addition, Chinese tax authorities provides that enterprises based in up in the collection of taxpayer are likely to deny the deductibility of China with limited functions and risks information, with a view to greater any charges that are literally labeled as should not bear market or “business” policing of outbound investments management fees, even if the charges risks related to the financial crisis.As as well as engagement in are not related to shareholder activities. noted above, if such companies do international information exchange. There are special rules related to the generate losses, they must submit deduction of fees by bank branches. transfer pricing documentation to the – Taxpayers continue to await tax authorities in charge. regulations on valuation of equities Are management fees subject to in the related party context, withholding? • Voluntary transfer pricing adjustments including a contemporaneous are encouraged: No. documentation requirement for – In August 2014, the SAT issued indirect transfers. This potential Are there limitations on the Notice 54, which formalizes the regulatory development is deductibility of royalties beyond the self transfer pricing adjustment consistent with the burgeoning arm’s length principle? program by providing detailed number of tax disputes focusing on Yes. On intra-group license instructions in relation to the self intra-group equity transfer. transactions, the most recently issued adjustment practice with the SAT’s – Another continuing development Circular 16 specifies that royalties paid monitoring and administration is a focus on the transfer pricing by a Chinese entity to an overseas mechanism. arrangements of the so-called related party which may only have the – In particular, the SAT encourages “High-New-Tech Enterprises” legal ownership but has not contributed taxpayers to make self (HNTE). Taxpayer with HNTE to the value created in connection with adjustments, i.e., voluntarily status enjoys a reduced corporate further developing, enhancing, and make an upward adjustment to income tax rate of 15 percent. commercially exploiting the subject the amount of income tax paid if There is an expectation on the part intangibles, cannot be deducted for related party transactions were of the Chinese tax authorities that corporate income tax purposes. not carried out on arm’s length HNTEs should not pay significant

amount of royalties on licensed Is there a filing fee for APAs? technologies and should earn No. a higher profit margin than the industry average. Does the tax authority publish APA data either in the form of an annual Tax treaty/double tax report or through the disclosure of resolution data in public forums? What is the extent of the double tax Yes. treaty network? Are there any difficulties or Extensive. limitations on the availability or effectiveness of APAs? If extensive, is the competent authority effective in obtaining Yes. The SAT published its fifth APA double tax relief? annual report (2013) in December 2014 and will issue periodic disclosure on Limited experience. developments of the APA program. When may a taxpayer submit an Based on the statistics in the APA adjustment to competent authority? annual report, more and more taxpayers in China are seeking tax certainty and After receiving a written tax assessment thus pursuing an APA, specifically, a from the tax authority in charge that may bilateral APA. In the future, the Chinese cause or have caused double taxation tax authorities will recruit and train a of the same income in different treaty larger pool of tax officers with transfer jurisdictions. pricing expertise to support the APA May a taxpayer go to competent program, thereby alleviating the current authority before paying tax? bottleneck between application and conclusion. No formal rules exist in this area.

Advance pricing agreements What APA options are available, if any? Unilateral, bilateral, multilateral.

KPMG in China

Cheng Chi Tel: +86 21 2212 3433 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Colombia

KPMG observation

In 2013, Colombia received an invitation from the Organisation for Economic Co-operation and Development (OECD) to become a member of the organization. Consequently, changes in both transfer pricing and tax legislation were carried out, taking into account the OECD Guidelines. The Base Erosion and Profit Shifting (BEPS) Action Plan has been mentioned by the Colombian government as a key tool to ensure that multinational entities are contributing their fair share of taxes with regard to the activities they carry out in Colombia. The Colombian Tax Authorities continue to scrutinize multinational entities’ transfer pricing and are closely reviewing the Informational Transfer Pricing Returns of taxpayers. They have assessed fines on those returns that have been filed incorrectly or contain inaccurate information. Additionally, they have changed the requirements for taxpayers that are obliged both to prepare and file transfer pricing documentation. The Tax Authorities have continued transfer pricing audits based on red flags detected in the informational return and the transfer pricing studies. It is expected that there will be more detailed audits and assessments going forward due to the experience gained by the Colombian Tax Authority.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Submission to tax Thresholds Applicable Not applicable contemporaneous authority required apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • deadlines, according to an annual • even when an entity does not have a decree, issued at the end of the capital relationship, it is considered Tax authority name respective taxable year. a related party when it is entitled to Dirección de Impuestos y Aduanas receive directly or indirectly more Effective date of transfer pricing Nacionales, (DIAN – National than 50 percent of the profits of a rules Administration of Taxes and Customs). company Citation for transfer pricing rules 1 January 2004. • when an operation takes place What is the relationship threshold between two subordinates, which • Tax Code, Chapter XI, Sections 260–1 for transfer pricing rules to apply are owned directly or indirectly by to 260–11 between parties? more than 50 percent by the same • Economic Sanctions, Tax Code individual or corporation or non- • ownership of greater than Sections 260-11 and 647 corporate entities; and 50 percent, based on voting power, • Decree 3030 of 2013 share capital, and under common • when there are consortiums, • tax havens, Decree 1966 of 2014; and control temporary unions, account

participations, and one of the entities What are the consequences of When the tax authority requests carries out a transaction with any failure to submit disclosures? a taxpayer’s transfer pricing of its related parties or any of the documentation, are there timing The transfer pricing penalties are included members of the group in favor or on requirements for a taxpayer to submit within Section 260–11 of the Tax Code. behalf of the consortium, joint venture its documentation? Please explain. or venture accounts. Transfer pricing study Taxpayers need to submit the What is the statute of limitations documentation within dates established on assessment of transfer pricing overview by the national government. However, adjustments? Can documentation be filed in if a request is issued by the tax a language other than the local authorities, taxpayers have 15 days to The statute of limitations for transfer language? If yes, which ones? provide the required information. pricing adjustments is in accordance with the statute of limitations of the No. If an adjustment is proposed by income tax return. When a transfer pricing study is the tax authority, what dispute resolution options are available? In case of not filing the transfer pricing prepared, should its content follow informative return and the supporting Chapter V of the Organisation The taxpayer can dispute the documentation, the tax administration for Economic Co-operation and adjustment of the tax authorities under has five years to challenge the taxpayer Development (OECD) Guidelines? administrative appeal and regular tax and to impose the relating penalties. No. The transfer pricing study content litigation. Moreover, Tax Code Article 260–5 and must follow the requirements of the If an adjustment is sustained, can the Ruling Decree states that taxpayers Colombian Tax Code and the regulatory penalties be assessed? If so, what which are obliged to prepare and file decree, i.e. executive summary, rates are applied and under what transfer pricing documentation have to functional analysis per controlled conditions? keep the documentation within their transaction (general information of the There are not any specific transfer records for a period of at least five company/activity and other specific pricing penalties other than those years, together with all the supporting information), industry analysis and mentioned in Section 260–11 of the Tax documentation that proves compliance economic analysis (the selection of Code (such as late filing, inaccuracy in with the transfer pricing rules in method, description of comparables and the transfer pricing informative return Colombia. conclusions, among others) and annex and/or supporting documentation). information. However, it is important Nevertheless, there are income tax to highlight that local transfer pricing Transfer pricing penalties linked to a transfer pricing regulation mirrors the OECD Guidelines. disclosure overview adjustment. Those penalties can be up to Does the tax authority require an 160 percent of the underpayment in tax, Are disclosures related to transfer advisor/tax practitioner to have plus additional penalties and interests. pricing required to be submitted to specific designation in order the revenue authority on an annual To what extent are transfer pricing to prepare or submit a transfer basis (e.g. with the tax return)? penalties enforced? pricing study? Yes. The disclosure takes place through Always. No. the informative TP return as well as the What defenses are available with TP Documentation, both are submitted respect to penalties? to the revenue authority annually, in a Transfer pricing methods virtual way (through web). Does your country follow the Litigation and settlements. transfer pricing methods outlined in What types of transfer pricing What trends are being observed Chapter II of the OECD Guidelines? information must be disclosed? currently? If exceptions apply, please describe. Colombian taxpayers are required to Tax authorities have begun to perform Yes. file an annual Informational Transfer audits in a more substantive way. The Pricing Return and/or supporting main challenges to taxpayers relate transfer pricing documentation which Transfer pricing audit to transfer pricing on expenses for contain information related to their and penalties technical assistance, technical services, intra-group transactions including intragroup services and royalties. When the tax authority requests the amounts, related parties, type of a taxpayer’s transfer pricing transactions, methods used to evaluate documentation, are there timing Special considerations the compliance with the arm´s length requirements for a taxpayer to Are secret comparables used by tax principle, interquartile ranges, amongst submit its documentation? And if authorities? other information. so, how many days? No. Yes, 15 days.

Is there a preference, or requirement, Are there limitations on deductibility If extensive, is the competent by the tax authorities for local of management fees beyond the authority effective in obtaining comparables in a benchmarking set? arm’s length principle? double tax relief? No. Yes. Deductibility of management Sometimes. fees paid are subject to the limitation Do tax authorities have When may a taxpayer submit an applicable to all expenses paid abroad requirements or preferences adjustment to competent authority? and not subject to withholding tax. If regarding databases for such fees or expenses do not exceed No formal rules exist in this area. comparables? 15 percent of the taxable income, they May a taxpayer go to competent No. Tax authorities expect the taxpayer can be taken as a deduction. authority before paying tax? to provide sufficient information Are management fees subject to regarding identification and Yes. withholding? determination of comparable parties used, information sources, inquiry dates Yes. Advance pricing and indication of the rejection criteria of Are there limitations on the rejected comparable entities. agreements deductibility of royalties beyond the What APA options are available, It is also important to present technical arm’s length principle? if any? adjustment descriptions and, when Yes. These payments are subject to needed, a generic description of Unilateral, bilateral, multilateral. withholding tax, therefore without it, the principal differences between tax deduction is not allowed. In addition, Is there a filing fee for APAs? Colombian accounting rules and the in some specific cases if royalties are rules in those countries where the No. related to technology, the respective comparable parties are located. agreement should be registered within Does the tax authority publish APA Does the tax authority generally the tax authority to take the deduction. data either in the form of an annual focus on the interquartile range in a report or through the disclosure of Are royalties subject to TNMM analysis? data in public forums? withholding? Yes, always. No. Yes. Does the tax authority have other Are there any difficulties or Are taxpayers allowed to file tax preferences in benchmarking? If so, limitations on the availability or return numbers that differ from please describe. effectiveness of APAs? book numbers? According to Colombian transfer pricing Not applicable. As of 31 December, Yes. The transfer pricing rules are silent regulations, the analysis should be 2014, one APA had been signed. upon this matter, therefore it is difficult to preformed using data from the year say whether they are permitted or not. under assessment for both the taxpayer and the comparable companies. If Other unique attributes? updated comparable data is not be When management fees do not contain available, it is mandatory to state the a technical component or elements specific date when the analyses were that might be considered as advisory, performed as well as the update of the payments do not require the application databases. Furthermore, if it is necessary of withholding tax, all other payments to consider several periods for the usually have a 10 percent withholding analysis, the analysis and explanations to tax rate. justify the use of such information should be included in the report. Tax treaty/double tax What level of interaction do tax authorities have with customs resolution authorities? What is the extent of the double tax treaty network? High. Customs and tax authorities are part of the same organization (DIAN). Extensive. Currently there are treaties Therefore, the officials of DIAN oversee with Canada, Mexico, Chile, Spain, KPMG in Colombia both audits. Switzerland and the member countries of the Andean Community (CAN). Myriam Stella Gutierrez Tel: +57 618 8000 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Costa Rica

KPMG observation

The Costa Rican transfer pricing regulations, enacted in September 2013, not only require Costa Rican taxpayers to carry out their intercompany transactions at arm’s length following the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines but also have established formal transfer pricing obligations to be completed annually. Taxpayers have been required to prepare transfer pricing studies since 2013. The transfer pricing information return will have to be completed starting with a taxpayer’s fiscal 2015. Specific regulations regarding the filing of this return are yet to be enacted. Even though general transfer pricing rules have been recently enacted, the Costa Rican Tax Authority has been able to adjust intercompany transactions if they were not in accordance with the arm’s length principle since 2003. Moreover, some transfer adjustments assessed by the Tax Authority for prior years have been ratified by the Constitutional Court and by the Supreme Court of Justice. In recent tax audits, the Tax Authority has requested the 2013 transfer pricing report of companies classified as large taxpayers.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Applicable contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold participation of at least 25 percent in the capital stock or voting rights of Tax authority name for transfer pricing rules to apply between parties? both entities Dirección General de Tributacion (DGT). Parties will be deemed to be related if • when entities are considered to be Citation for transfer pricing rules one of the following cases applies: part of the same business group (unidad de negocio), if one of them Decree 37898-H published on • when one person or company directs is a member or participant of the 13 September 2013. or controls the other, or holds, directly other and is related to it in any of Effective date of transfer pricing or indirectly, at least 25 percent of its the following situations: (i) holding a rules capital stock or voting rights majority of voting rights; (ii) having • when five persons or fewer direct the power to appoint or remove New transfer pricing rules are effective or control both related parties, or members or through its legal since fiscal year 2013. possess, directly or indirectly, a representative to intervene in the

other entity; (iii) through agreements or that operate under the free trade with international price quotations. with another partner, having the zone incentive system, must file, on an Specific regulations regarding these majority of voting rights; (iv) having annual basis, an informational return by other methods are still pending. appointed the majority of the board the deadline and under the conditions to members exclusively by their votes; be established by the Tax Authority. Transfer pricing audit and or (v) a majority of the members of What types of transfer pricing the governing body of the legal entity penalties information must be disclosed? are ombudsmen, managers or board When the tax authority requests members of the related party or the The information must include data a taxpayer’s transfer pricing other party dominated by it; or related to the group and to the taxpayer, documentation, are there timing as well as information regarding the requirements for a taxpayer to • when two or more companies controlled transactions, their nature submit its documentation? And if comprise a decision making bloc with and amount, the methods applied, so, how many days? regard to a third company, all them are comparable data used and results. considered to be a business group. Yes, 10 days. What are the consequences of Also in the following situations: When the tax authority requests failure to submit disclosures? • in a contract of collaboration or joint a taxpayer’s transfer pricing venture, when one of the participants Failure to prepare or submit disclosures documentation, are there timing holds, directly or indirectly, 25 percent may result in a penalty equivalent to two requirements for a taxpayer to submit of the results or profit under the percent of the taxpayer’s previous year’s its documentation? Please explain. income. This penalty has a minimum of contract The taxpayer has 10 work days to submit 10 base salaries (approximately 7,270 the information the Tax Administration • a resident in Costa Rica and a US dollars (USD)) and a cap of 100 base requests. distributor or exclusive agent of a salaries (approximately USD72,700). foreign jurisdiction Furthermore, the Tax Administration If an adjustment is proposed by • a distributor or exclusive agent, would be entitled to make its own the tax authority, what dispute resident in Costa Rica, of a resident of determination of what the appropriate resolution options are available? a foreign jurisdiction price for related party transactions In principle dispute resolution • a resident entity and its permanent should have been. options are available. However, it has establishment abroad; or been a very consistent practice of • a permanent establishment resident Transfer pricing study the government and of the State’s in Costa Rica and its foreign parent overview Attorney’s Office not to allow alternative dispute resolution options for matters company, as well as another permanent Can documentation be filed in regarding taxation. establishment of the same company or a language other than the local a person associated with it. language? If yes, which ones? If an adjustment is sustained, can penalties be assessed? If so, what What is the statute of limitations No. on assessment of transfer pricing rates are applied and under what adjustments? When a transfer pricing study is conditions? prepared, should its content follow One of the following penalties may be The normal statute of limitations is Chapter V of the Organisation applied: four years. This term is extended to for Economic Co-operation and 10 years for those taxpayers who (1) Development (OECD) Guidelines? • 50 percent of the incremental tax that have not filed their tax returns, (2) have is determined (this is the base case, Yes, for all transactions. not registered as taxpayers before the applicable for ‘inaccuracy’ upon filing Tax Administration, or (3) have filed Does the tax authority require an a tax return) tax returns that have been deemed advisor/tax practitioner to have • 100 percent of the incremental tax fraudulent. The statute of limitations specific designation in order that is determined (this penalty starts counting from 1 January of the to prepare or submit a transfer applies when the adjustment derives year following that in which the tax pricing study? from information that had been should have been paid. No. withheld from the Tax Administration) Transfer pricing • 150 percent of the incremental tax Transfer pricing methods that is determined (this penalty disclosure overview Does your country follow the applies when the taxpayer has Are disclosures related to transfer transfer pricing methods outlined in incurred ‘substantial’ anomalies in pricing required to be submitted to Chapter II of the OECD Guidelines? its accounting records, used falsified the revenue authority on an annual If exceptions apply, please describe. supporting documentation or used basis (e.g. with the tax return)? intermediate persons or entities with Yes. There is also the possibility of the purpose of hiding its identity). Yes. Taxpayers categorized as large applying other methods to analyze taxpayers or large territorial companies, export and import transaction of goods

To what extent are transfer pricing Do tax authorities have Are management fees subject to penalties enforced? requirements or preferences withholding? regarding databases for The Tax Administration automatically Yes. comparables? applies these penalties every time there Are there limitations on the is a tax adjustment, and they never There are no official requirements. deductibility of royalties beyond negotiate. Does the tax authority generally the arm’s length principle? What defenses are available with focus on the interquartile range in a Yes. Several conditions must be met in respect to penalties? TNMM analysis? order to avoid some limitations on the Taxpayers need to demonstrate that Yes, always. deductibility of royalties: they have been diligent. They need to Does the tax authority have other • the taxpayer needs to provide convince the Tax Administration that preferences in benchmarking? If so, evidence that the royalties paid they have analyzed the tax positions please describe. were necessary to generate taxable taken and that they are convinced that income their position is in accordance with Due to lack of publicly available local the law. The Tax Administration may information, international companies are • the taxpayer needs to have a contract disagree with the taxpayer in those accepted as comparables. in place and abide by the terms of the contract. Lack of a contract or a contract cases and still make a tax adjustment, What level of interaction do tax that does not correspond with the but that would allow the taxpayer to authorities have with customs intangible that was licensed or other avoid a penalty. It is therefore very authorities? important to document the client’s inaccuracies, or the parties actually transfer prices. The use of an APA would They do not have a high level of involved may create tax risks; and also be a mechanism that would protect interaction with customs authorities. • any applicable withholding must be the taxpayers from harsh penalties. Are there limitations on levied. What trends are being observed deductibility of management fees Even if the above conditions are met, currently? beyond the arm’s length principle? there are limitations in the law as to the The Tax Administration has made a Yes. Several conditions must be met in amount of royalties that a taxpayer may significant number of adjustments order to avoid some limitations on the deduct. Specifically, a cap equal to based on what they consider to be deductibility of management fees: 10 percent of a taxpayer’s gross sales. Comparable Uncontrolled Prices (CUPs). • the taxpayer needs to provide Are royalties subject to For example, they have made several evidence that the services were withholding? adjustments to companies that have a actually rendered and be able to prove Yes. local manufacturing facility that sells both that they were necessary to generate to local independent distributors and taxable income Are taxpayers allowed to file tax to related parties in other countries. In return numbers that differ from • the taxpayer needs to prove that the such cases, the Tax Administration has book numbers? applied the price used in the transactions services were not duplicative of other with the third party distributors to the functions carried out within Costa Yes. These adjustments must transactions with related parties, without Rica. If no support can be provided, be explained in the book to tax making adjustments (e.g. for volume, then the Tax Administration will reconciliation. Year-end adjustments functions or risks incurred). consider them as non-deductible may be captured in this reconciliation. • the taxpayer needs to have a contract Other unique attributes? in place and abide by the terms of Special considerations None. the contract. Lack of a contract or a Are secret comparables used by tax contract that does not correspond authorities? with the services actually provided Tax treaty/double tax The Tax Administration has said that or the parties actually involved may resolution they will not use secret comparables. create tax risks; and What is the extent of the double tax They have not used secret comparables • any applicable withholding must be treaty network? in the past. levied. There is only one double tax treaty Is there a preference, or Even if the above conditions are met, currently in effect with Spain. Double requirement, by the tax authorities there are limitations in the law as to tax treaties with Germany and Mexico for local comparables in a the amount of fees that a taxpayer may have been signed, but have not yet been benchmarking set? deduct. Specifically, a cap equal to approved by the Legislative Assembly. No. There is very limited public local 10 percent of a taxpayer’s gross sales. information.

KPMG in Costa Rica

Sergio Garcia Tel: + (506) 2201 4100 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Croatia

KPMG observation

The Croatian Tax Authority (CTA) is regularly performing detailed transfer pricing audits, with the primary targets being large taxpayers. Other audit triggers, apart from size, include a steep fall in profit, continuing losses and companies that are part of multinational groups.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information related parties, provided certain What is the statute of limitations conditions are met. Tax authority name on assessment of transfer pricing adjustments? March 2012 – amendments to the CPT Ministarstvo Financija, Porezna uprava Law to harmonize with Organisation for The statute of limitations is three years (Ministry of Finance, Tax Authority). Economic Co-operation and Development and commences after the end of the Citation for transfer pricing rules (OECD) Guidelines by abolishing the year in which any tax liabilities should Croatian Corporate Profit Tax (CPT) Law, provision that the comparable uncontrolled have been assessed (e.g. for the 2014 Article 13, and CPT Regulations, Article 40. price (CUP) method is the preferred year the statute of limitations expires transfer pricing method. at the end of 2018). Under certain The Institute for Public Finance, Ministry conditions an absolute statute of June 2012 – amendments to the of Finance, issued in May 2014 the limitations of six years may apply. Manual for Inspection of Transfer Prices CPT Regulations introducing terms (the Manual). Although the Manual is ‘traditional transactional method‘ and not legally binding, it provides useful ‘transactional profit based method‘ as Transfer pricing guidance in relation to transfer pricing well as ‘best method rule‘. disclosure overview matters and what the CTA might expect What is the relationship threshold Are disclosures related to transfer from taxpayers. for transfer pricing rules to apply pricing required to be submitted to Effective date of transfer pricing between parties? the revenue authority on an annual basis (e.g. with the tax return)? rules The definition of related parties is 1 January 2005 – new CPT Law entered very broad, but specifically includes No. Not unless specifically requested by into force introducing definitions of situations where one party directly the CTA. or indirectly participates in the related parties and transfer pricing What types of transfer pricing management, control, or capital of methods. information must be disclosed? another party (no specific thresholds), or 1 July 2010 – amendments to the CPT if the same parties participate directly or Not applicable. Law introducing provisions that transfer indirectly in the management, control or pricing rules also apply to domestic capital of another party.

What are the consequences of If an adjustment is proposed by are regularly performed. Audit triggers, failure to submit disclosures? the tax authority, what dispute apart from company size, include a resolution options are available? sharp fall in profit, continuing losses Not applicable. and those companies that are part of An adjustment is proposed following multinational groups. Further, the CTA a tax audit on the basis of a tax Transfer pricing study requested a number of large taxpayers assessment issued by the CTA. The to submit transfer pricing studies with overview taxpayer can appeal the tax assessment their annual CPT returns for 2014 (which Can documentation be filed in to an independent second degree body were due four months after the end of a language other than the local within the Ministry of Finance. language? If yes, which ones? the financial year). This trend is likely to If the taxpayer receives a negative ruling continue in the future. No. from the independent second degree When a transfer pricing study is body, the taxpayer is required to pay Special considerations prepared, should its content follow the corporate profits tax assessed, penalty interest and any fixed penalties. Are secret comparables used by Chapter V of the Organisation tax authorities? for Economic Co-operation and The taxpayer can then appeal to the Development (OECD) Guidelines? Administrative Court. There are no specific rules in the transfer If an adjustment is sustained, can pricing provisions; however, they are Yes, for certain transactions. Croatian CPT often used by the CTA in practice. legislation includes mandatory elements penalties be assessed? If so, what for a transfer pricing study and generally rates are applied and under what Is there a preference, or follows Chapter V of the OECD Guidelines. conditions? requirement, by the tax authorities Yes. The CPT law prescribes fixed for local comparables in a Does the tax authority require an benchmarking set? advisor/tax practitioner to have penalties between 2,000 and 200,000 specific designation in order to Croatian kunas (HRK). Additional No. There is no requirement to include prepare or submit a transfer taxable income assessed is subject to local comparables in the benchmarking pricing study? the standard CPT rate of 20 percent set. However, it is recommended to increased by a penalty interest of include them as local comparable No. 12 percent per annum. entities are affected by some of the To what extent are transfer pricing same developments, such as industry Transfer pricing methods penalties enforced? and economic trends. Does your country follow the Transactions with foreign related parties Do tax authorities have transfer pricing methods outlined in are often scrutinized by the CTA and in requirements or preferences Chapter II of the OECD Guidelines? the case of any non-compliance with regarding databases for If exceptions apply, please describe. the provisions of the tax legislation, comparables? Yes. the CTA can adjust taxable income and There is no requirement regarding the where any increase of taxable income use of a certain database for performing Transfer pricing audit and can result in an additional CPT liability searches for comparables. The CTA uses assess penalty interest. In addition, the the Orbis database. penalties CTA may impose fixed penalties. Tax Does the tax authority generally When the tax authority requests audits are regularly performed by the focus on the interquartile range in a a taxpayer’s transfer pricing CTA. Domestic transactions in certain TNMM analysis? documentation, are there timing circumstances are also focused on with requirements for a taxpayer to similar implications. Yes, sometimes. submit its documentation? And if so, how many days? What defenses are available with Does the tax authority have other respect to penalties? preferences in benchmarking? If so, No. please describe. Timely prepared transfer pricing When the tax authority requests documentation. There is no requirement regarding other a taxpayer’s transfer pricing preferences in benchmarking but it is What trends are being observed documentation, are there timing recommended to use independence currently? requirements for a taxpayer to submit thresholds for comparables companies its documentation? Please explain. As in previous years, the CTA has in which one shareholder being a legal Documentation should be made shown increasing interest in related person/entity holds less than 25 percent available immediately upon request. party transactions and transfer pricing of the share capital but the company can documentation. Transfer pricing audits have a shareholder which holds more

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 64 | Global Transfer Pricing Review than 25 percent of share capital under Tax treaty/double tax the condition that such shareholder is an individual. resolution What is the extent of the double tax Multiple year averages are treaty network? recommended to use contrary to single year average. Extensive. What level of interaction do tax If extensive, is the competent authorities have with customs authority effective in obtaining authorities? double tax relief? High. Limited practical experience. Are there limitations on When may a taxpayer submit an deductibility of management fees adjustment to competent authority? beyond the arm’s length principle? No formal rules exist in this area. Yes. Tax audits could attempt to May a taxpayer go to competent scrutinize management fees if they authority before paying tax? are beyond the arm’s length principle. Assuming documentary support exists No formal rules exist in this area. and economic benefit can be proven, management fees are deductible. Advance pricing Are management fees subject to agreements withholding? What APA options are available, if Yes. any? Are there limitations on the None. deductibility of royalties beyond the Is there a filing fee for APAs? arm’s length principle? Not applicable. Yes. Tax audits could attempt scrutinize royalties if they are beyond the arm’s Does the tax authority publish APA length principle. Assuming documentary data either in the form of an annual support exists and economic benefit can report or through the disclosure of be proven, royalties are deductible. data in public forums? Are royalties subject to withholding? Not applicable. Yes. Are there any difficulties or limitations on the availability or Are taxpayers allowed to file tax effectiveness of APAs? return numbers that differ from book numbers? Not applicable. Yes. CPT legislation does not include specific provisions or rules related to year-end transfer pricing adjustments. However, year-end adjustments occur in practice. Year-end adjustments may result in assessment and penalty interest on any customs duty/VAT that was not settled in a timely manner. Also, fixed penalties KPMG in Croatia may be charged due to non-compliance with the relevant legislation. Paul Suchar Tel: +385 1 5390 032 Other unique attributes? Email: [email protected] None. Tomislav Borosak Tel: +385 1 5390 171 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Czech Republic

KPMG observation

Transfer pricing in the Czech Republic has become a key issue in many tax audits, and transfer pricing is now a regular component of tax inspections, particularly for large companies and companies with investment incentives. In 2013, a Specialized Tax Authority (STA) was established for companies with turnover exceeding two billion Czech crowns (approximately 80 million US dollars (USD) and financial institutions. Transfer pricing is a strong area of focus for the STA. In fact, on 18 February 2015, the STA announced special tax audit action to review transfer pricing setting and prevent Czech tax evasion. Companies are selected for inspection based on an analysis of information and data obtained by the STA. Beginning for tax years commencing in 2014, taxpayers must file an appendix to the income tax return describing transactions with related parties. This appendix describes transaction types and magnitudes for each related party and is used by the Czech Tax Administration (CTA) to determine primary transfer pricing areas of focus. Failure to submit this appendix may result in a tax audit focused on transfer prices. The CTA is closely following the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. Transfer pricing documentation serves as a tool to put the burden of proof on the CTA. While currently not specifically required by tax legislation, providing documentation at the outset of a tax inspection may significantly limit scrutiny in this area.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules Effective date of transfer pricing rules Tax authority name Income Tax Act 23 (7), Czech Ministry of Finance decrees D–332 (international 1 January 1993. Specializovaný financˇní úrˇad (Specialized standards for taxation of transactions Tax Authority) for companies with What is the relationship threshold between related parties), D–333 turnover higher than 2 billion Czech for transfer pricing rules to apply (advanced pricing arrangements) and crowns (CZK) and financial institutions; between parties? D–334 (recommended scope of transfer Financˇní úrˇad (Tax Authority) for pricing documentation), and General Ownership of greater than 25 percent other entities. Financial Directorate decree D–10 (low based on voting power, share capital, value intra-group services). common control. No limit in the case

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 66 | Global Transfer Pricing Review of entering into a business relationship When a transfer pricing study is If an adjustment is sustained, can predominantly for tax evasion purposes. prepared, should its content follow penalties be assessed? If so, what Chapter V of the Organisation rates are applied and under what What is the statute of limitations for Economic Co-operation and conditions? on assessment of transfer pricing Development (OECD) Guidelines? adjustments? Yes. General tax penalties apply. Yes, for all transactions. Additional General limits for additional tax A penalty of 20 percent of the avoided information is usually required for assessment apply. Additional tax may tax or one percent of the overstated received services, with a strong be assessed within three years from tax loss is assessed when a transfer focus on the benefits test and proof the due date for filing the corporate tax pricing adjustment is made by the that services were actually rendered. return for the respective taxable period. CTA. Furthermore, interest for late Detailed calculations are required for This deadline may be extended up to payment of approximately 15 percent is major transactions during tax audits. 10 years in case of repeated tax audits. assessed (Czech National Bank REPO Special rules further extend the deadline Does the tax authority require an rate + 14 percent). In specific cases, for companies with tax incentives and/or advisor/tax practitioner to have withholding tax on a deemed dividend tax losses. specific designation in order is assessed (together with penalty and to prepare or submit a transfer interest). Companies with investment Transfer pricing pricing study? incentives granted in the form of tax holidays may forfeit the right to the tax No. disclosure overview holidays (even retroactively). Are disclosures related to transfer pricing required to be submitted to Transfer pricing methods To what extent are transfer pricing penalties enforced? the revenue authority on an annual Does your country follow the basis (e.g. with the tax return)? transfer pricing methods outlined in Tax sanctions are automatically enforced. Yes. In limited scope – Form 5404/ Chapter II of the OECD Guidelines? Ea is required to be filed for tax years If exceptions apply, please describe. What defenses are available with commencing in 2014. Yes. respect to penalties? What types of transfer pricing Only shifting the burden of information must be disclosed? Transfer pricing audit and proof through the use of proper documentation or defense files. Self- Form 5404/Ea summarizes a taxpayer’s penalties correction through filing supplementary transactions with each related party When the tax authority requests tax return avoids the basic penalty (transaction type, magnitude, etc.). a taxpayer’s transfer pricing (20 percent of additional tax or one Separate forms must be filed in documentation, are there timing percent of reduced tax loss); interest for electronic format for each foreign related requirements for a taxpayer to late payment is always due but taxpayer party that enters into transactions submit its documentation? And if could ask for a partial waiver. with the taxpayer. Companies granted so, how many days? investment incentives or reporting What trends are being observed Yes, 30 days. loss for the given period should report currently? also transactions with domestic When the tax authority requests The number of tax audits with a related parties. a taxpayer’s transfer pricing transfer pricing focus has increased documentation, are there timing What are the consequences of considerably. The main areas of focus requirements for a taxpayer to submit failure to submit disclosures? include subsidiaries of multinationals in its documentation? Please explain. a loss position, recipients of tax relief Failure to submit Form 5404/Ea The CTA regularly requires transfer pricing investment incentives, year-end transfer may result in a tax audit focused on documentation to be provided during pricing adjustments, explanations of transfer prices. tax inspections, within 15-30 days upon functional and risk profiles, intercompany request. This deadline can be extended services and their benefits to the taxpayer, Transfer pricing study upon the taxpayer’s request, i.e. minimum financial transactions and interest rates. overview time limit could therefore be 30 days. Investigating transfer pricing within a tax Can documentation be filed in Documentation is typically requested in inspection is now the rule rather than the a language other than the local the Czech language, however, a time-limit exception for multinationals. is usually provided for translation. language? If yes, which ones? Companies with investment Yes. The representatives of Czech If an adjustment is proposed by incentives in form of a tax relief are Tax Authorities will likely require the the tax authority, what dispute subject to transfer pricing scrutiny. documentation in Czech language, resolution options are available? A self-correction through filing a supplementary tax return does not avoid however English may be accepted in The taxpayer can initiate an appeal to the tax relief being challenged. However, certain circumstances. the Appeal Financial Directorate before potential penalties are reduced from going to a regional court.

May 2015: instead of a full loss of Are management fees subject to reason for the tax base increase or tax provided incentives, only additional tax withholding? loss decrease. In normal situations will now be assessed. there is a time limit of three years (if No. not prolonged due to the Tax Authority During tax audits, the Tax Authority Are there limitations on the audit or supplementary tax return focuses on the profitability of intra- deductibility of royalties beyond the filing). MAP procedure could breach this group transactions and requires detailed arm’s length principle? statute period. calculations to be provided and linked to the company’s statutory financials. No. May a taxpayer go to competent authority before paying tax? Are royalties subject to Special considerations withholding? No formal rules exist except for Advance Pricing Agreements (APAs). Are secret comparables used by tax Yes. authorities? Are taxpayers allowed to file tax Advance pricing Yes. return numbers that differ from Is there a preference, or book numbers? agreements What APA options are available, requirement, by the tax authorities Yes. No specific legal provisions on if any? for local comparables in a compensating adjustments exist in benchmarking set? the legislation. However, domestic Unilateral, bilateral, multilateral. legislation does not forbid taxpayers Local comparables are not required, Is there a filing fee for APAs? but can be used as support for regional to make these adjustments. The Tax analyses. Authority would first audit whether Yes. CZK10,000, approx. 350 euros the original transaction was set in (EUR)/USD400). Do tax authorities have requirements accordance with the arm’s length Does the tax authority publish APA or preferences regarding databases principle. for comparables? data either in the form of an annual Transfer pricing adjustments are report or through the disclosure of The Tax Authority usually uses the generally made before submitting a tax data in public forums? Amadeus database. Other sources of return. After this deadline, it could only information can be used as well. No. be done by submitting a supplementary Does the tax authority generally tax return based on new facts that are Are there any difficulties or focus on the interquartile range in a fully documented. In practice, taxpayers limitations on the availability or TNMM analysis? gradually adjust prices during the effectiveness of APAs? calendar year to minimize the need for Yes, always. Yes. Unilateral APAs on the transfer yearly transfer pricing adjustments. pricing method/approach are available Does the tax authority have other Other unique attributes? and are the most common type of APA. preferences in benchmarking? If so, Issued APAs are valid for three years. According to Decree D–10, an arm’s please describe. The Unilateral APA process takes nine to length mark-up of three to seven The Tax Authority typically accept 12 months. Bilateral (or multilateral) percent should apply to low value multiple year (three or five years) APAs are not common; there are intra-group services. average results of the comparables. currently less than 10 in place. The In case of transfer pricing audit where process typically takes two to three benchmark is missing the Tax Authority Tax treaty/double tax years and needs to be agreed on with tend to use retrospectively gathered resolution the Tax Authority on a case by case basis. data from Amadeus just for the period What is the extent of the double tax under scrutiny. treaty network? What level of interaction do tax Extensive. authorities have with customs authorities? If extensive, is the competent authority effective in obtaining Very close. double tax relief? Are there limitations on Frequently. deductibility of management fees KPMG in the Czech Republic beyond the arm’s length principle? When may a taxpayer submit an adjustment to competent authority? No. Taxpayers are often asked to Daniel Szmaragowski document that the services were The taxpayer should submit a Tel: +420 222 123 841 provided and consumed for the benefit supplementary tax return by the end Email: [email protected] of the taxpayer. of the month following the month in which the taxpayer discovered the As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Denmark

KPMG observation

The Danish Customs and Tax Administration (SKAT) and the Danish Parliament (Folketinget) continue to focus heavily on transfer pricing and perceived international corporate tax avoidance. This was most recently substantiated by the introduction of the first-ever general anti-avoidance rule (GAAR) into Danish tax law. Also, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan is of high interest to SKAT. In particular, the Danish government has openly expressed support for the BEPS project and will most likely be among the first to adopt the BEPS deliverables. This was reinforced by the fact that the BEPS project was specifically mentioned as part of SKAT’s 2015 action plan. Changes in relevant tax law In April 2015, the Danish Parliament passed a bill introducing (i) a GAAR aimed at European Union tax directive abuse and double tax treaty abuse; (ii) new rules on taxation of foreign trusts; and (iii) limitations on the permanence of binding assessment notices provided by SKAT relating to the cross-border transfer of assets. The wording of the GAAR is intended to be direct translations and implementations of: • the wording of the amendments made by the European Council on 27 January 2015 regarding the parent-subsidiary directive; and • the wording of the GAAR proposed by the OECD regarding rules aimed at arrangements where one of the principal purposes is to obtain treaty benefits. In 2012, the Danish Parliament passed a transfer pricing bill focusing on strengthening the measures against zero tax companies. The bill introduced new and more stringent regulations for companies engaging in controlled transactions, and Danish taxpayers are now starting to see the effects of this bill. The most important change in relation to transfer pricing is the tightening of the rules on specific transfer pricing fines and the introduction of the possibility for SKAT to require independent auditors’ opinions on transfer pricing. Another consequence of the bill is that Danish taxpayers’ corporate tax payments for 2011 and onwards are made public. The possibility of offsetting losses has also been limited. This means that the first million Euro (EUR) in losses can always be offset against positive taxable income, but the remaining losses can only reduce the remaining income by a maximum of 60 percent. Losses can still be carried forward indefinitely. BEPS impact SKAT has been following the developments of the BEPS project closely and is expected to continue its focus on the future developments of the BEPS project. More specifically, the developments resulting from the BEPS project are expected to find their way into the existing transfer pricing guidelines issued by SKAT. KPMG in Denmark has already seen cases in which SKAT has referred directly to BEPS discussion drafts as part of their reasoning/argumentation (e.g. by referring to the revised discussion draft on transfer pricing aspects of intangible assets in connection with SKAT’s transfer pricing audits regarding intangible assets).

How to react Danish taxpayers are urged (i) to be as aware of OECD work in progress/focus areas as SKAT, (ii) to identify significant risk areas and initiate any remediation as required on the basis of the current actions of tax authorities, including SKAT, and the future impact of OECD work (the BEPS project, etc.). It is expected that, going forward, SKAT will focus on companies’ ability to explain their transfer pricing processes, communicate how transfer pricing risks are identified and the controls applied to mitigate such transfer pricing risks. Other observations There is a continued trend towards SKAT being aggressive and detail-oriented in its audit of whether the content of the transfer pricing documentation fulfills the comprehensive qualitative transfer pricing documentation requirements set out in the Danish Executive Order. In recent years, this trend has led to many cases in which SKAT has claimed that the transfer pricing documentation prepared by the taxpayer did not fulfil the specific Danish transfer pricing requirements. This has resulted in SKAT issuing estimated and discretionary assessments, which then has resulted in a shift in the burden of proof. Along with this, SKAT has introduced deemed transactions in certain transfer pricing audits in order to reach an appropriate result in the eyes of SKAT. As a consequence thereof, the preparation of localized transfer pricing documentation is highly recommended. Such documentation should: • represent all relevant facts relating to the taxpayer; and • serve as a viable cornerstone of any potential transfer pricing audit. Therefore, the preparation of transfer pricing documentation should not be seen merely as a matter of compliance.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Danish Corporation Tax Act • Guidelines on the valuation of (selskabsskatteloven), section 11 business enterprises and ownership Tax authority name • Danish Executive Order no. 42 of 24 interests in business enterprises, The Danish Customs and Tax January 2006 (BEK nr. 42 af 24.01.06) including the valuation of goodwill Administration (SKAT). and other intangible rights as • Guidelines on Transfer Pricing Citation for transfer pricing rules issued by SKAT, 2009 (Transfer Documentation, updated on 30 pricing; Kontrollerede transaktioner, • Danish Tax Assessment Act January 2015 (Den juridiske vejledning værdiansættelse). The guidelines are (ligningsloven), section 2 2015–1; Selskabs-, fonds- og available for download on SKAT’s foreningsbeskatning; C.D.11 Transfer • Danish Tax Control Act website, but only in Danish. pricing). The guidelines are available (skattekontrolloven), sections 3 B, for download on SKAT’s website, but 14(4), 17(3) and 17(4) only in Danish; and

Effective date of transfer website. The form is now an integrated When a transfer pricing study is pricing rules part of the electronic corporate income prepared, should its content follow tax return filing system/process. Chapter V of the Organisation June 1998. for Economic Co-operation and What types of transfer pricing What is the relationship threshold Development (OECD) Guidelines? information must be disclosed? for transfer pricing rules to apply Yes, for certain transactions. Yes, between parties? The taxpayer’s main business activity, with some exceptions. The Danish the exact number of entities (including A company or an individual must own transfer pricing legislation sets out very permanent establishments) that (directly or indirectly) more than specific minimum requirements for participate in the taxpayer’s controlled 50 percent of the share capital or a transfer pricing study, which should transactions, their location and joint control more than 50 percent of the be addressed in order to comply with taxation status. As from the income votes or have an agreement regarding the documentation requirements. In year 2014, the actual amounts controlling interest in another company general, these requirements go further per transaction type (including nil (common control). than what is specified in the OECD transactions), as opposed to certain Guidelines. What is the statute of limitations volume/scope intervals, must be on assessment of transfer pricing disclosed. The amounts may be rounded SKAT normally emphasizes that the adjustments? according to certain specifications. contents of the descriptions and analyses are of great importance, SKAT must give notice of transfer pricing What are the consequences of meaning that the substance should be adjustments to the taxpayer by 1 May in failure to submit disclosures? adequately presented. the sixth year after the end of the income Penalties will be imposed. SKAT year subject to adjustment. This means Does the tax authority require an may impose a penalty in case of that income adjustments for the financial advisor/tax practitioner to have misrepresentation in connection with year 2014 can be made until 1 May 2020. specific designation in order the obligation to provide documentation, to prepare or submit a transfer SKAT must give notice of the final i.e. in relation to the appendices to the pricing study? income adjustment to the taxpayer by tax return (special forms) and high-level 1 August in the sixth year after the end of information given regarding the transfer No. the income year subject to adjustment. prices declared on the tax return. The penalty is issued in proportion to the In case of a corresponding adjustment Transfer pricing methods higher of either: (income adjustment made by a foreign Does your country follow tax authority), SKAT is not bound by • the turnover of the company the transfer pricing methods any statute of limitation. However, no (weighted as 0.5 percent of the outlined in Chapter II of the OECD later than six months after receipt of the turnover up to DKK500 million Guidelines? If exceptions apply, first notice of any such corresponding (approximately 67 million euros please describe. adjustment, the taxpayer must request (EUR)), 0.1 percent of the remaining a re-opening, if relevant, of the tax turnover up to DKK1 billion Yes. assessment for the relevant years. (approximately EUR135 million) and 0.05 percent of the turnover Transfer pricing audit Transfer pricing exceeding DKK1 billion; or and penalties disclosure overview • the number of employees in the When the tax authority requests company. The penalty amounts Are disclosures related to transfer a taxpayer’s transfer pricing to DKK250,000 (approximately pricing required to be submitted to documentation, are there timing EUR35,000) if the company has less the revenue authority on an annual requirements for a taxpayer to than 50 employees and increases by basis (e.g. with the tax return)? submit its documentation? And if DKK250,000 for every additional so, how many days? Yes. In accordance with section 50 employees. If the company 3B of the Danish Tax Control Act has more than 500 employees, Yes, 60 days. (skattekontrolloven), taxpayers engaging the penalty will be DKK2 million When the tax authority requests in controlled transactions must (approximately EUR270,000). a taxpayer’s transfer pricing provide information on their controlled documentation, are there timing transactions as an integrated part of Transfer pricing study requirements for a taxpayer their corporate income tax return if the to submit its documentation? total controlled transactions exceed overview Please explain. 5 million Denmark krone (DKK). Can documentation be filed in a language other than the local The taxpayer must submit its This information is provided in Form language? If yes, which ones? documentation no later than 60 days no. 05.021 (Danish version) or Form after receipt of a request to that effect. no. 05.022 (English version) which Yes. Danish, English, Swedish or are available for download on SKAT’s Norwegian.

If an adjustment is proposed by be appealed to the Danish National Tax Special considerations Tribunal and after that to the ordinary the tax authority, what dispute Are secret comparables used by tax courts where the taxpayer has the resolution options are available? authorities? opportunity to challenge the imposed Yes, the taxpayer can file a complaint penalty before it becomes final. No. with the Danish National Tax Tribunal. The complaint must be filed no later What trends are being observed Is there a preference, or than three months after the date of currently? requirement, by the tax authorities the adjustment. for local comparables in a SKAT has significantly increased the benchmarking set? If an adjustment is sustained, can number of field tax auditors specializing penalties be assessed? If so, what in transfer pricing audits. Since Yes, there is a preference, but not a rates are applied and under what 15 August 2011, the field tax auditors requirement, for local comparables in a conditions? have been authorized to make income benchmarking set. However, European adjustments. Prior to this, all transfer comparables are often produced, and SKAT can impose penalties relating to pricing adjustments were subject to accepted, by SKAT if only a limited documentation if the transfer pricing approval by SKAT’s Central Transfer number of local comparables are available. documentation requirements are not Pricing Office, and as a result, the income fulfilled, whether intentionally or due to Do tax authorities have adjustments made by SKAT are observed gross negligence. requirements or preferences to be less coherent. As stated above, regarding databases for It is not a condition for imposing penalties there is a continued trend towards SKAT comparables? that an income adjustment is made. being aggressive and detail-oriented in The penalty is fixed at DKK250,000 its audit of whether the content of the SKAT has no database requirements. (approximately EUR35,000) per financial transfer pricing documentation fulfils However, the most commonly used year per entity if the submitted transfer the comprehensive qualitative transfer databases include Amadeus, Orbis and pricing documentation is inadequately pricing documentation requirements. RoyaltyStat. For financial transactions, prepared preventing SKAT from using it SKAT uses Moody’s RiskCalc, In transfer pricing audits, companies as a basis for assessing whether prices Bloomberg and Thompson Reuters LPC are requested to submit a copy of their and conditions have been set on arm’s LoanConnector. transfer pricing documentation to SKAT. length terms. Typically, after the submission and once Does the tax authority generally Penalties can also be imposed if SKAT has read the company’s transfer focus on the interquartile range in a supplementary material, a benchmark pricing documentation, a meeting is held TNMM analysis? analysis or an auditor’s statement is with the field tax auditor. It is, therefore, Yes, always. not submitted at SKAT’s request. The important that the transfer pricing penalty can be reduced by 50 percent if documentation can operate on a stand- Does the tax authority have other the required materials are subsequently alone basis with respect to the facts and preferences in benchmarking? If prepared. On top of this, SKAT can conditions, and that the documentation so, please describe. also impose penalties relating to fulfils the statutory documentation Not applicable. adjustments. Such penalties are requirements. SKAT continues to focus calculated as an amount corresponding on loss-making companies and business What level of interaction do tax to up to 10 percent of an income restructurings, in particular the outbound authorities have with customs increase. If the applied transfer prices transfer of intangible assets. Financial authorities? are considered to constitute tax evasion, transactions are also increasingly subject Low, but the level is expected to the penalty can be significantly higher. to scrutiny. Furthermore, BEPS has had increase going forward. and is expected to continue to have a To what extent are transfer pricing major impact on SKAT’s approach to Are there limitations on penalties enforced? transfer pricing in general and transfer deductibility of management fees SKAT enforces the transfer pricing pricing audits involving BEPS related beyond the arm’s length principle? penalties more frequently. SKAT can issues in particular. Yes, some. For a company to be allowed apply the penalty regime starting with In addition to the increase in the total to deduct management fees, (i) the fees the income year 2009. number of transfer pricing audits, the must qualify as operating costs, i.e. What defenses are available with number of transfer pricing audits that the costs must relate to the company respect to penalties? actually result in proposed income acquiring, securing and maintaining adjustments remain at a historically taxable income, see section 6 of the The penalty of DKK250,000 high level in Denmark. In 2014, SKAT Danish State Tax Act (statsskatteloven); (approximately EUR35,000) for completed 76 transfer pricing audits (ii) no shareholder costs may be not preparing the transfer pricing resulting in proposed transfer pricing included in the management fees; (iii) documentation in the first place can adjustments of DKK20 billion, compared the services rendered must provide an be reduced if the documentation is to 77 audits resulting in proposed actual and documented benefit to the subsequently submitted. Penalties can adjustments of DKK17.4 billion in 2013.

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 72 | Global Transfer Pricing Review recipient; and (iv) the company must When may a taxpayer submit an have taxable income. adjustment to competent authority? Are management fees subject to After the taxpayer has been notified of withholding? the proposed adjustment. The taxpayer must submit an adjustment to SKAT no No. later than six months after notification. Are there limitations on the May a taxpayer go to competent deductibility of royalties beyond authority before paying tax? the arm’s length principle? Permitted. No. Are royalties subject to Advance pricing withholding? agreements Yes. What APA options are available, Are taxpayers allowed to file tax if any? return numbers that differ from Unilateral, bilateral, multilateral. book numbers? Is there a filing fee for APAs? Yes, provided that the transfer pricing adjustments are in accordance with the Yes. Currently, there is no filing fee for arm’s length principle and supported bilateral and multilateral APAs. There is by written agreements. Adjustments a filing fee of DKK400 (approximately must be presented in the transfer EUR50) for a binding advance pricing documentation as well as the assessment notice/unilateral APA. tax return. Does the tax authority publish APA Other unique attributes? data either in the form of an annual report or through the disclosure of No. data in public forums? Tax treaty/double tax Yes. resolution Are there any difficulties or limitations on the availability or What is the extent of the double tax effectiveness of APAs? treaty network? No. SKAT has quite substantial Extensive. experience in negotiating APAs and has If extensive, is the competent concluded several APAs as sufficient authority effective in obtaining resources have been provided. For double tax relief? example, in 2011, Denmark was the Almost always. first European country to enter into a bilateral APA with China.

KPMG in Denmark

Henrik Lund Tel: +45 5374 7066 Email: [email protected]

Simon Schaadt Tel: +45 5374 7044 Email: [email protected]

Martin Nielsen Tel: +45 5374 7055 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Dominican Republic

KPMG observation

Taxation in the Dominican Republic is governed by Law No. 11–92, which is commonly known as the Dominican Tax Code (“DTC”). The Dominican transfer pricing legislation is mainly set forth in Article 281 of the DTC. The DTC was amended extensively by Law 253–12 which, among other things, strengthened the collection powers of the State. Following the enactment and approval of Law 253–12, Article 281 of the DTC requires that all companies, regardless of their corporative structure, provide information to the tax authorities on their commercial or financial intercompany operations, to the extent these operations involve: (i) an associated resident; or (ii) individuals or entities incorporated or located in Special Fiscal Regimes. Unless specifically excluded or exempt, every transaction concluded between associated parties should be subject to a transfer pricing analysis. Even though the transfer pricing legislation is relatively new in the Dominican Republic, these rules are based on international guidelines. The Dominican tax authorities sought advice from different tax authorities in the region and the legislation includes some additional issues that are common in practice but not previously addressed by the transfer pricing legislation in other countries, including, but not limited to: • the use of multiple years of financial information of the tested party • the use of adjustments for accounts receivable, accounts payable, inventory, and property, plant, and equipment (PP&E); and • the definition of a related party includes the use of an exclusive agent, distributor, or dealer for the sale of goods, services, or rights, where the contracts for such arrangement contain ‘preferential’ terms. Based on informal conversations with the Dominican tax authorities, and as evidenced from the requests of transfer pricing information returns (referred to “DIOR”), the tax authorities will aggressively continue to look at transfer pricing as a source of tax revenue. Accordingly, companies must be ready to defend their transfer prices and file their DIOR.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information jurisdictions or tax havens or related What is the statute of limitations parties benefiting from the Free Trade Tax authority name on assessment of transfer pricing Zone Regime. adjustments? Dirección General de Impuestos As a result of the Tax Reform effective Three years from the filing date of Internos (DGII). 10 November 2012, taxpayers must the tax return, if the taxpayer filed the Citation for transfer pricing rules document the arm’s length nature return, or five years if no tax return • Taxation in the Dominican Republic of their intercompany transactions, was filed. regardless of the ownership structure is governed by Law No. 11–92 Transfer pricing commonly known as the Dominican of the organization. Taxpayers must Tax Code (“DTC”), its amendments document any commercial or financial disclosure overview operations with: and regulations. Are disclosures related to transfer • Article 281 of DTC - Validity of Legal • a related party pricing required to be submitted to Acts Between Associated Taxpayers. • individuals or legal entities domiciled, the revenue authority on an annual basis (e.g. with the tax return)? • General Standard 04–2011 – incorporated or based in countries or Transfer Pricing Rules Applicable territories with preferential, nil or low Yes. All companies must submit the to Transactions Between Related tax regime or tax havens, regardless Informative Return for Transactions Parties (the rules). of its composition as related parties. with Related Parties (DIOR). This Therefore, every transaction made informative return must be filed annually • Law No. 253–12 concerning the electronically, no later than 60 days after strengthening of the collection ability between related parties is subject to a transfer pricing analysis. the deadline for filing the corporate and revenue capacity of the State income tax return. for the Fiscal and Development Parties are deemed to be related: Sustainability (hereinafter the Tax The deadline for filing the Corporate • when one directly or indirectly Reform), introduced significant Income Tax return is 120 days after the participates in the management, changes to the scope and application fiscal closing date. control or capital of the other. (For of Article 281 of the DTC with management: when one party What types of transfer pricing reference to “Related Party occupies a position of senior information must be disclosed? Transactions.” management in both companies. For Examples of transfer pricing information Effective date of transfer pricing control or capital: having an interest that must be disclosed includes but is rules of at least 50 percent of the capital or not limited to: voting control) Transfer pricing documentation • related parties with which the requirements started for fiscal years • when one of the parties is a resident transactions were performed ended on 31 March 2011. It is important in the country has permanent • type of transaction to note that in the Dominican Republic, establishments abroad taxable years may end only on any of the • amount of the transaction • when a permanent establishment following dates: in the country has its headquarters • documentation supporting the • 31 March abroad transaction, as well as the methodology used to support the arm’s length nature • 30 June • when one of the parties enjoys of the transaction; and • 30 September; and exclusive agent, distributor or dealer status for the sale of goods, services • number of the invoice or document • 31 December. or rights that contains the transaction with What is the relationship threshold related parties. • when one of the parties agrees to for transfer pricing rules to apply What are the consequences of contractual terms with ‘preferred’ between parties? failure to submit disclosures? conditions For the taxable years ended between If a taxpayer does not file the • when one of the parties assumes 31 March 2011 and 30 September 2012, DIOR, or provide the Dominican Tax responsibility for any loss or expense the transfer pricing documentation authorities with a transfer pricing of the other requirements were only applicable to study when requested, then a fine local companies where their foreign • when one of the parties receives or of 85,000 Dominican Republic Pesos capital was greater than 50 percent of transfers 50 percent or more of its (DOP) to DOP154,740 is applicable their total share capital and conducted production to another company; and (approximately from 2,000 US dollars related party transactions with: (USD) to USD4,000). • when a company or business is a • foreign related parties; and decision unit, or when a company is a Other penalties may apply, such as ‘partner’ of another company. generated interest and late penalties, • individuals, companies or for the income generated under corporations domiciled in low tax

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Dominican Republic | 75 intercompany transactions not complying procedures. Also, taxpayers may appeal Does the tax authority have other with the arm’s length principle. to tax court. preferences in benchmarking? If so, please describe. If an adjustment is sustained, can Transfer pricing study penalties be assessed? If so, what No experience or knowledge. rates are applied and under what overview What level of interaction do tax conditions? Can documentation be filed in authorities have with customs a language other than the local Yes. However, since the transfer pricing authorities? language? If yes, which ones? regulations are new in the Dominican High level, but not seen for transfer Republic, there is no practical No. pricing, since the legislation came into experience on how the authorities will force in June 2011. When a transfer pricing study is act or interpret its application. prepared, should its content follow Are there limitations on However, general tax penalties, interest Chapter V of the Organisation deductibility of management fees and surcharges will apply (interest for Economic Co-operation and beyond the arm’s length principle? 1.73 percent monthly and surcharges Development (OECD) Guidelines? 10 percent the first month, then four No. There are no limitations. Yes. However, a transaction-by- percent on each subsequent month) on Are management fees subject to transaction analysis must be conducted. the adjustment. withholding? Does the tax authority require an To what extent are transfer pricing Yes. advisor/tax practitioner to have penalties enforced? specific designation in order to Are there limitations on the No experience to date, since legislation prepare or submit a transfer deductibility of royalties beyond only came into force in June 2011. pricing study? the arm’s length principle? What defenses are available with No. No. There are no limitations. respect to penalties? Are royalties subject to Same as for tax adjustments, for Transfer pricing methods withholding? example, documentation, negotiations. Does your country follow the Yes. transfer pricing methods outlined in What trends are being observed Chapter II of the OECD Guidelines? currently? Are taxpayers allowed to file tax If exceptions apply, please describe. return numbers that differ from No experience to date, since legislation book numbers? Yes. only came into force in June 2011. Yes, the tax return amounts are based Special considerations on the DTC while the book numbers Transfer pricing audit are generally based on accounting and penalties Are secret comparables used by principles, which may differ. When the tax authority requests tax authorities? Other unique attributes? a taxpayer’s transfer pricing No. documentation, are there timing None. Is there a preference, or requirement, requirements for a taxpayer to by the tax authorities for local submit its documentation? And if comparables in a benchmarking set? Tax treaty/double tax so, how many days? No experience to date, since legislation resolution No. only came into force in June 2011. What is the extent of the double tax When the tax authority requests However, due to the limited number of treaty network? a taxpayer’s transfer pricing local comparables DGII has indicated Minimal, only with Canada and Spain. documentation, are there timing foreign comparables will be accepted. requirements for a taxpayer to If extensive, is the competent Do tax authorities have requirements submit its documentation? Please authority effective in obtaining or preferences regarding databases explain. double tax relief? for comparables? The law does not indicate a time frame. No experience to date. No experience to date, since legislation If an adjustment is proposed by only came into force in June 2011. When may a taxpayer submit an the tax authority, what dispute adjustment to competent authority? Does the tax authority generally resolution options are available? focus on the interquartile range in a No experience to date. Yes, taxpayers can submit the resolution TNMM analysis? to an administrative area within Yes, always. the DGII, in order to object to the

May a taxpayer go to competent authority before paying tax? No experience to date. Advance pricing agreements What APA options are available, if any? Unilateral. Is there a filing fee for APAs? No. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? Not applicable. No current information due to the fact the transfer pricing regulations have been recently established.

KPMG in Dominican Republic

Marco Banuelos Tel: +1 809 262 9104 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Ecuador

KPMG observation

On 27 May 2015, the Ecuadorian Tax Authority published the resolution No. NAC-DGERCGC15-00000455 on transfer pricing, which establishes new content requirements for taxpayers’ transfer pricing studies. The following is a summary of the main changes: • A study should no longer consider arrangements with an independent party that accounts for over 50 percent of total purchases and sales. In addition, domestic related parties do not need to be considered, provided that they meet certain conditions. • The transfer pricing filing requirements and associated thresholds for a taxpayer are: – OPR Annex, if operations with related parties exceed 3 million US dollars (USD) – Transfer Pricing Report, if operations with related parties exceed USD15 million. • In relation to a taxpayer’s economic analysis, only the current tax year should be considered for identifying comparable companies. • For tax year 2015 only, the filing date for transfer pricing disclosures (OPR Annex and Transfer Pricing Report) is in September. Thereafter, the filing date will be in June.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold indistinctly, directly or indirectly in the management, administration, control Tax authority name for transfer pricing rules to apply between parties? or capital of such parties Servicio de Rentas Internas (SRI). The following, among others, are • the parties in which the decisions are Citation for transfer pricing rules considered related parties: made by governing entities consisting of mostly the same members Resolution of the SRI No. NAC- • the head office and its subsidiaries, DGERCGC15-00000455 of 27 May 2015. affiliates or permanent establishments • the parties in which the same member group, partner or stockholder, Effective date of transfer pricing • the branches, subsidiaries or participate indistinctly, directly or rules permanent establishment among them indirectly in the administration, 1 January 2005. • the parties in which the same management, control or capital of natural person or society, participate these

• members of governing bodies of the Transfer pricing disclosure Does the tax authority require an companies in respect of the same, as advisor/tax practitioner to have long as it is established among them overview specific designation in order to that those relations are non-inherent to Are disclosures related to transfer prepare or submit a transfer pricing their position pricing required to be submitted to study? the revenue authority on an annual • the administrators and commissioners basis (e.g. with the tax return)? No. of the society in respect of the same, as long as it is established among them Yes. Taxpayers who have cross-border Transfer pricing methods that relations are non-inherent to its or domestic transactions with related position parties, for an accumulated amount Does your country follow the exceeding USD3 million during the fiscal transfer pricing methods outlined in • a society in respect of the spouse year under analysis, must prepare and Chapter II of the OECD Guidelines? and relatives until the fourth submit to the tax administration a Transfer If exceptions apply, please describe. degree of blood relation, or second Pricing annex. If the accumulated amount Yes, with some exceptions. In import and degree of affinity of the executives, exceeds USD15 million during the fiscal export transactions involving products administrators, or commissioners of year under analysis, the taxpayer must traded on transparent markets, stock the society instead prepare and submit both a transfer markets or the like, there is a presumption • a natural person or society, and trusts in pricing annex and transfer pricing report. that prices on such markets would be which they have rights What types of transfer pricing used in comparable uncontrolled price • when a natural person or society is a information must be disclosed? (CUP) analysis, except where it could direct or indirect holder of 25 percent be shown they are not appropriate. The following information must be This also applies to imports and exports or more of the social capital or equity disclosed: capital in another society transactions involving brokers. • taxpayers must include in their annual • the societies in which the same income tax return the total amount Transfer pricing audit and partners, stockholders or their of transactions performed with spouses/husbands or their relatives related parties abroad differentiated penalties until the fourth degree of blood relation between tax haven and other regimes When the tax authority requests or second degree of affinity participate disaggregated as follows: assets, a taxpayer’s transfer pricing directly or indirectly in at least liabilities, income, and expenses documentation, are there timing 25 percent of the social capital, or own requirements for a taxpayer to funds or have commercial transaction, • in addition, the amount of transactions submit its documentation? And if provide services or are in a dependent with local (under certain conditions) so, how many days? relationship and foreign related parties must be included in the compliance tax report Yes, 60 days. • when a natural person or a company is that is submitted to the tax authorities When the tax authority requests a direct or indirect holder of 25 percent a taxpayer’s transfer pricing or more from the common stock or • transfer pricing report documentation, are there timing own funding in two or more companies • transfer pricing annex. requirements for a taxpayer to submit • when a natural person or a society, What are the consequences of its documentation? Please explain. whether domiciled or not in Ecuador, failure to submit disclosures? Normal practice is to expect performs 50 percent or more of its documentation within two months sales or purchases of goods, services If the taxpayer does not submit either a upon request. or another type of operations, with transfer pricing annex or a transfer pricing a natural person or society, whether report, the Internal Tax Regulations state If an adjustment is proposed by domiciled or not in the country. that a penalty of USD15,000 will be the tax authority, what dispute assessed. resolution options are available? The tax authority may presume there is a relationship between the parties when Yes, a taxpayer may challenge the their transactions do not follow the arm’s Transfer pricing study adjustment in the respective fiscal court. length principle. Related parties are overview If an adjustment is sustained, can also considered to include those parties Can documentation be filed in penalties be assessed? If so, what carrying on transactions with companies a language other than the local rates are applied and under what located in low-tax jurisdictions or tax language? If yes, which ones? conditions? havens. No. Yes, but the calculation for assessment is What is the statute of limitations not known. on assessment of transfer pricing When a transfer pricing study is adjustments? prepared, should its content follow To what extent are transfer pricing Chapter V of the Organisation penalties enforced? The SRI can determine transfer pricing for Economic Co-operation and adjustments up to three years from the Development (OECD) Guidelines? Penalties are frequently enforced to the return date. extent that there is no submission, or Yes, for all transactions. incorrect or missing.

What defenses are available with existence of the economic substance and When may a taxpayer submit an respect to penalties? clear confirmation that the service was adjustment to competent authority? provided. The only defense available is to have This depends on the timeframe allowed proper documentation of the transactions Are management fees subject to by the tax treaty. performed. withholding? May a taxpayer go to competent What trends are being observed Yes. authority before paying tax? currently? Are there limitations on the No. Since the transfer pricing regime came deductibility of royalties beyond the into force, the tax authority has primarily arm’s length principle? Advance pricing focused on controlled transactions of Yes. An analysis for royalties should be international business groups. agreements made through the CUP method which is What APA options are available, based on a contract. The SRI challenges if any? Special considerations the rate for assessing the operation. Unilateral. Are secret comparables used by tax Are royalties subject to authorities? withholding? Is there a filing fee for APAs? Yes. Yes. Not applicable. Is there a preference, or Are taxpayers allowed to file tax Does the tax authority publish APA requirement, by the tax authorities return numbers that differ from data either in the form of an annual for local comparables in a book numbers? report or through the disclosure of benchmarking set? data in public forums? No. No, due to the lack of local information. No. Other unique attributes? Do tax authorities have Are there any difficulties or Safe harbor – taxpayers that carry out requirements or preferences limitations on the availability or operations with related parties will be regarding databases for effectiveness of APAs? comparables? exempt from the application of the transfer pricing regulations provided that: Not applicable. Local regulations allows No, the tax administration uses Compustat taxpayer to negotiate an APA with the tax • the tax incurred is greater than North America and global databases but authorities, nevertheless the tax authority three percent of total taxable income it is not required in practice because other haven’t provided any guidelines to the databases can also be used. • they do not carry out operations with taxpayer for their practical application. Due Does the tax authority generally residents in tax havens or preferential to the lack of guidelines, taxpayers haven’t focus on the interquartile range in a tax regimes relied on APAs. TNMM analysis? • they do not maintain an agreement Yes, sometimes. with the State for exploration or exploitation of non-renewable Does the tax authority have other resources. preferences in benchmarking? If so, please describe. Additionally, regulations allow the tax authority to use secret comparables for The Tax Authority can challenge the the establishment of the arm’s length methodology used in each operation. principle. The tax authority could use all What level of interaction do tax of its information, as well as from third authorities have with customs parties, as set forth in the tax code and the authorities? LRTI. High, since customs provide information Tax treaty/double tax to the SRI when it is required by this KPMG in Ecuador organization. resolution Are there limitations on What is the extent of the double tax Gino A. Erazo deductibility of management fees treaty network? Tel: +59342290698 Email:[email protected] beyond the arm’s length principle? Extensive. Yes. Provided the fees are used to obtain, If extensive, is the competent Gabriela Cervantes maintain, and improve income of an authority effective in obtaining Tel: +59342290698 Ecuadorian source. Additionally, and with double tax relief? Email:[email protected] the purpose of ensuring the expense deductibility, the SRI demands the Frequently. As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Egypt

KPMG observation

Transfer pricing is now one of the most important topics for the Egyptian Tax Authority. The Tax Authority issued the first of three planned parts of transfer pricing guidelines on 29 November 2010. The first part mainly discussed the basis of the arm’s length principle, the transfer pricing methods and the importance of documentation. This first part is generally consistent with the Organization for Economic Co-operation and Development (OECD) Guidelines. There has been no announcement from the Tax Authority regarding the date of issuing the remaining two parts of the guidelines. The Tax Authority has now established a unit for audit and inspect the related parties’ transactions and the fairness of their transactions’ pricing.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Applicable Not applicable contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • any two or more companies in which company has used for transactions with a third person possesses at least related parties in the annual tax return. Tax authority name 50 percent of the number or value of What types of transfer pricing Egyptian Tax Authority. the shares or voting rights in them. information must be disclosed? Citation for transfer pricing rules What is the statute of limitations The name of the related party, nature of on assessment of transfer pricing Tax law, the executive regulations, the transactions, amount of transactions adjustments? and OECD module if the methods and the transfer pricing method used. mentioned in the Executive regulations Five years from the filing date of the What are the consequences of are not applicable. corporate tax return (which is four failure to submit disclosures? Effective date of transfer months after the financial year-end). The tax return will be considered pricing rules Transfer pricing incomplete and the Tax Authority may 2005 refuse to accept it. disclosure overview What is the relationship threshold for transfer pricing rules to apply Are disclosures related to transfer Transfer pricing study between parties? pricing required to be submitted to the revenue authority on an annual overview • ownership of greater than 50 percent, basis (e.g. with the tax return)? Can documentation be filed in based on voting power or share capital a language other than the local Yes. It is a statutory requirement to language? If yes, which ones? • partnerships, the joint partners, and mention the transfer pricing method the silent partners therein No.

When a transfer pricing study is If an adjustment is sustained, can Are there limitations on prepared, should its content follow penalties be assessed? If so, what deductibility of management fees Chapter V of the Organisation rates are applied and under what beyond the arm’s length principle? for Economic Co-operation and conditions? Yes, such expenses should be only Development (OECD) Guidelines? There are no special penalties for for branches from their headquarters Not applicable. However, the first part transfer pricing adjustments. However, and within 10 percent of the branch of the Egyptian guidelines (the only part if the transfer pricing adjustment has taxable profits. issued to date) is consistent with the affected the taxable profits, then normal Are management fees subject to OECD Guidelines and therefore it is penalties and delay fines are imposed. withholding? suggested that Chapter V is followed. To what extent are transfer pricing Yes. Does the tax authority require an penalties enforced? advisor/tax practitioner to have Are there limitations on the Not applicable. specific designation in order deductibility of royalties beyond the to prepare or submit a transfer What defenses are available with arm’s length principle? pricing study? respect to penalties? Yes. Royalty is subject to withholding No. Not applicable. tax, however if the royalty has exceeded the arms’ length then it may not be What trends are being observed accepted as a legitimate tax expense for Transfer pricing methods currently? the corporate tax purposes. Does your country follow the Not applicable. transfer pricing methods outlined in Are royalties subject to Chapter II of the OECD Guidelines? withholding? Special considerations If exceptions apply, please describe. Yes. Are secret comparables used by tax Yes. authorities? Are taxpayers allowed to file tax return numbers that differ from Unknown. Transfer pricing audit book numbers? Is there a preference, or and penalties Yes. The common practice is that requirement, by the tax authorities When the tax authority requests transfer pricing adjustments are made at for local comparables in a a taxpayer’s transfer pricing the year- end within the annual income benchmarking set? documentation, are there timing tax return required to be filed by the requirements for a taxpayer to Unknown. However, there is no taxpayer. Egyptian- specific database available. submit its documentation? And if Other unique attributes? so, how many days? Do tax authorities have None. No, 45 days. requirements or preferences regarding databases for When the tax authority requests comparables? Tax treaty/double tax a taxpayer’s transfer pricing documentation, are there timing At this point of time, there is no public resolution requirements for a taxpayer database in Egypt that can be used for What is the extent of the double tax to submit its documentation? benchmarking. Therefore, there is no treaty network? Please explain. clear view on tax authority preferences. Extensive. There is no time frame stipulated in the Does the tax authority generally If extensive, is the competent law. However according to the practice focus on the interquartile range in a authority effective in obtaining documentation should be submitted TNMM analysis? double tax relief? during the tax audit period. Not applicable. Should be. If an adjustment is proposed by Does the tax authority have other the tax authority, what dispute When may a taxpayer submit an preferences in benchmarking? If so, adjustment to competent authority? resolution options are available? please describe. Yes. If a taxpayer disagrees with the During the five years after the Unknown. adjustment proposed by the Tax Authority, adjustment year, limited by the Tax the taxpayer may appeal to the Internal What level of interaction do tax Authority inspection. Committee. If not solved at the Internal authorities have with customs May a taxpayer go to competent Committee level, then the taxpayer may authorities? authority before paying tax? appeal to the High Committee. A formal Unknown. court action may be taken if not solved at No formal rules exist in this area. the level of the High Committee.

Advance pricing agreements What APA options are available, if any? Unilateral. Is there a filing fee for APAs? No. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? Not applicable. The Tax Authority has not yet issued any APAs, and it is unclear when the first will be issued.

KPMG in Egypt

Khaled Balbaa Tel: +202 3536 2211 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

El Salvador

KPMG observation

Transfer pricing rules were introduced into the Tax Code in El Salvador in 2010. The rules require Salvadorian taxpayers to document the arm’s length nature of intra-group transactions conducted with domestic and foreign related parties, or with companies resident in low tax jurisdictions. The regulations require taxpayers to produce transfer pricing documentation. Failure to comply with the arm’s length principle enables the Salvadorian tax authority to make adjustments and apply penalties.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information adjustment if the transactions are not What is the relationship threshold conducted in accordance with the Tax authority name for transfer pricing rules to apply arm’s length principle between parties? Ministerio de Hacienda de • Art. 199-B of the Tax Code – Definition Related parties are defined as follows: El Salvador – Dirección General de of arm’s length principle Impuestos Internos. • when one person or company directs • Art. 199-C of the Tax Code – Definition Citation for transfer pricing rules or controls the other, or holds, direct of Related Party or indirectly, at least 25 percent of its • Art. 62-A of the Tax Code • Art. 199-D of the Tax Code – capital stock or voting rights Determination of prices Comparability Analysis and • when five or fewer persons direct • Art. 124-A and Art. 147 e) of Adjustments; and or control both persons, or possess, the Tax Code – Transfer Pricing • Orientation Guide DG-001/2012. direct or indirectly, at least 25 percent Documentation Requirements of participation in the capital stock or Effective date of transfer voting rights of both persons • Art. 135 f) of the Tax Code – pricing rules Obligations of the Certified Public • when companies belong to the same Accountant (CPA) • 1 January 2010 unit or business group decision. • Art. 199-A of the Tax Code – Tax • Reform Art. 62-A of the Tax Code in Specifically, two companies are part authority power to determine July 2014 – Use Guides of OECD. of the same unit or business group

decision if one of them is a member than 50 percent a person domiciled What types of transfer pricing or participant of the other and it is in the country and its permanent information must be disclosed? related to it in any of the following establishment abroad The transfer pricing information return situations: • a permanent establishment located requires disclosing the following –– holds a majority of voting rights in the country and its parent company information. located abroad, another permanent –– has the power to appoint or establishment of the same or a Taxpayer’s information: remove the majority of the person associated with it; and • identification number members of the board of directors • taxpayers must also document • legal name; and the arm’s length nature of the –– can dispose, under agreements • fiscal year (start and end date of the transactions carried out with entities with other partners of the majority fiscal year). domiciled, incorporated, or located of the voting rights in countries, states or territories with Detail of the controlled transactions: –– has appointed only with its votes preferential tax regimes, low or no • legal name of the related parties the majority of the members of taxation jurisdictions, or tax havens. the board of directors; and Entities in preferential tax regimes, • tax identification number of the related party –– most members of the board of low or no taxation jurisdictions, or tax directors of the acquired company havens are those that meet any of the • specification if the company is are members or managers of following requirements: domiciled or not in El Salvador the board of directors of the –– entities that are not taxed abroad, • code of the country of residence of other company. those who compute income the related party • when two companies are part of each tax on income or net income or • relationship code (reason why the unit or business group decision in taxable, less than 80 percent of taxpayer in El Salvador and the related a third company, all companies will income tax that would be caused party are considered to be related be integrated into a decision unit or in El Salvador parties and why the intra-group business group –– those classified by the transaction is being documented) • it is also considered that a person Organisation for Economic • code of the transaction possess participation in the capital Co-operation and Development • amount of the transaction in US stock or voting rights, when the (OECD) and the Financial Action dollars (USD) ownership direct or indirect belongs Task Force. to the spouse or person What is the statute of limitations • specification if the determination of the market value took into account • connected by relationship in direct on assessment of transfer pricing the following comparability criteria: or collateral, by consanguinity to the adjustments? characteristics of the transactions, fourth degree or by affinity to the Three years from filing date of functional analysis, assets and second degree the tax return but transfer pricing risks, contractual terms, micro and • in a union of persons, company event documentation must be maintained for macro-economic situation, and or business cooperation contract 10 years. business strategies specifications or joint venture agreement, when if the transfer pricing adjustments any of the contractors or partners Transfer pricing included: payment term, freight and participates directly or indirectly in insurance; and more than 25 percent of the profit of disclosure overview • transfer pricing method used. the contract activities resulting from Are disclosures related to transfer the association pricing required to be submitted to What are the consequences of the revenue authority on an annual • a person resident in the country and failure to submit disclosures? basis (e.g. with the tax return)? an exclusive distributor or agency If the taxpayers in El Salvador fail thereof residing abroad Yes. Taxpayers are required to provide to comply with the requirement of specific information in the transfer • a distributor or exclusive agent preparing the transfer pricing study, pricing studies to be prepared by domiciled in the country of an entity tax authorities will conduct appropriate taxpayers resident in El Salvador domiciled abroad analysis to determine the arm’s length documenting the arm’s length nature nature of the intra-group transactions • a person domiciled in the country and of the domestic and cross-border and apply the appropriate adjustments. its supplier abroad, when the resident intra-group transactions. In addition, in the country make purchases, and taxpayers must file the transfer pricing the volume thereof represents more information return.

Transfer pricing study If an adjustment is sustained, can What level of interaction do tax penalties be assessed? If so, what authorities have with customs overview rates are applied and under what authorities? Can documentation be filed in conditions? a language other than the local Low. Yes. General tax penalties apply. language? If yes, which ones? Are there limitations on No. To what extent are transfer pricing deductibility of management fees penalties enforced? beyond the arm’s length principle? When a transfer pricing study is prepared, should its content follow Penalties are enforced in full by the Yes. Taxpayers must support the fact Chapter V of the Organisation Commissioner General and where a that intra-group services have been for Economic Co-operation and court process is preferred; the sanctions rendered before a deduction is taken. Development (OECD) Guidelines? imposed by the court would subsist. That is, taxpayers must demonstrate that the services: Yes, for all transactions. What defenses are available with respect to penalties? • were actually rendered Does the tax authority require an advisor/tax practitioner to have No experience yet. • provided a benefit to the taxpayer and specific designation in order What trends are being observed • were not duplicative services. to prepare or submit a transfer currently? If no support can be provided, then pricing study? The transfer pricing rules are fairly the tax authority will consider them No. recent and therefore there are no non-deductible. specific information about the target Are management fees subject to Transfer pricing methods of audits. However, according to the withholding? law, the tax authority may estimate the Does your country follow the Yes. transfer pricing methods outlined in taxable income if the prices or amounts Chapter II of the OECD Guidelines? of compensation do not comply with Are there limitations on the If exceptions apply, please describe. market value in accordance with the deductibility of royalties beyond the established methodology. arm’s length principle? Yes. Yes. Taxpayers must support the fact Special considerations that royalties have been rendered Transfer pricing audit Are secret comparables used by tax before a deduction is taken. That is, and penalties authorities? taxpayers must demonstrate that the When the tax authority requests No. royalties: a taxpayer’s transfer pricing • were actually rendered documentation, are there timing Is there a preference, or requirements for a taxpayer to requirement, by the tax authorities • provided a benefit to the taxpayer; submit its documentation? And if for local comparables in a and so, how many days? benchmarking set? • have appropriated documentation. Yes, 5 days. No. If no support can be provided, then When the tax authority requests Do tax authorities have the tax authority will consider them a taxpayer’s transfer pricing requirements or preferences non-deductible. documentation, are there timing regarding databases for Are royalties subject to requirements for a taxpayer comparables? withholding? to submit its documentation? No. Please explain. Yes. Does the tax authority generally In practice, the taxpayer has five Are taxpayers allowed to file tax focus on the interquartile range in a return numbers that differ from business days but can request a TNMM analysis? 20-day extension. book numbers? Yes, always. If an adjustment is proposed by Yes. However, it is important that the the tax authority, what dispute Does the tax authority have other year-end adjustments are accounted resolution options are available? preferences in benchmarking? If so, for before the end of the fiscal year please describe. to make sure tax and accounting Yes, taxpayers can submit the resolution figures are consistent. It is advisable Not applicable. to an administrative area within the to conduct periodic reviews in order to Ministry of Finance, in order to object to avoid significant year-end adjustments. the procedures. In addition, taxpayers may appeal to tax court.

Customs issues must also be taken Advance pricing into account. agreements Other unique attributes? What APA options are available, None. if any? None. Tax treaty/double tax Is there a filing fee for APAs? resolution Not applicable. What is the extent of the double tax treaty network? Does the tax authority publish APA data either in the form of an annual Minimal, only with Spain. report or through the disclosure of If extensive, is the competent data in public forums? authority effective in obtaining Not applicable. double tax relief? Are there any difficulties or Not applicable. limitations on the availability or When may a taxpayer submit an effectiveness of APAs? adjustment to competent authority? Not applicable. Not applicable. May a taxpayer go to competent authority before paying tax? Not applicable.

KPMG in El Salvador

Flor de María Jaime Tel: +503 2213 8415 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Estonia

KPMG observation

The Estonian tax authorities have paid more and more attention to transfer pricing issues in recent years. For example, intra-group financing transactions, especially loans granted/deposits made by Estonian taxpayers, have been under public discussions and now face challenges by the tax authorities as mechanisms for hidden profit distribution. In light of this, in Estonia, being prepared for a transfer pricing audit with proper transfer pricing documentation is of key importance to avoid tax liabilities. The Estonian Tax and Customs Board is closely following the OECD’s BEPS developments. The BEPS initiative is expected to begin to have an effect on the Estonian regulatory regime in 2016.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Thresholds Applicable Not applicable apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information regulations concerning related parties capital, total number of votes or rights in the Income Tax Act are effective from to the profits of the legal person Tax authority name 1 January 2011. • one person, together with other Eesti Maksu- ja Tolliamet (Estonian Tax What is the relationship threshold persons with whom the person and Customs Board). for transfer pricing rules to apply is associated, owns more than Citation for transfer pricing rules between parties? 50 percent of the share capital, total number of votes or rights to the General rules are established by According to the Estonian Income profits of a legal person the Income Tax Act. Organisation Tax Act, persons are considered to for Economic Co-operation and be associated if they have common • legal persons where more than Development (OECD) compliant economic interests or if one person has 50 percent of the share capital, total methods and pricing principles are dominant influence over the other. The number of votes or rights to the established with the Decree by the official translation of the legislations profits belong to one and the same Minister of Finance. defines associated persons as: person or associated persons Effective date of transfer pricing • spouses, cohabiters, direct blood or • persons who own more than rules collateral relatives 25 percent of the share capital, total number of votes or rights to the profits Current general rules are effective from • companies belonging to one group of one and the same legal person 1 January 2000. Amended rules together • legal person and natural person who • legal persons where all members of with documentation requirements are owns at least 10 percent of the share the management boards or the bodies effective from 1 January 2007. New

substituting for the management Does the tax authority require an What defenses are available with boards are the same persons advisor/tax practitioner to have respect to penalties? specific designation in order • employers and their employees, Documentation. employee’s spouses, cohabiters or to prepare or submit a transfer direct blood relatives pricing study? What trends are being observed currently? • a person is a member of the No. management or controlling body of a The number of audits covering transfer legal person, or the spouse or a direct Transfer pricing methods pricing issues is increasing. Recently, the tax authorities have put more blood relative of a member of the Does your country follow the management or controlling body. focus on the finance transactions transfer pricing methods outlined in between the taxpayer and its related Where ’legal person’ is broadly defined Chapter II of the OECD Guidelines? parties. Special focus is on loans as a company, ’natural person’ is an If exceptions apply, please describe. granted/deposits made by the Estonian individual, and ’person’ can be either a Yes. Not applicable. taxpayer to its related party. legal or natural person. Transfer pricing documentation in the What is the statute of limitations Transfer pricing audit and local language is highly preferred by the on assessment of transfer pricing tax authorities. adjustments? penalties When the tax authority requests Three years from the filing date of the a taxpayer’s transfer pricing Special considerations tax return. In the event of intentional documentation, are there timing Are secret comparables used by tax failure to pay or withholding an amount requirements for a taxpayer to authorities? of tax, the limitation period for making submit its documentation? And if No. an assessment of tax is five years. In so, how many days? Estonia, tax returns are submitted on a Is there a preference, or requirement, Yes, 60 days. monthly basis. by the tax authorities for local When the tax authority requests comparables in a benchmarking set? a taxpayer’s transfer pricing Transfer pricing Yes. Estonian comparables are documentation, are there timing disclosure overview preferred, but if not available, foreign requirements for a taxpayer to comparables are accepted. Are disclosures related to transfer submit its documentation? Please pricing required to be submitted to explain. Do tax authorities have requirements the revenue authority on an annual or preferences regarding databases The documentation must be submitted basis (e.g. with the tax return)? for comparables? within 60 days of the tax authorities’ No. request. No. What types of transfer pricing If an adjustment is proposed by Does the tax authority generally information must be disclosed? the tax authority, what dispute focus on the interquartile range in Not applicable. resolution options are available? a TNMM analysis? What are the consequences of Disputes are generally resolved Yes, sometimes. between taxpayers and the tax failure to submit disclosures? Does the tax authority have other authorities. If they fail to reach an preferences in benchmarking? If so, Not applicable. agreement, the taxpayer has the right to please describe. turn to administrative court. Not applicable. Transfer pricing study There is no tax arbitration institution or a overview special tax court in Estonia. What level of interaction do tax Can documentation be filed in authorities have with customs If an adjustment is sustained, can a language other than the local authorities? penalties be assessed? If so, what language? If yes, which ones? rates are applied and under what Unknown, but in Estonia, tax and Yes. Not specified. Studies in English conditions? customs authorities operate as one are generally accepted; however, institution. General rules are applicable, but there Estonian language is highly preferred and is no special penalty for transfer pricing. Are there limitations on translation into Estonian may be required. Thus, if the taxpayer fails to submit deductibility of management fees When a transfer pricing study is the documentation, a penalty up to beyond the arm’s length principle? 3,200 euros (EUR) may be imposed. prepared, should its content follow No. Chapter V of the Organisation To what extent are transfer pricing for Economic Co-operation and Are management fees subject to penalties enforced? Development (OECD) Guidelines? withholding? So far no penalties have been imposed. Yes, for all transactions. No.

Are there limitations on the May a taxpayer go to competent deductibility of royalties beyond the authority before paying tax? arm’s length principle? Yes, but no formal rules. No, if related to business. Are royalties subject to Advance pricing withholding? agreements Yes. What APA options are available, if any? Are taxpayers allowed to file tax return numbers that differ from None. book numbers? Is there a filing fee for APAs? Yes. Tax return numbers may be in Not applicable. different period than book entries (tax returns are filed monthly in Estonia). Does the tax authority publish APA data either in the form of an annual Other unique attributes? report or through the disclosure of None. data in public forums? Not applicable. Tax treaty/double tax Are there any difficulties or resolution limitations on the availability or What is the extent of the double tax effectiveness of APAs? treaty network? Not applicable. The double tax treaty network of Estonia is extensive, with 56 treaties altogether. If extensive, is the competent authority effective in obtaining double tax relief? Almost always. When may a taxpayer submit an adjustment to competent authority? No formal rules. Basically anytime within three years of the submission of the tax return on the adjusted period.

KPMG in Estonia Maike Leppik Tel: +372 66 76 803 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Fiji

KPMG observation

It has been three years since the official introduction of Fiji’s Transfer Pricing Regulations and Guidelines in 2012. Apart from the traditional related party transactional audits involving sales and purchases of goods and services, Fiji Revenue & Customs Authority (FRCA) has plans to also look into areas covering royalty and trademark payments as well as intra-group financing arrangements. Transactions involving other intangibles are also covered under the Guidelines. As also outlined in the Fiji Transfer Pricing Regulations and Guidelines, the FRCA endorses the positions outlined in the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and proposes to follow the OECD Guidelines in administering Fiji’s transfer pricing rules. Consequently, the Fiji Guidelines are supplemental to the OECD Guidelines. The OECD Guidelines should be referred to if more detail is required in relation to issues referred to herein (e.g. concept of tested party), or not included in the Fiji Guidelines at this stage (e.g. cost contribution arrangements and business restructuring). In this regard, FRCA has also indicated that they will issue additional Guidelines as the need arises. KPMG in Fiji observes that over the past few years, payment of significant amounts of intra- group charges has become a very contentious area in a number of multinational company audits, and many taxpayers have had to defend their positions. Sometimes such defense is hampered by a lack of documentation or evidence to support the arm‘s length nature of the changes.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Thresholds Required to be Submission to tax Applicable apply/exist contemporaneous authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Tax Act 1974 (the Act) which requires of Transfer Pricing Regulations 2012 taxpayers to determine and apply the applies to the acquisition and supply of Tax authority name arm’s length price for their transactions goods (including tangible and intangible Fiji Revenue & Customs Authority (FRCA). with an associated person. goods), services between associated persons and intra-group financing. Both Citation for transfer pricing rules Income Tax (Transfer Pricing) local and cross-border transactions Regulations 2012 (Transfer Pricing The arm’s length principle is set out are covered under Transfer Pricing Rules 2012) was gazetted under Vol under Section 34 of the Fijian Income Regulations 2012. 13 No.8 of January 2012. The scope

Effective date of transfer pricing rules When a transfer pricing study is Transfer pricing audit and prepared, should its content follow The Transfer Pricing Regulations became Chapter V of the Organisation penalties effective from 1 January 2012. Prior to for Economic Co-operation and When the tax authority requests this date, transfer pricing adjustments Development (OECD) Guidelines? a taxpayer’s transfer pricing were made based on the general anti- documentation, are there timing avoidance provision. Yes, for all transactions. The Transfer requirements for a taxpayer to Pricing Guidelines in 2012, specify What is the relationship threshold submit its documentation? And if that the following should be included: for transfer pricing rules to apply so, how many days? organizational structure, group between parties? financial report, nature of the business/ Yes, 21 days. There is no specific threshold being industry and market conditions, When the tax authority requests outlined in the Transfer Pricing Regulations controlled transactions, pricing policies, a taxpayer’s transfer pricing or Guidelines. However, the arm’s length assumption, strategies and information documentation, are there timing principle is fundamental to transfer pricing regarding factors that influenced the requirements for a taxpayer to and requires that transactions between setting of pricing policies, comparability, submit its documentation? Please associated parties are to be conducted functional and risk analysis, selection explain. at arm’s length. As previously stated, this and application of the transfer pricing means that the transaction should have method. At this stage, the time frame the substantive financial characteristics requirement is not clear. However, in It is to be noted that in Fiji, there is a of a transaction between independent most situations, the normal demand statutory requirement for the taxpayer parties where each aims to get optimum situations, documentation should be to “record, in writing, sufficient benefit from the transaction. made available to FRCA within 21– information and analysis to verify that its 30 days from the date of request. What is the statute of limitations controlled transactions are consistent on assessment of transfer pricing with the arm’s length principle”. If an adjustment is proposed by adjustments? the tax authority, what dispute It is also noted that the documentation resolution options are available? The statute of limitation is six years must be contemporaneous and must upon the expiration of a particular year be in place prior to the due date for filing The dispute resolution option available of assessment, except in cases of the relevant tax return. to taxpayers, apart from the competent fraud, willful default, or negligence. Fiji authority process, is to appeal through From a practical perspective, this means is currently in year of assessment 2012. the judicial system. In Fiji, the first level the taxpayer must prepare and maintain For example, in year of assessment of appeal is generally to the Tax Tribunal. such documentation as is reasonable 2012, an assessment can be issued as in the circumstances. Therefore it is If an adjustment is sustained, can far back as year of assessment 2006. being emphasized that it is up to local penalties be assessed? If so, what management of the Fiji tax office to rates are applied and under what Transfer pricing determine documentation requirements conditions? disclosure overview in view of the nature of the relevant Where an adjustment is sustained, the Are disclosures related to transfer transactions. Commissioner may assess penalties pricing required to be submitted to Does the tax authority require an for omission of income. Penalty rates the revenue authority on an annual advisor/tax practitioner to have range from 20 percent to 75 percent basis (e.g. with the tax return)? specific designation in order calculated on the tax shortfall. The rate of 75 percent applies where the income No. to prepare or submit a transfer pricing study? is knowingly or recklessly omitted, What types of transfer pricing and in any other case the 20 percent information must be disclosed? No. applies. In addition, penalties for late filing (20 percent) and/or late payment Not applicable. Transfer pricing methods (25 percent) may also apply depending What are the consequences of Does your country follow the on the circumstances. failure to submit disclosures? transfer pricing methods outlined in To what extent are transfer pricing Not applicable. Chapter II of the OECD Guidelines? penalties enforced? If exceptions apply, please describe. Based on limited known transfer Transfer pricing study Yes. pricing cases to date, it appears that overview penalties are generally enforced, unless the taxpayer makes a voluntary Can documentation be filed in disclosure of tax shortfall before the a language other than the local commencement of any tax audits. language? If yes, which ones? No, must be in English.

What defenses are available with Do tax authorities have Are there limitations on the respect to penalties? requirements or preferences deductibility of royalties beyond the regarding databases for arm’s length principle? The availability of a local comparables? contemporaneous transfer pricing Yes. Deductions beyond the arm’s documentation will assist taxpayers At the present, there are no good length principle may be denied. to appeal for a lower penalty rate. In quality commercial databases for local Are royalties subject to addition, if the taxpayer has acted in companies. withholding? good faith and extended full cooperation Does the tax authority generally during the tax audit, FRCA will also take Yes. focus on the interquartile range in these factors into account. a TNMM analysis? Are taxpayers allowed to file tax What trends are being observed return numbers that differ from No. currently? book numbers? Does the tax authority have other Transfer pricing audits started in 2012 No. Book numbers form the basis for preferences in benchmarking? If so, and it is expected to intensify and will tax returns and year-end adjustments please describe. continue to intensify in future. In addition are permitted to ensure that the arm’s to the usual focus on transactions This is unknown at this time. length principle is upheld. These must be disclosed to allow reconciliation involving sales and purchases of What level of interaction do tax between book numbers and tax return goods, the Fijian tax authorities are also authorities have with customs numbers. increasing their scrutiny on payments for authorities? intra-group services as well as looking Other unique attributes? into intra-group financing arrangements Presently low. However, after the and payments in relation to intangible merger of the two departments in 1998, None. properties. there has been a vast improvement in enforcement measures enhanced In most cases, common audit triggers Tax treaty/double tax through the implementation of include companies declaring consistent integrated operations with other relevant resolution losses, fluctuating profitability or those agencies. It is expected that there will What is the extent of the double tax making very low profits. Companies be an increase in the level of interaction treaty network? with significant amounts of related party between the two divisions in future. transactions, especially payments for Limited. Fiji has signed double tax intra-group services and companies that Are there limitations on treaties with nine countries. underwent supply chain or business deductibility of management fees If extensive, is the competent restructuring, are also likely to be beyond the arm’s length principle? authority effective in obtaining selected for a tax audit. Yes, some. Deductions beyond the double tax relief? arm’s length principle may be denied. Not applicable. Special considerations Provided that the following criteria have Are secret comparables used by tax When may a taxpayer submit an been met it is less likely for a deduction adjustment to competent authority? authorities? to be denied: From an international practice Yes. Based on other international • a service has been provided industry information available to FRCA. perspective, taxpayers may initiate a • the charge should meet the arm’s mutual agreement procedure if there Is there a preference, or length standard. is a risk of double taxation and there requirement, by the tax authorities is a treaty agreement with the foreign The key focus is a realistic allocation, for local comparables in a counterparty. In most cases, this is after not accounting perfection and FRCA benchmarking set? being issued the Notice of Additional is looking for a fair charge for the Assessment. However, in Fiji’s situation, Yes. It is a preference of the Fijian tax services provided and a reasonable this will need to be clarified with the authority to use local companies as effort into establishing a basis for future local tax authority. comparables. Only in cases where no calculations. local comparable could be identified is the May a taxpayer go to competent Are management fees subject to use of foreign comparable companies in a authority before paying tax? benchmarking analysis an option. withholding? KPMG in Fiji expects so, but needs Yes. further clarification from FRCA.

Advance pricing agreements What APA options are available, if any? None. Is there a filing fee for APAs? Not applicable. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? Not applicable. Are there any difficulties or limitations on the availability or effectiveness of APAs? Not applicable.

KPMG in Fiji

Lisa Apted Tel: +679 3301155 Email: [email protected] Annie Yuen Tel: +679 3301155 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Finland

KPMG observation

The Finnish tax authority continues to pay attention to transfer pricing matters and audit activity has remained high. From the beginning of 2015, the formerly temporary transfer pricing project has been established as a permanent body of the Large Taxpayers’ Office. In addition, the Finnish tax authority has announced plans to develop its auditing of taxpayers’ transfer pricing into a more real time and proactive process.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Thresholds Applicable apply/exits

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • direct or indirect ownership of more What types of transfer pricing than 50 percent of the voting power information must be disclosed? Tax authority name • direct or indirect right to choose over All companies must disclose whether Konserniverokeskus (KOVE, Large half of the members of the board or they are obliged to prepare transfer Taxpayers’ Office). members of other corresponding pricing documentation. Entities that Citation for transfer pricing rules body; and are required to prepare transfer pricing Sections 14 a-c, 31, and 32 of the • other control. documentation under Section 14a of Taxation Procedure Act. the Taxation Procedure Act are required What is the statute of limitations to file a specific tax form detailing Effective date of transfer pricing on assessment of transfer pricing the main functions of the entity, rules adjustments? profitability of the entity and the group The arm’s length principle was Five years from tax year-end. it belongs to, and its related party implemented in 1965. The transfer transaction volumes during the tax year pricing documentation requirements Transfer pricing by transaction type. came into force on 1 January 2007. disclosure overview What are the consequences of failure to submit disclosures? What is the relationship threshold Are disclosures related to transfer for transfer pricing rules to apply pricing required to be submitted to Small penalty fees are possible. The between parties? the revenue authority on an annual tax form is mainly for information A company controls another company basis (e.g. with the tax return)? collection and tax audit target selection purposes. if it has: Yes. Transfer pricing explanation form • direct or indirect ownership of more to be submitted together with the than 50 percent of the share capital corporate income tax return.

Transfer pricing study is needed, it has to be given within What trends are being observed 90 days. Despite of the time limits, the currently? overview tax authorities allow six months after The focus is on business restructurings, Can documentation be filed in end of fiscal year to respond to any intangibles and intra-group financing. a language other than the local requests to provide transfer pricing However, other transfer pricing issues language? If yes, which ones? documentation. also surface in audits. The audits are Yes. Finnish, Swedish, English. If an adjustment is proposed by focused on all industries. the tax authority, what dispute When a transfer pricing study is resolution options are available? prepared, should its content follow Special considerations Chapter V of the Organisation National appeal process to the Adjustment Are secret comparables used by tax for Economic Co-operation and Assessment Board with subsequent authorities? Development (OECD) Guidelines? possibilities to appeal to Administrative No. Court and Supreme Administrative Court. Yes, with some exceptions. The MAP process based on Double Tax Is there a preference, or documentation requirements are based Treaty or Arbitration process based on EU requirement, by the tax authorities on the Organisation for Economic Arbitration Convention. for local comparables in a and Co-operation Development benchmarking set? (OECD) Guidelines but the Finnish tax If an adjustment is sustained, can authorities have published more detailed penalties be assessed? If so, what No, European comparables are typically instructions on the different parts of rates are applied and under what accepted. transfer pricing documentations. If the conditions? Do tax authorities have transactions per counterparty amount Yes, a maximum penalty of EUR25,000 requirements or preferences to less than 500,000 euros (EUR) during per negligence may be imposed on regarding databases for the tax year, functional analysis and a company failing to show complete comparables? comparables analysis are not required. transfer pricing documentation. In There are no such requirements. Does the tax authority require an addition, a tax increase (maximum advisor/tax practitioner to have 30 percent of adjusted income) is Does the tax authority generally specific designation in order possible, according to the regulations focus on the interquartile range in a to prepare or submit a transfer on general tax penalties. Additionally, a TNMM analysis? pricing study? penalty interest will be collected for the Yes, always. taxes due. No. Does the tax authority have other To what extent are transfer pricing preferences in benchmarking? If so, penalties enforced? Transfer pricing methods please describe. More commonly than in the past. The Does your country follow the The Tax Authorities follow the OECD penalties relating to the submission transfer pricing methods outlined in Transfer Pricing Guidelines in this and quality of transfer pricing Chapter II of the OECD Guidelines? respect. If exceptions apply, please describe. documentation have not been used regularly but this is expected to What level of interaction do tax Yes. increase. The general tax penalty on authorities have with customs adjusted income has been imposed in authorities? almost all cases, usually in the range Transfer pricing audit and Low. penalties of five to ten percent of the adjusted income. However, the Supreme Are there limitations on When the tax authority requests Administrative Court held in a decision deductibility of management fees a taxpayer’s transfer pricing published in February 2014 that if the beyond the arm’s length principle? documentation, are there timing taxpayer can show that it has acted requirements for a taxpayer to No. in good faith and sought to comply submit its documentation? And if with the arm’s length principle with Are management fees subject to so, how many days? reasonable care, it is not as a rule withholding? Yes, 60 days. considered to have met the gross No. negligence standard as stipulated in When the tax authority requests the tax assessment procedure act. This Are there limitations on the a taxpayer’s transfer pricing means that no tax penalty or only minor deductibility of royalties beyond the documentation, are there timing (up to EUR800) penalties could be arm’s length principle? requirements for a taxpayer to imposed in reassessments per tax year. submit its documentation? Please No. explain. What defenses are available with Are royalties subject to respect to penalties? The transfer pricing documentation withholding? must be submitted within 60 days of Documentation, reasonable cause. Yes. the request. If any further clarification

Are taxpayers allowed to file tax incurred. Applicability of the limitations Does the tax authority publish APA return numbers that differ from does not require a purpose of tax data either in the form of an annual book numbers? avoidance. The intra-group loans should report or through the disclosure of always meet the requirements of arm’s data in public forums? Yes. Year-end adjustment are possible, length principle for the interests to be provided that they result in arm’s No. deductible. length pricing. Upward adjustments Are there any difficulties or can be made in the corporate income limitations on the availability or tax return, downward adjustments are Tax treaty/double tax effectiveness of APAs? allowed only if they have been made in resolution Not applicable. The Finnish tax the financial statements. What is the extent of the double tax authorities are in favor of APAs and it is Other unique attributes? treaty network? recommended especially for intra-group The interest limitation regulations Extensive. transactions with high values. However, are effective from 1 January 2014 If extensive, is the competent there are only few concluded APAs. onwards. Net interest expenses paid authority effective in obtaining There is currently no specific APA to affiliate companies are deductible up double tax relief? legislation in place. However, the to 25 percent of the taxpayer’s EBITDA APAs are possible based on the MAP (business profits before interest, Frequently. paragraph of the Double Tax Treaties. depreciations and group contributions When may a taxpayer submit an received, deducted with group adjustment to competent authority? contributions granted). After an adjustment is proposed to the Limitations are not applied if the total taxpayer. sum of net interest expenses does not exceed EUR500,000. Both the May a taxpayer go to competent external and intra-group net interest authority before paying tax? expenses are taken into consideration Yes. in calculating the threshold, but the limitations do not affect deductibility of interest expenses paid to entities Advance pricing others than affiliated companies. If the agreements equity ratio of Finnish group companies What APA options are available, are higher or equal to the equivalent if any? ratio of the entire group, the intra-group net interest expenses are deductible Unilateral, bilateral, multilateral. without limitations. Is there a filing fee for APAs? Non-deductible interest payments are Yes. No fees for APAs. For advance carried forward and can be deducted rulings (“unilateral APA”) the fee is in the following fiscal years without determined based on the complexity time limits, taking into account the of the case and actual time needed to same annual tax EBITDA limitations conclude the advance ruling, ranging as in the tax year of interest expenses from EUR1,480 to EUR2,200.

KPMG in Finland

Sanna Laaksonen Tel: + 358 20 760 3417 Email: [email protected] Mikko Palmu Tel: + 358 20 760 3405 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

France

KPMG observation

In 2010, the French government introduced documentation requirements which are now contained in tax administrative doctrine. While the full ramifications of this legislative change remain to be seen as part of tax audits, multinational enterprises operating in France have certainly taken note and geared up in putting together transfer pricing documentation packages addressing specific French issues. The French government is striving to implement regulations in line with the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative. In this respect, transparency has been strengthened by the obligation to include, in transfer pricing documentation reports, rulings awarded to related parties by foreign tax authorities, even without direct link to transfer prices. In addition, penalties were also strengthened in the case of absent or incomplete transfer pricing documentation reports. Collection of transfer pricing data has also been reinforced in 2014 by the introduction of a compulsory annual submission of an abridged transfer pricing form. A limitation of base erosion has also been implemented via a limit on interest deduction. In addition to the various transparency measures, a regularization procedure was also implemented, allowing the French Tax Authorities (“FTA”) to exempt withholding tax for “deemed dividends” (in relation to transfer pricing adjustments or payments made to recipients located in “tax haven”), under specific conditions (notably that the audited company accepts the reassessments and penalties). Over the next months, it is highly expected that the French transfer pricing legislation will be amended to reflect the BEPS recommendations (including different levels of documentation). Finally, the FTA are giving increased attention to, and making increased allegations of, permanent establishments (PEs). These PE cases have given rise to a number of search and seizures, gaining some of the public attention also present in other European countries in respect of similar issues. New legislation should reinforce existing investigative powers against multinational enterprises keeping records on servers located outside of France.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Thresholds Required to be Submission to tax Applicable apply/exist contemporaneous authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations transaction type and changes that on assessment of transfer pricing occurred during the last fiscal year). Tax authority name adjustments? What are the consequences of Direction des Vérifications Nationales Three years, based on calendar year end. failure to submit disclosures? et Internationales (DVNI) (National Three years also when the FTA uses the and International Audit Department) At the moment, there is no specific international administrative assistance for companies with a turnover higher penalty. As such, the general EUR150 fine procedure (LPF Article L 188A ). When than 152.4 million euros (EUR) (higher shall apply (CGI, Article 1729 B), plus a the FTA demonstrates the existence of than EUR76.2 million for service EUR15 penalty per inaccuracy or omission tax fraud, it can also extend the statute of providers), subsidiaries of such (with a minimum fine of EUR60 and a limitations from three to a maximum of companies, and headquarters. maximum up to EUR10,000). five years (LPF Article L 187). In the case Directions Interrégionales de Contrôle of tax loss carry forwards, the statute Fiscal (DIRCOFI) (Interregional Tax of limitation is extended under certain Transfer pricing study Audits Department) for companies with limits and conditions (in relation to the overview a turnover ranging from EUR1.5 million use of losses). Can documentation be filed in to EUR152.4 million (up to a language other than the local EUR76.2 million for service providers). Transfer pricing language? If yes, which ones? Directions des Services Fiscaux disclosure overview Yes, English. (DSF) (Departmental Tax Services Are disclosures related to transfer Departments) for small companies with When a transfer pricing study is pricing required to be submitted to turnover lower than EUR1.5 million. prepared, should its content follow the revenue authority on an annual Chapter V of the Organisation Citation for transfer pricing rules basis (e.g. with the tax return)? for Economic Co-operation and CGI (Code general des impôts or French Yes. For large taxpayers (falling under Development (OECD) Guidelines? General Tax Code), Articles 57, New the scope of CGI Article L 13AA) Yes, for all transactions. The transfer Article 223 quinquies B, 238A and 238- whose tax return filing deadline falls pricing study should include information OA, 1735 ter; LPF (Livre des Procédures after 8 December 2013 (CGI Article on the group of which the French Fiscales or French Manual of Tax 223 quinquies B), an abridged transfer taxpayer is a part (including but not Procedures), Articles L 13 AA, L 13 AB, pricing documentation must be limited to, general business overview, L 13 B, L 188A, L 80 B 7° (APA). submitted to the relevant tax office of general description of the legal and Effective date of transfer pricing the taxpayer within six months following operational group structure, general rules the corporate income tax return filing description of the functions performed deadline (in practice this is within nine and risks assumed by group entities that • transfer pricing regulation, 1933 (CGI months following the end of the fiscal transact with the audited company, list Article 57) year or 10 months for enterprises with of the main intangible assets owned • reversal of the burden of proof in fiscal years ending on 31 December). and/or used by the French entity, a certain audit situations, April 1996 What types of transfer pricing general description of the group’s (LPF Article L13 B) information must be disclosed? transfer pricing policy) and information on the French company itself (activities, • transfer pricing documentation The annual transfer pricing information functional analysis, intra-group requirement, 2010 (LPF Article return consists of a specific form (No transactions, list of cost sharing, Rulings L 13 AA and L 13 B with tax 2257-SD) to be filed by the taxpayer or Advance Pricing Agreements (APAs), administrative doctrine (Bofip BOI- in the French language. It includes selection of transfer pricing methods BIC- BASE-80-10-20) and penalties both general information on the group and description of comparables), as well (CGI Article 1735 ter) of associated enterprises (general as rulings awarded to related parties • transfer pricing annual disclosure description of the activity, list of by foreign tax authorities for transfer requirement, 2013 (CGI Article 223 intangibles assets owned by any group pricing documentation covering financial quinquies B). entity and used by the French taxpayer, years ending as from 1 January 2014 a description of the group’s transfer What is the relationship threshold (CGI, Article L13 AA). pricing policy and changes that occurred for transfer pricing rules to apply during the last fiscal year) and specific French entities that enter into between parties? information on the French taxpayer transactions with related companies Ownership of more than 50 percent (description of the activity, presentation located in ‘non-cooperative’ states or considered for companies to be under of intra-group transactions including territories will need to provide additional common control. De facto control can the nature and the amount when the information (balance sheet and profit also be applicable. aggregate amount per transaction type and loss account of those related exceeds EUR100,000, a presentation parties, CGI, Article L13 AB). of the transfer pricing policy per

Does the tax authority require an double tax treaty with France. European fact that the penalties for insufficient advisor/tax practitioner to have Arbitration Convention provisions are documentation may vary could open specific designation in order to also applicable (under the rules of this possibilities to have the degree of prepare or submit a transfer pricing Convention). insufficiencies, and hence of penalties, study? being revisited by French tax courts. If an adjustment is sustained, can No. penalties be assessed? If so, what What trends are being observed rates are applied and under what currently? conditions? Transfer pricing methods Recent audits have focused on Does your country follow the There are two types of penalties transfers of intangibles resulting transfer pricing methods outlined in potentially applicable: general, and from group reorganizations, financial Chapter II of the OECD Guidelines? transfer pricing-specific penalties. services (namely guarantee fees) and unidentified embedded transactions in If exceptions apply, please describe. General Penalties: General tax penalties complex services agreements. Yes. apply only in limited cases, and are assessed at a rate of 40 percent of There also seems to be a trend whereby the tax avoided in case of bad faith transfer pricing reassessments are Transfer pricing audit behavior (where the purpose was alternatively associated with permanent and penalties to pay no or less tax), or 80 percent establishment reassessments of When the tax authority requests of the tax avoided in case of acts of activities such as e-commerce, a taxpayer’s transfer pricing fraud can be payable, in addition to where the activities are not physically documentation, are there timing interest on late payments. Transfer performed on French territory but requirements for a taxpayer to Pricing-Specific Penalties: In the case utilize a client base situated there. The submit its documentation? And if of absent or incomplete transfer pricing obligation to include rulings awarded to so, how many days? documentation report for entities related parties by foreign tax authorities, falling within the ambit of LPF Article L even without direct link to transfer Yes, 30 days. 13AA (or for the other entities in case pricing, illustrates the strengthening of When the tax authority requests of absence or incomplete responses the FTA’s investigative powers. a taxpayer’s transfer pricing on transfer pricing matters), the The transfer pricing documentation documentation, are there timing minimum penalty is EUR10,000 but penalties connected to the transfer requirements for a taxpayer to can reach the higher of the following pricing documentation are likely to submit its documentation? Please amount: (i) 0.5 percent of the amount increase due to the new provisions explain. of related transactions covered by mentioned previously. the documentation which was not Normal FTA practice is to expect receipt submitted or considered as complete The new regularization procedure of the documentation within 30 days by FTA after the issue of the formal allowing the FTA to exempt ‘deemed of a request. When the FTA apply the notice requiring for these documents dividends’ from the 30 percent L 13 B procedure, the documentation (or responses), and (ii) 5 percent of the withholding tax and treat any associated should be provided within two months, transfer pricing reassessment. This profits as ‘illegally transferred’ under although a one month extension may be penalty system is applicable to all tax the transfer pricing regulations may granted upon request. audits whose audit notice is sent as result in significant decreases in cost of However, as previously mentioned, from 1 January 2015. tax audits focused on transfer pricing companies that fall within the remit of issues. However, the criteria required To what extent are transfer pricing Article L 13 AA (LPF) have 30 days to to obtain the benefit of this procedure penalties enforced? comply with a (written) request from are strict (notably, acceptance of the the FTA to provide transfer pricing The new penalty system is likely to reassessments and penalties proposed documentation, with possible additional increase the penalties effectively applied by the tax authorities and repatriation of 30 days delay upon specific request in cases of insufficient transfer pricing the funds “illegally transferred”). to FTA. Article L 13 AA (LPF) applies documentation, making it all the more for financial years starting on or after important for taxpayers to carefully Special considerations 1 January 2010. prepare transfer pricing support. Are secret comparables used by tax If an adjustment is proposed by What defenses are available with authorities? the tax authority, what dispute respect to penalties? resolution options are available? Yes, but only in specific situations The exact amount of the penalty and very rarely. Tax auditors use their Mutual Agreement Procedures (i.e. 0.5 percent or five percent, as knowledge of other cases they have may be implemented provided that described above) depends on the audited and may refer to industry the adjustments are in relation to level of insufficiencies in a taxpayer’s standards. However, such secret transactions entered into between the documentation. Although it has been comparables cannot be used in the French taxpayer and a related entity judged that tax penalties cannot be, in context of court cases. established in a country which has a general, revisited by the tax courts, the

Is there a preference, or Are there limitations on the When may a taxpayer submit an requirement, by the tax authorities deductibility of royalties beyond the adjustment to competent authority? for local comparables in a arm’s length principle? It depends on the double tax treaty benchmarking set? No. Royalties paid by a French company involved, but usually within three years Yes. FTA inspectors generally prefer are deductible for corporate tax after an adjustment leading to double French comparables, where available, purposes provided they remunerate an taxation is proposed by a tax authority. because of the consistency of the intangible asset effectively used and to May a taxpayer go to competent generally accepted accounting the extent the remuneration is arm’s authority before paying tax? principles (GAAP) used. length. Specific provisions related to royalties paid for patents and related Permitted. Nonetheless, automatic Do tax authorities have rights state that the French taxpayer postponement of tax collection does requirements or preferences shall only deduct the royalties to the not apply anymore to mutual agreement regarding databases for extent (i) the use of the right is actual procedures introduced as from comparables? and cannot be deemed as an artificial 1 January 2014 (LPF art 277). No specific requirements have been operation with the aim to avoid the officially requested. However, the FTA French tax legislation, and (ii) the use Advance pricing does make use of the French Diane of the right creates over the licensing database. period an added value. agreements What APA options are available, Does the tax authority generally Are royalties subject to if any? focus on the interquartile range in withholding? a TNMM analysis? Unilateral, bilateral, multilateral. Yes. Yes, sometimes. Is there a filing fee for APAs? Are taxpayers allowed to file tax Does the tax authority have other return numbers that differ from No. preferences in benchmarking? If so, book numbers? Does the tax authority publish APA please describe. No. Taxpayers must file tax return data either in the form of an annual Tax authorities prefer French numbers that are consistent with the report or through the disclosure of comparables but can accept book numbers. Specific computerized data in public forums? regional ones such as pan European accounting regulations strengthened No. benchmarks. the power of the FTA in case of tax audit Are there any difficulties or What level of interaction do tax to check the numbers booked by the taxpayers. Taxpayers need to maintain limitations on the availability or authorities have with customs effectiveness of APAs? authorities? a mandatory “file of accounting entries” (in accordance with technical No. The APA program is successful Low, but there is a trend toward characteristics provided by law). in France (at least 50 agreements increasing their interaction. Other unique attributes? were granted since the creation Are there limitations on of this program). On average, the deductibility of management fees Not applicable. FTA is reporting that it processes beyond the arm’s length principle? approximately 20 APAs per year. No. Management fees paid by a French Tax treaty/double tax company are deductible for corporate resolution tax purposes provided they meet the What is the extent of the double tax FIDAL in France* following tax deductibility conditions: treaty network? Nadia Sabin • the French entity must actually Extensive. France has concluded Tel: +33 1 55681738 benefit directly from the services approximately 120 double tax treaties. Email: [email protected] rendered (ensuring there is no A mandatory arbitration clause has been duplicate services or to the extent); introduced in the US – French double tax Kate Noakes and treaty and with all EU member states Tel: +33 1 55681657 Email: [email protected] • the amount charged (costs and except Denmark. relevant markup, if appropriate) to the If extensive, is the competent Olivier Kiet French company should be consistent authority effective in obtaining Tel: +33 1 55681615 with the services rendered and double tax relief? Email: [email protected] should not be excessive. The 2006–2013 OECD statistics in As email addresses and phone numbers Are management fees subject to respect of France’s mutual agreement change frequently, please email us at [email protected] if you are unable to withholding? procedure (covering approximately the contact us via the information noted above. 2000 to 2013 period) indicate that very No. *FIDAL International is a separate and few cases result in double taxation. independent law firm that works with KPMG member firms on a non-exclusive basis in relation to the provision of tax services in France.

Georgia

KPMG observation

The Tax Code of Georgia (TCG), effective from 1 January 2011, contains a specific chapter on transfer pricing with rules based on the OECD arm’s length principle and OECD methods. The TCG states that the guidance on the application of transfer pricing rules is to be issued by the Minister of Finance of Georgia. Therefore the TCG rules in respect of transfer pricing were not enforced in practice till the issuance of the above mentioned guidance. On 18 December 2013, the Minister of Finance of Georgia signed Decree 423 “on the Approval of the Instructions on International Transfer Pricing” (the Decree). The Instruction clarifies transfer pricing principles set forth in the Tax Code, including: • definition of terms • interpretation of the practical control concept • transactions with off-shore jurisdictions • comparability factors and comparability adjustments • information sources to be used • selection and application of transfer pricing methods • selection of the tested party • market range calculation • transfer pricing documentation requirements; and • advance pricing arrangements. As a result of the guidance in the Instruction, transfer pricing became a hot topic in Georgia and number of companies are already hiring advisors to help them in preparing transfer pricing documentation.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information – person is entitled to (directly or whether it carried out any transactions indirectly) 50 percent or more of with related parties or the persons Tax authority name the profits of the enterprise registered in the so-called offshore Revenue Service. – the value of loans received by countries. Citation for transfer pricing rules an enterprise from or under What are the consequences of guarantee of the person is more failure to submit disclosures? Tax Code of Georgia, Chapter XVII: than 50 percent of the enterprise’s No specific penalties are defined for not • Article 126 – Meaning of the concepts total assets submitting disclosure, however a general for the purposes of this Chapter – a relative of a person directly penalty of 100 Georgian lari (GEL) may be • Article 127 – General principles of or indirectly holds more than imposed for failure to do so. transfer pricing 50 percent of an enterprise or • Article 128 – Transfer pricing methods directly or indirectly manages the enterprise Transfer pricing study • Article 129 – Special provisions of overview transfer pricing – control is otherwise evidenced by facts and circumstances. Can documentation be filed in • Article 129–1 – Advance Pricing a language other than the local What is the statute of limitations Agreement language? If yes, which ones? on assessment of transfer pricing • Decree N423 of Minister of Finance - adjustments? Yes. The documentation can be prepared Instructions on International Transfer in English, however tax authorities No specific statute of limitations Pricing. may require Georgian translation to be is established for transfer pricing arranged by taxpayer. Effective date of transfer pricing adjustments, therefore the general rules provisions of the Tax Code of Georgia When a transfer pricing study is Tax Code of Georgia effective from would be applied, according to which prepared, should its content follow 1 January 2011 contains a specific the statute of limitations is three years. Chapter V of the Organisation chapter on transfer pricing. However, according to the transitional for Economic Co-operation and provisions of the Tax Code of Georgia, Development (OECD) Guidelines? Decree N423 of Minister of finance the statute of limitations within the (Instructions on International Transfer Yes, for all transactions. Transfer pricing period from 1 January 2015 to 1 January documentation should contain: Pricing) is effective from December 18, 2016 is five years and within the period 2013. from 1 January 2016 to 1 January 2017 is • an overview of the Georgian What is the relationship threshold four years. enterprise’s business operations, for transfer pricing rules to apply including an analysis of the economic between parties? factors that affect the pricing of its Transfer pricing products and services Two persons shall be deemed related if: disclosure overview • a description of the Georgian • a person participates directly or Are disclosures related to transfer enterprise’s corporate organizational indirectly in the management, control pricing required to be submitted to structure covering all parties or capital of another person the revenue authority on an annual potentially relevant to the controlled basis (e.g. with the tax return)? • the same persons participate directly transactions being analyzed or indirectly in the management, Yes. In the annual corporate income • a description of the transaction being control or capital of both persons. tax return the taxpayer should indicate analyzed, including an analysis of the whether it carried out any transactions comparability factors and details of A person participates directly or with related parties or the persons the group’s transfer pricing policy indirectly in the management, control registered in the so-called offshore (where relevant) or capital of another enterprise if such countries. person: • a description of the transfer pricing Note that the instruction defines transfer method selected and an explanation • holds directly or indirectly more than pricing documentation as one prepared of why this method was selected 50 percent of such enterprise before submitting the tax return. • a comparability analysis, including: • exercises practical control over However, taking into account that a) no a description of the comparable business decisions of an enterprise, further clarification is provided to which uncontrolled transactions that were including: tax return refers the Instruction b) no utilized, explanation of the basis specific tax return is to be submitted for – person holds or controls directly for the rejection of any potential transfer pricing, it appears that the rules or indirectly a majority of voting internal comparable uncontrolled indicated in preceding paragraph should stocks/shares transaction (where applicable), be applied. – person can control directly or details of the external comparables indirectly the composition of the What types of transfer pricing search process (where applicable), board of directors information must be disclosed? the assessment of comparability of the controlled transactions and the In the annual corporate income tax comparable uncontrolled transactions return the taxpayer should indicate

(with reference to the comparability within 30 calendar days after their appropriate, comparability adjustments factors specified in Article 5 of these written request. may need to be made. Instructions), and, a description of any If an adjustment is proposed by Do tax authorities have comparability adjustments that were the tax authority, what dispute requirements or preferences made resolution options are available? regarding databases for • an explanation of any economic comparables? A tax dispute may be resolved within analysis and projections relied on the system of the Ministry for Finance No. in developing the transfer pricing of Georgia and in court. methodology Does the tax authority generally • details of any Advance Pricing If an adjustment is sustained, can focus on the interquartile range in Agreements or advance decisions penalties be assessed? If so, what a TNMM analysis? rates are applied and under what relevant to the controlled transactions Yes, sometimes. conditions? • a conclusion as to compliance with the Does the tax authority have other No specific penalties are defined in market principle, and where relevant, preferences in benchmarking? If so, respect of transfer pricing. The standard any adjustments made by the Georgian please describe. enterprise to its transfer prices/taxable penalties for under reporting of tax income for the relevant years in order will apply. Penalty in the amount of Generally, taxpayers are expected to to ensure compliance with the market 50 percent of under reported tax and conduct economic analysis using the principle; and late payment interests of 0.06 percent benchmarks relevant to the financial per each overdue day may be applied. year in which controlled transactions • any other information that may have a It should be noted that late payment occurred; except: material impact on the determination interest is decreased to 0.05 percent of the Georgian enterprise’s a. if information relating to the starting from 1 July 2015. compliance with the market principle financial year in which the controlled with respect to the controlled To what extent are transfer pricing transaction took place is not transactions. penalties enforced? available at the time of assessing the comparability of a comparable Transfer pricing requirements are Does the tax authority require an uncontrolled transaction with relatively new in Georgia and the advisor/tax practitioner to have a controlled transaction, then attitude of Georgian tax authorities is specific designation in order to information from the preceding year not yet known. prepare or submit a transfer pricing may be used provided the standard of study? What defenses are available with comparability is satisfied No. respect to penalties? b. if information relating to a period, Comprehensive and proper transfer not being more than four years prior Transfer pricing methods pricing documentation. to the financial eary in which the controlled transaction took place, Does your country follow the What trends are being observed reveals facts which could have an transfer pricing methods outlined in currently? Chapter II of the OECD Guidelines? influence on the determination of If exceptions apply, please describe. Not yet known. the comparability of the transactions being compared (for example, Yes. Special considerations evidence of impact of product, industry or economic cycles). Are secret comparables used by tax Transfer pricing audit authorities? What level of interaction do tax and penalties authorities have with customs No. Tax authorities are not allowed to When the tax authority requests authorities? use secret comparables. a taxpayer’s transfer pricing Customs authorities are part of the documentation, are there timing Is there a preference, or Revenue Service. requirements for a taxpayer to requirement, by the tax authorities submit its documentation? And if for local comparables in a Are there limitations on so, how many days? benchmarking set? deductibility of management fees beyond the arm’s length principle? Yes, 30 days. Due to the difficulties associated with obtaining information on comparable No. When the tax authority requests uncontrolled transactions in Georgia, a taxpayer’s transfer pricing Are management fees subject to the use of foreign comparables documentation, are there timing withholding? is acceptable, provided that the requirements for a taxpayer to standard of comparability is met. Yes. submit its documentation? Please When foreign comparables are relied Are there limitations on the explain. upon, geographic differences, as well deductibility of royalties beyond the Taxpayer should present transfer pricing as other differences in comparability arm’s length principle? documentation to the tax authorities factors, must be analyzed and, where No.

Are royalties subject to May a taxpayer go to competent withholding? authority before paying tax? Yes. No formal rules exist in this area. Are taxpayers allowed to file tax return numbers that differ from Advance pricing book numbers? agreements Yes. No specific restriction exists in this What APA options are available, if area. any? Other unique attributes? Unilateral, bilateral, multilateral. Controlled transactions include Is there a filing fee for APAs? transactions between a Georgian No. No specific fee is determined for enterprise and a resident of a so- APA yet. Also there is no practice of called offshore country, regardless of issuance of APA so far. whether they are related persons. The list of countries that are considered Does the tax authority publish APA offshore countries was specified by data either in the form of an annual the government in Resolution 132 of report or through the disclosure of 30 May 2013. data in public forums? Not applicable. Tax treaty/double tax Are there any difficulties or resolution limitations on the availability or What is the extent of the double tax effectiveness of APAs? treaty network? Not applicable. There is no practice of Extensive (nearly 50 effective double tax issuance of APA so far. Unilateral APA treaties). can be concluded by the Georgian taxpayers for the transactions going If extensive, is the competent forward if the value of such transactions authority effective in obtaining is expected to exceed GEL50 million double tax relief? and the maximum period covered by an Frequently. APA is three years. When may a taxpayer submit an adjustment to competent authority? No formal rules exist in this area.

KPMG in Georgia

Ioseb Garsevanishvili Tel: +995322935713 Ext. 40010 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Germany

KPMG observation

Transfer pricing still is one of the highest priority issues for German tax authorities and is receiving increased attention and discussion during German tax audits. In KPMG’s experience, German tax auditors often put forward a case of insufficient or incomplete transfer pricing documentation in order to shift the burden of proof to taxpayers and try to achieve significant transfer pricing adjustments by way of an estimate. Other preferred audit targets currently include outbound licensing of brand names and trademarks as well as debt pricing and cash pools. The Organisation for Economic Co-operation and Development (OECD) authorized approach, stipulated in the new Article 7 of the OECD Model Tax Convention and its commentary was incorporated into German tax law in 2013. These fundamental changes with regard to transfer pricing for permanent establishments were supplemented by additional decree in 2014. As of 2008, the German tax authorities are allowed to aggressively audit business restructuring cases. The Base Erosion and Profit Shifting (BEPS) initiative fits into the German tradition of developing measures against profit shifting. Germany has strongly advocated the adoption of the BEPS Action Plan and played a decisive role in the shaping of the actions and supports all of the 15 actions envisaged by the OECD. The German Federal Ministry of Finance is focusing on four key items: digital economy, hybrid mismatch arrangements, prevention of treaty abuse and harmful tax competition.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules Effective date of transfer pricing rules Tax authority name German Foreign Transactions Tax Act (Außensteuergesetz – AStG) Section 1, The legal basis for the determination Federal Ministry of Finance General Tax Code (Abgabenordnung – of intra-group transfer prices has (Bundesministerium der Finanzen – BMF); AO) Section 90 Para. 3 and Section 162 recently changed in Germany since Federal Tax Office (Bundeszentralamt für Para. 3 and 4, Corporate Income Tax the revision of Section 1 of the Foreign Steuern – BZSt). Act (Körperschaftsteuergesetz – KStG) Transactions Tax Act in 2013. The 2013 Section 8 Para. 3. Tax Act introduces changes which

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 106 | Global Transfer Pricing Review clarify the rules for cross-border What are the consequences of transactions the deadline is 30 days profit allocation that apply to various failure to submit disclosures? upon request in a tax audit. legal structuring options such as Not applicable. If an adjustment is proposed by corporation, partnership, and permanent the tax authority, what dispute establishments. Documentation resolution options are available? requirements were introduced in 2003 Transfer pricing study and penalties in 2004. overview In principle, the taxpayer can choose to litigate, a strategy rarely chosen What is the relationship threshold Can documentation be filed in because of the lack of economic for transfer pricing rules to apply a language other than the local experience at German tax courts leading between parties? language? If yes, which ones? to unforeseeable results. The taxpayer The taxpayer holds direct or indirect Yes. Any living language, in practice can also choose to submit an application ownership of 25 or more percent in the usually English. for a mutual agreement procedure related party, or has direct or collateral When a transfer pricing study is under Article 25 of the OECD Model Tax possibility to exert a dominating prepared, should its content follow Convention at the Federal Tax Office. influence to the related party; a third Chapter V of the Organisation There is also the possibility of using the party holds a share of 25 percent or for Economic Co-operation and complaints system or the European more in the taxpayer and the related Development (OECD) Guidelines? Union (EU) arbitration procedure. party or exerts indirectly or collaterally a If an adjustment is sustained, can dominating influence. Yes, for all transactions. The manner, penalties be assessed? If so, what content and extent of documentation What is the statute of limitations rates are applied and under what in a German transfer pricing study is on assessment of transfer pricing conditions? determined by the “Decree-Law in the adjustments? spirit of Sec. 90(3) of the General Tax Yes. Section 162, Paragraph 4, General In general, four years from tax filing Code (GTC)”, which generally follows Tax Code provides that in the absence year-end, but the respective tax Chapter V of the OECD Guidelines. of materially complete documentation rules and provisions are much more Does the tax authority require an the higher of either 5,000 euros (EUR) comprehensive. advisor/tax practitioner to have or a fraction of five percent to specific designation in order 10 percent of the transfer pricing Transfer pricing to prepare or submit a transfer adjustment made has to be assessed. pricing study? Therefore, a penalty cannot be removed disclosure overview if no documentation exists, but the Are disclosures related to transfer No. exact amount of the penalty is subject pricing required to be submitted to to the tax authorities’ discretion which the revenue authority on an annual Transfer pricing methods may depend on the taxpayer’s degree of basis (e.g. with the tax return)? compliance or the nature of the transfer Does your country follow the pricing adjustments. The same applies No. Disclosures related to transfer pricing transfer pricing methods outlined in for penalties sanctioning late filing are not required to be submitted to the Chapter II of the OECD Guidelines? (maximum surcharge of EUR1 million, revenue authority on an annual basis, e.g. If exceptions apply, please describe. with filing a corporate income tax return. with a minimum of EUR100 for each Yes. The transfer pricing documentation for day after the 30/60 days time limit is so-called extraordinary transactions exceeded) and the tax administration’s has to be prepared within six months Transfer pricing audit ability to use the full arm’s length range after the business year-end in which and penalties to the detriment of the taxpayer in case the respective transaction took place. no useful documentation exists. When the tax authority requests However, it is strongly recommended a taxpayer’s transfer pricing To what extent are transfer pricing to prepare contemporaneous transfer documentation, are there timing penalties enforced? pricing documentation. requirements for a taxpayer to Always. In general, the transfer pricing submit its documentation? And if What defenses are available with documentation for all types of intragroup so, how many days? respect to penalties? transactions has to be provided to the Yes, 30 days. revenue authority upon request, typically With regard to cross-border transfer for the purposes of a tax audit. When the tax authority requests pricing issues, preparation of a taxpayer’s transfer pricing comprehensive transfer pricing What types of transfer pricing documentation, are there timing documentation is required to avoid information must be disclosed? requirements for a taxpayer to penalties and surcharges. However, No specific disclosure is not required. submit its documentation? if penalties are assessed they can If management identifies incorrect Please explain. occasionally be negotiated with local transfer pricing after filing the tax return, Taxpayers need to provide tax authorities to a lower level. this needs to be indicated and corrected documentation within 60 days upon without delay. request in a tax audit; for extraordinary

What trends are being observed Does the tax authority generally If the taxpayer’s statutory book currently? focus on the interquartile range in numbers do not reflect arm’s length a TNMM analysis? prices – in particular if the German German tax auditors often assume profits were below an arm’s length a case of insufficient or incomplete Yes, always. level – the taxpayer is required to make transfer pricing documentation in order Does the tax authority have other the appropriate adjustments for tax to make significant transfer pricing preferences in benchmarking? If so, purposes. In practice, a deviation of adjustments to the taxable income by please describe. statutory book numbers from tax return way of an estimate. Particular attention numbers is likely to lead to greater is currently being paid to the outbound It is not unusual that a German tax scrutiny by the tax auditor. transfer of functions and risks, cash auditor would dispute the reliability of pooling, outbound brand licensing and the external data available for application Other unique attributes? to permanent establishments. of the TNMM. In such cases they None. may resort to other third party (often Special considerations internal) or reject the documentation as insufficient and try to make an Tax treaty/double tax Are secret comparables used by tax adjustment based on an estimate. authorities? resolution What level of interaction do tax What is the extent of the double tax Yes, occasionally, but they have lesser authorities have with customs treaty network? evidence value in court. authorities? There is an extensive double tax treaty Is there a preference, or Low interaction with customs network. As of 1 January 2015, about requirement, by the tax authorities authorities. The customs service 100 double tax treaties with other for local comparables in a occasionally requests transfer pricing countries were in place. benchmarking set? documentation. If extensive, is the competent No, there is no legal requirement to Are there limitations on authority effective in obtaining have local comparables. However, deductibility of management fees double tax relief? German tax authorities prefer local beyond the arm’s length principle? comparables in benchmarking studies. In most cases. Benchmarking studies that have no local Yes, some. In general, management When may a taxpayer submit an comparables are sometimes challenged fees are deductible assuming the adjustment to competent authority? with regard to comparability. services were rendered to the benefit of the service recipient and the Once double taxation becomes Do tax authorities have pricing was arm’s length (benefit test). imminent which is usually considered requirements or preferences However, general domestic deductibility to take place at the point in time the tax regarding databases for limitations may apply, e.g. in respect of audit report is issued by the auditor. comparables? stock option costs, entertainment costs May a taxpayer go to competent There are no legal requirements to or remuneration of supervisory boards. authority before paying tax? use any particular database. It is most Are management fees subject to Yes. common to use the Amadeus database withholding? for pan-European comparables searches, which is published by Bureau No. Advance pricing van Dijk. The German tax authorities Are there limitations on the agreements have licensed this database and are deductibility of royalties beyond the What APA options are available, using it. The tax authorities require arm’s length principle? that the information from databases if any? is verified through internet research, No. Bilateral, multilateral. i.e. to determine the comparability of Are royalties subject to withholding? Is there a filing fee for APAs? a certain company; it is insufficient to rely only on the information which is Yes. Yes. An application fee of EUR20,000 provided by the database. The Dafne Are taxpayers allowed to file tax and a fee of EUR15,000 for a renewal of database with German comparables return numbers that differ from an APA. Moreover, in case of a change and the Orbis database for non- book numbers? in the application, a fee of EUR10,000 European comparables searches is applicable. When the transaction might also be used. Yes. Tax returns need to reflect taxable volume covered by an APA is less than profits based on arm’s length pricing. EUR5 million for the transfer of goods

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 108 | Global Transfer Pricing Review and less than EUR500,000 for other cases, the aforementioned fees are reduced to EUR10,000, EUR7,500, and EUR5,000. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? No. The German tax authority actively welcomes and supports APAs for transfer pricing purposes. Multinational companies actively use the APA program in their transfer pricing policies.

KPMG in Germany

Achim Roeder Tel: +49 69 9587 1400 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Ghana

KPMG observation

Since the inception of transfer pricing regulations in Ghana in 2012 (L.I. 2188), the Ghana Revenue Authority (GRA) has become aggressive in undertaking both desk and field transfer pricing audits. As of January 2015, over 250 reviews (mainly desk audits) have been undertaken by the GRA. This is expected to increase with emphasis on more on-site audits by the Transfer Pricing Unit set up within the GRA. This development is expected to increase the awareness of transfer pricing compliance among Ghanaian taxpayers.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Applicable contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold It should be noted that, a controlled relationship means a relationship Tax authority name for transfer pricing rules to apply between parties? between one person and another Ghana Revenue Authority (GRA). person by the terms of which the The threshold relations between relations is able to influence the Citation for transfer pricing rules persons: transfer price set in a transaction. These • Internal Revenue Act, 2000 (Act 592). • persons who are in controlled relationships may include associates, • Transfer Pricing Regulations, 2012 relationships trust, partnerships, subsidiary, and, (L.I. 2188). • a permanent establishment closed corporations. Effective date of transfer (a branch) and its head office What is the statute of limitations pricing rules • a permanent establishment and other on assessment of transfer pricing adjustments? The principal act, Internal Revenue Act, related branches of the permanent 2000 (Act 592), became effective from establishment; and There is no statute of limitations to the 2000. This act had a general transfer • persons, who are in employer- transfer pricing regime of Ghana. pricing rule which was very broad. employee relationships. However, the transfer regulations became effective from 2012.

Transfer pricing • comparability If an adjustment is sustained, can disclosure overview • selection of the most appropriate penalties be assessed? If so, what transfer pricing method rates are applied and under what Are disclosures related to transfer conditions? pricing required to be submitted to • economic analysis. the revenue authority on an annual Yes and below are the possible tax Does the tax authority require an basis (e.g. with the tax return)? penalties: advisor/tax practitioner to have Yes. The Annual Return on Transfer specific designation in order to • 10 percent of the underreported Pricing Transaction (the Return), is the prepare or submit a transfer income if the amount has return disclosure form that taxpayers are pricing study? been outstanding for less than required to file annually with the GRA. three months Yes. It should be noted the taxpayer’s • 20 percent of the underreported income if the amount has been transfer pricing study is only submitted Transfer pricing methods to the GRA only upon request from the outstanding for more than Does your country follow the Commissioner-General of the GRA. three months. transfer pricing methods outlined in To what extent are transfer pricing What types of transfer pricing Chapter II of the OECD Guidelines? penalties enforced? information must be disclosed? If exceptions apply, please describe. Transfer pricing audits and penalties are Listed are the key information that Yes. strictly enforced. would be disclosed on the Annual Transfer Pricing Return: What defenses are available with Transfer pricing audit respect to penalties? • corporate information – company’s and penalties name, address, tax identification The only defense is compliance with the When the tax authority requests number, address, key contact person transfer pricing laws. a taxpayer’s transfer pricing • particulars of related parties with documentation, are there timing What trends are being observed which the taxpayer has conducted any requirements for a taxpayer to currently? form of transaction or dealing within submit its documentation? And if There has been a considerable increase the year so, how many days? in the number of transfer pricing audits • related party transactions, including No. and this is expected to result in tax the amounts penalties. When the tax authority requests • transfer pricing method selected. a taxpayer’s transfer pricing What are the consequences of documentation, are there timing Special considerations failure to submit disclosures? requirements for a taxpayer to Are secret comparables used by tax submit its documentation? authorities? Failure to file the Return may result in a Please explain. GHS4 per day penalty. We are not aware of the use of The Commissioner-General of the secret comparables by the Ghana tax GRA stipulates the time frame within authorities. Transfer pricing study which taxpayers are required to submit Is there a preference, or overview documentation. requirement, by the tax authorities Can documentation be filed in Taxpayers are not required to submit for local comparables in a a language other than the local their transfer pricing study reports or benchmarking set? language? If yes, which ones? contemporaneous reports on an annual No. No. basis. They are provided to the GRA only upon request. Do tax authorities have When a transfer pricing study is requirements or preferences prepared, should its content follow If an adjustment is proposed by regarding databases for Chapter V of the Organisation the tax authority, what dispute comparables? for Economic Co-operation and resolution options are available? Development (OECD) Guidelines? The Ghana Revenue Authority (GRA) • objection to the adjustment through does not have any requirements Yes. The following is required: the use of the GRA’s internal or preference for any database for administrative process • information of related parties and comparables. It should be noted that, nature of relationship • objection through the law courts the Transfer Pricing Regulations in Ghana • description of the related party • objection through a prescribed is silent on this subject. transactions arbitration per a tax treaty agreement. • financial analysis

Does the tax authority generally the Return is concerned with the May a taxpayer go to competent focus on the interquartile range in amounts accrued exclusively during authority before paying tax? a TNMM analysis? the year, the amounts per the audited Yes. financial statements which are based Yes, always. on amounts outstanding as of year-end Does the tax authority have other may differ from what has been accrued Advance pricing preferences in benchmarking? If so, during the year. agreements please describe. In relation to year-end adjustments, the What APA options are available, None. Regulation is silent on this. However, if any? in times of any year-end adjustments, What level of interaction do tax None. there is the possibility of customs/VAT authorities have with customs adjustments. Is there a filing fee for APAs? authorities? Other unique attributes? Not applicable. There is a fair interaction between tax authorities with the customs None. Does the tax authority publish APA authorities. data either in the form of an annual report or through the disclosure of Are there limitations on Tax treaty/double tax data in public forums? deductibility of management fees resolution beyond the arm’s length principle? No. What is the extent of the double tax No. treaty network? Are there any difficulties or limitations on the availability or Are management fees subject to Currently, Ghana has eight DTA’s with effectiveness of APAs? withholding? the listed countries: Not applicable. Yes. • South Africa Are there limitations on the • United Kingdom deductibility of royalties beyond the • Germany arm’s length principle? • France No. It should be noted that, there could • Italy be agreed percentages or amounts that royalties can be charged. However, the • Swiss Confederation GRA may only allow the tax deduction • Belgium of expenses after compliance with the • Netherlands. arm’s length principle. If extensive, is the competent Are royalties subject to withholding? authority effective in obtaining Yes. double tax relief? Are taxpayers allowed to file tax Yes. return numbers that differ from When may a taxpayer submit an book numbers? adjustment to competent authority? No. The number per the Return has Yes. to match the number in the audited financial statements. However, since

KPMG in Ghana

Kofi Frempong-Kore Tel: +233302770454 Email: [email protected]

Emmanuel Obeng Asiedu Tel: +233302731007 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Greece

KPMG observation

Enterprises must comply with different acts of legislation in relation to their transfer pricing obligations depending on the financial year under review. For tax years commencing 1 January 2014, the new transfer pricing provisions apply on the basis of the New Income Tax Code (Law 4172/2013) and the New Code of Tax Procedures (Law 4174/2013). The new transfer pricing provisions extend the scope of transactions that must be documented and the definition of associated enterprises. Law 4174/2013 requires entities having the legal form of a corporation to obtain an Annual Tax Certificate. In the process of issuing these Annual Tax Certificates, certified auditors review a taxpayer’s transfer pricing documentation. Those taxpayers that do not comply will be issued an Annual Tax Certificate “with a reservation”, regarding the auditors’ inability to express an opinion on the arm’s length nature of a taxpayer’s transactions, and which in turn could result in the Greek tax authorities initiating a tax audit.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Submission to tax Thresholds Applicable contemporaneous authority required apply/exit

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules Effective date of transfer pricing rules Tax authority name • for tax years 2008-2012 article 26 of Law 3728/2008 of the Ministry of For tax years commencing 1 January Transfer pricing audits are carried Development 2014, the transfer pricing documentation out by the tax authorities. For large file must be prepared and the relevant enterprises the competent authority is • for tax years 2010-2013 Articles 39, summary information sheet concerning the Tax Office of Large Incorporations. 39A, 39B and 39C of Income Tax intra-group transactions must be Furthermore, entities having the legal Law 2238/1994 as in force in each electronically submitted to the Ministry form of Anonymos Eteria (AE), Eteria respective year of Finance within four months from the Periorismenis Efthynis (EPE) and • for tax years commencing 1 January end of the company’s year-end. branches of foreign entities, which 2014 onwards, Articles 50 and 51 of satisfy specific criteria will have their Law 4172/2013 and Articles 21, 22 transfer pricing documentation audited and 56 of Law 4174/2013. by certified auditors for the issuance of the Annual Tax Certificate.

What is the relationship threshold to their certified auditors before the information regarding the Greek for transfer pricing rules to apply issuance of the Annual Tax Certificate entities of the group, the permanent between parties? (not all companies have an obligation to establishments of the foreign entity in obtain a tax certificate) and in any case Greece or the permanent establishments According to Law 4172/2013, the within four months from the end of of the Greek entity abroad. threshold relationship for transfer pricing their financial year. The transfer pricing rules to apply for associated persons What are the consequences of documentation file is accompanied is direct or indirect substantial control failure to submit disclosures? by a summary information sheet. This in the management or capital. The summary information sheet must be Where the summary information participation threshold in the capital is set electronically submitted to the General sheet and/or the transfer pricing at a percentage of 33 and above. It also Secretariat of Information Systems of the documentation file are not submitted to includes cases where there is decisive Ministry of Finance within four months of the competent audit authority, a one-off influence or where there is a capability the end of the company’s financial year. penalty at the rate of one percent of the to exercise decisive influence. Specific Even in the cases where a Tax Certificate company’s recorded gross revenues cases are also described in the relevant has been issued a sample of at least nine (including any adjustments of profits) is legislation. percent of the companies under audit imposed. The penalty imposed should Greek companies must maintain a by certified auditors will be selected to not be less than EUR10,000 and should transfer pricing documentation file for be further audited by the tax authorities not exceed EUR100,000. Moreover, their intra-group transactions with one based on criteria set by the Ministry of the one-off penalty at the rate of one or more associated enterprises which Finance. If no Tax Certificate obligation percent of the company’s recorded exceed the amount of either: exists the documentation file must be gross revenues is imposed in the submitted to the competent tax authority case of submission of an inaccurate/ • 100,000 euros (EUR) in total, if the in case of a tax audit within 30 days of incomplete summary information sheet. gross revenues of the company in request. question for the respective tax year does not exceed the amount of What types of transfer pricing Transfer pricing study EUR5 million; or information must be disclosed? overview • EUR200,000 in total if the gross The summary information sheet must Can documentation be filed in revenue of the company in question contain information regarding the a language other than the local for the respective tax year exceeds functional identity of the company, i.e. language? If yes, which ones? the amount of EUR5 million. the group it belongs to, the functions Yes. The basic file may be maintained Law 4174/2013 as currently in force does it performs and the risks it assumes, in English with the obligation to be not stipulate a minimum amount for the as well as a list of the intra-group translated in Greek if requested transactions that must be documented transactions that require documentation by the tax authority within 30 days if the above thresholds are met, which have taken place within the from the relevant request. The Greek therefore if above thresholds are met respective financial year. It must also Documentation File must be maintained all intercompany transactions must be include the transfer pricing method in Greek. documented. followed to test each intercompany transaction, whether APAs exist and When a transfer pricing study is What is the statute of limitations also whether a transfer pricing study is prepared, should its content follow on assessment of transfer pricing in place. Chapter V of the Organisation adjustments? for Economic Co-operation and The transfer pricing documentation file Development (OECD) Guidelines? Five years from tax year-end. The five consists of the “basic documentation year period commences at the end of file” and the “Greek documentation No. According to the transfer pricing the year in which the annual corporate file”. The exact information that provisions, the tax authority’s audit income tax return was filed with respect must be included in the transfer will take into consideration the OECD to the previous accounting year. Under pricing documentation file as well Guidelines. It is further specifically certain conditions, the statute can be as the summary information sheet stipulated that a transfer pricing extended to 20 years. is determined in Circular (i.e. POL documentation file consists of the 1097/2014 as amended by POL “basic documentation file” and the Transfer pricing 1144/2014) which has been issued by “Greek documentation file”. The exact the Ministry of Finance). information which must be included is disclosure overview stipulated in the respective Ministerial Are disclosures related to transfer In general the basic documentation file Circular (POL 1097/2014 as amended by pricing required to be submitted to is common for all group entities and POL 1144/2014). the revenue authority on an annual contains typical information for all the basis (e.g. with the tax return)? associated companies and the branches Generally the information covered is of the group. The Greek documentation the information of Chapter V of the Yes. A transfer pricing study (transfer file, which accompanies the basic OECD Guidelines but also includes pricing documentation file) must be documentation file, contains additional some additional information i.e. specific prepared and provided by the companies

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 114 | Global Transfer Pricing Review information for business restructurings, When the tax authority requests interest is calculated in the amount of APAs, court decisions and cost a taxpayer’s transfer pricing tax due from the expiration of the initial contribution agreements, copies of documentation, are there timing filing deadline up to the date the actual contracts, specific information on the requirements for a taxpayer payment of tax takes place. contractual arrangements and additional to submit its documentation? To what extent are transfer pricing information for transactions with Please explain. penalties enforced? entities in countries with which Greece The documentation file must be has no administrative cooperation for Ministry of Finance transfer pricing submitted to the competent tax tax purposes (there is a list of such audits which are now being finalized authority in case of a tax audit within countries). have commenced to impose penalties. 30 days of request. However, please Does the tax authority require an note that apart from the obligation What defenses are available with advisor/tax practitioner to have towards the competent tax authority, respect to penalties? specific designation in order the transfer pricing file is required to It is imperative to have the stipulated to prepare or submit a transfer be completed within four months from transfer pricing file in place in order pricing study? the closing date of the company’s to avoid penalties. If documentation financial year. Failure to submit the No. evidences that transactions are not documentation file is subject to a one- arm’s length, then specific justification off penalty at the rate of one percent of Transfer pricing methods must be provided e.g. extraordinary the company’s recorded gross revenues events. No court precedents exist yet Does your country follow the including any adjustment of profits. The accepting such justifications. transfer pricing methods outlined in penalty imposed should not be less than Chapter II of the OECD Guidelines? EUR10,000 and should not exceed the What trends are being observed If exceptions apply, please describe. amount of EUR100,000. currently? Yes. The transfer pricing methods to If an adjustment is proposed by The Ministry of Finance audits mainly be used are determined by virtue of the tax authority, what dispute focus on intra-group transactions within Ministerial Circular POL 1097/2014 as resolution options are available? multinational groups, on transactions amended by POL 1144/2014 issued by involving intangibles and related royalty Upon the issuance of a tax assessment the Ministry of Finance on 18 July 2013. issues, on loss making companies and note the taxpayer may file a request for These are the transfer pricing methods companies having a substantial volume re-examination at the Department of outlined in Chapter II of the OECD of international transactions. Internal Re-Examinations of the General Guidelines. Secretariat of Public Revenues. The In addition to the above, Law 4172/2013 Ministerial Circular POL 1097/2014 taxpayer has a right of appeal against introduced the application of the as amended by POL 1144/2014 the administrative decision before the arm’s length principle to business stipulates that there is a priority of the administrative courts. There is also the restructurings either local or cross- traditional transfer pricing methods (e.g. option to use the Mutual Agreement border. More specifically business Comparable Uncontrolled Price (CUP) Procedure and the Arbitration restructurings consisting of a transfer method, resale price method and cost Convention. of operations, assets, risks and/ plus method) over the transactional or business opportunities between If an adjustment is sustained, can transfer pricing methods (transactional related parties as well as any transfer penalties be assessed? If so, what net margin method and profit split or granting of a right to use goodwill rates are applied and under what method). In cases where there is or intangible assets effected in the conditions? insufficient or no data for the use of the context of such business restructurings traditional transfer pricing methods, Law 4172/2013 does not include any must be performed at a price that is taxpayers may use the transactional special provisions in this respect. in compliance with the arm’s length transfer pricing methods provided Therefore the general tax provisions will principle. that justification for their selection apply whereby an adjustment in profits in included in the transfer pricing will be subject to the relevant penalties Special considerations applying to an inaccurate tax return. documentation file. Are secret comparables used by tax In case of an inaccurate tax return the authorities? Transfer pricing audit penalty will amount to 10 percent of the additional tax not reported, if the Although there is no precedence in this and penalties tax amount is equal to or higher than respect in practice tax authorities may When the tax authority requests five percent but less than 20 percent use secret comparables. This remains to a taxpayer’s transfer pricing of the correct tax due, 30 percent of be determined. documentation, are there timing additional tax not reported, if the tax is Is there a preference, or requirements for a taxpayer to higher than 20 percent of the correct requirement, by the tax authorities submit its documentation? And if tax due, 100 percent of the additional for local comparables in a so, how many days? tax not reported, if the tax is higher than benchmarking set? 50 percent of the correct tax due and Yes, 30 days. provided that the inaccurate reporting No. In practice pan European of information was intentional. Also benchmarking studies are used.

Do tax authorities have the company’s usual transactions, the competent administrative bodies is requirements or preferences (ii) expenses should correspond to a within a 30 day period. regarding databases for genuine transaction and the value of the May a taxpayer go to competent comparables? transaction should not be lower/higher authority before paying tax? than the market value according to the No. data available to the tax authorities and There are no formal rules. Does the tax authority generally (iii) should be posted in the accounting focus on the interquartile range in books of the company and should be Advance pricing a TNMM analysis? evidenced by relevant documentation (i.e. invoices etc.). agreements Yes, always. What APA options are available, Are royalties subject to Does the tax authority have other if any? withholding? preferences in benchmarking? If so, Unilateral, bilateral, multilateral. please describe. Yes. Is there a filing fee for APAs? The benchmarking studies used must Are taxpayers allowed to file tax cover the most recent three year period return numbers that differ from Yes. The applicable fees (payable by and the initial benchmarking study may book numbers? the applicant) throughout the APA be updated for the next two years. procedure are determined by Ministerial No. Normally tax returns must not differ Shareholder’s ownership threshold Circular POL. 1284/2013, as follows: from book numbers however, in practice must be less than 33 percent. This there can be year-end transfer pricing • fee of EUR1,000 at the time of step must apply for both corporate and adjustments if they are sufficiently the submission of the Preliminary individuals shareholders. In addition, stipulated in writing (e.g. agreements, Consultation Application subsidiary ownership threshold must be transfer pricing documentation). They less than 33 percent. • fee of EUR5,000 at the time of the are usually highly scrutinized. submission of the APA application, or What level of interaction do tax Other unique attributes? of the APA revision application authorities have with customs authorities? The benchmarking studies used for • fee of EUR10,000 in the case of a testing the year under review must request for collaboration with the High. cover the most recent three year period foreign tax authority in each state. Are there limitations on of comparable companies. The initial Does the tax authority publish APA deductibility of management fees benchmarking study may be updated for data either in the form of an annual beyond the arm’s length principle? the next two years. report or through the disclosure of data in public forums? Yes. Beyond the arm’s length principle No safe harbors exist. the general tax requirements will No. also need to be satisfied, i.e. (i) fees/ Tax treaty/double tax Are there any difficulties or expenses should be paid for the benefit limitations on the availability or of the company or should relate to resolution effectiveness of APAs? the company’s usual transactions, What is the extent of the double tax (ii) expenses should correspond to a treaty network? No. There are no precedents on APAs genuine transaction and the value of the yet. A number of APA applications Extensive. There are currently 56 Double transaction should not be lower/higher have been submitted to the Ministry Tax Treaties between Greece and other than the market value according to the of Finance. tax authorities. data available to the tax authorities and (iii) should be posted in the accounting If extensive, is the competent books of the company and should be authority effective in obtaining evidenced by relevant documentation double tax relief? (i.e. invoices etc.). There is extensive use of the Double Are management fees subject to Tax Treaties however Greece has limited withholding? experience with Mutual Agreement Procedures (MAP). No. When may a taxpayer submit an Are there limitations on the adjustment to competent authority? KPMG in Greece deductibility of royalties beyond the Taxpayers may submit a supplementary arm’s length principle? Effie Adamidou income tax return with an adjustment Yes. Beyond the arm’s length principle Tel: +30 2106062120 any time before a tax audit of the year the general tax requirements will Email: [email protected] in question. Any procedures under a tax also need to be satisfied, i.e. (i) fees/ treaty must take place within a three expenses should be paid for the benefit As email addresses and phone numbers year period. However, please note that of the company or should relate to change frequently, please email us at the right to initiate procedures before [email protected] if you are unable to contact us via the information noted above.

Guatemala

KPMG observation

Transfer pricing documentation requirements were established in Guatemala in 2012. However, the first year that taxpayers in Guatemala have to comply with transfer pricing documentation requirements is 2015. The Guatemalan Tax Authority is increasingly requesting information from taxpayers in order to understand their intra-group transactions.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information indirectly, at least 25 percent of its – has appointed exclusively by capital stock or voting rights, whether their votes to the majority of the Tax authority name a domestic or foreign entity members of the board Superintendencia de Administración • when five or fewer people direct – a majority of the members of Tributaria. or control both related parties, or the governing body of the legal Citation for transfer pricing rules possess directly or indirectly at least entity are ombudsmen, managers 25 percent of participation in the or members of the board of Decree No.10-2012 published in capital stock or voting rights of both the related party or other one the Central America Official gazette entities dominated by it. (amendment by Decree No.19-2013). • legal entities resident in Guatemala When two companies comprise a Effective date of transfer pricing or abroad belonging to the same decision group with respect to a third rules corporate group are considered company, all these companies are 1 January 2015. to be part of the same business considered a business group. It is also group if one of them is a member or considered that an individual has a What is the relationship threshold participant of the other and is related stake in the capital stock or voting rights for transfer pricing rules to apply to it in any of the following situations: when the owner of the share or shares, between parties? – holds a majority of voting rights directly or indirectly is the spouse or Two entities can be considered related person connected by relationship, by parties when one of them is a resident – has the power to appoint or blood relation to the fourth degree of Guatemala and the other is resident remove members or through its or affinity to the second degree. The in a foreign tax jurisdiction, if one of the legal representative to intervene term person refers to individuals, following cases applies: decisively in the other entity corporations and other organizations – may have, under agreements with with or without legal personality. • when one of them directs or controls other partners, most of the voting the other, or holds, directly or rights

Also considered related parties are the When a transfer pricing study is If an adjustment is proposed by following: prepared, should its content follow the tax authority, what dispute Chapter V of the Organisation resolution options are available? • a resident of Guatemala and a for Economic Co-operation and distributor or exclusive agent of a Yes. Taxpayers can submit the resolution Development (OECD) Guidelines? foreign territory to an administrative area within the • a distributor or exclusive agent Yes, for all transactions. tax authorities in order to object to the procedures. Also, taxpayers may appeal resident in Guatemala of an entity Does the tax authority require an to the tax court. resident abroad and the latter advisor/tax practitioner to have • a resident of Guatemala and abroad specific designation in order to If an adjustment is sustained, can its permanent establishments prepare or submit a transfer pricing penalties be assessed? If so, what study? rates are applied and under what • a permanent establishment located conditions? in Guatemala and its foreign parent No. company, another permanent Yes. General tax penalties apply. establishment of the same company Transfer pricing methods To what extent are transfer pricing or a person associated with it. Does your country follow the penalties enforced? What is the statute of limitations transfer pricing methods outlined in Not yet known. on assessment of transfer pricing Chapter II of the OECD Guidelines? adjustments? If exceptions apply, please describe. What defenses are available with respect to penalties? Transfer pricing study snapshot Four years from filing date of the tax Yes. However, the following return. methodologies will need to be None. The purpose of a transfer pricing study considered (or rejected) before applying What trends are being observed methods outlined in Chapter II: Applicable Transfer pricing currently? • market value in transferring goods or Legal requirements disclosure overview The transfer pricing requirements are services abroad: the price established Are disclosures related to transfer very recent in Guatemala. The first Protection from penalties by other entities (unrelated with pricing required to be submitted to legislation was published in 2012 and the tested party) that sell the same Reduce risk of adjustment the revenue authority on an annual applicable in 2015. Therefore, as of yet products or render the same services Shifts burden of proof basis (e.g. with the tax return)? there have been no transfer pricing from Guatemala to the same country audits. Yes. The transfer pricing information abroad return must be completed. Taxpayers • import market price: the price should, however, be able to support the Special considerations established for the same goods and arm’s length nature of the intra-group Are secret comparables used by tax services between third parties within transactions at the moment of filing authorities? the country in which the product or the income tax return. The transfer service is going to be acquired plus No. pricing documentation must include the freight charges if it is the case. the information that the taxpayer used Is there a preference, or to determine the arm’s length nature requirement, by the tax authorities of the intra-group transactions. This Transfer pricing audit and for local comparables in a documentation will need to be prepared penalties benchmarking set? on an annual basis. When the tax authority requests Based on experience in Guatemala, What types of transfer pricing a taxpayer’s transfer pricing North American comparable companies information must be disclosed? documentation, are there timing are used for benchmarking purposes. requirements for a taxpayer to Along with the Income Tax return, an submit its documentation? And if Do tax authorities have appendix that summarizes the main so, how many days? requirements or preferences information must be attached, but the regarding databases for form is not available. Yes, 20 days. comparables? What are the consequences of When the tax authority requests Not yet known. failure to submit disclosures? a taxpayer’s transfer pricing documentation, are there timing Does the tax authority generally Not applicable. requirements for a taxpayer to focus on the interquartile range in a submit its documentation? Please TNMM analysis? Transfer pricing study explain. Not applicable. overview The taxpayer has 20 days. Does the tax authority have other Can documentation be filed in preferences in benchmarking? If so, a language other than the local please describe. language? If yes, which ones? Not applicable. No.

What level of interaction do tax Are royalties subject to May a taxpayer go to competent authorities have with customs withholding? authority before paying tax? authorities? Yes. No formal rules exist in this area. High. Are taxpayers allowed to file tax Are there limitations on return numbers that differ from Advance pricing deductibility of management fees book numbers? agreements beyond the arm’s length principle? Yes. However, it is important that the What APA options are available, if Yes. However, taxpayers must support year-end adjustments are accounted any? the fact that intra-group services have for before the end of the fiscal year Bilateral, multilateral. been rendered before a deduction to make sure tax and accounting is taken. That is, the taxpayer must figures are consistent. It is advisable Is there a filing fee for APAs? demonstrate that the services (1) to conduct periodic reviews in order to No. were actually rendered, (2) provided a avoid significant year-end adjustments. benefit to the taxpayer and (3) were not Customs issues must also be taken into Does the tax authority publish APA duplicative services. If no support can account. data either in the form of an annual be provided, then the tax authority will report or through the disclosure of Other unique attributes? consider them non-deductible. data in public forums? Mutual agreement procedures (MAPs) Are management fees subject to Not applicable. are not available. withholding? Are there any difficulties or Yes. limitations on the availability or Tax treaty/double tax effectiveness of APAs? Are there limitations on the resolution deductibility of royalties beyond the Not applicable. What is the extent of the double tax arm’s length principle? treaty network? Yes. Taxpayers must support the fact Not applicable. that intra-group services have been rendered before a deduction is taken. If extensive, is the competent That is, the taxpayer must demonstrate authority effective in obtaining that the services (1) were actually double tax relief? rendered, (2) provided a benefit to the Not applicable. taxpayer and (3) were not duplicative services. If no support can be provided, When may a taxpayer submit an then the tax authority will consider them adjustment to competent authority? non-deductible. No formal rules exist in this area.

KPMG in Guatemala

Felipe Gómez Tel: +502 2334 2628 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Honduras

KPMG observation

The Honduran Transfer Pricing Law became effective on January 2014; however, regulations regarding the correct application of the Law have not been issued yet. The date for the issuance of the regulations is unknown.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • entities comprise a decision unit. An such participation must be more than entity is considered to be a member 50 percent; and Tax authority name of another and if they are in any of the • when a company or business is a Dirección Ejecutiva de Ingresos (DEI). following situations: decision unit, or when a company is a Citation for transfer pricing rules – hold a majority of voting rights. ‘partner’ of another company. If the member has the power to Decreto Ley No. 232-2011. What is the statute of limitations appoint or remove the majority of on assessment of transfer pricing Effective date of transfer pricing the members of board of directors adjustments? rules – could have, under agreements with Five years from filing date of the income other partners, most of the voting 1 January 2014. tax return, and ten years in cases of tax rights; and What is the relationship threshold fraud determined by the DEI. for transfer pricing rules to apply – has appointed only with its votes between parties? most of the members of the board of directors. Transfer pricing Two or more entities are related parties disclosure overview when: • they participate in direct or indirect commercial and financial transactions Are disclosures related to transfer • a person or entity participates directly (not yet defined by the tax authorities) pricing required to be submitted to or indirectly in the management, the revenue authority on an annual • a person resident in the country has control or capital of both legal entities basis (e.g. with the tax return)? permanent establishments abroad • a person or a company participates in Yes. The DEI shall demand the Annual • a company has the same directors or the management, control or capital Transfer Pricing Affidavit, however such managers as a related company of another entity, both entities or affidavit is not available for taxpayers the person and the entity are related • when the relationship between yet. According to Law on 30 April 2015, parties potentially related parties is taxpayers was supposed to have transfer considered in terms of the social pricing studies, however, Tax Authority capital or control of voting rights, has announced an extension of three

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 120 | Global Transfer Pricing Review months starting from the issue of the OECD transfer pricing methods, the • any other breach of the provisions Transfer Pricing Regulation, however the following methodology will need to be contained in the Honduran Transfer date for the issuance of the regulation is considered or rejected. Pricing Law. unknown. Applicable method for the exports The offense described in number one What types of transfer pricing of goods with international quote: shall be punished by a fine of USD10,000 information must be disclosed? In the case of exports of goods with payable in its equivalent in Lempiras; the international quote in transparent offense described in number two shall be Transfer Pricing Law only indicates markets, the exporter subject to income punished be a fine of 15 percent of the that taxpayers must submit to the tax will have the choice to apply the amount of the adjustment made by the DEI the tax return, the information comparable uncontrolled price (CUP) Tax Authority. If any of those behaviors and sufficient analysis to assess its method using third parties information, are accompanied by that typified in operations with related parties, this regarding the prices agreed with third number one, the previous penalty for obligation shall be without prejudice to parties as the market value of those both offenses will rise to the greater of any additional information that will be goods in similar conditions. 30 percent or USD20,000 payable in required at the request of DEI. The DEI its equivalent in Lempiras, the offense have not provided specific detail about described in number three shall be the information that should be included Transfer pricing audit punished by a fine of USD5,000 payable in the transfer pricing disclosures/ and penalties in its equivalent in Lempiras. documentation study. When the tax authority requests To what extent are transfer pricing a taxpayer’s transfer pricing What are the consequences of penalties enforced? failure to submit disclosures? documentation, are there timing requirements for a taxpayer to The TP Law is in force, but it have not The taxpayer not providing or providing submit its documentation? And if been applied yet because the issuance false or grossly incomplete or inaccurate so, how many days? of a regulation is pending. Therefore no data information or documentation penalty has been applied yet. required by Tax Authority, is punishable Yes. by a fine of 10,000 US dollars (USD) What defenses are available with When the tax authority requests payable in its equivalent in Lempiras. respect to penalties? a taxpayer’s transfer pricing documentation, are there timing Occasionally. Congress approves tax Transfer pricing study requirements for a taxpayer to breaks that reduce the impact of the overview submit its documentation? Please penalties if the taxpayer decides to explain. avail them while making the penalty Can documentation be filed in payments. a language other than the local According the Honduran Tax Code, language? If yes, which ones? taxpayers must have with immediately What trends are being observed availability all tax documentation when currently? Spanish. the Tax Authorities request it. Tax Authority has not applied the When a transfer pricing study is If an adjustment is proposed by Honduran Transfer Pricing Law yet. prepared, should its content follow the tax authority, what dispute Chapter V of the Organisation resolution options are available? for Economic Co-operation and Special considerations Development (OECD) Guidelines? Appeal. Are secret comparables used by tax authorities? Not applicable. This is not detailed in the If an adjustment is sustained, can Honduran Transfer Pricing Law. penalties be assessed? If so, what Tax Authority has not applied the rates are applied and under what Honduran Transfer Pricing Law yet. Does the tax authority require an conditions? advisor/tax practitioner to have Is there a preference, or specific designation in order to Yes. In accordance with Honduran requirement, by the tax authorities prepare or submit a transfer pricing Transfer Pricing Law, violations are: for local comparables in a study? benchmarking set? • failure to provide or providing false No. or grossly incomplete or inaccurate Tax Authority has not applied the data information or documentation Honduran Transfer Pricing Law yet. required by Tax Authority Transfer pricing methods Do tax authorities have Does your country follow the • declare any taxable year a lower tax requirements or preferences transfer pricing methods outlined in base which would have been payable regarding databases for Chapter II of the OECD Guidelines? due to a different valuation agreed to comparables? If exceptions apply, please describe. have agreed independent parties in comparable Tax Authority has not applied the Yes. However, for the case of export Honduran Transfer Pricing Law yet. transactions of goods with an • circumstances, unless there is international quote, before applying documentation to support the statement; and

Does the tax authority generally Are taxpayers allowed to file tax Advance pricing focus on the interquartile range in a return numbers that differ from TNMM analysis? book numbers? agreements What APA options are available, if No. Not applicable. Tax Authority has not any? applied the Honduran Transfer Pricing Does the tax authority have other Law yet. Bilateral. preferences in benchmarking? If so, please describe. Other unique attributes? Is there a filing fee for APAs? Tax Authority has not applied the Not applicable. No. According to Honduran Transfer Honduran Transfer Pricing Law yet. Pricing Law, the Dirección Ejecutiva de Ingresos can enter into APAs with What level of interaction do tax Tax treaty/double tax resident and non-resident income authorities have with customs resolution taxpayers. authorities? What is the extent of the double tax Does the tax authority publish APA Tax and customs in Honduras are under treaty network? data either in the form of an annual the same management. None. report or through the disclosure of Are there limitations on data in public forums? If extensive, is the competent deductibility of management fees authority effective in obtaining No. beyond the arm’s length principle? double tax relief? Are there any difficulties or Yes. However, taxpayers must support Not applicable. limitations on the availability or the fact that intra-group services have effectiveness of APAs? been rendered before a deduction When may a taxpayer submit an is taken. That is, taxpayer must adjustment to competent authority? Not applicable. Tax Authority has not demonstrate that the services: applied the Honduran Transfer Pricing In case of adjustments to financial and Law yet. • were actually rendered commercial operations between related parties, that have been practiced in • provided a benefit to the taxpayer; another State and that result in a greater and income that the derived of the operation • were not duplicative services. as a whole, the Dirección Ejecutiva de If no support can be provided, then the Ingresos prior to the request of the tax authority will consider them non- resident taxpayer in its territory, shall deductible. examine the origin of the adjustment and determine that double taxation Are management fees subject to has been produced, shall admit the withholding? adjustments for the amount of the Yes. tax received as well as the accessory elements of the tax debt. Are there limitations on the deductibility of royalties beyond the May a taxpayer go to competent arm’s length principle? authority before paying tax? No. Not specified in TP Honduran Law. No formal rules exist in this area. Are royalties subject to withholding? Not applicable.

KPMG in Honduras

Ruben Alonzo Tel: + 504 2238 5605 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Hong Kong

KPMG observation

The Hong Kong Inland Revenue Department (IRD) released comprehensive transfer pricing guidelines in December 2009 with potential retroactive effect. The guidelines were released in the form of Departmental Interpretation and Practice Notes No. 46 (DIPN 46) and they indicate the IRD’s interpretation and practices regarding transfer pricing methodologies and related issues. DIPN 46 is generally consistent with the Organisation for Economic Co-operation and Development (OECD) Guidelines and with international transfer pricing practices. DIPN 46 states that the IRD will apply the arm’s length principle and follows the preference of traditional transaction methods over the profit-based methods instead of the most appropriate method approach outlined in the revised OECD Guidelines in 2010. In practice, profit based methods are commonly applied. The IRD released DIPN No.48 Advance Pricing Arrangement in March 2012 establishing the procedure for enterprises seeking an Advance Pricing Agreement (APA) in Hong Kong. APAs are generally available on bilateral or multilateral basis with counterparty jurisdictions with which Hong Kong has a Double Tax Agreement (DTA), although unilateral APAs are possible in certain limited circumstances. As of 30 April 2015, Hong Kong has concluded two bilateral APAs, one with the Netherlands and one with Japan. Following the recommendation of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, Hong Kong introduced a Bill that allows Hong Kong to enter into standalone Tax Information Exchange Agreements (TIEAs) and enhances the existing exchange of information (EoI) under a DTA. The Bill was passed by Legislative Council in July 2013. The enactment of the Bill demonstrates Hong Kong’s commitment to implementing internationally agreed standards. Going forward, the tax information to be exchanged under a DTA/TIEA will have much coverage and the Commissioner will have wider powers to collect and disclose tax information. In September 2014, Hong Kong indicated to the OECD its support for implementing the new standard on Automatic Exchange of Information (AEoI), with a view to commencing the first information exchanges by the end of 2018, on the basis that necessary legislation is in place by 2017. With respect to the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, the IRD has no immediate plans to change the current laws or practices, but has indicated in a press release in November 2013 that they will closely monitor the international development in this respect, including OECD discussions, with a view to assess the need for any corresponding measures. The IRD will embark on studies and engage local stakeholders for appropriate follow-up actions in due course.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations Transfer pricing study Tax authority name on assessment of transfer pricing adjustments? overview Hong Kong Inland Revenue Department Can documentation be filed in The IRD is empowered to raise (IRD). a language other than the local additional assessment(s) for a year of language? If yes, which ones? Citation for transfer pricing rules assessment at any time within six years Yes. English, Chinese. • DIPN 46 refers to relevant articles after the end of that year of assessment of double taxation treaties signed if it considers that the taxpayer has When a transfer pricing study is by Hong Kong when applicable, been under-assessed, or has not been prepared, should its content follow and to sections 14, 16(1), 17(1) (b), properly assessed for that year. Chapter V of the Organisation 17(1) (c), 20 and 61A of the Inland for Economic Co-operation and Revenue Ordinance (IRO) in other Transfer pricing Development (OECD) Guidelines? circumstances. disclosure overview Yes, for all transactions. Broadly, yes. • DIPN 45, which was also released Are disclosures related to transfer DIPN 46 refers to the OECD Guidelines during 2009, provides guidance pricing required to be submitted to for the type of information which would with regard to relief from double the revenue authority on an annual be useful to be included in a transfer taxation arising from transfer pricing basis (e.g. with the tax return)? pricing study. adjustments in the context of DTAs. Yes. Taxpayers are required to disclose Does the tax authority require an • DIPN 47, sets out the current practice certain information on related party advisor/tax practitioner to have on exchange of information upon transactions in the annual tax return. specific designation in order to requests received from treaty prepare or submit a transfer pricing partners. DIPN 48 establishes the What types of transfer pricing study? procedure for enterprises seeking an information must be disclosed? No. APA in Hong Kong. Transaction amounts and jurisdiction(s) of related parties with which Effective date of transfer pricing Transfer pricing methods rules transactions have been conducted. Does your country follow the There is no specific date, but provisions What are the consequences of transfer pricing methods outlined in of DIPN 46 may apply retroactively to all failure to submit disclosures? Chapter II of the OECD Guidelines? open tax years. APA applications will be In case of a failure to prepare or submit If exceptions apply, please describe. considered as of April 2012 onwards and the tax return where the taxpayer does Yes. the IRD has indicated that rollbacks may not have a “reasonable excuse” for the be considered in some cases. offence, the maximum penalty that can What is the relationship threshold be imposed is 10,000 Hong Kong dollars Transfer pricing audit for transfer pricing rules to apply (HKD) plus three times the amount of and penalties between parties? tax undercharged. When the tax authority requests No numeric threshold. Association is a taxpayer’s transfer pricing established via common management documentation, are there timing control or shareholding. requirements for a taxpayer to

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 124 | Global Transfer Pricing Review submit its documentation? And if Continued tax scrutiny was Are there limitations on so, how many days? foreshadowed in Hong Kong’s 2015-2016 deductibility of management fees fiscal budget, where the Hong Kong beyond the arm’s length principle? Yes, 30 days. government has specifically singled Yes. Subject to the general requirement When the tax authority requests out the IRD to “step up its efforts in that the expense must be incurred in a taxpayer’s transfer pricing combating cross-border tax evasion earning profits chargeable to tax. documentation, are there timing in accordance with the latest global requirements for a taxpayer to standard” to preserve the territory’s Are management fees subject to submit its documentation? Please revenue base. IRD would continue to withholding? explain. focus audit activities on high risk areas No. including significant transactions with Generally within 30 days of request, related parties in low/no tax jurisdictions, Are there limitations on the subject to extension. poor results not consistent with industry deductibility of royalties beyond the If an adjustment is proposed by norms, sustained losses or fluctuating arm’s length principle? the tax authority, what dispute profits and losses with growing Yes. Subject to the general requirement resolution options are available? businesses, etc. that the expense must be incurred in Available dispute resolution Hong Kong is also actively expanding earning profits chargeable to tax. options include: objections to the its double tax treaty network which Are royalties subject to Commissioner, appeals to the Board of expands potential for an increased withholding? Review, and appeals to the courts. DIPN number of corresponding adjustments, 6 provides an overview of the objection APA negotiations and Mutual Yes. channels and appeal procedures. Agreement Procedures (MAPs). Are taxpayers allowed to file tax If an adjustment is sustained, can return numbers that differ from penalties be assessed? If so, what Special considerations book numbers? rates are applied and under what Are secret comparables used by tax Yes. Generally yes. In Hong Kong conditions? authorities? there is no specific law addressing Yes. General tax penalties apply. The Generally no. subsequent transfer pricing extent of these penalties depends on adjustments. However, in order to the degree of the offence. Where the Is there a preference, or be reflected in the tax return for the taxpayer does not have a “reasonable requirement, by the tax authorities year in which the adjustment relates, excuse” for the offence, the maximum for local comparables in a it should be included in the audited penalty that can be imposed is benchmarking set? financial statements for that year HKD10,000 plus three times the amount No. and be supported by the relevant of undercharged tax. documentation. Do tax authorities have To what extent are transfer pricing requirements or preferences Other unique attributes? penalties enforced? regarding databases for None. Penalties are less common in practice. comparables? What defenses are available with No. Tax treaty/double tax respect to penalties? Does the tax authority generally resolution Preparation of transfer pricing focus on the interquartile range in a What is the extent of the double tax documentation. Generally, in the TNMM analysis? treaty network? absence of fraud or tax evasion the Yes, sometimes. Minimal but developing. penalties may not be enforced. Does the tax authority have other If extensive, is the competent What trends are being observed preferences in benchmarking? If so, authority effective in obtaining currently? please describe. double tax relief? There are increasing audit cases which No. Approaches consistent with No experience yet due to relatively involve transfer pricing issues and the the OECD Guidelines are generally limited (but expanding) treaty network. tax authority is continuously seeking to acceptable by the IRD. develop its transfer pricing resources When may a taxpayer submit an and skills. The IRD has recently launched What level of interaction do tax adjustment to competent authority? a large number of tax audits of asset authorities have with customs authorities? Subject to applicable DTA, generally managers in Hong Kong and it is highly only after the first notification of actions likely that the IRD will look to target Low. giving rise to taxation not in accordance other prevailing industry sectors. with the DTA has been issued by the DTA state.

May a taxpayer go to competent authority before paying tax? Currently there are no formal rules in this respect.

Advance pricing agreements What APA options are available, if any? Bilateral, multilateral. Is there a filing fee for APAs? No. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? Yes. APAs are only applicable on a bi- or multilateral basis with counterparty jurisdictions with which Hong Kong has a DTA due to resource constraints, at least at the initial stage of the program. A unilateral APA may be available in cases when the DTA partner(s) do not wish to participate in developing an APA, agreement stalls with the DTA partner(s) when negotiating a bilateral or multilateral APA and in cases when a non DTA state is prepared to agree a unilateral APA regarding transactions that are integrally linked to the controlled transactions covered by a bilateral or multilateral APA. The IRD has also set a threshold for an application of HKD80 million for each year covered in the APA if the controlled transactions involve sale and purchase of goods, a threshold of HKD40 million per annum if the application relates to services and a threshold of HKD20 million if the application relates to intangible property. The threshold may be waived on a case by case basis following review by the Commissioner.

KPMG in Hong Kong

John Kondos Tel: +852 2685 7457 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Hungary

KPMG observation

The Hungarian tax authorities are paying special attention to transfer pricing issues. Previously, the mere existence of transfer pricing documentation was sufficient, but recent experience shows that tax audits are moving towards more in-depth analysis of transactions (questioning qualitative screening, testing comparables, challenging particularly benchmarking studies, examining or excluding loss making comparables in the benchmarking set and functional analysis). In addition, the Hungarian tax authorities are focusing on a comprehensive review of documentation (including contracts, back-up calculations that support the arm’s length pricing of transactions and deductibility of costs) and challenging loss-making entities. In line with Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, tax avoidance and harmful tax structures will likely be met with challenges by the Hungarian tax authorities.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Section 18 (1)-(4) regulates the • Section 18 (9) determines a new rule determination of the arm’s length regarding the rules of the application Tax authority name price and the applicable methods of the interquartile range. Nemzeti Adó- és Vámhivatal (NAV) • Section 18 (5) determines transfer Act XCII of 2003 on Rules of Taxation: — National Tax and Customs pricing documentation requirements Administration of Hungary. • Section 23 (4) (b) notification of for taxpayers. Decree 22/2009 of the related parties (both the start and the Citation for transfer pricing rules Ministry of Finance effective from cessation of relationship) 1 January 2010 determines the formal Act LXXXI of 1996 on Corporate Income requirements for transfer pricing • Section 172 (16) default penalty Tax and Dividend Tax (CIT): documentation • Section 132/B-C Advance Pricing • Section 4 (23) a–e determines the • Section 18 (6)-(8) special cases (e.g. Agreement (APA); and concept of related parties dividend payment in-kind, capital • Section 178.17 definition of the decrease/increase in-kind etc.) are related parties. listed which have to be supported by transfer pricing documentation; and

Effective date of transfer What is the statute of limitations Does the tax authority require an pricing rules on assessment of transfer pricing advisor/tax practitioner to have adjustments? specific designation in order to • the new Decree (MF Decree 22/2009) prepare or submit a transfer pricing on detailed regulation of transfer Five years after the last day of the study? pricing documentation was effective calendar year in which taxes should from 1 January 2010 and is generally have been declared or reported, or No. applicable for the 2010 financial year. paid in the absence of a tax return or However, if a company wished, the declaration. Transfer pricing methods new regulations could be also applied Does your country follow the for the fulfillment of the obligations in Transfer pricing transfer pricing methods outlined in connection with financial year 2009 disclosure overview Chapter II of the OECD Guidelines? • from 1 January 2011, Section 18 of Are disclosures related to transfer If exceptions apply, please describe. the CIT incorporated profit split and pricing required to be submitted to transactional net margin method Yes. the revenue authority on an annual (TNMM) as equivalent approaches basis (e.g. with the tax return)? with traditional transactional methods. Transfer pricing audit However, note that this modification is Yes. A company should declare in the and penalties only applied on business years starting tax return that the transfer pricing When the tax authority requests in 2011 and onwards documentation has been prepared in a taxpayer’s transfer pricing line with the European documentation • as of 1 January 2012 certain sections documentation, are there timing standards (EU Master file concept). of 22/2009 MF Decree changed. requirements for a taxpayer to These modifications aimed to What types of transfer pricing submit its documentation? And if decrease the administrative burden information must be disclosed? so, how many days? on taxpayers. However, note that the understanding of the new regulation A company should declare in the Yes, three days. tax return that the transfer pricing is still uncertain due to possible When the tax authority requests documentation has been prepared in differences in the interpretation of the a taxpayer’s transfer pricing line with the European documentation wording of the new sections. Further documentation, are there timing standards (EU Master file concept). clarification was published in 2013 requirements for a taxpayer to • as of 21 June 2013 a new modification What are the consequences of submit its documentation? Please of the MF Decree 22/2009 was failure to submit disclosures? explain. released. The purpose of the Decree If the taxpayer does not prepare its Normal practice is to expect was to decrease the administrative transfer pricing documentation before documentation within three days burden on taxpayers — which was the statutory deadline, a default penalty of request (documentation should the aim of the previous change as can be imposed. be prepared together with the CIT well — and also to clarify some vague return, therefore it is assumed that provisions of the former regulation Transfer pricing study documentation is already prepared). • effective from 1 January 2015, certain If an adjustment is proposed by sections of 22/2009 MF Decree overview Can documentation be filed in the tax authority, what dispute changed. The regulation introduced resolution options are available? special rules in connection with the a language other than the local application of the interquartile range language? If yes, which ones? After unsuccessful exhaustion of administrative procedures, a company • for 2009 and prior financial years, Yes. English, German and French. is entitled to bring the matter before transfer pricing obligations were Can documentation be filed in the competent court or in certain cases regulated by the 18/2003 MF Decree. a language other than the local might initiate a supervisory procedure at What is the relationship threshold language? If yes, which ones? the head of Tax Authorities and Ministry for transfer pricing rules to apply Yes, for all transactions. It should be of National Economy. between parties? noted that Chapter V is not directly If an adjustment is sustained, can Direct or indirect ownership with applicable, rather only through the penalties be assessed? If so, what greater than 50 percent voting power, 22/2009 MF Decree on detailed rates are applied and under what or the existence of majority control. regulation of transfer pricing, which conditions? Majority control means when any party is based on the OECD Guidelines, If the applied price is not in line with has the right to appoint or dismiss including Chapter V. arm’s length prices, the adjustment the majority of executive officers and will have an effect on the amount of tax supervisory board members. Due payable. Accordingly, a default penalty of to recent changes, in certain cases 50 percent and a late payment penalty overlap in managing directors could interest might be levied on the basis of also trigger related party status. the tax arrears due to such adjustments.

To what extent are transfer pricing Does the tax authority have other tax issues (e.g. if the adjustments are penalties enforced? preferences in benchmarking? If so, directly related to transactions subject to please describe. VAT, the costs of goods sold or services Unknown. intermediated are adjusted etc.). The tax authority prefers the What defenses are available with benchmarking study to be prepared Year-end adjustments are generally respect to penalties? according to the Hungarian legislation recordable in the financial statements, Default penalties can only be avoided (appropriate independence criteria, pursuant to Hungarian generally by complying with transfer pricing region). Furthermore, the tax authority is accepted accounting principles (GAAP), requirements. very keen on comparables with negative i.e. no special treatments are required. profitability. What trends are being observed Other unique attributes? currently? What level of interaction do tax Effective from 1 January 2012, no authorities have with customs More and more attention is being paid to documentation is required if the authorities? the transfer pricing requirements during transactional value is below 50 million tax audits, and tax authority inspectors Medium, but cooperation is increasing Hungarian forint (HUF) (approximately are being trained accordingly. Although due to the merger of the National Tax 170,000 euros (EUR)). special industry focus or transaction and Customs Administrations in 2011. Effective from 1 January 2012, in the focus has not yet been observed, Are there limitations on case of certain low value-added services management fees and royalties are deductibility of management fees (as defined by the 22/2009 MF Decree usually inspected thoroughly, as beyond the arm’s length principle? e.g. IT services, translation, interpreting, well as benchmarking studies (the accounting and legal activities, language screening steps, geographical selection, Yes, some. There are limitations education, administrative services, qualitative screening, and loss making if it cannot be supported that the storage, canteen service, etc.) special comparables in the benchmarking set, management fees incurred are in the rules were introduced in order to ease etc.) and financial transactions. interest of the company. the associated burden to prepare Are management fees subject to transfer pricing documentation. This rule Special considerations withholding? was further modified as of 21 June 2013. Are secret comparables used by tax No. According to the new rules on simplified authorities? documentation applicable for these Are there limitations on the services, if the service provider applies Generally no. deductibility of royalties beyond the a margin between 3 and 10 percent, Is there a preference, or arm’s length principle? the price applied is qualified as an arm’s requirement, by the tax authorities Yes. There are limitations if it cannot be length price without any further analysis for local comparables in a supported that the royalties incurred are or benchmark study. Accordingly, the benchmarking set? in the interest of the company. transfer pricing documentation can be Yes. The tax authorities prefer local Are royalties subject to prepared with limited content. However, comparables (or at least regional ones). withholding? the condition for applying the new rule is Where existing local comparables that the arm’s length price of the service are left out of the benchmarking set, No. needs to be assessed by means of the the tax authorities may challenge the Are taxpayers allowed to file tax cost-plus method. benchmarking study prepared by the return numbers that differ from Please note that, pursuant to the MF taxpayer and perform its own search. book numbers? Decree, there are a limited number of Do tax authorities have Yes. Year-end adjustments are permitted, conditions that if not met, can result requirements or preferences but they should be sufficiently justified by in the simplified documentation being regarding databases for the taxpayer as to economic necessity rejected. First, if the margin applied comparables? (e.g. in order to achieve a targeted level falls outside the previously mentioned range of 3 and 10 percent or the pricing Databases used by the taxpayer of profitability in line with the functional method of cost-plus 3 and 10 percent are obliged to be publicly available profile of the taxpayer etc.) i.e. their does not reflect the arm’s length price, or verifiable by the tax authorities. business nature should be defensible. the taxpayer is not entitled to apply the The preferred database is Amadeus, Where the tax authorities do not simplified documentation. Furthermore, published by BvD, but not required recognize such adjustments — true- the net value of the services, taking into (online version is not appropriate). ups — as costs that arose in the business interest of the taxpayer, its tax base consideration all transactions which can Does the tax authority generally might be increased with the amount of be consolidated in one document, cannot focus on the interquartile range in a the true-ups and taxed accordingly. exceed HUF150 million (EUR526,000), TNMM analysis? five percent of the seller’s net sales In certain cases, such adjustments revenue and 10 percent of the operation Yes, always. might also entail VAT or local business costs of the purchaser in the tax year.

According to the latest modification, the • for unilateral procedures with Hungarian legislation incorporated the other methods, the fee payable application of the interquartile range. is from HUF2 million (EUR7,000) The 22/2009 Decree introduced special to HUF7 million (approximately rules when the interquartile range must EUR24,500) be used, and when it is appropriate to • for bilateral procedures the fee payable apply the full range. is from HUF3 million (approximately However, note that the understanding of EUR10,500) to HUF8 million the new regulation is currently uncertain (approximately EUR28,000); and due to possible differences in the • for multilateral procedures the interpretation of the wording of the new fee payable is HUF5 million sections. (approximately EUR17,500) to HUF10 million (approximately Tax treaty/double tax EUR35,000). resolution If the exact arm’s length price could What is the extent of the double tax not be established or the subject of the treaty network? agreement is only the methodology, the filing fee is the minimum amount of the Extensive. fee ranges shown above. If extensive, is the competent Does the tax authority publish APA authority effective in obtaining data either in the form of an annual double tax relief? report or through the disclosure of In the case of transfer pricing issues, it data in public forums? is not usually effective. No. When may a taxpayer submit an Are there any difficulties or adjustment to competent authority? limitations on the availability or The taxpayers are entitled to submit effectiveness of APAs? an adjustment to the tax authorities, No. Unilateral APAs are quite common as competent authority, at any time. now due to the 2009 decrease in However, we would note that such procedure fees. Contemporaneously claims made directly to the tax bilateral APAs, nontraditional authorities are very rare in the Hungarian approaches or more complex cases may market. cause difficulties for the tax authorities. May a taxpayer go to competent Based on general experience, an APA authority before paying tax? procedure might be time consuming (depending on the type of the APA, Yes. The possibility to file an APA exists. the complexity of the intra- group transaction as well as the capacity of the Advance pricing tax authorities). agreements What APA options are available, if any? Unilateral, bilateral, multilateral. Is there a filing fee for APAs? Yes. The filing fee depends on the type of APA (unilateral, bilateral, or multilateral procedure) and on the type of applicable approach (transfer pricing methods). KPMG in Hungary • for unilateral procedures with Mihály Gódor traditional methods (i.e. CUP method, Tel: + 36 (1) 887 7340 RPM and CPLM), the fee payable is Email: [email protected] from HUF500,000 (approximately EUR1,700) to HUF5 million (approximately EUR17,500) As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Iceland

KPMG observation

The law that enacted the Icelandic transfer pricing rules was passed in 2013 and came into effect 1 January 2014. On 23 December 2014, Regulation No. 1180/2014 on documentation and transfer pricing in transactions between related parties was issued by the Ministry of Finance. The Regulation became effective on 1 January 2015. Under the Regulation, Icelandic legal entities or permanent establishments that 1) have transactions with related entities or permanent establishments and 2) have assets or turnover in excess of one billion ISK are subject to the transfer pricing documentation rules. As the transfer pricing rules only became applicable on 1 January 2014, it is difficult to predict what Iceland’s approach to Base Erosion and Profit Shifting (BEPS) will be. However, it is likely that a similar approach as the other Nordic countries will be taken.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold • legal entities that are directly or indirectly in majority ownership or Tax authority name for transfer pricing rules to apply between parties? controller by individuals that are Directorate of Internal Revenue related by family, i.e. married, siblings, Direct or indirect ownership of more (Ríkisskattstjóri). etc. The same applies to individuals than 50 percent. Citation for transfer pricing rules that are connected through business According to the law: relations and investments. Paragraphs 3-6 of Article 57 of the • legal entities that are part of a group Icelandic Income Tax Act No 90/2003. according to Article 2 of Act 3/2006 What is the statute of limitations Regulation No. 1180/2014. on Annual Accounts or are under the on assessment of transfer pricing Effective date of transfer pricing direct or indirect ownership of control adjustments? rules of two or more companies within the same group; or The statute of limitation is six years from 1 January 2014. the tax year-end. • there is a majority ownership over a The Regulation became effective on legal entity jointly by group companies 1 January 2015. either directly or indirectly; or

Transfer pricing description and organizational intangible asset within the group chart where there is a formal that has an effect on intercompany disclosure overview management system. transactions Are disclosures related to transfer pricing required to be submitted to • Information on key markets, main – information on likely resale price the revenue authority on an annual competitors and competitive and net present value of expected basis (e.g. with the tax return)? products of the group: future earning of the intangible – description of any restructuring asset shall also be presented. Yes. There is a special form to be during the fiscal eary • Transfer pricing methods: submitted with the tax return. – financial information – the documentation shall contain a The form has not been completed by description of the transfer pricing the tax authorities but it is expected – the documentation shall include financial statements of the three method used and why it was that it should be filed with the 2016 tax chosen. return (income year 2015). preceding years for all related entities which the entity subject to • Information on comparability analysis: What types of transfer pricing the documentation in Iceland has information must be disclosed? – the documentation shall include transactions with. If the financial a comparability analysis where Not applicable as the form has not been statements are not accessible or appropriate completed by the tax authorities. if they don’t contain information on earnings before depreciation, – the analysis shall be made with What are the consequences of interest or earnings before reference to the OECD Guidelines failure to submit disclosures? valuation changes and taxes that comparability factors. If affected taxpayers do not submit the information must be specifically • Information on contracts: provided form, the tax filings could be deemed – all contracts that have an effect incomplete. Providing insufficient or – if the entity subject to on the pricing of intercompany wrongful information can lead to penalty documentation has suffered a loss transactions shall be included taxes being imposed on adjusted the reasons for the loss must be – all Advance Pricing Agreements transfer pricing amounts in tax audits. described. (APAs) and other agreements • Information about the nature and in relation to setting transfer Transfer pricing study scope of transactions: prices shall be included in the overview – description of the nature and extent documentation. Can documentation be filed in of intercompany transactions Does the tax authority require an a language other than the local – information on commercial terms advisor/tax practitioner to have language? If yes, which ones? specific designation in order to – information on how the pricing prepare or submit a transfer pricing English. decisions were made, what study? When a transfer pricing study is method according to the OECD No. prepared, should its content follow Guidelines was used for the Chapter V of the Organisation pricing. Whether the pricing for Economic Co-operation and was based on guidance from Transfer pricing methods Development (OECD) Guidelines? independent experts or other Does your country follow the available methods. Furthermore the transfer pricing methods outlined in Yes, for all transactions. In certain transactions should be described situations a more detailed information Chapter II of the OECD Guidelines? with reference to the OECD If exceptions apply, please describe. should be provided. Guidelines comparability factors Yes. According to the regulations the transfer – recurrent transactions should be pricing documentation requirements especially described. Transfer pricing audit and should include among other the • Service between related entities: following information. penalties – in relation to cost allocation of • Information about the group, When the tax authority requests services, it shall be sufficiently a taxpayer’s transfer pricing individual legal entities and documented that the entity subject operations: documentation, are there timing to the documentation did in fact requirements for a taxpayer to – brief historical overview of the receive the services submit its documentation? And if group and individual legal entities – in relation to R&D cost allocation so, how many days? – general description of ownership sufficient information on the terms Yes, 45 days. and legal form of legal entities and of allocation shall be available. the tax domicile of the entities • Information on intangible assets: – description of the operations of – the entity subject to individual legal entities and their documentation shall describe any role within the group. A general

When the tax authority requests Do tax authorities have If extensive, is the competent a taxpayer’s transfer pricing requirements or preferences authority effective in obtaining documentation, are there timing regarding databases for double tax relief? requirements for a taxpayer to comparables? No experience. submit its documentation? Please Not applicable. Amadeus will most likely explain. When may a taxpayer submit an be used. adjustment to competent authority? The taxpayer has 45 days to submit its Does the tax authority generally documentation. No formal rules exist in this area. focus on the interquartile range in a If an adjustment is proposed by TNMM analysis? May a taxpayer go to competent the tax authority, what dispute authority before paying tax? No. resolution options are available? Permitted. Meetings with the Does the tax authority have other The taxpayer can bring the case to the Directorate of Internal Revenue. preferences in benchmarking? If so, tax state internal revenue board and/or However, taxes become payable upon please describe. the courts. the tax office’s decision being made, so Not applicable. generally taxes have to be paid prior to If an adjustment is sustained, can going to the competent authority. penalties be assessed? If so, what What level of interaction do tax rates are applied and under what authorities have with customs conditions? authorities? Advance pricing Yes. General tax penalties only: up to Medium. agreements What APA options are available, if 25 percent increase on the tax base Are there limitations on any? adjusted. deductibility of management fees To what extent are transfer pricing beyond the arm’s length principle? None. penalties enforced? No. Is there a filing fee for APAs? Not yet known as the rules just took Are management fees subject to Not applicable. effect 1 January 2014. withholding? Does the tax authority publish APA What defenses are available with No. data either in the form of an annual respect to penalties? report or through the disclosure of Are there limitations on the data in public forums? Taxpayers are obliged to disclose deductibility of royalties beyond the sufficient and correct information about arm’s length principle? Not applicable. their transfer pricing. The defense would thus generally be to argue that No. Are there any difficulties or limitations on the availability or the taxpayer has complied with these Are royalties subject to effectiveness of APAs? requirements with reasonable cause. withholding? Other defense is negotiation with tax Not applicable. There are no APAs Yes. authorities. available in Iceland. What trends are being observed Are taxpayers allowed to file tax currently? return numbers that differ from book numbers? Not applicable. Yes. There is no practice regarding this Special considerations available to date. Are secret comparables used by tax Other unique attributes? authorities? Not applicable. Not applicable. Is there a preference, or Tax treaty/double tax requirement, by the tax authorities resolution for local comparables in a What is the extent of the double tax benchmarking set? treaty network? KPMG in Iceland Unofficially they have said that pan- Medium. Treaties with about European comparables should be 40 countries. Ágúst Karl Guðmundsson accepted and are preferable. Tel: + 354 5456152 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

India

KPMG observation

The Indian Transfer Pricing Regulations were introduced in 2001 and are largely in line with the Organisation for Economic Co-operation and Development (OECD) Guidelines. Since their introduction in 2001, the Indian Transfer Pricing Regulations have come of age — both in terms of quality of audits as well as the revenue generated for the Indian government. Further, over the past few years, there has been significant guidance from Income Tax Tribunals and higher Appellate Authorities on various fundamental transfer pricing issues across industries. The Indian Transfer Pricing Regulations extend to international as well as domestic transactions between associated enterprises. The Regulations have been developing over the years and now also aim to cover: debts arising during course of business; business reorganizations or restructuring (included irrespective of whether the same has an impact on current year’s profits, income, losses or assets); and intangible properties including marketing intangibles, human assets or technology related intangibles, etc. The introduction of the Advance Pricing Agreement (APA) program in 2012 has been followed by the introduction of APA rollback regulations in 2015. All taxpayers who have filed for APAs to date will also be eligible to file for rollback of their APAs up to a maximum period of four prior years, subject to certain conditions. Even those taxpayers who have signed APAs with the government will also be eligible for APA rollbacks. However, it is important to note that before availing of a rollback of APA terms, the taxpayers and the Revenue authorities need to withdraw any pending litigation. OECD-BEPS initiative India has been actively involved in various action points of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, and is engaging closely with other G20 member countries in respect of the BEPS initiative. India is also part of the BEPS Bureau, which is coordinating and guiding the work being done in all areas, and will seek to implement the guidelines issued by OECD from time to time under the BEPS initiative. Indian transfer pricing authorities have already been adopting the OECD’s approach on BEPS in relation to intangible-related returns and concurs that such returns should reside with the entity which makes strategic decisions around creation of the intangibles, and not with the entity which has mere ownership of title and funding capacity. India therefore believes that by adopting the ‘‘significant people functions’’ approach in determining the economic owner of intangibles, the disconnect between profit and economic activity will be significantly resolved. In respect of the OECD’s guidance on transfer pricing documentation and Country-by-Country (CbyC) reporting, the Indian Revenue authorities are of the view that the proposed three tier structure (i.e. master file, local file, and CbyC report) would assist in making proper risk assessments and identifying cases where transfer pricing audits are required.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information trademarks, copyrights, trademarks, However, even after the 36 months licenses, franchises, etc.) owned by have passed, if the tax authority has Tax authority name either party reason to believe that at least 100,000 Central Board of Direct Taxes (CBDT). • dependency relating to borrowings — Indian rupees (INR) of taxable income Citation for transfer pricing rules i.e. advancing of loans amounting has escaped assessment for any to not less than 51 percent of total assessment year, they may reopen the Sections 92 to 92F of Income-tax assets or provision of guarantee assessment for those particular years, Act, 1961 (Act); Rules 10A to 10TF of amounting to not less than 10 percent provided they issue the required notice Income-tax Rules, 1962, which now of the total borrowings, etc. for reopening the assessment within includes new Rule 10MA introducing the six years from the end of the relevant provisions for rollback of APAs. In respect of deeming provisions, assessment year. the regulations are now extended to Effective date of transfer pricing transactions between an enterprise and Further, in all cases where it is found rules an independent person where there that an international transaction has 1 April 2001. is a prior arrangement between the not been reported (either by non-filing or non-inclusion in the Accountant’s What is the relationship threshold independent person and associated enterprise, irrespective of whether such Report) it is considered as avoidance of for transfer pricing rules to apply income and could be reopened under between parties? independent person is a non-resident or resident. Therefore, even transactions the provisions of the Act. The transfer pricing provisions between two resident and independent incorporate a very wide definition enterprises may be covered under Transfer pricing of associated enterprises to include Transfer Pricing regulations if there disclosure overview direct and indirect participation in the is a prior arrangement between one Are disclosures related to transfer management, control or capital as independent enterprise and associated pricing required to be submitted to well as certain conditions wherein enterprise of the other independent the revenue authority on an annual two enterprises are “deemed” to be enterprise. associated enterprises. basis (e.g. with the tax return)? What is the statute of limitations Yes. Filing of the Accountant’s Report Significant conditions include: on assessment of transfer pricing in Form No. 3CEB certifying the arm’s adjustments? • direct/indirect shareholding giving rise length nature of the international to 26 percent or more of voting power The time limit for completion of a transactions and specified domestic • 90 percent or more purchase of raw transfer pricing audit is typically transactions with Associated materials/sale of manufactured goods 34 months from the end of the Enterprises is required to be prepared by an enterprise from/to the other assessment year (the year immediately by the taxpayer and submitted to enterprise at prices and conditions following the tax year). The tax year the revenue authorities. The report influenced by the latter in India is the financial year (FY) i.e. has to be obtained from a Chartered 1 April – 31 March. Further, the time Accountant and submitted to the • authority to appoint more than limit for completion of the regular tax revenue authorities by the statutory due 50 percent of the board of directors or audit (scrutiny by the Assessing Officer) date (presently 30 November after the one or more of the executive directors is 36 months from the end of the end of the relevant FY). • dependency in relation to intellectual assessment year. property rights (know-how, patents,

However, Transfer Pricing Study report or • failure to furnish information or Central Board of Direct Taxes (CBDT) to documentation (including the Functional documents during the audit: two prescribe any other method. And under analysis and Economic analysis) that percent of the value of international this provision CBDT inserted “Other supports the Accountant Report, has to transaction/domestic transaction. Method” in addition to the above five be shared with the Revenue authorities, prescribed methods in the Transfer only when and if the taxpayers case Transfer pricing study Pricing rules via a Notification applicable is selected for detailed audit by the from FY 2011-12. Revenue authorities. overview Can documentation be filed in The “Other Method” is described What types of transfer pricing a language other than the local as “any method which takes into information must be disclosed? language? If yes, which ones? account the price which has been charged or paid, or would have been As previously stated, the Accountant’s Yes, English. charged or paid, for the same or similar Report is required to certify that uncontrolled transaction, with or appropriate documentation has been When a transfer pricing study is between non-associated enterprises, maintained by the taxpayer and the prepared, should its content follow under similar circumstances, information disclosed is true and correct. Chapter V of the Organisation for Economic Co-operation and considering all the relevant facts”. The following information is generally Development (OECD) Guidelines? Proper documentation specifying the disclosed: No. India is not a member of the rejection reasons for non-application • name, address, permanent account OECD thus does not follow the of the above five prescribed methods number and status of the taxpayer OECD Guidelines. However, there and the appropriateness of the “Other • name, nature of relationship and are similarities in the Indian transfer Method” based on the facts and other details (as prescribed) of the pricing Regulations and Chapter V of the circumstances of the case would have Associated Enterprise with whom regulations with respect to preparation to be maintained by the taxpayer. the taxpayer has entered into of a transfer pricing study. The taxpayers international transactions/ domestic and the Indian tax authorities have Transfer pricing audit transactions during the year resorted to the OECD Guidelines to and penalties • description of international support principles found in the Indian Transfer Pricing Regulations and where When the tax authority requests transactions entered into, including a taxpayer’s transfer pricing quantity, value, paid/payable, guidance is not available. The Indian Transfer Pricing Regulations are relied documentation, are there timing received/receivable and the method requirements for a taxpayer to used to test arm’s length criteria. upon where there are differences from the OECD Guidelines. Also a recent submit its documentation? And if However, as mentioned above the High Court ruling specifies, that India is so, how many days? Transfer Pricing Study has to be not a member of the OECD, and hence Yes, 30 days. prepared by the statutory due date these Guidelines have only persuasive When the tax authority requests (30 November) but shared only on status; and do not have any legal a taxpayer’s transfer pricing request. sanction. documentation, are there timing What are the consequences of Does the tax authority require an requirements for a taxpayer to failure to submit disclosures? advisor/tax practitioner to have submit its documentation? Please The Indian Transfer Pricing Regulations specific designation in order to explain. have penal provisions for failure to prepare or submit a transfer pricing study? Generally, the notice of an audit by the prepare or submit disclosures: revenue authorities specifies the period • failure to maintain prescribed No. within which the taxpayer is required to information/documents: two percent provide the required documentation. of value of international transactions / Transfer pricing methods If an adjustment is proposed by domestic transaction Does your country follow the the tax authority, what dispute • failure to file Accountant’s report by transfer pricing methods outlined in resolution options are available? Chapter II of the OECD Guidelines? deadline: INR100,000 (approximately There is an appellate mechanism if If exceptions apply, please describe. 1,667 US dollars (USD)) the taxpayer contests an adjustment • failure to report any international No. The transfer pricing methods in the proposed by the revenue authorities. transaction/domestic transactions Indian Transfer Pricing Regulations are to It includes several stages: which is required to be reported: two be followed when preparing the transfer • Appellate Commissioner percent of the value of international pricing study. (complemented by Dispute transaction/domestic transaction The methods prescribed in the Indian Resolution Panel) • providing incorrect information or Transfer Pricing Regulations are similar • Jurisdictional Appellate Tribunals documents: penalty of two percent of to those outlined in Chapter II of the the value of international transaction/ OECD Guidelines. However, the Indian • Jurisdictional High Courts domestic transaction Transfer Pricing Regulations permits the • National Supreme Court.

It can take three to eight years for a To what extent are transfer pricing value’ and have sought to apply the Profit taxpayer to obtain a conclusive decision penalties enforced? Split Method (‘PSM’) for performing a by the Indian judiciary. transfer pricing adjustment. The basis of The above imposition of penalties the adjustment assumed that the R&D The assessment/appellate procedure in is discretionary and depends upon center performed non-routine functions India are generally rules-based and the the facts and circumstances of each and contributed to the creation of unique authorities typically will not negotiate a individual case. intellectual property which in-turn got settlement. What defenses are available with transferred to the foreign affiliates Use of mutual agreement procedure respect to penalties? without appropriate compensation. (MAP) under the tax treaties can be Please refer to the information provided To illustrate, in the most recently invoked as an alternative dispute previously. In addition, the intent of the completed round of transfer pricing resolution mechanism. India has taxpayer is also given due consideration, audits concluded, in January 2015 entered into various double taxation i.e. whether the intent is mala fide the Indian transfer pricing authorities treaties to avoid tax disputes whether or whether the taxpayer had made have made adjustments to the tune jurisdictional conflicts or matters of bona fide attempts to comply with the of INR470 billion, i.e. approximately interpretation. prescribed regulations. Establishing USD7.8 billion. In matters pertaining to potential double bona fide intent can provide some It is important to note that from the next taxation or taxation not in accordance defense for the taxpayer. assessment cycle beginning from March with a double tax convention, the option What trends are being observed 2016 pertaining to FY 2012 - FY 2013, available before or after exhaustion of currently? even the domestic transactions will be any domestic administrative appeals audited by the revenue authorities. It is process is either to apply for MAP under After the new government took charge, expected that newer disputes may arise the relevant tax treaty; or litigate the there have been lot of policy changes as a result. matter through the courts. and positive outcomes to long debated transfer pricing litigation issues like The Advance Pricing Agreements (APA) the share valuation and the marketing Special considerations mechanism was introduced in July 2012, intangibles controversies. In case of the and provides the taxpayers with an Are secret comparables used by tax share valuation issue the government alternate mechanism for resolution of authorities? has decided to accept the High Court’s potential transfer pricing disputes. The Yes, although the Transfer Pricing ruling and not to challenge it before response to the Indian APA program has Regulations contain no guidance on the the Supreme Court though there was been very positive so far and a few APAs use of secret comparables. Practically, an avenue to do so. Further in case of are expected to be signed in 2015. the Indian revenue authorities have marketing intangibles issue, though been using secret comparables in the If an adjustment is sustained, can the same will be covered under the course of transfer pricing audits. There penalties be assessed? If so, what ambit of Transfer Pricing Regulations, are judicial rulings which have held that rates are applied and under what the High Court has delved deep into the secret comparables (which are not conditions? fundamentals of transfer pricing and available to the taxpayer at the time of economics and has placed substantial The Indian Transfer Pricing Regulations setting its transfer prices) should not be reliance on detailed international have prescribed the following penalty used in the course of transfer pricing guidance in the OECD and the ATO provisions summarized below: audits against the taxpayer. guidelines, by approving that there • in case of a post-inquiry adjustment, may not be a separate remuneration Is there a preference, or there is deemed to be a concealment for marketing intangibles if such requirement, by the tax authorities of income — 100-300 percent of tax compensation is already provided by for local comparables in a on the adjusted amount way of lower import prices or reduced benchmarking set? payment of royalties. • failure to maintain documents — two Yes. In transfer pricing audits conducted, percent of the value of transaction Indian Revenue authorities continue to the Indian revenue authorities have • failure to furnish documents — two determine the arm’s length value of the consistently shown a marked preference percent of the value of transaction intra-group services as “Nil” alleging for selecting Indian comparables that such charges are simply a means of and accordingly, in accepting the • maintaining or furnishing incorrect profit repatriation and leads to erosion of corresponding economic analysis. The information or documents — two India’s tax base. tax authorities prefer local comparables percent of the value of transaction in the benchmarking set and often reject Further in case of captive R&D service • failure to furnish accountant’s foreign comparables on the basis of providers, while earlier the focus of report — INR100,000 (USD1667) geographical differences or cite lack of revenue audits had largely been on the data availability as reasons. • failure to report a transaction in level of mark-ups, recently the Indian accountant’s report — two percent of Revenue authorities have classified in the value of transaction. some cases these services as ‘high

Do tax authorities have revenue authorities in order to bring The concept of Arithmetic Mean was requirements or preferences greater harmonization, coordination used where more than one arm’s regarding databases for and communication between the two length price was determined, till FY comparables? departments as regards valuation of ended on 31 March 2014.The Finance imported goods. Minister, in his budget speech of 10 July The tax authorities generally use two 2014, announced that the concept Indian databases, being Prowess and Are there limitations on of price range for determination of CapitalinePlus. In practice these two deductibility of management fees ALP, will be introduced in the income databases are also widely used by the beyond the arm’s length principle? tax rules, to align the Indian transfer taxpayers. No, management fees are deductible. pricing regulations with international Does the tax authority generally However, a commercial expediency leading practices. However, the existing focus on the interquartile range in a test and a benefits test are rigorously concept of arithmetic mean would TNMM analysis? applied by tax authorities with respect continue to apply where the number of to payment of management fees. available comparables are inadequate. No. Are management fees subject to Accordingly, the tolerance band which Does the tax authority have other withholding? was available to the taxpayers shall not preferences in benchmarking? If so, be available to the taxpayers for the please describe. Yes. transactions undertaken from 1 April The concept of Arithmetic Mean is used Are there limitations on the 2014. The provisions in this regard, for where more than one arm’s length deductibility of royalties beyond the the actual implementation of range price was determined, till FY ended on arm’s length principle? concept are awaited, as the deadline for 31 March 2014. The Finance Minister, filing the return of income for FY 2014 - No. Royalties paid are deductible. in his budget speech of 10 July 2014, FY2015 shall be 30 November, 2015. However, a commercial expediency announced that the concept of price test and a benefits test are rigorously Multiple-year data: range for determination of ALP, will applied by tax authorities with respect The Indian Revenue authorities do not be introduced in the income tax rules, to payment of royalty. generally permit use of multiple-year to align the Indian transfer pricing data. The data pertaining to the relevant regulations with international leading Are royalties subject to FY has to be benchmarked against practices. The existing concept of withholding? comparable data of the same FY. The arithmetic mean would continue to Yes. use of multiple year is permitted only apply where the number of available in the event, if the previous year’s comparables are inadequate. Are taxpayers allowed to file tax data reveals facts, which could have Accordingly, the tolerance band which return numbers that differ from an influence on the determination was available to the taxpayers shall not book numbers? of transfer prices in relation to the be available to the taxpayers for the Yes, but only upward adjustments to transactions being compared. The transactions undertaken from 1 April income are permitted. In the course of onus is on the taxpayer to show such 2014. The provisions in this regard, for conducting the benchmarking analysis inference. However, there is no option the actual implementation of range (forming part of the preparation of the to use the previous year’s data for the concept are awaited, as the deadline for transfer pricing documentation of the tested party. filing the return of income for FY 2014 - taxpayer), where the taxpayer believes FY2015 shall be 30 November, 2015. that the value of the international In this regard, the Finance Minister in his budget speech of 10 July 2014, What level of interaction do tax transaction reported in the financial proposed to amend regulations to authorities have with customs statements is different from the arm’s allow the use of multiple year data for authorities? length price, the taxpayer may only make an upward adjustment for the comparability analysis. However, the There is a lack of consistency between additional amount of income to be provisions for actual implementation are customs valuation procedures and offered to tax in the corporate tax still awaited. Transfer Pricing Regulations under return, to the extent of the difference tax laws. The departments work at between the actual transaction price Tax treaty/double tax divergent purposes in relation to the and the arm’s length price determined. resolution same transactions. Suitable methods The adjustment would also be required for valuation of imported goods should to be carried out prior to filing the What is the extent of the double tax be established which are acceptable Transfer Pricing Accountant’s Report in treaty network? to both customs law and the transfer Form No.3CEB. However, downward India has an extensive tax treaty pricing regulations. To this end, the adjustments are not permitted. network and has entered into Indian revenue authorities set up a comprehensive tax treaties with Joint Working Group, comprising Other unique attributes? 92 countries (as on 31 December 2014). transfer pricing and customs officers. Arithmetic Mean: India is also party to a series of treaties Considering the lack of synchronization, under negotiation. this initiative was undertaken by the

If extensive, is the competent • transaction value not exceeding authority effective in obtaining INR2000 million — fee amount double tax relief? INR1.5 million Sometimes. India’s general experience • transaction value exceeding with MAPs is quite recent. Most MAP INR2000 million — fee amount cases that the Indian Competent INR2 million. Authority has dealt with have been with Does the tax authority publish APA the US, Japan and a few countries in data either in the form of an annual Europe. report or through the disclosure of In practice, MAP as a mechanism data in public forums? for dispute resolution in regards to No. transfer pricing has not been found to be very successful until recently in Are there any difficulties or India. The reason is that even after the limitations on the availability or consultation process has commenced, effectiveness of APAs? the process lasts for a long time and its Yes. In the first three years of APAs, outcome is uncertain. However, recently 386 formal APA applications were after the visit of the US President to filed with the Indian Government. India, the MAP cases between India Multinational corporations dealing and US, primarily in the IT /ITeS industry in diverse industries such as have been taken on fast track and are pharmaceuticals, consumer electronics, expected to be resolved soon. media, cement, telecom, etc. have When may a taxpayer submit an filed applications. Several rounds of adjustment to competent authority? discussions are already in process and the experience has been satisfactory so There are no formal rules. far. International transfer pricing experts May a taxpayer go to competent have welcomed the collaborative authority before paying tax? approach of the Indian APA team. Based on the latest available information, a Yes, however before invoking MAP total of nine APAs have been signed by procedures, in some cases a bank the CBDT with the taxpayer’s of which guarantee generally needs to be eight are unilateral and one bilateral APA submitted for the tax demand in with Japan. question. This has been the procedure to date in MAP cases involving the US The option of APAs can be explored and UK. However, based on a recent in case of complex and high value Memorandum of Understanding transactions or where the company signed between India and UK, the tax is already undergoing transfer pricing collection from the taxpayers of both audit scrutiny and hence would be the countries, will be suspended till selected for audits again or where the the resolution of the pending MAP company needs financial certainty requests. with regard to future tax implications. APAs would reduce the need for documentation and costs associated Advance pricing with audit and appeals over APA term agreements and facilitate transfer pricing planning. What APA options are available, if Double taxation can be avoided in case any? of bilateral/multilateral APAs. Unilateral, bilateral, multilateral. Is there a filing fee for APAs? Yes. The schedule of fees payable at the time of making the application is as KPMG in India follows: Rohan K Phatarphekar • transaction value not exceeding Tel: +91 22 3090 2000 INR1000 million — fee amount Email:[email protected] INR1 million

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Indonesia

KPMG observation

Indonesian transfer pricing has seen a flurry of activity since 2009 with the introduction of a number of transfer pricing-related regulations and a concurrent drive by the Indonesian Tax Office (ITO) to enforce them. It is increasingly important for Indonesian taxpayers to ensure that they keep abreast of the developments to allow for both offensive and defensive strategies to avoid potentially significant adjustments and the prospect of difficult and costly dispute resolution. Experience shows that robust documentation and a sound understanding of transfer pricing policies can mitigate the impact of what may be seen as an aggressive approach by the ITO against even the most straightforward related party arrangements. In many cases, documentation which may be seen as compliant in other jurisdictions is not accepted by the ITO and can increase the compliance burden on a taxpayer. As the ITO moves into new phases of development in transfer pricing application, KPMG in Indonesia expects to see an increase in trained resources and an accompanying increase in sophistication in approach and scope. Mutual agreement procedures (MAPs) and Advance Pricing Agreements (APAs) are now possible in practice. The ITO has publicly stated that it will implement the Base Erosion and Profit Shifting (BEPS) recommendations, but there are no details on how and when.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules Effective date of transfer pricing rules Tax authority name Article 18 of the Income Tax Law. Regulation PER43/2010 as amended by Effective date of transfer pricing rules Directorate General of Taxation/ PER32/2011. is 1984, enabling tax authority to adjust Indonesian Tax Office (ITO). related party transactions. 2009 marks the introduction of current regulations.

What is the relationship threshold Transfer pricing methods What defenses are available with for transfer pricing rules to apply Does your country follow respect to penalties? between parties? the transfer pricing methods Penalties will be imposed on late Ownership of 25 percent, under outlined in Chapter II of the OECD payment of taxes following an common control, and family Guidelines? If exceptions apply, adjustment. The defenses against relationship. please describe. penalties are therefore the same as those against adjustments — robust What is the statute of limitations Yes. documentation and a good working on assessment of transfer pricing knowledge of how it relates to the adjustments? Transfer pricing audit taxpayer’s situation. Five years from tax year-end filing date, and penalties What trends are being observed phased in by 2013 from previous 10 years. When the tax authority requests currently? a taxpayer’s transfer pricing Transfer pricing documentation, are there timing The ITO still focuses on services and licensing transactions and more often disclosure overview requirements for a taxpayer to submit its documentation? And if than not denies deductibility. For other Are disclosures related to transfer so, how many days? transactions, it is moving away from pricing required to be submitted to applying the comparable uncontrolled the revenue authority on an annual Yes, 30 days. price (CUP) method and starting to basis (e.g. with the tax return)? When the tax authority requests question economic/benchmarking Yes. The taxpayer has to declare a taxpayer’s transfer pricing analyses or performing its own whether transfer pricing documentation documentation, are there timing benchmarking analyses. covering 15 specific items is available. requirements for a taxpayer to submit its documentation? Please What types of transfer pricing Special considerations explain. information must be disclosed? Are secret comparables used by tax According to the Tax Procedures Law, authorities? Details of transactions with related within 30 days of request. In practice parties including amounts, pricing Yes. However, these should not be certain questionnaires are issued and methodologies and reasons. admissible to Tax Court. the taxpayer is given seven days to What are the consequences of complete them. However, practical Is there a preference, or failure to submit disclosures? experience has shown that in many requirement, by the tax authorities cases these deadlines are flexible. for local comparables in a It is likely that lack of disclosure will lead benchmarking set? to increased attention by the ITO with If an adjustment is proposed by the ultimate outcome being the need to the tax authority, what dispute Yes, but there is a recognition that submit documentation. resolution options are available? choices are limited and in practice Pan- Asian sets may be accepted. The taxpayer is able to object to a Transfer pricing study transfer pricing assessment and further Do tax authorities have overview appeal an unfavorable decision in the requirements or preferences same way as with any tax assessment. regarding databases for Can documentation be filed in The taxpayer can also file for a Mutual comparables? a language other than the local Agreement Procedure. language? If yes, which ones? The ITO uses Osiris and Oriana but has If an adjustment is sustained, can publicly stated that any database may Yes, English. penalties be assessed? If so, what be used. In practice they also perform When a transfer pricing study is rates are applied and under what internet searches in an attempt to apply prepared, should its content follow conditions? CUPs. Chapter V of the Organisation Yes. General tax penalties only: two Does the tax authority generally for Economic Co-operation and percent per month on late payment of focus on the interquartile range in a Development (OECD) Guidelines? resulting tax, 50 percent surcharge if TNMM analysis? Yes, for all transactions. The Indonesian an objection to an assessment is lost. Yes, always. transfer pricing regulations are largely in Surcharge increases to 100 percent if line with the OECD Guidelines. the amount is appealed and the appeal Does the tax authority have other is lost. preferences in benchmarking? If so, Does the tax authority require an please describe. advisor/tax practitioner to have To what extent are transfer pricing specific designation in order to penalties enforced? According to the regulations, multiple- prepare or submit a transfer pricing year averages should be applied. In Always. study? practice the ITO also uses single-year analyses. No.

What level of interaction do tax When may a taxpayer submit an authorities have with customs adjustment to competent authority? authorities? As soon as the dispute exists. None. There has been some discussion, May a taxpayer go to competent but no action. authority before paying tax? Are there limitations on Yes. Taxpayers may object to deductibility of management fees assessments and this defers the beyond the arm’s length principle? payment date, subject to sanctions on No, they should be properly any losses at objection or later appeal. In documented with a focus on the benefit the meantime, the issue may be raised for the taxpayer. to competent authority. Are management fees subject to withholding? Advance pricing Yes. agreements What APA options are available, if Are there limitations on the any? deductibility of royalties beyond the arm’s length principle? Unilateral, bilateral. No. Is there a filing fee for APAs? Are royalties subject to No. withholding? Does the tax authority publish APA Yes. data either in the form of an annual report or through the disclosure of Are taxpayers allowed to file tax data in public forums? return numbers that differ from book numbers? Not applicable. Yes, as there are no regulations Are there any difficulties or forbidding their application. In practice, limitations on the availability or downward adjustments will most effectiveness of APAs? certainly be questioned. Not applicable. No APAs have Other unique attributes? been concluded to date. However, negotiations are taking place. Focus on evidence of price-setting mechanism even where benchmarking tests show prices are at arm’s length. Denial of certain related party transactions at tax audit stage and deferring decision to Tax Court. Adjustments assessed without full analysis or sound basis.

Tax treaty/double tax resolution What is the extent of the double tax treaty network? Extensive. If extensive, is the competent authority effective in obtaining double tax relief? KPMG in Indonesia To date, no MAPs have been concluded Iwan Hoo although several negotiations are being Tel: +62 570 4888 conducted. Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Ireland

KPMG observation

Transfer pricing legislation was introduced as part of the 2010 Finance Act, effective for accounting periods on or after 1 January 2011 and applicable to trading transactions (not to non-trading activities taxed at a 25% rate). Transactions entered into prior to 1 July 2010 are grandfathered, unless the terms and conditions under which they are conducted do change. The Irish transfer pricing rules generally follow the OECD Guidelines. The Irish transfer pricing regime applies to both cross-border and domestic transactions. In November 2012, the Irish Revenue announced Transfer Pricing Compliance Reviews (TPCRs) as the primary process to monitor compliance with the transfer pricing regime. Transfer pricing audits may be conducted if a TPCR is not conducted in a satisfactory manner. Some of the structures established by multinational companies with residency in Ireland may be regarded as primary targets of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. The Irish government has repeatedly declared that it perceives the transfer pricing regulations in Ireland as fully compliant with the OECD Guidelines and that they will remain so.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold A party will have control over another party if it is able to control the affairs of Tax authority name for transfer pricing rules to apply between parties? the other party in such a way that they Office of the Revenue Commissioners. are conducted in accordance with the The transfer pricing rules will apply if wishes of the controlling party by virtue Citation for transfer pricing rules (1) one of the parties participates in of shareholding, voting power or articles the management, control, or capital Part 35A, Section 835, Taxes of association. Consolidation Act 1997. of the other party, or (2) if both parties fall under the management, control or There is no fixed participation quota or Effective date of transfer pricing rules capital of another party. shareholding stated in the regulations. 1 January 2011.

What is the statute of limitations Does the tax authority require an tax authorities charge penalties for on assessment of transfer pricing advisor/tax practitioner to have three categories of negligence on the adjustments? specific designation in order to part of the taxpayer. The categories prepare or submit a transfer pricing are insufficient care (20 percent of There are no specific limitations for study? tax underpaid), careless behavior transfer pricing, but the general rule is (40 percent) and deliberate behavior four years from the year-end, in which No. (100 percent). These standard penalties tax return is filed. can be reduced by co-operation and by Transfer pricing methods disclosure of the taxpayer. Transfer pricing Does your country follow the To what extent are transfer pricing disclosure overview transfer pricing methods outlined in penalties enforced? Are disclosures related to transfer Chapter II of the OECD Guidelines? It remains to be seen how the Irish pricing required to be submitted to If exceptions apply, please describe. tax authorities will enforce penalties the revenue authority on an annual Yes. to transfer pricing transactions. It is basis (e.g. with the tax return)? expected that penalties will be levied No. Transfer pricing audit in the same manner as general tax What types of transfer pricing and penalties penalties. information must be disclosed? When the tax authority requests What defenses are available with respect to penalties? Not applicable. a taxpayer’s transfer pricing documentation, are there timing Sufficient transfer pricing What are the consequences of requirements for a taxpayer to documentation. failure to submit disclosures? submit its documentation? And if What trends are being observed Not applicable. so, how many days? currently? Yes, 28 days. TPCR have started during 2013. Irish Transfer pricing study When the tax authority requests Revenue is in the process of increasing a taxpayer’s transfer pricing overview its resources both in terms of staffing documentation, are there timing Can documentation be filed in transfer pricing experts and utilizing requirements for a taxpayer to a language other than the local transfer pricing specific databases. language? If yes, which ones? submit its documentation? Please explain. Yes, English, Irish. Special considerations Documentation should be prepared Are secret comparables used by tax When a transfer pricing study is on a timely basis, but no specific time authorities? prepared, should its content follow deadline is outlined. Normal practice in Chapter V of the Organisation a tax audit is to expect documentation No. for Economic Co-operation and within 28 days of request. If a company Is there a preference, or Development (OECD) Guidelines? is selected for a TPCR, the timeline for requirement, by the tax authorities submission is three months. Yes. While there are no specific for local comparables in a requirements set down in the If an adjustment is proposed by benchmarking set? legislation, the OECD Guidelines should the tax authority, what dispute No. be followed when preparing a transfer resolution options are available? pricing study. The Irish tax authorities Do tax authorities have Yes. The standard tax appeal procedures have stated that the form and manner requirements or preferences are available. that the documentation takes will be regarding databases for dictated by the facts and circumstances If an adjustment is sustained, can comparables? of the transactions and that the costs penalties be assessed? If so, what No. involved in preparing the documentation rates are applied and under what should be commensurate with the risk conditions? Does the tax authority generally involved. Additionally, if documentation focus on the interquartile range in a Yes. No specific transfer pricing exists in another territory which TNMM analysis? supports the Irish arrangement, this will penalties are included within the also be sufficient from an Irish transfer legislation, so the standard interest and No. pricing perspective as long as the general tax penalty provisions will apply. Does the tax authority have other documentation is in English. Under general tax penalties provision, preferences in benchmarking? If so, interest arises on underpaid tax at a please describe. daily rate of 0.0219 percent (equivalent to 7.99 percent per annum). The Irish None.

What level of interaction do tax When may a taxpayer submit an authorities have with customs adjustment to competent authority? authorities? There is no specific timing or form for Low. making a Competent Authority request. The tax treaty between Ireland and the Are there limitations on counterparty jurisdiction may require deductibility of management fees a claim for double tax resolution to be beyond the arm’s length principle? made within a specified time period. Yes. The general deductibility rules There is no specific document for costs and expenses applies to all requirement either. expenses to ensure they were incurred “wholly and exclusively” for the purpose May a taxpayer go to competent of the Irish trading activity. authority before paying tax? Are management fees subject to No. withholding? No. Advance pricing Are there limitations on the agreements deductibility of royalties beyond the What APA options are available, if arm’s length principle? any? No. Unilateral, bilateral. Are royalties subject to Is there a filing fee for APAs? withholding? No. No. Does the tax authority publish APA Are taxpayers allowed to file tax data either in the form of an annual return numbers that differ from report or through the disclosure of book numbers? data in public forums? Yes. The arm’s length standard of any No. adjustments should be explained in Are there any difficulties or the transfer pricing documentation limitations on the availability or prepared. effectiveness of APAs? Other unique attributes? Yes. The Irish tax authorities have None. been willing to enter into bilateral APA negotiations once a case has been Tax treaty/double tax successfully accepted into the APA program of the other jurisdiction. It resolution remains to be seen whether Ireland will What is the extent of the double tax formalize its APA procedures. treaty network? The Irish double tax treaty network is extensive. If extensive, is the competent authority effective in obtaining double tax relief? Almost always. KPMG in Ireland

Eoghan Quigley Tel: + 353 1 410 2327 Email: [email protected]

Warren Novis Tel: + 353 1 700 4154 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Israel

KPMG observation

The Israeli transfer pricing regulations require companies to list all international transactions on the corporate tax return (Form 1385) and to declare that the transactions were conducted according to “market conditions”. As a member of the Organisation for Economic Co-operation and Development (OECD), Israel will be affected by the planned changes relating to transfer pricing as a result of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. The potential effects and implications will be clearer as the specifics of the initiative take form and move closer to implementation.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations What types of transfer pricing Tax authority name on assessment of transfer pricing information must be disclosed? adjustments? Ongoing or one-time transaction, Israel Tax Authority. Three years from end of year of tax description of intra-group transaction, Citation for transfer pricing rules return submission. May be extended in details and location of foreign related Israel Tax Ordinance Section 85A special cases. party to the transaction, and total and Israel Tax Regulations (Market transaction price. The form must be Conditions Determination), 2006. Transfer pricing signed under the declaration that the transaction was conducted under Effective date of transfer pricing disclosure overview “market conditions” as described in rules Are disclosures related to transfer Section 85A and the transfer pricing 29 November 2006. pricing required to be submitted to regulations. the revenue authority on an annual What are the consequences of What is the relationship threshold basis (e.g. with the tax return)? for transfer pricing rules to apply failure to submit disclosures? Yes. The Market Conditions Survey between parties? Statute of limitations begins following should be prepared and a special full submission. Burden of proof falls on In general, any special relationship declaration form should be submitted taxpayer. (controlled directly or indirectly by the with the corporate tax return (form 1385). same interest). Specifically (but not limited to): ownership or control of 50 percent or more.

Transfer pricing study If an adjustment is sustained, can Does the tax authority have other penalties be assessed? If so, what preferences in benchmarking? If so, overview rates are applied and under what please describe. Can documentation be filed in conditions? a language other than the local No. No specific transfer pricing penalties, language? If yes, which ones? What level of interaction do tax however, general tax penalties applies. Yes, English and Hebrew. authorities have with customs To what extent are transfer pricing authorities? When a transfer pricing study is penalties enforced? prepared, should its content follow Low. Not applicable. Chapter V of the Organisation Are there limitations on for Economic Co-operation and What defenses are available with deductibility of management fees Development (OECD) Guidelines? respect to penalties? beyond the arm’s length principle? Yes, for all transactions. Documentation or negotiation. No. Management fees conducted at arm’s length are deductible. Does the tax authority require an What trends are being observed advisor/tax practitioner to have currently? Are management fees subject to specific designation in order to withholding? prepare or submit a transfer pricing Restructuring and intellectual property study? (IP) migration are under scrutiny from No. the Israeli Tax Authority. No. Are there limitations on the The Tax Authority takes the position deductibility of royalties beyond the that stock options must be included in arm’s length principle? Transfer pricing methods the cost base. It should be noted that No. Does your country follow the in many circumstances, stock options transfer pricing methods outlined in are not deductible expenses for tax Are royalties subject to Chapter II of the OECD Guidelines? purposes. withholding? If exceptions apply, please describe. In addition, the Tax Authority has taken Yes. Yes. The Comparable Uncontrolled Price an aggressive approach and is assessing Are taxpayers allowed to file tax is preferable to all other methods. The secondary adjustments in cases where return numbers that differ from transaction-based methods (cost plus a transfer pricing adjustment is made. book numbers? or resale price) have priority over the transactional net margin method. Yes, but we recommend seeking Special considerations professional advice before doing so. Are secret comparables used by tax Transfer pricing audit authorities? Other unique attributes? and penalties No. Not applicable. When the tax authority requests Is there a preference, or a taxpayer’s transfer pricing Tax treaty/double tax documentation, are there timing requirement, by the tax authorities requirements for a taxpayer to for local comparables in a resolution submit its documentation? And if benchmarking set? What is the extent of the double tax so, how many days? No. In the case of an Israeli tested party, treaty network? Yes, 60 days. the authorities generally expect US or Extensive, approximately 40 countries. European comparables. When the tax authority requests If extensive, is the competent a taxpayer’s transfer pricing Do tax authorities have authority effective in obtaining documentation, are there timing requirements or preferences double tax relief? requirements for a taxpayer to regarding databases for Sometimes. submit its documentation? Please comparables? explain. No specific requirements (in practice, When may a taxpayer submit an adjustment to competent authority? Within 60 days of request. Israeli tax authorities use Osiris and Amadeus databases). No formal domestic rules, depends on If an adjustment is proposed by treaties. the tax authority, what dispute Does the tax authority generally resolution options are available? focus on the interquartile range in a May a taxpayer go to competent TNMM analysis? authority before paying tax? Appeals, courts, and treaties. Yes, always. No formal domestic rules, depends on treaties.

Advance pricing agreements What APA options are available, if any? Unilateral. Is there a filing fee for APAs? No. At this stage, there are no filing fees. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? Yes. The APA procedure is lengthy.

KPMG in Israel

John Fisher Tel: +972 3 684 8666 Email: [email protected]

David Samson Tel: +972 3 684 8970 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at transferpricing@ kpmg.com if you are unable to contact us via the information noted above.

Italy

KPMG observation

At this stage, there are no official observations from the Italian Tax Authorities on the Base Erosion and Profit Shifting (BEPS) initiative. Most of the comments from Italian tax and legal firms on the discussion drafts issued by the Organisation for Economic and Co-operation Development (OECD) emphasize the need to find a balanced approach between new requests for information deriving from the country- by-country report and the additional administrative burden on the taxpayer. In this regard, it is suggested that more certain and objective criterion are introduced to evaluate the materiality of intra-group transactions to be included in the new documentation requirements. In addition, some advice entrusting judgment on the adequacy of transfer pricing documentation to an independent arbitrator. With regard to the UN Practical Transfer Pricing Manual for Developing Countries, it is observed that the report is consistent with the OECD Guidelines and offers adequate operational details on transfer pricing methods and comparability analyses. Therefore, it is deemed to represent a good opportunity to help developing countries in defining their transfer pricing policies. However, also in this regard, no public comments from Italian tax authorities are currently available. Transfer pricing continues to be an area of focus in Italy. The number of multinationals under scrutiny for transfer prices persists on a steady increasing trend, following instructions by the Italian tax authorities on tax inspection activities and the introduction of transfer pricing documentation rules. The presence of transfer pricing documentation for Italian companies that are part of multinational groups, although not mandatory, is now considered as an ordinary requirement in practice during tax audits.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules The penalty protection regime for taxpayer preparing transfer pricing Tax authority name Basic transfer pricing rules are contained documentation is contained in Article 1, in Article 110 (7) of the Italian Income Ministero dell’Economia e delle Finanze paragraph 2-ter of Legislative Decree of Tax Code (Presidential Decree of 22 (Italian Ministry of Economy and 18 December 1997, no. 471, introduced December 1986, no. 917 and subsequent Finance). by Article 26 of Law Decree no. 78 of amendments).

31 May 2010, converted into Law no. What types of transfer pricing When a transfer pricing study is 122 of 30 July 2010. Documentation information must be disclosed? prepared, should its content follow rules are contained in the decision of the Chapter V of the Organisation Information to disclose in the tax return Commissioner of Italian Revenue Agency for Economic Co-operation and include the existence of intra-group dated 29 September 2010. Clarifications Development (OECD) Guidelines? relationships and the amount of costs on transfer pricing documentation rules and revenues relating to intra-group Yes. Nevertheless, in order to obtain were provided with circular letter no. transactions. A description and amount penalty protection, the documentation 58/E, dated 15 December 2010. of intra-group transactions must also must be prepared in accordance with Advance Pricing Agreement (APA) be indicated in the annual financial the provisions of the above mentioned regulations are contained in Article 8 of statements. Article 26 that outlines a rigid formal the Law Decree no. 269/2003 converted structure and detailed information What are the consequences of with modifications into Law no. on the content of the transfer pricing failure to submit disclosures? 326/2003 and in the related regulations documentation. The structure of the issued on 24 July 2004. The failure in submitting disclosure documentation makes also reference to of the existence of intra-group the guidance provided by the European Mutual Agreement Procedure (MAP) relationships and the amount of costs Union (EU) Code of Conduct on Transfer guidelines were provided by circular and revenues relating to intra-group Pricing Documentation. Consequently, letter no. 21/E, dated 5 June 2012. transactions is subject to the ordinary the documentation must follow the EU Effective date of transfer pricing tax penalties applying for formal definition of “master file/country specific rules inaccuracies (ranging from EUR251.73 documentation” concept, depending to EUR1,006.91 pursuant to the 1 January 1988. on the qualification of the company (i.e. provisions of Article 8 of Legislative holding, sub-holding or subsidiary). What is the relationship threshold Decree no. 471 of 18 December 1997. for transfer pricing rules to apply Does the tax authority require an However, an incorrect or missing between parties? advisor/tax practitioner to have disclosure of the existence of specific designation in order to Ownership of greater than 50 percent, intra-group relationships could prepare or submit a transfer pricing based on voting power, share capital, and be considered an obstacle to the study? parties that are under common control. assessment activity performed by the No. What is the statute of limitations Italian tax authorities and therefore on assessment of transfer pricing may cause an increase in the penalties adjustments? ordinarily applying in case of tax Transfer pricing methods adjustments (ranging from 100 to Does your country follow the Four years from filing date of the relevant 200 percent of additional taxes due). transfer pricing methods outlined in tax return. The exact term is 31 December The disclosure of existence of transfer Chapter II of the OECD Guidelines? of the fourth year subsequent to the one If exceptions apply, please describe. in which the tax return is filed. In the event pricing documentation is one of of a violation implying criminal sanctions the conditions required to prevent Yes. as provided for by the tax criminal law application of the ordinary tax penalties (legislative decree no. 74 dated 10 March that would apply in the case of transfer Transfer pricing audit pricing adjustments. Therefore, a failure 2000), the terms for an assessment of the and penalties tax periods during which the crime was to prepare or submit disclosures would committed are doubled. mean that penalties are applied to When the tax authority requests taxpayers. a taxpayer’s transfer pricing documentation, are there timing Transfer pricing Transfer pricing study requirements for a taxpayer to disclosure overview submit its documentation? And if overview Are disclosures related to transfer so, how many days? Can documentation be filed in pricing required to be submitted to Yes, 10 days. the revenue authority on an annual a language other than the local basis (e.g. with the tax return)? language? If yes, which ones? When the tax authority requests a taxpayer’s transfer pricing Yes. The documentation has to be filed Yes. From FY 2010, taxpayers may documentation, are there timing in Italian. The only exception is for the choose to, but they are not obliged to, requirements for a taxpayer to Masterfile prepared by an EU holding communicate the existence of the transfer submit its documentation? company and submitted by an Italian pricing documentation every year in the Please explain. tax return. Therefore, the preparation, as sub-holding company, which can be well as the disclosure, of transfer pricing drafted in English. The documentation must be submitted documentation is not mandatory. in a timely manner, i.e. within 10 days from request. Supplementary

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 150 | Global Transfer Pricing Review information must be provided To what extent are transfer pricing at trying to dispute the application of the within seven days of request or in a penalties enforced? penalty protection regime. longer time period depending on the If the taxpayer does not qualify for the Additionally, with regard to the type of complexity of the transaction, to the penalty protection regime, penalties are intra-group transactions analyzed during extent that such period is consistent always applied in case additional taxes tax audits, there is a growing interest on with the time of the audit. According to arise from transfer pricing adjustments. intangibles and related royalty issues by Italian law, tax audits must be finalized the Italian tax authorities and financial in a maximum of 30 working days, What defenses are available with transactions. In recent years the Italian which can be extended by additional respect to penalties? tax authorities have focused more on 30 days. “Appropriate” documentation, as “relocation abroad” (esterovestizione) If an adjustment is proposed by detailed previously. In cases where and “permanent establishments” issues, the tax authority, what dispute no documentation is prepared, or it is including attribution of profits and free resolution options are available? not be considered as “appropriate” capital to permanent establishments. to qualify for penalty protection, Yes. The taxpayer may choose from a penalties can be reduced under the range of different dispute resolution Special considerations above described dispute resolution options. options (i.e. agreement on the note Are secret comparables used by tax Agreement on the ”note of inspection” of inspection, voluntary assessment authorities? (adesione al pvc), which implies procedure, judicial conciliation). No. accepting in full all the adjustments In the case of tax losses in the current Is there a preference, or proposed subsequently to a tax year or carried forward, they can offset requirement, by the tax authorities inspection and paying the relevant the amount of the transfer pricing for local comparables in a taxes, penalties and interest due within adjustment and, consequently, reduce benchmarking set? 30 days. Under this procedure, penalties the amount of taxes due and resultant are reduced to one-sixth of the amount Yes. In principle, the presence of local penalties (however this only applies in of taxes due. comparables in a benchmarking set respect to IRES (corporate income tax) is preferred, although it is recognized So-called “voluntary assessment and not for IRAP (local tax) purposes). that the choice between local procedure” (accertamento con What trends are being observed comparables and broader sets depends adesione), which implies a negotiation currently? on the comparability of economic with the tax authorities, in order to circumstances, including characteristics reduce the amount of the adjustment The attention of tax authorities on intra- of the market of reference for the and consequent additional taxes, group transactions during tax audits transaction under analysis. penalties and interest. Under this continues to remain very high and procedure, the amount of penalties is the number of audits (i.e. inspections Do tax authorities have reduced to one-third of the final amount and assessments) on intra-group requirements or preferences of taxes resulting from the agreement. transactions within multinational groups regarding databases for This procedure interrupts the terms has risen. Transfer pricing audits are comparables? for litigation and — if an agreement usually performed every two to three No. The database should be is reached — no further litigation is years (particularly on large companies), selected depending on whether the possible. and carried out by more skilled benchmarking study is performed in officials and/or specifically dedicated “Judicial conciliation” (conciliazione order to identify local comparables departments of the tax authorities. giudiziale), which consists of reaching (Aida) or international comparables Sometimes the Italian tax authorities an agreement with the tax authorities (Amadeus/Orbis). tend to adopt an aggressive approach, during the litigation phase but before by requiring further documentation (in Does the tax authority generally the first hearing of the tax court. In this addition to that the company makes focus on the interquartile range in a case, a reduction of penalties is granted available at the beginning of a tax TNMM analysis? up to 40 percent of the amount of taxes audit) with a very challenging deadline, resulting from the agreement. Yes, always. exerting considerable pressure on If an adjustment is sustained, can personnel involved in the tax inspection. Does the tax authority have other penalties be assessed? If so, what preferences in benchmarking? If so, Furthermore, the measure of the penalties rates are applied and under what please describe. due upon transfer pricing adjustments conditions? resulting in additional taxes is sometimes When performing a TNMM analysis, the Yes. If the taxpayer does not qualify higher than the minimum (100 percent), Italian tax authorities tend to focus on the for the penalty protection regime, ranging around 120-150 percent of the interquartile values of the arm’s length general tax penalties apply in an amount additional tax assessed. In addition, there range, as they are considered to be the ranging from 100 to 200 percent of are sometimes challenges on transfer most representative indicators of the the additional taxes resulting from the pricing documentations by the Italian tax potential comparable companies included transfer pricing adjustments. authorities, related to a tendency aiming in the final set resulting from the analysis.

In case of transfer pricing adjustments, i.e. The taxpayer should produce adequate Some indications about arm’s length when the tested party’s margin does not supporting documentation in order to royalty rates were provided by the fall within the interquartile range, the Italian substantiate the situation, i.e. the respect Italian Ministry of Economy and tax authorities generally adjust the tested of the “inherence” principle and that the Finance in 1980, which are still used as party’s margin to the median of the range. intangible property received is capable to reference during tax audits and, in some bring benefits to the company. cases, also by tax courts. However, Additional preference is made towards their widespread application is under Italian comparables for an Italian In addition, the transfer pricing studies discussion and more complex analyses tested party. More specifically, when supporting the determination of the are now carried out by tax authorities on a Pan-European comparable search royalty rate applied should be reviewed intangibles. does not have a sufficient number of in the light of the pre-determined Italian comparables in the final set, the indicators provided by the Italian Italian tax authorities may reject it as Ministry of Economy and Finance Tax treaty/double tax acceptable for an Italian tested party in 1980 and, in general, should be resolution and perform their own search, using the compliant with the Italian best practices. What is the extent of the double tax local Italian database. Are royalties subject to treaty network? What level of interaction do tax withholding? Extensive. authorities have with customs Yes. authorities? If extensive, is the competent Are taxpayers allowed to file tax authority effective in obtaining Low. The interaction appears to be very return numbers that differ from double tax relief? low in practice, although in principle book numbers? it has been expressly admitted that in Frequently. It is generally effective some cases the tax authorities may take Yes. In principle year-end transfer within the EU under the EU Arbitration into consideration the value defined for pricing adjustments or true-ups are Convention. Outside the EU, competent customs purposes in order to appraise permitted. However, in managing such authority procedures cannot be the transfer prices. adjustments close attention should be considered as effective. However, there paid as they are deeply scrutinized by are some signs of improvement. Are there limitations on the Italian tax authorities. Therefore, it deductibility of management fees When may a taxpayer submit an would be preferable to support year-end beyond the arm’s length principle? adjustment to competent authority? adjustments with detailed documentation Yes. The deduction of management fees, and by means of a specific provision in the The procedure is regulated in in addition to compliance to transfer pricing relative agreements. accordance with the applicable tax rules, is subject to certain domestic rules treaties (if any) either by referring to the In addition, downward year-end requiring compliance to the so-called corresponding adjustment provided adjustments must be recorded in the “inherence” requisite. Accordingly, by Article 9 (2) of the OECD Model Tax accounts to be tax deductible, whereas apart from respect of the arm’s length Convention or to the mutual procedure only upward adjustments can be made principle, deduction of management fees provided by Article 25 of the OECD to taxable income in the tax return requires the demonstration of the actual Model Tax Convention. In addition, for when they have not been recorded in provision of services and of the potential adjustments between EU countries, the the accounts. However, in this latter benefit for the recipient, to be provided Arbitration Convention would apply. case, in order to support the reliability by means of appropriate documentation, of the accounts, under local generally May a taxpayer go to competent supplementary to transfer pricing accepted accounting principles (GAAP), authority before paying tax? documentation. it is considered appropriate to make a Yes, if a competent authority procedure Are management fees subject to specific note in the financial statements. is started following a tax assessment, withholding? VAT and customs implications need to under the MAP suspension of payment be appropriately addressed and also No. of additional taxes due may be obtained. Intrastat reporting fulfilments. Specific Are there limitations on the penalties may apply for failure to such deductibility of royalties beyond the accomplishments. Advance pricing arm’s length principle? Other unique attributes? agreements Yes. In compliance with the so-called What APA options are available, if The analysis on the arm’s length nature “inherence” principle, royalties paid any? of the intra-group transactions should for patents, trademarks, know-how be performed on a yearly basis and not Unilateral, bilateral, multilateral. and similar rights are deductible to the on multiple year data. However, for extent that they are strictly connected Is there a filing fee for APAs? benchmarking purposes, reference is to the taxpayer’s ordinary business and made to comparable data of the last No. that they are determined in accordance three years preceding the year under with the arm’s length principle. examination.

Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? No. The number of APAs under discussion in Italy has largely increased and the timing for the conclusion of an APA has significantly been reduced, according to the latest statistics (from 18-20 months, to 15 months on average, in the last three years).

KPMG in Italy

Gianni De Robertis Tel: +39 06 8096 3563 Email: [email protected]

Maria Eugenia Palombo Tel: +39 06 8096 3584 Email: [email protected]

Filippo Bertoletti Tel: +39 02 6764 4712 Email: [email protected]

Samuel Marinelli Tel: +39 02 6764 4712 Email: [email protected]

Stefano Rota Tel: +39 02 6764 4708 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at transferpricing@ kpmg.com if you are unable to contact us via the information noted above.

Japan

KPMG observation

Transfer pricing is, and has been, a key focus of the Japanese tax authorities. The 2011 Tax Reform, in particular, was noteworthy for taxpayers, as it was comprehensive and tried to follow the 2010 Organisation for Economic Co- operation and Development (OECD) Guidelines. It introduced several important concepts, such as the most appropriate method rule, arm’s length range, secret comparables, and clarified use of profit split methods. The 2012 Tax Reform did not include major changes in transfer pricing areas, although it had some important changes in tax investigation procedures in general that have had quite an impact on transfer pricing examinations. The tax code has not been drastically changed in terms of transfer pricing since 2013, however, KPMG in Japan expects that the tax code will be changed and ratified around March 2016 according to reflect the OECD Base Erosion and Profit Shifting (BEPS) initiative.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold Transfer pricing Tax authority name for transfer pricing rules to apply between parties? disclosure overview Kokuzei-cho; National Tax Agency (NTA). Are disclosures related to transfer Ownership of 50 percent or greater. pricing required to be submitted to Citation for transfer pricing rules What is the statute of limitations the revenue authority on an annual Special Taxation Measures Law, Article on assessment of transfer pricing basis (e.g. with the tax return)? 66–4 and Enforcement Cabinet Order adjustments? Yes. Some information relating to of Special Taxation Measures Law, Six years after the fiscal year-end in companies’ related party transactions Article 39-12. principle but details are complicated. are required to be submitted with the Effective date of transfer pricing tax return. rules 1 April 1986, in general.

What types of transfer pricing Transfer pricing audit and Special considerations information must be disclosed? penalties Are secret comparables used by tax One must disclose the nature of When the tax authority requests authorities? the transaction and name of the a taxpayer’s transfer pricing In very limited cases. If used, they have counterparties, the selected transfer documentation, are there timing reduced evidence value in court. pricing methods, the amounts of requirements for a taxpayer to the transactions, and whether any submit its documentation? And if Is there a preference, or transactions are subject to an Advance so, how many days? requirement, by the tax authorities Pricing Agreement (APA). This for local comparables in a information is required on specific forms No. benchmarking set? within the tax return. When the tax authority requests Yes. It is usually not acceptable to omit What are the consequences of a taxpayer’s transfer pricing Japanese comparables where the failure to submit disclosures? documentation, are there timing Japanese entity is the tested party. requirements for a taxpayer to Nothing specifically mentioned in the submit its documentation? Please Do tax authorities have regulations. explain. requirements or preferences regarding databases for No specific rule, but documentation has to comparables? Transfer pricing study be submitted on a timely manner after the overview request, possibly within 30 days or so. They have access to ORBIS, Compustat and others, but they have no special Can documentation be filed in If an adjustment is proposed by preferences. a language other than the local the tax authority, what dispute language? If yes, which ones? resolution options are available? Does the tax authority generally focus on the interquartile range in a No. Domestic administrative protest TNMM analysis? When a transfer pricing study is procedures available to the taxpayer Yes, always. prepared, should its content follow include a request for reinvestigation Chapter V of the Organisation followed by a request for Does the tax authority have other for Economic Co-operation and reconsideration and appeal at district preferences in benchmarking? If so, Development (OECD) Guidelines? court level. please describe. Yes, with some exceptions. Specific If an adjustment is sustained, can Not applicable. penalties be assessed? If so, what documents required are listed under What level of interaction do tax rates are applied and under what Special Taxation Measures Law (STML) authorities have with customs conditions? Enforcement Regulations Order, Article authorities? 22–10, but major elements include Yes, general tax penalties for Very Low. company overview, description on intra- underpayment only, 10 to 15 percent of group transactions, functional and risk incremental amount of tax assessed. Are there limitations on analysis, industry analysis, selection of deductibility of management fees To what extent are transfer pricing method, description of comparables, beyond the arm’s length principle? and, economic analysis. penalties enforced? No, if they are arm’s length. Does the tax authority require an There is no transfer pricing specific advisor/tax practitioner to have penalty, if the taxpayer received a Are management fees subject to specific designation in order to transfer pricing assessment, penalties withholding? are imposed in the same manner with prepare or submit a transfer pricing No. study? general corporate tax audit. Are there limitations on the What defenses are available with No. deductibility of royalties beyond the respect to penalties? arm’s length principle? Not applicable. Transfer pricing methods No, it is deductible as long as the royalty Does your country follow the What trends are being observed is arm’s length. transfer pricing methods outlined in currently? Chapter II of the OECD Guidelines? Are royalties subject to If exceptions apply, please describe. More and more audits are focused withholding? on intangible and intra-group service Yes. Yes, with some exceptions. Use of transactions as well as transactions the so-called ‘other method’, even in within Asia. The number of cases has cases where there is no other choice, steadily increased and the amount has no clear authority in the Japanese of assessment per case may be regulations. decreasing.

Are taxpayers allowed to file tax Advance pricing return numbers that differ from book numbers? agreements What APA options are available, Yes, but it should be carefully executed. if any? It has to be pre-agreed and clearly show a change of transfer prices (not transfer Unilateral, bilateral. of profit). Is there a filing fee for APAs? Other unique attributes? No. None. Does the tax authority publish APA data either in the form of an annual Tax treaty/double tax report or through the disclosure of resolution data in public forums? What is the extent of the double tax Yes. treaty network? Are there any difficulties or Extensive. limitations on the availability or effectiveness of APAs? If extensive, is the competent authority effective in obtaining No. Very successful. double tax relief? Frequently. When may a taxpayer submit an adjustment to competent authority? Where double taxation occurs, or the possibility of occurrence of double taxation is very high. In practice, an adjustment to competent authority is submitted after an assessment is issued. May a taxpayer go to competent authority before paying tax? Taxpayers can request a grace period under certain conditions.

KPMG in Japan

Jun A Tanaka Tel: +81362298322 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Kenya

KPMG observation

Although the introduction of transfer pricing rules in Kenya is fairly recent, the Kenya Revenue Authority (KRA) has since started to conduct transfer pricing audits. The KRA currently chairs the Africa Tax Administrators Forum Transfer Pricing roundtable and assists other African tax authorities in performing transfer pricing audits. The KRA has so far issued assessments (deficiency notices) of up to USD50 million to taxpayers and it is expected that this focus on transfer pricing will continue since all ongoing tax audits must incorporate a report of findings on taxpayer transfer pricing activities. As a recent trend, KPMG in Kenya notes that there has been increased cooperation between Kenya and other competent authorities around the world for both information sharing and settling transfer pricing disputes through mutual agreement procedures (MAPs).

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold • where an individual who participates in the management, control or capital Tax authority name for transfer pricing rules to apply between parties? of the business of one, is associated Kenya Revenue Authority (KRA). by marriage, consanguinity or affinity An enterprise will be deemed to be to an individual who participates in Citation for transfer pricing rules related to another: the management, control or capital of Legal Notice no. 67 of 2006 and Section • if one of the enterprises participates the other. 18 (3) of the Income Tax Act (ITA). directly or indirectly in the The transfer pricing rules apply to cross- management, control or capital of Effective date of transfer pricing border transactions and to transactions the other enterprise or a third; person rules undertaken between a permanent participates directly or indirectly in establishment and its head office or 1 July 2006. the management, control or capital of other related branches. both enterprises; or

What is the statute of limitations Does the tax authority require an is arrived at based on the impact of the on assessment of transfer pricing advisor/tax practitioner to have existing transfer pricing policy on taxable adjustments? specific designation in order to profits and consequently on corporation prepare or submit a transfer pricing tax. Therefore, in arriving at the tax Seven years from the year to which the study? payable on the revised taxable profit, the income relates. KRA applies the corporation tax rates of No. 30 percent on residents and 37.5 percent Transfer pricing on non-residents. Transfer pricing methods disclosure overview Under the ITA, penalties accrue on Are disclosures related to transfer Does your country follow the unpaid taxes at the rate of 20 percent. pricing required to be submitted to transfer pricing methods outlined in Additionally, the principal tax the revenue authority on an annual Chapter II of the OECD Guidelines? outstanding attracts interest at two basis (e.g. with the tax return)? If exceptions apply, please describe. percent per month over the period it remains unpaid. However, because Yes. Although the ITA does not require Yes. However, the Commissioner may of the in duplum rule, the interest is taxpayers to include copies of transfer prescribe other methods where in his capped to a maximum of the principal pricing documentation when submitting opinion, the Chapter II methods (which tax assessed on adjustment. the annual tax return, the KRA has are similar to those in the transfer pricing introduced an online tax return platform rules) do not yield an arm’s length price. To what extent are transfer pricing where taxpayers should disclose details penalties enforced? of the related party transactions. Transfer pricing audit and Transfer pricing penalties are enforceable What types of transfer pricing penalties to the full extent of the Income Tax Act. information must be disclosed? When the tax authority requests The Commissioner may recover the taxes due from the person assessed The disclosure required while filing a taxpayer’s transfer pricing e.g. through attaching bank balances and the tax return is the related party, the documentation, are there timing registering liens over fixed assets. transaction value and description of the requirements for a taxpayer to submit its documentation? And if transaction. What defenses are available with so, how many days? What are the consequences of respect to penalties? Yes, 30 days. failure to submit disclosures? Documentation forms the basis for penalty protection. A taxpayer is expected The consequences of not providing the When the tax authority requests to capture all justification in the transfer related party disclosures details entails a taxpayer’s transfer pricing pricing documentation for demonstrating filing an erroneous return and it is a documentation, are there timing the arm’s length nature of prices charged trigger for an audit. requirements for a taxpayer to submit its documentation? Please explain. on intra-group transactions. Transfer pricing study The KRA may require a taxpayer to What trends are being observed furnish documentation within a specified currently? overview time, usually no less than 30 days. Can documentation be filed in The tax authority is vigilant on training a language other than the local If an adjustment is proposed by its staff on transfer pricing to ensure language? If yes, which ones? the tax authority, what dispute enforcement of the transfer pricing resolution options are available? rules. For example, transfer pricing audit It should be in English. teams are specializing based on the An aggrieved taxpayer has recourse different aspects of a documentation When a transfer pricing study is through an appeal procedure system report. Thus the KRA audit team will have prepared, should its content follow established under the ITA. The order of an expert on functional analysis, asset Chapter V of the Organisation appeal for an adjustment proposed by analysis, risk analysis, economic analysis for Economic Co-operation and the tax authorities is as follows: Development (OECD) Guidelines? etc. Additionally, the tax authority has • first level: Local Committee subscribed to Orbis as a benchmarking Yes, for all transactions. Transfer pricing • second level: High Court of Kenya tool. This tool has over 65 million documentation should be reviewed companies in its database and is more annually to ensure that it remains • third level: Court of Appeal; and advanced than the benchmarking tools relevant in view of changes in the • fourth level: Supreme Court of Kenya. currently in use by most tax advisors. business environment. According to the transfer pricing rules (paragraph If an adjustment is sustained, can The KRA is conducting more audits 10), the Commissioner can request penalties be assessed? If so, what on multinational corporations and documentation at any time, and thus rates are applied and under what levying tax penalties on transfer pricing documentation must be readily available. conditions? adjustments on sale of goods and services, financial transactions, shared A sustained adjustment results in unpaid services, etc. corporation tax. Any assessment raised

Special considerations In Kenya, all domestic taxes are Tax treaty/double tax administered under the Commissioner Are secret comparables used by tax of Domestic Taxes of the KRA, even resolution authorities? though Customs is headed by a What is the extent of the double tax No secret comparables are used by the Commissioner. These domestic taxes treaty network? revenue authorities. include: customs and excise duties, Minimal. VAT, and, corporation tax among others. Is there a preference, or If extensive, is the competent requirement, by the tax authorities As such, the level of interaction among these tax administration departments is authority effective in obtaining for local comparables in a double tax relief? benchmarking set? relatively high. Sometimes. Yes. KRA has expressed a preference Are there limitations on for local comparables, especially where deductibility of management fees When may a taxpayer submit an comparable uncontrolled prices are beyond the arm’s length principle? adjustment to competent authority? readily available and have intimated Yes, some. Management’s fees paid In the event that the tax adjustment the possibility of making country risk by a branch to the head office are will affect both countries, it may involve adjustments where comparables from not deductible expenses in arriving transfer of profits and therefore impact different geographical locations such as at the taxable profits. They are also on the tax paid with respect to the Europe are used. not subject to withholding tax. respective years. Do tax authorities have Management fees beyond the arm’s length price, will not be allowable May a taxpayer go to competent requirements or preferences authority before paying tax? regarding databases for deductions when arriving at the taxable comparables? income for corporation tax. Yes, we have previous experience with competent authority in UK (HMRC). No. The KRA does not have Are management fees subject to requirements or preferences regarding withholding? databases to be used for comparables. Yes. Advance pricing However the larger the database to be agreements Are there limitations on the used, the more optimal the transfer deductibility of royalties beyond the What APA options are available, if pricing benchmarking results. As stated arm’s length principle? any? earlier, KRA is at an advantage as it uses a more comprehensive database Yes. Where the royalty payments None. (Orbis). This may result in differing exceed the arm’s length price, the Is there a filing fee for APAs? benchmarking results as compared to excess royalty payments will not be Not applicable. other databases, consequently resulting allowable deductions when arriving at in tax exposures to the particular the taxable income for corporation tax. Does the tax authority publish APA companies involved. data either in the form of an annual Are royalties subject to report or through the disclosure of Does the tax authority generally withholding? focus on the interquartile range in a data in public forums? Yes. TNMM analysis? Not applicable. Are taxpayers allowed to file tax Yes, sometimes. Are there any difficulties or return numbers that differ from limitations on the availability or Does the tax authority have other book numbers? preferences in benchmarking? If so, effectiveness of APAs? Yes, but it should be carefully executed. please describe. Not applicable. It has to be pre-agreed and clearly show Preference is given to the CUP method a change of transfer prices (not transfer if it is available. of profit). The KRA advocates for the use of the Other unique attributes? median and are not comfortable with Before the issuance of the specific accepting that the arm’s length price lies transfer pricing legislation, the KRA within the interquartile range. had engaged a Kenyan multinational in What level of interaction do tax the High Court with regard to transfer authorities have with customs pricing issues. The KRA has also KPMG in Kenya authorities? proposed to amend the annual tax return to include a section on transfer Peter Kinuthia pricing disclosures. Tel: +254 20 2806 000 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Latvia

KPMG observation

Latvian legislation requires a written transfer pricing study if a taxpayer’s annual net turnover exceeds 1.43 million euros (EUR) and intra-group transactions undertaken exceed EUR14,300. Latvian transfer pricing regulations generally follow the Organisation for Economic Co-operation and Development (OECD) approach.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Not applicable Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Development (OECD) Guidelines when What is the statute of limitations choosing a transfer pricing method. Tax authority name on assessment of transfer pricing adjustments? Effective date of transfer pricing Valsts ienemumu dienests. rules Transfer pricing adjustments and a Citation for transfer pricing rules penalty can be applied by the tax 1 April 1995 in general. 1 July 2006 authority for the previous five years General transfer pricing requirements for transactional net margin method for transactions with foreign related to carry out related party transactions (TNMM) and profit split. 1 January 2013 parties and three years for local related at arm’s length prices are set out in the for transfer pricing documentation party transactions — starting from the Latvian Law on Corporate Income Tax. requirements and Advance Pricing corporate income tax payment date. The Latvian Law on Taxes and Duties Agreements (APAs). sets the requirement for particular What is the relationship threshold Transfer pricing taxpayers in preparing transfer pricing for transfer pricing rules to apply documentation. It lists the information between parties? disclosure overview that must be included in the transfer Are disclosures related to transfer Any transaction between foreign related pricing documentation. pricing required to be submitted to companies (20 percent ownership and the revenue authority on an annual The Cabinet of Ministers regulation above) or Latvian companies belonging basis (e.g. with the tax return)? No. 556 as of 1 July 2006 provides the to the same group of companies (at methods to be used when determining least 90 percent ownership or voting Yes. An entity is required to disclose arm’s length prices. The tax legislation rights) must be carried out on an arm’s related party transactions to the tax in Latvia allows the use of Organisation length basis, i.e. market value. authority in the annual corporate income for Economic Co-operation and tax return.

What types of transfer pricing Transfer pricing methods with the assessment and as a result part of the late payment fees and penalties information must be disclosed? Does your country follow the are cancelled. Along with the annual corporate income transfer pricing methods outlined in tax return, the following information Chapter II of the OECD Guidelines? What trends are being observed must be submitted: If exceptions apply, please describe. currently? • the name of the related party to the Yes. All five methods are acceptable. The tax authority’s interest in transfer transaction pricing has increased and as a result • the registration number and country Transfer pricing audit and more transfer pricing audits are performed by the tax authority. of registration penalties • the transaction type and amount; When the tax authority requests Special considerations • the transfer pricing method applied; and a taxpayer’s transfer pricing documentation, are there timing Are secret comparables used by tax • the amount for which taxable income requirements for a taxpayer to authorities? is increased (the amount of transfer submit its documentation? And if KPMG in Latvia has no information about pricing adjustment), if any. so, how many days? the use of any secret comparables. The taxpayer also must show in the Yes, 30 days. Is there a preference, or corporate income tax return the amount requirement, by the tax authorities by which its Latvian related party has When the tax authority requests for local comparables in a increased its taxable income for non- a taxpayer’s transfer pricing benchmarking set? compliance with the arm’s length documentation, are there timing principle, if any. requirements for a taxpayer to Yes, if local comparables can be found. submit its documentation? Please If local comparables are not available, What are the consequences of explain. a European benchmarking study is failure to submit disclosures? A month, if the taxpayer is required acceptable. A penalty can be applied for late filing to prepare full transfer pricing If local comparables are found by the of a tax return varying from EUR70 documentation. tax authority but they are not included in — EUR700. If no return is filed, the the entity’s benchmarking study, the tax maximum penalty can be applied If an adjustment is proposed by authority could use that as an argument EUR700. the tax authority, what dispute resolution options are available? to challenge the entity’s results. Transfer pricing study The only option available is appealing the Do tax authorities have requirements or preferences overview audit decision to General Director and then to the court. regarding databases for Can documentation be filed in comparables? a language other than the local If an adjustment is sustained, can language? If yes, which ones? penalties be assessed? If so, what No. The tax authority itself uses the rates are applied and under what Amadeus database. However, there are No. conditions? no requirements or recommendations When a transfer pricing study is on the use of any specific database. Yes. A penalty of 20 percent or prepared, should its content follow Some entities prefer to use the Amadeus 30 percent is applied. It can be halved Chapter V of the Organisation database because it is more likely that the i.e. 10 percent or 15 percent if the for Economic Co-operation and tax authority would obtain the same, or at tax infringement is not considered Development (OECD) Guidelines? least similar, benchmarking study results. as a repeated tax infringement and Yes, for all transactions. the taxpayer has complied with the Does the tax authority generally statutory due dates for submitting tax focus on the interquartile range in a Latvia is not a member of the OECD, declarations and tax payments, as well TNMM analysis? thus the OECD Guidelines are not as has been cooperative with the tax applicable. However, Latvian legislation Yes, always. administration. is based on the OECD Guidelines, Does the tax authority have other and the court practice shows that the To what extent are transfer pricing preferences in benchmarking? If so, taxpayer and tax authorities should take penalties enforced? please describe. into consideration the provisions of the Always. OECD Guidelines. The tax authority’s approach is not What defenses are available with officially documented and published. Does the tax authority require an respect to penalties? KPMG is aware that the tax authorities advisor/tax practitioner to have have their reservations with respect to specific designation in order to No penalties are assessed in a loss three-year averages, especially where prepare or submit a transfer pricing position, where no additional tax is the tested party’s price or profitability study? assessed. Furthermore, the taxpayer levels fall into interquartile range of can enter into an agreement with the tax No. average profitability, but not within the authorities whereby the taxpayer agrees range of a particular year.

What level of interaction do tax Tax treaty/double tax authorities have with customs authorities? resolution What is the extent of the double tax High. The audit is combined and as treaty network? such, customs and transfer pricing audit specialists work side by side in the audit Extensive. team. If extensive, is the competent Are there limitations on authority effective in obtaining deductibility of management fees double tax relief? beyond the arm’s length principle? KPMG in Latvia has no experience with No, provided the benefit can be double tax relief being requested for demonstrated. transfer pricing adjustments under the double tax treaty. Are management fees subject to withholding? When may a taxpayer submit an adjustment to competent authority? Yes. No formal rules exist in this area. Are there limitations on the deductibility of royalties beyond the May a taxpayer go to competent arm’s length principle? authority before paying tax? No. Yes. Are royalties subject to withholding? Advance pricing No. agreements What APA options are available, if Are taxpayers allowed to file tax any? return numbers that differ from book numbers? Unilateral. Yes. The taxpayer may reduce its Is there a filing fee for APAs? corporate income tax base by the Yes. The fee per APA is EUR7,114. difference between intragroup prices and market prices by which its qualified Does the tax authority publish APA related party has increased its corporate data either in the form of an annual income tax base. report or through the disclosure of data in public forums? Furthermore, the taxpayer is in certain cases even required to make period No. (e.g. year-end) adjustment for ongoing Are there any difficulties or related party transactions if actual limitations on the availability or payments over the year are not arm’s effectiveness of APAs? length. Not applicable. APAs were introduced If the transfer pricing adjustment is only few years ago, thus there is no made in the tax return and one of established practice or trend yet. the parties is engaged in VAT exempt transactions, VAT adjustments for the transactions might be required. Other unique attributes? None.

KPMG in Latvia

Steve Austwick Tel: +371 67 038 000 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Lithuania

KPMG observation

Transfer pricing rules were implemented in Lithuania in 2004. In general, they are a condensed form of the Organisation for Economic Co-operation and Development (OECD) Guidelines. Over the past few years, transfer pricing has been subject to higher scrutiny. The Lithuanian tax authorities are increasingly requesting companies to submit transfer pricing documentation for review. The Lithuanian tax authorities have direct access to the Bureau van Dijk (BvD) Amadeus database, allowing them to analyze benchmarking studies and perform adjustments. Similarly, the tax authorities have gained access to a loan benchmarking database, which has resulted in an increase in scrutiny of intra-group financing transactions in the past year. The trends of the past few years — increased attention to management services, cost-sharing arrangements and royalty payments — continued in 2014 and is expected to be a trend in 2015 as well.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold Transfer pricing Tax authority name for transfer pricing rules to apply between parties? disclosure overview Valstybine mokesciu inspekcija (State Are disclosures related to transfer Ownership higher than 25 percent, Tax Inspectorate). pricing required to be submitted to based on voting power, or under the revenue authority on an annual Citation for transfer pricing rules common control, or in cases where the basis (e.g. with the tax return)? Order No. 1K-123 of the Minister of parties can otherwise influence each other. Yes. Disclosures related to transfer Finance (9 April 2004). pricing (form FR0528 for declaring Effective date of transfer pricing What is the statute of limitations transactions with related parties) must rules on assessment of transfer pricing be submitted to the tax authorities with adjustments? the annual corporate income tax return. 22 April 2004. Generally, the current year and five previous taxable years.

What types of transfer pricing Does the tax authority require an What defenses are available with information must be disclosed? advisor/tax practitioner to have respect to penalties? specific designation in order to An annual statement (form FR0528) The penalties can be reduced by up to prepare or submit a transfer pricing should include the following information: 10 percent of the outstanding corporate study? income tax if the taxpayer properly • identification details of a taxpayer and No. communicates with the tax authorities associated parties and presents all requested documents/ • number of transactions Transfer pricing methods explanations. • type of transactions performed with Does your country follow the What trends are being observed each associated party (sale/purchase transfer pricing methods outlined in currently? of tangible fixed assets, sale/purchase Chapter II of the OECD Guidelines? The number of tax audits related to of intangibles, sale/purchase of raw If exceptions apply, please describe. materials, goods, production items, transfer pricing issues has been steadily and provision/acquisition of financial Yes. To be precise, Lithuanian rules increasing over the past few years. The services, provision/acquisition of follow the OECD Guidelines of 1995, number of tax disputes and transfer other services, sale/purchase of therefore, the priority of methods is still pricing adjustments has increased as shares and/or derivatives, lease of real enshrined in local law. well. Majority of the audits are targeted estate and other property, as well as at larger companies with international any other transactions) Transfer pricing audit operations. The transactions subject to scrutiny the most are intercompany • income received/expenses incurred and penalties finance, royalty payments, intra-group for each type of transaction; and When the tax authority requests services (particularly management • accrued interest on loans and the a taxpayer’s transfer pricing services) and cost sharing arrangements. amount of loans granted by related documentation, are there timing parties must be specified. requirements for a taxpayer to Special considerations submit its documentation? And if Are secret comparables used by tax What are the consequences of so, how many days? failure to submit disclosures? authorities? Yes, 30 days. Administrative penalties for non- Yes, the tax authorities may use submission may be imposed. In When the tax authority requests comparables which are not disclosed to practice, one does not observe penalties a taxpayer’s transfer pricing the taxpayer. being imposed. documentation, are there timing Is there a preference, or requirements for a taxpayer to requirement, by the tax authorities submit its documentation? Please for local comparables in a Transfer pricing study explain. overview benchmarking set? The statutory requirement is to present Can documentation be filed in Yes, unless the use of a broader set is transfer pricing documentation within a language other than the local sufficiently justified (e.g. lack of local 30 days of the request. language? If yes, which ones? comparables, international scope of If an adjustment is proposed by operations, etc.). Yes. Any language, but must be the tax authority, what dispute translated upon request. Do tax authorities have requirements resolution options are available? or preferences regarding databases When a transfer pricing study is The procedure of ordinary dispute for comparables? prepared, should its content follow resolution should be followed, i.e. the Chapter V of the Organisation No. taxpayer may file a claim with the central for Economic Co-operation and tax authorities or with the Commission Does the tax authority generally Development (OECD) Guidelines? of Tax Disputes. focus on the interquartile range in a Yes, for all transactions. There are some TNMM analysis? If an adjustment is sustained, can requirements which are applicable in penalties be assessed? If so, what Yes, sometimes. practice. The tax authorities require rates are applied and under what transaction specific information or Does the tax authority have other conditions? industry reviews and functions/risks. preferences in benchmarking? If so, For example, an IT market review is Generally, the tax penalties imposed please describe. required for group IT services even if range from 10 to 50 percent of the Only economic benchmarking criteria the main line of company’s business outstanding tax amount. are accepted — i.e. lack of a company’s is industrial manufacturing. Functions To what extent are transfer pricing website on a database is not an and risks should also be specific to the penalties enforced? acceptable rejection criterion. transaction under analysis and not just the organization as a whole. Often. Authorities also prefer the use of multiple year data.

What level of interaction do tax If extensive, is the competent authorities have with customs authority effective in obtaining authorities? double tax relief? High. No experience (in transfer pricing cases). Are there limitations on deductibility of management fees When may a taxpayer submit an beyond the arm’s length principle? adjustment to competent authority? Yes, some. The company’s management Generally, in the current year and for five must be able to provide sufficient previous taxable years. evidence of the receipt of services, their May a taxpayer go to competent actual need in the organization, and the authority before paying tax? economic benefit for the provision of management services. Not permitted. The tax due would have to be paid on the due date even Are management fees subject to though the case has been referred to withholding? competent authority. No. Are there limitations on the Advance pricing deductibility of royalties beyond the agreements arm’s length principle? What APA options are available, No. if any? Are royalties subject to Unilateral, bilateral. withholding? Is there a filing fee for APAs? Yes. No. Are taxpayers allowed to file tax Does the tax authority publish APA return numbers that differ from data either in the form of an annual book numbers? report or through the disclosure of Yes. Year-end adjustments should data in public forums? preferably be reflected in the financial No. statements. It is, however, also possible to make the year-end adjustments in the Are there any difficulties or tax return. limitations on the availability or effectiveness of APAs? Adjustments may have both customs and VAT implications. Year-end Yes. APAs are only available for adjustments must be substantiated. new transactions and the transfer pricing should be determined prior to Other unique attributes? approaching the authorities. None. A very small number of APAs has been concluded so far so the tax authorities Tax treaty/double tax have little experience in the area. resolution What is the extent of the double tax treaty network? Currently Lithuania has 53 double tax treaties.

KPMG in Lithuania

Biruté Petrauskaité Tel: +370 (5) 2 102 613 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Luxembourg

KPMG observation

Effective 1 January 2015, Article 56 of the Luxembourg Income Tax Law makes explicit reference to the (arm’s length) conditions agreed between independent businesses as a standard for evaluating the conditions agreed between related parties for all transactions. The Article does not make a distinction between cross- border and domestic intra-group transactions. Hence all intra-group transactions’ prices should be supported by transfer pricing documentation. Currently, the law is very general and taxpayers in Luxembourg is waiting for some circulars in the near future for more guidance. In addition, and also effective 1 January 2015, §171 of the General Tax Law — which states that upon of request of the Luxembourg tax authorities a taxpayer has to prove the accuracy of their tax return — now explicitly encompasses transactions between associated enterprises.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Effective date of transfer pricing shareholders or persons close to them (Article 164 LIR). Tax authority name rules 28 January 2011 for intra-group financing Threshold as defined by Article 9(1) Ministère des Finances. activities only and 1 January 2015 for of the Organisation for Economic Citation for transfer pricing rules every intra-group transaction. Co-operation and Development (OECD) Model Tax Convention for associated Luxembourg Income Tax Code; General What is the relationship threshold enterprises. Tax Law, Article 56, Article 97 (1), Article for transfer pricing rules to apply 164; paragraph 5 and 6 StAG. Circular between parties? What is the statute of limitations LIR 164/2 of 28.01.11. Circular LIR 164/2 on assessment of transfer pricing Transactions between related parties, bis of 08.04.11. adjustments? whether directly or indirectly, which

do not comply with the arm’s length Five years from the issuance of the

principle (Article 56 LIR) and such tax assessment by the tax authorities transactions with direct or indirect (10 years in the case of fraud).

Transfer pricing Transfer pricing study If an adjustment is proposed by the tax authority, what dispute disclosure overview overview resolution options are available? Are disclosures related to transfer Can documentation be filed in pricing required to be submitted to a language other than the local No specific transfer pricing rules. the revenue authority on an annual language? If yes, which ones? General law applies. basis (e.g. with the tax return)? Yes. The documentation can be filed in The dispute resolution process regarding No. However, it is recommended English, German and French. transfer pricing is part of the general tax to enclose proper transfer pricing law of Luxembourg. In this context, if When a transfer pricing study is documentation to the corporate tax a taxpayer does not agree with the tax prepared, should its content follow return for every significant intra-group adjustment proposed by the Luxembourg Chapter V of the Organisation transaction. tax authorities, he can first make a claim for Economic Co-operation and which must be filed with the Director What types of transfer pricing Development (OECD) Guidelines? of the Tax Administration within three information must be disclosed? Yes, for all transactions. The months from the receipt of the tax Disclosures related to transactions Luxembourg tax authorities apply the notice. The tax authorities have 6 months of special interest to the tax authority 2010 version of the Transfer Pricing to reply. In case of negative answer (or or related to specific computations/ Guidelines for Multinational Enterprises deemed negative answer after 6 month), tax treatment must be made in the and Tax Administrations. When the the taxpayer may appeal for reversal corporate tax return in order to evidence revised Chapter V (i.e. encompassing (main application against the decision of that the pricing and/or tax treatment the BEPS work) will come into force, the Director of the Tax Administration) previously agreed is respected. These in principle, the Luxembourg tax before the Administrative Court within a disclosures are not listed per se in any authorities should apply it. maximum period of 3 months, through a specific regulation and are mainly based lawyer or an accountant. If no response Does the tax authority require an on the Luxembourg administrative is received within 6 months, the taxpayer advisor/tax practitioner to have practice. In any case, where an Advance may appeal to the Administrative Tribunal, specific designation in order to Pricing Agreement (APA) has been without any time limit to comply in this prepare or submit a transfer pricing submitted to the tax authorities, a case. Finally, the appeal of the decision study? transfer pricing study must be enclosed. of the Administrative Tribunal (if any) No. must be filed with the Administrative In addition, as from 1 January 2015, a Court within 40 days of notification of the new subparagraph under §171 of the judgment. General Tax Law, which states that Transfer pricing methods upon request of the Luxembourg tax Does your country follow the If an adjustment is sustained, can authorities the taxpayer has to prove transfer pricing methods outlined in penalties be assessed? If so, what the correctness of his tax return, makes Chapter II of the OECD Guidelines? rates are applied and under what it clear that this obligation also applies If exceptions apply, please describe. conditions? to transaction between associated Yes. Yes. General tax penalties only, enterprises. 25 percent of the tax avoided for transfer What are the consequences of Transfer pricing audit and pricing adjustments and 50 percent failure to submit disclosures? of the tax avoided where the primary penalties purpose was to pay minimal or no tax. Where no APA has been concluded When the tax authority requests and/or where no transfer pricing To what extent are transfer pricing a taxpayer’s transfer pricing documentation has been enclosed, penalties enforced? documentation, are there timing the burden of proof lies in the hands requirements for a taxpayer to Rarely. of the taxpayer. In this context, the submit its documentation? And if Luxembourg tax authorities may What defenses are available with so, how many days? consider readjusting the remuneration respect to penalties? of the company, potentially leading to an Yes, 28 days. Transfer pricing documentation. increase of the taxable basis and, thus, When the tax authority requests of the overall tax charge of the company. What trends are being observed a taxpayer’s transfer pricing currently? In particular, intra-group financing documentation, are there timing activities are subject to a risk of requirements for a taxpayer to More and more transfer pricing exchange of information with the submit its documentation? Please documentation requests. country of residence of the borrower explain. and hence a potential non-application Normal Administrative Tax Office (ATO) Special considerations of the benefit of the double tax treaties practice is to expect documentation Are secret comparables used by tax with resultant withholding tax issues. within 28 days of request. authorities? No.

Is there a preference, or requirement, Are royalties subject to Is there a filing fee for APAs? by the tax authorities for local withholding? Yes, applicable from 1 January 2015. The comparables in a benchmarking set? No. filing fee ranges between 3,000 euros No. (EUR) to EUR10,000 and is payable by Are taxpayers allowed to file tax the taxpayer to the Luxembourg tax Do tax authorities have return numbers that differ from authorities. requirements or preferences book numbers? regarding databases for Does the tax authority publish APA Yes, (upward and downward) comparables? data either in the form of an annual adjustments in the corporate tax returns report or through the disclosure of No. in order to restate market conditions data in public forums? that would not have been commercially Does the tax authority generally respected. Yes. focus on the interquartile range in a TNMM analysis? Other unique attributes? Are there any difficulties or limitations on the availability or Yes, sometimes. Not applicable. effectiveness of APAs? Does the tax authority have other No. Until 1 January 2015, the APAs preferences in benchmarking? If so, Tax treaty/double tax could be filed with the tax authorities please describe. resolution without constraint. However, since this No. What is the extent of the double tax date, the filing fee is hampering many treaty network? What level of interaction do tax taxpayers to proceed with an APA. authorities have with customs Extensive. authorities? If extensive, is the competent None. authority effective in obtaining double tax relief? Are there limitations on deductibility of management fees Almost always. beyond the arm’s length principle? When may a taxpayer submit an No. The Luxembourg tax authorities adjustment to competent authority? may make a tax adjustment of the After an adjustment is proposed to the management fees if they consider they taxpayer. are beyond the arm’s length principle. May a taxpayer go to competent Are management fees subject to authority before paying tax? withholding? Permitted. No. Are there limitations on the Advance pricing deductibility of royalties beyond the arm’s length principle? agreements What APA options are available, No. The Luxembourg tax authorities if any? may make a tax adjustment of the management fees if they consider they Unilateral, bilateral, multilateral. are beyond the arm’s length principle.

KPMG in Luxembourg

Philippe Neefs Tel: +352 225 151 5531 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Malawi

KPMG observation

Malawi introduced transfer pricing legislation in 1964. Section 127A to the Taxation Act as amended in July 2015 is aimed at enforcing the arm’s length principle in cross-border transactions carried out between connected persons. Although transfer pricing legislation has existed since 1964 in the Taxation Act, specific and detailed regulations on the application of these rules have never been published by the Malawi Revenue Authority (MRA). However, in setting or supporting intercompany prices for multinational entities, taxpayers should consider the transfer pricing rules stipulated in the Taxation Act since the Commissioner General is empowered to assess taxpayers up to six years back. The Commissioner General of the MRA will re-examine and make adjustments to transactions involving related parties involved in cross border businesses which produce no profit or a loss due to transfer pricing and will determine the profits derived from such businesses as if the prices of the two related parties were at arm’s length.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Thresholds apply/exist Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold Malawi, in which case the permanent establishment shall be treated as a Tax authority name for transfer pricing rules to apply between parties? distinct and separate enterprise from Malawi Revenue Authority (MRA). its head office and related branches. These regulations shall apply to: What is the statute of limitations a) transactions between associated on assessment of transfer pricing Citation for transfer pricing rules enterprises within a multinational adjustments? Section 146 of the Taxation Act. company where one company is located in Malawi and is subject to Where there is no fraud proven, the Malawi tax, and the other is located time limit is up to six years back and, if Effective date of transfer pricing outside Malawi; and there is fraud proven by MRA, there is rules b) transactions between a permanent no time limit. establishment and its head office or The effective date of Transfer Pricing other related branches within Rules is 2009.

Transfer pricing Transfer pricing audit and What trends are being observed disclosure overview penalties currently? Are disclosures related to transfer When the tax authority requests The tax authority is focusing on all pricing required to be submitted to a taxpayer’s transfer pricing industries irrespective of where the the revenue authority on an annual documentation, are there timing entities are incorporated. basis (e.g. with the tax return)? requirements for a taxpayer to submit its documentation? And if Yes. Disclosures related to transfer Special considerations so, how many days? pricing shall be prepared and are required Are secret comparables used by tax to be submitted to the MRA. This is Yes, 21 days. authorities? done at inception and whenever there When the tax authority requests Yes. are changes to the disclosures. The a taxpayer’s transfer pricing documentation is on how the company Is there a preference, or documentation, are there timing will handle transfer pricing issues in requirement, by the tax authorities requirements for a taxpayer to relation to the arm’s length principle. for local comparables in a submit its documentation? Please benchmarking set? What types of transfer pricing explain. information must be disclosed? No. Under normal circumstances MRA Information that relates to how the gives 21 days or you may apply for an Do tax authorities have company transacts so that the arm’s extension within which to submit the requirements or preferences length principle is adhered to at all times. documentation. regarding databases for comparables? What are the consequences of If an adjustment is proposed by failure to submit disclosures? the tax authority, what dispute No. resolution options are available? The Tax Authority (MRA) determines the Does the tax authority generally appropriate consequences on a case- Taxpayer can submit for an objection to focus on the interquartile range in a by-case basis based on intercompany MRA (on facts), submit a formal appeal TNMM analysis? transactions that have occurred. to the Commissioner General (facts and No. on point of law), appeal to the Special Arbitrator, appeal to the High Court, and, Does the tax authority have other Transfer pricing study preferences in benchmarking? If so, Transfer pricing study snapshot appeal to the Supreme Court of Appeal overview (the highest court of the land). please describe. Can documentation be filed in If an adjustment is sustained, can None. The purpose of a transfer pricing study a language other than the local penalties be assessed? If so, what language? If yes, which ones? What level of interaction do tax Applicable Requiredto be contemporaneous Thresholdsapply/exist Submission to tax authority required rates are applied and under what authorities have with customs Legal requirements Yes, English. conditions? authorities? Protection from penalties When a transfer pricing study is Penalties are punitive and when assessed It is under one umbrella called the MRA. prepared, should its content follow Reduce risk of adjustment the rates can be more than 100 percent Chapter V of the Organisation depending on the gravity of the case. Are there limitations on Shifts burden of proof for Economic Co-operation and However, currently interest is charged at deductibility of management fees Development (OECD) Guidelines? the prevailing bank rate plus 5 percent per beyond the arm’s length principle? Yes, for all transactions. Malawi is a annum on the tax due at the time. Yes, we are aware that MRA has member to OECD as such the contents To what extent are transfer pricing rejected management fees where it was of the study follow the same trend. penalties enforced? more than five percent of total turnover. Does the tax authority require an Transfer pricing penalties are enforced Are management fees subject to advisor/tax practitioner to have immediately by the Commissioner withholding? specific designation in order to General. Yes. prepare or submit a transfer pricing What defenses are available with study? Are there limitations on the respect to penalties? deductibility of royalties beyond the Yes. Where proper documentation is already arm’s length principle? placed and due to some reasons to No. Transfer pricing methods be deemed as valid by Commissioner Does your country follow the General, the documentation was not Are royalties subject to transfer pricing methods outlined in submitted, negotiations can be done. withholding? Chapter II of the OECD Guidelines? Yes. If exceptions apply, please describe. Yes.

Are taxpayers allowed to file tax May a taxpayer go to competent return numbers that differ from authority before paying tax? book numbers? It is negotiable but it is a requirement to No. pay tax first and object/or appeal later. Other unique attributes? Advance pricing Not applicable. agreements Tax treaty/double tax What APA options are available, if any? resolution None. What is the extent of the double tax treaty network? Is there a filing fee for APAs? Malawi has valid tax treaties with six No. countries. Does the tax authority publish APA If extensive, is the competent data either in the form of an annual authority effective in obtaining report or through the disclosure of double tax relief? data in public forums? Yes. Not applicable. When may a taxpayer submit an Are there any difficulties or adjustment to competent authority? limitations on the availability or effectiveness of APAs? Up to six years back. Not applicable.

KPMG in Malawi

Jimmy Gondwe Tel: +2651820744 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Malaysia

KPMG observation

The Malaysian tax authority has been very active in monitoring taxpayer’s compliance with the applicable transfer pricing regulations. In addition to the introduction in 2014 of a new field in tax returns (Form C) which requires taxpayers to declare whether transfer pricing documentation has been prepared, the Malaysian Inland Revenue Board (MIRB) is now handing out “Transfer Pricing Awareness Survey” forms (TPAS) to selected taxpayers. The objective of the TPAS is to gauge the transfer pricing awareness of the selected taxpayer’s local management. Whilst the taxpayer may not need to have sound transfer pricing knowledge in completing the TPAS, local management needs to exercise due care when completing it. This is to avoid the MIRB misinterpreting the responses provided by local management, which may then impact the manner in which a transfer pricing audit is subsequently conducted. The MIRB, in January 2015, published an article with the title “Base Erosion and Profit Shifting (BEPS) — A Malaysian Perspective”. The MIRB is highly aware of the BEPS action plan and BEPS-related issues, and is endeavoring to combat base erosion and profit shifting out of Malaysia. The article outlined BEPS issues that are of significance in Malaysia, as well as the challenges faced by the MIRB in combating tax base erosion. The MIRB has also been actively attending OECD working party meetings as observers from developing countries. The MIRB recently issued Mutual Agreement Procedure (MAP) Guidelines. The purpose of these guidelines is to provide guidance on obtaining assistance from the Malaysian Competent Authority (CA) to persons that fall within the scope of an effective Tax Treaty that Malaysia has with its Treaty Partners. This assistance is provided to taxpayers in order to try to resolve international tax disputes involving double taxation and inconsistencies in the interpretation and application of a Tax Treaty.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules apply the arm’s length price for their transactions with an associated person Tax authority name The arm’s length provision is set out in for the acquisition or supply of property Section 140A of the Malaysian Income Lembaga Hasil Dalam Negeri (Malaysian or services. Along with the introduction Tax Act 1967 (the Act). Section 140A Inland Revenue Board or MIRB). of Section 140A, the concept of thin requires taxpayers to determine and capitalization was also introduced, but

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 172 | Global Transfer Pricing Review implementation has been deferred until they have prepared transfer pricing d) determination of transaction the end of December 2015. documentation. price in view of transfer pricing methodologies Income Tax (Transfer Pricing) Rules Besides that, the amount of transactions 2012 (TP Rules 2012) were released to with associated persons are also e) communication with MIRB the public on 11 May 2012. The scope of needed to be disclosed in the annual tax f) awareness of Mutual Agreement TP Rules 2012 applies to the acquisition return forms. Procedure (MAP). and supply of goods (including tangible In July 2011, Form MNE [2/2012] (latest What are the consequences of and intangible goods), services version being [4/2015]) was introduced by failure to submit disclosures? between associated persons and intra- the MIRB to collect certain information group financing. Both local and cross- For disclosures which are an integral from taxpayers relating to their cross- border transactions are covered under component of the annual tax return border transactions. This is issued TP Rules 2012. forms, failure to furnish information only to selected taxpayers and aims to relating to the disclosures could Effective date of transfer pricing rules complement the information already render the annual tax return form as disclosed in the annual tax returns. • Section 140A became effective from an incorrect return, which could result 1 January 2009. Prior to this date, What types of transfer pricing in a fine not less than 1,000 Malaysian transfer pricing adjustments were information must be disclosed? ringgits (MYR) and not more than made based on the general anti- The annual tax return forms require MYR10,000. avoidance provision. taxpayers to declare whether they have However, if the taxpayer defaults in • TP Rules 2012 are applied prepared transfer pricing documentation, furnishing the annual tax return forms, retroactively, from 1 January 2009. as well as the disclosure of the amount of on conviction, could result in a fine not • The transfer pricing guidelines issued transactions with associated persons for less than MYR200 and not more than in 2003 were revised in July 2012. the following type of transactions: MYR20,000. What is the relationship threshold • sales to associated persons for transfer pricing rules to apply • purchases from associated persons Transfer pricing study between parties? • other payments to associated overview The scope of TP Rules 2012 applies persons Can documentation be filed in to transactions between ‘associated a language other than the local • loans to/from associated persons; and persons.’ Generally, a relationship is language? If yes, which ones? deemed to exist if there is a shareholding • receipts from associated persons. Yes. The documentation can be prepared relationship of more than 50 percent. On the other hand, the Form MNE in Bahasa Malaysia or English. However, the Malaysian transfer pricing [4/2015] can be segregated into four guidelines also consider a relationship to sections: When a transfer pricing study is exist if one party participates directly or prepared, should its content follow indirectly in the management, control, • general information Chapter V of the Organisation or capital of the other party or the same • particulars of transactions with for Economic Co-operation and person participates directly or indirectly in foreign related companies Development (OECD) Guidelines? the management, control and capital of • particulars of financial assistance with Yes, for all transactions. both companies. foreign related companies Does the tax authority require an What is the statute of limitations • other information including: (i) a advisor/tax practitioner to have on assessment of transfer pricing declaration whether transfer pricing specific designation in order to adjustments? documentation has been prepared prepare or submit a transfer The statute of limitation for non arm’s for the relevant year, (ii) a declaration pricing study? of any business restructuring for length transaction is seven years Yes. upon the expiration of a particular year the taxpayer and its related parties of assessment, except in cases of in the group during the year or the investigations, fraud, willful default, or last five years (and to indicate the Transfer pricing methods negligence. relevant date if business restructuring Does your country follow the took place), and (iii) an overall transfer pricing methods outlined in Transfer pricing characterization of the company. Chapter II of the OECD Guidelines? If exceptions apply, please describe. disclosure overview With regards to the TPAS, there are six different sections in total which require No. The transfer pricing methods Are disclosures related to transfer the taxpayer to rank the degree of their outlined in Chapter II of the OECD pricing required to be submitted to transfer pricing awareness: Guidelines are applicable to Malaysia. the revenue authority on an annual However, the TP Rules 2012 provide that basis (e.g. with the tax return)? a) knowledge of transfer pricing taxation traditional transactional methods should b) involvement of top management Yes. With effect from year of assessment be considered first before transactional 2014, taxpayers are required to declare c) establishment of global transfer profit methods. in the annual tax return forms whether pricing policy

Transfer pricing audit and What trends are being observed Does the tax authority have other currently? preferences in benchmarking? If so, penalties please describe. Transfer pricing audits have intensified When the tax authority requests and are expected to continue to Pursuant to TP Rules 2012, in a taxpayer’s transfer pricing intensify in Malaysia. In addition to the determining the arm’s length price, documentation, are there timing usual focus on transactions involving the comparison between a controlled requirements for a taxpayer to sales and purchases of goods, the transaction and uncontrolled submit its documentation? And if MIRB is also increasing their scrutiny transaction(s) shall be on a year-by-year so, how many days? on payments for intra-group services as basis. Further, for tax audit purposes, Yes, 30 days. well as looking into intra-group financing the MIRB often uses the median of arrangements and payments in relation the range as a starting point when When the tax authority requests to intangible properties. evaluating whether related party a taxpayer’s transfer pricing transactions are at arm’s length. documentation, are there timing Common audit triggers include requirements for a taxpayer to companies exhibiting consistent What level of interaction do tax submit its documentation? Please losses, fluctuating profitability or those authorities have with customs explain. making very low profits. Companies authorities? with significant amounts of related Documentation should be made Presently low, however, the party transactions, especially payments available to the MIRB within 30 days MIRB and the Royal Malaysian for intra-group services, royalties or from the date of request. Customs Department have signed a intangible property and companies memorandum of understanding on If an adjustment is proposed by that have undergone supply chain or joint audit, where auditors from both the tax authority, what dispute business restructurings are also likely to departments will work together. resolution options are available? be selected for a tax audit. Are there limitations on Taxpayer can approach the dispute deductibility of management fees resolution panel (DRP) set up by the Special considerations beyond the arm’s length principle? MIRB to resolve matters prior to court Are secret comparables used by tax proceedings. With respect to the judicial authorities? Yes, some. Management fees are system, the first level of the appeal is generally deductible except for those No. generally to the Special Commissioner relating to shareholder or custodial of Income Tax through the submission Is there a preference, or activities, duplicative services, services of a Form Q. requirement, by the tax authorities that provide incidental or passive for local comparables in a association benefits and on-call services If an adjustment is sustained, can benchmarking set? (note: the deductibility of on-call services penalties be assessed? If so, what can be reviewed on a case-by-case rates are applied and under what Yes, MIRB prefers to use local basis), or when taxpayers fail to provide conditions? companies as comparables. The use evidence to support the receipt of of foreign comparable companies in a Transfer pricing adjustments made management services and commercial benchmarking analysis will most likely during a tax audit which result in benefits accrued to the local entity. The not be sufficient to convince the MIRB additional tax payable will be subject to MIRB is intensifying their review on of the arm’s length outcome. a general penalty rate of 35 percent of payments for intra-group services during the additional taxes payable. A lower Do tax authorities have transfer pricing audits to determine penalty rate of 25 percent will apply requirements or preferences whether the payments comply with where transfer pricing documentation regarding databases for the arm’s length principle. The MIRB is prepared and nil where the transfer comparables? has been very strict and in many recent pricing documentation meets the transfer pricing audits, companies are In Malaysia, a local benchmarking contemporaneous requirement. finding it difficult to produce sufficient analysis is carried out manually based and reliable evidence to justify the arm’s To what extent are transfer pricing on publicly available directories and by length nature of their payments. penalties enforced? extracting financial accounts from the Companies Commission of Malaysia. Are management fees subject to Always. At present, there are no good quality withholding? What defenses are available with commercial databases for local Yes. respect to penalties? companies. Are there limitations on the The availability of a local Does the tax authority generally deductibility of royalties beyond the contemporaneous transfer pricing focus on the interquartile range in a arm’s length principle? documentation will assist taxpayers to TNMM analysis? appeal for a lower penalty rate. In addition, Yes. Other than arm’s length principle, Yes, sometimes. the MIRB will also take into account if the one shall also determine the benefits taxpayer has acted in good faith and fully of paying such royalty. For example, cooperated during the tax audit. should a taxpayer continue paying the

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 174 | Global Transfer Pricing Review same royalty rate for certain know-how May a taxpayer go to competent or technology that was developed a authority before paying tax? number of years ago. If the dependence Yes. The taxpayer is permitted to initiate on the know-how or technology has a competent authority negotiation reduced, the MIRB might disallow even before the issuance of the Notice some portion of the claim on the royalty of Additional Assessment and paying payment. taxes. Once the Notice of Assessment/ Are royalties subject to Notice of Additional Assessment is withholding? issued, the taxpayer needs to remit payment within 30 days; otherwise Yes. a penalty for late payment will be Are taxpayers allowed to file tax imposed. return numbers that differ from book numbers? Advance pricing Yes. However, they may attract enquiries agreements from MIRB and there are also indirect What APA options are available, tax implications to be considered in if any? respect of such adjustments. Unilateral, bilateral, multilateral. Other unique attributes? Is there a filing fee for APAs? None. No. At the moment, to encourage Tax treaty/double tax taxpayers to apply for APAs, no fees are imposed. However, taxpayers resolution will bear any overseas traveling and What is the extent of the double tax accommodation expenses incurred by treaty network? the Malaysian government in relation to Extensive. bilateral or multilateral APAs. If extensive, is the competent Does the tax authority publish APA authority effective in obtaining data either in the form of an annual double tax relief? report or through the disclosure of data in public forums? Sometimes. No. When may a taxpayer submit an adjustment to competent authority? Are there any difficulties or limitations on the availability or Normally, a taxpayer may initiate a MAP effectiveness of APAs? if there is a risk of double taxation and there is a treaty agreement with the Not applicable. foreign counterparty. In most cases, this is after being issued the Notice of Additional Assessment.

KPMG in Malaysia

Bob Kee Tel: +603 7721 7029 Email: [email protected]

Chang Mei Seen Tel: +603 7721 7028 Email: [email protected]

Ivan Goh Tel: +603 7721 7012 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Mexico

KPMG observation

Mexico has been very active in transfer pricing. The Mexican tax authorities have been performing a considerable number of audits in different industries. One hot topic is service fees paid to a foreign related party. A frequent concern is lack of sufficient evidence to establish that the services were provided, and that there was a business reason for the services. In many cases, the deductibility of such service fees is being challenged. Additionally, documentation and reporting requirements have increased considerably, so it is very important for taxpayers to prepare a transfer pricing documentation study. Failure to do so may result in non-deductibility of payments to related parties.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Effective date of transfer pricing What is the statute of limitations Tax authority name rules on assessment of transfer pricing adjustments? Ley del Impuesto Sobre la Renta: Servicio de Administración Tributaria 1 January 1997. Ley del Impuesto Five years from filing date of the tax (SAT). Empresarial a Tasa Unica: 1 January return. Citation for transfer pricing rules 2008 to 31 December 2013. From 2002 to 2013: Ley del Impuesto What is the relationship threshold Transfer pricing Sobre la Renta (Mexican Income Tax for transfer pricing rules to apply disclosure overview Law) Articles 86-XII, 86-XIII, 86-XV, 215, between parties? Are disclosures related to transfer 216, and 216-Bis. Starting 2014: Ley Direct or indirect ownership of capital, pricing required to be submitted to del Impuesto Sobre la Renta (Mexican administration or control. No specific the revenue authority on an annual Income Tax Law) Articles 76-IX, 76-X, threshold for the entities to be basis (e.g. with the tax return)? 86-XII, 179, 180 and 181. From 2008 to considered related parties (i.e. even 2013: Le del Impuesto Empresarial a Yes. Mexican taxpayers are required if there is a one percent ownership of Tasa Unica (Mexican Business Flat Tax to provide specific information in the the shares, the entities are considered Law) Article 18-III. transfer pricing studies documenting related). the arm’s length nature of domestic and

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 176 | Global Transfer Pricing Review cross-border intra-group transactions. nature of intra-group transactions, Income Tax Law indicates Transfer Pricing These studies are not to be filed with the Advance Pricing Agreements (APAs) Guidelines for Multinational Enterprises tax authority unless they are requested under negotiation, Tax ID of transfer and Tax Administrations issued by the by the SAT. In addition, taxpayers must pricing advisors, interests deemed Committee on Fiscal Affairs of the also disclose information regarding to be dividends, prorate expenses, OECD might be used as a reference the conclusions of the transfer pricing financial derivative transactions with for performing the transfer pricing documentation studies as part of the related parties, thin capitalization issues, documentation report to the extent that transfer pricing appendices of the corresponding adjustments, etc. said Guidelines are consistent with the Statutory Tax Audit report (i.e. Dictamen Mexican Income Tax Law and the tax Transfer pricing questionnaire: The external Fiscal) or the information alternative to treaties signed by Mexico. auditors of the Mexican taxpayer filing the the Statutory Tax Audit report. Taxpayers Statutory Tax Audit report will also have to Does the tax authority require an are also required to submit information complete a transfer pricing questionnaire advisor/tax practitioner to have regarding transactions with foreign- confirming that all transactions were at specific designation in order to resident related parties during the arm’s length and that documentation prepare or submit a transfer pricing immediately preceding calendar year. requirements were met. study? What types of transfer pricing Companies that meet the threshold for No. information must be disclosed? filing the Dictamen Fiscal but choose Transfer pricing documentation report not to do so must also submit additional Transfer pricing methods of domestic intra-group transactions: information that is similar to the transfer Does your country follow the methodology used to show that pricing appendices of the Dictamen transfer pricing methods outlined in the transactions were conducted in Fiscal previously mentioned. Chapter II of the OECD Guidelines? accordance with the arm’s length What are the consequences of If exceptions apply, please describe. principle. failure to submit disclosures? Yes. The OECD Transfer Pricing Transfer pricing documentation Tax authorities might deny the Guidelines are applicable to the report of cross-border intra-group tax deductions of the intra-group extent that they are consistent with transactions: 1) name, domicile, tax transactions that represent expenses the Mexican Income Tax Law and residence and detail of the direct or for the Mexican taxpayer, (i.e. inbound the tax treaties signed by Mexico. In indirect participation between or among transactions), if the Mexican taxpayer Mexico there is a priority of methods the related parties; (2) information of did not comply with the obligation of as described in the previous version of functions, assets, and risks borne by preparing the transfer pricing study or the OECD Transfer Pricing Guidelines. each type of operation; (3) detail of the in those cases where the Information In general, Mexico does not accept pro controlled transactions; and (4) transfer Return for cross-border intra-group rata expenses from foreign taxpayers; pricing methodology used. transactions was not filed. A penalty therefore, Cost Sharing Arrangements Companies that file a Statutory Tax Audit may also be imposed if the taxpayer fails might not be possible to be used in report must also submit the following to submit the Information Return for Mexico. appendices with regard to transfer cross-border intra-group transactions. pricing (the numbers of the appendices Transfer pricing audit and might vary depending on the type of Transfer pricing study company): penalties overview When the tax authority requests • Appendix of the Statutory Tax Can documentation be filed in a taxpayer’s transfer pricing Audit report (Dictamen Fiscal) — a language other than the local documentation, are there timing information of intercompany language? If yes, which ones? requirements for a taxpayer to transactions: Type and amount of submit its documentation? And if intra-group transactions by related No. The Mexican tax authorities require so, how many days? party, transfer pricing method used, all documentation to be in Spanish. whether the intra-group transaction However, in those cases in which the Yes, 15 days. is at arm’s length, and amount of the initial documentation is provided in When the tax authority requests adjustment so that the transaction is English, a translation by a certified a taxpayer’s transfer pricing at arm’s length. translator will be required within 15 days. documentation, are there timing • Appendix of the statutory tax audit When a transfer pricing study is requirements for a taxpayer to report (Dictamen Fiscal) — additional prepared, should its content follow submit its documentation? Please information of intercompany Chapter V of the Organisation explain. transactions: Business activity of the for Economic Co-operation and The taxpayer has 15 business days. An taxpayer, ownership of intangible Development (OECD) Guidelines? extension of 10 business days could assets used, date in which the Yes, provided that the analysis is be granted by the tax authorities upon information return was submitted and conducted by using a transaction-by request. whether the taxpayer has supporting transaction approach. The Mexican documentation of the arm’s length

If an adjustment is proposed by Special considerations If the intercompany transaction is conducted with a taxpayer resident in the tax authority, what dispute Are secret comparables used by tax a country with a treaty to avoid double resolution options are available? authorities? taxation, no withholding applies. In any Yes, taxpayers can submit the resolution Yes. Any information to which the tax other case, a 25 percent withholding to an administrative area within the authority has access may be used. tax rate might apply according to the Ministry of Finance, in order to object However, use of secret comparables is Mexican Income Tax Law. to the procedures. Also, taxpayers may not very common. appeal to tax court, or if the related Are management fees subject to party of the adjustment is a resident of Is there a preference, or withholding? a country with which Mexico has a tax requirement, by the tax authorities Yes. treaty, Competent Authority may be for local comparables in a applied. benchmarking set? Are there limitations on the deductibility of royalties beyond the If an adjustment is sustained, can Usually North American comparable arm’s length principle? penalties be assessed? If so, what companies are used by the SAT for audit rates are applied and under what purposes. No. conditions? Do tax authorities have Are royalties subject to Yes. General tax penalties only: 55 to requirements or preferences withholding? regarding databases for 75 percent of the omitted income tax Yes. or 30 to 40 percent of excess loss if comparables? Are taxpayers allowed to file tax due to transfer pricing. However, if The Mexican tax authorities use return numbers that differ from the taxpayer prepared transfer pricing Compustat (i.e. North American public book numbers? documentation, they may be entitled to companies) and RoyaltyStat. a 50 percent reduction in the penalty. Yes, year-end adjustments might be Does the tax authority generally conducted to support that the intra- To what extent are transfer pricing focus on the interquartile range in a group pricing could be concluded penalties enforced? TNMM analysis? to be at arm’s length. However, it is Often. Yes, always. important that the year-end adjustments are accounted for before the end of What defenses are available with Does the tax authority have other the fiscal year to make sure tax and respect to penalties? preferences in benchmarking? If so, accounting figures are consistent. It is Article 76 of the Federal Fiscal Code please describe. advisable to conduct periodic reviews allows the Mexican tax authority to Not applicable. in order to avoid significant year-end assess penalties (i.e. 55 to 75 percent adjustments. Customs issues must also of the omitted income tax or 30 to What level of interaction do tax be taken into account. 40 percent of excess loss if due to authorities have with customs transfer pricing) in cases in which it authorities? Other unique attributes? deems a company’s transfer pricing is Low. Pro rata expenses (cost-sharing) made not consistent with the arm’s length Are there limitations on to foreign entities might be considered standard under the Mexican transfer non-deductible. pricing regulations detailed in the deductibility of management fees Mexican Income Tax Law (LISR). The beyond the arm’s length principle? article also provides for a 50 percent Yes. It should be taken into account Tax treaty/double tax reduction in the penalty imposed for that pro rata expenses from foreign resolution underpaid taxes or for excess tax parties/service providers are non- What is the extent of the double tax loss filed due to transfer pricing, if deductible from a Mexican tax treaty network? the taxpayer keeps transfer pricing standpoint. Therefore, taxpayers must Extensive. Mexico has treaties to avoid supporting documentation. However, have evidence showing they were double taxation with 65 countries and if imposed, penalties cannot be not prorated, as well as information negotiations in progress with another negotiated. demonstrating that the services 15 countries. What trends are being observed (i) were actually rendered; (ii) provided currently? a benefit to the Mexican taxpayer; If extensive, is the competent (iii) were not duplicative services. When authority effective in obtaining Current audits focus on business supporting evidence can be provided, double tax relief? restructuring, domestic intra-group service fees might be considered to be Sometimes. transactions, sales of shares that trigger deductible, otherwise the tax authority tax losses, management fees that will consider them as non-deductible. When may a taxpayer submit an Mexican tax authorities might consider Additional special documentation adjustment to competent authority? to be pro rata expenses, and marketing requirements must be met based on Depends on the time frame allowed by fees for those companies with a license the miscellaneous rule published on the tax treaty. to use marketing intangible assets. October 2014.

May a taxpayer go to competent authority before paying tax? Yes.

Advance pricing agreements What APA options are available, if any? Unilateral, bilateral, multilateral. Is there a filing fee for APAs? Yes. Approximately 1,000 US dollars (USD) for the first year and USD100 for a review to be conducted every year of the APA term. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? No. The APA program can be viewed as successful if we compare the number of APAs filed with the number of APAs that have been concluded. However, there are still opportunities to reduce the length of the process.

KPMG in Mexico

M. Teresa Quiñones Tel: +52 (55) 5246-8347 Email:[email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Montenegro

KPMG observation

Transfer pricing rules have existed for more than a decade in the Montenegrin Corporate Income Tax (CIT) Law, but specific and detailed regulations on the application of these rules have never been published by the Ministry of Finance. Nevertheless, in setting or supporting intercompany prices, taxpayers should consider the transfer pricing rules stipulated in the CIT Law since the tax authorities may change their current practice retroactively.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Special conditions are: Transfer pricing Tax authority name • participation in the capital or in the disclosure overview voting power of at least 25 percent Tax Administration of Montenegro. Are disclosures related to transfer • the existence of a subordinated pricing required to be submitted to Citation for transfer pricing rules relationship between two entities the revenue authority on an annual basis (e.g. with the tax return)? Articles 19, 20 and 38 of the Corporate • if one entity is under control (direct or Income Tax (CIT) Law. indirect) of another entity Yes. Effective date of transfer pricing • if two entities are subsidiaries of the What types of transfer pricing rules same entity; or information must be disclosed? 1 January 2002. • if entities are under direct or indirect Income and expenses generated from What is the relationship threshold control of a third entity. related party transactions during the for transfer pricing rules to apply What is the statute of limitations year must be separately disclosed in the between parties? on assessment of transfer pricing CIT return. adjustments? A company is defined as being related What are the consequences of to another company or an individual if Generally five years from the end of the failure to submit disclosures? year in which a tax liability should have this other company or the individual No consequences are defined in the been determined. The absolute period of has a direct effect on the conditions or CIT Law for failure to prepare or submit limitation is 10 years. There is no special economic results of the transactions disclosures. between these entities. statute of limitations on assessment of transfer pricing adjustments.

Transfer pricing study If an adjustment is proposed by Does the tax authority generally the tax authority, what dispute focus on the interquartile range in a overview resolution options are available? TNMM analysis? Can documentation be filed in a language other than the local Adjustments assessed by the tax Not applicable. authorities must be applied and then language? If yes, which ones? Does the tax authority have other the taxpayer has an option to appeal to preferences in benchmarking? If so, No. the second instance, degree procedure please describe. When a transfer pricing study is with the tax authorities or finally, to the prepared, should its content follow administrative court. No practice exist in relation to benchmarking. Chapter V of the Organisation If an adjustment is sustained, can for Economic Co-operation and penalties be assessed? If so, what What level of interaction do tax Development (OECD) Guidelines? rates are applied and under what authorities have with customs Not applicable. As there is no required conditions? authorities? documentation necessary to support No penalties are defined in the CIT Law Interaction between tax and customs transfer prices applied, taxpayers are for underpayment of tax due to transfer authorities regarding VAT is high. advised to follow the OECD Guidelines. pricing. However, it is not possible to estimate the level of interaction regarding transfer Does the tax authority require an To what extent are transfer pricing pricing. advisor/tax practitioner to have penalties enforced? specific designation in order to Are there limitations on Not applicable. prepare or submit a transfer pricing deductibility of management fees study? What defenses are available with beyond the arm’s length principle? respect to penalties? No. No. Please note that non-documented Not applicable. costs are non-deductible as well as costs that are not incurred for business Transfer pricing methods What trends are being observed purposes. Does your country follow the currently? transfer pricing methods outlined in Are management fees subject to The government is currently rarely Chapter II of the OECD Guidelines? withholding? If exceptions apply, please describe. performing transfer pricing audits due to lack of experience and a relatively Yes. Yes. However, please note that only the low corporate income tax rate (nine Are there limitations on the traditional methods are prescribed by the percent), which results in much more deductibility of royalties beyond the regulations i.e. comparable uncontrolled attention paid to indirect and payroll arm’s length principle? price (CUP) resale minus and cost plus. taxes. Taking into account that the tax authorities in neighboring countries in No. Transfer pricing audit and South Eastern Europe have started to Are royalties subject to pay much more attention to transfer withholding? penalties pricing, it is expected that this trend will When the tax authority requests spread to Montenegro as well. Yes. a taxpayer’s transfer pricing Are taxpayers allowed to file tax documentation, are there timing return numbers that differ from requirements for a taxpayer to Special considerations book numbers? submit its documentation? And if Are secret comparables used by tax so, how many days? authorities? No. Yes. No. Other unique attributes? When the tax authority requests Is there a preference, or Not applicable. a taxpayer’s transfer pricing requirement, by the tax authorities for local comparables in a documentation, are there timing Tax treaty/double tax requirements for a taxpayer to benchmarking set? submit its documentation? Please No. resolution explain. What is the extent of the double tax Do tax authorities have treaty network? The taxpayer should in principle possess requirements or preferences documentation to support transfer regarding databases for Minimal. prices declared at the moment of comparables? request from the tax authorities. Time may be granted for the preparation of No, none in practice. documentation during the tax audit.

If extensive, is the competent authority effective in obtaining double tax relief? No experience. When may a taxpayer submit an adjustment to competent authority? No formal rules exist in this area. May a taxpayer go to competent authority before paying tax? No formal rules exist in this area.

KPMG in Montenegro

Igor Loncarevic Tel: +381112050570 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Namibia

KPMG observation

Namibia introduced transfer pricing legislation on 14 May 2005. The legislation in the form of Section 95A to the Namibian Income Tax Act is aimed at enforcing the arm’s length principle in cross-border transactions carried out between connected persons. In September 2006, the Directorate of Inland Revenue issued Practice Note 2 of 2006 (PN 2/2006) containing guidance on the application of the transfer pricing legislation.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • any other company, where both “Connected person” is also defined companies are subsidiaries of the in relation to a natural person, trust, Tax authority name same holding company connected person in relation to a trust Directorate: Inland Revenue (DIR). • any person (other than a company) and a member of any partnership. Citation for transfer pricing rules that holds individually or jointly with Additionally, Practice Note 2 also any connected person in relation to Section 95A of the Income Tax Act and provides that the transfer pricing rules that person at least 20 percent of the Practice Note 2 of 2006. apply to transactions between a head equity share capital or voting rights in office and a branch and branches of the Effective date of transfer pricing the company same person dealing with each other. rules • any other company that holds at least What is the statute of limitations 14 May 2005. 20 percent of the equity share capital, on assessment of transfer pricing where no other shareholder holds the What is the relationship threshold adjustments? majority shares; and for transfer pricing rules to apply In terms of section 69 of the Income Tax between parties? • any other company if that other Act, the Commissioner may at any time company is managed or controlled by In relation to a company, the following issue additional assessments — there is a connected person in relation to the no statute of limitations. are regarded as connected persons: first company or a connected person • its holding company in relation to the first connected In practice, DIR allows for amended person. tax returns to be submitted by the • its subsidiary taxpayer until the taxpayer is assessed.

In terms of section 71 of the Income reference to (the old) paragraph 5.4 of If an adjustment is sustained, can Tax Act a taxpayer has only 90 days to the OECD Guidelines. penalties be assessed? If so, what object to a notice of assessment by the rates are applied and under what Does the tax authority require an Commissioner. conditions? advisor/tax practitioner to have specific designation in order to Yes. Transfer pricing prepare or submit a transfer pricing On late payment: disclosure overview study? • 10 percent penalty on tax outstanding Are disclosures related to transfer No. on due date for each month or part pricing required to be submitted to thereof during which the amount the revenue authority on an annual Transfer pricing methods remains unpaid; and basis (e.g. with the tax return)? Does your country follow the • interest at 20 percent per annum. No. The disclosures in the tax return transfer pricing methods outlined in are not specific to connected persons, Chapter II of the OECD Guidelines? On underestimation of the provisional except dividends to shareholders. If exceptions apply, please describe. tax payments: There is currently no statutory Yes. • first provisional payment: Additional requirement that the transfer pricing tax of 40 percent of the annual tax policy should be submitted to the DIR as Transfer pricing audit liability less any payments made; and part of the Annual Income Tax Return. and penalties • second provisional payment: Additional tax of 80 percent of the annual tax What types of transfer pricing When the tax authority requests liability less any payments made. information must be disclosed? a taxpayer’s transfer pricing Not applicable. documentation, are there timing To what extent are transfer pricing Transfer pricing study snapshot requirements for a taxpayer to penalties enforced? What are the consequences of submit its documentation? And if DIR generally always enforces penalties The purpose of a transfer pricing study failure to submit disclosures? so, how many days? if errors are detected. Only recently Applicable Not applicable Not applicable. No. have we seen DIR starting to question Legal requirements transfer pricing matters. Transfer pricing study When the tax authority requests Protection from penalties a taxpayer’s transfer pricing What defenses are available with overview documentation, are there timing respect to penalties? Reduce risk of adjustment requirements for a taxpayer to Can documentation be filed in Generally, one can request a waiver Shifts burden of proof submit its documentation? Please a language other than the local of penalties if it can be shown that the explain. language? If yes, which ones? error was not a result of intent to evade No. Documentation is filed in English The Income Tax Act does not specify tax or circumstances which the taxpayer which is the official language for a time period. However, Practice was not aware at the time of payment of Namibia. Note 2 says that the taxpayer must the provisional tax payments. be in possession of transfer pricing When a transfer pricing study is However, KPMG in Namibia has not documentation. Section 64 of the prepared, should its content follow yet seen objections specific to transfer Income Tax Act allows for the Minister Chapter V of the Organisation pricing being raised in practice. to require any person to produce for Economic Co-operation and documentation as required by the Where the taxpayer has transfer pricing Development (OECD) Guidelines? Minister. documentation it would be easier to Yes, with exceptions. Per Practice substantiate any connected person/ If an adjustment is proposed by Note 2, the “Taxpayer needs to transaction value queries by DIR. the tax authority, what dispute demonstrate that it has developed a resolution options are available? What trends are being observed sound transfer pricing policy in terms currently? of which transfer prices are determined Objections to assessments may be in accordance with the arm’s length made, in writing, within 90 days after DIR has not raised transfer pricing principle by documenting the policies the date of issue of the assessment. queries in the past. However, DIR has and procedures for determining those If the taxpayer is not happy with the made investments in this aspect and prices”. Minister’s response on the objection, we expect transfer pricing queries to be the taxpayer may appeal to a special raised in the future. The transfer pricing documentation court for hearing income tax appeals should include the policies and or a tax tribunal if all the requirements procedures for determining the arm’s Special considerations are met. Such notice of appeal must be length prices. However, the taxpayer Are secret comparables used by tax furnished to the Minister within 30 days is expected to use judgment in authorities? after the notice issued by the Minister determining the level of documentation on the objection. Not as far as KPMG in Namibia are required. Practice Note 2 makes aware.

Is there a preference, or Are there limitations on the May a taxpayer go to competent requirement, by the tax authorities deductibility of royalties beyond the authority before paying tax? for local comparables in a arm’s length principle? Not applicable. benchmarking set? Yes. In order to be deductible, royalties No. must be at arm’s length and must Advance pricing meet the requirements of the general Do tax authorities have deduction formula. agreements requirements or preferences What APA options are available, if regarding databases for Are royalties subject to any? comparables? withholding? None. No. Yes. Is there a filing fee for APAs? Does the tax authority generally Are taxpayers allowed to file tax focus on the interquartile range in a return numbers that differ from Not applicable. TNMM analysis? book numbers? Does the tax authority publish APA No. No. The tax return does not make data either in the form of an annual provision for year-end adjustments. report or through the disclosure of Does the tax authority have other The DIR has not provided any guidance data in public forums? preferences in benchmarking? If so, surrounding year-end adjustments. please describe. Not applicable. The underestimation of provisional DIR has raised few transfer pricing Are there any difficulties or payments penalties discussed above queries in the past. We are not aware of limitations on the availability or may apply. any preferences in this regard. effectiveness of APAs? Other unique attributes? What level of interaction do tax Not applicable. authorities have with customs In practice a 3:1 debt-to-equity ratio is authorities? used for thin capitalization transactions. Unknown, but we expect minimal as regards to corporate tax matters (import Tax treaty/double tax VAT matters are handled with reference resolution to customs documentation). What is the extent of the double tax Are there limitations on treaty network? deductibility of management fees Minimal. beyond the arm’s length principle? If extensive, is the competent Yes. In order to be deductible, fees authority effective in obtaining charged for management services must double tax relief? be at arm’s length and must meet the requirements of the general deduction Not applicable. formula. When may a taxpayer submit an Are management fees subject to adjustment to competent authority? withholding? Not applicable. Yes.

KPMG in Namibia

Adeline Beukes Tel: +264 61 387 532 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Netherlands

KPMG observation

The Dutch Tax Authorities intend to adhere to the Organisation for Economic Co-operation and Development (OECD) Guidelines and Base Erosion and Profit Shifting (BEPS) initiative. The Netherlands also has an accessible and professional Advance Pricing Agreement (APA)/Advance Tax Ruling (ATR) practice. As transfer pricing is becoming ever more important in the Netherlands, the tax authorities have expanded their resources with experienced transfer pricing staff. Consequently, KPMG in the Netherlands has observed both a more enhanced review of transfer pricing documentation by the tax authorities and a substantial increase in transfer pricing audits and competent authority procedures.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Decree DGB 2014/296, 3 June 2014 the tax return. In certain (international) cases this period may be extended to Tax authority name • Decree DGB 2004/1337M; and 12 years. Dutch Tax Authorities (DTA). • Decree DGB 2014/3098, 3 June 2014. Citation for transfer pricing rules Effective date of transfer pricing Transfer pricing rules • Article 8b of the Dutch Corporate disclosure overview Income Tax Act (Wet op de Codification as of 1 January 2002. Are disclosures related to transfer Vennootschapsbelasting 1969) What is the relationship threshold pricing required to be submitted to • Decree IFZ/2013/184, 14 November for transfer pricing rules to apply the revenue authority on an annual 2013 between parties? basis (e.g. with the tax return)? • Decree IFZ 2010/457M, 15 January OECD definition (direct or indirect Yes. The annual Dutch corporate income 2011 participation in management, control or tax return includes one question on capital). whether there are any transactions with • Decree IFZ 2008/248M, 29 related companies. September 2008 What is the statute of limitations For intra-group financing and licensing • Decree DGB 2004/1339M, 17 August on assessment of transfer pricing and similar activities, certain substance 2004 adjustments? related questions may need to be Five years from the tax year-end plus • Decree DGB 2014/3101, 3 June 2014 replied to. any extensions granted for filing of • Decree DGB 2014/3102, 3 June 2014

What types of transfer pricing When the tax authority requests Special considerations information must be disclosed? a taxpayer’s transfer pricing Are secret comparables used by tax documentation, are there timing If a company has any transactions with authorities? requirements for a taxpayer to related companies, a brief description submit its documentation? Please Yes, but in principle only for case needs to be included on the corporate explain. selection. tax return form. In principle, within 30 days of the Is there a preference, or What are the consequences of request. However, this may be extended requirement, by the tax authorities failure to submit disclosures? by the DTA depending on the complexity for local comparables in a Potential reversal of the burden of proof of the case. benchmarking set? and (general tax) penalties, where the If an adjustment is proposed by No. Benchmarking helps to demonstrate DTA requests documentation and it is the tax authority, what dispute that transfer prices are at arm’s length, not submitted in time. resolution options are available? and the DTA accepts pan-European benchmarks, provided they meet Local litigation or mediation, or Transfer pricing study comparable search strategy standards requesting a unilateral Dutch APA with a set by the DTA. overview roll back provision. Can documentation be filed in Do tax authorities have If an adjustment is sustained, can a language other than the local requirements or preferences penalties be assessed? If so, what language? If yes, which ones? regarding databases for rates are applied and under what comparables? Yes, English. conditions? Yes, a strong preference for the extended When a transfer pricing study is Yes, general tax penalties only. full version Amadeus database. For prepared, should its content follow To what extent are transfer pricing financial and licensing transactions, other Chapter V of the Organisation penalties enforced? databases may be used. for Economic Co-operation and Development (OECD) Guidelines? There are no specific transfer pricing Does the tax authority generally penalties. General tax penalties (up to focus on the interquartile range in a Yes. Documentation should be, in 100 percent) may apply in the case of an TNMM analysis? principle, prepared contemporaneously. intentional act (e.g. the taxpayer took a Yes, always. Does the tax authority require an non-defendable standpoint) leading to advisor/tax practitioner to have underpayment of taxes. Does the tax authority have other specific designation in order to preferences in benchmarking? If so, What defenses are available with prepare or submit a transfer pricing please describe. respect to penalties? study? See above plus very strict independence Transfer pricing documentation and to No. criteria. argue that any incorrect transfer pricing is not intentional and not of gross What level of interaction do tax Transfer pricing methods negligence. authorities have with customs Does your country follow the authorities? What trends are being observed transfer pricing methods outlined in currently? High. Chapter II of the OECD Guidelines? If exceptions apply, please describe. The DTA is enforcing the 14 November Are there limitations on 2013 Decree on transfer pricing. Issues deductibility of management fees Yes. specifically dealt within this Decree beyond the arm’s length principle? Transfer pricing audit and are headquarter services, intra-group No. Not applicable. financing, guarantee provisions, penalties captives, intangibles and centralized Are management fees subject to When the tax authority requests procurement. withholding? a taxpayer’s transfer pricing The number of transfer pricing audits No. documentation, are there timing still increases. Business restructuring Are there limitations on the requirements for a taxpayer to and exit (valuation) issues continue submit its documentation? And if deductibility of royalties beyond the to be focus areas in audits. Latest arm’s length principle? so, how many days? (tax) audits have shown a more Yes, 30 days. detailed review of documentation and No. comparable searches.

Are royalties subject to tax is available or the assessment will withholding? trigger substantial interest which might cause immediate financial difficulties No. for the taxpayer, the Dutch competent Are taxpayers allowed to file tax authority is willing to assist the taxpayer return numbers that differ from by commencing bilateral discussions book numbers? immediately, namely an extra- accelerated MAP. The Dutch competent Yes, provided they are on an arm’s authority might even contact its foreign length basis. counterparts before any tax assessment Other unique attributes? (including a transfer pricing adjustment) The DTA generally refers to multiple is received by the Dutch taxpayer in the year data and the interquartile range in other jurisdiction, and before a position terms of benchmarking. paper is received from the other jurisdiction’s competent authority. Tax treaty/double tax May a taxpayer go to competent resolution authority before paying tax? What is the extent of the double tax Yes, see previous. treaty network? Extensive. The Netherlands has one of Advance pricing the largest tax treaty networks in the agreements world. What APA options are available, If extensive, is the competent if any? authority effective in obtaining Unilateral, bilateral, multilateral. double tax relief? Is there a filing fee for APAs? Yes, in practice, not effective for non- No. OECD countries. Does the tax authority publish APA When may a taxpayer submit an data either in the form of an annual adjustment to competent authority? report or through the disclosure of The Netherlands aims to eliminate data in public forums? double taxation as early as possible. Yes. Therefore, in the Dutch Decree of 29 September 2008, IFZ2008/248M, Are there any difficulties or dealing with mutual agreement limitations on the availability or procedures (MAPs), a distinction is effectiveness of APAs? made between “ordinary”, “accelerated” No. The APA program is very successful, and “extra-accelerated” procedures. and Dutch APAs may be concluded If a Dutch taxpayer can show that due within short time frames. The main to an action by foreign tax authorities purpose is to agree on arm’s length there will be taxation which is not in OECD based transfer pricing policies in accordance with the tax treaty, and advance. either no extension for payment of any

KPMG in Netherlands

Jeroen Dijkman Tel: +31 88 909 2543 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

New Zealand

KPMG observation

The New Zealand Inland Revenue published a new international tax questionnaire on its website (www.ird.govt.nz/international/business/ questionnaire/). Along with the increasing global focus on Base Erosion Profit Shifting, Inland Revenue designed this new questionnaire to collect key information on financing (including cash pooling), tax governance and transfer pricing issues. It is expected that Inland Revenue will distribute the questionnaire in May 2015 to New Zealand taxpayers (or NZ groups) that are foreign-owned, and which have turnover in excess of 80 million New Zealand dollars (NZ) per year. The questionnaire currently focuses on the 2014 income year (i.e. the year-ended 31 December 2013).

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations What types of transfer pricing Tax authority name on assessment of transfer pricing information must be disclosed? adjustments? The primary activity of the CFC, details Inland Revenue. Four years from the end of year in which of gross revenue, royalty income, Citation for transfer pricing rules the tax return is filed. earnings before interest and tax, among Sections GC 6 – GC 14 of the Income other detailed financial information. Tax Act 2007. Transfer pricing What are the consequences of Effective date of transfer pricing disclosure overview failure to submit disclosures? rules Are disclosures related to transfer None specifically related to the failure to 1997. pricing required to be submitted prepare or submit the disclosure. to the revenue authority on an What is the relationship threshold annual basis (e.g. with the tax Transfer pricing study for transfer pricing rules to apply return)? between parties? overview Yes. For New Zealand-owned outbound Can documentation be filed in Cross-border arrangement between multinational groups, disclosures a language other than the local associated persons, based on are required for Controlled Foreign language? If yes, which ones? 50 percent or greater common Companies (CFCs). shareholding or effective control. No.

When a transfer pricing study is • litigation, if both parties cannot reach Does the tax authority generally prepared, should its content follow an agreement in the earlier steps of focus on the interquartile range in a Chapter V of the Organisation the process. TNMM analysis? for Economic Co-operation and If an adjustment is sustained, can Yes, sometimes. Development (OECD) Guidelines? penalties be assessed? If so, what Does the tax authority have other Yes, for all transactions. rates are applied and under what conditions? preferences in benchmarking? If so, Does the tax authority require an please describe. advisor/tax practitioner to have Yes. General tax penalties only, normally Multiple year averages, with a specific designation in order to 20 to 40 percent of the tax shortfall. preference for five years. prepare or submit a transfer To what extent are transfer pricing pricing study? penalties enforced? What level of interaction do tax authorities have with customs No. Sometimes. authorities? Transfer pricing methods What defenses are available with Moderate. Inland Revenue and the New respect to penalties? Zealand Customs Service have entered Does your country follow the into a Memorandum of Understanding transfer pricing methods outlined in Specific legislative and Inland Revenue ruling requirements dictate when allowing the sharing of information in Chapter II of the OECD Guidelines? relation to GST, which may go to issues If exceptions apply, please describe. penalties may be imposed. Taxpayers may be able to make a case that the of valuation. Yes. penalty provisions should not apply in Are there limitations on their circumstances (e.g. reasonable care deductibility of management fees Transfer pricing audit and has been taken in relation to their transfer beyond the arm’s length principle? prices evidenced through supporting penalties documentation), or may be able to apply Yes. Management fees must meet the When the tax authority requests for a reduction in penalties on the basis of requirements of the normal deductibility a taxpayer’s transfer pricing prior compliance with income tax rules. rules. documentation, are there timing What trends are being observed Are management fees subject to requirements for a taxpayer to withholding? submit its documentation? And if currently? so, how many days? KPMG in New Zealand has observed No. Yes, 28 days. a continuing increase in the level of Are there limitations on the transfer pricing audit activity, with deductibility of royalties beyond the When the tax authority requests transfer pricing questionnaires being arm’s length principle? a taxpayer’s transfer pricing issued in all general income tax audits Yes. Royalties must meet the documentation, are there timing of multinationals in the last four to five requirements of the normal deductibility requirements for a taxpayer to years. There is also an increasing use of rules. submit its documentation? Please APAs to resolve audit disputes. explain. Are royalties subject to Normal Inland Revenue practice is to Special considerations withholding? specify a due date. This is generally at Are secret comparables used by tax Yes. least 28 days from the receipt of the authorities? information request. However, deadlines Are taxpayers allowed to file tax may be extended via negotiation. Yes, but only for the purposes of transfer return numbers that differ from pricing risk assessment by Inland book numbers? If an adjustment is proposed by Revenue prior to an audit. the tax authority, what dispute Yes. Where the tax treatment of a resolution options are available? Is there a preference, or requirement, transaction differs to the accounting by the tax authorities for local treatment. Taxpayers can follow a prescribed comparables in a benchmarking set? dispute resolution process which Other unique attributes? No. In practice it is difficult to identify includes: Inland Revenue has reserved its sufficient qualitative and quantitative • Inland Revenue issuing a notice of position on Article 7 of the OECD Model information on New Zealand proposed adjustment to the taxpayer Tax Convention. The Inland Revenue comparables. supports the single entity concept rather • a conference between taxpayer and Do tax authorities have than the separate legal entity concept Inland Revenue disclosure by both requirements or preferences for branch taxation. parties regarding databases for • adjudication and review comparables? • assessment/amended assessment No specific database required. by Inland Revenue; or

Tax treaty/double tax Advance pricing resolution agreements What is the extent of the double tax What APA options are available, if treaty network? any? Medium. New Zealand’s double tax Unilateral, bilateral, multilateral. treaty network is focused on countries Is there a filing fee for APAs? with strong trading and investment ties to New Zealand, as well as developing Yes. The fee is NZD322. countries that New Zealand may have Does the tax authority publish APA trading ties with in the future. data either in the form of an annual If extensive, is the competent report or through the disclosure of authority effective in obtaining data in public forums? double tax relief? Yes. Sometimes. Are there any difficulties or When may a taxpayer submit an limitations on the availability or adjustment to competent authority? effectiveness of APAs? It depends on the mutual agreement No. Unilateral APAs are highly provisions of the relevant double tax successful and most APAs are agreement. concluded in a timely manner. Bilateral APAs are generally reserved for high May a taxpayer go to competent value or high risk transactions. authority before paying tax? Yes.

KPMG in New Zealand

Kim Jarrett Tel: +64 9 363 3532 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Nigeria

KPMG observation

Income Tax (Transfer Pricing) Regulations were introduced in Nigeria in 2012 and became effective on 2 August 2012. Under the Regulations, companies are required to conduct transactions with related parties at arm’s length and appropriate documentation must be available to verify that the pricing of controlled transactions is consistent with the arm’s length principle. Such documentation includes a transfer pricing study (which should be in place before the filing of the taxpayer’s tax returns for the year of interest) and statutory forms (i.e. transfer pricing declaration form and disclosure forms) along with the tax returns. In line with the spirit of increased transparency under the Base Erosion and Profit Shifting (BEPS) Action Plan, the Federal Inland Revenue Service (FIRS) has sent letters to some taxpayers with related party transactions to submit their Group/Global transfer pricing policies as well as Local transfer pricing policies to aid with their transfer pricing risk assessment.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information persons. Enterprises are considered six years except in cases of fraud, willful to be associated where one party default, or neglect with respect to any Tax authority name participates directly or indirectly in the tax payable, in which case there is no Federal Inland Revenue Service (FIRS). management, control or in the capital statute of limitation. Citation for transfer pricing rules of the other; or, the same person or persons participate directly or indirectly Transfer pricing The Income Tax (Transfer Pricing) in the management, control or in the Regulations No. 1, 2012. capital of both enterprises. disclosure overview Are disclosures related to transfer Effective date of transfer What is the statute of limitations pricing required to be submitted to pricing rules on assessment of transfer pricing the revenue authority on an annual adjustments? 2 August 2012. basis (e.g. with the tax return)? The Regulations do not provide for a What is the relationship threshold Yes. The Regulations require companies statute of limitations on assessment of for transfer pricing rules to apply to file statutory transfer pricing forms transfer pricing adjustments. However, between parties? (Declaration and Disclosure Forms) the Companies’ Income Tax Act (CITA) along with their annual income tax The Regulation covers all transactions provides that the statute of limitation is entered into by connected taxable returns.

What types of transfer pricing Transfer pricing study When the tax authority requests information must be disclosed? a taxpayer’s transfer pricing overview documentation, are there timing The transfer pricing Declaration Form Can documentation be filed in requirements for a taxpayer to submit requires the disclosure of general a language other than the local its documentation? Please explain. information about the reporting company’s language? If yes, which ones? legal form and ownership structure. Twenty-one days. However, upon a Specifically, companies are to provide Transfer pricing documentation are reasonable request, the tax authority detailed information on the following: required to be filed in English Language has discretionary power to grant an which is the official language. extension. • particulars of the reporting company or entity When a transfer pricing study is If an adjustment is proposed by prepared, should its content follow • particulars of immediate parent the tax authority, what dispute Chapter V of the Organisation resolution options are available? company for Economic Co-operation and • particulars of the directors of the Development (OECD) Guidelines? Taxpayers may approach the Decision reporting company or entity Review Panel (DRP). The decision of the Yes, for all transactions. Yes. The DRP on any assessment or adjustment is • major shareholders of reporting Regulations did not provide specific final and conclusive. However, where the company or entity information regarding the content taxpayer is dissatisfied with the decision • particulars of subsidiaries and other of transfer pricing documentation. It of the DRP, it may refer the matter to a connected persons to the reporting is therefore acceptable if it follows court of competent jurisdiction. entity Chapter V of the OECD Guidelines. If an adjustment is sustained, can • particulars of external auditors, Does the tax authority require an penalties be assessed? If so, what rates company secretary and tax consultants advisor/tax practitioner to have are applied and under what conditions? to the reporting company; and specific designation in order to prepare or submit a transfer Yes. The applicable penalty rates are as • particulars of the person completing pricing study? follows: the declaration form. • income tax of companies — in The transfer pricing Disclosure Form No. addition to the principal tax liability requires the disclosure of the nature of chargeable at 30 percent, the law connected transactions. Specifically, Transfer pricing methods imposes penalties of 10 percent plus companies are to provide detailed Does your country follow interest at Central Bank of Nigeria’s information on the following: the transfer pricing methods rediscount rate outlined in Chapter II of the OECD • particulars of the reporting company • value added tax (VAT) — in addition to Guidelines? If exceptions apply, or entity the principal liability chargeable at five please describe. • income from controlled transactions percent, the law imposes penalties Yes. In addition, if a taxpayer is of of five percent plus interest at the • costs of controlled transactions the view that none of the methods commercial rate. • transfer pricing method and stated in Chapter II are appropriate for To what extent are transfer pricing documentation determining the arm’s length pricing, penalties enforced? • basic financial information; and a taxable person may apply transfer pricing methods other than those listed The tax authority has discretionary • particulars of the person completing in the Regulations, so long as they can power to waive part or entire penalty. the Disclosure Form. show that the transactions are at arm’s Nevertheless, we observed that the tax What are the consequences of length. authority currently exercise significant failure to submit disclosures? caution in exercising this discretion. The penalties for failure to submit Transfer pricing audit and What defenses are available with disclosures are the same as the penalties penalties respect to penalties? for not filing tax returns, and are provided When the tax authority requests Taxpayers can generally appeal to the for in the income tax legislation. a taxpayer’s transfer pricing tax authority’s sentiments to enable Further, the failure to submit the documentation, are there timing them exercise this power in their disclosures may be a potential audit requirements for a taxpayer to favor. This could be hinged on financial trigger and result in unilateral income submit its documentation? And if position of the company, ambiguity adjustment by the tax authority. Any so, how many days? in interpretations of tax provisions, resulting additional tax liability may also availability of company’s key officers that Yes, 21 days. be subject to both penalties and interest. will take decision, among others.

What trends are being observed Are there limitations on the enabling legislation (i.e. Companies currently? deductibility of royalties beyond the Income Tax Act 2007) however permits arm’s length principle? a taxpayer to file revised tax returns as The tax authority has commenced often as necessary within six years after rigorous audit of some selected Yes. Royalties are deductible only if the the accounting year-end date. companies. The exercise is very detailed taxpayer has obtained prior approval and time consuming. of the National Office for Technology May a taxpayer go to competent Acquisition and Promotion (NOTAP) and authority before paying tax? the tax authority is satisfied that they Special considerations Yes. are at arm‘s length. However, NOTAP is Are secret comparables used by tax often reluctant to grant approval where authorities? the recipient of royalties has more than Advance pricing Not yet known. 75 percent shareholding in the Nigerian agreements subsidiary. Is there a preference, or What APA options are available, if requirement, by the tax authorities Are royalties subject to any? for local comparables in a withholding? Unilateral, bilateral, multilateral. benchmarking set? Yes. Is there a filing fee for APAs? Not yet known. Are taxpayers allowed to file tax No. Do tax authorities have return numbers that differ from requirements or preferences book numbers? Does the tax authority publish APA regarding databases for data either in the form of an annual There is no express provision in this comparables? report or through the disclosure of regard. data in public forums? The tax authority has subscribed to Other unique attributes? Orbis database. It could therefore be No. inferred that they will prefer it. There are safe harbor provisions in Are there any difficulties or the Regulations. They provide that a Does the tax authority generally limitations on the availability or taxpayer will no longer be required to focus on the interquartile range in a effectiveness of APAs? prepare transfer pricing documents if TNMM analysis? the pricing arrangement is approved Not applicable. Although the Nigerian Yes, sometimes. by relevant government agencies transfer pricing Regulations provides and the tax authority is satisfied that for APAs, the tax authority is yet to Does the tax authority have other the transactions are at arm’s length. commence the APA program. preferences in benchmarking? If so, The agencies include Department of please describe. Petroleum Resources (DPR), Central Not yet known. Bank of Nigeria (CBN), and, NOTAP, among others. What level of interaction do tax authorities have with customs authorities? Tax treaty/double tax Minimal. resolution What is the extent of the double tax Are there limitations on treaty network? deductibility of management fees beyond the arm’s length principle? Minimal. Nigeria currently has double tax agreements with nine countries. Yes. Management fees are deductible only if the taxpayer has obtained prior If extensive, is the competent approval of the National Office for authority effective in obtaining Technology Acquisition and Promotion double tax relief? (NOTAP) and the tax authority is Sometimes. satisfied that they are at arm‘s length. When may a taxpayer submit an Are management fees subject to adjustment to competent authority? withholding? KPMG in Nigeria The Regulation is silent on the timing Yes. for submission of adjustments. The Tayo Ogungbenro Tel: + 234 803 402 1016 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Norway

KPMG observation

The focus on transfer pricing in Norway remains strong. There are several court cases being decided on transfer pricing issues and the Norwegian tax authorities have increased the number of tax audits conducted on various transfer pricing topics. Furthermore, intra-group interest deduction limitation rules have been implemented with effect from 1 January 2014. These rules will have a significant impact on multinationals with intra-group financing relating to their operations in Norway. The Norwegian tax authorities are following the development of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan closely. As an example, the Ministry of Finance gathered a group of tax experts in Norway which evaluated the entire tax system and its alignment with international practice. The recommendations were presented at the end of 2014 but it remains to be seen whether any of these recommendations result any new legislation. Finally, there is a particular focus on the quality of the comparability analysis presented to the tax authorities. This is in line with the updated OECD Guidelines and there is an expectation of a much more analytical approach to the determination and evaluation of transfer prices.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Section 6-41 in the GTA sets out the 1 January 2008, cf. Section 4-12 of the rules on intra-group interest deduction Tax Assessment Act with regulations. Tax authority name limitation. What is the relationship threshold Norwegian Tax Authorities (Skatteetaten • Section 4-12 in the Tax Assessment for transfer pricing rules to apply in Norwegian). Act (TAA) includes the requirements between parties? Citation for transfer pricing rules to prepare transfer pricing Direct or indirect ownership or control of documentation. • Section 13–1 in the General Tax Act at least 50 percent. (GTA). Income can be adjusted based Effective date of transfer pricing rules on the general clause in section Formal transfer pricing documentation 13–1 of the GTA. requirements commenced on

What is the statute of limitations incomplete. Providing insufficient or When the tax authority requests on assessment of transfer pricing wrongful information can lead to penalty a taxpayer’s transfer pricing adjustments? taxes being imposed on adjusted documentation, are there timing transfer pricing amounts in tax audits. requirements for a taxpayer to The statute of limitations is 10 years submit its documentation? Please from tax year-end if the taxpayer has not explain. provided sufficient factual information Transfer pricing study about the transfer pricing in an appendix overview Within 45 days of a written request. to the tax return. If taxpayers include an Can documentation be filed in Generally, no extension is granted. appendix to the tax return setting out a language other than the local If an adjustment is proposed by sufficient factual information about the language? If yes, which ones? the tax authority, what dispute transfer pricing, the statute of limitations resolution options are available? will be two years after the financial year. Yes. English, Norwegian, Swedish, or Danish. The taxpayer can bring the case to the Transfer pricing When a transfer pricing study is tax appeal board and/or the courts. In addition, taxpayers can opt for disclosure overview prepared, should its content follow Chapter V of the Organisation the international route, i.e. Mutual Are disclosures related to transfer for Economic Co-operation and Agreement Procedure. pricing required to be submitted to Development (OECD) Guidelines? If an adjustment is sustained, can the revenue authority on an annual penalties be assessed? If so, what basis (e.g. with the tax return)? Yes. There are specific transfer pricing documentation regulations which must rates are applied and under what Yes. From financial year 2007, taxpayers be adhered to. The study must include conditions? are obliged to file the form RF–1123 a company overview, industry analysis, Yes. General tax penalties could apply. regarding intra-group transactions with functional analysis, selection of transfer This means that a penalty, generally of the annual tax return, if the total amount pricing method and comparability 30 percent of the tax avoided, may be of controlled transactions exceed analyses. There is no specific levied for transfer pricing adjustments. 10 million Norwegian krone (NOK) requirement to perform a database The penalty exposure can be reduced by or if the total amount of outstanding search although this is advisable if including an appendix to the tax return accounts exceeds NOK 25 million. a net margin method is applied. The where the intra-group transactions In addition, the form RF-1315 is to be tax authorities can request such an and methods applied are described in used regarding the rules on intra-group analysis and the taxpayer will get an a correct and sufficient manner. The interest deduction limitation. additional 60 to 90 days to file according rate of penalty tax can be increased to What types of transfer pricing to the transfer pricing documentation 60 percent in cases of gross negligence information must be disclosed? regulations in Norway. by the taxpayer. The value of related party transactions Does the tax authority require an To what extent are transfer pricing to be disclosed depends on the advisor/tax practitioner to have penalties enforced? category of the transaction such as specific designation in order to In recent years we have noted that the services, tangible property transactions, prepare or submit a transfer pricing tax authorities enforce penalties more loans and interest, etc. study? frequently in transfer pricing cases. On the front page of the yearly tax No. On the other hand, according to a new return, taxpayers have to confirm Supreme Court decision, an increase in whether they are covered by the Transfer pricing methods taxable income should not automatically formal transfer pricing documentation lead to a penalty if the taxpayer has Does your country follow the requirements and/or reporting acted in a prudent manner. transfer pricing methods outlined in requirements (RF–1123). There is no Chapter II of the OECD Guidelines? What defenses are available with requirement to file the transfer pricing If exceptions apply, please describe. respect to penalties? study before being requested by the tax authorities to do so. In cases of Yes. Taxpayers are obliged to disclose uncertainty one should consider an sufficient and correct information about appendix to the tax return in order to Transfer pricing audit their transfer pricing. The defense limit the open years of re-assessment to would thus generally be to argue that two years after the financial year and/or and penalties the taxpayer has complied with these to reduce the risk of penalty taxes if an When the tax authority requests requirements. adjustment is sustained. a taxpayer’s transfer pricing What trends are being observed documentation, are there timing What are the consequences of currently? requirements for a taxpayer to failure to submit disclosures? submit its documentation? And if There is a particular focus on the quality If affected taxpayers do not submit form so, how many days? of the comparability analyses presented RF–1123, the tax filings can be deemed to the tax authorities. This is in line with Yes, 45 days.

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 196 | Global Transfer Pricing Review the updated OECD Guidelines, and What level of interaction do tax May a taxpayer go to competent there is an expectation of a much more authorities have with customs authority before paying tax? analytical approach to the determination authorities? This is permitted and meetings with the and evaluation of transfer prices. In Medium. relevant tax authorities are possible. particular, the treatment of intangible However, taxes become payable upon assets are currently areas of great interest Are there limitations on the tax office’s decision being made, to the Norwegian tax authorities. A wide deductibility of management fees so generally taxes have to be paid prior range of industries is being questioned beyond the arm’s length principle? to going to the competent authority. by the tax authorities, however, No. Taxpayers can postpone payment by the pharmaceutical, software and obtaining a parent or bank guarantee. telecommunication industries are often Are management fees subject to shown particular attention with regard withholding? to questions about intangible assets. No. Advance pricing Finally, the Norwegian tax authorities have agreements Are there limitations on the stated that they will continue to scrutinize What APA options are available, deductibility of royalties beyond the Norwegian subsidiaries and branches if any? with low margins or losses. arm’s length principle? Bilateral. No. Is there a filing fee for APAs? Special considerations Are royalties subject to Are secret comparables used by tax withholding? No. authorities? No. Does the tax authority publish APA Yes. data either in the form of an annual Are taxpayers allowed to file tax report or through the disclosure of Is there a preference, or return numbers that differ from data in public forums? requirement, by the tax authorities book numbers? for local comparables in a Not applicable. benchmarking set? Yes. There are situations where income and/or costs are treated differently for Are there any difficulties or No. There is no requirement to use local book and tax purposes. However, as a limitations on the availability or comparables. However, it is preferable main principle, taxpayers should avoid effectiveness of APAs? since the tax authorities have more discrepancies between book and tax Not applicable. Norway does not have a information on such comparables than numbers. others. That being said, the Norwegian formal APA program in place. The APAs tax authorities generally acknowledge Other unique attributes? currently negotiated are based on tax treaty provisions. that it is difficult to find proper None. comparables looking at the Norwegian market in isolation. Tax treaty/double tax Do tax authorities have resolution requirements or preferences regarding databases for What is the extent of the double tax comparables? treaty network? There are no specific requirements. The Extensive. Norwegian tax authorities use several If extensive, is the competent databases when conducting database authority effective in obtaining searches, with Amadeus being the most double tax relief? frequently used. Almost always. However, there Does the tax authority generally is pressure on the Norwegian tax focus on the interquartile range in a authorities to handle MAP cases more TNMM analysis? rapidly. As a result, the Norwegian tax Yes, sometimes. authorities have put in place a separate group exclusively dealing with MAP and Does the tax authority have other APA cases. preferences in benchmarking? If so, KPMG in Norway please describe. When may a taxpayer submit an adjustment to competent authority? Marius Basteviken In cases where the Norwegian taxpayer Tel: +47 4063 9032 There are no formal rules in this area, is a limited risk entity, the Norwegian tax Email: [email protected] authorities expect loss-making entities however, it must be in line with the applicable tax treaty. to be excluded from the final set of As email addresses and phone numbers comparables. change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Oman

KPMG observation

The Oman Tax Department is increasingly focusing on the pricing of related party transactions. In the context of tax law that includes only very broad, related party principles, this can present a challenge to a company in terms of demonstrating that the transactions have been concluded on an arm’s length basis. The Oman income tax law provides for a full tax assessment system. The Tax Department has five years from the end of the tax year in which the income tax return was submitted to raise enquiries. Typically, enquiries will be raised between three and five years from the date of filing, often with enquiries into multiple tax years issued at the same time. Although there is no requirement to prepare formal transfer pricing documentation or to have documentation in place at the time of filing the income tax return, the length of the enquiry period, i.e. five years, may impact a company’s ability to respond to enquiries, e.g. where the people with relevant knowledge have left the company and/or documents may have been lost or misplaced etc. In the majority of cases where related party transactions occur, the Oman Tax Department will usually seek supporting information. This need not, necessarily, take the form of a full, formal transfer pricing report, provided the documentation that is submitted is adequate and appropriate to support the pricing adopted between the related parties. Even where a formal transfer pricing report is provided, the Tax Department will typically ask for other, contemporaneous evidence, to show that goods and services have actually been provided, and to what level, to support the level of related party charges in the taxpayer’s books. The Tax Department will typically make adjustments if supporting documentation is not provided or, despite some documentation being provided, they determine that transactions were not carried out at arm’s length. A company would, therefore, be better placed to respond to enquiries if they were to prepare contemporaneous documentation, and hold this in readiness for the Tax Department’s enquiries.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • is entitled to the greater part of disclosures in the audited financial distributions by the company (where statements that are submitted with the Tax authority name the company to distribute its total income tax return. Secretary General for Taxation, Ministry income); and What are the consequences of of Finance (generally referred to as the • is entitled to the greater part of the failure to submit disclosures? Tax Department). company’s assets on dissolution or There are no specific penalties relating Citation for transfer pricing rules cessation. to the related party disclosures Income Tax Law No 28 / 2009 — Part The ‘control’ test shall take into account required within the income tax return. Four, Chapter Two, Section One: entitlement to future rights, interests or As noted, there is no requirement to Cases of Avoidance between related authority, as well as: provide documentation, nor to provide individuals — Articles 125 to 128. • rights vested in another person in the confirmation that documentation has The Oman Income Tax Law includes capacity of representative been prepared at the time of filing the return, correspondingly, no specific related party provisions (not specifically • rights that are required to be penalties exist either. referred to as “transfer pricing” provisions) exercised by another person under under which the value of related party directions; and Failure to provide full disclosures of transactions can be ignored and taxable related party transactions within the • rights held by relatives up to the third income can be calculated, instead, on the income tax return would likely amount lineage (whether direct or indirect). basis of an independent price. to deception and would allow the Tax What is the statute of limitations The related party rules sit alongside Department to apply the extended on assessment of transfer pricing wider reaching, anti-avoidance rules, 10 year assessment period. adjustments? which give power to the Tax Department to adjust a taxpayer’s taxable income The Oman Income Tax Law provides for Transfer pricing study where it is felt that the “principle a full assessment system and the Tax overview objective” of any transaction (or the Department have five years from the Can documentation be filed in combined effect of two or more end of the tax year in which the income a language other than the local transactions) is the avoidance of tax. tax return is filed to raise enquiries into language? If yes, which ones? Effective date of transfer pricing any aspect of the income tax return. Yes, English or Arabic. Objections to tax rules Where no income tax return has been assessments, and higher appeals, must filed, the period shall be extended to The current related party rules are be filed in Arabic. 10 years from the end of the tax year included in Income Tax Law No. for which the return was due to be When a transfer pricing study is 28/2009, effective 1 January 2010. submitted. prepared, should its content follow Broadly similar related party rules were Chapter V of the Organisation The assessment period shall also also included in the old Income Tax Law, for Economic Co-operation and be extended to 10 years in cases of the Law of Income Tax on Companies Development (OECD) Guidelines? deception or fraud. of 1981. Not applicable. The Income Tax What is the relationship threshold Transfer pricing Law does not contain any guidance for transfer pricing rules to apply as to the format that related party between parties? disclosure overview documentation or evidence should Are disclosures related to transfer take. That said, the Tax Department For the purpose of the related party pricing required to be submitted to considers the OECD Transfer Pricing provisions, persons will be treated as the revenue authority on an annual Guidelines for Multinational Enterprises related if one party has control over the basis (e.g. with the tax return)? and Tax Administrations (2010) (the other or a third party has control over OECD Guidelines) to provide a suitable both of them. Yes. The income tax return requires basis for the pricing of related party taxpayers to disclose details of Individuals will be treated as related transactions and we would, therefore, related party transactions. There is no if one person is a relative of the other, consider Chapter V to be a suitable prescribed format for these disclosures up to the third lineage, i.e. from basis, if any documentation were being and reference is typically made to the grandparents through to grandchildren. prepared. related party disclosures in the audited Control may be direct or indirect. financial statements that are submitted The Tax Department will generally ask Control will exist where a person has with the income tax return. for “supporting documentation” in the right to exercise control over the generic terms and enquiries may be What types of transfer pricing activity and commercial matters of a resolved without the need for formal information must be disclosed? company. In particular, this will be the documentation following the format set case where a person: There is no prescribed format for the out in Chapter V. It may be sufficient to disclosures that are required with • owns the greater part of the provide, for example, copies of intra- the income tax return and reference company’s capital or voting rights group agreements and the basis for the is typically made to the related party calculation of the price under enquiry.

Our advice to taxpayers, though, would If the matter is not resolved through Special considerations always be to prepare some, minimum Objection, an Appeal can be made to the documentation and benchmarking, to Tax Committee and, ultimately, a further Are secret comparables used by tax give the best defense against enquiries. appeal can be made to the Commercial authorities? Court. Does the tax authority require an Yes, the Tax Department maintains advisor/tax practitioner to have If an adjustment is sustained, can its own databases and comparative specific designation in order to penalties be assessed? If so, what information. prepare or submit a transfer rates are applied and under what Is there a preference, or pricing study? conditions? requirement, by the tax authorities No. The due date for payment of any for local comparables in a additional tax is specified on the Tax benchmarking set? Transfer pricing methods Department’s Assessment Order. No. Failure to pay by the date specified will Does your country follow the attract additional tax at one percent per Do tax authorities have transfer pricing methods outlined in month on the unpaid amount (or balance requirements or preferences Chapter II of the OECD Guidelines? thereof) until settled. regarding databases for If exceptions apply, please describe. comparables? To what extent are transfer pricing No. The Tax Department may consider penalties enforced? No. Chapter II of the OECD Guidelines as Does the tax authority generally providing a suitable basis for the pricing Transfer pricing adjustments form focus on the interquartile range in a of related party transactions, but the Tax part of the overall assessment of a TNMM analysis? Department will not be bound by the company’s tax position for a particular OECD Guidelines. year. Any additional penalty tax resulting No. from non-payment is normally enforced. Does the tax authority have other Transfer pricing audit What defenses are available with preferences in benchmarking? If so, and penalties respect to penalties? please describe. When the tax authority requests The Secretary General for Taxation has The Tax Department may take account a taxpayer’s transfer pricing the power to grant exemption, in full or of the margins achieved by other, documentation, are there timing in part, from the additional penalty tax. local businesses which they consider requirements for a taxpayer to What trends are being observed to be comparable to the taxpayer’s submit its documentation? And if currently? business, which may not be determined so, how many days? by reference to commonly accepted The Tax Department is very active No. databases. in requesting taxpayers to provide When the tax authority requests documentary evidence to support their What level of interaction do tax a taxpayer’s transfer pricing related party transactions. authorities have with customs documentation, are there timing authorities? The Tax Department has a backlog requirements for a taxpayer to of unassessed tax years and it is not There is a good level of interaction with submit its documentation? Please uncommon for taxpayers to have the Customs authority. The Income explain. three, four, or five years’ income Tax Law gives specific powers to the A company normally has 30 days to tax returns that have not yet been Tax Department to request information respond to requests from the Tax assessed. There is now a drive, within and documentation from a wide Department for information, although the Tax Department, to clear these range of ministries and other public a time extension may be granted, if open tax years and assessments are establishments and public juristic required. being accelerated, with several years’ persons, and it uses this power regularly assessments being dealt with at the during the assessment process. The Tax Department’s questions will same time, to bring things up to date. likely enquire into the taxpayer’s related Are there limitations on party pricing in more general terms, Taxpayers are, therefore, being asked to deductibility of management fees rather than specifically requesting provide supporting documentation for beyond the arm’s length principle? formal transfer pricing documentation. multiple years. If documentation was Yes, some. The deductibility of not prepared at the time of completing If an adjustment is proposed by management fees (and other the tax return, this imposes a significant the tax authority, what dispute related party charges) is subject to burden on the company and, if adequate resolution options are available? the overarching principle that fees documentation cannot be provided, they are reasonable by reference to the If a related party pricing adjustment is may find themselves disadvantaged by services provided to the taxpayer and included in the Tax Department’s final the Tax Department’s final assessment. to the services being necessary to the assessment, the taxpayer can file a business of the taxpayer. formal Objection.

Are management fees subject to When may a taxpayer submit an withholding? adjustment to competent authority? Yes. We would expect to rely on the time limits included in the relevant tax treaty Are there limitations on the and to approach the Tax Department, deductibility of royalties beyond the prior to making any formal application, to arm’s length principle? discuss the process. Yes. The deductibility of royalties (and May a taxpayer go to competent other related party charges) is subject authority before paying tax? to the overarching principle that fees are reasonable by reference to the rights This would have to be agreed with provided to the taxpayer, and to the the Tax Department at the time of rights (to which the royalty payments discussing the application process. relate) being necessary to the business of the taxpayer. Advance pricing Are royalties subject to agreements withholding? What APA options are available, if Yes. any? Are taxpayers allowed to file tax None. return numbers that differ from Is there a filing fee for APAs? book numbers? Not applicable. There is no formal APA No. In some, exceptional cases, the Tax mechanism in place. In certain cases, Department may accept a tax return the Tax Department may be prepared where the taxable income has been to provide an informal (non-binding) calculated on the basis of a ‘deemed agreement as to the basis for pricing profit’ margin. This is discouraged by the certain related party transactions. Tax Department and the Tax Department may push for ‘deemed profit’ margins Does the tax authority publish APA which discourage this method. data either in the form of an annual report or through the disclosure of Other unique attributes? data in public forums? None. Not applicable. Tax treaty/double tax Are there any difficulties or limitations on the availability or resolution effectiveness of APAs? What is the extent of the double tax Not applicable. The Tax Department treaty network? is only willing to provide informal Oman has approximately 30 double tax (non-binding) agreements, and such treaties in force. agreements are not sufficiently common to establish any sort of If extensive, is the competent ‘practice’ of the Tax Department. authority effective in obtaining double tax relief? In our experience, very few (if any) cases have been escalated to the level of the competent authority and it remains to be seen how effective the mutual agreement procedure would be in obtaining double tax relief. KPMG in Oman

Neil Allmark Tel: +968 2474 9246 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Panama

KPMG observation

In the process of the implementation of Panama’s international tax policy, transfer pricing legislation was enacted in 2010. Originally, the scope of the legislation was limited to operations among related parties located in countries with which Panama had entered into agreements to avoid double taxation. However, on 28 August 2012, by means of Law No. 52 of 2012, Panama approved legislation widening the scope of its transfer pricing provisions, to include all taxpayers that carry out transactions with related parties abroad. The Law became effective beginning with fiscal year 2012. On 7 August 2013 Panama’s Finance Ministry (Ministerio de Economía y Finanzas) issued a decree that regulates transfer pricing documentation and studies. The transfer pricing documentation rules in Panama are based on the Organisation for Economic Co- operation and Development (OECD) Guidelines. According to Panama’s transfer pricing legislation, the OECD Guidelines are to be considered the technical reference for purposes of interpreting of its transfer pricing rules and provisions.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Decree No. 958 published in the official What is the relationship threshold gazette No. 27,347 of 7 August 2013. Tax authority name for transfer pricing rules to apply between parties? Effective date of transfer pricing Dirección General de Ingresos (DGI). rules Direct or indirect ownership of capital, Citation for transfer pricing rules administration or control. No specific Transfer pricing rules have been in place threshold for the entities to be Law No. 33, published in the Official since 1 July 2010 but were mandatory considered related parties (i.e., even Gazette No. 25,566-A of 30 June 2010, only for certain taxpayers (i.e. those if there is a one percent ownership of Articles 762-A through 762-Ñ in the benefiting from the application of a tax the shares, the entities are considered Panamanian Fiscal Code. Modified by treaty). The current scope of application related). Law No. 52 published in the Official to all intra-group operations with foreign Gazette No. 27,108 of 28 August 2012, based related parties is effective as of Articles 7 through 14, and Executive FY 2012.

What is the statute of limitations When a transfer pricing study is To what extent are transfer pricing on assessment of transfer pricing prepared, should its content follow penalties enforced? adjustments? Chapter V of the Organisation The tax authorities are actively auditing for Economic Co-operation and Three years from the filing date of the transfer pricing documentation. It is Development (OECD) Guidelines? income tax return. customary that penalties are enforced. Yes, for all transactions. What defenses are available with Transfer pricing Does the tax authority require an respect to penalties? advisor/tax practitioner to have disclosure overview The taxpayer can initiate a controversy specific designation in order to Are disclosures related to transfer process with the tax authority in order to prepare or submit a transfer pricing pricing required to be submitted to establish its criteria, seeking to modify study? the revenue authority on an annual the tax administration’s position. basis (e.g. with the tax return)? No. What trends are being observed Yes, the taxpayer must submit a currently? transfer pricing return (i.e. Form 930) Transfer pricing methods The tax administration is currently within the six months following the Does your country follow the reviewing the FY 2013 studies. fiscal year-end. transfer pricing methods outlined in However, few assessments had been What types of transfer pricing Chapter II of the OECD Guidelines? issued so far. information must be disclosed? If exceptions apply, please describe. It is likely that the tax administration The information must include the name Yes. will leverage on the transfer pricing of the related parties with which the documentation in order to develop its transactions were entered into, country Transfer pricing audit and fiscal policies. of residence of such related parties, penalties type of transactions, whether the When the tax authority requests Special considerations transactions were income or expenses, a taxpayer’s transfer pricing nature and amounts of the transactions Are secret comparables used by tax documentation, are there timing with related parties. Likewise, authorities? requirements for a taxpayer to information regarding the transfer There is no evidence that the tax submit its documentation? And if pricing analysis must be disclosed, administration is utilizing secret so, how many days? such as, whether grouped or individual comparables. analysis was performed, transfer pricing Yes, 45 days. Is there a preference, or method selected, entity selected as When the tax authority requests requirement, by the tax authorities tested party (i.e., the taxpayer or the a taxpayer’s transfer pricing for local comparables in a related party) type of margin used in documentation, are there timing benchmarking set? the analysis (i.e., gross or operating), requirements for a taxpayer to and percentage of profit, loss or rate The transfer pricing decree expressly submit its documentation? obtained in the transaction. states that in searching for external Please explain. comparables, taxpayers can use reliable What are the consequences of 45 days. commercial databases created by failure to submit disclosures? public information companies. If these If an adjustment is proposed by In the Article 8 of Law 52 (modified commercial databases contain no the tax authority, what dispute Article 762-I of Law 33) it is established information on Panamanian companies resolution options are available? the sanction of one percent of the total or with respect to comparable operations carried out with related Yes, taxpayers can submit the resolution transactions within Panama, taxpayers parties in the event that the taxpayer to an administrative review before the can use information available to failed to submit Form 930. DGI. Subsequently, taxpayers may companies in other countries. appeal before the Tax Court. Finally, The Law 114 enacted on December Do tax authorities have taxpayers are allowed to submit the case 10, 2013 modified the article 762-I of the requirements or preferences for judicial review before the Supreme Fiscal Code establishing the maximum regarding databases for Court of Justice (Third Chamber). amount for this penalty at 1 million comparables? US dollars (USD). If an adjustment is sustained, can No formal rules exist in this area. penalties be assessed? If so, what Transfer pricing study rates are applied and under what Does the tax authority generally overview conditions? focus on the interquartile range in a TNMM analysis? Can documentation be filed in There is a surcharge of 10 percent of a language other than the local the difference in taxes paid due to the Yes, always. language? If yes, which ones? adjustment. Additionally, interest of about one percent per month is also No. applied on the same amount.

Does the tax authority have other Tax treaty/double tax preferences in benchmarking? If so, please describe. resolution What is the extent of the double tax Currently, there is no sufficient treaty network? experience on how the Tax Administration will handle this issue. Panama has 17 signed tax treaties. What level of interaction do tax If extensive, is the competent authorities have with customs authority effective in obtaining authorities? double tax relief? Tax and customs authorities are Panama applies the exemption method separate entities. We are not aware of for alleviating double taxation. an active coordination between the two When may a taxpayer submit an entities on transfer pricing issues. adjustment to competent authority? Are there limitations on No formal rules exist in this area. deductibility of management fees Depends on the time frame allowed by beyond the arm’s length principle? the tax treaty. Yes, the taxpayer should provide May a taxpayer go to competent evidence that the services had authority before paying tax? been actually rendered and that are connected with the generation of Permitted after the assessment. There is taxable income in Panama. no requirement to pay the assessment before going to the competent authority. Are management fees subject to withholding? Advance pricing Yes. agreements Are there limitations on the What APA options are available, if deductibility of royalties beyond the any? arm’s length principle? None. Yes, it is a requirement that the royalties are necessary for the production Is there a filing fee for APAs? of taxable income. It is important Not applicable. to mention that if the taxpayer is Does the tax authority publish APA established in a special regime the data either in the form of an annual royalties may not be deductible. report or through the disclosure of Are royalties subject to data in public forums? withholding? Not applicable. Yes. Are there any difficulties or Are taxpayers allowed to file tax limitations on the availability or return numbers that differ from effectiveness of APAs? book numbers? Not applicable. No. Other unique attributes? None. KPMG in Panama

Luis Laguerre Tel: +507 208 0710 Email: [email protected]

María Claudia Pimentel Tel: +507 208-0700 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Peru

KPMG observation

The tax authority in Peru is well informed about the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan, and has internal initiatives to be aligned with this plan, as Peru is pursuing a possible admission into OECD in the future. The Peruvian tax authorities were very active in 2014 with respect to transfer pricing audits. These audits have focused on primary industries and important local groups. In KPMG’s experience, audits are very thorough and it appears that audit teams are focused on gaining experience. Audits have been triggered by a number of factors — for example, transaction size, continuous losses, and industry analyses. The information provided by taxpayers in their transfer pricing return is also used to select taxpayers to be inspected. A taxpayer’s annual transfer pricing return and transfer pricing study need to be presented to the Peruvian tax authorities in June of the following year.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous Submission to tax authority required Thresholds apply/exist Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • More specific regulations are included • Advance Price Agreement rules in Articles 108 to 119 of Income Tax are defined by Superintendency Tax authority name Law Rulings. Resolution N° 377-2013-SUNAT. Superintendencia Nacional de • Penalties are defined in Article Effective date of transfer pricing Administración Tributaria (SUNAT) 176, numbers 2) and 4); Article 177, rules (National Superintendency of Tax numbers 25) and 27); and Article 178 Administration). number 1) of the Tax Code. January 2001. Citation for transfer pricing rules • Thresholds and exceptions issued • Market value and transfer pricing with Superintendency Resolutions N° rules are defined in Articles 32 and 175-2013-SUNAT. 32-A of Income Tax Law.

What is the relationship threshold What are the consequences of of commodities. In this case, the arm’s for transfer pricing rules to apply failure to submit disclosures? length price needs to be estimated between parties? based on the international price of the In case the taxpayer fails to file its commodity. Direct or indirect ownership greater transfer pricing return, a fine of than 30 percent of capital. Companies approximately 30,000 US dollars (USD) can also be considered related if they is applicable. In addition, failure to Transfer pricing audit and share common directors, managers present the transfer pricing return may penalties or executives with decision power. trigger an audit by the tax authority on When the tax authority requests Additional criteria for determining the taxpayer. a taxpayer’s transfer pricing economic relationships also exist. documentation, are there timing What is the statute of limitations Transfer pricing study requirements for a taxpayer to on assessment of transfer pricing overview submit its documentation? And if adjustments? so, how many days? Can documentation be filed in Four years, counting from 1 January a language other than the local Yes, 5 days. language? If yes, which ones? of the year following the date of When the tax authority requests presentation of the Income Tax Return. No. a taxpayer’s transfer pricing documentation, are there timing When a transfer pricing study is Transfer pricing requirements for a taxpayer to prepared, should its content follow submit its documentation? Please disclosure overview Chapter V of the Organisation explain. Are disclosures related to transfer for Economic Co-operation and pricing required to be submitted to Development (OECD) Guidelines? Formally, transfer pricing documentation the revenue authority on an annual needs to be provided within five working No. Peruvian legislation is very specific basis (e.g. with the tax return)? days of request. Nevertheless, the tax on the issues a transfer pricing study authority could set a time limit of one to Yes. A transfer pricing return is should contain. Even though most of two weeks, or more, depending on the required for taxpayers based on certain the issues are similar to what is outlined complexity of the information requested thresholds (revenues and amounts in Chapter V of the OECD Guidelines, and the stage of the inspection process. transacted with related parties and/ the taxpayer is required to follow the or existence of transactions with tax more specific requirements detailed in If an adjustment is proposed by havens). The transfer pricing return is not Peruvian legislation. the tax authority, what dispute submitted with the Income Tax Return, resolution options are available? Does the tax authority require an but it is submitted in June of the year advisor/tax practitioner to have Once an adjustment is proposed by the following the fiscal year under analysis. specific designation in order to tax authority, it can be challenged by The transfer pricing study is required prepare or submit a transfer pricing the taxpayer through an administrative Applicable Notapplicable Requiredto be contemporaneous Submission to tax authority required Thresholdsapply/exist to be attached to the transfer pricing study? process within the same tax authority. return. After that, the case can be taken to Legal requirements No. a specialized fiscal court outside the Protection from penalties What types of transfer pricing jurisdiction of the tax authority. And information must be disclosed? Reduce risk of adjustment Transfer pricing methods after that, if there is still conflict with Shifts burden of proof The transfer pricing return has two main Does your country follow the the decision, the case can be taken to sections: transfer pricing methods outlined in regular Peruvian courts. • The first section reports the Chapter II of the OECD Guidelines? If an adjustment is sustained, can identification of the taxpayer, If exceptions apply, please describe. penalties be assessed? If so, what the related parties with which Yes. However, Peruvian transfer pricing rates are applied and under what transactions exist, and the types and legislation considers six methods conditions? amounts of transactions. instead of five. The difference is Peruvian Yes. 50 percent of the tax omitted, plus legislation differentiates the profit split • The second section must be interest counting from the moment the method and the residual profit split completed when the taxpayer passes tax should have been paid. the thresholds and is required to have method as independent methodologies. a transfer pricing study. In this second To what extent are transfer pricing In addition, Peruvian transfer pricing penalties enforced? section, the taxpayer must report the legislation includes a special way of methodologies used in the transfer applying the comparable uncontrolled There is little experience but some pricing analysis and the adjustments price method when the transaction companies have already been assessed, made, if applicable. under analysis is the purchase or sale adjusted and charged with penalties.

What defenses are available with Special considerations Are management fees subject to respect to penalties? Are secret comparables used by tax withholding? The main defense is the documentation authorities? Yes. i.e. the transfer pricing study. Related Secret comparables may be used to Are there limitations on the documentation, such as intra-group determine which taxpayers should deductibility of royalties beyond the contracts, invoices, or other documents, be inspected. Nevertheless, there arm’s length principle? can also be useful as a means of is no evidence that the tax authority defense. Yes. It is necessary to have uses secret comparables to perform documentation supporting that the Penalties can also be reduced if, adjustments. royalties paid are related to an intangible during an audit from the tax authority, Is there a preference, or necessary for the business. the taxpayer agrees that the transfer requirement, by the tax authorities Are royalties subject to pricing adjustment suggested by for local comparables in a withholding? the tax authority during its review is benchmarking set? correct and accepts to pay the omitted Yes. tax without further discussion. In this Yes, there is a preference, but case, the penalties arising from having information about local comparables is Are taxpayers allowed to file tax omitted tax payments can be reduced to scarce, so international comparables are return numbers that differ from 50 percent or more, depending on the also accepted. book numbers? timing of the payment. Do tax authorities have Yes. There is no explicit prohibition in In addition, penalties can be avoided requirements or preferences the legislation about this. However, if the taxpayer negotiates an Advance regarding databases for these differences need to be carefully Pricing Agreement (APA) with the tax comparables? analyzed in each case, in order to evaluate whether it would be accepted authority. The tax authority has a specific or not by the tax authority. What trends are being observed database, but does not require that currently? taxpayers use the same database for Other unique attributes? their studies. Over the last year, the Peruvian Tax Transactions with local related parties Authority has significantly increased Does the tax authority generally fall into the scope of transfer pricing the number of specific requests to focus on the interquartile range in a rulings. TNMM analysis? taxpayers to present transfer pricing The tax authority usually expects studies and related documentation. The Yes, always. the transaction to be tested against number of transfer pricing audits has same-year data. In addition, complete Does the tax authority have other also increased, resulting in adjustments information about comparable preferences in benchmarking? If so, and penalties for some taxpayers. companies, including complete annual please describe. Currently, the principal of SUNAT is reports or 10-K’s are necessary for a specialist in transfer pricing, and Use of interquartile range, when the company to be regarded as a valid the transfer pricing team of SUNAT applying TNMM, is mandatory according comparable. to Peruvian transfer pricing legislation. has been hiring professionals with Transactions involving commodities experience in transfer pricing. In What level of interaction do tax need to be analyzed taking into account addition, changes to the transfer pricing authorities have with customs the international price of the commodity, regulations have been issued during the authorities? following specific rules detailed in last two years, and it is expected that Peruvian transfer pricing legislation. further changes will be issued soon, Tax and customs authorities are part of in order to increase transfer pricing the same institution (SUNAT). Currently, enforcement. the customs team usually reviews the Tax treaty/double tax transfer pricing reports in order to see if resolution It is expected that audits will focus on there are potential customs issues. the imports/exports of commodities What is the extent of the double tax such as mineral, agricultural and other Are there limitations on treaty network? deductibility of management fees similar products. Intra-group services Minimal. Peru currently has double beyond the arm’s length principle? and financial transactions are also tax treaties with Brazil, Canada, Chile, expected to be audited. Yes, some. It is necessary to have Mexico, the Andean region and Korea. documentation to support that the This network is expected to grow in services have really been rendered and the short and medium term, including that the value is reasonable. countries such as China, Finland, Portugal, Spain, Switzerland and others.

If extensive, is the competent authority effective in obtaining double tax relief? Not applicable. When may a taxpayer submit an adjustment to competent authority? No formal rules exist in this area. May a taxpayer go to competent authority before paying tax? No formal rules exist in this area.

Advance pricing agreements What APA options are available, if any? Unilateral, bilateral, multilateral. Is there a filing fee for APAs? No. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? Not applicable. No APAs have been filed yet, but taxpayers are expected to be interested in APAs. In 2013, the tax authority published the Superintendency Resolution N° 377-2013-SUNAT with specific rules about APAs.

KPMG in Peru

Juan Carlos Vidal Tel: +51 6113000 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Philippines

KPMG observation

While the Philippine tax office has not yet taken concrete steps to enforce the transfer pricing regulations, there is an indication that they will follow the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. This will allow taxpayers to be consistent with the transfer pricing strategies of the group of companies they belong to.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations What types of transfer pricing Tax authority name on assessment of transfer pricing information must be disclosed? adjustments? Under Revenue Regulations No. 02- Bureau of Internal Revenue (BIR). There is no existing law or specific 2014, dated 24 January 2014, the top Citation for transfer pricing rules statute of limitations on transfer pricing 20 stockholders of a corporation, including Section 50 of the National Internal assessment. However the statute their capital contribution and percentage Revenue Code (Tax Code): Revenue of limitations under the Tax Code is of ownership, must be provided in the Regulations No. 02-2013, dated generally three years from the date of new forms of the annual corporate 23 January 2013 (RR No. 02-2013). filing of the return or from the date the income tax returns starting with taxable return should have been filed. Under year-ended 31 December 2013. Effective date of transfer pricing certain conditions, however, the statute What are the consequences of rules of limitations may be 10 years. failure to submit disclosures? 9 February 2013. Administrative penalties. What is the relationship threshold Transfer pricing for transfer pricing rules to apply disclosure overview Transfer pricing study between parties? Are disclosures related to transfer overview Direct or indirect participation in the pricing required to be submitted to management, control or capital or the revenue authority on an annual Can documentation be filed in being under direct or indirect common basis (e.g. with the tax return)? a language other than the local language? If yes, which ones? management, control or capital. No. Yes, English.

When a transfer pricing study is Transfer pricing audit and What trends are being observed prepared, should its content follow currently? Chapter V of the Organisation penalties Before the introduction of the recent for Economic Co-operation and When the tax authority requests transfer pricing regulations, the tax Development (OECD) Guidelines? a taxpayer’s transfer pricing documentation, are there timing office is known to have transfer pricing Yes. RR No. 02-2013 enumerates the requirements for a taxpayer to related findings in conducting regular details of what should be the contents submit its documentation? And if audits. Hence, the timely submission of an adequate documentation. The so, how many days? of documentation may be useful to details include, but are not limited to, contest deficiency tax findings. The the following: No. documentation may also be a defense against possible benchmarking 1. organizational structure When the tax authority requests a taxpayer’s transfer pricing performed by the tax office based on 2. nature of the business/industry and documentation, are there timing industry averages. market conditions requirements for a taxpayer to 3. controlled transactions submit its documentation? Please Special considerations 4. assumptions, strategies, and policies explain. Are secret comparables used by tax 5. cost contributions assumptions, RR No. 02-2013 does not specify this. authorities? strategies, and policy arrangements However, following rules under a Not yet known since the regular tax audit, documents supporting 6. comparability, functional and risk implementation of RR No. 02-2013 is in the taxpayers’ defenses are usually analysis the early stages. submitted within 15 to 30 days of the 7. selection of the transfer pricing request, subject to extension if allowed. Is there a preference, or method requirement, by the tax authorities If an adjustment is proposed by for local comparables in a 8. application of the transfer pricing the tax authority, what dispute benchmarking set? method resolution options are available? 9. background documents; and No, RR No. 02-2013 is silent on the RR No. 02-2013 remains silent on matter. 10. index to documents. transfer pricing specific dispute Do tax authorities have However, the details may vary, resolution options and procedures. requirements or preferences depending on what is crucial to However, there are remedies available regarding databases for demonstrate the efforts exerted to to taxpayers in the context of regular comparables? determine the arm’s length pricing, audits (for taxes of all types), such given the nature or complexity as protests, appeals and going to No. the courts. It is expected that these of the related party transactions, Does the tax authority generally appropriateness of the method used in remedies will apply in the case of transfer pricing audits. focus on the interquartile range in a determining the arm’s length pricing, or TNMM analysis? other factors. If an adjustment is sustained, can Yes, sometimes. Does the tax authority require an penalties be assessed? If so, what advisor/tax practitioner to have rates are applied and under what Does the tax authority have other specific designation in order to conditions? preferences in benchmarking? If so, prepare or submit a transfer pricing It is expected that penalties can be please describe. study? assessed in the case of transfer pricing In exceptional circumstances where No. adjustments. The penalties are expected there may not be comparable to be the same as those imposed under transactions or sufficient data to apply regular tax audits (25 percent/50 percent the TP methods, the tax office may use Transfer pricing methods surcharge; 20 percent deficiency the following approaches: Does your country follow the interest; 20 percent delinquency transfer pricing methods outlined in interest; compromise penalties). a) extension of the TP methods. The Chapter II of the OECD Guidelines? comparable may be with enterprises To what extent are transfer pricing If exceptions apply, please describe. in another industry segment or group penalties enforced? of segments Yes. Not yet known since the b) use of a combination or mixture of implementation of RR No. 02-2013 is in the TP methods or other methods or the early stages. approaches. What defenses are available with respect to penalties? Not yet known since the implementation of RR No. 02-2013 is in the early stages.

What level of interaction do tax Tax treaty/double tax authorities have with customs authorities? resolution What is the extent of the double tax High, but the interaction so far is not in treaty network? relation to transfer pricing. Minimal. Are there limitations on deductibility of management fees If extensive, is the competent beyond the arm’s length principle? authority effective in obtaining double tax relief? Yes, provided the management fees may still be shown to be ordinary and The BIR has no experience in this area. necessary expenses and are properly When may a taxpayer submit an substantiated. adjustment to competent authority? Are management fees subject to Currently, no rules exist in this area. withholding? May a taxpayer go to competent Yes. authority before paying tax? Are there limitations on the Currently, no rules exist in this area. deductibility of royalties beyond the arm’s length principle? Advance pricing Yes, provided the royalty fees may agreements still be shown to be ordinary and necessary expenses and are properly What APA options are available, if substantiated. any? Are royalties subject to None. withholding? Is there a filing fee for APAs? Yes. Not applicable. Are taxpayers allowed to file tax Does the tax authority publish APA return numbers that differ from data either in the form of an annual book numbers? report or through the disclosure of Yes, RR No. 02-2013 is silent on the data in public forums? matter. Not applicable. Other unique attributes? Are there any difficulties or None. limitations on the availability or effectiveness of APAs? Not applicable.

KPMG in Philippines

Maria Carmela M. Peralta Tel: +63 2 885-7000 (ext. 320) Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Poland

KPMG observation

On 18 July 2013, amendments to Decrees of Ministry of Finance relating to transfer pricing came into force. They reflect changes in the Organisation for Economic Co-operation and Development (OECD) Guidelines and were aimed at integrating the conclusions developed by the European Union Joint Transfer Pricing Forum (EU JTPF) in the area of low value adding services into the Polish tax system. The scope of the implemented changes is complex and extensive and includes provisions encompassing the following areas: • business restructuring • low value adding services (new documentation possibilities but no safe-harbor of mark-ups has been introduced) • shareholder costs • choice of transfer pricing method; and • procedure for conducting benchmarking studies, including requirements for a comparability analysis. Regulations on business restructuring must be especially emphasized, as this is an area of special interest to the tax authorities in Poland. In addition to the regulations implemented in July 2013, extensive guidelines on business restructuring were published by the Ministry of Finance in March 2014. Following the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, a series of amendments to the Polish tax law have been implemented. The most important includes new more restrictive thin cap rules and controlled foreign corporation (CFC) rules. Furthermore, completely new transfer pricing documentation rules may potentially come into force starting from 1 January 2017. Under the draft of amendments to the current regulations, the documentation obligation would depend on a taxpayer’s turnover or costs. Three types of different documentation obligations are envisaged, among them, a domestic benchmarking study. Currently, the proposed amendments to the regulations also introduce an obligation to file an affirmation signed by a board member stating that a taxpayer’s transfer pricing documentation is completed at the financial year- end. Such a statement is supposed to be filed together with the annual corporate income tax (CIT) return. In 2014 and 2015, KPMG in Poland has noted a significant increase in the number of transfer pricing audits. Areas subject to scrutiny include, but are not limited to: localization of transfer pricing documentation (that is, documentation should be in line with the Polish transfer pricing documentation regulations; group transfer pricing documentation is not accepted) and charges for services provided by foreign related parties. KPMG in Poland expects that tax authorities’ interest in related party transactions will become even stronger, especially due to the fact that a special central transfer pricing audit team was constituted in the Ministry of Finance last year.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Advance Pricing Agreements (APA) — paid by foreign related parties to foreign 1 January 2006. individuals providing services (working) Tax authority name for the Polish subsidiary. What is the relationship threshold Ministerstwo Finansów. for transfer pricing rules to apply What are the consequences of Citation for transfer pricing rules between parties? failure to submit disclosures? • Reassessment of Income: Article Ownership of greater than five percent Individuals responsible for the tax 11 Corporate Income Tax (CIT) Act. share capital means that the entities are compliance of companies may be held • Decree of the Ministry of Finance under common control. responsible under the penal-fiscal code for not submitting required tax of 10 September 2009 establishing What is the statute of limitations information. the taxpayers’ income through on assessment of transfer pricing the assessment of prices, and on adjustments? the method and procedure for the Transfer pricing study Six years from tax year-end. elimination of double taxation of overview the legal person in the case of profit adjustments for related parties, in Transfer pricing disclosure Can documentation be filed in a language other than the local force as of 17 October 2009, amended overview as of 18 July 2013. language? If yes, which ones? Are disclosures related to transfer No. • Information requirements: Article pricing required to be submitted to 82 and 82a of the Tax Ordinance Act the revenue authority on an annual When a transfer pricing study is and the Decree of the Ministry of basis (e.g. with the tax return)? prepared, should its content follow Finance of 24 December 2002 on tax Chapter V of the Organisation Yes. Certain transfer pricing information information. for Economic Co-operation and about transactions with foreign Development (OECD) Guidelines? • Documentation requirements: Article parties must be submitted to the tax 9a CIT. authorities and statutory transfer pricing Generally yes, however there are specific • Documentation requirements documentation must be prepared (but requirements to be met. (sanctions): Article 19, sec. 4, CIT Act. submitted only upon request). A taxpayer is required to provide the • Harmful tax competition: Decree of What types of transfer pricing tax authorities with statutory transfer the Ministry of Finance of 9 April 2013. information must be disclosed? pricing documentation within seven days of receiving the request. The • Advance Pricing Agreement (APA): Information on whether an entity is documentation should be prepared for Article 20a–20q, Tax Ordinance Act. obliged to prepare statutory transfer transactions concluded by a taxpayer Effective date of transfer pricing rules: pricing documentation; information on with a related party which exceed, in the agreements concluded with related • Arm’s length principle — given tax year, the following thresholds: parties when the value exceeds 300,000 15 February 1992. euros (EUR) (total value of receivables or • EUR100,000 – if the value of the • Application of methods — liabilities resulting from all agreements transaction does not exceed 20 1 October 1997. concluded with one related party within a percent of the company’s share capital fiscal year) or EUR5,000 if an agreement • Information requirement — • EUR30,000 – for service transactions is concluded with a related party which 31 December 1997. and transactions involving intangibles has a permanent establishment in • Documentation requirement — Poland; information on remuneration • EUR50,000 – in the remaining cases. 27 July 2000.

Additionally, a taxpayer is required to If an adjustment is proposed by scrutiny of shareholders cost charged prepare transfer pricing documentation the tax authority, what dispute to subsidiaries for a contribution in a partnership, if resolution options are available? • a shift to a significantly more flexible the total value of contributions of all No dispute resolution options available and business friendly approach by partners exceeds EUR50,000. (only litigation after the adjustment is the Ministry of Finance APA team to Moreover, each transaction exceeding made). taxpayers and transactions subject to EUR20,000 should be documented if an APA In case of cross-border adjustments concluded with an entity operating in a leading to double taxation Mutual • transfer pricing audits conducted in country listed by the Ministry of Finance Agreement Procedure (MAP) may be cooperation with other countries’ tax as a tax haven. initiated with the Competent Authority. authorities (cooperation includes, for The statutory transfer pricing instance, exchange of information If an adjustment is sustained, can documentation is not required to between the tax administrations); and penalties be assessed? If so, what include a benchmarking study or rates are applied and under what • transfer pricing audits focusing on other comparable economic analysis conditions? more complicated transactions than documenting the compliance of the the ones that were examined in the transaction with the arm’s length Yes. If a taxpayer fails to submit past (for instance, sale of economic standard. However, inclusion of such an such documentation or provides ownership of a trademark). analysis prepared following the OECD documentation which does not meet Guidelines is highly recommended. the legal requirements, and the tax Special considerations authorities therefore assess additional Does the tax authority require an income, the assessed income will be Are secret comparables used by tax advisor/tax practitioner to have taxed at the penal 50 percent tax rate authorities? specific designation in order to (instead of standard rate — currently 19 Secret comparables are not allowed. prepare or submit a transfer pricing percent). Nevertheless, in practice, cases study? To what extent are transfer pricing of the tax authorities using secret No. penalties enforced? comparables do occur. Always. Is there a preference, or Transfer pricing methods requirement, by the tax authorities Does your country follow the What defenses are available with for local comparables in a transfer pricing methods outlined in respect to penalties? benchmarking set? Chapter II of the OECD Guidelines? Documentation provides for penalty Yes, but it is a preference. The If exceptions apply, please describe. protection against the 50 percent consequences of not having local Yes. With some exceptions (for example penalty tax rate for adjusted incomes. comparables depend on the level of the berry ratio is not an allowed profit Country specific documentation, comparability between Poland and other level indicator). including a benchmarking search with markets. The worst-case scenario is a local database, confirming the arm’s challenging the whole search. length standard of the transactions will Transfer pricing audit mitigate the risk of the prices being Do tax authorities have and penalties challenged. requirements or preferences regarding databases for When the tax authority requests What trends are being observed comparables? a taxpayer’s transfer pricing currently? documentation, are there timing Preference (but no obligation) to use requirements for a taxpayer to The following trends are currently being the local database, as it provides more submit its documentation? And if observed: details on local comparables. The so, how many days? • strong emphasis on business preferred databases are: Tegiel (Polish database), Amadeus, Monitor Polski Yes, 7 days. restructuring issues: new regulations, additional explanations/guidelines “B” (registry court data). When the tax authority requests published, media coverage following Does the tax authority generally a taxpayer’s transfer pricing general OECD/global discussion on focus on the interquartile range in a documentation, are there timing base erosion and tax ‘morality’; bad TNMM analysis? requirements for a taxpayer to press for companies adopting tax submit its documentation? Please Yes, sometimes. optimization measures explain. • new documentation possibilities Seven days following the request of the for taxpayers concerning low value tax authorities. added services but no safe-harbor of mark-ups has been introduced

Does the tax authority have other declaration needs to be submitted. Year- • for foreign entities no less than preferences in benchmarking? If so, end adjustments may trigger a tax audit, PLN20,000 and no more than please describe. especially if the amount of the corporate PLN100,000; and income tax pre-paid during the tax year is The tax authorities focus on the • for bilateral or multilateral, no less higher than the total tax due (i.e. when the interquartile range, however the than PLN50,000 and no more than refund of the pre-paid tax is requested in preference exists for the median PLN200,000. the final tax return). (unless there are strong arguments for Renewal fees are half of the amount of different values). The rules are different Other unique attributes? the original filing fee. for interest — the regulations indicate Multiple year data are required the lowest interest in the market to be Does the tax authority publish APA (on average, three year period) for considered as arm’s length. data either in the form of an annual comparables. The testing of a single year report or through the disclosure of What level of interaction do tax result of the tested company against a data in public forums? authorities have with customs multiple year period is preferred. authorities? No. No safe-harbors exist. High. Are there any difficulties or Polish regulations envisage personal limitations on the availability or Are there limitations on responsibility for decreasing a company’s effectiveness of APAs? deductibility of management fees tax liability (financial penalty, records beyond the arm’s length principle? in the criminal register, imprisonment). Yes. The Ministry of Finance is open Polish tax authorities do exercise this to discussions about all types of Yes, some. Management fees may rule and penalize company management transactions and already has some be tax deductible if all of the following (financial penalties mostly). experience with the APA program. conditions are met: However taxpayers are still reluctant to use the APA route, mostly due to • the recipient of the management Tax treaty/double tax service can prove that services have the costs of the proceedings. We have been factually rendered resolution noticed a clear change of attitude of What is the extent of the double tax the authorities who are becoming • the expense is incurred for the treaty network? significantly more business friendly and purpose of earning revenue and does are encouraging taxpayers to benefit not arise from a simple shifting of Extensive. from the APA possibility. expenses incurred on the group level If extensive, is the competent with no factual benefit to the recipient authority effective in obtaining (stewardship expense); and double tax relief? • the expense is not listed in Article 16 of the CIT Act, which describes Sometimes, only limited experience. non-tax-deductible expenses. When may a taxpayer submit an Are management fees subject to adjustment to competent authority? withholding? After acknowledgement of a double Yes. taxation. Are there limitations on the May a taxpayer go to competent deductibility of royalties beyond the authority before paying tax? arm’s length principle? Yes. Yes. Similar to management fees, royalties should be incurred for the Advance pricing purpose of earning revenue in order to agreements be treated as tax deductible. What APA options are available, if Are royalties subject to any? withholding? Unilateral, bilateral, multilateral. Yes. Is there a filing fee for APAs? Are taxpayers allowed to file tax Yes. The filing fee is one percent of the KPMG in Poland return numbers that differ from value of a transaction with the following book numbers? provisions: Jacek Bajger Yes. Preferably, the adjustment should be Tel: +48225281173 • for unilateral agreements with reflected in the correction of the original Email: [email protected] domestic entities, no less than 5,000 transaction price, the financial statement Polish zloty (PLN) and no more than and tax return. An adjustment triggers VAT As email addresses and phone numbers PLN50,000 change frequently, please email us at and customs implications. No special tax [email protected] if you are unable to contact us via the information noted above.

Portugal

KPMG observation

The Portuguese transfer pricing legislation has been in force since 1 January 2002, covering both cross-border and domestic transactions. The original rules experienced some changes over the years, typically because of increasing scope. One of the most significant changes was the introduction in 2008 of an Advance Pricing Agreement (APA) provision. Currently, taxpayers can significantly reduce transfer pricing risk in Portugal through unilateral, bilateral or multilateral APAs. On the enforcement side, the tax authorities have increased transfer pricing audits across virtually all industries and transaction categories. Transfer pricing has been one of the Portuguese Government’s top priorities to date. The Portuguese Government recently issued its strategic plan against fraud and tax evasion for 2015-2017, which will further increase the focus on transfer pricing. Transfer pricing documentation is required in Portugal for taxpayers with net sales and other revenues equal or above 3 million euros (EUR). There are some tax forms that require specific transfer pricing information, including a statement of whether or not the taxpayer has adequate transfer pricing documentation at the time of filing the company’s tax return. After a discussion period during 2013, the Corporate Income Tax Reform was finally implemented with effect from 1 January 2014. This reform aims to significantly increase the competitiveness of Portugal for foreign investments and investors, therefore creating a number of challenges and opportunities from a Portuguese transfer pricing perspective.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous Submission to tax authority required Thresholds apply/exist Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information 21 December; and Ministerial Order What is the relationship threshold (Portaria) n. 620–A/2008 of 16 July. Tax authority name for transfer pricing rules to apply between parties? Effective date of transfer pricing Autoridade Tributária e Aduaneira (ATA). rules There is a special relationship when Citation for transfer pricing rules one entity has the power to exercise, 1 January 2002. Article 63 of the IRC Code; Ministerial directly or indirectly, a significant Order (Portaria) n. 1446–C/2001 of influence in the management of the

other. As of 2014, any of the following Transfer pricing Portuguese transfer pricing rules follow conditions would define the relationship OECD Guidelines. as related party: disclosure overview Are disclosures related to transfer Does the tax authority require an • one entity participates directly or pricing required to be submitted to advisor/tax practitioner to have indirectly in at least 20 percent of the revenue authority on an annual specific designation in order to the share capital or voting rights basis (e.g. with the tax return)? prepare or submit a transfer pricing of another entity (10 percent until study? 2013 — inclusively) Yes. All Portuguese corporate taxpayers need to provide disclosure on a yearly No. • both entities are at least 20 percent basis, transfer pricing information on owned, directly or indirectly, by the their Annual Tax and Accounting Return same legal entity (10 percent until Transfer pricing methods (IES) to be submitted by the 15th day of 2013 — inclusively) Does your country follow the the seven-month period following the transfer pricing methods outlined in • an entity and the members tax year-end. Chapter II of the OECD Guidelines? of its corporate bodies, or What types of transfer pricing If exceptions apply, please describe. any administration, direction, information must be disclosed? management or supervising boards Yes. entities in which the majority of the Taxpayers usually need to disclose the board of directors are constituted by following information: Transfer pricing audit and the same persons • amounts of related party transactions, penalties • entities related under a subordination per transaction category, domestic When the tax authority requests agreement and cross-border transactions a taxpayer’s transfer pricing • entities that are in a control • selection of the transfer pricing documentation, are there timing relationship under the article 486 of methods on cross border transactions requirements for a taxpayer to Commercial Companies Code submit its documentation? And if • declaration whether documentation so, how many days? • entities whose legal relationship requirements were compiled when allows, by its terms and conditions, filing the income tax return. Yes, 10 days. the control of the management What are the consequences of decisions of the other, arising from When the tax authority requests failure to submit disclosures? facts outside the commercial or a taxpayer’s transfer pricing professional relationship itself; and Specific penalties have been published documentation, are there timing to transfer pricing infringements in 2012. requirements for a taxpayer to • transactions between a resident Late submission of the documentation submit its documentation? Please entity and entities resident in a clearly is subject to a penalty of from EUR500 explain. more favorable tax regime (as listed to EUR10,000 and the refusal of in Ministerial Order (Portaria) n.º As a rule 10 working days. presentation is subject to a penalty up to 292/2011, 8 November). If an adjustment is proposed by EUR150,000. Moreover it should be noted that the tax authority, what dispute resolution options are available? transfer pricing rules apply not only Transfer pricing study to transactions established between Administrative claim, hierarchical appeal, a permanent establishment located overview arbitral court, competent authority and in the Portuguese territory and its Can documentation be filed in mutual agreement procedures. foreign headquarters or other foreign a language other than the local permanent establishments, but also language? If yes, which ones? If an adjustment is sustained, can to transactions established between penalties be assessed? If so, what resident entities in Portugal and all its Documentation must be in Portuguese. rates are applied and under what permanent foreign establishments and Documents in foreign languages must conditions? among its permanent establishments. be translated into Portuguese before presented to tax authorities, although Transfer pricing adjustments are What is the statute of limitations this requirement. regulated by the general tax penalty on assessment of transfer pricing regime. If an adjustment is sustained, adjustments? When a transfer pricing study is general penalties may be assessed from prepared, should its content follow EUR750 to EUR45,000. Generally, four years from the last day Chapter V of the Organisation of the tax year-end (in cases where tax for Economic Co-operation and Compensatory interest is accrued losses exist, it may vary, depending of Development (OECD) Guidelines? at four percent monthly rate for late the year being considered). payment. Yes, for all transactions.

To what extent are transfer pricing • the increase in the number of ATA What level of interaction do tax penalties enforced? technicians assigned to the transfer authorities have with customs pricing department, as well as to authorities? With the expected increase of transfer the analysis of complex tax issues pricing audits, a broader enforcement Low, although increasing. The taxpayer such as transfer pricing, international of transfer pricing penalties is also is sometimes required to deliver its taxation and the application of anti- expected as foreseen in the Law. transfer pricing documentation under abuse rules. customs tax inspections. The Strategic Plan Against Fraud and This plan is likely to increase transfer Tax Evasion 2015-2017 foresees the pricing audits. Are there limitations on reinforcement of tax inspections deductibility of management fees regarding transfer pricing. beyond the arm’s length principle? Special considerations What defenses are available with No. Are secret comparables used by tax respect to penalties? authorities? Are management fees subject to Negligent behavior and cooperation will withholding? No. As a rule secret comparables are not impact the penalty value. allowed. Nevertheless, tax authorities Yes. What trends are being observed may use them in practice to benchmark Are there limitations on the currently? a taxpayer’s return in relation to its deductibility of royalties beyond the peers. Given the current economic scenario arm’s length principle? in Portugal, the tax authorities are Is there a preference, or No. concentrating efforts on transfer pricing requirement, by the tax authorities audits, as transfer pricing adjustments for local comparables in a Are royalties subject to tend to result in larger tax assessments benchmarking set? withholding? and tax collection. Yes. Local comparables (Portuguese Yes. Recent audits have focused more on and to a certain extent Spanish) are Are taxpayers allowed to file tax adjusting operating losses (disregarding preferred, but others may be allowed return numbers that differ from the effect of the global economic crisis), whenever these are not available. book numbers? payment for intra-group services, Do tax authorities have financial transactions, IP transactions, Yes. Positive transfer pricing adjustments requirements or preferences as well as business restructuring are foreseen in the law. Negative transfer regarding databases for processes. pricing adjustments are not permitted comparables? after the year-end. There could be VAT or The Portuguese Government has The Tax Authorities use both the SABI customs implications, which should also recently launched a strategic plan (with Iberian companies) and the be carefully evaluated on a case-by-case against fraud and tax evasion for 2015- Amadeus (with European companies) basis. 2017 which lists a series of measures databases. The preference is for that aim to ensure a fairer distribution Other unique attributes? Portuguese (or Iberian) independent of the tax efforts and punish in a more comparables, regardless of the Not applicable. effective way the intentional practices database. Other databases may be of tax failure. These measures that will used (and accepted by the ATA) for be implemented in 2015, foresee some Tax treaty/double tax specific categories of transactions or changes in transfer pricing, namely: industries (e.g. Royaltystat, Orbis, and, resolution • the use of APAs more frequently as a Bloomberg). What is the extent of the double tax means to increase tax certainty and treaty network? Does the tax authority generally predictability focus on the interquartile range in a Extensive. • enforcement of the transfer pricing TNMM analysis? If extensive, is the competent regime in terms of VAT in cases Yes, sometimes. authority effective in obtaining where there are transactions double tax relief? between related parties are subject to Does the tax authority have other different deduction regimes preferences in benchmarking? If so, Yes, as a rule. • assessment of the transfer pricing please describe. When may a taxpayer submit an policy specifically in cross-border As a rule, tax authorities tend to select adjustment to competent authority? transactions and the payments made the median values of the benchmarking After having been notified of an to related parties located in countries results. additional tax assessment. with a more favorable tax regime

May a taxpayer go to competent authority before paying tax? Permitted by providing a guarantee or a similar measure.

Advance pricing agreements What APA options are available, if any? Unilateral, bilateral, multilateral. Is there a filing fee for APAs? Yes. The submission of the request in respect of the preliminary phase is free of charge. The submission of the proposal implies the payment of a fee that may vary between approximately EUR3,150 and EUR35,000, depending on the revenue of the taxpayer. Renewals or reviews of APAs require a filing fee, calculated in a similar way, but with a discount of 50 percent of the initial fee. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? Yes. Are there any difficulties or limitations on the availability or effectiveness of APAs? No. From a Portuguese transfer pricing perspective APAs are run in a very efficient timing. However, in cases of bilateral and multilateral APA final results will depend on the counterpart.

KPMG in Portugal

Luis Magalhães Tel: +351 210 102 087 Email: [email protected]

Susana Miguel Pinto Tel: +351 212 487 391 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Puerto Rico

KPMG observation

After the termination of the Internal Revenue Code (IRC) section 936 election in 2006, some United States (US) companies decided to incorporate as non-US entities, subject to Puerto Rico tax rules. Any such companies should review their intra-group transactions to make sure they comply with local transfer pricing requirements. In recent years, new non-transfer pricing provisions have been introduced into the Puerto Rico tax rules which nevertheless impact intra-group transactions. For example, inter- and intra-company charges are subject to a 51 percent disallowance for regular income tax purposes and those same charges are subject to a 20 percent tax for Alternative Minimum Tax (AMT) purposes. Thus, companies need to evaluate their intra- group transactions and the related impact of these new provisions.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold Transfer pricing Tax authority name for transfer pricing rules to apply between parties? disclosure overview Departamento de Hacienda (Treasury Are disclosures related to transfer Parties are related when there is Department). pricing required to be submitted to direct or indirect control, either legally the revenue authority on an annual Citation for transfer pricing rules established or just exercised. There is basis (e.g. with the tax return)? Articles 1047-1 to 1047-4 of the Puerto presumption of control if the income or deductions are arbitrarily manipulated. No. Puerto Rican taxpayers are not Rico Tax Regulation and Section 1040.09 obliged to submit transfer pricing of the Puerto Rico Internal Revenue What is the statute of limitations documentation to the tax authorities. Code of 2011, as amended (PRIRC). on assessment of transfer pricing adjustments? What types of transfer pricing Effective date of transfer pricing information must be disclosed? rules Generally four years from the date the tax return is filed. Under the revised statutory audited 21 January 2001 (Effective date of financial statements requirements, Regulations). taxpayers with related entities operating

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 220 | Global Transfer Pricing Review in Puerto Rico must file consolidated/ Transfer pricing audit that transfer pricing topic is receiving combined audited financials and a from the Government. However, the reconciling schedule showing the and penalties rules adopted deal with the subject results of operations of each of the When the tax authority requests matter indirectly by way of limiting entities and eliminating entries. An a taxpayer’s transfer pricing in different ways the deductibility of exception to the combined/audited documentation, are there timing intercompany charges. financials has been approved for 2011, requirements for a taxpayer to 2012 and 2013 to the extent that the submit its documentation? And if Special considerations related party name is mentioned in the so, how many days? Are secret comparables used by tax notes of the audited financials. Yes, 30 days. authorities? What are the consequences of When the tax authority requests No. failure to submit disclosures? a taxpayer’s transfer pricing Is there a preference, or Income tax return could be considered documentation, are there timing requirement, by the tax authorities not filed. requirements for a taxpayer to submit its documentation? Please for local comparables in a benchmarking set? Transfer pricing study explain. No. Usually US companies are accepted overview Thirty days from the day requested. Extensions are generally granted. as comparable companies. Can documentation be filed in a language other than the local If an adjustment is proposed by Do tax authorities have requirements language? If yes, which ones? the tax authority, what dispute or preferences regarding databases resolution options are available? for comparables? Yes, English or Spanish. No special procedure is applicable. No specific preferences. When a transfer pricing study is However, besides the competent Does the tax authority generally prepared, should its content follow authority, the taxpayer could request the Chapter V of the Organisation focus on the interquartile range in a assistance of the United States Internal TNMM analysis? for Economic Co-operation and Revenue Service (IRS) in cases involving Development (OECD) Guidelines? a US jurisdiction and creating a potential Not applicable. No. Since there is no requirement to double taxation issue. Does the tax authority have other prepare a transfer pricing study, the If an adjustment is sustained, can preferences in benchmarking? If so, authority has not adopted specific penalties be assessed? If so, what please describe. requirements with respect to contents rates are applied and under what No specific preferences. when the taxpayer elects to submit conditions? a TP study. The only underlying What level of interaction do tax requirement would be to show that the Yes, a deficiency will be assessed upon authorities have with customs result is consistent with the applicable which interest and surcharges will be authorities? regulations. determined, which will be collected in the same manner as the tax. Interest consists Low. Does the tax authority require an of a 10 percent single annual rate and Are there limitations on advisor/tax practitioner to have surcharge of 10 percent (one time). deductibility of management fees specific designation in order to beyond the arm’s length principle? prepare or submit a transfer pricing To what extent are transfer pricing study? penalties enforced? Yes, some. Beginning in 2013 in the case of management fees paid to a home No. Always. office or a related entity not engaged in What defenses are available with a trade or business in Puerto Rico, only Transfer pricing methods respect to penalties? 49 percent of such fees are deductible. Does your country follow the None. Surcharge can only be removed Further, amounts equal to 20 percent of transfer pricing methods outlined in at the discretion of the tax authority by any such management fees and all other Chapter II of the OECD Guidelines? execution of a closing agreement. intercompany charges, are added to the If exceptions apply, please describe. regular Alternative Minimum Tax (AMT). What trends are being observed Not applicable. currently? Are management fees subject to withholding? Recent changes to the Internal Revenue Code shows the increasing attention No.

Are there limitations on the Advance pricing deductibility of royalties beyond the arm’s length principle? agreements What APA options are available, if Yes. These are deductible only when any? paid, not just accrued. None. Are royalties subject to withholding? Is there a filing fee for APAs? Yes. Not applicable. Are taxpayers allowed to file tax Does the tax authority publish APA return numbers that differ from data either in the form of an annual book numbers? report or through the disclosure of data in public forums? Yes. If the year-end adjustment is performed prior to the closing of the Not applicable. fiscal year, the year adjustments are Are there any difficulties or acceptable. Nevertheless, it is important to limitations on the availability or consider any impact from an indirect taxes effectiveness of APAs? perspective, as well as customs duties. Not applicable. Other unique attributes? None.

Tax treaty/double tax resolution What is the extent of the double tax treaty network? Minimal. There is a competent tax authority agreement in place between the Puerto Rican Treasury Department and the IRS intended to resolve disputes when a transaction is treated differently in both tax jurisdictions. If extensive, is the competent authority effective in obtaining double tax relief? Almost always. When may a taxpayer submit an adjustment to competent authority? When a double taxation issue has been identified. May a taxpayer go to competent authority before paying tax? Yes.

KPMG in Puerto Rico

Carlos A. Molina Tel: +1 787 622 5311 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Romania

KPMG observation

The Romanian legislation on transfer pricing documentation follows the principles of the European Union (EU) regulations on transfer pricing (e.g. the EU Code of Conduct on Transfer Pricing). Although transfer pricing documentation requirements were introduced some time ago, many Romanian taxpayers prefer to wait for a specific request issued by the Romanian tax authorities in order to start preparing their transfer pricing documentation. The Romanian tax authorities tend to adopt a simple approach when it comes to transfer pricing topics. Cases arise where the tax authorities challenge various aspects of a taxpayer’s position, and typically the only way to resolve the resulting dispute is in court. With respect to the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, and the United Nations’ (UN) Practical Transfer Pricing Manual for Developing Countries issued October 2012, it is likely that the Romanian tax authorities will intensify their current practice of reclassifying transactions based on substance.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Article 11 (2) of the Romanian Fiscal Government Decision no. 529/2007, Code and its application Norms – regarding the procedure of issuing Tax authority name providing for the arm’s length principles the advance tax rulings and Advanced Ministry of Public Finances; National and transfer pricing methods. Pricing Agreements (APAs). Agency for Fiscal Administration Article 42 and article 79 of the Romanian Order of the President of National (ANAF). Fiscal Procedure Code approved by Agency for Fiscal Administration no. Citation for transfer pricing rules Government Ordinance no. 92/2003, 222/2008, regarding the content of the Article 7 of the Romanian Fiscal Code — as further amended and completed — transfer pricing documentation file, as defining “related parties.” requiring the preparation of a transfer well as the postponement of the control pricing file. until the transfer pricing file is ready.

Effective date of transfer pricing What types of transfer pricing upon their written request. From the rules information must be disclosed? date of the official request, the taxpayer has up to three months to submit its 1 January 2004, the obligation to comply Not applicable. documentation, with the possibility of an with transfer pricing principles was What are the consequences of extension equal to the initial period granted reinforced. failure to submit disclosures? within the tax authorities’ official request. In May 2007, the procedure to be followed Not applicable. If an adjustment is proposed by by taxpayers in order to obtain an APA the tax authority, what dispute ruling from the Romanian tax authorities resolution options are available? was enforced. In July 2007, the obligation Transfer pricing study to have transfer pricing documentation overview Taxpayers can challenge a transfer files available was enforced. In February Can documentation be filed in pricing adjustment at administrative 2008, the obligation to have specific a language other than the local level, by submitting an appeal against transfer pricing documentation available language? If yes, which ones? the decision issued by the Romanian were enforced, thus creating a more tax authorities, or in a court of justice. stable regulatory environment for transfer No. According to the Romanian transfer pricing purposes. When a transfer pricing study is pricing legislation, when transfer pricing adjustments are made with respect Although the obligation to document prepared, should its content follow to transactions between Romanian domestic intragroup transactions for Chapter V of the Organisation related parties, an automatic adjustment Romanian transfer pricing purposes for Economic Co-operation and is to be made at the level of the other was clearly stated in the Fiscal Code Development (OECD) Guidelines? related parties involved in the adjusted as of May-June 2010, there is still Yes, with some additional local transactions. Although the procedure a risk that the previous text of the requirements regarding the TP to be followed in such a case is not very relevant provision of the Fiscal Code documentation. clear, the companies may apply for it. could be interpreted in a way that such The possibility to apply the Mutual documentation obligation was also Does the tax authority require an Agreement Procedure (MAP) is provided applicable in the past. advisor/tax practitioner to have specific designation in order to in the majority of double tax treaties What is the relationship threshold prepare or submit a transfer pricing concluded by Romania. for transfer pricing rules to apply study? If an adjustment is sustained, can between parties? No. penalties be assessed? If so, what Direct or indirect ownership of rates are applied and under what a minimum of 25 percent of the conditions? participation titles or voting rights or Transfer pricing methods Starting from 1 March 2014 the late effective control. Does your country follow the transfer pricing methods outlined in payment interest decreased from What is the statute of limitations Chapter II of the OECD Guidelines? 0.04 percent per day to 0.03 percent on assessment of transfer pricing If exceptions apply, please describe. per day, while another late payment adjustments? penalty of 0.02 percent per day of delay Yes. may also be added to such upward Five years from filing date. adjustments. Also, a tax audit can be performed for Transfer pricing audit and To what extent are transfer pricing tax liabilities arising in the last 10 years penalties enforced? in case of a fiscal evasion. penalties When the tax authority requests Always. a taxpayer’s transfer pricing Transfer pricing documentation, are there timing What defenses are available with disclosure overview requirements for a taxpayer to respect to penalties? Are disclosures related to transfer submit its documentation? And if Comprehensive and proper transfer pricing required to be submitted to so, how many days? pricing documentation. the revenue authority on an annual Yes, 90 days. What trends are being observed basis (e.g. with the tax return)? When the tax authority requests currently? No. There is no specific transfer pricing a taxpayer’s transfer pricing Currently, the strategy of the disclosure is required in the annual documentation, are there timing Romanian tax authorities is to focus corporate tax return. A summary of requirements for a taxpayer to submit on loss-making companies and on transactions carried out with related its documentation? Please explain. companies with high turnover. parties must be disclosed when preparing the financial statements, but Based on the local legislation, the there is no disclosure requirement on transfer pricing documentation file needs the tax return. to be submitted to the tax authorities

Special considerations What level of interaction do tax Other unique attributes? authorities have with customs Are secret comparables used by tax If a transfer pricing documentation authorities? authorities? file does not include all the sections The exchange of information with required by the legislation, there is a As a matter of principle, Romanian tax the customs authorities on transfer risk that the file may be considered as authorities use public information and pricing adjustments is increasing. incomplete, which gives the right to the databases. Additional information may Customs base adjustments are also tax authorities to make adjustments. be found via exchange of information made in accordance with the General with other tax authorities. Transfer pricing adjustments may be Agreement for Trade and Tariffs (GATT). Is there a preference, or made by the tax authorities based requirement, by the tax authorities Are there limitations on on three independent transactions for local comparables in a deductibility of management fees (qualifying as similar with the one that is benchmarking set? beyond the arm’s length principle? being analyzed). The simple average will be used. Yes, some. General corporate Yes. For Romanian transfer pricing conditions must be cumulatively In practice, the Romanian tax authorities purposes, in order to determine met: the service is actually rendered; do not accept loss-making companies to the arm’s length character of prices the taxpayer can provide supporting be included in benchmark studies. charged between a Romanian entity documents attesting that the and its related parties, a local market service was provided (that is, written benchmark study has to be carried out Tax treaty/double tax agreement, timesheets, reports, etc.); first. It is only in the case of insufficiently and the service is rendered for the resolution available information regarding local benefit of the taxpayer’s business. What is the extent of the double tax comparables that Romanian tax treaty network? authorities will accept a pan-European In the absence of such supporting search. Nevertheless, the search for documents, tax inspectors may deny Extensive. comparables in the local market has to the deductibility of these service If extensive, is the competent be documented and justified as “not fees. Management services are often authority effective in obtaining possible”. In practice, we noticed that scrutinized by tax inspectors trying to double tax relief? the Romanian tax authorities are asking question their deductibility. for Romanian comparables, and other Frequently. Also, management fees should be benchmarks (on the EU market or on priced at the market-price level. When may a taxpayer submit an extended markets) are usually rejected adjustment to competent authority? by the Romanian tax authorities. Are management fees subject to withholding? No specific provision. Do tax authorities have requirements or preferences Yes. May a taxpayer go to competent regarding databases for authority before paying tax? Are there limitations on the comparables? deductibility of royalties beyond the No formal rules exist in this area. No. However, the Amadeus database arm’s length principle? is most commonly accepted by the Yes. There are no specific rules or Advance pricing Romanian tax authorities. limitations regarding the deductibility agreements Does the tax authority generally of royalties. The general corporate rules What APA options are available, if focus on the interquartile range in a for deductibility must be observed any? TNMM analysis? (see above). In practice there are cases where the tax authorities tried to reject Unilateral, bilateral, multilateral. Yes, always. the deductibility of royalties charged to Is there a filing fee for APAs? Does the tax authority have other Romanian taxpayers. preferences in benchmarking? If so, Yes. The tariff which would be charged Are royalties subject to please describe. for releasing the APA is 10,000 euros withholding? (EUR) up to EUR20,000 (in the case of Yes, the interquartile range is taken into Yes. large taxpayers, as well as in the case of account in a TNMM analysis. In most other categories of taxpayers of which cases in practice, the tax authorities Are taxpayers allowed to file tax the consolidated value of transactions focus on the search criteria used to return numbers that differ from exceeds EUR4 million). The tariff for select the comparable companies, in book numbers? amendments of an already released APA order to ensure that the criteria is in line Yes. There is nothing in the Romanian is EUR6,000 up to EUR15,000 (in the with the Romanian legal requirements. legislation to prohibit year-end case of large taxpayers, as well as in the However, in some cases the authorities adjustments, which may be subject to case of other categories of taxpayers did not agree with the comparable other tax consequences depending on of which the consolidated value of companies selected and performed the nature of the underlying transaction. transactions exceeds EUR4 million). It is separate benchmarking studies. payable in RON at the National Bank of

Romania’s foreign exchange rate, valid at the date of payment. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? Not applicable. The APA program is developing slowly. So far, it seems that only four APAs have been concluded between the Romanian tax authorities and taxpayers.

KPMG in Romania

Teodora Alecu Tel: +40 (372) 377 800 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Russia

KPMG observation

The current Russian transfer pricing rules have been effective since 2012. They are generally based on the Organisation for Economic Co-operation and Development (OECD) Guidelines, but have certain differences. For example, while there are five basic transfer pricing methods (as in the OECD Guidelines), under the Russian transfer pricing rules, the Comparable Uncontrolled Price (CUP) method and Resale Price Method have priority over other methods. Under Russian law, even large domestic transactions between related parties are subject to the transfer pricing rules. Furthermore, the Russian tax authorities may control prices not only in cross-border transactions with related parties, but also in transactions with unrelated companies located in offshore jurisdictions. Export / import prices for certain commodities (e.g. oil products, precious metals) are also within the scope of the Russian transfer pricing rules. Taxpayers need to prepare transfer pricing documentation on an annual basis in Russia, and a local benchmarking study is required when testing the profitability of a Russian company. In addition, taxpayers are required to submit a notification on controlled transactions by 20 May following the reporting year. Advance Pricing Agreements (APAs) are available in Russia, but the practice is not extensive.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Submission to tax authority required Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information provisions on prices and taxation. authority monitoring. Notification of Information used for comparability controlled transactions Tax authority name analysis • Chapter 14.5. (Articles 105.17-105.18 Federal Tax Service (FTS). • Chapter 14.3. (Articles 105.7-105.13 of the Russian Tax Code) — Tax Citation for transfer pricing rules of the Russian Tax Code) — Transfer control of prices between related pricing methods parties • Chapter 14.1. (Articles 105.1-105.2 of the Russian Tax Code) — Related • Chapter 14.4. (Articles 105.14- • Chapter 14.6. (Articles 105.19-105.25 parties 105.16 of the Russian Tax Code) — of the Russian Tax Code) — Advance Controlled transactions. Preparation pricing arrangements • Chapter 14.2. (Articles 105.3-105.6 and submission of documents for tax of the Russian Tax Code) — General • Articles 129.3-129.4 of the Russian Tax Code — Penalties; and

• Certain articles of Chapter 25 of the • a decision to conduct a tax audit of • OKP (Russian Classification of Russian Tax Code stipulate specific controlled transactions performed Products) — domestic transactions transfer pricing rules for securities and in 2012 can be taken no later than for goods; and derivatives (Article 280 of the Russian 30 June 2014 (amendments to the • OKVED (Russian Classification of Tax Code) and interest (Article 269 of transfer pricing legislation of April Economic Activities) (for works, the Russian Tax Code). 2013); and services, or property rights) — for Effective date of transfer pricing • a decision to conduct a tax audit of services and other transactions. rules controlled transactions performed in The most detailed information is 1 January 2012. 2013 can be taken no later than required for transactions with goods 31 December 2015. where the taxpayer will have to inform What is the relationship threshold the tax authority additionally of: for transfer pricing rules to apply between parties? Transfer pricing • the country of origin, shipping disclosure overview (loading) point More than 25 percent direct/indirect ownership of one company by another Are disclosures related to transfer • delivery (discharging) point; and pricing required to be submitted to company including parties in which • as well as the terms of delivery. one company participates directly or the revenue authority on an annual indirectly and such participation exceeds basis (e.g. with the tax return)? Please note that the above information should be provided for each transaction. 25 percent (sister companies). Yes. A taxpayer must submit As a result, companies usually prepare notification to the tax authorities about Moreover, the definition of related and file a transfer pricing notification in controlled transactions that occurred parties also includes: the electronic format. in each calendar year by 20 May of the • parties that are controlled by the following year. What are the consequences of same CEO or board of directors, failure to submit disclosures? 50 percent of which are the same What types of transfer pricing persons information must be disclosed? Failure to submit notification to the tax authorities about controlled transactions The form of the taxpayer’s notification • parties where one party has the right or the disclosure of incorrect data may is rather complex and contains the to appoint the CEO for the other party result in fine of 5,000 Russian rubles following main fields: or at least 50 percent of the board of (RUB) per taxpayer. Also, failure to directors for the other party • calendar year in which a transaction submit notification increases likelihood • party and an individual where the subject to the transfer pricing of transfer pricing audit (in case local tax individual performs the duties of the regulations occurred inspectorate informs Federal Tax Service party’s chief executive officer • subject matter of the transaction about controlled transactions of the taxpayer). • parties and/or individuals, if the • information about the parties to share of direct participation of each the transactions, (name, taxpayer’s preceding party in each subsequent identification number) Transfer pricing study organization equals more than overview 50 percent • income received and expenses incurred relating to the transaction Can documentation be filed in • individuals, if one individual is a language other than the local • grounds for classifying the subordinate to another individual by language? If yes, which ones? official position transactions as controlled No. • an individual, his or her spouse, • pricing methods used by the taxpayer parents (including adoptive parents), (optional); and When a transfer pricing study is children (including adopted children), • information sources used by the prepared, should its content follow full and half brothers and sisters; and taxpayer (optional). Chapter V of the Organisation for Economic Co-operation and • a trustee and ward by a court decision When providing information on the Development (OECD) Guidelines? on related party status. subject matter of the transaction, it No. Transfer pricing documentation What is the statute of limitations will be necessary not only to give a full description (e.g. goods, works, services, can be presented in any format, but on assessment of transfer pricing under the Tax Code should contain the adjustments? or property rights), but also to submit more detailed data, including the code following details: The tax authorities can audit only three for the subject matter of the transaction • indication of the parties to the calendar years preceding the year in in accordance with one of three transaction and their residence, which the decision to conduct a transfer classifications: description of their functions, pricing audit was taken by the transfer assets and risks attributable to the pricing authority. • TNVED (Foreign Economic Activity Commodity Nomenclature) — for transactions The new transfer pricing rules also cross-border transactions with goods stipulate certain transitional provisions for 2012-2013:

• description of the transaction: Transfer pricing audit What defenses are available with subject matter, terms and conditions, respect to penalties? methodology applied, etc. and penalties When the tax authority requests If a taxpayer makes a transfer pricing • justification of the transfer pricing a taxpayer’s transfer pricing self-adjustment and pays additional tax method applied: indication of sources documentation, are there timing liabilities and late payment interest prior of information used, calculation of requirements for a taxpayer to to the tax audit, no penalties should the range of arm’s length prices/ submit its documentation? And if apply. profitability, amount of income so, how many days? received and/or expenses incurred A taxpayer is exempt from 20 percent/ relating to the transactions and Yes, 30 days. 40 percent penalty if the relevant transfer related economic benefits received pricing documentation supporting arm’s When the tax authority requests length level of prices was properly • description of adjustments to the a taxpayer’s transfer pricing prepared and provided to the tax tax base (if any) performed by the documentation, are there timing authorities within 30 working days upon taxpayer requirements for a taxpayer to receiving their request. • other information necessary to justify submit its documentation? Please explain. What trends are being observed the transfer prices used. currently? Transfer pricing documentation should The taxpayer must provide the transfer pricing documentation to the tax During transfer pricing audits the be prepared with references to the Federal Tax Service mainly focus on Russian tax code (rather than the authorities within 30 working days from the date of the tax authorities’ request. cross-border transactions. From our OECD transfer pricing Guidelines). A experience, they tend to apply the local benchmarking analysis is usually If an adjustment is proposed by CUP method in transactions with required. the tax authority, what dispute commodities. resolution options are available? In addition, the Russian tax The local tax authorities generally authorities published for taxpayers Upon the audit, the tax authorities pay much attention to intra-group Guidelines on preparing transfer issue the act summarizing the audit transactions such as management pricing documentation. It is strongly results. The taxpayer is able to provide services, IP royalty, interest deduction. recommended to prepare local transfer their appeal to this act. Then, the tax They inter alia analyze substance of pricing files in accordance with these authorities take the decision on the transactions and their proper document Guidelines. transfer pricing audit. If the taxpayer support. Also, Russian tax authorities Does the tax authority require an does not agree with the decision, the may test the arm’s length nature of advisor/tax practitioner to have tax authorities will try to enforce it via prices in non-controlled transactions (i.e. specific designation in order to a litigation procedure in the Russian transactions between unrelated parties) prepare or submit a transfer pricing arbitrage court. in case they assume unjustified tax study? If an adjustment is sustained, can benefit of the taxpayer. No. penalties be assessed? If so, what rates are applied and under what Special considerations conditions? Transfer pricing methods Are secret comparables used by tax If a transfer pricing adjustment results in authorities? Does your country follow an additional tax liability, the taxpayer is the transfer pricing methods No. Nonetheless, tax authorities may subject to late payment interest of 1/300 outlined in Chapter II of the OECD use secret comparables for selection of of the currently effective refinancing rate Guidelines? If exceptions apply, companies for transfer pricing audits. established by the Central Bank of the please describe. Russian Federation (8.25 percent as of Is there a preference, or No. Under the Tax Code, the Resale 1 July 2015). requirement, by the tax authorities Price Method is a priority method for for local comparables in a The penalty for underpayment of tax goods, which were purchased in a benchmarking set? arising from non-compliance with controlled transaction and resold to the the transfer pricing regulations is A local study is required for testing independent party. The CUP method 40 percent of the underpaid tax. This profitability of Russian companies (a requires a high degree of comparability penalty applies starting from 2017. For permanent establishment in Russia for its application. In the case where 2012-2013, the penalty is not applied. of a foreign company). For testing general transfer pricing methods (or For 2014-2016, the penalty will be profitability of foreign companies, a a combination thereof) cannot be 20 percent of the underpaid tax. foreign study may be accepted, but applied, the market price for non- the search strategy in the study should recurring transactions (e.g. sale of a To what extent are transfer pricing be in line with requirements under the trademark) could be determined using penalties enforced? Russian Tax Code (e.g. requirement to an independent appraisal report. Penalties are generally enforced in reject loss-making companies etc.). practice.

Do tax authorities have Are taxpayers allowed to file tax Does the tax authority publish APA requirements or preferences return numbers that differ from data either in the form of an annual regarding databases for book numbers? report or through the disclosure of comparables? data in public forums? Yes. If a company underestimated its The results of benchmarking studies tax base due to non-arm-length prices No. aimed at testing the arm’s length nature and confirm this during preparation of Are there any difficulties or of prices/margins of Russian companies transfer pricing documentation, the limitations on the availability or (or foreign companies with a Russian company is required to make a self- effectiveness of APAs? permanent establishment) are more adjustment in the tax return. likely to be acceptable if the data for Yes. APAs are available only for ‘large For cross-border transactions true the search were obtained from Russian taxpayer’. The general qualification down adjustments (i.e. adjustments databases (i.e. SPARK, RUSLANA, etc.). criteria for a ‘large taxpayer’ varies to decrease the tax base in Russia) are depending at which level (federal or To test the arm’s length nature of prices/ generally not feasible due to tax and regional) such taxpayer is subject to tax margins of European companies, the customs issues and prohibited as such administration. A taxpayer is generally Amadeus database can be used. under Russian transfer pricing rules. considered a ’large taxpayer’ at the True-up adjustments should be carefully Does the tax authority generally regional level if any of the following structured as various options can be focus on the interquartile range in a criteria is met: considered. TNMM analysis? • total amount of annual federal taxes For domestic transactions starting from Yes, always. equals RUB1 billion; or 2015, the mechanism of correlative Does the tax authority have other adjustments is introduced. • total annual revenue equals preferences in benchmarking? If so, RUB1billion to RUB20 billion Other unique attributes? please describe. (amendment of Federal Tax Service None. dated 24 April 2012) of Federal Tax Please note that the Russian Tax Code Service dated 24 April 2012). contains a special formula for calculating the arm’s length range. This formula is Tax treaty/double tax The qualification criteria for a ‘large slightly different from the interquartile resolution taxpayer’ at the federal level are even range. higher. What is the extent of the double tax What level of interaction do tax treaty network? The practice of APA develops in Russia. authorities have with customs According to the official information, Extensive. authorities? the 1st APA was concluded by an oil If extensive, is the competent company, Rosneft, in November 2012. There is some interaction, but it is authority effective in obtaining Under this agreement, Rosneft and generally limited. double tax relief? the Federal Tax Service agreed on Are there limitations on certain pricing methods for oil sales The Russian competent authority has deductibility of management fees transactions in the domestic market. little experience in transfer pricing beyond the arm’s length principle? As of July 2015, more than 20 APAs matters. were concluded, mostly on domestic Yes. They must be supported by When may a taxpayer submit an Russian transactions. KPMG Russia has documentation evidencing the fact that adjustment to competent authority? an extensive practical experience on services were actually rendered and obtaining APAs in Russia. that a Russian taxpayer received the No formal rules exist in this area. economic benefit from such services. May a taxpayer go to competent Are management fees subject to authority before paying tax? withholding? No formal rules exist in this area. No. Are there limitations on the Advance pricing deductibility of royalties beyond the agreements arm’s length principle? What APA options are available, if Yes. There should be economic any? KPMG in Russia justification of the royalty payment. Unilateral, bilateral, multilateral. There are certain court decisions Natalia Valkovskaya arguing the economic substance of Is there a filing fee for APAs? Tel: +7 495 937 4477 (ext. 13766) royalty payment outside of Russia. Yes. The fee for concluding a unilateral Email: [email protected] Are royalties subject to withholding? APA is RUB2 million. Yes. As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Saudi Arabia

KPMG observation

While Saudi Arabia does not have complex transfer pricing rules, transactions between related parties must be concluded on terms as if the parties were independent. As a result, KPMG in Saudi Arabia is seeing the Department of Zakat and Income Tax (DZIT) scrutinizing cross-border transactions between related parties and challenging such transactions where arm’s length principles are not satisfied. Even though there is a need to maintain arm’s length pricing under Saudi tax law, there are no detailed transfer pricing rules in Saudi Arabia to reach an acceptable arm’s length price for a particular transaction. In the absence of such detailed rules, the Saudi tax authorities generally accept a price if they are satisfied that it represents the fair market value (FMV) of the subject services or goods. The lack of specific transfer pricing rules does provide wide powers to the Saudi tax authorities to accept or reject any particular pricing mechanism. Hence, it is always better to provide as much objective support as possible for arm’s length pricing between related parties to be able to defend any potential challenge from the Saudi tax authorities. KPMG in Saudi Arabia notes that transfer pricing is one of the top priorities for the DZIT. The DZIT is currently in the process of developing detailed guidelines on transfer pricing. A recent Ministerial Resolution (No. 1776 dated 19 March 2014 — Article 10, Para 11) states: • in respect of transactions with related parties, the DZIT will issue rules for determining the “fair value” or “arm’s length value” of those transactions in accordance with agreed international standards • however, the DZIT has not made any formal announcement on a timeline for implementation of formal transfer pricing guidelines/rules. KPMG’s current understanding, based on informal discussions, is that the projected timeline for the introduction of formal transfer pricing guidelines/rules is late 2015.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Transfer pricing Transfer pricing audit and Tax authority name disclosure overview penalties Department of Zakat and Income Tax Are disclosures related to transfer When the tax authority requests (DZIT). pricing required to be submitted a taxpayer’s transfer pricing to the revenue authority on an documentation, are there timing Citation for transfer pricing rules annual basis (e.g. with the tax requirements for a taxpayer to No specific transfer pricing rules have return)? submit its documentation? And if so, how many days? been issued by the Saudi tax authority, No. however, the principle of arm’s length Yes, 30 days. transactions has been embedded within What types of transfer pricing Saudi tax law. information must be disclosed? When the tax authority requests a taxpayer’s transfer pricing Not applicable. We note that transfer pricing is one of documentation, are there timing the top priorities for the DZIT in Saudi What are the consequences of requirements for a taxpayer to Arabia. The DZIT is currently in the failure to submit disclosures? submit its documentation? Please process of developing detailed guidelines explain. on transfer pricing. A recent Ministerial Not applicable. Resolution (No. 1776 dated 19 March Generally where the DZIT requests 2014 — Article 10, Para 11) states: Transfer pricing study information they expect a response within 30 days. However, in practice this “In respect of transactions with related overview varies considerably and is usually longer parties, the DZIT will issue rules for Can documentation be filed in as the DZIT may grant an extension. determining the “fair value” or “arms’ a language other than the local length value” of those transactions in language? If yes, which ones? If an adjustment is proposed by accordance with agreed international the tax authority, what dispute standards.” No. resolution options are available? However, the DZIT has not made any When a transfer pricing study is If an adjustment is proposed by the formal announcement on a timeline for prepared, should its content follow Saudi tax authority because of a dispute implementation of formal transfer pricing Chapter V of the Organisation regarding an arm’s length price and guidelines/rules. Based on informal for Economic Co-operation and an addition is made to taxable income discussions, our current understanding Development (OECD) Guidelines? because of this, such adjustment will is that the projected timeline for the Yes, for all transactions. become part of a larger tax assessment introduction of formal transfer pricing Notwithstanding the lack of formal by the Saudi tax authority. However, such guidelines/rules is late 2015. transfer pricing guidelines, we assessment orders can be challenged by the taxpayer like an assessment order Effective date of transfer pricing rules recommend companies prepare transfer pricing documentation (following OECD addressing any other issues. A taxpayer Not applicable. Guidelines) especially, where related can appeal against such an order in the Preliminary Appeal Committee (First What is the relationship threshold party transactions are significant. This Appellate Authority), and if not satisfied, for transfer pricing rules to apply will assist in mitigating the risk where in the Higher Appeal Committee (Second between parties? the DZIT applies the anti-avoidance provisions in the tax law. Appellate Authority), and finally the Board 50 percent or more directly or indirectly of Grievance will be the last Appellate related; beneficial ownership may also Does the tax authority require an Authority. be taken into account by the DZIT. advisor/tax practitioner to have specific designation in order to If an adjustment is sustained, can What is the statute of limitations prepare or submit a transfer pricing penalties be assessed? If so, what on assessment of transfer pricing study? rates are applied and under what adjustments? conditions? No. There is no specific statute of limitations Penalties are applicable under general set out in Saudi tax law, however, provisions of Saudi tax law. Penalties there is a general statute of limitations Transfer pricing methods resulting from misrepresentation is which shall apply in case the Saudi tax Does your country follow 25 percent of the tax sought to be authority is making adjustments to the transfer pricing methods evaded. Additionally, there is also a taxable income from the perspective of outlined in Chapter II of the OECD delay fine on unpaid or underpaid tax the arm’s length standard. The specific Guidelines? If exceptions apply, amounting to one percent for each 30 limitation is five years, and 10 years please describe. days. in cases where the tax return was No. While the DZIT is not required to To what extent are transfer pricing not filed, or if filed, was found to be follow OECD Guidelines currently, we penalties enforced? incomplete or incorrect with intent to recommend that any transfer pricing No specific transfer pricing penalties but evade tax. In practice the DZIT does study undertaken be completed in general penalties under the tax law may not follow this and has been known to accordance with the OECD Guidelines. extend beyond 10 years. apply.

What defenses are available with individual taxpayer and other person to deduction of the difference and respect to penalties? prevent any reduction in tax payable as accordingly raise the assessment of the a result of income splitting (assumed to corporate tax liability and penalty for the Not applicable. apply to corporate taxpayers as well). period of default. What trends are being observed For purposes of the above, income It is therefore important to ensure currently? splitting means: consistency between the value of the From a practical perspective, taxpayers • the transfer of income, directly or goods as disclosed in the contract/ are already required to produce indirectly, from one person to an invoice, auditor’s certificate, customs documentation to support related party associate; and clearances, financial statements, etc. transactions. The DZIT has the power • the transfer of property (including Are there limitations on to request documentation to support money), directly or indirectly, from deductibility of management fees related party transactions (Article 61). one person to an associate with the beyond the arm’s length principle? Failure to produce documentation result that the associate realizes Yes. A branch is not allowed to take can lead to the disallowance of income from that property, where a deduction for a head office cost expenses (Article 58). based on our the reason or one of the reasons allocation. experience, the DZIT in Saudi Arabia is for the transfer is to lower the total increasingly requesting documentation tax payable upon the income of the Are management fees subject to to support related party transactions transferor or the transferee. withholding? and comparing the price paid to third party prices. In some cases, the DZIT In determining whether the taxpayer Yes. is seeking to split income, the DZIT has adjusted transfer prices between Are there limitations on the may consider the value given by the related parties but there is a lack of deductibility of royalties beyond the transferee. applied transfer pricing methodology arm’s length principle? to support these transfer price Do tax authorities have No. adjustments. requirements or preferences For goods supplied by related parties, regarding databases for Are royalties subject to Saudi companies are being requested to comparables? withholding? submit custom clearance documents. Not applicable. Yes. In some cases a certificate from the sellers’ auditors has been requested Does the tax authority generally Are taxpayers allowed to file tax confirming that the supply of goods was focus on the interquartile range in a return numbers that differ from made at international market prices, TNMM analysis? book numbers? prevailing at the date of dispatch. The Not applicable. No. DZIT has also raised questions around substance, beneficial ownership, and Does the tax authority have other Other unique attributes? preferences in benchmarking? If so, the nature of the services provided. Not applicable. please describe. Special considerations Not applicable. Tax treaty/double tax Are secret comparables used by tax What level of interaction do tax resolution authorities? authorities have with customs What is the extent of the double tax Not applicable. authorities? treaty network? The Saudi tax authority (DZIT) interacts Is there a preference, or Saudi Arabia has expanded its double quite extensively with customs requirement, by the tax authorities tax treaty network in recent past and authorities, and many taxpayers have for local comparables in a around 30 tax treaties are now in effect. benchmarking set? received notices in the past for the gap in their purchases/imports or sales/ All of the Saudi Arabian treaties (except While there are no local comparables exports etc. as reported to/recorded by France) follow the Organisation for in any benchmarking set used by the the two respective authorities. Economic Co-operation and Development/ DZIT in Saudi Arabia, the DZIT has a United Nations model and include the In practice, the DZIT often compares the right to raise an arbitrary assessment ‘Associated Enterprises’ article. However, value of the goods as per the invoice/ in the case of any transaction between the practical application of this provision is contracts, the auditors’ certificate, the related parties or parties under yet to be challenged by the DZIT in Saudi amount declared for customs duty, common control, to allocate income or Arabia. deductions between these parties as the value as reflected in the financial If extensive, is the competent is necessary to reflect the income that statements, etc. authority effective in obtaining would have resulted from a transaction In the case where the cost of ‘Imported double tax relief? between independent persons. Goods’ reflected in the income This is yet to be ascertained in terms of Furthermore, the tax law provides for statement would not match with the the existing tax treaty network in Saudi the DZIT to adjust the tax base of an value of goods declared for customs duty purposes, the DZIT may disallow Arabia.

When may a taxpayer submit an adjustment to competent authority? Not applicable. May a taxpayer go to competent authority before paying tax? Not applicable.

KPMG in Saudi Arabia

Mubeen Khadir Phone: +966 13 887 7241 email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Serbia

KPMG observation

Transfer pricing rules have been present for more than a decade in Serbian corporate income tax (CIT) legislation. However, specific and detailed regulations on the application of these rules were published by the Ministry of Finance only in 2013. Significant efforts have been made to align local rules and practices to established international guidelines. Tax authorities have yet to issue an official approach regarding transfer pricing audits, which are currently conducted sporadically.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Required to be Submission to tax Applicable Not applicable Thresholds apply/exist contemporaneous authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information came into force on 1 January 2013. Possessing at least 25 percent of the The Rulebook was enacted on 20 July voting rights is considered as having an Tax authority name 2013, and was amended on 29 January influence on business decisions. Tax Administration of Serbia. 2014, while the latest Interest Rates These tests are applied to both direct Rulebook came into force on 2 March Citation for transfer pricing rules and indirect ownership. 2015. Our comments relate to the latest Articles 59, 60, 61, 61a and 62 of the amendments and rules in force from Furthermore, companies are deemed CIT Law, Rulebook on Transfer Prices 15 February 2014. to be related if the same persons and Methods Applied for Determining directly or indirectly participate in the What is the relationship threshold Prices in Related Party Transactions management, ownership or control for transfer pricing rules to apply in Accordance With the Arm’s Length of both companies in the manner between parties? Principle (Rulebook) and Rulebook on described above. ‘Arm’s Length’ Interest Rates (Interest An entity is deemed a related party Members of the immediate family of Rates Rulebook). if it has the possibility of control or shareholders who own at least 25 percent considerable influence on the business Effective date of transfer pricing of shares or hold at least 25 percent of decisions made. rules voting rights are also deemed as related Rules have been present since 1 July Ownership of at least 25 percent of the parties (but the companies owned by 2001, while the latest amendments shares in the capital is considered as the those family members are not). possibility of control.

In addition, any company which is transactions with related parties, as well Transfer pricing audit and a resident of a jurisdiction with a as the amount of the tax base adjustment preferential tax system is deemed relating to transfer pricing if any. penalties to be a related party regardless of When the tax authority requests Transfer pricing study must contain the percentage of direct or indirect a taxpayer’s transfer pricing information on the group, industry, ownership or voting rights in a Serbian documentation, are there timing functional and economic analysis, company. requirements for a taxpayer to as well as the assessment of “arm’s submit its documentation? And if A jurisdiction with a preferential tax length” nature of all of the transactions. so, how many days? system exists if the relevant regulations In case a transaction is assessed not to allow for a significant reduction in be at “arm’s length”, the calculation of Yes, 30 days. income and dividend taxation when respective adjustment has to be made. When the tax authority requests compared to Serbian regulations. A What are the consequences of a taxpayer’s transfer pricing territory also qualifies as a jurisdiction failure to submit disclosures? documentation, are there timing with a preferential tax system if its requirements for a taxpayer to regulations do not allow, or impede, Failure to submit transfer pricing study submit its documentation? Please access to information on ownership or or separately disclose the value of explain. other data relevant for resolving taxation related party transactions in accordance issues. with the arm’s length principle carries The documentation needs to be penalty exposure from 100,000 Serbian submitted along with the CIT return. The Ministry of Finance published a list dinar (RSD) to RSD2 million. However, an additional deadline may of jurisdictions with a preferential tax apply for amending the documentation system in 2013, which includes 51 tax Submission of transfer pricing study as well as for providing additional jurisdictions, mainly tax havens. after the deadline carries penalty information. Such additional deadline is exposure of RSD100,000. What is the statute of limitations defined as ‘adequate’ or ‘appropriate’, Transfer pricing study snapshot on assessment of transfer pricing and may vary from 30 to 90 days. adjustments? Transfer pricing study If an adjustment is proposed by The purpose of a transfer pricing study The right of the Tax Administration to overview the tax authority, what dispute resolution options are available? assess a tax liability is limited to five Can documentation be filed in years from the day when the period a language other than the local Adjustments assessed by the tax of limitation commenced. The period language? If yes, which ones? authorities must be applied and then commences as of 1 January of the year No. the taxpayer has an option to appeal to following the year when the tax liability the second instance degree procedure became due. The absolute period of When a transfer pricing study is with the tax authorities, or finally to the limitation is 10 years. prepared, should its content follow Administrative Court. Chapter V of the Organisation There is no special statute of limitations for Economic Co-operation and If an adjustment is sustained, can on assessment of transfer pricing Development (OECD) Guidelines? penalties be assessed? If so, what adjustments. rates are applied and under what Yes, for all transactions. Additional conditions? guidance regarding the content of the Transfer pricing transfer pricing study is provided in the Yes. Penalties may range from disclosure overview Rulebook. RSD100,000 to RSD2 million Are disclosures related to transfer (approximately between 9,000 euros Does the tax authority require an pricing required to be submitted to (EUR) to EUR17,000) for non-disclosure advisor/tax practitioner to have the revenue authority on an annual of transfer prices at arm’s length in the specific designation in order to basis (e.g. with the tax return)? tax balance sheet. In addition, there prepare or submit a transfer pricing is a potential penalty depending on Yes. A taxpayer is obliged to prepare study? the additional tax liability assessed and submit documentation presenting No. by the tax authorities. This penalty related party transactions at both amounts to 30 percent of the assessed transfer and arm’s length prices along Transfer pricing methods additional tax liability but not less than with their annual tax return. The deadline RSD200,000 (approximately EUR1,600). is set to 180 days from the observed Does your country follow the period end. transfer pricing methods outlined in To what extent are transfer pricing Chapter II of the OECD Guidelines? penalties enforced? What types of transfer pricing If exceptions apply, please describe. information must be disclosed? Rarely, although a significant shift is Yes. Please note that interest rates expected in this respect during 2015 and A transfer pricing documentation can also be assessed using an interest 2016. study must be submitted along with rate prescribed as arm’s length by the the tax balance sheet. The tax balance Ministry of Finance. sheet needs to disclose the volume of

What defenses are available with What level of interaction do tax Tax treaty/double tax respect to penalties? authorities have with customs authorities? resolution Preparing documentation should What is the extent of the double tax mitigate the risk of penalties. Other The level of interaction between tax treaty network? defense strategies may include and customs authorities with regards to negotiation and reasonable cause but VAT is high. However, it is not possible Minimal. such strategies are less likely to have to estimate the level of interaction If extensive, is the competent the desired positive effects. between these authorities regarding authority effective in obtaining transfer pricing. What trends are being observed double tax relief? currently? Are there limitations on No experience. deductibility of management fees Outcomes from audits are revealing that beyond the arm’s length principle? When may a taxpayer submit an the tax authorities prefer the comparable adjustment to competent authority? uncontrolled price (CUP) method, but Yes, some. Please note that non- apply that method in a very simplified way. documented costs are non-deductible The formal procedure for obtaining a as are costs that are not incurred for corresponding adjustment is regulated There are also strong indications that business purposes. by double tax treaties mutual agreement the tax authorities will place a firm focus procedure (MAP). CIT Law generally allows on transfer pricing during tax audits in Are management fees subject to corresponding adjustments only when it is the following period. withholding? available through a mechanism provided in No. a double tax treaty signed by Serbia. Special considerations Are there limitations on the May a taxpayer go to competent Are secret comparables used by tax deductibility of royalties beyond the authority before paying tax? authorities? arm’s length principle? No formal rules exist in this area. No. No. Is there a preference, or Are royalties subject to Advance pricing requirement, by the tax authorities withholding? agreements for local comparables in a What APA options are available, if benchmarking set? Yes. any? Yes, the Rulebook states that the Are taxpayers allowed to file tax None. search for comparables must start return numbers that differ from with local companies and only if book numbers? Is there a filing fee for APAs? insufficient companies are found, No. Adjustments, aimed at aligning Not applicable. the search for comparables can be transactions with the arm’s length broadened to other jurisdictions. The value and mitigating the risk of tax base Does the tax authority publish APA consequence of not starting the search increase, are not permitted in Serbian data either in the form of an annual with local comparables can be that the regulations. However, adjustments can report or through the disclosure of comparable sample may be viewed as be executed for specific transactions data in public forums? inadequate allowing the Tax Authorities by issuing credit/debit notes relating to Not applicable. to assess the arm’s length nature of specific invoices. transactions by themselves. Are there any difficulties or Other unique attributes? limitations on the availability or Do tax authorities have effectiveness of APAs? requirements or preferences Local authorities publish annual arm’s regarding databases for length interest rates which can be Not applicable. comparables? used to assess intercompany loans. The rates are set depending on the No. term and currency of the loan, and are Does the tax authority generally different for financial institutions and focus on the interquartile range in a businesses. Taxpayers can opt to use TNMM analysis? another transfer pricing method to set an interest rate but this implies an ‘all or Yes, always. nothing’ approach i.e. all intercompany KPMG in Serbia Does the tax authority have other loans can either be assessed by using preferences in benchmarking? If so, the published interest rates or by using Igor Loncarevic please describe. transfer pricing methods. Tel: +381112050570 Email: [email protected] Not applicable.

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Singapore

KPMG observation

With the addition of Section 34D (Transactions not at arm’s length) to the Singapore Income Tax Act (the Act) in 2010, the Inland Revenue Authority of Singapore (IRAS) has become more focused on enforcing transfer pricing compliance in Singapore. In January 2015, the IRAS released significantly expanded transfer pricing requirements. The IRAS’ objective is for the new requirements to foster greater transfer pricing compliance, and alignment with broader international transfer pricing developments such as the Base Erosion and Profit Shifting (BEPS) initiative. Most notably, there is now a requirement for taxpayers to prepare adequate and contemporaneous transfer pricing documentation by their tax filing due date. To provide legislative weight to the publication, the IRAS makes explicit references to certain sections of the Act – including the aforementioned Section 34D and Section 94(2) (General penalty). The IRAS continues to use computer analytics to select transfer pricing audit targets, and continues to send out transfer pricing questionnaires to taxpayers to assess their transfer pricing compliance levels. These questionnaires are usually seven to eight pages in length, with detailed questions on transfer pricing arrangements and availability of supporting documentation. Depending on the response received, the case may progress through a transfer pricing consultation process that includes further rounds of questioning and field audits.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Tax Act (Transactions not at arm’s Singapore Income Tax Act (Transactions length) (2010). not at arm’s length) in 2010. Tax authority name Effective date of transfer pricing What is the relationship threshold Inland Revenue Authority of Singapore rules for transfer pricing rules to apply (IRAS). between parties? Transfer pricing guidelines were Citation for transfer pricing rules first issued in 2006, and this was Under direct/indirect common control or IRAS e-Tax Guide: Transfer Pricing subsequently updated and expanded significant influence. Guidelines (Second Edition) (2015), and in 2015. Explicit legislative reference Section 34D of the Singapore Income was included in Section 34D of the

What is the statute of limitations Transfer pricing audit and considerable number of these cases on assessment of transfer pricing have progressed to full transfer pricing adjustments? penalties audits. Increasingly, non-transfer pricing When the tax authority requests specialists within the IRAS are raising From FY 2007, five years from the fiscal a taxpayer’s transfer pricing queries and reassessments on related year in which the transaction occurred. documentation, are there timing party transactions in the course of their requirements for a taxpayer to review of taxpayers’ annual corporate Transfer pricing submit its documentation? And if tax computations. disclosure overview so, how many days? Are disclosures related to transfer Yes, 30 days. Special considerations pricing required to be submitted to When the tax authority requests Are secret comparables used by tax the revenue authority on an annual a taxpayer’s transfer pricing authorities? basis (e.g. with the tax return)? documentation, are there timing No. IRAS is of the view that use of No. Not directly. However, the audited requirements for a taxpayer to secret comparables is not conducive financial statements of the taxpayer submit its documentation? Please to transparency and that it can hamper have to be submitted and material explain. competent authority procedures. related party transactions must be IRAS is empowered to invoke the Is there a preference, or disclosed in the notes to the financial relevant sections of the Singapore statements. requirement, by the tax authorities Income Tax Act to request for local comparables in a What types of transfer pricing documentation be submitted within benchmarking set? information must be disclosed? 30 days from the date of request. The taxpayer may ask for an extension to IRAS indicates that taxpayers should Not applicable. submit documentation. However, this use local comparables due to a higher What are the consequences of may lower the taxpayer’s compliance degree of comparability in terms of their failure to submit disclosures? rating and increase the risk of a full market and economic circumstances. transfer pricing audit. Not applicable. Do tax authorities have If an adjustment is proposed by requirements or preferences the tax authority, what dispute regarding databases for Transfer pricing study resolution options are available? comparables? overview Domestically through the objections and No. Can documentation be filed in appeals process, or through MAP/APA a language other than the local Does the tax authority generally processes. language? If yes, which ones? focus on the interquartile range in a If an adjustment is sustained, can TNMM analysis? No, English. penalties be assessed? If so, what Yes, always. When a transfer pricing study is rates are applied and under what prepared, should its content follow conditions? Does the tax authority have other Chapter V of the Organisation preferences in benchmarking? If so, Yes. Up to 400 percent of tax evaded for Economic Co-operation and please describe. and even incarceration. However, most Development (OECD) Guidelines? penalties are in the 100 percent to IRAS is of the view that loss-generating No. It should follow the Singapore 200 percent range of tax under-declared. comparables (i.e. weighted average transfer pricing guidelines, which There are also penalties for failure to loss for the tested period, or losses provide guidance on the content produce documentation in a timely incurred for more than half of the tested expected, in order for the transfer manner. period) should be excluded. Use of pricing study to be considered adequate. multiple-year data for establishing a To what extent are transfer pricing comparable set is preferred. Does the tax authority require an penalties enforced? advisor/tax practitioner to have What level of interaction do tax Increasingly so. specific designation in order to authorities have with customs prepare or submit a transfer pricing What defenses are available with authorities? study? respect to penalties? Low interaction as very few items attract No. Transfer pricing documentation custom duties in Singapore. represents the first line of defense Are there limitations on Transfer pricing methods against transfer pricing audits and is deductibility of management fees crucial for mitigating transfer pricing risk. Does your country follow the beyond the arm’s length principle? transfer pricing methods outlined in What trends are being observed Yes. Management fees are generally Chapter II of the OECD Guidelines? currently? tax deductible in Singapore if they are If exceptions apply, please describe. IRAS continues to issue transfer pricing charged to the Singapore entity on an Yes. questionnaires to companies and a arm’s length basis and are incurred

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Singapore | 239 wholly and exclusively in the production When may a taxpayer submit an of the taxpayer’s income, and not adjustment to competent authority? prohibited under any provisions of the Within the time limit specified in the Singapore Income Tax Act. MAP Article of the relevant double tax Are management fees subject to treaty. Taxpayers are advised to contact withholding? the IRAS early and not to settle their cases with the overseas tax authority Yes. before submitting an adjustment to the Are there limitations on the competent authority. deductibility of royalties beyond the May a taxpayer go to competent arm’s length principle? authority before paying tax? Yes. Royalties are generally tax No. Any late payment will be subject to deductible in Singapore if they are late penalties. charged to the Singapore entity on an arm’s length basis and are incurred wholly and exclusively in the production Advance pricing of the taxpayer’s income, and not agreements prohibited under any provisions of the What APA options are available, if Singapore Income Tax Act. any? It should be noted that Singapore has Unilateral, bilateral, multilateral. various special incentives with respect to companies investing in productivity Is there a filing fee for APAs? and innovation, and intellectual property. Yes. A filing fee is only applicable for Are royalties subject to unilateral APAs where the related party withholding? transactions involve a jurisdiction with which Singapore does not have a tax Yes. treaty. There is no filing fee for bilateral Are taxpayers allowed to file tax or multilateral APAs as the Singapore return numbers that differ from tax authorities view this as part of their book numbers? treaty obligations. Yes. It is possible to deem additional Does the tax authority publish APA taxable income in the taxpayer’s tax data either in the form of an annual return which will then be subject to tax. report or through the disclosure of data in public forums? Other unique attributes? Yes. Exemption from documentation (but not from the arm’s length principle) is Are there any difficulties or possible for transactions whose value limitations on the availability or falls below certain low thresholds. effectiveness of APAs? No. In 2013/2014, IRAS completed Tax treaty/double tax 11 unilateral and bilateral APAs. As at resolution 31 March 2014 IRAS has 33 ongoing unilateral, bilateral and multilateral What is the extent of the double tax APAs. IRAS is particularly encouraging treaty network? to taxpayers to submit bilateral APA Extensive. There are more than applications. 70 comprehensive tax treaties in place. If extensive, is the competent authority effective in obtaining double tax relief? Almost always. As at 31 March 2014, KPMG in Singapore IRAS has 17 MAPs at different stages of completion. Geoffrey Soh Tel: +65 6213 3035 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Slovakia

KPMG observation

Beginning with the introduction of mandatory transfer pricing documentation (for taxable periods starting from 2009), transfer pricing has become one of the top priorities for the Slovak tax authorities. The tax authorities have started to initiate transfer pricing audits and inspect transfer pricing arrangements in more detail than ever before. The tax authorities have built specialized transfer pricing teams and it is expected that the number of transfer pricing audits is going to increase.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Submission to tax authority required Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information legislation in the 1990s. An important 10 years. Ten years always applies if amendment detailing the obligation to international tax treaties are involved. Tax authority name maintain transfer pricing documentation Dañový úrad (tax authorities). became effective on 1 January 2009. Transfer pricing Citation for transfer pricing rules What is the relationship threshold disclosure overview for transfer pricing rules to apply Article 2 Letter n through r, Article 17 Are disclosures related to transfer between parties? (5) through (7), and Article 18 of the Act pricing required to be submitted to No. 595/2003 Coll. on the Income Tax as More than 25 percent direct or indirect the revenue authority on an annual amended. share of voting rights or registered basis (e.g. with the tax return)? capital, or personal relation (statutory Guidelines of the Ministry of Finance of Yes. Corporate taxpayers are required to bodies) or business relation solely for the Slovak Republic No. MF/8288/2009- disclose volumes of transactions with the purpose of decreasing tax base/ 72 and MF/8120/2014-721 on details related parties in their annual tax return. regarding the content for keeping increasing tax loss. What types of transfer pricing documentation for the transfer pricing What is the statute of limitations information must be disclosed? method applied by a taxpayer according to on assessment of transfer pricing the Article 18 (1) of the Act No. 595/2003 adjustments? Terms of the following transactions Coll. on the Income Tax as amended. concluded with foreign related parties Five years from the calendar year-end have to be reported in the annual tax Effective date of transfer pricing rules of the filing date. Seven years if the return of a corporate entity (all values taxpayer carries forward tax losses General transfer pricing rules have been stated in euros (EUR)): applicable since the introduction of according to income tax legislation • interest resulting from provision of the first post-communist income tax effective from 1 January 2010. Maximum statute of limitations is loans or credits

• granting license rights Transfer pricing audit and What defenses are available with • provision of services penalties respect to penalties? • transfer of tangible, intangible and When the tax authority requests Penalties can be reduced only in financial assets; and a taxpayer’s transfer pricing extraordinary circumstances stipulated by the tax law. • transfer of inventory. documentation, are there timing requirements for a taxpayer to In the case of penalties arising However, disclosure of details regarding submit its documentation? And if from additional tax assessments individual transactions is not required in so, how many days? resulting from a tax audit, ordinary the annual tax return. Yes, 15 days. and extraordinary legal remedies are What are the consequences of available for the taxpayer, including failure to submit disclosures? When the tax authority requests appeal, review beyond appellate a taxpayer’s transfer pricing proceedings, and renewal of If the tax return is not complete, the tax documentation, are there timing proceedings. An action may be filed by authorities may ask for the completion requirements for a taxpayer to the taxpayer with the court against the of the respective information in the tax submit its documentation? Please decision on tax assessment (confirmed return after the tax return was filed. explain. by the appellate tax authorities) against According to Article 18 (6) of the which no ordinary legal remedy is Transfer pricing study Slovak Income Tax Act, transfer pricing allowed. overview documentation must be made available What trends are being observed Can documentation be filed in to the tax authorities within 15 days of currently? a language other than the local request. The tax authorities are more frequently language? If yes, which ones? Transfer pricing study snapshot If an adjustment is proposed by focusing on transfer pricing audits of all Yes. Subject to agreement with tax the tax authority, what dispute types of businesses, and exit taxation The purpose of a transfer pricing study authorities. resolution options are available? issues are starting to be discussed in Slovakia. Applicable Submission to tax authority required Thresholds apply/exist When a transfer pricing study is Most tax treaties which Slovakia has prepared, should its content follow with other OECD countries contain The tax authorities are more and more Legal requirements Chapter V of the Organisation mutual agreement procedures (MAPs) familiar with transfer pricing issues and Protection from penalties for Economic Co-operation and if the adjustment assessed by the tax the inspections are more efficient and Reduce risk of adjustment Development (OECD) Guidelines? authorities results, or is likely to result, sophisticated (e.g. tax authorities are in double taxation. preparing their own benchmark studies). Shifts burden of proof No. The content of the full scope transfer pricing documentation prepared by IFRS Furthermore, the EU Arbitration Tax inspections could be carried out reporters should correspond with the Convention provides mechanisms on by specialized teams with trained and requirements of the European Union how disputes between the authorities skilled people, who can help the tax (EU) Code of Conduct on Transfer Pricing of the involved countries should be authorities in any region. Taxpayers are Documentation, i.e. it must include a resolved. advised to prepare extended transfer master file for the group of related parties The respective proceedings are pricing documentation (not just content and country specific documentation for rather lengthy and administratively specified for simplified documentation) the taxpayer. However, requirements of cumbersome procedures with results as tax authorities may additionally EU Code of Conduct on Transfer Pricing being difficult to anticipate. require supporting information/ Documentation are similar to those documents upon a potential inspection. outlined in OECD Guidelines. If an adjustment is sustained, can penalties be assessed? If so, what If certain conditions are met, the rates are applied and under what Special considerations taxpayer may provide reduced-scope conditions? Are secret comparables used by tax documentation. authorities? If a tax difference detrimental to the Does the tax authority require an State budget is assessed as a result of Under certain circumstances the tax advisor/tax practitioner to have non-compliance with the arm’s length authorities are allowed to determine specific designation in order to principle, a penalty in the amount of tax according to aids at their disposal or prepare or submit a transfer pricing three times the base interest rate of procured without cooperation with the study? the European Central Bank will be taxpayer. This may potentially involve No. assessed. However, not less than 10 comparables derived from the files of percent from the misstated tax would other taxpayers which are not publicly be levied. available. However, based on other Transfer pricing methods law provisions, the tax authorities are To what extent are transfer pricing Does your country follow the required to clearly demonstrate what penalties enforced? transfer pricing methods outlined in aids have been used to assess the Chapter II of the OECD Guidelines? Always, if a misstatement of tax is specific tax difference. If exceptions apply, please describe. identified. Yes.

Is there a preference, or address a term year-end adjustment. Does the tax authority publish APA requirement, by the tax authorities In practice, year-end transfer pricing data either in the form of an annual for local comparables in a adjustments (reflected in the same report or through the disclosure of benchmarking set? taxable period as related transactions) data in public forums? in both directions are utilized. In No. No. general, it is expected that a year-end Do tax authorities have adjustment is described/anticipated Are there any difficulties or requirements or preferences in relevant agreements covering limitations on the availability or regarding databases for intragroup transactions and specific effectiveness of APAs? comparables? formulae/ calculations are in place. Not applicable. Currently, APA’s are not The tax authorities in Slovakia use the Other unique attributes? commonly requested in Slovakia. Amadeus database. Not applicable. Does the tax authority generally focus on the interquartile range in a Tax treaty/double tax TNMM analysis? resolution Yes, sometimes. What is the extent of the double tax Does the tax authority have other treaty network? preferences in benchmarking? If so, Extensive. The current double tax treaty please describe. network includes 65 tax treaties. New Not applicable. tax treaties are being negotiated. What level of interaction do tax If extensive, is the competent authorities have with customs authority effective in obtaining authorities? double tax relief? Regarding corporate income tax, Almost always. the interaction of the tax authorities When may a taxpayer submit an with the customs authorities is low. adjustment to competent authority? However, the responsibilities of both authorities can lead to a higher level of No formal rules exist in this area. interaction in the area of VAT. However, at the latest within four to 10 years after the respective taxable Are there limitations on period. deductibility of management fees beyond the arm’s length principle? May a taxpayer go to competent authority before paying tax? No. Yes. Are management fees subject to withholding? Advance pricing Yes. agreements Are there limitations on the KPMG in Slovakia What APA options are available, if deductibility of royalties beyond the any? arm’s length principle? Tomáš Ciran Unilateral, bilateral, multilateral. Tel: +421 2 599 84 111 No. Email: [email protected] Is there a filing fee for APAs? Are royalties subject to withholding? Yes. As of 1 September 2014, an Branislav Durajka administrative fee applies for filing the Tel: +421 2 599 84 303 Yes. APA request. The amount of the fee is Email: [email protected] Are taxpayers allowed to file tax different for unilateral (one percent of return numbers that differ from the value of the transaction, minimum Zuzana Blažejová book numbers? EUR4,000 and maximum EUR30,000) Tel: +421 2 599 84 331 and bilateral/multilateral APAs (two Email: [email protected] Yes, although the Slovak transfer percent of the value of the transaction, pricing legislation does not specifically minimum EUR5,000 and maximum Martin Zima Tel: +421 2 599 84 348 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Slovenia

KPMG observation

There have been an increasing number of transfer pricing audits in Slovenia, especially of transactions with foreign related parties. Notably, in the transfer pricing audits, the tax authorities are paying special attention to cross-border business restructurings. Other important topics of the transfer pricing audits in Slovenia are the following: multiple year tax losses, thin capitalization, transfer of intangible property and intercompany services. In order to minimize the tax risks arising from transfer pricing, taxpayers are advised to have up to date transfer pricing documentation demonstrating that all transactions, including cross-border business restructurings, were carried out at arm’s length.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Submission to tax authority required Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information companies can also be considered the tax should have been announced, related parties if one company is calculated, withheld or assessed. Tax authority name controlled due to some agreement The period of limitation on the right to Ministrstvo za finance, Financna uprava concluded between these companies assess tax shall be interrupted by any Republike Slovenije. or in case transactions between two official act by the tax authorities for the Citation for transfer pricing rules companies differ from conditions purpose of assessing tax, and in respect that would be agreed between of which the taxable person has been Corporate Income Tax (CIT) Act, Tax unrelated parties in same or similar informed. The tax liability absolutely Procedure Act, Rules on transfer prices circumstances (i.e., based on economic ceases after 10 years from when the and, Rules with the respect to recognized or some other control). period of limitation first started. interest rate among related parties. What is the statute of limitations Effective date of transfer pricing rules on assessment of transfer pricing Transfer pricing 1 January 2007. adjustments? disclosure overview What is the relationship threshold Transfer pricing adjustments (if any) Are disclosures related to transfer for transfer pricing rules to apply are assessed in the CIT return. pricing required to be submitted to between parties? CIT returns are based on taxpayers’ the revenue authority on an annual self-assessment. The right to assess tax basis (e.g. with the tax return)? Direct or indirect ownership of greater shall fall under the statute of limitation, Yes. Some information related to than 25 percent. However, two being five years from the day when transactions with related parties must

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 244 | Global Transfer Pricing Review be submitted to the tax authorities on When a transfer pricing study is conclusion or translation depending on an annual basis together with the CIT prepared, should its content follow the extent and the complexity of the return. Chapter V of the Organisation data. for Economic Co-operation and What types of transfer pricing If an adjustment is proposed by Development (OECD) Guidelines? information must be disclosed? the tax authority, what dispute Yes, in general. However, transfer pricing resolution options are available? In the enclosures to the CIT returns documentation shall comprise of master the following information must be Internal: appeal to Ministry of Finance file and country specific file according disclosed: and appeal to Administrative Court. to the Domestic Tax Procedure Act, • cumulative yearly amounts of which generally follows Code of conduct International: Corresponding receivables and liabilities (exceeding on transfer pricing documentation for Adjustment and/or MAP according to 50,000 euros (EUR)) realized with associated enterprises in the European the EU Arbitration Convention and MAP each related party, the type of Union (EU TPD). according to the bilateral Tax Treaties. connection with each related party, Does the tax authority require an If an adjustment is sustained, can tax numbers of related parties; and advisor/tax practitioner to have penalties be assessed? If so, what • the total amount of loans exceeding specific designation in order to rates are applied and under what EUR50,000 granted to or received prepare or submit a transfer pricing conditions? from each related party on a yearly study? Yes. In case the tax base is lower basis. In addition, the enclosures shall than it should have been, penalties disclose names of related parties, No. for understated tax liabilities range with whom the Slovenian entity had between 30-45 percent (depending if transactions, the type of connection Transfer pricing methods micro/small or medium/large company) between related parties (e.g. parent Does your country follow the of understated tax liability, but not company, sister company, etc.), transfer pricing methods outlined in more than EUR150,000 (for micro/ tax numbers of related parties and Chapter II of the OECD Guidelines? small companies) or EUR300,000 (for information relating to whether the If exceptions apply, please describe. medium/large companies) and from company has made any adjustments EUR700 to EUR5,000 (also depending if of the tax base due to transfer pricing. Yes. Local Corporate Income Tax Act only defines five OECD recognized micro/small or medium/large company) The adjustment of the tax base due transfer pricing methods and does for the company’s responsible person. to transfer prices is needed if the not allow “other methods”, which are However, in practice the tax authority transactions between related parties allowed to be applied in accordance does not apply penalties for the transfer do not correspond to the arm’s length with OECD transfer pricing guidance at pricing adjustment, if the taxpayer principle. However, the adjustment paragraph 2.9. submits relevant transfer pricing between two related resident documentation and if it fully cooperates companies is not required, unless with the tax authority throughout the one of the companies involved in the Transfer pricing audit and duration of the tax audit. transaction has an accumulated tax loss penalties To what extent are transfer pricing from previous years, is exempt from CIT When the tax authority requests penalties enforced? or is entitled to use a lower CIT rate. a taxpayer’s transfer pricing Strictly, if transfer pricing documentation What are the consequences of documentation, are there timing is not prepared appropriately and/or is failure to submit disclosures? requirements for a taxpayer to submit its documentation? And if not submitted to the tax authority. Tax penalties may apply in the range so, how many days? What defenses are available with between EUR1,200 and EUR30,000 respect to penalties? (depending on the size of the company) Yes, 30 days. for the company and between EUR600 When the tax authority requests Prepared transfer pricing documentation and EUR4,000 for the responsible a taxpayer’s transfer pricing containing all the data required by the person of the company. documentation, are there timing Slovenian Tax Procedure Act. requirements for a taxpayer to What trends are being observed submit its documentation? Please currently? explain. Transfer pricing study There is special transfer pricing The tax authority may request transfer department at the Slovenian tax overview pricing documentation in the case of a Can documentation be filed in administration, which consists of tax audit. The taxpayer has to submit it 15 to 20 transfer pricing tax auditors a language other than the local immediately, but if the transfer pricing language? If yes, which ones? (internationally trained). They are mainly documentation is not completed yet focused on cross-border transactions in No. However, in practice, tax authorities (e.g. is not available in local language tax audits if the taxpayer has been in a often accept master file in English or is not at disposal in Slovenia), the loss position for several years. language. tax authority grants 30-90 days for the

Recently, they have been conducting What level of interaction do tax May a taxpayer go to competent many tax audits in entities that were authorities have with customs authority before paying tax? involved in business restructurings and authorities? Yes. However, this does not preserve in companies in the financial sector, High. a company of liability to pay tax when with excessive debts (thin capitalization assessment decision is issued by the issues). Are there limitations on tax authority. deductibility of management fees Tax auditors also conduct detailed beyond the arm’s length principle? checks and reviews on benchmark Advance pricing analyses prepared by the taxpayers and/ No. or their advisors. They use full Orbis agreements Are management fees subject to database and ktMine integrated. What APA options are available, if withholding? any? No. Special considerations None. Are there limitations on the Are secret comparables used by tax Is there a filing fee for APAs? authorities? deductibility of royalties beyond the arm’s length principle? Not applicable so far. However, Based on the information provided by according to information available, No. the tax authority, secret comparables Ministry of Finance is preparing new are used by the tax authorities only for Are royalties subject to regulation on APAs. the indicative nature and not to compute withholding? adjustments. Does the tax authority publish APA Yes. data either in the form of an annual Is there a preference, or report or through the disclosure of Are taxpayers allowed to file tax requirement, by the tax authorities data in public forums? for local comparables in a return numbers that differ from benchmarking set? book numbers? Not applicable. Yes. Local comparables are preferable if Yes. In general, yes. Year-end Are there any difficulties or they exist. adjustments are permitted in the CIT limitations on the availability or return (artificial increase of the tax base effectiveness of APAs? Do tax authorities have requirements due to transfer prices), however in case Not applicable. or preferences regarding databases of a tax audit such kind of adjustments for comparables? are usually subject to special attention. The tax authority uses Amadeus, Other unique attributes? Orbis and ktMine databases (they are preferable), but also other databases are None. acceptable under the certain conditions. Does the tax authority generally Tax treaty/double tax focus on the interquartile range in a resolution TNMM analysis? What is the extent of the double tax Yes, sometimes. treaty network? Does the tax authority have other There are 54 treaties currently in force. preferences in benchmarking? If so, If extensive, is the competent please describe. authority effective in obtaining Yes. Depending on the nature of the case double tax relief? and availability of comparables. Normally Slovenia competent authority has benchmark together with TNMM is limited experience in mutual agreement acceptable for the routine business procedures (MAP), especially they activities without owning important are not initiated if transfer pricing intangibles. In addition, loss-making adjustment is made in Slovenia. companies are not allowed to be in the final selection, sample for the manual When may a taxpayer submit an selection must not exceed 100 potential adjustment to competent authority? KPMG in Slovenia comparables, strict independence criteria When tax authority announce that must be used, region EU28 is preferable, transfer pricing adjustment will be Marko Mehle textual search is normally allowed only for made. Tel: +386 1 236 43 22 the exclusion of potential comparables, Email: [email protected] use of multiple year financial data is normally required. As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

South Africa

KPMG observation

Transfer pricing in South Africa, and Africa as a whole, has taken on immense importance and is currently in the spotlight. The South African Revenue Authority is training its transfer pricing department to be able to cast its net wider as far as audits are concerned. Transfer pricing has recently been a topic of much media coverage in South Africa, with increasing calls from politicians and the judiciary for transfer pricing to be prioritized by the South African Revenue Service (SARS). KPMG anticipates that the SARS will continue to support the Base Erosion and Profit Shifting (BEPS) Action Plan.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the statute of limitations The income tax return does however request disclosure of transactions. Tax authority name on assessment of transfer pricing adjustments? What types of transfer pricing South African Revenue Service (SARS). Three years from the date of information must be disclosed? Citation for transfer pricing rules assessments unless there has been The following information must be fraud, misrepresentation and/or a Section 31 of the Income Tax Act and disclosed: Practice Note 7. material nondisclosure by the taxpayer. • disclosure of related party Effective date of transfer pricing transactions rules Transfer pricing disclosure overview • disclosure as to whether the 1995. company has transfer pricing Are disclosures related to transfer documentation What is the relationship threshold pricing required to be submitted to for transfer pricing rules to apply the revenue authority on an annual • disclosure of financial assistance to/ between parties? basis (e.g. with the tax return)? from an offshore-related party • disclosure of any Advance Pricing Ownership of greater than 20 percent Yes. Transfer pricing documentation, Agreements (APAs) in a foreign of the share capital or under common together with justification for the pricing jurisdiction. management or control. of transactions, should be prepared and available to SARS on request.

What are the consequences of When the tax authority requests Is there a preference, or failure to submit disclosures? a taxpayer’s transfer pricing requirement, by the tax authorities documentation, are there timing for local comparables in a The annual income tax return requires requirements for a taxpayer to benchmarking set? disclosure relating to transactions submit its documentation? Please with related parties. Failure to provide No. explain. accurate responses would lead to the Do tax authorities have prescription period not applying to the Generally, the response period is requirements or preferences return, which would mean SARS could 30 days. Extensions of the time period regarding databases for challenge the transfer pricing at any can be requested and are generally comparables? time and would not be limited to the approved. prescription period of three years after No, but it is common practice to use If an adjustment is proposed by assessment. Bureau van Dijk Orbis database. the tax authority, what dispute resolution options are available? Does the tax authority generally Transfer pricing study focus on the interquartile range in a The taxpayer may approach SARS and TNMM analysis? overview follow alternative dispute resolution Can documentation be filed in (ADR) procedures. This procedure is Yes, sometimes. a language other than the local between the taxpayer and SARS. MAP Does the tax authority have other language? If yes, which ones? procedures could also be followed. preferences in benchmarking? If so, No. Documentation can be submitted If an adjustment is sustained, can please describe. in any of South Africa’s 11 official penalties be assessed? If so, what Comparable Uncontrolled Prices (CUPs) languages. However, on a practical level, rates are applied and under what are preferred if available but generally all English is preferable. conditions? OECD methods are accepted. When a transfer pricing study is Yes. Up to 200 percent of the adjusted What level of interaction do tax prepared, should its content follow tax amount. authorities have with customs Chapter V of the Organisation To what extent are transfer pricing authorities? for Economic Co-operation and penalties enforced? Development (OECD) Guidelines? High. Depends largely on the intention of the Yes, for all transactions. Are there limitations on taxpayer. deductibility of management fees Does the tax authority require an What defenses are available with beyond the arm’s length principle? advisor/tax practitioner to have respect to penalties? specific designation in order to No. General deduction principles and prepare or submit a transfer pricing The maintenance of contemporaneous Exchange Control requirements may in study? documentation evidencing the certain circumstances limit this. taxpayer’s intention and that No. Are management fees subject to consideration has been given to the withholding? transfer prices can be used as a defense Transfer pricing methods against penalties. No. Does your country follow the What trends are being observed Are there limitations on the transfer pricing methods outlined in currently? deductibility of royalties beyond the Chapter II of the OECD Guidelines? arm’s length principle? If exceptions apply, please describe. Extensive audits by SARS across all industries. SARS is focusing on No. General deduction principles and Yes. distribution entities, particularly where Exchange Control requirements may in these have been classified as low-risk certain circumstances limit this. Transfer pricing audit and distributors. Companies that have Are royalties subject to penalties effected true-up payments at year-end withholding? are also being looked at. When the tax authority requests Yes. a taxpayer’s transfer pricing documentation, are there timing Special considerations Are taxpayers allowed to file tax requirements for a taxpayer to Are secret comparables used by tax return numbers that differ from submit its documentation? And if authorities? book numbers? so, how many days? Not to our knowledge. Yes, but these need to be supported Yes, 30 days. by the transfer pricing policy and methodology applied and may lead to queries from SARS.

Other unique attributes? Advance pricing SARS works closely with the South agreements African Reserve Bank to monitor the What APA options are available, if inflow and outflow of money from and any? to South Africa. None. Tax treaty/double tax Is there a filing fee for APAs? resolution Not applicable. What is the extent of the double tax Does the tax authority publish APA treaty network? data either in the form of an annual Extensive. report or through the disclosure of data in public forums? If extensive, is the competent authority effective in obtaining Not applicable. double tax relief? Are there any difficulties or No experience. limitations on the availability or effectiveness of APAs? When may a taxpayer submit an adjustment to competent authority? Not applicable. No formal rules exist in this area. May a taxpayer go to competent authority before paying tax? No formal rules exist in this area.

KPMG in South Africa

Natasha Vaidanis Tel: +27 11 647 5712 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

South Korea

KPMG observation

The Korean Transfer Pricing Regulations, namely, the Law for the Co-ordination of International Tax Affairs (LCITA) and the Presidential Enforcement Decree (PED) of the LCITA (PED of LCITA), were extensively amended in 2010 to reflect changes made to the Organisation for Economic Co-operation and Development (OECD) Guidelines at the same time. They were also modified in other ways with the intention of increasing transparency and broadening the scope for interpreting and applying the LCITA. In recent years, offshore tax evasion and profit shifting have made the headlines in Korea, and the Korean government has repeatedly announced its intention to fight such tax behaviors. In 2015, the Korean government announced that they are reviewing the Base Erosion and Profit Shifting (BEPS) Action Plan recommendations and intend to incorporate the recommendations into the LCITA in 2016. Lastly, to promote proactive transfer pricing risk management, the Korean government introduced in 2015 two new advanced management tools: • a new “Simplified APA” for non-resident taxpayers with gross revenues less than 50 billion South Korean won (KRW); and • a mechanism for combined filing and review of unilateral Advance Pricing Agreements (APA and advanced customs valuation arrangements • both new tools have been introduced to provide taxpayers with more clarity and simplified processes.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules Effective date of transfer pricing rules Tax authority name The Law for the Coordination of International Tax Affairs (LCITA) and 1 January 1996. National Tax Service (NTS). Presidential Enforcement Decree of the LCITA (PED of LCITA).

What is the relationship threshold – (ii) the volume of annual cross- When the tax authority requests for transfer pricing rules to apply border tangible intra-group a taxpayer’s transfer pricing between parties? transactions to each foreign affiliate documentation, are there timing is greater than KRW1 billion or requirements for a taxpayer to Ownership of greater than 50 percent, the volume of annual intra-group submit its documentation? Please based on voting power, is under service transactions to each foreign explain. common control, and under de facto affiliate is greater than KRW200 control in substance. In general, the NTS expects the million. taxpayer to submit transfer pricing What is the statute of limitations What are the consequences of documentation immediately in the on assessment of transfer pricing failure to submit disclosures? case of a tax audit due to the specified adjustments? The failure to provide the requested number of days set for each tax audit. The general statute of limitations for information on the prescribed form may Failure to do so may lead to suspension transfer pricing adjustments is five years result in penalties up to KRW100 million. or extension of audit. Generally, the from the date the annual tax return filing responses should be made within 60 due date (within three months of the last days to avoid non-compliance penalties. day of the fiscal year). However, in the Transfer pricing study If an adjustment is proposed by case where a company utilizes its net overview the tax authority, what dispute operating losses (NOL) incurred after 1 Can documentation be filed in resolution options are available? January 2009 to offset taxable income, a a language other than the local different statute of limitations may apply. language? If yes, which ones? There are three levels of appeals in If the NOL is used within five years, the South Korea. statute of limitations is still five years. If No. The document should be filed in 1. Review by the NTS the NOL is used for a period of up to 10 Korean. English is acceptable only with years, then the statute of limitations is one the tax authorities’ approval. 2. Appeal to Tax Tribunal or Board of year greater than the number of years of When a transfer pricing study is Audit and Inspection (but taxpayers taxable income offset by the NOL. prepared, should its content follow may elect to by-pass this step and Chapter V of the Organisation appeal in Court) Transfer pricing for Economic Co-operation and 3. Appeal in the Courts disclosure overview Development (OECD) Guidelines? 4. Initiate MAP Are disclosures related to transfer Yes, for all transactions. If an adjustment is sustained, can pricing required to be submitted to Does the tax authority require an penalties be assessed? If so, what the revenue authority on an annual advisor/tax practitioner to have rates are applied and under what basis (e.g. with the tax return)? specific designation in order to conditions? Yes. The transfer pricing details are to prepare or submit a transfer pricing Yes. Generally speaking, a 10 percent be submitted on a prescribed foreign study? under-reporting penalty and 10.95 reporting form with the annual tax No. percent interest on the income tax return. assessment will be levied as penalties What types of transfer pricing Transfer pricing methods for the transfer pricing income information must be disclosed? adjustment. In case of gross negligence Does your country follow the additional penalties could apply. A taxpayer is required to submit with the transfer pricing methods outlined in annual tax return: Chapter II of the OECD Guidelines? To what extent are transfer pricing If exceptions apply, please describe. penalties enforced? • a detailed statement of the cross- border intra-group transactions Yes. If a transfer pricing income adjustment is sustained, transfer pricing penalties • summarized income statements of are likely to be enforced. the foreign affiliates Transfer pricing audit and What defenses are available with • the transfer pricing method selected penalties respect to penalties? and description of the reasons for the When the tax authority requests selection, if: a taxpayer’s transfer pricing LCITA provides a relief from under- reporting penalties where a taxpayer – (i) the total accumulated volume of documentation, are there timing has exercised due care as demonstrated annual cross-border tangible intra- requirements for a taxpayer to either by contemporaneous group transactions of the taxpayer submit its documentation? And if documentation or through mutual is greater than KRW5 billion or the so, how many days? agreement procedure (MAP). total volume of annual cross-border Yes, 60 days. intra-group service transactions of In addition, where new information the taxpayer is greater than KRW1 (e.g. comparables’ most recent financial billion; or information) is obtained subsequent to

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. South Korea | 251 the filing of the tax return, resulting in an Customs Act to harmonize the transfer If extensive, is the competent upward adjustment to taxable income, pricing and customs regulations. The authority effective in obtaining a relief from under-reporting penalties is harmonizing legislation, which became double tax relief? granted where the taxpayer, within 60 effective on 1 July 2012, states that Frequently. days of the findings, files an amended transfer pricing or customs valuation tax return. adjustments made by one tax authority When may a taxpayer submit an should be respected by the other. adjustment to competent authority? What trends are being observed currently? Additionally beginning 2015, the new The taxpayer can file a request for legislation has been enacted to allow for competent authority procedure within Payments of royalties (for brand, combined advanced pricing review of three years from the date when a notice know-how, intangibles, et.), intra-group transfer pricing and customs valuation of income tax assessment is received. service charges and intercompany (joint APA/ACVA). guarantees are heavily scrutinized May a taxpayer go to competent during tax audits. The level of details Are there limitations on authority before paying tax? on the information requests have deductibility of management fees Yes. In the case of a transfer pricing intensified making it difficult to defend. beyond the arm’s length principle? income adjustment, the taxpayer is Yes. Any compensation above the arm’s allowed to make the request to suspend Special considerations length price will likely be denied for the tax payment until the conclusion Are secret comparables used by tax taxable deduction. MAP. However, this option is only available when the other contracting authorities? Are management fees subject to state also allows the suspension. The No. withholding? taxpayer may still be subject to interest Is there a preference, or requirement, No. penalty upon the conclusion of MAP. by the tax authorities for local Are there limitations on the comparables in a benchmarking set? deductibility of royalties beyond the Advance pricing Yes. Only local comparables are arm’s length principle? agreements accepted when the tested party is a Yes. Any compensation above the arm’s What APA options are available, if Korean entity. length price will likely be denied for any? taxable deduction. Do tax authorities have Unilateral, bilateral, multilateral. requirements or preferences Are royalties subject to Is there a filing fee for APAs? regarding databases for withholding? comparables? No. Yes. The tax authorities use the local database Does the tax authority publish APA Are taxpayers allowed to file tax called Korea Information Service Line data either in the form of an annual return numbers that differ from (KIS-Line). The KIS-Line database report or through the disclosure of book numbers? contains financial data on various data in public forums? companies, many of which maintain Yes. There may be permanent and Yes. assets over KRW10 billion and thus are temporary timing differences which subject to an independent annual audit. require reconciliation between book and Are there any difficulties or Does the tax authority generally tax. However, these items should be limitations on the availability or focus on the interquartile range in a tracked and reconciled each year. effectiveness of APAs? TNMM analysis? Other unique attributes? Not applicable. Yes, always. If the company does not receive Does the tax authority have other remuneration from related parties for preferences in benchmarking? If so, the transfer pricing income adjustment please describe. assessed by the tax authorities, the tax authorities can assess secondary Generally, interquartile ranges are used adjustment in the form of deemed but other more reasonable methods can dividend subject to withholding tax and be explored. If the results of the tested additional investment of capital. party falls outside the interquartile KPMG in South Korea range, the adjustments are made to the Tax treaty/double tax median of the comparables. Gil Won Kang What level of interaction do tax resolution Tel: +82 2 2112 0907 authorities have with customs What is the extent of the double tax Email: [email protected] authorities? treaty network? Extensive. As email addresses and phone numbers Ministry of Strategy and Finance change frequently, please email us at amended the LCITA and the Korea [email protected] if you are unable to contact us via the information noted above.

Spain

KPMG observation

The Spanish Tax Administration has participated in every Base Erosion and Profit Shifting (BEPS) Focus Group and has actively followed the discussions. The Tax Administration is supportive of the BEPS Action Plan, and legislation is already in place regarding the treatment of hybrid instruments or hybrid income and limitations on the deductibility of financial expenses. In addition, the Tax Administration has announced new documentation requirements, which focus on transparency and Country-by-Country reporting (CbyC), as of 2016. There are some areas, such as the permanent establishment definition, where Spain has a quite aggressive position — not only due to Court Decisions, but also to some general rulings and administrative practices in the last three or four years. Additionally, taxpayers are also required to disclose specific information with respect to their intra-group transactions when filing their corporate income tax return, such as the type of transaction, the relationship of the parties involved, the transfer pricing methodology applied and the amount of each type of transaction disclosed.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Recent legislation: Effective date of transfer pricing rules Tax authority name Regulation developing Law 27/2014 New transfer pricing legislation Spanish Tax Agency (Agencia Estatal de • Royal Decree 634/2015 of 10 July. is applicable to fiscal years that Administración Tributaria – AEAT). Additional Regulations: commenced on or after 1 January 2015. Citation for transfer pricing rules • Royal Decree 1794/2008, on MAPS, Regulations developing the CITL Legislation: Article 18 of the Corporate 18 November 2008. approved by Royal Decree 1777/2004 Income Tax Law (Law 27/2014 of 27 of 30 July, modified by the regulation November; hereinafter referred to as approved by Royal Decree 1793/2008 CITL) of 18 November and by Royal

Decree 897/2010 of 9 July, are partly What are the consequences of Transfer pricing audit and applicable, especially on documentation failure to submit disclosures? requirements, during 2015. penalties A penalty of 150 euros (EUR) per data When the tax authority requests Notwithstanding this, it should be missing. Chances of being audited are a taxpayer’s transfer pricing highlighted that a new CIT draft much higher. documentation, are there timing Regulation is expected to be passed requirements for a taxpayer to in the following months, and will be Transfer pricing study submit its documentation? And if effective as of January 2016. overview so, how many days? What is the relationship threshold Can documentation be filed in Yes, 10 days. for transfer pricing rules to apply a language other than the local between parties? When the tax authority requests language? If yes, which ones? a taxpayer’s transfer pricing The relationship threshold is as follows: Documentation must be prepared in documentation, are there timing • companies that belong to the same Spanish in principle. In an ordinary requirements for a taxpayer to group tax audit, the tax auditor may accept submit its documentation? Please explain. • at least 25 percent direct or indirect the transfer pricing documentation in participation in another related entity. other languages (e.g. English), but a Upon tax audit, the tax inspector will translation into Spanish may still be determine the submission deadline on Also considered related parties in Spain: requested. a case-by-case basis with a minimum • partners, shareholders, board When a transfer pricing study is period of 10 business days counting members, directors, and their prepared, should its content follow from the business day subsequent to immediate, collateral, third-degree Chapter V of the Organisation the request. consanguinity or affinity spouses or for Economic Co-operation and If an adjustment is proposed by relatives, and the company and their Development (OECD) Guidelines? the tax authority, what dispute cross relations with other companies resolution options are available? of the group. Yes, for all transactions. Similar to requirements of the OECD Guidelines The taxpayer has the following options What is the statute of limitations and European Union Joint Transfer for claiming against the adjustment on assessment of transfer pricing Pricing Forum (EUJTPF) — master proposed: adjustments? file and country-specific concepts are • “recurso de reposición”: Appeal Four years from the due date of the tax required. before the same administrative body return (same as general tax regime). Taxpayers’ documentation, when that issued the final assessment requested to be disclosed, should Transfer pricing include the identification of the • claim before the Economic- companies involved in the related Administrative Courts: Appeal before disclosure overview transactions, legal, organizational and an independent administrative body Are disclosures related to transfer operational structure of the group, • claim before judicial Spanish Courts pricing required to be submitted to nature and volume of the intra-group (First Instance; National High Court; the revenue authority on an annual transactions carried out, functional Supreme Court) basis (e.g. with the tax return)? analyses of such transactions, transfer • MAP; and Yes. Taxpayers are required to disclose, pricing policy applied to set the prices • Arbitration Convention (EU). in their corporate income tax returns, of the transactions and transfer pricing information regarding the intra-group methodologies and economic analyses If an adjustment is sustained, can transactions performed during the fiscal used to test such prices. penalties be assessed? If so, what year. Does the tax authority require an rates are applied and under what conditions? What types of transfer pricing advisor/tax practitioner to have information must be disclosed? specific designation in order to For transfer pricing adjustments based prepare or submit a transfer pricing on the legislation that came into force Taxpayers are required to disclose, in study? on 19 February 2009, penalties could their corporate income tax returns, amount to 50 percent to 150 percent the following information with respect No. of the additional tax due, although they to their intra-group transactions (with have very seldom been applied. certain limitations and exemptions): the Transfer pricing methods identification of the related parties, the Does your country follow the Based on the penalty regime foreseen type of relationship between them, the transfer pricing methods outlined in in Law 27/2104, (which may be applied type of intra-group transaction carried Chapter II of the OECD Guidelines? retroactively to fiscal years previous out, the volume of the same, and the If exceptions apply, please describe. to 1 January 2015), penalties linked transfer pricing methodology applied to to the formal requirements of the test the intra-group price applied. Yes. documentation are also enforceable

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 254 | Global Transfer Pricing Review and may apply to both (i) the lack of Special considerations • whether the services rendered documentation supporting the related provide the entity with economic or Are secret comparables used by tax party transactions carried out by the commercial value; and authorities? taxpayer and (ii) adjustments imposed • the arm’s length nature of the Secret comparables are not used. by the tax authorities when the transaction. arm’s length price supported on the Is there a preference, or documentation does not match with the Are management fees subject to requirement, by the tax authorities withholding? amounts declared in the CIT Form, thus for local comparables in a establishing the following two types of benchmarking set? Yes. penalties: Normally pan-European comparables Are there limitations on the • when there is no transfer pricing are accepted although there are not deductibility of royalties beyond the adjustment, a fixed fine of EUR1,000 specific written guidelines. arm’s length principle? per data and EUR10,000 per group of omitted or misleading data might be Do tax authorities have No. However, taxpayers must provide imposed on the taxpayer due to faults requirements or preferences very sound evidence on: in the documentation provided. There regarding databases for • whether in fact the services have is a limit which cannot exceed one comparables? been provided percent turnover The tax authority uses Bureau van Dijk’s • whether the services rendered • when a transfer pricing adjustment pan-European Amadeus database to provide the entity with economic or is proposed by the tax authorities, a perform its own analyses using external commercial value; and penalty of 15 percent of the additional comparables. • the arm’s length nature of the tax base is applicable in addition to Does the tax authority generally transaction. the tax due and the corresponding focus on the interquartile range in a interest associated with the delayed Are royalties subject to TNMM analysis? payment of the additional tax. withholding? Yes, sometimes. To what extent are transfer pricing Yes. penalties enforced? Does the tax authority have other Are taxpayers allowed to file tax preferences in benchmarking? If so, return numbers that differ from In principle, the existence of solid please describe. transfer pricing documentation book numbers? (in accordance with the Spanish • tax authorities very normally focus No. There is no clarity around this issue Regulations) will protect from on the interquartile range in a TNMM but in some occasions it is accepted if documentation related penalties. analysis soundly explained. It is recommended What defenses are available with • Spanish or European comparables are that in order to ensure that the respect to penalties? used adjustments will be respected by the tax authority, transfer pricing adjustments Where the taxpayer has a sound • independence threshold: lower than (i) should be made prior to the end of documentation requirements, penalties 25 percent the fiscal year, and (ii) should be carried should not be levied. If imposed high • multiple year averages are normally out via rectifying invoices, which should chances to be eliminated at Court level. used. include the reason for the change in What trends are being observed What level of interaction do tax price and should specifically reference currently? authorities have with customs the previously issued invoice(s) to be authorities? modified. An increasing number of audits and a more aggressive approach is being There is little communication between Other unique attributes? observed, especially regarding: the income tax and the customs • Management fees are not subject to authorities, but such communication • financial expenses withholding when there is a double is increasing and there is a plan to tax convention in place. • leveraged acquisitions undertake joint audits. • reorganizations • Royalties are subject to withholding Are there limitations on except when the EU Directive on • management services (reality and deductibility of management fees interest and royalty payments applies. benefit test); and beyond the arm’s length principle? • loss-making companies. No. However, taxpayers must provide Tax treaty/double tax very sound evidence on: Sectors being audited: electronics, resolution chemicals, pharmaceuticals and new • whether in fact the services have What is the extent of the double tax technologies, large distributor. been provided treaty network? Extensive.

If extensive, is the competent Are there any difficulties or authority effective in obtaining limitations on the availability or double tax relief? effectiveness of APAs? Frequently. No. Although the Spanish APA program does not publish an annual report with When may a taxpayer submit an statistics regarding the program’s adjustment to competent authority? success rate, the process has a On 18 November 2008, the Spanish generally high rate of success, for both Ministry of Economy and Finance unilateral and bilateral agreements. officially published the Royal Decree Unilateral APAs are routinely concluded 1794/2008 of 3 November, which between 12 and 18 months, while regulates mutual agreement and bilateral agreements generally require arbitration procedures. closer to 24 months. When a transfer pricing adjustment The success rate and duration of an affects transactions between a APA are closely linked with the nature Spanish entity and a non-resident, the and complexity of the underlying mechanisms established in the relevant transactions. In particular, transactions double taxation treaty should be involving the sale or licensing of applied. When the non-resident is within intangible property tend to present the EU, the provisions of the Arbitration more of a challenge. One can expect an Convention regarding the elimination of in-depth discussion. double taxation can also be applied. The Royal Decree establishes different regimes, depending on whether the procedures for double taxation are initiated by the Spanish or the foreign competent authorities and depending on which tax administration has made the evaluations. The timing for competent authority assistance requests varies depending on the applicable tax treaty between Spain and the other country in question. May a taxpayer go to competent authority before paying tax? Yes, however, if the taxpayer applies for a suspension of collection of taxes it should provide a guarantee in the same terms as if it were appealing to internal KPMG in Spain courts. Juan Ignacio Marrón Advance pricing Tel: +34 91 451 33 54 agreements Email: [email protected] What APA options are available, if Montserrat Trapé any? Tel: +34 93 253 29 36 Unilateral, bilateral, multilateral. Email: [email protected] Is there a filing fee for APAs? José Díaz-Faes No. Tel: +34 91 451 30 23 Does the tax authority publish APA Email: [email protected] data either in the form of an annual report or through the disclosure of Elisenda Monforte data in public forums? Tel: +34 93 254 23 11 Email: [email protected] No. As email addresses and phone numbers change frequently, please email us at transferpricing@ kpmg.com if you are unable to contact us via the information noted above.

Sri Lanka

KPMG observation

Transfer pricing regulations were introduced into Sri Lanka Income Tax legislation in April 2006. The regulations rely on the arm’s length standard as the guiding principle for transactions between ‘associated undertakings’. Recently, revised transfer pricing regulations were issued via gazette to address the ambiguities in the previous regulations. The revised regulations supplement the previous ones with administrative guidance on the enforcement of the transfer pricing rules. Transfer pricing is very new in Sri Lanka, with enforcement only beginning in 2013. Hence, Revenue Authorities have not indicated a position to the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information and an ‘associated undertaking’, that • more than half of the directors, or is where there is a degree of direct or one or more executive directors or Tax authority name indirect control between the parties. members of the governing board of Department of Inland Revenue. Transfer pricing provisions apply to all one undertaking are appointed by the Citation for transfer pricing rules transactions regardless of value. other undertaking • more than half of the directors are Section 104 of the Inland Revenue A person is considered to be an associate appointed by the same person or Act No.10 of 2006 and the Gazette of the other in the following instances: persons Notification No 1823/5 of 12 August 2013. • direct or indirect shareholding with not less than 50 percent voting power • the manufacture, process, or Effective date of transfer pricing rules business is wholly dependent on • any person directly or indirectly holds Practical enforcement (as per recent IRA the input provided by the other not less than 50 percent of the voting circular) — Not confirmed by the IRD undertaking power in both undertakings yet. • 90 percent or more of the raw • loans and advances granted exceed materials required for manufacture What is the relationship threshold 51 percent of the book value of total or process is provided directly or by for transfer pricing rules to apply assets of the recipient between parties? persons specified; and • guarantees not less than 25 percent Transfer pricing rules apply to of the borrowings of the other transactions between the taxpayer undertaking

• a mutual relationship which can be When a transfer pricing study is • a record of the actual work carried out prescribed. prepared, should its content follow in determining the arm’s length price, Chapter V of the Organisation including details of the comparable What is the statute of limitations for Economic Co-operation and data and financial information used on assessment of transfer pricing Development (OECD) Guidelines? in applying the most appropriate adjustments? method, and adjustments, if any, Yes, for all transactions. Regulations The statute of limitations applicable to which were made to account for are still to be enforced, but prescribed income tax applies. Accordingly: differences between the transaction documentation includes the following: and the comparable uncontrolled • if return of income has been filed on • a description of the ownership transactions, or between the time: 1.5 years structure of the assesse undertaking undertakings entering into such • if return of income has not been filed • a profile of the multinational or group of transactions; and on time: four years; and which the assesse undertaking is a part • the assumptions, policies and price • where return has not been filed or in • a broad description of the business negotiations, if any, which have the case of fraud, evasion, or wilful of the assesse and the industry in critically affected the determination default: no time limitation. which the assesse operates, and of the arm’s length price details of the of the business of the associated adjustments, if any, made to transfer Transfer pricing undertakings with whom the assesse prices to align them with arm’s length has transacted prices determined under these rules disclosure overview and consequent adjustments made to Are disclosures related to transfer • the nature and terms (including the total income for tax purposes. pricing required to be submitted to prices) of international or group the revenue authority on an annual transactions entered into with each Availability of supporting documentation basis (e.g. with the tax return)? associated undertaking in the public domain as prescribed includes: No. There are no mandated disclosures • a description of the functions in tax returns or document to be performed, risks assumed and assets • official publications, reports, studies submitted with the tax return. employed or to be employed by and databases from the government the assesse and by the associated of the country of residence of the It is required that specified undertaking associated undertaking, or of any documentation be maintained for other country possible audit for five years to prove • a record of the economic and market • reports of market research studies arm’s length pricing in the event of a analysis, forecasts, budgets or any carried out and technical publications revenue assertion. other financial estimates prepared by the assesse for the business as a brought out by institutions of national The revised regulations mandate that whole and for each division or product or international repute the directors certify that transactions separately, which may have a bearing • price publications including stock concluded with the related parties are on the transactions entered into by exchange and commodity market at arm’s length, and such certification the assesse quotations should be included in the annual • a record of uncontrolled transactions accounts. • published accounts and financial taken into account for analyzing their statements relating to the business What types of transfer pricing comparability with the transactions affairs of the associated undertaking information must be disclosed? entered into, including a record of the • agreements and contracts entered nature, terms and conditions relating Not applicable. into with associated undertaking to any uncontrolled transaction or with unrelated enterprises in What are the consequences of with third parties which may be respect of transactions similar to that failure to submit disclosures? of relevance to the pricing of the transaction; and None. transactions • letters and other correspondence • a record of the analysis performed to documenting any terms negotiated evaluate comparability of uncontrolled Transfer pricing study between the assesse and the transactions with the relevant associated undertaking documents overview transaction Can documentation be filed in normally issued in connection with • a description of the methods a language other than the local various transactions under the considered for determining the language? If yes, which ones? accounting practices followed. arm’s length price in relation to each Yes. No formal rules. The generally transaction or class of transaction; Does the tax authority require an accepted rule is that documentation the method selected as the most advisor/tax practitioner to have can be filed in one of the national appropriate method along with specific designation in order to languages — Sinhala or Tamil — or in explanations as to why such method prepare or submit a transfer pricing English. was selected, and how such method study? was applied in each case No.

Transfer pricing methods Special considerations Safe harbor rule exists at three percent. Specifically, the regulation provides Does your country follow the Are secret comparables used by tax for a three percent tolerance level i.e. transfer pricing methods outlined in authorities? if the arm’s length price is within three Chapter II of the OECD Guidelines? It is theoretically possible. However, to percent range from the actual price, no If exceptions apply, please describe. date, we have not seen this in practice. adjustment is required. Yes. Is there a preference, or requirement, by the tax authorities for local Tax treaty/double tax Transfer pricing audit comparables in a benchmarking set? resolution and penalties None to date. What is the extent of the double tax When the tax authority requests treaty network? Do tax authorities have requirements a taxpayer’s transfer pricing or preferences regarding databases Extensive. documentation, are there timing for comparables? requirements for a taxpayer to If extensive, is the competent submit its documentation? And if No. authority effective in obtaining so, how many days? double tax relief? Does the tax authority generally No. focus on the interquartile range in a Sometimes. TNMM analysis? When the tax authority requests When may a taxpayer submit an a taxpayer’s transfer pricing No. adjustment to competent authority? documentation, are there timing Does the tax authority have other No formal rules exist in this area. requirements for a taxpayer to submit preferences in benchmarking? If so, its documentation? Please explain. May a taxpayer go to competent please describe. authority before paying tax? The law does not prescribe a time frame Regulation prescribes the use of but requires it to be maintained for five Yes, under an Advance Pricing arithmetic mean. years. Agreement (APA). What level of interaction do tax If an adjustment is proposed by authorities have with customs the tax authority, what dispute Advance pricing authorities? resolution options are available? agreements High. The normal appeal procedure available What APA options are available, if in the Inland Revenue Act would be Are there limitations on any? applicable. deductibility of management fees Unilateral, bilateral. beyond the arm’s length principle? If an adjustment is sustained, can Is there a filing fee for APAs? penalties be assessed? If so, what Yes. Deductibility of management fee rates are applied and under what is limited to 2 million Sri Lankan Rupees No. (LKR) or one percent of the turnover conditions? Does the tax authority publish APA whichever is lower. Yes. The penalty applicable for income data either in the form of an annual tax default would be applicable (i.e. 10 Are management fees subject to report or through the disclosure of percent for the first month and thereafter withholding? data in public forums? two percent for each of the subsequent Yes. Not applicable. months). Are there limitations on the Are there any difficulties or To what extent are transfer pricing deductibility of royalties beyond the limitations on the availability or penalties enforced? arm’s length principle? effectiveness of APAs? To date, revenue investigations into No. Not applicable. transfer pricing have been limited and carried out under general anti-avoidance Are royalties subject to withholding? provisions in the domestic statute and Yes. the Associated Enterprises Article under treaties. Are taxpayers allowed to file tax return numbers that differ from KPMG in Sri Lanka What defenses are available with book numbers? respect to penalties? No. The current regulations do not Shamila Jayasekara None. provide for this. Tel: +94 11 5426503 Email: [email protected] What trends are being observed Other unique attributes? currently? Multiple year data permitted for two As email addresses and phone numbers Not applicable. change frequently, please email us at prior years. [email protected] if you are unable to contact us via the information noted above.

Sweden

KPMG observation

Transfer pricing continues to be one of the main focus areas of the Swedish Tax Agency. In the last couple of years, companies with intellectual property transfers or having undergone reorganizations, have been frequently audited. A new focus area within transfer pricing appears to be branches and Permanent Establishments (PEs) in Sweden, where the number of audits have increased at a rapid pace. Branches and PEs are audited by non-transfer pricing specialists having limited knowledge of transfer pricing. This fact has already lead to several misunderstandings from the Swedish Tax Agency’s side, resulting in adjustments being made and penalties levied. Litigation is bound to follow.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information The regulations are binding. STA Transfer pricing Guidelines (SKV M 2007:25) published Tax authority name 15 November 2007. disclosure overview Skatteverket (Swedish Tax Agency or Are disclosures related to transfer Effective date of transfer pricing STA). pricing required to be submitted to rules the revenue authority on an annual Citation for transfer pricing rules 1928. basis (e.g. with the tax return)? The arm’s length principle is found in What is the relationship threshold No. There is no requirement to disclose 14:19 Inkomstskattelagen, Chapter 14, for transfer pricing rules to apply any transfer pricing information Section 19 of the Income Tax Act. between parties? with the tax return, but there is a Documentation requirements are found statutory requirement that transfer Direct or indirect management, in 39:15 -16 Skatteförfarandelagen, pricing documentation be prepared supervision, ownership or control is Chapter 39, sections 15 -16 of the Tax annually. Submitting transfer pricing required. Procedures Act. Arm’s length principle documentation with the tax return introduced 1928; amended last time What is the statute of limitations when it is filed makes it more difficult in 2001 with no material changes save on assessment of transfer pricing for the STA to levy penalties should an for a change in the burden of proof. adjustments? adjustment be made. Different filing Documentation requirements were dates for the tax return (depending on Six years from tax year-end. introduced in STA regulations (SKVFS financial year-end) apply from 2013. 2007:1) published 20 February 2007.

What types of transfer pricing Transfer pricing methods Disclosing more limited information on intra-group cross-border transactions as information must be disclosed? Does your country follow the an appendix to the tax return might also No disclosure has to be made in the tax transfer pricing methods outlined in help avoiding penalties. return save for information on Advance Chapter II of the OECD Guidelines? Pricing Agreements (APAs) that have If exceptions apply, please describe. What trends are being observed been concluded. Taxpayers with APAs currently? Yes. must disclose information whether the The number of transfer pricing audits APA has been applied and whether the continues to increase dramatically. Most assumptions etc. on which the APA Transfer pricing audit and of the audits result in adjustments at the rests are still valid. penalties STA level. What are the consequences of When the tax authority requests The STA has a national focus group of failure to submit disclosures? a taxpayer’s transfer pricing documentation, are there timing experienced tax advisors/auditors based Failure to provide disclosures/ requirements for a taxpayer to in Stockholm, Gothenburg and Malmö. documentation upon request will likely submit its documentation? And if They work solely on transfer pricing and shift the burden of proof from the STA so, how many days? act as in-house advisors to the auditors to the taxpayer and will make it more in transfer pricing audits and other difficult to avoid penalties in the case of Yes, 30 days. transfer pricing related issues. With adjustments being made. When the tax authority requests the STA appointing dedicated transfer a taxpayer’s transfer pricing pricing auditors and litigators, the result Transfer pricing study documentation, are there timing has been an increased focus on transfer pricing. overview requirements for a taxpayer to submit its documentation? Please The STA’s current focus areas are Can documentation be filed in explain. restructurings and profit/loss allocation a language other than the local to permanent establishments. Industry language? If yes, which ones? Normal STA practice is to request that the documentation be submitted within focuses are pharmaceutical companies Yes. Swedish, Danish, Norwegian, and 30 days. and private equity firms. English. If an adjustment is proposed by When a transfer pricing study is the tax authority, what dispute Special considerations prepared, should its content follow resolution options are available? Are secret comparables used by tax Chapter V of the Organisation authorities? for Economic Co-operation and 1) Filing an appeal with the Development (OECD) Guidelines? Administrative Court. This has happened in a few instances. It will likely not be the case in the future. Yes, but in addition the following 2) Application of the Arbitration information is also required: Convention may be requested for Is there a preference, or transactions within the European requirement, by the tax authorities • intra-group agreements (if numerous Union (EU). for local comparables in a a list of the agreements will suffice) benchmarking set? 3) Requesting that a MAP be initiated. • APAs The vast majority of Swedish tax Yes. The STA prefers Swedish • Mutual Agreement Procedures treaties contain provisions for MAP. comparables when auditing a (MAPs) Swedish company, but pan-European If an adjustment is sustained, can comparables are readily accepted. • rulings. penalties be assessed? If so, what Comparability is more important rates are applied and under what No economic analysis is required for than location. Local comparables are conditions? documentation of transactions with low preferred when a foreign entity is the value. However, in the case of an audit, Yes. General tax penalties only: 40 tested party, but also in these cases the STA has the right to request that an percent of the additional tax due on the pan-European, pan-Asian comparables economic analysis be prepared by the transfer pricing adjustment. etc. are readily accepted depending on taxpayer. tested party’s location. To what extent are transfer pricing Does the tax authority require an penalties enforced? Do tax authorities have advisor/tax practitioner to have requirements or preferences Almost always. specific designation in order to regarding databases for prepare or submit a transfer pricing What defenses are available with comparables? study? respect to penalties? There are no legal requirements No. Penalties might be avoided if complete to present a benchmark. Only a documentation is filed with the tax return comparability analysis is required. as an integral part of the tax return. However, a benchmark is commonly

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Sweden | 261 requested by the STA. The STA uses acceptable. Multi-year data is preferred Does the tax authority publish APA Orbis and Amadeus. The quality of the over single-year data. There are no safe data either in the form of an annual comparables is more important than the harbors. report or through the disclosure of database. data in public forums? Does the tax authority generally Tax treaty/double tax Yes. focus on the interquartile range in a resolution Are there any difficulties or TNMM analysis? What is the extent of the double tax limitations on the availability or Yes, always. treaty network? effectiveness of APAs? Does the tax authority have other Extensive. Yes. The competent authority has preferences in benchmarking? If so, If extensive, is the competent limited resources which makes the APA please describe. authority effective in obtaining process slow. The STA requires strict independence double tax relief? for the comparables. Almost always. What level of interaction do tax When may a taxpayer submit an authorities have with customs adjustment to competent authority? authorities? The taxpayer should submit an Low, but increasing, especially between application to the competent authority the Nordic countries. within three years of being made aware Are there limitations on of the decision that resulted in the deductibility of management fees taxation violating the applicable tax beyond the arm’s length principle? treaty. There is no such timeframe in domestic Swedish law. A tax treaty may No. contain another statute of limitation Are management fees subject to in this respect. It is advisable that withholding? submission is made to the competent authority as soon as possible when the No. taxpayer has been made aware of the Are there limitations on the double taxation. deductibility of royalties beyond the May a taxpayer go to competent arm’s length principle? authority before paying tax? No. Yes. It is possible to obtain an extension Are royalties subject to for the tax payment when the case is withholding? referred to the competent authority in a mutual agreement procedure and when No. the arbitration convention is applied as Are taxpayers allowed to file tax long as it can be proven that the tax has return numbers that differ from been paid on the income in the other book numbers? state. It is normally also possible to be Yes. True-ups and true-downs are granted an extension for the tax payment normally expected and accepted. Year- when a case is appealed to the court. end adjustments should preferably be reflected in the financial statements Advance pricing (tax follows the accounting treatment agreements in Sweden with few exceptions). It What APA options are available, if is, however, also possible to make any? the adjustments in the tax return. Adjustments may have both customs Bilateral, multilateral. and VAT implications. The method Is there a filing fee for APAs? for year-end adjustments should be clearly described in the transfer pricing Yes. The current filing fee is 150,000 KPMG in Sweden documentation. Swedish krona (SEK) per country Annika Lindström involved for a new APA and SEK100,000 Other unique attributes? Tel: +46 8 723 61 71 for a renewal. Email: [email protected] Documentation in EU transfer pricing format is explicitly referred to as As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Switzerland

KPMG observation

Switzerland is a member of the Organisation for Economic Co-operation and Development (OECD) and has accepted the OECD Guidelines without reservation. On 4 March 1997, the Federal Tax Administration issued a circular letter instructing the cantonal tax administrations to adhere to the OECD Guidelines when assessing multinational companies. Recent experience with tax audits seems to indicate that the tax authorities are increasingly considering transfer pricing issues, as some have requested OECD-compliant transfer pricing documentation. However, the level of awareness is different from canton to canton. The OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan provoked measurable reaction in Switzerland. In particular, actions to increase transparency and disclosure — such as the proposed Country-by-Country reporting — concern Swiss-based companies as well as Swiss authorities. Significantly increased transparency is seen as the starting point to detecting base erosion and profit shifting, and as such, is generally welcomed by the Swiss authorities. However, there are practical questions around how to obtain all the information, in what form, and how to reconcile the pattern(s) the information shows with the actual business models and their commercial and economical rationales. The fact that Switzerland is widely seen as a destination for profit shifting further increases the threat of Switzerland being the immediate focus of many assessing tax authorities around the world.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules What is the statute of limitations on assessment of transfer pricing Tax authority name Not applicable. adjustments? Eidgenössische Steuerverwaltung Effective date of transfer pricing rules Ten years from tax year-end. Changes (ESTV) [Federal Tax Administration] Not applicable. to facts and figures as filed with the as well as the relevant cantonal tax tax return are possible until the final authorities are the assessing authorities What is the relationship threshold assessment of the tax return by the for direct corporate income taxes at all for transfer pricing rules to apply assessing taxing authorities. Any levels (federal, cantonal and communal). between parties? changes after final assessment require Not applicable.

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Switzerland | 263 a court decision or closing letter of a Transfer pricing audit group transactions involving offshore mutual agreement procedure (MAP). locations and entities. In particular, with and penalties respect to the financial services industry Transfer pricing When the tax authority requests and intra-group financing transactions, a taxpayer’s transfer pricing there are increasing challenges to disclosure overview documentation, are there timing the ’correct’ allocation of the profits. Are disclosures related to transfer requirements for a taxpayer to Lack of substance or requalification of pricing required to be submitted to submit its documentation? And if the actual place of management of a the revenue authority on an annual so, how many days? foreign counterparty to the transactions basis (e.g. with the tax return)? Yes, 60 days. concerned are often reported. No. When the tax authority requests What types of transfer pricing a taxpayer’s transfer pricing Special considerations information must be disclosed? documentation, are there timing Are secret comparables used by tax requirements for a taxpayer to authorities? Not applicable. submit its documentation? Please No. What are the consequences of explain. failure to submit disclosures? Is there a preference, or Tax authorities expect to be provided requirement, by the tax authorities Failure to prepare or submit requested with transfer pricing documentation for local comparables in a information in an enquiry of the assessing within a reasonable time frame which benchmarking set? tax authority (i.e. information requested can be negotiated to a certain extent, in addition to the normal tax return during often up to 90 days. No. the assessment) could lead to a formal If an adjustment is proposed by Do tax authorities have tax audit and subsequently to a shift of the the tax authority, what dispute requirements or preferences burden of proof on an assessment of the resolution options are available? regarding databases for taxable income of the taxpayer. comparables? Legal proceedings. No, the Amadeus database is largely Transfer pricing study If an adjustment is sustained, can accepted and applied. overview penalties be assessed? If so, what rates are applied and under what Does the tax authority generally Can documentation be filed in conditions? focus on the interquartile range in a a language other than the local TNMM analysis? language? If yes, which ones? General tax penalties could be assessed. Furthermore, adjustments can be treated Yes, sometimes. Yes. One of the official languages as a hidden profit distribution subject (depending on the canton): German, Does the tax authority have other to 35 percent Swiss withholding tax French, Italian, Rhaeto-Romanic. English preferences in benchmarking? If so, (non-treaty) or the applicable treaty rate is frequently accepted. please describe. (portfolio rate, i.e. 15 percent) according When a transfer pricing study is to the relevant tax treaty. Not applicable. prepared, should its content follow To what extent are transfer pricing What level of interaction do tax Chapter V of the Organisation penalties enforced? authorities have with customs for Economic Co-operation and authorities? Development (OECD) Guidelines? Not applicable. Low. Yes. Generally, OECD compliant What defenses are available with transfer pricing documentation is respect to penalties? Are there limitations on recommended. deductibility of management fees Although Switzerland does not have beyond the arm’s length principle? Does the tax authority require an specific transfer pricing penalties, advisor/tax practitioner to have general tax penalties can be assessed Yes, some. Question is are the fees and specific designation in order to in severe cases of non-arm’s length the corresponding services provided prepare or submit a transfer pricing arrangements, ultimately assessed commercially justified or would a third study? as abusive or even fraudulent. In such party not have requested such as cases, taxpayers are recommended to not necessary for the tested party’s No. provide full disclosure of all available business. In such case, not the mark-up information to counter the assessment and the cost are crucial but the arm’s Transfer pricing methods and avoid penalization. length price on the services provided as such. Does your country follow the What trends are being observed transfer pricing methods outlined in currently? Are management fees subject to Chapter II of the OECD Guidelines? withholding? If exceptions apply, please describe. Increased scrutiny is observed with any structures and corresponding intra- No. Yes.

Are there limitations on the May a taxpayer go to competent deductibility of royalties beyond the authority before paying tax? arm’s length principle? Yes. Yes. Similar to management fees, if a royalty payment is not to be justified Advance pricing (completely) commercially, it can be refused and deductibility can be denied. agreements What APA options are available, if Are royalties subject to any? withholding? Unilateral, bilateral, multilateral. No. Is there a filing fee for APAs? Are taxpayers allowed to file tax return numbers that differ from No. book numbers? Does the tax authority publish APA Yes, any adjustments need to be data either in the form of an annual reflected in the financial statements report or through the disclosure of (following the principle that tax data in public forums? accounting should be based on No. commercial accounting). Are there any difficulties or Other unique attributes? limitations on the availability or None. effectiveness of APAs? No. The Swiss competent authority Tax treaty/double tax is frequently involved in bilateral APA resolution negotiations and applies the APA program often and very successfully. What is the extent of the double tax Since 2008 there have been about treaty network? 250 APAs involving Switzerland. More Extensive. than half of them have been settled successfully, none failed or were If extensive, is the competent rejected by the taxpayer. authority effective in obtaining double tax relief? Almost always. When may a taxpayer submit an adjustment to competent authority? After an adjustment notice is provided to the taxpayer.

KPMG in Switzerland

Markus Wyss Tel: + 41 58 249 41 29 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Taiwan

KPMG observation

The Taiwan Transfer Pricing Regulations came into effect in 2005 and are generally in line with the Organisation for Economic Co-operation and Development (OECD) Guidelines. Transfer pricing has been one of the hottest tax topics since then, and the enforcement of transfer pricing has intensified significantly in recent years. Transfer pricing-focused task force teams have been formed at the regional tax office level, and the number of companies selected as transfer pricing audit targets has continued to multiply. In terms of the types of transactions targeted, the Taiwan tax authorities have focused more and more on transactions involving marketing intangibles, provision of services and intercompany funding arrangements (particularly, intercompany guarantees). In 2015, the concepts of business restructuring were incorporated into the Transfer Pricing Regulations. Companies that restructure their businesses are required to evaluate the arm’s length nature of the restructuring in their transfer pricing reports beginning with tax year 2014. This is expected to result in a significant increase in the compliance burden borne by applicable companies in Taiwan. The Taiwan tax authorities have been closely monitoring the progress achieved by the Base Erosion and Profit Shifting (BEPS) Action Plan, both the OECD level and in terms its implementation in major economies around the world. It is not clear at this time if the Transfer Pricing Regulations will be amended again to incorporate the recommendations of the BEPS Action Plan. However, it is anticipated that Taiwan will follow a similar approach as countries in the surrounding area and major economies around the world. The Taiwan tax authorities have started requesting that taxpayers provide information resembling that suggested by the OECD for the Country-by-Country (CbyC) report during recent transfer pricing audits. Going forward, in transfer pricing audits, it is likely that the tax authorities will be more and more inclined to invoke the exchange of information procedures provided for under tax treaties to access more information from other countries. Multinational enterprises with corporate residences in tax treaty partner states of Taiwan should seriously consider pursuing bilateral advance pricing agreements (APA) to obtain certainty for transactions with relatively high audit risk.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • whether the taxpayer has signed Transfer pricing methods APAs with tax authorities in Taiwan or Tax authority name Does your country follow the foreign jurisdictions and the relevant transfer pricing methods outlined in Ministry of Finance (MOF) and the information; and Chapter II of the OECD Guidelines? district offices of the National Tax • whether a transfer pricing study has If exceptions apply, please describe. Administration (NTA). been prepared. Yes. With some exceptions. Instead Citation for transfer pricing rules What are the consequences of of the transactional net margin Article 43-1 of the Income Tax Act and failure to submit disclosures? method (TNMM), Taiwan Transfer Regulations Governing Assessment of There is no penalty involved, but if Pricing Assessment Rules adopt the Profit-Seeking Enterprise Income Tax uncovered by the tax offices, it will comparable profits method, which is on Non-Arm’s Length Transfer Pricing undermine the credibility of taxpayers. very similar to the TNMM outlined in (Taiwan Transfer Pricing Assessment the OECD Guidelines. Advance approval Rules). Transfer pricing study must be obtained from the MOF for Effective date of transfer pricing applying unspecified methods. rules overview Can documentation be filed in 28 December 2004. Transfer pricing audit and a language other than the local penalties What is the relationship threshold language? If yes, which ones? When the tax authority requests for transfer pricing rules to apply Yes. Documentation could be filed in a taxpayer’s transfer pricing between parties? English if prior approval could be obtained documentation, are there timing In addition to a 20 percent ownership, from the tax authorities concerned. requirements for a taxpayer to the MOF has adopted the ‘substantive When a transfer pricing study is submit its documentation? And if management and control’ and ‘material prepared, should its content follow so, how many days? influence’ concepts in defining a related Chapter V of the Organisation Yes, 30 days. party relationship. for Economic Co-operation and When the tax authority requests What is the statute of limitations Development (OECD) Guidelines? a taxpayer’s transfer pricing on assessment of transfer pricing No. Taiwan Transfer Pricing Assessment documentation, are there timing adjustments? Rules have listed out the following requirements for a taxpayer to Five years from the tax return filing date minimum required items to be included submit its documentation? Please if the return is filed in a timely fashion. in the transfer pricing study: explain. In situations where a taxpayer fails to 1) industry and economic condition Upon request, taxpayers are required file the annual tax return within the analysis to submit the documentation within statutory deadline or is involved in tax one month from the date of receipt of fraud or tax avoidance, the statute of 2) function and risk analysis of each notification. In special circumstances, limitations will be extended to seven entity engaged in the controlled taxpayers are also given the option of years. transactions under review a one-time extension of an additional 3) the application of arm’s length principle month. Transfer pricing 4) selection of comparables If an adjustment is proposed by disclosure overview 5) comparability analysis the tax authority, what dispute Are disclosures related to transfer 6) selection of the most appropriate resolution options are available? pricing required to be submitted to method, methods considered and Yes, the taxpayer has the option the revenue authority on an annual reasons for rejection of specific to resolve disputes through the basis (e.g. with the tax return)? methods administration remedy or litigation Yes. The taxpayer must disclose 7) pricing method adopted by procedure. information about controlled the counterparty of controlled If an adjustment is sustained, can transactions on forms filed with income transactions; and penalties be assessed? If so, what tax returns. 8) evaluation of arm’s length nature rates are applied and under what What types of transfer pricing achieved by the controlled conditions? information must be disclosed? transactions or determination of arm’s length result(s). Yes. If the transfer pricing audit results in The types of information to be disclosed income adjustments and assessments, include, but are not limited to: Does the tax authority require an a penalty of up to 200 percent of the advisor/tax practitioner to have • legal structure underpaid tax amount (where the specific designation in order to taxpayer has filed their tax returns on • detailed information on related parties prepare or submit a transfer pricing time) will be imposed under any one of • controlled transaction types and study? the following situations: respective amounts No.

• where the reported controlled Special considerations Are there limitations on the transaction prices are 200 percent Are secret comparables used by tax deductibility of royalties beyond the or more, or 50 percent or less of the authorities? arm’s length principle? arm’s length prices as assessed by Yes. Royalties expenses will be the tax authority Based on our observation of the current deductible for Taiwan income tax practice, secret comparables are not • where the income adjustment purposes only if they are necessary and used by tax authorities. assessed by the tax authority reaches relevant to a business’ operation. 10 percent of the taxpayer’s assessed Is there a preference, or annual income and 3 percent of the requirement, by the tax authorities Are royalties subject to assessed annual net sales for local comparables in a withholding? • where the taxpayer fails to provide benchmarking set? Yes. a transfer pricing study and cannot Yes. If the tested party is a company Are taxpayers allowed to file tax provide other documentation to in Taiwan, the tax authorities prefer return numbers that differ from prove that its transfer price is at arm’s to apply local comparables. However, book numbers? length; and foreign comparables are acceptable Yes. In general only adjustments if insufficient number of local • other situations where the tax increasing taxable income are allowed. comparables are available. authority finds evidence of According to the Taiwan Transfer Pricing underreporting income and the Do tax authorities have Assessment Rules, if the results of a amount underreported is considered requirements or preferences controlled transaction fall outside the significant. regarding databases for arm’s length range, the current year To what extent are transfer pricing comparables? result shall be adjusted based on the median of the range. Nonetheless, no penalties enforced? There are no specific requirements transfer pricing adjustment is allowed regarding which database should be In practice, penalties are rarely enforced if it results in a decrease in Taiwan tax applied. because most audits are settled via liability. negotiation. Does the tax authority generally The MOF once issued a private ruling What defenses are available with focus on the interquartile range in a TNMM analysis? to a company allowing it to make a respect to penalties? one-time downward transfer pricing There is no defense to any of the Yes, always. adjustment before closing the financial penalties, other than to defend against Does the tax authority have other accounts, provided certain conditions the underlying adjustment. preferences in benchmarking? If so, were met. Other companies who wish to make downward transfer pricing What trends are being observed please describe. adjustments should apply for a specific currently? Analysis based on multiple-year pre-approval ruling with the MOF based The tax authorities are currently averages preferred. on their own facts and circumstances. stepping up the pace of transfer What level of interaction do tax The application process is expected to pricing audits as a way to actively seek authorities have with customs be lengthy and extensive supporting additional tax revenue. As a result, authorities? information will be required. special transfer pricing audit teams have Other unique attributes? been formed by the tax authorities to Currently, low. conduct more comprehensive and Are there limitations on None. in-depth transfer pricing audits than in deductibility of management fees the past. The number of cases selected beyond the arm’s length principle? Tax treaty/double tax has increased along with the intensity of the tax authorities’ review. Yes. Generally speaking, expenses will resolution be deductible for Taiwan income tax What is the extent of the double tax We have observed that under audit, purposes only if they are necessary and treaty network? the tax authorities tend to question relevant to a business’ operation. In the aggregate testing approach and practice, taxpayers bear a heavy burden Up to the time when this review is request separate testing for different of proof to justify to the tax authorities updated, Taiwan has concluded and controlled transactions. Moreover, the that management fees are necessary ratified 28 tax treaties. tax authorities have focused more on and relevant to a business’s operation. If extensive, is the competent intangible property and intra-group Are management fees subject to authority effective in obtaining funding arrangements, especially double tax relief? cash-pooling and intra-group guarantee withholding? arrangements. Yes. To our knowledge, Taiwan has limited experience with competent authority.

On the other hand, the information related to the implementation and effectiveness of the competent authority is not available to the public. When may a taxpayer submit an adjustment to competent authority? Depends on the mutual agreement procedure provision of each tax treaty. May a taxpayer go to competent authority before paying tax? Yes.

KPMG in Taiwan

Sherry Chang Tel: +886 2 8101 6666 ext. 04590 Email: [email protected]

Willis Yeh Tel: +886 2 8101 6666 ext: 02281 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Tanzania

KPMG observation

Most companies operating in Tanzania are subsidiaries of multinational enterprises that have engaged in foreign direct investment in Tanzania. The tax authority is generally of the view that these multinationals are focused on repatriating as much profit out of Tanzania as possible, while suffering the least possible tax costs. For this reason, the Tanzanian tax authority is aggressively challenging transactions between Tanzanian operations and their non-resident related parties. In 2014, Income Tax (Transfer Pricing) Regulations were published and became effective on 2 February 2014 (even though the Regulations only became available on 23 May 2014). The Regulations apply to controlled transactions between Tanzania resident entities and non-resident entities. The Regulations also apply for controlled transactions between two Tanzania entities. With the publication of these Regulations, Tanzania now joins Kenya, Uganda and Rwanda as countries in the region which have transfer pricing rules in place. It is important for taxpayers with related party transactions, whether cross-border or in-country to maintain contemporaneous transfer pricing documentation as required by the Regulations. The penalty for not having the transfer pricing documentation in place is imprisonment for a term not exceeding six months, a fine not less than TShs 50 million (approx. 25,000 US dollars (USD) at the exchange rate of 1 USD = 2000 TShs), or both. Violation of the Regulations attracts a penalty of 100% of the underpaid tax and resulting interest thereon.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Submission to tax authority required Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information between related parties must be Effective date of transfer pricing conducted at arm’s length Tax authority name rules • The Income Tax (Transfer Pricing) • 2004 — Section 33 of ITA Tanzania Revenue Authority (TRA). Regulations, 2014 (TP Regulations) • 2014 — TP Regulations were Citation for transfer pricing rules • Tanzania Revenue Authority (TRA) published and came to force on 2 • Section 33 of the Income Tax Act Transfer Pricing Guidelines (TP February 2014, even though the (ITA) requires that any arrangement Guidelines). Regulations became available to public on 23 May 2014.

What is the relationship threshold that runs until the proper documents are three methods (CUP, RPM, CPM) are for transfer pricing rules to apply prepared), or 100,000 Tanzanian shillings considered as traditional methods. between parties? (TZS), whichever is higher. The second However, the TP Regulations also lay offence is punishable by a penalty of The relationship threshold is as follows: down application of most appropriate either 50 percent or 100 percent of tax method having regard to the nature of • a company which controls or may that the authorities believe would have the transaction, or class of transaction, benefit from 50 percent or more of been underpaid if the omission went or class of associated persons or the rights to income or capital or undetected, depending on whether the functions performed by such person in voting power of other entity whether omission was made with reasonable relation to the transaction. directly or indirectly excuse (50 percent) or made knowingly • partners in the same partnership, or recklessly (100 percent). Hence, there seems to be an unless the Commissioner is satisfied inconsistency with the TP Regulations that it is not reasonable to expect that Transfer pricing study which also provide for application of OECD and UN model Tax Conventions either person will act in accordance overview with the intentions of the other; and which have themselves scrapped Can documentation be filed in hierarchy of transfer pricing methods. • an individual and a relative of the a language other than the local individual, unless the Commissioner language? If yes, which ones? is satisfied that it is not reasonable to Transfer pricing audit and expect that either individual will act Yes, English. penalties in accordance with the intentions of When a transfer pricing study is When the tax authority requests the other. prepared, should its content follow a taxpayer’s transfer pricing What is the statute of limitations Chapter V of the Organisation documentation, are there timing on assessment of transfer pricing for Economic Co-operation and requirements for a taxpayer to adjustments? Development (OECD) Guidelines? submit its documentation? And if so, how many days? Three years from the date of filing the Yes, for all transactions. The TP tax return. However, in cases where the Regulations are broadly based on OECD Yes, 30 days. Guidelines. tax authorities suspect fraud or intent When the tax authority requests to evade payment of tax, the three year A contemporaneous transfer pricing a taxpayer’s transfer pricing limitation can be ignored. documentation is required to be documentation, are there timing prepared and maintained before the requirements for a taxpayer to Transfer pricing due date of filing the final tax return. The submit its documentation? Please transfer pricing documentation needs to explain. disclosure overview be maintained and updated on a year on Yes. 30 days from date of such request. Are disclosures related to transfer year basis. pricing required to be submitted to If an adjustment is proposed by The transfer pricing documentation the revenue authority on an annual the tax authority, what dispute needs to be submitted to the revenue basis (e.g. with the tax return)? resolution options are available? authority only after receipt of request Yes. Details of related party transaction from Commissioner within 30 days of The tax authority first attempts to must be disclosed in the tax return. receipt of such request. resolve the dispute, and if this fails, dispute resolution is progressed to What types of transfer pricing Does the tax authority require an the Tax Revenue Appeals Board. If the information must be disclosed? advisor/tax practitioner to have taxpayer remains aggrieved by the specific designation in order to Description and amounts of related decision of the Appeals Board, an appeal prepare or submit a transfer pricing party transactions must be disclosed in can be lodged with the Tax Revenue study? the tax returns. Appeals Tribunal, and eventually with the What are the consequences of No. Court of Appeal. failure to submit disclosures? If an adjustment is sustained, can The taxpayer could be deemed either Transfer pricing methods penalties be assessed? If so, what to have failed to maintain proper Does your country follow the rates are applied and under what documents for a year of income, or transfer pricing methods outlined in conditions? to have misled the tax authorities in a Chapter II of the OECD Guidelines? The penalty for not having the transfer material manner by omitting to disclose If exceptions apply, please describe. pricing documentation In place is certain matters. The first offence is No. The TP Regulations provide for a imprisonment for a term not exceeding punishable by a monthly penalty of 2.5 hierarchy of transfer pricing methods six months or a fine not less than percent of any outstanding income tax with traditional methods ranking TZS50 million (approx. SD25,000 at the time of filing the return (a penalty higher than other methods. The first at the exchange rate of 1 USD =

TZS2000) or both. Contravention of the Is there a preference, or Are taxpayers allowed to file tax TP Regulations attracts a penalty of requirement, by the tax authorities return numbers that differ from 100 percent of the underpaid tax and for local comparables in a book numbers? resulting interest thereon. benchmarking set? Yes. With an approval from the Further, interest can be assessed where No. Priority is given to the availability of Commissioner. As per section 33 the sustained adjustment creates sufficient and verifiable information on of the Income Tax Act, 2004, the a situation where tax is deemed to both tested party and comparables. Commissioner is empowered to make have been paid later than its due date. corrective adjustments should he think TRA will not accept foreign tested parties Interest rates are amended annually, that the transactions between related where information is neither available nor based on the Bank of Tanzania discount parties are not at arm’s length. verifiable. rate at the beginning of the year. In Other unique attributes? 2014, the applicable rate is 21 percent Do tax authorities have per annum, compounded on a monthly requirements or preferences None. basis. regarding databases for comparables? To what extent are transfer pricing Tax treaty/double tax penalties enforced? No. resolution Without fail, penalties are computed Does the tax authority generally What is the extent of the double tax and assessed where a taxpayer is focus on the interquartile range in a treaty network? deemed to have failed to pay tax by the TNMM analysis? Minimal. date on which it was due. Yes, always. If extensive, is the competent What defenses are available with Does the tax authority have other authority effective in obtaining respect to penalties? preferences in benchmarking? If so, double tax relief? Documentation and reasonable cause. please describe. Not applicable. The tax authority has legislative power to None. reduce or remove penalties where the When may a taxpayer submit an taxpayer submits justifiable reasons for What level of interaction do tax adjustment to competent authority? authorities have with customs the reduction or removal to be considered. Where the taxpayer essentially feels authorities? What trends are being observed that the adjustment is creating double currently? Significant. The customs authorities are taxation (taxation of the same income in actually a facet/department of the larger Tanzania and in another jurisdiction), and Generally, all transactions between local tax authority. the two countries share a double tax companies and their related parties relief treaty that provides for competent who are Tanzanian non-resident are Are there limitations on authority intervention. coming under immense scrutiny. The deductibility of management fees tax authority is asking for evidence beyond the arm’s length principle? May a taxpayer go to competent authority before paying tax? that services were rendered (where Yes, some. For management fee to be the transactions relate to payment by deductible, in addition to arm’s length Yes, provided that negotiations with the Tanzanian company for services principle they should be incurred for the tax authority have failed and the provided by related persons); together business purposes. tax authority has either made a final with documentation proving that the decision to proceed with the adjustment Are management fees subject to prices were at arm’s length. Where or has raised an assessment for tax that withholding? the authorities remain dissatisfied, the the taxpayer disagrees with. consequence is for the service fees/ Yes. related party payments to be disallowed as expenses for the Tanzanian company, Are there limitations on the Advance pricing thus increasing taxable profits. deductibility of royalties beyond the agreements arm’s length principle? What APA options are available, if Special considerations Yes. For royalties to be deductible, any? in addition to arm’s length principle Are secret comparables used by tax Unilateral, bilateral, multilateral. authorities? they should be incurred for business purposes. Is there a filing fee for APAs? The tax authority may use comparables that will not be disclosed to the taxpayer Are royalties subject to No formal rules exists in this area. due to the confidentiality of the withholding? information collected by the authority Yes. from other taxpayers.

Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? Not applicable. Are there any difficulties or limitations on the availability or effectiveness of APAs? Yes. The APA program is provided for in the income tax regulations, but the tax authority has been hesitant to conclude any APAs with taxpayers, and we suppose that the reason for this would be the lack of skilled expertise in the tax authority in so far as transfer pricing is concerned.

KPMG in Tanzania

David Gachewa Tel: +255 22 2122003 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Thailand

KPMG observation

In May 2015, the Thai cabinet approved a draft Transfer Pricing law that will amend the Revenue Code to prevent tax evasion driven by transfer pricing. The purpose of draft law is to add provisions in the Thailand Revenue Code which will: • define the criteria for determining pricing that should be applied between related entities • allow a tax officer to make adjustments to assessable income and allowable deductions; and • determine the period of eligibility for tax refunds. One of requirements of the draft law is that entities with related party transactions will have to prepare and submit certain documentation within 150 days of the end of their accounting period. Failure to do so will result in a penalty of up to 400,000 Thai baht (THB) (about 12,000 US dollars (USD)). The draft law is broad, and it is expected that more details (which may be in form of Departmental Instruction or Notification) will be issued once the law is enacted. Given this new transfer pricing law — specifically, the provision for mandatory transfer pricing documentation ‚ transfer pricing will be one of the most pressing issues in Thailand going forward. A company operating in Thailand, with related party transactions, should be prepared to manage its transfer pricing risk and compliance.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Sections 65 bis (4), (7) Transfer Pricing Law: Cabinet has approved draft law in May 2015. The law Tax authority name • Section 65 ter (13), (14), and (15). has not been enacted. Krom Sumpakorn (Thai Revenue Specific rules: Effective date of transfer pricing Department (TRD)). Departmental Instruction Paw 113/2545. rules Citation for transfer pricing rules The Guidance on the Advance Pricing Agreement (APA) Process (APA Specific rules issued in May 2002 as General laws: Guidance) was issued in April 2010. guidelines for TRD officers. No legal effect.

What is the relationship threshold Under the draft transfer pricing law, there If an adjustment is proposed by for transfer pricing rules to apply will be a penalty up to THB400,000 (about the tax authority, what dispute between parties? USD 12,000) if the taxpayer does not resolution options are available? submit the document as required by law. Direct or indirect relationship with If a conclusion cannot be reached at regard to management, control or the documentation review and a notice capital. Transfer pricing study of assessment is issued, the dispute may be settled by filing a tax appeal What is the statute of limitations overview within 30 days after receiving the notice on assessment of transfer pricing Can documentation be filed in of assessment. If the taxpayer fails to adjustments? a language other than the local language? If yes, which ones? obtain a successful resolution at this Five years from due date or filing date. level, the taxpayer may appeal to the tax Transfer pricing assessments follow Yes but may be asked to provide Thai court. the statute of limitations on income tax translation. English. If an adjustment is sustained, can return audits, which is five years from When a transfer pricing study is penalties be assessed? If so, what due date of tax return, or from filing date prepared, should its content follow rates are applied and under what if failure to file by due date. Chapter V of the Organisation conditions? for Economic Co-operation and Transfer pricing Development (OECD) Guidelines? Yes. General income tax penalties — i.e. a surcharge of 1.5 percent per month of disclosure overview Yes, for certain transactions. Thailand additional tax payable up to the amount Are disclosures related to transfer is not an OECD member. However, of tax will be imposed. Penalties of up to pricing required to be submitted to Thailand’s transfer pricing guidelines 100 percent of additional tax payable will the revenue authority on an annual follow similar concepts to the OECD. be added if the adjustment is made as a basis (e.g. with the tax return)? Does the tax authority require an result of a tax audit summons. No. No specific requirement for transfer advisor/tax practitioner to have To what extent are transfer pricing pricing disclosure. However, there specific designation in order to penalties enforced? are questions in the annual corporate prepare or submit a transfer pricing Always (if the adjustment results in income tax return (yes or no answers) study? additional tax). which the taxpayer is required to answer No. in relation transactions departing from What defenses are available with market price. respect to penalties? Transfer pricing methods Under the draft transfer pricing law, None, if there is tax payable. It is Does your country follow the the taxpayer is required to submit the necessary to negotiate with the tax transfer pricing methods outlined in document required by law within the authorities at the documentation review Chapter II of the OECD Guidelines? same deadline of tax return. The level of to reduce the assessed tax amount If exceptions apply, please describe. disclosure has not been available yet. such that the penalties can be reduced Yes. accordingly. What types of transfer pricing information must be disclosed? What trends are being observed Transfer pricing audit and currently? The questions in the tax return that require the taxpayer’s confirmation are: penalties Tangible property transactions are still When the tax authority requests the main target but the tax authorities • has the business sold products, a taxpayer’s transfer pricing are more and more focused on services or property, lent money, or documentation, are there timing intragroup services transactions as well. leased out property, without value requirements for a taxpayer to If there are intra-group fees for services received or with received value below submit its documentation? And if or for intangible property, there may market price in amounts considered so, how many days? be questions about tax deductions. substantial? The taxpayers are often required to Yes, seven days. • has the business bought assets, or demonstrate that the services have incurred expenses in acquiring such When the tax authority requests been received and are relevant to assets, at a value above normal price a taxpayer’s transfer pricing the Thai operations, and that the in an amount considered substantial? documentation, are there timing consideration is not excessive. What are the consequences of requirements for a taxpayer to failure to submit disclosures? submit its documentation? Please explain. Special considerations Not applicable (the questions in the Are secret comparables used by tax A normal timeline in the tax authorities’ annual corporate income tax return, as authorities? requested letter is between 7 and 15 mentioned, have to be answered as part days, but, in practice, a request for an This is possible. of the tax return). extension is possible.

Is there a preference, or Are taxpayers allowed to file tax more requests for APAs. With more requirement, by the tax authorities return numbers that differ from experience and the requirement to for local comparables in a book numbers? submit the APA application in both Thai benchmarking set? and English, the Thai tax authorities Yes. It is strongly recommended that should begin to review and process Yes. If the taxpayers do not provide the year-end transfer pricing adjustment the APAs faster. The APA working team a set of local comparable companies should be performed before closing has been requesting factory tours, in during the transfer pricing audits, the the financial statements for the period. the case of manufacturing subsidiaries transfer pricing audit team will conduct Care must be taken if the transfer in Thailand, in order to obtain more their own search for local comparables pricing adjustment results in reduced understanding of functional and risk and use the local benchmarking results profitability in Thailand. profiles as well as manufacturing as a starting point to challenge the Other unique attributes? process for comparable selection. taxpayers. None. Do tax authorities have requirements or preferences regarding databases for Tax treaty/double tax comparables? resolution No requirements, however, the tax What is the extent of the double tax authorities use Business Online, a well- treaty network? known local database. Extensive. Does the tax authority generally If extensive, is the competent focus on the interquartile range in a authority effective in obtaining TNMM analysis? double tax relief? Yes, always. No experience. Does the tax authority have other When may a taxpayer submit an preferences in benchmarking? If so, adjustment to competent authority? please describe. No formal rules exist in this area. No. May a taxpayer go to competent What level of interaction do tax authority before paying tax? authorities have with customs authorities? Where a client requires double taxation relief, the same can be obtained from None. the tax authorities prior to paying the Are there limitations on tax. deductibility of management fees beyond the arm’s length principle? Advance pricing Yes, some. Generally, management agreements fees are deductible if the taxpayer can What APA options are available, if substantiate the expenses incurred for any? business and the fees are not excessive. Bilateral. Are management fees subject to withholding? Is there a filing fee for APAs? Yes. No. Are there limitations on the Does the tax authority publish APA deductibility of royalties beyond the data either in the form of an annual KPMG in Thailand arm’s length principle? report or through the disclosure of data in public forums? Yes. For tax deduction, Thai tax authority Benjamas Kullakattimas would also focus on benefits received No. Tel: +66 2 677 2426 by Thailand. Are there any difficulties or Email: [email protected]

Are royalties subject to limitations on the availability or Abhisit Pinmaneekul withholding? effectiveness of APAs? Tel: +66 2 677 2470 Yes. No. Since the APA guidance has been Email: [email protected] issued in April 2010, there have been As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Turkey

KPMG observation

Turkey follows global trends, and the Turkish government is implementing new compliance rules, and opening many audits, in the area of transfer pricing. Since the beginning of 2007, transfer pricing has emerged as one of the main focus of inquiries by the Turkish tax authorities. During recent years, this focus on transfer pricing has intensified. Management fees and royalties are the most frequent issues raised in these recent tax audits. In addition, if taxpayers have internal comparables, the Turkish tax authorities generally have been trying to use these prices as a comparable in tax audits even if the factors are not completely comparable. Therefore, taxpayers are advised to use internal comparables wherever possible, and, to include discussion of the selection or rejection of internal comparables along with the factors of comparability considered. Regarding Base Erosion and Profit Shifting (BEPS) Action Plan and the United Nations (UN) Practical Transfer Pricing Manual for Developing Countries issued October 2012, the Turkish administration has not taken any action thus far. Since Turkey already has a ‘substance over form’ principle under its Tax Procedural Law, the application of BEPS may require only minor changes in transfer pricing rules in the future.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Transfer Pricing Communiqué No. 2 A rule that was added to Article 13 — 22 April 2008 states that the “disguised profit Tax authority name • General Communiqué No. 3 — distribution through transfer pricing” Revenue Administration, Ministry of November 2008 provision would be applicable if there Finance. is a “treasury loss” with respect to the • Decree 2007/12888 — 6 December Citation for transfer pricing rules domestic intra-group transactions of a 2007 corporate taxpayer. The term “treasury • Article 13 of Corporate Tax Law No. • Decree 2008/13490 — 13 April 2008; loss” is defined as an under-declaration 5520 and or late declaration of all types of taxes resulting from transfer prices that do not • Transfer Pricing Communiqué No. • Circular TF-1/2008–1 — 24 April 2008. 1–18 November 2007 comply with the arm’s length principle.

This rule was effective as from 6 June • a summary of the transfer pricing When the tax authority requests 2008 and applied to 2008 and later tax methods used for the transactions. a taxpayer’s transfer pricing returns. What are the consequences of documentation, are there timing requirements for a taxpayer to Effective date of transfer pricing failure to submit disclosures? submit its documentation? Please rules The tax penalty for failure to prepare or explain. 1 January 2007. submit the disclosures is a procedural irregularity penalty, which is immaterial. See prior question. What is the relationship threshold However, this failure may cause further If an adjustment is proposed by for transfer pricing rules to apply tax audit and tax assessment by the tax the tax authority, what dispute between parties? authorities. resolution options are available? Based on shareholding (an individual or a The taxpayer may choose to apply to legal entity related to a shareholder) that Transfer pricing study courts in its jurisdiction. provides a direct or indirect control over related parties including a transaction overview If an adjustment is sustained, can effected with a resident of a low-tax Can documentation be filed in penalties be assessed? If so, what jurisdiction i.e. a resident located in a tax a language other than the local rates are applied and under what haven country. There are no thresholds language? If yes, which ones? conditions? for transfer pricing rules to apply No. Yes. The tax penalty equals 100 percent between parties. When a transfer pricing study is of the additional taxes accrued. If the What is the statute of limitations prepared, should its content follow tax assessment is in recurring nature on assessment of transfer pricing Chapter V of the Organisation (taxpayer has been imposed to more adjustments? for Economic Co-operation and than one tax assessment in five years time), the penalty equals to 150 percent Five years starting from the close of Development (OECD) Guidelines? of the additional taxes accrued. related fiscal period (i.e. 31 December No. There is no official binding 2014 is the expiry period for the fiscal requirement to follow OECD Guidelines. To what extent are transfer pricing year 2009). Following the completion OECD Guidelines should only be used penalties enforced? of fiscal period, no tax related for reference purposes. Where there is a penalty assessment adjustment/tax return preparation/use after a tax audit for transfer pricing of standard tax attributes is allowed for Does the tax authority require an issues, these penalties are almost taxpayers and it is binding for the tax advisor/tax practitioner to have always enforced. administration as well, since it is not specific designation in order to authorized to carry out tax audits on prepare or submit a transfer pricing What defenses are available with the accounts of taxpayers or make tax study? respect to penalties? adjustments. No. Taxpayers can apply for settlement after a tax penalty is imposed. Generally Transfer pricing Transfer pricing methods 80 to 100 percent of the penalties are disclosure overview Does your country follow the cancelled by virtue of settlement. Are disclosures related to transfer transfer pricing methods outlined in What trends are being observed pricing required to be submitted to Chapter II of the OECD Guidelines? currently? the revenue authority on an annual If exceptions apply, please describe. The structural change in the tax audit basis (e.g. with the tax return)? No. CUP method has priority over organization of the Ministry of Finance Yes. All corporate taxpayers are required other methods. Turkish transfer pricing has contributed to the increased to complete and attach a transfer pricing rules are not updated per to OECD number of transfer pricing audits. In July form attached to their annual corporate Chapter II. 2011, tax auditors were reorganized and income tax returns to be submitted with merged under a single board, the Turkish the corporate tax return. Transfer pricing audit Tax Inspection Board. Four subgroups were formed under this board, one of What types of transfer pricing and penalties which was organized to perform transfer information must be disclosed? When the tax authority requests pricing investigations as a special The information should include: a taxpayer’s transfer pricing department. documentation, are there timing • the list of related parties that the requirements for a taxpayer to This formation shows that transfer taxpayer entered into the transaction submit its documentation? And if pricing is regarded as a special field in with so, how many days? tax audits and is organized accordingly. • the amounts of related party Recurring losses, royalties and intra- Yes, 15 days. transaction by transaction type (i.e. group service charges are the specific financing, services, goods etc.); and focus areas of transfer pricing audits.

Tax auditors tend to treat management Are there limitations on the Is there a filing fee for APAs? fee charges as royalties and apply deductibility of royalties beyond the Yes. Effective 1 January 2015, the withholding taxes. arm’s length principle? application fee for an APA is 50,202 No. Turkish lira (TRY) (approximately Special considerations 19,000 US dollars (USD)). The fee Are royalties subject to for an APA application renewal is Are secret comparables used by tax withholding? authorities? TRY40,162 (approximately USD15,400). No. The application and renewal fees are Yes, secret comparables are used by typically re-assessed at the beginning of the tax authorities. Since there are Are taxpayers allowed to file tax each calendar year. not enough local comparables in the return numbers that differ from database, tax authorities choose to book numbers? Does the tax authority publish APA data either in the form of an annual adopt secret comparables. Yes. Satisfying that the differences are report or through the disclosure of Is there a preference, or explainable and supportable. data in public forums? requirement, by the tax authorities Other unique attributes? for local comparables in a No. None. benchmarking set? Are there any difficulties or There is no requirement for using local limitations on the availability or databases. However, Tax authorities Tax treaty/double tax effectiveness of APAs? have a preference for local comparables. resolution Yes. Turkey’s APA system is still in its If a broader set is used, performing What is the extent of the double tax early stages. The first unilateral APA was necessary adjustments including country treaty network? concluded in July 2011 and the other specific adjustments is recommended. two agreements were signed as of There are a limited number of local Extensive. Turkey has signed 80 income December 2012. However, corporations comparables in the Amadeus database, tax treaties to date, and these generally in Turkey are becoming more aware of therefore, both local comparables and include mutual agreement procedures its advantages as APA is regarded as broader sets can be used. (MAPs) in Article 25 of the subject treaties. a major means of resolving transfer Do tax authorities have pricing disputes globally. requirements or preferences If extensive, is the competent regarding databases for authority effective in obtaining comparables? double tax relief? Tax Authorities have Amadeus (Orbis) Not effective. and Thomson Reuters. When may a taxpayer submit an Does the tax authority generally adjustment to competent authority? focus on the interquartile range in a A taxpayer must make a MAP application TNMM analysis? within the time period listed in the double Yes, sometimes. tax treaty. However, if the double tax treaty does not provide a time period Does the tax authority have other for filing a MAP application, then the preferences in benchmarking? If so, period for making a MAP application will please describe. be determined by the tax laws of the Not applicable. country, which is one year for Turkey. MAP request can be made when the What level of interaction do tax double taxation have been realized. authorities have with customs authorities? May a taxpayer go to competent authority before paying tax? The two authorities are generally working separately. No. Are there limitations on deductibility of management fees Advance pricing beyond the arm’s length principle? agreements KPMG in Turkey What APA options are available, if No. Abdulkadir Kahraman any? Are management fees subject to Tel: +902166819000 withholding? Unilateral, bilateral, multilateral. Email: [email protected] Yes. As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Uganda

KPMG observation

Transfer pricing rules in Uganda came into effect on 1 July 2011. From that time, the Income Tax Act (the Act) and the Transfer Pricing Regulations contained therein became binding legislation. Under the Act, the Organisation for Economic Co-operation and Development (OECD) Guidelines are to be referred to unless they differ from the Act, in which case, the Act takes precedence. A practice note was released in May 2012 to aid taxpayers in compliance. The 2012/2013 financial year was the first time taxpayers had to have transfer pricing documentation in place. As a result, information on trends and existing practices is still limited.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold The Income Tax Act also allows the taxpayer to amend their return in case Tax authority name for transfer pricing rules to apply between parties? there are some adjustments to be made Uganda Revenue Authority (URA). but does not give a limitation on the The rules apply to controlled time within which this can be done. Citation for transfer pricing rules transactions for multinational S.90 and S.91 of the Income Tax Act, enterprises (MNEs) or controlled Cap. 340 read together with the Transfer transactions in aggregate equal to or Transfer pricing Pricing Regulations 2011, OECD and the exceeding 25,000 currency points in disclosure overview Transfer Pricing Practice Note, 2012. a year of income (500 million Uganda Are disclosures related to transfer shillings (UGX)). This relates to pricing required to be submitted to Effective date of transfer pricing transactions between related parties the revenue authority on an annual rules within Uganda. There is no threshold for basis (e.g. with the tax return)? Although the transfer pricing regulations transactions across borders. No. The taxpayer is not required to came into effect 1 July 2011, S.90 and 91 What is the statute of limitations submit disclosures to the URA on an of the Income Tax Act had been in place on assessment of transfer pricing annual basis but is expected to keep requiring taxpayers with related party adjustments? all information up to date related to the transactions to deal at arm’s length. This has not yet been specified. The transfer pricing policies, to be provided Act gives the URA commissioner the to the URA on request. authority to make adjustments but does not indicate a time limit for such adjustments.

What types of transfer pricing Transfer pricing methods To what extent are transfer pricing information must be disclosed? Does your country follow the penalties enforced? Not applicable. transfer pricing methods outlined in The extent of enforcement will only Chapter II of the OECD Guidelines? be known after some companies have What are the consequences of If exceptions apply, please describe. been found not to be compliant on failure to submit disclosures? carrying out reviews of their transfer Yes. Not applicable. pricing documentation. Transfer pricing audit What defenses are available with Transfer pricing study respect to penalties? overview and penalties When the tax authority requests Default defense is documentation but Can documentation be filed in a taxpayer’s transfer pricing other defenses are to be established a language other than the local documentation, are there timing once the authorities have taken on language? If yes, which ones? requirements for a taxpayer to some noncompliant taxpayers. Yes, English. submit its documentation? And if What trends are being observed so, how many days? When a transfer pricing currently? study is prepared, should its No. The Tax Authorities have started asking content follow Chapter V of the When the tax authority requests for policies from taxpayers. Organisation for Economic Co- a taxpayer’s transfer pricing operation and Development documentation, are there timing Special considerations (OECD) Guidelines? requirements for a taxpayer to Are secret comparables used by tax Yes, for all transactions. In addition, submit its documentation? Please authorities? the Practice Note also gives guidelines explain. of the required documentation to be Unknown. The authorities are just This has not been specified. The maintained by the taxpayer: starting to roll out audits of transfer Regulations state that the policy pricing documentation prepared by • Company details including brief should be submitted upon request. The taxpayers. history and the relationships taxpayer is expected to have the policy with their related parties, brief in place before filing the annual tax Is there a preference, or history of the company, worldwide return for the year of income. requirement, by the tax authorities organizational structure and for local comparables in a If an adjustment is proposed by participants in the transactions. benchmarking set? the tax authority, what dispute • Transaction details including resolution options are available? No. description of the transactions, Not yet specified, but it is expected that Do tax authorities have names of the participants and the the tax authorities would pay attention requirements or preferences functions of each of the parties in the to explanations by the tax consultants in regarding databases for transaction. defending transactions and in case this comparables? • Determination of arm’s length does not work out, the tribunal would None have been specified. entailing selection of the method have jurisdiction for such cases. and the reason for selection of the Does the tax authority generally method, searches and databases If an adjustment is sustained, can focus on the interquartile range in a used, and, the criteria used in the penalties be assessed? If so, what TNMM analysis? selection of comparables. rates are applied and under what conditions? Yes, sometimes. • Conclusion as to whether Does the tax authority have other transactions with the related parties This has not been specified, but it is preferences in benchmarking? If so, are at arm’s length basing on the expected that penalties would be the please describe. comparables derived from the same as if one had not submitted a database used. policy in the first place, i.e. a financial No experience yet. penalty of UGX500,000, and/or six What level of interaction do tax Does the tax authority require an months imprisonment for the directors authorities have with customs advisor/tax practitioner to have if convicted. There would also be authorities? specific designation in order to penalties in respect of the tax not paid prepare or submit a transfer pricing that should have been paid, based The customs body is a subset of the tax study? on the taxation Acts. The penalty for authority and hence there is a high level No. income tax is two percent per month. of interaction and all information from customs is accessible to the authorities.

Are there limitations on Advance pricing deductibility of management fees beyond the arm’s length principle? agreements What APA options are available, if Yes. The income Tax Act gives the any? commissioner the powers to reclassify transactions and if a fee is deemed Unilateral, bilateral, multilateral. above arm’s length, the commissioner Is there a filing fee for APAs? may disallow the excess. Not applicable. Does the tax authority publish APA Are management fees subject to data either in the form of an annual withholding? report or through the disclosure of Yes. data in public forums? Are there limitations on the Not applicable. deductibility of royalties beyond the Are there any difficulties or arm’s length principle? limitations on the availability or Yes. Excess over the arm’s length price effectiveness of APAs? may be disallowed. No known case has been handled. Are royalties subject to withholding? Yes. Are taxpayers allowed to file tax return numbers that differ from book numbers? No. The URA has not yet clarified this but it is highly unlikely that such adjustments will be acceptable. Other unique attributes? There are no specifications on the use of single versus multiple year data or same year data.

Tax treaty/double tax resolution What is the extent of the double tax treaty network? Minimal (there are double taxation agreements with only seven countries). If extensive, is the competent authority effective in obtaining double tax relief? Not applicable. When may a taxpayer submit an adjustment to competent authority? Not applicable. May a taxpayer go to competent KPMG in Uganda authority before paying tax? Benson Ndung‘u This has not been specified. Tel: +256 414 340315/6 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Ukraine

KPMG observation

A law in Ukraine concerning transfer pricing, that is effective as of 1 January 2015, enhances the compliance rules for taxpayers. Concerning transfer pricing, the law: • expands the criteria for those that qualify as related parties • revises the requirements for controlled transactions • imposes new compliance requirements • increases the penalty regime; and • introduces a new mechanism for transfer pricing adjustments. Under the new transfer pricing law, the arm’s length principle is introduced, and this standard must apply to all controlled transactions. Transactions with non-resident related parties as well as with non-related parties registered in certain jurisdictions, as listed by the Cabinet of Ministers of Ukraine, are deemed controlled if the following criteria are satisfied: • a taxpayer’s and/or the related parties’ joint annual revenue exceeds 20 million Ukrainian Hryvnia (UAH) (approximately 757,000 US dollars (USD)); and • the transaction volume exceeds the lesser of UAH1 million or three percent of the taxpayer’s annual revenue. Given the devaluation of the Ukrainian currency, it appears that the vast majority of business transactions of all types involving (non-resident) related parties will be deemed to be controlled transactions, thereby imposing an additional compliance burden on Ukrainian companies with foreign capital. Prices in controlled transactions are assumed not to be at arm’s length, unless otherwise proved by the taxpayer. Companies must also prove that the commercial and economic conditions of a controlled transaction are comparable to those for transactions between unrelated parties. The burden of proof, thus, shifts from the tax authorities to taxpayers engaged in controlled transactions. Ukrainian companies need to review their intra-group transactions and prepare thorough transfer pricing documentation (in the Ukrainian language) so as to confirm that the arm’s length principle has been applied in such transactions. An advance pricing agreement (APA) between the taxpayer and the tax authorities can provide a level of certainty against adjustments and penalties.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous Submission to tax authority required

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information • Moreover, the tax authorities can What are the consequences of prove in court that the parties Tax authority name failure to submit disclosures? are related “based on facts and 300 minimal wages, as set at the State Fiscal Serfice of Ukraine (SFS). circumstances” by demonstrating beginning of the reporting year (UAH that one legal entity (or physical Citation for transfer pricing rules 1218 or ca. USD55 for 2015) for person) had practical control over failure to file the Report on Controlled Tax Code of Ukraine (TC): another entity’s (or both entities’) Transactions in a timely fashion. • Paragraph 14.1.159 (definition of business decisions. One percent of the volume of related parties) What is the statute of limitations transactions not disclosed in the Report on assessment of transfer pricing • Article 39 (arm’s length principle, on Controlled Transactions (but not more adjustments? definition of controlled transactions, than 300 minimal wages). transfer pricing methods, advance Seven years. pricing agreements); and Three percent of the transaction volume for failure to submit transfer pricing • Articles 133 — 142 (corporate profit Transfer pricing documentation at request, but not tax). disclosure overview more than 200 minimal wages for all controlled transactions. Effective date of transfer pricing Are disclosures related to transfer rules pricing required to be submitted to Minimal wages = UAH1218 as of 1 September 2013. Enhanced transfer the revenue authority on an annual 1 January 2015 (ca. USD55 using the pricing rules came into force on basis (e.g. with the tax return)? exchange rate for 18 August 2015). This amount is reviewed annually by the 1 January 2015. Yes. Taxpayers engaged in controlled Government of Ukraine. What is the relationship threshold transactions during the reporting for transfer pricing rules to apply year must file a Report on Controlled between parties? Transactions with the Ukrainian tax Transfer pricing study authorities no later than 1 May of the • Ownership of at least 20 percent overview next calendar year. of capital, directly or through third Can documentation be filed in entities. If an entity is owned by Transfer pricing documentation must be a language other than the local another entity or physical person both prepared at the time when a transaction language? If yes, which ones? is performed, but submitted upon directly or through third entity(ies), No. all direct and indirect ownership request of the tax authorities only. When a transfer pricing study is will be added to calculate effective What types of transfer pricing prepared, should its content follow ownership. information must be disclosed? Chapter V of the Organisation • Entities under common control (by The Report on Controlled Transactions for Economic Co-operation and ownership, voting power, common must contain detailed information on Development (OECD) Guidelines? management) will be recognized as the subjects of controlled transactions, related. Yes, for all transactions. including (physical) characteristics, • If the amount of all loans provided industry-specific codes, prices applied, and/or guaranteed by one party to transfer pricing method used, arm’s another exceeds a ratio of 3.5 of the length price etc. recipient company’s own capital, parties are recognized to be related.

Does the tax authority require an Administrative Court, Administrative closest market. However, this only applies advisor/tax practitioner to have Court of Appeal, High Administrative if the selected tested party is a resident specific designation in order to Court and Supreme Court of Ukraine (for of Ukraine. The Tax Code states that the prepare or submit a transfer pricing limited instances only), in that order. selected tested party does not necessarily study? need to be a resident of Ukraine. If an adjustment is sustained, can No. penalties be assessed? If so, what Do tax authorities have rates are applied and under what requirements or preferences Transfer pricing methods conditions? regarding databases for comparables? Does your country follow the If a transfer pricing adjustment results transfer pricing methods outlined in in additional tax liabilities, the taxpayer The tax authorities give preference Chapter II of the OECD Guidelines? can be subject to penalties of 25 to state statistical information and If exceptions apply, please describe. percent and up to 75 percent of the tax databases. underpayment if there is a recurring No. Transfer pricing methods described The following official sources of violation. in Chapter II of the OECD Guidelines information will be acceptable for are recognized and used in Ukraine. A taxpayer can reassess own tax establishing the arm’s length price: liabilities in connection with transfer However, a specific hierarchy of these • information sources officially pricing adjustments and reflect them in methods applies: approved by the Cabinet of Ministers the tax return. In this case, no penalties 1) CUP method of Ukraine apply. Such reassessment can also 2) Resale Price or Cost Plus method; be made and filed separately after the • statistical data of the state authorities and tax return is submitted. In such case, and agencies 3) TNMM or Profit Split method. penalties will apply to the amount of • commodity exchange prices and underpaid tax for each day of delay. stock exchange quotation If a taxpayer engages in a transaction with a counterparty (whether related The penalty for violations (use of non- • benchmark prices of specialized or not) registered in a so-called “low- arm’s length transfer prices) committed commercial publications, including tax” jurisdictions, and subject(s) of the in 2013 and 2014 is UAH1. electronic and other databases transaction are listed commodities, CUP To what extent are transfer pricing • reports and data provided by method must be applied. In other cases, penalties enforced? economic departments of Ukrainian the taxpayer must submit to the tax diplomatic missions abroad authorities copies of contracts used in the Strictly enforced. • results of public auctions; and entire supply chain of such commodities, What defenses are available with up to the first unrelated party. respect to penalties? • internal comparable prices of taxpayers. Contemporaneous transfer pricing Transfer pricing audit documentation. If the official sources do not contain and penalties sufficient information for the analysis What trends are being observed of prices in controlled transactions, When the tax authority requests currently? other information sources, including a taxpayer’s transfer pricing commercial databases (RUSLANA, documentation, are there timing The Ukrainian tax authorities have Amadeus, Thomson Reuters, ktMINE requirements for a taxpayer to already requested about 60 transfer and Bloomberg etc.) can be used. submit its documentation? And if pricing documentations from taxpayers. so, how many days? The first special tax audit in the field is Does the tax authority generally underway. We expect numerous court focus on the interquartile range in a Yes, 30 days. disputes between the taxpayers and the TNMM analysis? When the tax authority requests tax authorities to begin in the nearest No. a taxpayer’s transfer pricing future. documentation, are there timing Does the tax authority have other requirements for a taxpayer to Special considerations preferences in benchmarking? If so, submit its documentation? Please Are secret comparables used by tax please describe. explain. authorities? The Ukrainian transfer pricing legislation Yes, 30 days. No. The use of secret comparables is prescribes the use of a range that is calculated slightly differently from the If an adjustment is proposed by forbidden. interquartile range, though resembles it the tax authority, what dispute Is there a preference, or closely. resolution options are available? requirement, by the tax authorities What level of interaction do tax Following the administrative procedure, for local comparables in a authorities have with customs a taxpayer can apply to the tax authority benchmarking set? authorities? of a higher ranking. If still dissatisfied, Yes. Ideally, the comparables should be the taxpayer can file a claim to District local or derived from the geographically High.

Are there limitations on Are taxpayers allowed to file tax May a taxpayer go to competent deductibility of management fees return numbers that differ from authority before paying tax? beyond the arm’s length principle? book numbers? No (see above). Yes, some. Management fees are Yes. True-up adjustments are allowed; generally deductible in full. true-down adjustments are not allowed. Advance pricing Management fees payable to a non- Generally, the numbers in the tax return agreements resident service provider are deductible will differ from the book numbers due What APA options are available, if in the amount of 70 percent of such fees to adjustments, as prescribed by the Tax any? if paid to a non-resident registered in a Code. “low-tax” jurisdiction. Unilateral, bilateral, multilateral. Other unique attributes? The above limitation does not apply to Is there a filing fee for APAs? Information available at the moment transactions, for which a taxpayer has when controlled transaction is No. a contemporaneous transfer pricing performed and/or information documentation substantiating the Does the tax authority publish APA available from previous years can arm’s length level of prices in such data either in the form of an annual be used. Common practice is to use transactions (even if such transaction report or through the disclosure of multiple-year data (usually, data is used is not deemed controlled for transfer data in public forums? from three years preceding the year pricing purposes). when controlled transaction took place). No. Are management fees subject to Are there any difficulties or withholding? Tax treaty/double tax limitations on the availability or No. resolution effectiveness of APAs? Are there limitations on the What is the extent of the double tax Yes. APAs are only available to large deductibility of royalties beyond the treaty network? taxpayers. arm’s length principle? Extensive (nearly 70 effective double tax Yes. Royalties are only deductible in the treaties). amount not exceeding 4 percent of the If extensive, is the competent previous year’s revenue. authority effective in obtaining Royalties are fully non-deductible if: double tax relief? • paid to a non-resident registered in a Yes. Historically, double tax relief has “low-tax jurisdiction been available to a taxpayer if there was • paid to any non-resident with regard a valid tax residence certificate of its to intangible property, the ownership counterparty confirming that the latter rights for which were initially created is tax resident in a jurisdiction which in Ukraine has an effective double tax treaty with Ukraine. • paid to a non-resident who is not the beneficial owner of royalties Since 2011, the Tax Code introduced a beneficial ownership concept as • paid to a non-resident who is not an additional mandatory prerequisite subject to tax with regard to royalties for the application of a double tax in their jurisdiction; or treaty relief. The tax authorities have • paid to any legal entity (resident or already started challenging certain non-resident) who is not subject to structures (e.g. trademark sublicensing income tax or pays it at a different contracts) which they believe have been rate, or pays it included in the amount introduced to benefit from the double of other taxes. tax treaty protection. The above limitations do not apply, When may a taxpayer submit an and royalties are deductible in full if adjustment to competent authority? proved to be at arm’s length (via a If a corresponding adjustment is contemporaneous transfer pricing KPMG in Ukraine applicable, the taxpayer may only claim documentation), even if such transaction a corresponding adjustment after its is not deemed controlled for transfer Konstantin Karpushin counterparty has paid the amount of tax pricing purposes. Tel: +38 044 490 55 07 resulting from the adjustments of their Email: [email protected] Are royalties subject to tax liabilities. Documents verifying that withholding? such payment has been made must As email addresses and phone numbers be available in order for the taxpayer to Yes. change frequently, please email us at claim a corresponding adjustment. [email protected] if you are unable to contact us via the information noted above.

United Kingdom

KPMG observation

Her Majesty’s Revenue and Customs (HMRC) supports the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative and the UK is expected to be an early adopter of the recommendations arising from the BEPS Action Plan. The UK transfer pricing legislation already incorporates the 2010 OECD Transfer Pricing Guidelines and KPMG in the UK is starting to see the principles contained in the new draft of Intangibles Chapter VI being raised during HMRC inquiries. Following BEPS, KPMG in the UK expects to see an increase in Advance Pricing Agreement (APA) applications and Mutual Agreement Procedures (MAP) claims. HMRC recognizes the importance of these tools in making the UK a good place to do business and helping taxpayers manage their double taxation risk. Its willingness to assist taxpayers and enter into negotiations with other tax authorities will continue after BEPS.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Thresholds apply/exist

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Effective date of transfer pricing rules small, direct relationship between the lender and borrower. Tax authority name 1 July 1999. What is the statute of limitations HMRC (Her Majesty’s Revenue and What is the relationship threshold on assessment of transfer pricing Customs). for transfer pricing rules to apply adjustments? Citation for transfer pricing rules between parties? Four years from tax year-end (except in Ownership between 40 percent and For years ending before 1 April 2010, cases involving fraud or carelessness). 50 percent; based on voting power, Schedule 28AA ICTA 1988. For years share capital, or management control. ending on or after 1 April 2010, the With respect to financing transactions, Transfer pricing relevant legislation has been rewritten where the lender has acted together as Part 4 of the Taxation (International disclosure overview with shareholders to provide funding, and Other Provisions) Act 2010. The Are disclosures related to transfer the shareholders’ stake can be attributed changes were merely an attempt to pricing required to be submitted to to the lender, meaning a financing present the legislation in a more logical the revenue authority on an annual transaction may be caught by the and accessible format. basis (e.g. with the tax return)? legislation where there is no, or a very No.

What types of transfer pricing If an adjustment is proposed by HMRC is fully involved in the BEPS information must be disclosed? the tax authority, what dispute project. Principles being debated in resolution options are available? the BEPS Actions are regularly raised Not applicable. on audit. The taxpayer has the right to appeal What are the consequences of against a transfer pricing adjustment. HMRC is willing to work with taxpayers failure to submit disclosures? Such an appeal will be heard by the on transfer pricing issues in real-time Not applicable. Tribunals Service. There is now an and provide general opinion on the additional option of trying to resolve the transfer pricing methodology, but not Transfer pricing study dispute using mediation to avoid the the price. The only way a taxpayer can appeal going to tribunal. get legal certainty about the transfer overview pricing treatment of transactions is If an adjustment is sustained, can Can documentation be filed in under the formal APA process. a language other than the local penalties be assessed? If so, what language? If yes, which ones? rates are applied and under what conditions? Special considerations Nothing specified in Legislation. Time Are secret comparables used by tax will be allowed for translation. Under the general penalty regime for incorrect returns, a transfer pricing authorities? When a transfer pricing study is adjustment may lead to a penalty based No. Secret comparables may be used prepared, should its content follow on a percentage of actual tax loss. by HMRC to select companies for audit, Chapter V of the Organisation Penalties are up to 30 percent for a but they are not used for setting an for Economic Co-operation and failure to take reasonable care; up to 70 arm’s length rate. Development (OECD) Guidelines? percent for a deliberate understatement Is there a preference, or or over claim; and up to 100 percent for Yes, for all transactions. requirement, by the tax authorities a deliberate understatement aggravated for local comparables in a Does the tax authority require an by concealment. advisor/tax practitioner to have benchmarking set? HMRC may apply a lower percentage specific designation in order to Yes. HMRC would prefer to see UK penalty where there is disclosure, prepare or submit a transfer pricing comparables for UK based activity. In the extent of mitigation depending study? practice European comparables are on whether disclosure is prompted or accepted when limited UK companies No. unprompted. A 10 percent penalty is are available. applied to overstated losses. Do tax authorities have Transfer pricing methods To what extent are transfer pricing requirements or preferences Does your country follow the penalties enforced? transfer pricing methods outlined in regarding databases for Chapter II of the OECD Guidelines? KPMG in the UK is seeing HMRC comparables? enforce penalties more strictly in recent If exceptions apply, please describe. No. Typically when European activities years. Yes. are being benchmarked Fame would be What defenses are available with used for UK searches and Amadeus for respect to penalties? European searches. HMRC has access Transfer pricing audit to the databases. In its guidance, HMRC indicates that and penalties the existence of appropriate transfer Does the tax authority generally When the tax authority requests pricing documentation may help to focus on the interquartile range in a a taxpayer’s transfer pricing mitigate any tax-geared penalty due as TNMM analysis? documentation, are there timing a result of a transfer pricing adjustment. No. requirements for a taxpayer to Penalties may also be mitigated through submit its documentation? And if cooperation with HMRC. Does the tax authority have other so, how many days? preferences in benchmarking? If so, What trends are being observed please describe. Yes, 45 days. currently? HMRC expects sound economic When the tax authority requests There has been an increased focus on principles to be used in applying a taxpayer’s transfer pricing transfer pricing in the media, which database screens. Poor screens could documentation, are there timing has led to large multinationals being lead to penalties for carelessness if this requirements for a taxpayer to questioned on their transfer pricing results in a tax adjustment. submit its documentation? Please practices by the government’s Public explain. Accounts Committee. This scrutiny There are no specific deadlines. HMRC has led to increased funding for HMRC will decide on a case-by-case basis but transfer pricing specialists. will typically allow 45–90 days.

What level of interaction do tax Tax treaty/double tax authorities have with customs authorities? resolution What is the extent of the double tax HMRC was formed in 2005 by the treaty network? merger of the Inland Revenue and HM Customs and Excise. KPMG in the UK Extensive. has observed that customs officials If extensive, is the competent sometimes request transfer pricing authority effective in obtaining documentation as part of their review. double tax relief? Are there limitations on Almost always. deductibility of management fees beyond the arm’s length principle? When may a taxpayer submit an adjustment to competent authority? Yes, some. General tax principles require expenses to be incurred wholly and Typically, after an adjustment is exclusively for the purpose of the trade. proposed to the taxpayer. However, an application can be made and HMRC is Are management fees subject to prepared to enter into discussions with withholding? the treaty partner before an adjustment No. is finalized. Are there limitations on the May a taxpayer go to competent deductibility of royalties beyond the authority before paying tax? arm’s length principle? Yes. No. Are royalties subject to Advance pricing withholding? agreements Yes. What APA options are available, if any? Are taxpayers allowed to file tax return numbers that differ from Unilateral, bilateral, multilateral. book numbers? Is there a filing fee for APAs? Yes. Both upward and downward No. transfer pricing adjustments may be made in the financial statements. If Does the tax authority publish APA transfer pricing adjustments are invoiced data either in the form of an annual and made in the financial statements, report or through the disclosure of indirect tax implications must also be data in public forums? considered. Yes. Only upward transfer pricing adjustments Are there any difficulties or may be made in the tax computation. limitations on the availability or Tax computation transfer pricing effectiveness of APAs? adjustments may lead to increased No. The APA program is well-established analysis of transfer pricing arrangements and very successful in the UK. HMRC and increase the likelihood of double has extended the number of countries taxation. A transfer pricing adjustment with which it has concluded APAs, in the tax computation in itself is not an including countries starting up their APA event which creates a customs duty or programs. VAT requirement. However, this might be seen by HMRC as an indication A taxpayer must demonstrate doubt that the original transaction was not in or difficulty in the application of the UK accordance with VAT and customs duty transfer pricing legislation in order to KPMG in the United Kingdom valuation principles and may result in an apply for an APA Consequently, APAs indirect tax enquiry and adjustments. are not commonly obtained for routine Komal Dhall Other unique attributes? transfer pricing situations. Tel: +44 20 7694 4498 Email: [email protected] None.

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

United States

KPMG observation

The United States has one of the oldest and most mature transfer pricing regimes in the world. Over the last year the US Treasury Department has been actively engaged in the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project. As the OECD has made progress over the last year on Action Items relating to transfer pricing, the US has indicated that it agrees with the broad parameters of the OECD’s proposals on country-by-country reporting, master file and local file rules under Action 13. The US plans to implement country-by- country reporting, but has not yet issued any related rules or guidance. With respect to audits, the Internal Revenue Service (IRS) issued the Transfer Pricing Roadmap in February 2014, guiding Exam teams on how to focus on up-front planning and better factual development of transfer pricing issues. In addition, as part of the IRS’s efforts toward greater knowledge sharing, issue-based analyses, and training of additional Examiners, the IRS published a number of training guides on international tax and transfer pricing topics (including, for example, exhaustion of remedies, review of transfer pricing documentation, and treatment of management fees). These guides are available within the IRS and to the public on the internet. In the courts, the IRS is pursuing a number of different transfer pricing cases, more now than at any other point in history. The largest of these cases, of course, address the transfer of intangibles. The IRS’s combination of the Advance Pricing Agreement (APA) program and the competent authority program into a newly created group, the Advance Pricing & Mutual Agreement program (APMA), has allowed for more expedited processing and resolution of transfer pricing disputes. In late 2013, the IRS released draft guidance with respect to APAs and competent authority matters. This proposed guidance represents substantial changes compared to the current procedures and is consistent with the objectives of APMA to enhance integration between competent authority matters and APAs, to improve allocation of resources, and to increase transparency and efficiency. The IRS has received comments on this draft guidance, and plans to release final guidance during 2015.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Not applicable Required to be contemporaneous Submission to tax authority required Thresholds apply/exist Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information foreign parents), and Schedule UTP Under the US transfer pricing rules, (Uncertain Tax Position), which is part there are 10 principal documents Tax authority name of Form 1120, must be attached to the required to be included in a transfer Internal Revenue Service (IRS). US tax return. In addition, participants pricing study: in an intangible development cost Citation for transfer pricing rules 1. overview of the business sharing arrangement (CSA) must file a Substantive rules: Internal Revenue CSA statement upon formation of the 2. organization structure chart Code (IRC) Section 482 arrangement and annually with their 3. documentation required by • Treas. Reg. Section 1.482–1 through tax returns if they wish to ensure the regulation, e.g. cost share participant Section 1.482–9 arrangement will be governed by Treas. names, market share strategy Reg. Section 1.482–7. • Penalty rules: IRC Section 6662(e) and 4. description of transfer pricing Treas. Reg. Section 1.6662–6. Forms 5471 and 5472, in general, methodology and reason for require disclosure of related party selection (best method analysis) Effective date of transfer pricing transactions including loans, tangible 5. discussion of alternative methods rules goods, services, and intangibles. not selected • Effective 6 October 1994 for Treas. Schedule UTP requires certain 6. description of controlled transactions Reg. Section 1.482–1 through Section taxpayers to report federal income tax 1.482–6, and Section 1.482–8 positions (including positions relating 7. description and analysis of to transfer pricing) for which an audited comparables • 9 February 1996 for Section 1.6662–6 financial statement reserve is recorded 8. economic analysis • 1 August 2009 for Section 1.482–9 and or is not recorded due to an expectation 9. description of any relevant post year- • 19 December 2011 for Section 1.482–7. to litigate. end data, if applicable, and What is the relationship threshold What are the consequences of 10. an index of the principal and for transfer pricing rules to apply failure to submit disclosures? background documents relied on. between parties? A penalty of 10,000 US dollars (USD) is Does the tax authority require an The parties must be under common imposed for each Form 5471 or Form advisor/tax practitioner to have control. Control is based on a facts and 5472 that is filed after the due date specific designation in order to circumstances test, and not on specific of the income tax return (including prepare or submit a transfer pricing ownership thresholds. extensions) or does not include the complete and accurate information study? What is the statute of limitations described in Section 6038(a). Currently, No. on assessment of transfer pricing there are no penalties directly adjustments? associated with Schedule UTP; the IRS Transfer pricing methods Generally, the IRS has three years is studying the issue. If a CSA statement Does your country follow the from the tax return filing date to make is not filed (and other requirements not transfer pricing methods outlined in adjustments. However, if gross income met), a taxpayer cannot rely on Treas. Chapter II of the OECD Guidelines? in excess of 25 percent of the gross Reg. Section 1.482–7 to allow sharing If exceptions apply, please describe. income stated in the return is omitted, of intangible development expenses the statute is extended to six years. at cost rather than value, the netting of Yes. There are some minor differences. The statute is unlimited if a false or royalty and cost sharing payments, or The US allows for: fraudulent return is filed, if a wilfull any other of its provisions. • tangible property transactions: attempt to evade taxes is made, or if no comparable uncontrolled price (CUP) return is filed. Transfer pricing study method resale price, cost plus, profit overview splits (comparable and residual), Transfer pricing Can documentation be filed in comparable profits method (CPM, disclosure overview a language other than the local equivalent to OECD transactional Are disclosures related to transfer language? If yes, which ones? net margin method), and other unspecified methods pricing required to be submitted to No. the revenue authority on an annual • intangible property transactions: basis (e.g. with the tax return)? When a transfer pricing study is CUT, profit splits, CPM, other prepared, should its content follow unspecified methods, and, in certain Yes. Chapter V of the Organisation circumstances, methods for platform What types of transfer pricing for Economic Co-operation and contribution transactions (PCTs) information must be disclosed? Development (OECD) Guidelines? under a cost sharing arrangement (CSA) IRS Forms 5471, (generally, US Yes, for certain transactions. The US companies with foreign subsidiaries), transfer pricing rules are similar to, but • services transactions: services 5472 (generally, US companies with do not reference, the OECD Guidelines. cost (safe harbor), comparable

uncontrolled services price (CUSP), Penalty applies at a 20 percent rate the trend to continue as increased gross services margin, cost of where the misstated transfer price for reporting requirements take hold around services plus, profit splits, CPM, and any property or service is 200 percent the world. More IRS resources will be other unspecified methods or more, or 50 percent or less, of the needed to move cases efficiently to • loans or advances: arm’s length, correct price. The Transactional Penalty resolution. applies at a 40 percent rate if the status of the borrower, and method Finally, IRS positions on the transfer of misstated transfer price is 400 percent based on applicable federal rate (safe intangible assets will be affected by the or more, or 25 percent or less, of the harbor) transfer pricing litigation cases currently correct price. The Net Adjustment in the pipeline. • cost sharing transactions (balancing Penalty applies at a 20 percent rate if payments): reasonably anticipated the total net transfer pricing adjustment benefit share for the year is more than USD5 million Special considerations • PCTs (cost sharing buy-ins): CUT, or 10 percent of gross receipts. The Are secret comparables used by tax CUSP, income method, acquisition Net Adjustment Penalty applies at a 40 authorities? price, market capitalization, residual percent rate if the adjustment is more No. profit split, and other unspecified than USD20 million or 20 percent of methods. gross receipts. Is there a preference, or requirement, by the tax authorities To what extent are transfer pricing for local comparables in a Transfer pricing audit penalties enforced? benchmarking set? and penalties The Net Adjustment Penalty is nearly Yes, although it depends on the tested When the tax authority requests always enforced unless a valid defense party. Because the US Securities and a taxpayer’s transfer pricing applies (e.g. a reasonable basis). In Exchange Commission has detailed documentation, are there timing practice, the IRS rarely, if ever, has reporting requirements for public requirements for a taxpayer to asserted the Transactional Penalty. submit its documentation? And if corporations that are used by providers What defenses are available with so, how many days? to create company databases and by respect to penalties? practitioners to prepare transfer pricing Yes, 30 days. reports, the IRS would expect US (and Submitting a reasonable transfer pricing sometimes Canadian) comparables When the tax authority requests study to the tax authority is the sole way to be used to benchmark a US tested a taxpayer’s transfer pricing to avoid the Net Adjustment Penalty. The party, in the absence of a compelling documentation, are there timing Transactional Penalty can be avoided by reason to use a different set. For foreign requirements for a taxpayer to demonstrating reasonable cause and tested parties, the IRS historically has submit its documentation? Please good faith, which can be established been receptive to using any set (e.g. explain. through a transfer pricing study or in US comparables, global comparables, other ways. By regulation, the taxpayer has 30 regional comparables or specific days to submit documentation to avoid What trends are being observed country comparables) that can be penalties. currently? supported based upon the specific facts If an adjustment is proposed by The IRS continues to treat transfer and circumstances and the reliability of the tax authority, what dispute pricing as a key priority both from its available data. resolution options are available? own compliance and enforcement Do tax authorities have There are several administrative appeal perspective and on the international requirements or preferences routes including: regular appeals stage. Not alone in this effort, the IRS regarding databases for process, fast track appeals, early referral is working closely with the OECD and comparables? G-20 member countries in the global to appeals, Advance Pricing Agreements Although there are no requirements to trend toward tax transparency. (APAs) with a ‘rollback’ to include the use a specific database, APMA and the years under audit, and the simultaneous The IRS is also carefully scrutinizing IRS field generally use Standard and appeals and competent authority concerns regarding the confidentiality Poor’s Compustat database to identify process. of taxpayer information. Although comparable companies worldwide. If an adjustment is sustained, can consensus exists regarding country-by- In some circumstances, particularly penalties be assessed? If so, what country reporting, how information is involving the competent authority, other rates are applied and under what exchanged among tax administrations— databases (e.g. Disclosure Mergent, conditions? particularly given confidentiality Orbis GlobalVantage, Worldscope concerns—remains to be negotiated. OneSource, Osirus) may be used, There are two types of penalties that The IRS experienced a significant including non-US databases that are can be assessed as an additional increase in requests for double tax relief used by its income tax treaty partners. 20 percent or 40 percent of the tax from 2013 to 2014, and many expect underpayment. The Transactional

Does the tax authority generally may have US customs reporting Advance pricing focus on the interquartile range in a implications. Additionally, there are rules TNMM analysis? prescribed (Revenue Procedure 99-32) agreements for moving the cash accounts consistent What APA options are available, if Yes. with the post year-end adjustment. any? Does the tax authority have other Other unique attributes? Unilateral, bilateral, multilateral. preferences in benchmarking? If so, please describe. The US regulations permit comparison Is there a filing fee for APAs? of controlled and uncontrolled The IRS makes public certain informal Yes. Currently, the filing fee is transactions based upon results over an guidance, such as the format in which it USD50,000 for large taxpayers appropriate multiple-year period. prefers benchmarking data presented as (USD35,000 for renewals), and well as certain adjustments to be used The US regulations also have safe USD22,500 for smaller taxpayers in comparable searches. harbors for interest rates and certain in certain circumstances (i.e. gross types of services. worldwide income less than USD200 What level of interaction do tax million or small transactions not greater authorities have with customs than USD50 million annually and authorities? Tax treaty/double tax intangible transactions not greater than High. resolution USD10 million). What is the extent of the double tax Are there limitations on Does the tax authority publish APA treaty network? deductibility of management fees data either in the form of an annual beyond the arm’s length principle? Extensive. There are approximately 60 report or through the disclosure of income tax treaties that the US currently data in public forums? Yes, some. While the arm’s length has in force with other nations. principle is the primary vehicle for Yes. establishing the tax treatment of If extensive, is the competent Are there any difficulties or management fees, the IRS has other authority effective in obtaining limitations on the availability or tools to challenge the deductibility of double tax relief? effectiveness of APAs? such fees under the Internal Revenue Yes, generally. The IRS publishes annual Code and based on case-law precedent. Yes. The creation of the APMA statistics indicating that, overall, double These situations are rare. Program has improved efficiency in tax relief is almost always provided. the processing of APAs by the IRS. The Are management fees subject to However, these statistics are not program completed 42 APAs in 2011 as withholding? published on a country by country basis. compared with 140 in 2012 and 145 in No. When may a taxpayer submit an 2013. However, over the past year the adjustment to competent authority? IRS has lost resources, resulting in a Are there limitations on the decline in APAs closed to 101 in 2014. deductibility of royalties beyond the For a US-initiated adjustment, a written arm’s length principle? request for competent authority The IRS received 108 APA requests in assistance may be submitted as soon 2014, an insignificant change from the Yes. While the arm’s length principle is as is practical after the proposed 108 received in 2013. As such, APAs the primary vehicle for establishing the adjustment is communicated to the remain an important tool to achieve tax treatment of royalties, the IRS has taxpayer in writing (generally, when the certainty and mitigate transfer pricing other tools to challenge the deductibility IRS Notice of Proposed Adjustment risk for many companies. of such fees under the Internal Revenue is issued). For a foreign-initiated Code and based on case-law precedent. Cites: (Announcement 2014-14, adjustment, competent authority These situations are rare. 2014-16 I.R.B. 948, (14 April 2014)) and assistance may be requested as soon (Announcement 2015-11, 2015-15 I.R.B. Are royalties subject to as the taxpayer believes such filing is 883, (30 March 2015)). withholding? warranted, based on the actions of the country proposing the adjustment. Yes. The income tax treaties of the US have Are taxpayers allowed to file tax varying provisions as to when notice return numbers that differ from must be provided of the action giving book numbers? rise to the need for competent authority assistance. Yes. When year-end financial results are KPMG in the United States not within an arm’s length range, the US May a taxpayer go to competent rules allow taxpayers to make post-year- authority before paying tax? Brian Trauman end adjustments — to be reported on Tel: +1 212 954 5871 Yes. Schedule M of a timely filed original tax Email: [email protected] return — to bring the taxpayer within the arm’s length range. Such adjustments As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Uruguay

KPMG observation

After transfer pricing rules were introduced in Uruguay in 2007 in the context of a global tax reform, and the enactment of other rules during 2009, the tax authorities have expressed their concerns with respect to transfer pricing issues and hence have been paying increasing attention to transfer pricing during tax audits. An Advance Pricing Agreement (APA) regime has recently been implemented, allowing for unilateral APAs, and the first APAs have already been executed. Transactions under the scope of the transfer pricing regulations include those with certain low tax jurisdictions listed by the Decree as well as with free trade zones (even those located in Uruguay). Additionally, the regulations include a specific methodology to measure the taxable income derived from import or export transactions involving “commodities”. No types of transactions have yet been identified as subject to special scrutiny by the Dirección General Impositiva (DGI). In 2011, the first transfer pricing audits commenced and, initially, attention was focused on companies with low margins and transactions structured through international traders, especially if these transactions involve commodities with internationally known market prices. In the current audit environment, the focus of the tax authorities continues to be on transfer pricing issues, with a strong emphasis on transparency (e.g. through the exchange of information provisions contained in an increasing network of international tax treaties).

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Effective date of transfer pricing discriminate between different thresholds; rather they apply equally Tax authority name rules to all levels of ownership (a DGI 1 July 2007. Dirección General Impositiva (DGI). Resolution establishes 10 percent of Citation for transfer pricing rules What is the relationship threshold capital). Furthermore, and beyond the for transfer pricing rules to apply company capital interest, under the Income Taxes Act Articles 38–46 and between parties? Local Income Tax Law, there are several supplementary regulations. other relationships for which transfer Based on voting power, share pricing rules apply, such as functional capital and other. The law does not or other kinds, whether contractual or

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 294 | Global Transfer Pricing Review otherwise, that influence the decision • identification of the foreign Does the tax authority require an power to direct or define the activities counterparty for the intercompany advisor/tax practitioner to have of the operations. Transactions with transaction specific designation in order to unrelated companies located in low tax • determination of the median and the prepare or submit a transfer pricing jurisdictions are subject to increased interquartile range study? transfer pricing scrutiny. • transcription of the statement of No. What is the statute of limitations income of the comparable companies on assessment of transfer pricing corresponding to the fiscal years Transfer pricing methods adjustments? necessary for the comparability Does your country follow the Five years from 1 January of the year analysis, with an indication of the transfer pricing methods outlined in after the filing date (can be extended sources of such information Chapter II of the OECD Guidelines? to 10 years in certain cases, including • description of the corporate If exceptions apply, please describe. fraud). activity and the characteristics of Yes. The regulations includes a special the business carried out by the methodology to measure the taxable comparable companies Transfer pricing income derived from import or export disclosure overview • rejection matrix with criteria followed involving commodities transactions. to discard companies as comparables; Are disclosures related to transfer and pricing required to be submitted to Transfer pricing audit and the revenue authority on an annual • conclusions obtained, and the Transfer penalties basis (e.g. with the tax return)? Pricing Return indicating the different related party transactions, the When the tax authority requests Yes. Taxpayers must submit an annual transaction amount, and other general a taxpayer’s transfer pricing declaration (Transfer Pricing Return) and information. documentation, are there timing a transfer pricing documentation report requirements for a taxpayer to when any of the following conditions What are the consequences of submit its documentation? And if are met: failure to submit disclosures? so, how many days? • the value of the transactions is higher Taxpayers that fail any of the formal Yes, 10 days. than 50 million Unidades Indexadas duties established under the transfer (UI) (approximately 6 million US pricing regime provisions is graded When the tax authority requests dollars (USD) in the corresponding according to the severity of the violation a taxpayer’s transfer pricing fiscal period; or and other circumstances and a fine documentation, are there timing levied of 6,090 Uruguayan pesos requirements for a taxpayer to • if notified by the DGI. (UYU) to a maximum of UYU6,090,000 submit its documentation? Please Although not all taxpayers are required (approximately USD250). explain. to file theTransfer Pricing Return and the Responses to tax authority requests transfer pricing documentation report, Transfer pricing study are normally expected to be submitted the ones with no obligation to submit within 10 days of the request. information must prepare and maintain overview the documentation that supports the Can documentation be filed in If an adjustment is proposed by correct pricing determination. a language other than the local the tax authority, what dispute language? If yes, which ones? resolution options are available? What types of transfer pricing information must be disclosed? No. In order to appeal the adjustment proposed by the tax authorities, The following information must be When a transfer pricing study is the taxpayer must first appeal disclosed: prepared, should its content follow administratively against the Tax Office Chapter V of the Organisation • business description/overview itself and the Ministry of Economy. After for Economic Co-operation and that stage the taxpayer will be able to • functional analysis Development (OECD) Guidelines? appeal to a specialized court (Tribunal de • risk analysis Yes, for all transactions. Even though lo Contencioso Administrativo). • description of controlled transactions Uruguayan regulations do not make If an adjustment is sustained, can direct reference to the Guidelines, the • method selection penalties be assessed? If so, what transfer pricing study to be prepared rates are applied and under what • rejection of alternate methods for local purposes mostly takes conditions? • identification of comparables into account the general content of Chapter V. The transfer pricing tax adjustment is • economic analysis; and subject to the general penalties regime

(fines and surcharges/interest). In the know in relation to taxpayers it does Are taxpayers allowed to file tax case of fraud, the penalties will range not have special requirements or return numbers that differ from from one to 15 times the unpaid tax preferences on the subject. book numbers? amount. The statute of limitations period Does the tax authority generally Yes. It is not explicitly stated in the is 5 years, which can be extended to focus on the interquartile range in a regulations, but under an evaluation of 10 years in certain cases, including tax TNMM analysis? the transfer pricing policy, the taxpayer fraud. could consider an adjustment. However, Yes, always. To what extent are transfer pricing the impact of the adjustment in the penalties enforced? Does the tax authority have other financial statements, other taxes, preferences in benchmarking? If so, custom issues, documentation and Although the application of the transfer please describe. others should be considered. pricing regime is fairly recent, if irregular situations are detected, penalties will be Not applicable. Other unique attributes? applied. What level of interaction do tax An additional method included in the What defenses are available with authorities have with customs Uruguayan Income Tax Law establishes respect to penalties? authorities? that in the case of imports and exports of commodities to related parties and In principle, documentation. Medium. in general, any assets having a known What trends are being observed Are there limitations on quotation in transparent markets, currently? deductibility of management fees involving an international broker who beyond the arm’s length principle? The tax authorities have expressed their will not be the effective receiver of concerns with respect to transfer pricing Yes. For fees to be considered the goods, the best method for the issues and hence have been paying deductible, the Uruguayan entity must purpose of determining the export’s and increased attention to transfer pricing show that the management fees were import’s Uruguayan sourced income during tax audits. Since the 2011 audits, paid in order to obtain, maintain and will be the goods’ quotation in the special attention is placed on companies preserve profits assessed by Uruguayan transparent market on the date of a with low margins and transactions tax. In addition, there registered contract or the bill of lading structured through international traders, should be sufficient proof that such date for non-registered contracts. This especially if these transactions involve expenses relate to the Uruguayan methodology could be left out providing commodities with internationally known entity’s operations. Additionally, the that the international broker complies market prices. deductible amount will depend on the with certain requirements. percentage of income tax applicable The tax authorities are also working on to non-residents in Uruguay and the the implementation of an APA regime. Tax treaty/double tax income tax paid abroad by the non- resolution residents. Special considerations What is the extent of the double tax Are management fees subject to treaty network? Are secret comparables used by tax withholding? authorities? At the moment Uruguay has 23 treaties Yes. in force, with others additional ones in The possibility of using transfer pricing the process of approval. information from one taxpayer in another Are there limitations on the taxpayer’s audit is available for the Tax deductibility of royalties beyond the If extensive, is the competent Office, however, it is not clear whether arm’s length principle? authority effective in obtaining this facility is actually being used. Yes. For royalties to be considered double tax relief? Is there a preference, or deductible, the Uruguayan entity must No experience currently. requirement, by the tax authorities show that royalties were paid in order When may a taxpayer submit an for local comparables in a to obtain, maintain and preserve profits adjustment to competent authority? benchmarking set? assessed by Uruguayan tax. In addition, there should be sufficient proof that No formal rules have currently been In principle, no, however the regime is such expenses relate to the Uruguayan established. recent in Uruguay and administrative entity´s operations. Additionally, the May a taxpayer go to competent practices may change. deductible amount will depend on the authority before paying tax? Do tax authorities have percentage of income tax applicable to requirements or preferences non-residents in Uruguay and the income No formal rules have currently been regarding databases for tax paid abroad by the non-residents. established. comparables? Are royalties subject to Although the Tax Office uses an withholding? international database, as far as we Yes.

Advance pricing agreements What APA options are available, if any? Unilateral. Is there a filing fee for APAs? No. Does the tax authority publish APA data either in the form of an annual report or through the disclosure of data in public forums? No. Are there any difficulties or limitations on the availability or effectiveness of APAs? The first APAs have been executed and others are in progress.

KPMG in Uruguay

Alejandro Horjales Tel: + 598 29024546 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Venezuela

KPMG observation

The Venezuelan Income Tax Law recently established rules regarding thin capitalization that limit the deduction of interest expenses registered with related parties. The thin capitalization rules require a 1:1 debt-to-equity relationship (i.e. debts with related parties plus debts with non-related parties over equity should be less than or equal to one) to be deductible. In addition, the Tax Administration recently established procedures to calculate the interquartile range and perform transfer pricing.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information participate directly or indirectly in the becomes ten years. The term for lapsing direction, control or capital of both will be calculated from 1 January of the Tax authority name companies. calendar year following that in which the Servicio Nacional Integrado de taxable event occurred. The rules apply to the operations Administración Aduanera y Tributaria performed through intermediaries (SENIAT). that do not qualify as related persons, Transfer pricing Citation for transfer pricing rules residing in the Bolivarian Republic of disclosure overview Venezuela, whereby the latter operates Venezuelan Income Tax Law. Are disclosures related to transfer with another party abroad qualifying as a pricing required to be submitted to Effective date of transfer pricing related party. the revenue authority on an annual rules Transactions performed with companies basis (e.g. with the tax return)? 1 January 2000. domiciled in tax havens are considered Yes. An informative transfer pricing as performed with related parties. What is the relationship threshold return (Form PT99, discussed below) for transfer pricing rules to apply What is the statute of limitations must be submitted six months after between parties? on assessment of transfer pricing year-end. Such declaration contains A related party shall be any company adjustments? all the transactions registered by the taxpayer with foreign related parties. participating directly or indirectly in the The Venezuelan Tax Code establishes a direction, control or capital of another six year statute of limitations. If no tax company, or when the same companies return is filed the statute of limitations

What types of transfer pricing Does the tax authority require an What defenses are available with information must be disclosed? advisor/tax practitioner to have respect to penalties? specific designation in order to General information to be included in During an audit review there is the prepare or submit a transfer pricing the transfer pricing return (Form PT99) possibility to negotiate with the Tax study? includes: Administration. In this situation the No. quality of the documentation and • type of transaction (code indicated in analysis supporting the transactions and the form) rejected comparables are important. • transaction date Transfer pricing methods Does your country follow the Another defense is the tax • currency of the transaction transfer pricing methods outlined in administrative appeal or tax litigation • exchange rate Chapter II of the OECD Guidelines? appeal, where other factors would be taken into consideration. • transaction amount If exceptions apply, please describe. adjustments. • tax residence code of the related What trends are being observed party (code indicated in the form) Yes. currently? • name of the related party The Tax Administration has placed Transfer pricing audit and special emphasis on transactions • transfer pricing method applied for such as royalties, technical assistance, the transfer pricing analysis penalties export of goods, management fees and When the tax authority requests • if the transaction generated gain or interest rates applicable to loans. losses; and a taxpayer’s transfer pricing documentation, are there timing • margin generated in the requirements for a taxpayer to Special considerations transaction, Interest rate, royalty fee submit its documentation? And if Are secret comparables used by tax (percentage), cost plus that applies so, how many days? authorities? to the transaction subject to analysis (percentage), among others. Yes, three days, No. What are the consequences of When the tax authority requests Is there a preference, or failure to submit disclosures? a taxpayer’s transfer pricing requirement, by the tax authorities documentation, are there timing for local comparables in a Taxpayers are subject to penalties requirements for a taxpayer to benchmarking set? where they have failed to prepare the submit its documentation? Please No. The Tax Administration requires transfer pricing analysis or submit the explain. transfer pricing return. The penalty goes for the transfer pricing analysis the from 50 to 150 tax units. Normally when the SENIAT requests selection of comparables companies transfer pricing documentation, with public information. Venezuela only In addition, this situation could trigger a taxpayers must submit the information has two public data bases for banks and tax audit. requested within three working days. insurances companies. If an adjustment is proposed by Do tax authorities have Transfer pricing study the tax authority, what dispute requirements or preferences overview resolution options are available? regarding databases for comparables? Can documentation be filed in The taxpayer has two options available a language other than the local to solve a dispute: a tax administrative The Tax Administration uses a language? If yes, which ones? appeal (Tax Administration) or tax commercial database for comparables, No. litigation appeal (Court). although its use is not a requirement. The taxpayer must use databases with If an adjustment is sustained, can When a transfer pricing study is public information of the companies. prepared, should its content follow penalties be assessed? If so, what Chapter V of the Organisation rates are applied and under what Does the tax authority generally for Economic Co-operation and conditions? focus on the interquartile range in a TNMM analysis? Development (OECD) Guidelines? If an adjustment is sustained, the Yes, for all transactions. The Venezuela taxpayer is subject to fine from 100 to Yes, always. 1000 percent of the unpaid tax plus Income Tax Law established the formal Does the tax authority have other interest. duties that all companies that register preferences in benchmarking? If so, transactions with related parties must To what extent are transfer pricing please describe. conserve, this information is according penalties enforced? with the Chapter V of the OECD No. Guidelines. Frequently.

What level of interaction do tax Tax treaty/double tax authorities have with customs authorities? resolution What is the extent of the double tax High. treaty network? Are there limitations on Venezuela has signed tax treaties with deductibility of management fees 31 countries. beyond the arm’s length principle? If extensive, is the competent Yes. If the taxpayer in Venezuela is a authority effective in obtaining branch, the expenses for management double tax relief? fees are non-deductible. No experience yet. Are management fees subject to withholding? When may a taxpayer submit an adjustment to competent authority? Yes. No formal rules exist in this area. Are there limitations on the deductibility of royalties beyond the May a taxpayer go to competent arm’s length principle? authority before paying tax? Yes. If the taxpayer in Venezuela is a Venezuela Income Tax Law has rules branch, the expenses for royalty fees are about the applications of APAs, but till non-deductible. today the Tax Administration has not signed any APAs. Are royalties subject to withholding? Advance pricing Yes. agreements Are taxpayers allowed to file tax What APA options are available, if return numbers that differ from any? book numbers? Unilateral. Yes. An adjustment should be included when the transactions performed Is there a filing fee for APAs? between related parties are not arm´s No. length. The transfer pricing adjustment, if required, must be included as a Does the tax authority publish APA non-deductible item in the income tax data either in the form of an annual return. Likewise, the transfer pricing report or through the disclosure of adjustment is for tax purposes only, data in public forums? therefore, it is not recorded in the No. financial statements. Are there any difficulties or Other unique attributes? limitations on the availability or The Tax Law has introduced a thin effectiveness of APAs? capitalization rule. This rule limits the Yes. The APA program has not been deduction of interest payments to successful in Venezuela mainly because related parties. The maximum debt/ the APA option established in the equity ratio will be one-to-one. Tax Law is a unilateral one and the procedures to access this program are unclear.

KPMG in Venezuela

Carlos Adrianza Tel: +582122777959 Email: [email protected]

As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Vietnam

KPMG observation

In line with the Action Plan on transfer pricing management for the 2012-2015 period (Action Plan) announced by the Ministry of Finance (MOF) in 2012, transfer pricing audits have been initiated by provincial tax departments under the General Department of Taxation (GDT)’s instruction across a number of provinces since late 2013. Until now, the transfer pricing audits, which have generally included two to three tax years for a specific audit cycle, have focused primarily on transactions pertaining to the export and import of tangible goods (e.g. raw materials, semi- finished and finished goods). In the future it is expected that the focus of transfer pricing audits will shift to royalties for manufacturing and trademark intangibles, expatriate payments, management fees, and financial payments. With the introduction of official regulations on the application of Mutual Agreement Procedures (MAP) and Advance Pricing Agreements (APAs), the Vietnamese transfer pricing regime has now become comprehensive. The Vietnamese tax authorities have taken several serious steps to build capacity and expertise in transfer pricing enforcement, such as consulting experts at the Organisation for Economic Co-operation and Development (OECD). Despite these advances though, additional measures are still needed in order for Vietnam to evolve into a mature transfer pricing regime. Vietnamese policy makers are closely monitoring progress on the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, but are waiting for developments in other countries before amending local regulations.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable Required to be contemporaneous

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Citation for transfer pricing rules • Decree 83/2013/NĐ-CP dated 22 July 2013 of the Government Tax authority name • Tax Administration Law No 78/2006/ (effective 15 September 2013) QH11 Ministry of Finance (MOF), General • Law No 71/2014/QH13 dated Department of Taxation (GDT). • Amended Tax Administration Law 26 November 2014 on amendments No 21/ 2012/QH13 (effective from and supplementation of a number of 1 July 2013) tax laws

• Decree 91/2014/ND-CP of the party transactions disclosed, transacting Transfer pricing audit and Government dated 1 October 2014 related parties, and criterion defining the related party relationship. penalties • Decree 12/2015/ND-CP dated When the tax authority requests 12 February 2015 Under Form 03-7/TNDN, in addition to a taxpayer’s transfer pricing • Circular 66/2010/TT-BTC dated the above, transfer pricing adjustments documentation, are there timing 22 April 2010 (which replaces as self-assessed by taxpayers are also requirements for a taxpayer to Circular 117/2005/TT-BTC dated required. submit its documentation? And if 19 December 2005) What are the consequences of so, how many days? • Circular 201/2013/TT-BTC dated 20 failure to submit disclosures? Yes, 30 days. December 2013 of the MOF providing Failure to make disclosures in Form When the tax authority requests detailed guidance on APA (effective 5 GCN-01/QLT or Form 03-7/TNDN implies February 2014) a taxpayer’s transfer pricing an exposure to the reassessment documentation, are there timing • Circular 205/2013/TT-BTC dated of transfer prices or profits for tax requirements for a taxpayer to 24 December 2013 of the MOF purposes, which can be accompanied submit its documentation? Please providing guidance on application of by penalties and interest charges. explain. double tax treaties, effective from Administrative penalties for failure to 6 February 2014. submit a tax return may also be applied. The taxpayer has 30 working days from the date of receipt of the tax authority’s Effective date of transfer pricing written request (with a one-time rules Transfer pricing study extension allowed for up to 30 days Since 27 January 2006. overview where good reasons can be provided). Can documentation be filed in What is the relationship threshold If an adjustment is proposed by a language other than the local for transfer pricing rules to apply the tax authority, what dispute language? If yes, which ones? between parties? resolution options are available? No. Ownership of 20 percent or more: Appeals to the tax authority and the control and management, family When a transfer pricing study is administrative tribunal are possible. relationship, and others. prepared, should its content follow If an adjustment is sustained, can Chapter V of the Organisation What is the statute of limitations penalties be assessed? If so, what for Economic Co-operation and on assessment of transfer pricing rates are applied and under what Development (OECD) Guidelines? adjustments? conditions? No. Technically required for all Ten years. However, the tax recovery Underpayment penalties being 20 transactions, although no specific can be indefinite if the entity failed to percent of the shortfall amount, mention has been stated in the register itself as a taxpayer. associated with late payment interest regulations. Having said that the charges of 0.05 percent per day on tax authorities or the taxpayer may overdue tax (applicable from 1 January Transfer pricing eventually refer to the OECD Guidelines 2015) or evasion penalties (from one disclosure overview for any guidance. to three times the tax liability amount) Are disclosures related to transfer Does the tax authority require an apply, depending on the nature of the pricing required to be submitted to advisor/tax practitioner to have offences and circumstances. Late the revenue authority on an annual specific designation in order to payment of tax will be subject to basis (e.g. with the tax return)? prepare or submit a transfer pricing late payment interest charge only if study? voluntarily corrected by the taxpayers Yes. Form GCN-01/QLT (applicable from prior to the tax audit/ inspection notice 2010 to 2013) and Form 03-7/TNDN No. by local tax authorities. (applicable from tax year commencing 1 January 2014 onwards) is to be Transfer pricing methods To what extent are transfer pricing completed and filed with the annual penalties enforced? corporate income tax return. Form 03-7/ Does your country follow the transfer pricing methods outlined in Administrative penalties apply in case of TNDN should be filed within 90 days transfer pricing adjustments. from the end of the financial year. Chapter II of the OECD Guidelines? If exceptions apply, please describe. What defenses are available with What types of transfer pricing respect to penalties? information must be disclosed? Yes, with comparable profit method (CPM) being used in place of Documentation. Further appeal to tax Under Form GCN-01/QLT, related party transactional net margin method authorities providing and explaining transactions (detailed by transacting (TNMM). genuine business case for non-levy of related parties), value of related party penalty in the case of the taxpayer. transactions, transfer pricing method for each of the categories of related

What trends are being observed Are there limitations on Advance pricing currently? deductibility of management fees beyond the arm’s length principle? agreements Transfer pricing audits will be stepped What APA options are available, if up in accordance with the Action Plan. No. any? Controversies are mainly around ability Are management fees subject to of the tax authorities to make transfer Unilateral, bilateral, multilateral. withholding? pricing assessment or adjustments, Is there a filing fee for APAs? comparables and use of secret company Yes. No. data, and accordingly range of profit Are there limitations on the levels, share of profits and tax. MAP deductibility of royalties beyond the Does the tax authority publish APA and APAs may be used to resolve such arm’s length principle? data either in the form of an annual controversies. report or through the disclosure of No. Intangibles royalty payments, interest data in public forums? and secondment charges are a few of Are royalties subject to No. the recent inter-company transactions withholding? Are there any difficulties or which have been challenged in recent Yes. audits. limitations on the availability or Are taxpayers allowed to file tax effectiveness of APAs? Special considerations return numbers that differ from No APAs has been concluded yet. APA book numbers? regulations are yet to be tested. Are secret comparables used by tax authorities? Yes. Per Form 03-7/TNDN, taxpayers can offer self-adjustment for transfer pricing. Yes. Under certain circumstances, the tax authority is empowered to make a Other unique attributes? presumptive assessment of tax based Royalties are subject to specific rules, on its internal data. besides the transfer pricing rules. Is there a preference, or requirement, by the tax authorities Tax treaty/double tax for local comparables in a resolution benchmarking set? What is the extent of the double tax Yes, local companies are preferred as treaty network? comparables. However, the transfer pricing regulations also provide that Extensive. information and data extracted from If extensive, is the competent certified and verifiable sources may be authority effective in obtaining used for supporting the comparability double tax relief? along with regional comparables, if any. No experience. Do tax authorities have requirements or preferences When may a taxpayer submit an regarding databases for adjustment to competent authority? comparables? Apply for MAP within three years from the date of first decision on adjustment No. by the tax authority in relation to the tax Does the tax authority generally treatment which the taxpayers consider focus on the interquartile range in a not to be in accordance with a double TNMM analysis? tax treaty. Yes, always. May a taxpayer go to competent Does the tax authority have other authority before paying tax? preferences in benchmarking? If so, No. To be eligible for applying MAP, please describe. taxpayers are required to fulfil all KPMG in Vietnam No specific guidance. obligations which have been stated in an official decision on tax collection before What level of interaction do tax and during the appeal process, except for Hoang Thuy Duong authorities have with customs the circumstance where a government Tel: +84 (4) 3946 1600 – ext. 6406 authorities? competent authority decides to suspend Email: [email protected] Low but increasing. the implementation of such a decision on tax amounts or tax impositions. As email addresses and phone numbers change frequently, please email us at [email protected] if you are unable to contact us via the information noted above.

Zambia

KPMG observation

Transfer pricing provisions were written into the Income Tax Act (ITA) in 1999 in the form of Sections 97A, 97B, 97C and 97D. Together, these sections permit the Commissioner General to compute income from transactions between associated parties to reflect arm’s length conditions, and to assess the taxpayer a corresponding amount of tax. While these broad provisions exist, currently, there are no detailed rules on transfer pricing in Zambia. The ITA was amended, effective 1 January 2014, to allow the Minister of Finance (MOF), by way of a statutory instrument, to prescribe documentation rules. The documentation rules will specify the information and documents required to be kept by a taxpayer, and prescribe penalties for non-compliance with the rules. As of the time of this publication, the MOF has not yet formally issued the rules.

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information Effective date of transfer pricing rules the definition of control. Specifically, the MOF may prescribe the direct Tax authority name The transfer pricing legislation was and indirect participation in the initially enacted in 1999 and came The Zambia Revenue Authority (ZRA) management, control or capital of a into force on 1 April 1999. The BOZ is mandated to enforce the provisions person, and different provision that may administered provisions took effect on of the ITA, Value Added Tax Chapter be made in relation to different cases or 5 December 2014. 331, Customs and Excise Act Chapter different classes of each case. The BOZ 322 and the Property Transfer Tax Act What is the relationship threshold provisions apply to related parties in a Chapter 340 of the laws of Zambia. for transfer pricing rules to apply “group” or “conglomerate”. between parties? Citation for transfer pricing rules What is the statute of limitations Two persons are associated if one of There are no detailed rules on transfer on assessment of transfer pricing them participates, directly or indirectly, pricing. However, the ITA sections 97A, adjustments? in the management, control or capital 97B, 97C and 97D make provisions The ZRA is not limited by law as to how of the other, or if another person relating to transfer pricing. The Central many revised assessments it can issue. participates, directly or indirectly, in Bank of Zambia (BOZ) introduced The only limitation is that the revised the management, control or capital of gazette notice No. 7171 of 2014 assessments, in non-fraud cases, must both of them. Further, the MOF may applicable to companies falling under be issued within six years after the tax issue a statutory instrument spelling the Banking and Financial Services act. return due date. out documentation requirements and

Transfer pricing Transfer pricing study If an adjustment is proposed by the tax authority, what dispute disclosure overview overview resolution options are available? Are disclosures related to transfer Can documentation be filed in pricing required to be submitted to a language other than the local The taxpayer can appeal to the the revenue authority on an annual language? If yes, which ones? Commissioner General and if still basis (e.g. with the tax return)? dissatisfied, appeal to the Revenue Yes, English. Appeal Tribunal. Further recourse can be No. Parts five, six and seven of the When a transfer pricing study is sought at the High Court of Zambia and tax return require disclosure to be prepared, should its content follow finally, the Supreme Court of Zambia, in made of shareholding and shareholder Chapter V of the Organisation that order. emoluments, advances to shareholders for Economic Co-operation and and associated companies, and If an adjustment is sustained, can Development (OECD) Guidelines? interests in other businesses. Apart penalties be assessed? If so, what from the disclosures as per tax return, Yes, for all transactions. ZRA generally rates are applied and under what there is no additional requirement to accepts studies based on OECD conditions? make any transfer pricing disclosures Guidelines. There is no requirement to The penalties prescribed under the together with the tax return except for submit such studies but ZRA expects ITA depend on whether the omission what is provided for under International that such a study would be used to is negligent, wilfull, or as a result of a Accounting Standards (IAS) and prepare the tax return. BOZ requires fraud. The penalties are determined as International Financial Reporting evidence to be submitted as a basis for follows: Standards (IFRS). The tax authorities approval to outsource. require tax returns to be accompanied • in case of negligence, 17.5 percent of Does the tax authority require an the amount by financial statements. advisor/tax practitioner to have • in the case of wilfull default, 35 Please note that with effect from specific designation in order to percent of the amount 1 January 2014, the MOF is now prepare or submit a transfer pricing empowered to specify, by way of study? • in the case of fraud, 52.5 percent of statutory instrument, information and the amount of any income omitted No. documents to be kept by a taxpayer. or understated, or any expenses BOZ regulations require its regulated overstated, in consequence of such entities to clearly articulate and Transfer pricing methods failure, incorrect return, information or demonstrate evidence of its arm’s Does your country follow the submission. length pricing methodologies when transfer pricing methods outlined in To what extent are transfer pricing seeking approvals for the outsource. Chapter II of the OECD Guidelines? penalties enforced? If exceptions apply, please describe. What types of transfer pricing Penalties are enforced in full by the information must be disclosed? Yes. Commissioner General and where a ZRA introduced a new return which court process is preferred; the sanctions is submitted electronically. The return Transfer pricing audit and imposed by the court would subsist. requires disclosure of related party penalties What defenses are available with transactions and disclosure of basis When the tax authority requests respect to penalties? of pricing and confirmation whether a taxpayer’s transfer pricing functional analysis was performed The Commissioner General has the documentation, are there timing discretion to waive the penalties or to arrive at the price and relevant requirements for a taxpayer to documentation kept. partially reduce the penalties depending submit its documentation? And if on the mitigating circumstances. What are the consequences of so, how many days? Where documentation is supplied to the failure to submit disclosures? No. satisfaction of the Commissioner General, the penalties can be waived in full. ZRA officials periodically carry out When the tax authority requests audits and review whether transactions a taxpayer’s transfer pricing What trends are being observed between related parties are at arm’s documentation, are there timing currently? length. If transactions are not at requirements for a taxpayer to arm’s length, adjustments are made There has been an increased desire by submit its documentation? Please the tax authorities to clamp down on and penalties and interest levied explain. accordingly. Further, the MOF may transfer pricing. Experts from Norway prescribe penalties for non-compliance, The normal period for the Commissioner have been assisting the tax authorities by statutory instrument. With regard General to require a company to submit on audits of mining and large taxpayers. to BOZ, approval would not be granted information is 30 days, and this can BOZ too is actively monitoring related to outsource the services. Any breach be extended at the Commissioner party transactions. Furthermore, in could lead to sanctions. General’s discretion. We anticipate new recent years, the Government has a information and documents requirement strong drive on getting more taxes from when the MOF prescribes additional corporate institutions and less from guidelines. employed individuals.

Special considerations The reference price is defined as: apply to companies under the banking and financial services act and require Are secret comparables used by tax • the monthly average London Metal approval from BOZ before outsourcing authorities? Exchange (LME) cash price services from a related party. ZRA has procured a database for the • the monthly average Metal Bulletin use of comparables. (MB) cash price to the extent that the base metals or precious metal prices Tax treaty/double tax Is there a preference, or are not quoted on the LME resolution requirement, by the tax authorities What is the extent of the double tax for local comparables in a • the monthly average cash price of treaty network? benchmarking set? any other metal exchange market as approved by the Commissioner A number of tax treaties are being No. General to the extent that the base renegotiated among them Ireland, the Do tax authorities have metal price or precious metal price is United Kingdom, India, South Africa requirements or preferences not quoted on the LME or MB. and the Netherlands. New treaties with regarding databases for The average monthly LME cash price, Serbia, Botswana among others have comparables? average monthly MB cash price or any been negotiated. There are no such requirements. other monthly average metal market If extensive, is the competent exchange cash price approved by authority effective in obtaining Does the tax authority generally the Commissioner General, less any double tax relief? focus on the interquartile range in a discounts on account of poor or low TNMM analysis? quality or grade. No experience yet. Not applicable. Are management fees subject to When may a taxpayer submit an adjustment to competent authority? Does the tax authority have other withholding? preferences in benchmarking? If so, Yes. This process is yet to be formalized. please describe. Are there limitations on the May a taxpayer go to competent For related party loans, there is an deductibility of royalties beyond the authority before paying tax? expectation that the status of the arm’s length principle? Where a client requires double taxation balance sheet of the borrower must be relief, the same can be obtained from the such that an independent person could No. tax authorities prior to paying the tax. be willing to lend to the borrower. Are royalties subject to withholding? What level of interaction do tax Advance pricing authorities have with customs Yes. authorities? agreements Are taxpayers allowed to file tax What APA options are available, if any? The Zambian tax authorities have an return numbers that differ from integrated tax administration system book numbers? None. which captures information from the Is there a filing fee for APAs? customs system called Asycuda++ and Yes. Generally, year-end adjustments uses this information as intelligence are permitted. For transfer pricing, Not applicable. data in income tax and VAT audits. adjustments can be made in order to make the results clear or fairly Does the tax authority publish APA Are there limitations on presented. Such adjustments may data either in the form of an annual deductibility of management fees give rise to VAT and withholding tax report or through the disclosure of beyond the arm’s length principle? depending on whether they relate to data in public forums? Yes. ZRA expects that management services or not. No. fees will be paid by based on actual Other unique attributes? Are there any difficulties or services provided to the Zambian entity. Thin capitalization is dealt with under limitations on the availability or Generally, OECD Guidelines methods general transfer pricing rules. effectiveness of APAs? are applied on all transfer pricing Not applicable. transactions, except those related to For mining companies, the maximum minerals which have specific provisions accepted debt-to-equity ratio is 3:1. under the Act. The arm’s length price Interest outside the thin capitalization KPMG in Zambia for minerals is determined using the ratio is not allowed as a deduction. reference price as described below. Prior to 2013, mining companies’ thin Michael Phiri The sale price (i.e. arm’s length price) capitalization was dealt with outside Tel: +260211372900 in any transaction involving the sale of the transfer pricing rules. With effect Email: [email protected] minerals by a company carrying out from 1 January 2013, interest payments mining operations, directly or indirectly, on debt made by mining companies As email addresses and phone numbers shall be subjected to transfer pricing change frequently, please email us at to related or associated parties is the [email protected] if you are unable to reference price. rules too. The new BOZ regulations contact us via the information noted above.

The following countries are those which currently do not have transfer pricing regulation, or guidance surrounding their transfer pricing regulations is still evolving.

Country Answer Bahamas There are no transfer pricing regulations in the Bahamas. However, Bahamas Customs does have the right to reassess the declared value of imports if they believe such value is not based on commercial terms. Belarus In the Republic of Belarus, transfer pricing regulations allow the tax authorities to correct the corporate profit tax base in the following cases: Sale of immovable property if the transaction price deviates downward by more than 20 percent of its market value; and, foreign transactions with related or unrelated parties, if the price of the transaction(s) with one party exceeds one billion Belarusian rubles within the period of one calendar year on the date of the provision/acquisition of goods/services, and the price of the transaction deviates from the market price by more than 20 percent on the date of sale. Cambodia Currently, there are no Directives, Circulars or Rulings issued by the Cambodian Tax Office with respect to transfer pricing. However, the Tax Laws (Article 18) give power to the Tax Office to adjust related party transactions. A related party relationship is one where there is a 20 percent or more shareholders relationship. Article 18 of the Tax Laws states that “In the case of two or more enterprises, whether incorporated in or outside of the Kingdom of Cambodia, which are under common ownership, the tax administration may as may be necessary distribute, gross income, deductions or other benefits among such enterprises and their owners in order to prevent the avoidance or evasion of taxes or to clearly reflect the income of such enterprises, or their owners.” Through using the power of the related party provisions, the Tax Office has adopted a very aggressive approach to the tax audit of related party transactions.

Country Answer Cayman Islands There are no existing transfer pricing regulations in the Cayman Islands. Kazakhstan Kazakhstan has a transfer price law specifying a hierarchy of transfer pricing methodologies that taxpayers must consider and apply. This hierarchy places the Comparable Uncontrolled Price (CUP) method at the very top. That is, the CUP method must be employed unless it is impossible to do so (e.g. due to data limitations). The law further stipulates that any cross-border transaction (except for sales and purchases of agricultural goods) with a transaction price deviating from market price may be reviewed, regardless of whether it occurs between related parties. Cross-border sales and purchases of agricultural goods are subject to transfer pricing scrutiny only if the transaction price deviates from market price by more than 10 percent. The transfer pricing law also contains rules that specify pricing of uranium, titanium and magnesium products. Recent updates to the law have added guidance on the pricing of oil and gas products being sold under production-sharing agreements. Advance Pricing Agreements (APAs) are, in principle envisaged by the law, but the revenue authorities are reluctant to conclude them and the applicable rules are complex. Kuwait Kuwait does not currently have formal transfer pricing regulations. However, Executive Rule No. 49 issued by the Kuwait Tax Authority (KTA) provides that the KTA is entitled to verify that intra-group transactions are conducted on an arm’s length basis and not for the purpose of obtaining illegal tax privileges. In such a case, the intra-group transactions of related companies shall be compared in accordance with the arrangements between companies that are not legally or financially related. Furthermore, depending on the nature of the relationship between the supplier/service provider and the acquirer with respect to a transaction, KTA deems certain percentage of the costs or services rendered outside Kuwait as inadmissible. Macedonia The Macedonian tax legislation does not include explicit transfer pricing provisions regarding the transfer pricing documentation requirements of taxpayers. The transfer pricing provisions that do exist are quite general (i.e. that the tax authorities can request a taxpayer to provide information and evidence that the conditions under which the transfer prices are set are at arm’s length). The transfer pricing provisions in the Macedonian Corporate Profit Tax Law stipulate that revenues and expenses incurred on transactions between related parties are recognized for tax purposes at market prices, and the law prescribes the Comparable Uncontrolled Price (CUP) or the Cost Plus Method (CPLM) as the basis for determining any differences. The definition of related parties is provided in the Macedonian Trading Companies’ Law. In addition, the Macedonian Personal Income Tax Law provides that expenses incurred between related parties are recognized for tax purposes up to the level of the prices which would have been agreed on the domestic market (i.e. the Macedonian market) or on a comparable foreign market between unrelated parties. Mauritius There are no transfer pricing regulations in Mauritius. Transactions between related parties should be at arm’s length. Moldova In Moldova, transactions carried out between related parties must follow the arm’s length principle and must be documented from a transfer pricing perspective, otherwise the expenses/losses registered in relation to such transactions cannot be deducted for corporate tax purposes. In terms of transfer pricing documentation requirements, currently, there are no specific provisions regarding the content of a taxpayer’s transfer pricing documentation. There is, however, draft legislation on this subject which is expected to enter into force starting on 1 January 2016. United Arab There are currently no transfer pricing regulations in the United Arab Emirates. Emirates

APA – Advance Pricing Agreements IFRS – International Financial Reporting Standards

APMA – Advance Pricing and Mutual Agreement IP – Intellectual Property

ATR – Advance Tax Ruling IRC – Internal Revenue Code

BvD – Bureau van Dijk IRS – Internal Revenue Service

CA – Competent Authority MAP – Mutual Agreement Procedure

CFCs – Controlled Foreign Companies MB – Metal Bulletin

CPM – Comparable Profits Method OECD – Organisation for Economic Co-operation and Development CSA – Cost Sharing Arrangement OECD CUP – Comparable Uncontrolled Price Guidelines – OECD Transfer Pricing Guidelines for Multinational Enterprises and CUSP – Comparable Uncontrolled Services Price Tax Administrations (22 July 2010) CUT – Comparable Uncontrolled Transaction PCT – Platform Contribution Transactions DTA – Double Tax Agreement SEC – Securities and Exchange Commission EEA – European Economic Area SME – Small and Medium Enterprises EU – European Union TNMM – Transactional Net Margin Method EU JTPF – EU Joint Transfer Pricing Forum UK – United Kingdom EUR – Euro US – United States GBP – Great Britain Pound USD – US Dollars HMRC – Her Majesty’s Revenue and Customs VAT – Value Added Tax IAS – International Accounting Standards

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Designed by Evalueserve. Publication name: Global Transfer Pricing Review Publication number: 133077-G Publication date: February 2016