Multinational companies are operating in an environment of unprecedented complexity. The rising volume and variety of intercompany transactions and transfer pricing regulations, coupled with increased tax authority collaboration across borders presents both risks and opportunities. Our country updates will provide you with the latest transfer pricing issues and developments worldwide that may affect your business.
Japan’s proposed adoption of BEPS Action 13 includes new prescriptive rules
The Japanese Cabinet approved the 2016 tax reform proposal, which includes new transfer pricing documentation rules. The new rules follow the three-tier documentation approach contained in the final report of BEPS action 13:
- Japanese multinational groups with a global revenue of over ¥100 billion (€780 million) must file a Country-by-Country report for tax years beginning on or after 1 April 2016.
- Japan-based companies that are members of a multinational group with revenue of ¥100 billion must also file a master file for tax years beginning after 1 April 2016. The master file is due within one year after the financial year end. It may be prepared in Japanese or English.
- A local file must be filed by Japan-based companies which have at least ¥5 billion of related-party transactions or ¥300 million of related-party intangible property transactions in the corresponding year. It must first be prepared under the new rules for taxable years beginning after 1 April 2017.
The new Japanese transfer pricing rules are more prescriptive than the prior rules in terms of the required information as well as the timeline. Companies doing business in Japan will have to maintain robust documentation and may have to review their documentation process in order to meet the new deadlines.
Ireland issues Country-by-Country reporting regulations
The Irish Revenue published regulations relating to the implementation of Country-by-Country (“CbC”) reporting for Irish-parented multinational groups with annual consolidated group revenue in excess of EUR 750 million. The new regulations are effective 1 January 2016.
The proposed regulation addresses also the case where the ultimate parent company of a local constituent entity cannot file a CbC report. Contrary to the recommendations of the OECD, the regulations introduce the term “equivalent CbC report” which is not covered under BEPS action 13. This report requires only information that the Irish constituent entity has within its possession or has the power to obtain to be included, and thus may not include relevant information for other group companies that are subsidiaries of the Irish constituent entity.
European Commission releases proposed anti-tax avoidance package
On 28 January 2016, the European Commission released its anti-tax avoidance package, which covers various measures including a draft directive on the implementation of country-by-country (“CbC”) reporting as well as a draft anti-tax avoidance directive.
The draft CbC reporting directive requires EU member states to introduce by 31 December 2016 requirements for multinationals based in the relevant state to file CbC reports, where turnover exceeds the EUR 750 million benchmark set by the G20/OECD. The filing requirement would apply to fiscal years commencing on or after 1 January 2016.
The draft anti-tax avoidance directive further includes propositions for restrictions of interest deductions. The proposed rule starts with the principle that borrowing costs should be deductible to the extent interest income is generated from financial assets. The directive then proposes that where interest costs exceed finance income, the deduction of financing costs should be restricted to 30% of EBITDA. The directive also proposes several reliefs, including:
- A de minimis exemption for interest not exceeding EUR 1 million;
- A fallback to a group-wide test, based on the accounting ratio of third-party debt to assets, less 2%; and
- The ability to carry forward excess EBITDA and disallowed interest.
The draft anti-tax avoidance directive proposes an exit tax on transfers of assets or the transfer of residence, requiring the EU member state of origin to levy tax on the fair market value minus the tax book value. For transfers from an EU member state to another EU member state, tax could be paid in instalments over a five-year period. The receiving member state should provide for a step-up to fair market value as established by the member state of origin as the starting value of the assets for tax purposes.
U.S. issues proposed regulations on Country-by-Country Reporting
The U.S. Treasury issued the proposed regulations that require annual country-by-country (“CbC”) reporting of U.S. ultimate parent entities with annual revenue of $850 million or more.
The proposed regulations are based on the model template for CbC reporting developed by the OECD as part of the BEPS project and should apply to taxable years of parents of U.S. multinational enterprise (“MNE”) groups that begin on or after the date of publication of the Treasury decision adopting these rules as final regulations. Therefore, provided that the regulations are finalised in 2016, calendar year taxpayers will first file the CbC report for tax year 2017. However, other countries may require filing for the first fiscal year beginning on or after 1 January 2016, which will raise an issue as to whether members of U.S. MNE groups that are operating in those jurisdictions will be subject to CbC filing requirements for 2016.