TO BE OR NOT TO ... BEPS?
That is the question on the new fiscal order.
A short movie for those MNEs who are looking for the answers. By Transfer Pricing Services -Romania
Starring – angry people at a coffe shop on Conduit Street, London, the US president, the OECD secretary-general. What unites them? Pay attention before pay penalties! This time is different.
If you read during the week an editorial written by a well-known name here in Romania, not only by economists but also by the general public, you already know that "transfer-pricing practices (of profit export through manipulated transfer prices) are more detrimental for the host country in time of crisis."
And if you heard the Minister of Finance’s statements you also know that upgrading IRS’s department of transfer pricing is a priority. "I’m not saying that such operations are illegal, but we must be careful that profits of multinationals are being distributed in a fair way for the Romanian state too."
With two or three more such public declarations I think the Romanians will be enlightened and even if they won’t exactly know what "this transfer pricing" means they will certainly know "it's not good. It's some sort of conspiracy, there’s a hidden agenda "... What more can we say, it is the perfect public enemy.
If I tell you that transfer prices are nothing more than the prices at which a subsidiary carries out transactions with the parent company/majority shareholder ... that these prices are correct and no one is to say they are high, low, good or bad prices as long as they are at market value ... that for years, also in Romania, each company member of a group (national, multinational) has a duty to prove that it used the correct prices otherwise is fined... That being the case, you would probably think that I want to distract you from…what do they call it ... transfer pricing?
Actually, I would really like you to see the real issue here and no, I am not going to give a technical speech. Instead, I would like you to relax for a few minutes, and soak up the atmosphere of an American baseball game.
Imagine a huge baseball stadium with excited people in the stands and tense teams swinging their bats. The megaphone announces that a powerful team is about to enter on the field but they seem to have a problem with the “fair balls”.
Specifically: around spring, the permanent investigations subcommittee of the US Senate releases a report - "The Caterpillar off-shore tax strategy". I will not go into details but I guess you figured it out…it’s about transfer pricing. It looks like Caterpillar has established a subsidiary in Switzerland which sells spare parts on foreign markets and it records all profits even thoughthe job of buying parts from suppliers, storage etc. it’s for those from back home in the States where they do not receive the applicable tax. That’s around $ 2.4 billion in 13 years, as calculated by the “Swiss Scheme” regarding the loss for the IRS.
Did you get the picture? In Bucharest, if you come across a construction site you will immediately understand what a CAT bulldozer is and what the business with spare parts for such a machinery entails. Go to the States and ask how many employers from the heavy industry provide 52,000 jobs and you will understand why CAT is a symbol-company loved by Americans ... But this company does not bring the profits backhome (as we would say, it exports it) ... and acts just like the stubborn “Irish” from the IT business (i.e. American multinationals that establish their subsidiaries in Ireland. For example Apple who obviously has a report from the US Senate).
The political megaphone can see that it upset the crowd and wants to cool off the small taxpayers / SMEs blasting "Look who's to blame! That's why we have large deficits, because multinationals, with their transfer prices are exporting profits! And now, with a bulldozer!”.
But even if it’s not a thin report (it has 90 pages) and gentle at all, a political report can’t give a verdict. After making some noise the IRS enters the field! Feared by all, the IRS bulldozer who caught even Al Capone enters the scene and puts everything in order.
The game has started. Immediately after the report, CAT throws the ball really hard with a tough statement - “We disagree with these proposed adjustments, which the IRS did not propose in previous audits of U.S. tax returns in which the same tax positions were taken,” IRS does not retaliate (officially it doesn’t give details about the control checks) but I don’t believe it was pleased about it. So the IRS was conducting audits and found nothing suspicious...this is not at all a gracious statement; it looks like CAT wants to play hard.
Once again, the megaphone announces the mighty "policeman" for the American capital market, also known as SEC, who is submitting a question: let CAT tell us (because it's listed) what is their opinion about the IRS inspection and what will they do if...? "More likely than not” to win, CAT insists. They also make it clear that the The IRS is likely to make its determination within 12 months, Caterpillar, and if the IRS disallows Caterpillar's Swiss tax strategy, the company said, it would appeal that decision, a process that could take years.
Speaking the language from the baseball field do you have any idea how such an answer could be interpreted?
However, where did this unusual bravery of CAT came from? With the IRS? No room for negotiation?
CAT's defense is simple:
1. We have a plan of tax restructuring which was meant to improve the business by eliminating the redundant middleman between supplier and client, given that two-thirds of sales are from outside US.
2. The Swiss maneuver played out within the legal framework, exploiting the offered opportunities.
In a few words "Americans pay the taxes they owe, but not more. As an American company we pay the taxes we owe, not more"- as one of CAT’s tax manager said in the Senate hearings. Remember we are talking about a iconic-company, so he knows the language of the spectators.
Any ordinary man can now understand what happens on the field- it is natural (neither good nor bad) for a company to pursue their interest / profit within the legal framework ahead of them. If the government doesn’t agree with the results then there’s nothing else to do but change the law. It has the right, but it also has to face the consequences of their action.
You, American government, ask yourself: would CAT still be able to offer employment to hundreds of thousands of Americans (directly and indirectly through suppliers) if the provided framework is uncompetitive, and lose to Japanese or Chinese competitors? You should ask yourself, why did you come to have the highest effective tax rate among industrialized countries and the third highest in a ranking of 163 countries?
This also applies for us now that the Tax Code is in discussion, including transfer pricing. I really welcome the fact that there are taken into consideration the points of view from the business community. This is the kind of atmosphere that should always be on the field, because we are not in a game with the good and bad, on one side the government and on the other side the multinationals. We are actually playing a game where there should not be opponents or an enemy handed for the crowd to bite from.
Article published on contributors.ro in August 27. Author: Adrian Luca, TPS.
No manager will be able to do his job properly until there are definite regulations for all state companies to reject prices out of the market range.
For years there has been an important categoryof privately held companies which have no right to presumption of innocence regarding taxes. The tax authority doesn’t trust companies part of a group that state "When I carry out transactions with my mama, I use only the market price, cross my heart and hope to die".
Therefore, when the tax authority goes to the privately held company, they do not ask whether they auctioned or not, or the name of the manager and what kind of person he is. They only ask whether the price is arm’s length.So why wouldn’t the state company be required to do the same, especially if we presume it to be part of an interest group?
You can find the full article on www.contributors.ro. Author: Adrian Luca, TPS
In the September 2013 issue of our newsletter (TPS Express) we brought into discussion several suggestions that could make make life easier for the taxpayers and even serve the interests of the tax authorities. Today, the measures are up-to-date:
1. Current Romanian legislation requires all companies to have transfer pricing documentation with regard to transactions carried out with related parties.
2. The law does not take into account the size of the companies or value of transactions. In other words, a company with 10 employees performing occasional intra-group transactions of EUR 1,000 may have the same fixed costs of documentation as a company with 500 employees and current transactions of one million euros.
3. EU Joint Transfer Pricing Forum recommends a flexible, balancedapproach to rules for reporting / transfer pricing documentation for SMEs.
1. Elimination of transfer pricing documentation regarding related party transactions in cases where:
i) companies with turnover below a certain level;
ii) transactions that combined do not exceed a certain annual value.
2. Introduction of simplified transfer pricing documentation (eg. no mandatory benchmarking studies for certain transactions) for companies with turnover within a certain range;
3. Regulation adjustment mechanism
Do you agree with these measures? That these should be the legal thresholds?
You can write your opinions and comments at: adrian.luca@transferpricing.ro, 0742.159.142.
We want a constructive dialogue regarding this issue therefore, in order to make an informed decision we would like to offer you all the necessary elements. The actual question is:
It seems like we are on the horns of a dilemma…
What do the results reported by 2,000 of the largest companies in 2008 – 2012 show us?
During 2008 - 2012, circa 30% of the largest 2,000 Serbian companies (turnover wise) incurred net losses at least in one year, and circa 11% of them incurred net losses for three years. If operating losses are taken into account, about 37% of the sample companies saw losses at least in one year, with circa 12% if them sustaining losses during no less than three years.
|
Indicator |
1 year |
2 years |
3 years |
4 years |
5 years |
|
Net losses |
30% |
17% |
11.5% |
7% |
3.4% |
|
Operating losses |
37% |
20.5% |
12% |
7% |
4% |
Table 1: Share of companies that incurred net losses during 2008 – 2012, i.e. for … years
Above are the results of a research focusing on the scope of the aging losses amongst Serbian companies, carried out as a first by the consulting firm Transfer Pricing Services. Both aggregate data and data broken down as per controlling shareholder (resident or non-resident) are available upon request.
“It is a common sight, the new normal, to talk about losses during downturn times. However, analyses revealing the exact extent of the phenomenon are still overdue. For instance, the size of the segment of companies that incur losses for multiple years in a row. It is what we planned to uncover in our study now, five years after the recognised onset of the current global economic crisis” says Marko Milojevic, TPS Serbia director.
For full access to the article, please click here.
Tax authorities all over Europe are engaged in a process of changing important issues of the tax legislation and even the procedures, basically to close the tax loopholes, and … to bring more money to the budget. There is no surprise, many of these changes impact transfer pricing side of the multinationals companies. So, if your mother-company is based in Italy or France, have in mind that the fiscal context is even more complicated.
Italy – the Finance Act 2014 says clear that yes, transfer pricing adjustments are subject to regional corporation tax (IRAP), with retroactive effect for every financial year beginning on January 1, 2008 or later. But it should be noticed that Italian taxpayers may now claim IRAP tax relief under a Mutual Agreement Procedures (MAP).
France – the 2014 Finance Law cancels the suspension of tax payments which was available when a MAP was launched. Another measure says the large companies have to provide their management accounts during a tax audit (it means, for example, that the tax authority could check the accuracy of the cost base, the allocation keys uses and the net margins of each intra-group transaction).
The OECD has unveiled a new single global standard for the automatic exchange of information between tax authorities worldwide.
The standard calls on jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
”Around the globe, tax authorities have become more aggressive, primarily to reduce government fiscal deficit”. This is how an analysis recently published on tpweek.com has started (tpweek.com is edited by the prestigious International Tax Review).
You will hardly find today an analysis on transfer pricing issues without this common type of safety warning. It has become a kind of globally well-known "objects in the mirror are closer than they appear”. So, for a taxpayer engaged in business with a related party in the world (and who isn’t nowadays?) any advice from UK, let’s say, would be everywhere welcomed.
According to the amendments to Serbia’s rulebook on transfer pricing, the taxpayers may submit a short form report for the transactions with related parties that satisfy at least one of the following conditions:
1) If the transaction with the associated enterprise is a one-off transaction in the year for which the tax balance is prepared and if the value of transaction is not higher than the value of sale for which the Value Added Tax Law sets the obligation of registration for the value added tax (in this moment RSD 8 million, approximately EUR 70,000, USD 94,000);
2) If the total value of transaction with one associated enterprise during the year for which the tax balance is submitted is not higher than the value of sale for which the Value Added Tax Law sets the obligation of registration for the value added tax.
This relief is not permitted for loans and credit transactions.
Short form report should include the following information:
Irrespective of the form, the taxpayer shall submit the transfer pricing documentation together with the annual tax return.
”We interpret the recent changes as a signal that tax authorities intend to focus on ”heavy weight” transactions during tax inspections and therefore a case of significant adjustment of transfer prices should be expected to happen pretty soon. It is a predictable development, based on our experience in other countries. Everywhere, tax authorities are in rush for collecting more and more money to the state budget, and transfer pricing matters are a tool to identify new taxable revenues. Notably, many times an aggressive transfer pricing audit follows as a result of a general tax audit or in some cases may also start from a VAT refunding” – notes Adrian Luca from TPS.
According to the amendments to Serbia’s rulebook on transfer pricing, the taxpayers may submit a short form report for the transactions with related parties that satisfy at least one of the following conditions:
1) If the transaction with the associated enterprise is a one-off transaction in the year for which the tax balance is prepared and if the value of transaction is not higher than the value of sale for which the Value Added Tax Law sets the obligation of registration for the value added tax (in this moment RSD 8 million, approximately EUR 70,000, USD 94,000);
2) If the total value of transaction with one associated enterprise during the year for which the tax balance is submitted is not higher than the value of sale for which the Value Added Tax Law sets the obligation of registration for the value added tax.
This relief is not permitted for loans and credit transactions.
Short form report should include the following information:
Irrespective of the form, the taxpayer shall submit the transfer pricing documentation together with the annual tax return.
”We interpret the recent changes as a signal that tax authorities intend to focus on ”heavy weight” transactions during tax inspections and therefore a case of significant adjustment of transfer prices should be expected to happen pretty soon. It is a predictable development, based on our experience in other countries. Everywhere, tax authorities are in rush for collecting more and more money to the state budget, and transfer pricing matters are a tool to identify new taxable revenues. Notably, many times an aggressive transfer pricing audit follows as a result of a general tax audit or in some cases may also start from a VAT refunding” – notes Adrian Luca from TPS.
for transfer pricing safety 