Transfer pricing and BEPS developments in Singapore … · tax planning arrangements 2 12 Limit base erosion via interest deductions and other financial payments Develop rules to

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Transfer pricing and BEPS developments in Singapore andselected countries29 August 2016

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Transfer pricing in a BEPS world: GlobalTP developments

Sean F. Foley

Global Head of Transfer Pricing

KPMG in the United States

3© 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.

BEPS backgroundThe changing landscape

Increased political focus on perceived tax avoidance by multinationals

Governments under extreme fiscal pressure as a consequence of the global

economic crisis

The G20 was concerned that current international tax rules and frameworks

were/remain inadequate

The G20 was applying political support/pressure to push for change

The OECD response to growing pressure was to release the Base Erosion

and Profit Shifting (BEPS) report

There is a drive to develop a tax system that is fit for purpose for today’s

multinationals and digital age

Transfer pricing is at the heart of the debate.



Neutralise the

effects of hybrid

mismatch

arrangements

Prevent the

artificial

avoidance of

PE status

Require taxpayers to

disclose their

aggressive

tax planning

arrangements

2

12

Limit base erosion

via interest

deductions and

other financial

payments

Develop rules to prevent

BEPS by transferring

risks among, or

allocating

excessive capital

to, group members

Make dispute

resolution

mechanisms

more effective

4

14

Counter harmful tax

practices more

effectively, taking

into account

transparency

and substance

Develop rules to preventBEPS by engaging in transactionswhich wouldnot, or would only very rarely,occur between third parties

Develop a multilateral

instrument

10

Strengthen CFC rules

Develop rules to

prevent BEPS by

moving

intangibles

among group

members.

Re-examine transfer

pricing documentation

Address the tax

challenges of

the digital

economy

Prevent treaty abuse

Establish methodologies

to collect and

analyze data

on BEPS and

the actions to

address it

6

BEPS Action Plan

An overview –BEPS Action 13



■ Objective: Risk Assessment

■ Approach: Provides an overview of the

multinational group and business

Master file

■ Objective: Appropriate considerations in setting

transfer prices

■ Approach: Provides additional detail on the

operations and transactions relevant to that

jurisdiction

Local file

■ Objective: Prioritization of Audit Issues

■ Approach: Provides summary data by jurisdiction

including revenue, income, taxes, and indicators

of economic activity

Country-By-Country

(CbyC) Report

BEPS Action 13 guidanceThree-tired approach for documentation



Short-Term Action Steps

— Identify potential data sources for required CbyC reported items, and

internal resources that can help explain scope, logic, inputs, etc.

— Perform initial data mapping

• What items can be pulled electronically?

• What items must be manipulated manually?

• What items are subject to significant interpretation or discretion?

— Assess available master and local country transfer pricing

documentation

• How long would it take to prepare items not currently available?

— Perform “dry run” CbyC report and master and local documentation

— Identify BEPS risks highlighted by your dry run reporting packages

• What are the risks for proposed adjustments?

• How can you mitigate those risks?

What are companies doing to prepare?



Frequently Asked Questions Headquarter

Conversation

Subsidiary

Conversation

What are my competitors doing? Am I behind the pack?

How do I message to management?

What will my ETR look like over the next five years?

What does this do to our cash taxes?

Do I have resources to manage the changes?

Are we in the loop with what is happening at headquarters?

How do I keep up with changes?

Action 13 not only matters for the headquarters of a MNE but also subsidiaries

of MNEs

Why Action 13 matters for subsidiaries

An overview –BEPS Actions8, 9 & 10



Historically, MNEs Have:

— Used contracts to move assets and risks

to principal companies

— Moved the economic responsibility for,

and key benefits from, important local

functions to principal companies

— Limited local returns

The OECD and Other Key G20

Countries Pushed to:

— Increase the importance attached to

people and local functions

— Focus on key decision makers and

where they are located

— Limit profits associated with “naked”

contractual rights

Risks

Assets Functions

Key Themes in Chapter I of OECD

Transfer Pricing Guidelines

Contractual arrangements and actual

conduct should be considered

Need to look at the location of

decision-makers and the decisions they

have made, especially with respect to risk

Transfer Pricing Generally Focuses on:

More focus on people & functions



Identify economically significant risks with specificity1

Identify contractual assumption of the specific risk2

Functional analysis. Establish conduct and which enterprises perform control

functions and risk mitigation functions and have the financial capacity to

assume the risk

3

Is the contractual assumption consistent with the conduct? Do the entities

follow the contractual terms and does the party assuming risk exercise control

and have the financial capacity to assume risk?

4

If the party assuming the risk does not control the risk or does not have the

financial capacity to assume the risk, then allocate the risk to the group company

having most control and having the financial capacity to assume the risk

5

Price the accurately delineated transaction taking into account the financial and other

consequences of risk assumption, as appropriately allocated6

Six-step analytical risk framework



We Love Acronyms: BEPS, KERTF/SPF, FRA, DEMPE, PSM…

Understanding DEMPE Functions

— Existing “IP” models did not always include an analysis of the parties responsible for:

• Legal ownership

• Funding [economic ownership]

• Important “IP” functions: Development, Enhancement, Maintenance, Protection and

Exploitation [new ownership concept?... shared ownership, like the shared economy]

— Many “IP” planning strategies did not clearly define “IP”. Often it means, “anything” leading

to profits above “routine” or “normal” profits. Model was applied for all industries, from high

tech to consumer goods, in a similar way

— A review of DEMPE functions may require changes to the allocation of profits in the value

chain

— New emphasis on control: people with the relevant knowledge to make decisions

— The importance of each function: Development, Enhancement, Maintenance, Protection

and Exploitation will be different for different sectors (e.g., mining, pharma, luxury goods,

software) and may change with the life cycle of the business (e.g., start up vs. mature

company)

— Does DEMPE put an emphasis on “IP” at the beginning of the supply chain or at the end?

What is DEMPE?

An overview –BEPS developments in the US



Treas. Reg. § 1.6038-4 (“Final Regs”)

— Effective for tax years that begins on or after June 30, 2016

— Additional IRS guidance is anticipated with respect to 2016 “gap year”

filings

— Designates the U.S. CbyC report as Form 8975

• Still under development, with further guidance expected in the form

instructions

• Remember that electronic filing is required, pursuant to the OECD’s

XML schema

OECD Guidance

— Issued concurrently with the final regulations

— Non-binding, but instructive in that the Treasury and IRS (and other

countries) seek consistency with OECD model template

CbyC Final Regulations



Effective Date— OECD: MNE’s fiscal year beginning on or after January 1, 2016

— Final Regs: taxable years beginning on or after June 30, 2016, with anticipated guidance for voluntary “gap year” filings (see below)

First filing deadlines— OECD: by 12 months after the end of the reporting period (e.g.,

December 31, 2017, for calendar year 2016 reports)

— Final Regs: with the parent’s income tax return, including filing extensions*

Annual reporting threshold requirement— OECD: reporting required for MNE groups with annual consolidated

group revenue of at least €750 million

— Final Regs: reporting required for MNE groups with consolidated group revenue of at least US$850 million

* The Final Regs provide that Form 8975 may prescribe an alternative time and manner for filing.

Comparison with OECD Template



OECD BEPS Action 14

- Final BEPS Action 14 package includes commitment by 20 countries to provide for

mandatory binding MAP arbitration in their bilateral tax treaties: Australia, Austria,

Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the

Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland,

the UK and the US

- Mandatory binding MAP provision to be developed as part of BEPS Action 15

(multilateral instrument)

Mandatory Binding Mutual Agreement Procedure (MAP) Arbitration

— The US has entered into new treaties or protocols with the following countries, each

containing mandatory binding MAP arbitration

— All have “last-best-offer” (baseball-style) arbitration occurring after 2 years of

unsuccessful MAP negotiations

— Only arbitrations to have occurred to date involved Canada

In Force Not In Force

Belgium Japan

Canada Spain

France Switzerland

Germany

Arbitration



CbCR

Final Legislation

United States

Implemented

Draft bills/Public discussion draft

Intention to Implement

CbCR / MF / LF

Final Legislation

Mexico

CbCR

Draft legislation

Canada

CbCR / MF / LF

Final Legislation

Australia

CbCR / MF /LF

Final Legislation

China

CbCR / MF / LF

Final Legislation

Denmark

CbCR / MF / LF

Final Legislation

Poland

Norway

CbCR

Final Legislation

France

CbCR

Final Legislation

IrelandCbCR / MF /LF

Final Legislation

Japan

CbCR

Draft

Korea

MF / LF

Final

South Africa

CbCR

Intentions

Nigeria

CbCR / MF / LF

Intentions

New Zealand

CbCR / MF / LF

Intentions

Taiwan

CbCR

Final

Portugal

MF / LF

Intention

CbCR / MF / LF

Draft Legislation

Sweden

CbCR / MF / LF

Draft Legislation

Finland

CbCR

Draft legislation

Singapore

Israel

Romania

United Kingdom

CbCR

Final Legislation

Source: KPMG International member firms

CbCR

Draft

MF / LF

Intention

CbCR / MF/LF

Intentions

Chile

Switzerland

CbCR

Draft

MF / LF

Intention

CbCR

Intention

Russia

CbCR

Draft

MF

Intention

MF / LF

Final

Germany

CbCR

Intentions

Bermuda

Austria

CbCR / MF /LF

Final Legislation

Belgium

CbCR / MF /LF

Final Legislation

CbCR/MF

Draft

LF

Intention

CbCR

Final Legislation

Italy

CbCR / MF / LF

Final Legislation

Netherlands

CbCR

Intentions

Jersey

CbCR

Draft legislation

Luxembourg

CbCR / MF / LF

Draft Legislation

Liechtenstein

CbCR / MF / LF

Intentions

MalaysiaCbCR / MF / LF

Intentions

Indonesia

CbCR

Draft Legislation

Slovenia

CbCR / MF / LF

Intentions

Czech Republic

CbCR / MF / LF

Final Legislation

Spain

India

CbCR

FInal

MF / LF

Draft

CbCR

Intentions

Brazil

CbCR

Draft

MF/LF

Intention

CbCR / MF/LF

Intentions

Peru

CbCR/LF

Draft

MF

Intention

BEPS today …and more to come!



kpmg.com/action13updates

Check for updates

http://kpmg.com/action13updates

© 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 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.

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ContactSean F. FoleyGlobal Head of Transfer Pricing

KPMG in the United States

T: +202 533 5588

E: [email protected]

Transfer pricing developments and outlook in Singapore

Geoffrey Soh

Head of Transfer Pricing

KPMG in Singapore

Recent developments

22© 2016 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.

Meanwhile in Singapore ...• IRAS is concerned about international

developments on TP, and their impact on Singapore.

• Several concerns drive the current focus on TP:

− that Singapore be seen as responsible to the global

community and international sensitivities on BEPS;

− that taxpayers may err on the side of caution and allocate

more profits to jurisdictions with new/stricter TP rules;

− that taxpayers have not paid adequate attention to TP even

after the guidance in 2006; and

− to fulfil Singapore’s obligations as a BEPS Associate.



OECD

IRAS 1

Jan 20152nd Edition IRAS TP

Guidelines

2 3 54 76

Jan 20163rd Edition IRAS TP

Guidelines

Jun 2016Singapore joins BEPS Inclusive

Framework

E-tax

guide on

CbCR

Revised

guidance on

interest and

services

Jan 2015Today

29th August 2016

A B

Oct 2015Final Report on BEPS Actions 8

to 10 and 13

Jun 2016Additional

guidance on CbCR

C

Formal inclusion of

BEPS changes into

OECD Guidelines

Jan 2016

Notes: (1) Timeline is not to scale.

(2) Only major events stated, list of events stated here are not exhaustive

New Form-C

and

TPG v4.0

Legislation,

enforcement

and

penalties

Transfer Pricing Developments: Timeline



Evolution of TP Guidance in Singapore• First edition of TP Guidelines issued in 2006.

• IRAS Circulars in 2008/2009.

• Section 34D incorporated in SITA in 2010.

• Second edition of TP Guidelines issued January 2015:

− mandatory contemporaneous documentation

− requirements for detailed information at the group level and entity level; and

− negative implications for non-compliance, including penalties under Section

94(2).

• Third Edition of TP Guidelines issued January 2016:

− amended guidance on the MAP and APA process; and

− some (minimal) changes in the application of TP methodologies.

• Singapore joins the BEPS Inclusive Framework in June 2016.



MOF’s Announcement on BEPS (June 2016)• MOF announced Singapore’s participation in the OECD’s

Inclusive Framework for the implementation of measures

against BEPS.

• The inclusive framework focuses on the four minimum

standards:

− Action 5: Countering harmful tax practices

− Action 6: Preventing treaty abuse

− Action 13: TP documentation and Country-by-Country Reporting

(CbCR)

− Action 14: Enhancing tax dispute resolution

• CbCR will give tax authorities access to detailed

information about group operations and substance

worldwide, in order to assess TP risks.



Why be a BEPS Associate?• Singapore will have equal rights as the OECD/G20

members, in developing standards and monitoring

implementation on BEPS-related issues.

• Strengthens Singapore’s commitment to the

transparency required, to ensure that profits are

taxed where economic activities take place and value

is created.

• Should serve to safeguard Singapore’s reputation as

a responsible member of the international tax

community.

Transfer pricing compliance



Required …• Contemporaneous TP documentation:

− prior to or at the time of undertaking the transactions;

− for ease of compliance, no later than the time of

completing and filing the tax return; and

− date of creation to be stated.

• What content would meet minimum standards of

adequacy?

− On a group and local entity level (see next slides) …



Minimum Standards for DocumentationGroup-Level Information

• Worldwide organisationalstructure

• Group's business segments

• Group's business models and strategies

• Group’s supply chain and principal business of each party

• Consolidated financial statements

Entity-Level Information

• Entity’s management and organisational chart

• Entity's business segments

• Entity's business model and strategies

• Entity’s transactions with related parties

• Entity’s financial information

• Contracts and agreements

Industry Analysis and Functional

Analysis

• The Group and entity’s industry dynamics and regulatory setting

• Detailed analysis of the functions performed, assets used and risks assumed in relation to the related-party transactions

Economic Analysis

• Transfer pricing method chosen and reason

• Application of chosen transfer pricing method

• Typically, screening for comparable companies and transactions

• Comparability analysis

• Computation of arm's-length price/margin



Required …• After TP documentation is prepared:

− testing of arm’s-length nature of transactions should be

done annually; and

− TP documentation to be updated periodically.

• Taxpayers to submit TP documentation within 30

days of request from IRAS.

• Non-compliant taxpayers can be penalized under

Section 94(2) of the SITA.

• May be exemptions from documentation if below

certain thresholds. For situations when risk of tax

leakage is small.



TP documentation process and contents

Functional analysis

Choice of TP methodology and

approach

Economic analysis /

benchmarking

Development of TP

documentation

Updating the TP documentation ENTITY

LEVEL

GROUP

LEVEL



Supporting documents• Legal contracts

• Invoices

• Business plans

• Allocation rationale and formulas

• Minutes and memos

• Valuation report

Consequences of Non-Compliance



Adverse Tax and Other Consequences 1) Record keeping penalties per Section 94(2) of the

SITA.

2) Adjustments to income per Section 34(D) of the SITA.

3) No MAP support to resolve double taxation

incidences.

4) Denial of APA application.

5) Rejection of year-end and self-initiated retrospective

TP adjustments.

6) Negative publicity.

7) Drain on resources to defend against TP audit.



Risk Indicators Leading to Audit Selection• Related-party transactions are

of significant value, and also

when compared to other

transactions.

• Losses or erratic/marginal

profitability.

• Business performance at odds

with industry/peers.

• Complex chain of transactions.

• Its all data analytics!



How Can I Mitigate Exposure?• Basic option – do the TP documentation and implement it.

• A step beyond – consider a bilateral Advance Pricing

Agreement to further mitigate TP risk.

• A bilateral APA includes an agreement between a

transacting party and its tax authority, specifying the TP

method to be applied and profitability to be accorded for

the controlled transaction(s).

• In Singapore, a bilateral APA can cover 3 to 5 future years

as well as a roll-back period of 2 years

− An APA will help mitigate the possibility of future disputes

and reduces the incidence of double taxation.

Red flags – Things to Avoid



Function Creep

Functions Compensation

Good ol’ DaysPurchases from related

parties, for resale to

unrelated customers

Accorded a

margin of 5%

Moving Up the

Food Chain

As above but including:

• kitting

• financing

Still same 5% as

above?



Focusing on Half the Issue

• Benchmarking study completed with an identified

arm’s-length profitability range.

• However, the TP methodology is total cost plus a

mark-up (5%? 10%? 15%?).

• Cost base compiled correctly? It has the greatest

impact:

− Only direct costs?

− Indirect costs? Overheads?

− Is allocation appropriate?

• Cost base has the greatest impact (100%).



Entity Classification At Odds With Legal Agreements or Fact Pattern

Classification Actual Fact Pattern

Toll ManufacturerTake possession of

raw materials purchased

Administrative service

providerFinances purchases

Sales FacilitatorOwns/utilizes warehouses

and delivery vehicles



Leaving It Too Long• Distributor earns a fixed $5.00 per unit sold as

remuneration for its distribution activities.

• Purchase and sales price are determined based on

quoted market prices.

• In periods of significant fluctuation in market

prices, Distributor received the same fixed

amount.

• Resulted in significant fluctuations in gross

margin and audited by IRAS.



Year 1

($ per unit)

Year 2

($ per unit)

Year 3

($ per unit)

Sales 85 125 45

COGS 80 120 40

Gross Margin 6% 4% 11%

Leaving It Too Long (Cont’d)

What’s Next? Future Developments



MOF’s Announcement on CbCR• In June 2016, MOF announced Singapore to

implement CbCR and to join Inclusive Framework

for implementing measures against BEPS.

• Applies to MNCs, whose ultimate parent entity is in

Singapore, and whose group turnover exceeds SGD

1.125 billion.

• Requirement to file their CbCR report within 12

months from the last day of the financial year

starting on/after 1 January 2017.

• Meaning … 31 December 2018 is the first due date.



Potential Implications• Tedious and mechanical data collection is required,

at least for the first time.

• How will the data be perceived? For example, high

revenues and low tax paid in Singapore and losses

in another jurisdiction.

• Pay attention to the content of CbCR to ensure this

would not trigger negative reactions from tax

authorities.



What Some Taxpayers Are Doing

• Proactive ‘Mock CBCR’ dry run with previous year’s

data.

• Use the mock run to flush out anomalies and clear

these up while there is still time – by aligning

profitability to value creation.

• Prepare at the minimum TP documentation or enter

into an APA for transactions likely subjected to

challenge.



More To Come?• IRAS will continue to closely monitor

taxpayer compliance. If this is unsatisfactory,

more stringent compliance measures may be

introduced.

• A safe harbor is expected to be introduced

for intra-group loans.

• IRAS to come out with e-tax guide on CbCR.

• International agreements/treaties for

automatic exchange of CbCR information.

• New Form C.

• International developments will continue to

have impact and Singapore requirements will

be adjusted accordingly.



How Should We Be Prepared?• Review your current transfer pricing policy and

the adequacy of your existing documentation.

• Plan how to prepare documentation in a

consistent and systematic way.

• Remember – even if below exemption thresholds,

arm’s-length principle still needs to be adhered to.

• Consider proactive measures to manage your

transfer pricing, e.g. APAs.

• BEPS health check on existing related-party

transactions/arrangements.



1 September 2016© KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

ContactGeoffrey SohHead of Transfer Pricing

KPMG in Singapore

T: +65 6213 3035


http://kpmg.com/socialmedia


BEPS is part of the here and now in Australia but what does it signal for the rest of the region?Jeremy Capes

Partner, Global Transfer Pricing

KPMG in Australia

1 September 2016© KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 51

“My message is clear – if you do business

in Australia, you must pay your fair share

of tax on the profits you earn here”Chris Jordan, Commissioner of Taxation, 3 March 2016


How is the Australian TP landscape changing?

Yesterday

• Introduction of 815-A

• Introduction of 815-B and repeal of 815-A and Division 13

• ATO’s International Structuring and Profit Shifting (ISAPS) program

• Senate Inquiry into Corporate Tax Avoidance

• Chevron decision handed down

Today

• Implications of Chevron decision & Senate Inquiry into Corporate Tax Avoidance

• Country-By-Country (CbC) reporting

• Multi-National Anti-Avoidance Law (MAAL)

• Diverted Profits Tax

Tomorrow

• ATO’s new Tax Avoidance Taskforce

• Implementation of the 2015 OECD report into Australian legislation

• Other transparency measures

• Increased penalties

Current developments –What are the implications of the recent Senate Inquiry into Corporate Tax Avoidance and the Chevron decision?


In signalling the political support for BEPS, the Senate Committee in 2015

focused on a number of themes in the hearings:

- Global tax structures and entities in low tax jurisdictions, particularly Singapore,

Ireland and Switzerland

- A comparison of the profits and relative profitability of Australia versus global

profits and profitability

- Current and past ATO interactions of taxpayers, including court cases, risk

reviews, audits and APAs

- The comparative cost of products supplied into other jurisdictions compared to

the cost of supply into Australia, and any knowledge by local management of

these prices

- Local management incentives, Key Performance Indicators and the link to

global group performance

- Corporate citizenship and current/former legal proceedings outside taxation

(such as fraud or negligence)

Senate inquiry into corporate tax avoidance –signals a subtle shift in TP focus?


In addition to a number of taxpayers, the ATO also appeared before the

Senate Review Committee and signalled a new focus in transfer pricing on:

- Is the taxpayer truly a low risk entity or is it something more?

- Has the Australian taxpayer truly acted in its own best interests or instead in

the interests of the multinational group?

- Would the cross border arrangement be structured in the same way if agreed

at arm’s length?

Taxpayers should be aware of the evolving landscape in Australia –

the sands are shifting

Senate inquiry into corporate tax avoidance –signals a subtle shift in TP focus? (Cont’d)


The case (Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner of Taxation [2015] FCA 1092)

considered the quantum of deductible interest in relation to related party loans in the 2004 –2008 income years

The case was run under both Division 13 of Income Tax Assessment Act 1936 and Subdivision 815-A of Income

Tax Assessment Act 1997 (Australia’s current 815-B legislation, and its explicit reconstruction provisions was not

applicable then)

The Court held that the taxpayer failed to prove that the amended assessments were excessive (taxpayer’s

onus)

Chevron’s Full Court appeal was set for a 5-day hearing commencing Monday 29 August but has been deferred.

Implications:

- Onus of proof and evidence

- Debt pricing

- Arm’s length conditions and reconstruction

- Comparability and expert evidence

- Beyond debt?

CVX USA

CAHPL

Chevron-

Texaco

Funding Corp.

Implicit support?

Interest

(LIBOR + 4.14%)

US$2.45bn

loan

100%

100%

USA AUS

S128F funding (AUD)

(withholding tax

exempt)

Taxpayers need to consider the arm’s

length support for the terms, structure

and substance of their loans and other

transactions, not just the pricing

Chevron case – implications for debt and beyond?

Current developments –How has CbC Reporting been adopted in Australia?


CbC

legislation

announced

in Federal

budget

CbC exposure

draft released

OECD BEPS

Action 13 Report

finalised

CbC legislative

bill passed in

Parliament

Legislation given

Royal Assent

Law Companion

Guide 2015/3

published

Start of first CbC

reporting year for

31 Dec balancers

ATO releases

draft High Level

Design for the

Local File.

Consultation

period

commences

End of first CbC

reporting year for

31 Dec balancers

Lodgement of first

reports for first CbC

reporting year for 31 Dec

balancers

May

2015

5 Oct

20153 Dec

201511 Dec

2015

17 Dec

2015

19 Jan

201631 Dec

201631 Dec

2017

1 Jan

20166 Aug

2015

OECD releases

standardised

electronic format

for CbC report

(Schema) -Aus

will adopt

22 Mar

2016

ITR, IDS & TP Doc due

Final ATO High Level

Design released with

compendium of

comments from

consultation.

ATO confirms it will

follow the OECD

format for the Master

File but will differ for

local file

24 May

2016

Still to come…

• Electronic approved form for Local

File and instructions

• Exemption process guidance

• Administrative solutions and

mechanics

CbC Reporting – how has it evolved in Australia?


• Entities who have annual total global income of $1 billion or

more and are either:

− Australian residents (i.e. Australian headquartered MNCs

or Australian subsidiaries of MNCs headquartered outside

Australia); or

− Foreign residents with an Australian Permanent

Establishment.

• The first period in scope will be the accounting period

beginning on or after 1 January 2016.

• Entities required to provide a statement to the Commissioner

within 12 months after the close of the income year.

• Potential for replacement reporting period where parent and

local entity year ends differ.

• The first filings will therefore be 31 December 2017.

• Provide a statement to the Commissioner in the ‘approved

form’, subject to exemption.

• Approved form yet to be determined by the Commissioner

but likely to include the following:

• That tax authority will automatically share the CbC report

with countries in which the group operates providing certain

conditions are met (i.e. confidentiality, consistency and

appropriate use).

• ATO designing administrative implementation guidance (e.g.

permanent and transitional exemptions).

• Administrative penalties apply if the statement is not filed in

time and/or false and misleading information is provided.*

Who? When?

What? How?

Files to be lodged by Aus entity CbyCMaster

File

Local

File

Australian headquartered MNE

Australian Sub of overseas MNE 1

1 Expected to be obtained via

automatic exchange of information

* Note 2016 Federal Budget proposed increased penalties up to

$450,000

CbC Reporting – what do I need to know for Australia?


Where is there overlap?

• Significant overlap between the Australian Local File and the IDS

• Some overlap between the 284-E documentation and both the Master File and Australian Local File

• Centrally prepared materials can be useful but be aware of the local Australian requirements and differences

ObligationExisting

obligation

New

(additional)

obligation

Due date

Self-assess compliance with Subdivision 815-B/C

Before

lodging the

tax return

Prepare contemporaneous Subdivision 284-E

transfer pricing documentation (for penalty

mitigation purposes)

Lodge Country-by-Country Report (“CbCR”), if not

available through automatic EOI

Within 12

months after

year endLodge Master File

Lodge Australian Local File

Lodge an International Dealings Schedule (“IDS”)

with tax return, if “Part A” of Australian Local File is

not lodged with the return

With tax

return

CbC Reporting – how does it align to existing TP documentation?

Current developments –Am I affected by MAAL?


• Australia has signalled it will adopt the BEPS action item 7 in respect of the artificial

avoidance of PEs

• In the meantime, MAAL is aimed at “artificial or contrived arrangements to avoid the

attribution of business profits to Australia through a taxable presence in Australia”

• Domestic action to respond to base erosion and profit shifting (“BEPS”). ATO

acknowledges MAAL will likely cover transition until OECD BEPS changes on PE

occur

• MAAL is intended to be a part of and supplement Australia’s existing general anti-

avoidance provisions (“GAAP”) in Part IVA

• Applies from 1 January 2016 (including schemes that were entered into beforehand)

• Four key “limbs”:

− Significant global entity

− “Gateway provisions”

− Principal purpose(s)

− Tax benefit

• The Commissioner has the power to cancel any tax benefit on the basis of

reasonably alternative postulate

What is MAAL?


Applies to

certain

schemes from

this date

onward.

Deadline for

“voluntary

disclosures”

ATO issues guidance

on when proposed

MAAL rules may or

may not apply

1 Jan

2016

19 Nov

2015

26 Apr

2016

Bill relating to

MAAL introduced

into parliament

16 Sep

2015

12 May

2015

Government

announces in

budget and

releases exposure

draft bill on MAAL

MAAL came

into effect

11 Dec

2015

ATO releases

alert on

transactions

that are

designed to

avoid tax

31 Mar

2016

ATO target

for initial 175

risk ratings

30 Nov

2016

MAAL – how has it evolved in Australia?


• A foreign entity makes certain supplies to an

Australian customer;

• Activities are undertaken in Australia in connection

with the supply;

• Some or all of those activities are undertaken by an

Australian entity (or an Australian PE of an entity)

that is an associate of or is commercially dependent

on the foreign entity;

• The foreign entity derives ordinary or statutory

income from the supply; and

• Some or all of that income is not attributable to an

Australian PE of the foreign entity.

• Tax benefit can be either i) an Australian tax benefit or

ii) both to obtain an Australian tax benefit and a

foreign tax benefit

• Require CoT to identify a reasonable alternative

postulate to the actual “scheme”

• Necessary to hypothesise that steps would have been

taken in Australia that would lead to the additional

income being attribute to a permanent establishment

in Australia

• Two likely tax benefits:

o Amount not included in assessable income of a

taxpayer; and

o A taxpayer not being liable to withholding tax.

• “a scheme that was entered into or carried out for a

principal purpose of, or for more than one principal

purpose that includes a purpose of obtaining a tax

benefit (or obtaining both a tax benefit and reducing a

foreign tax liability) under the scheme.”

• Captures entities that are part of a group with more

than A$1 billion in revenue.

Gateway provisions Tax benefit

Principal purpose(s) Significant global entity

MAAL – what are the key elements?


Key features – low risk scenario

Low likelihood that MAAL would apply

ParentCo owns, develops and maintains IP

Formal agreement between ParentCo and AusCo for marketing

and support services

Sales and marketing strategy developed by ParentCo; any tailoring

for local market approved by ParentCo

AusCo does not contribute significantly to bringing about customer

contracts.

No contact between customers and AusCo prior to sales

Key features – high risk scenario

Strong likelihood that MAAL would apply

ParentCo owns, develops and maintains IP

Sub A is located in a jurisdiction with no income tax, has no employees

and makes no contribution to development or maintenance of IP

IP sublicensed to Sub B, located in a low tax jurisdiction

Sub B sells products and services to channel partners or customers

contract directly with Sub B

AusCo does not make any sales itself in Australia

AusCo undertakes most of the activities necessary to bring about

customer contracts (e.g. identifying and meeting with channel partners

and conveying key corporate messages)

AusCo costs reimbursed by Sub B with a mark-up

Offshore

parent

company

Australian

company

Australian

customer

Contract

and product Payment

and contractPayment

Services

General marketing

and post contract

support services

Low risk scenario

Offshore

parent

company

Australian

company

Australian

customer

Payment and contract

Sales functions

contributing to

contracts

High risk scenario

Offshore

Subsidiary A

Offshore

Subsidiary B

Cost contribution

agreement

Royalty / License

Payment for services

Australia Australia

Offshore Offshore

MAAL – how do I know if I am high or low risk?

Current developments –What will the proposed DPT mean for me?


• In 2015, the United Kingdom introduced a Diverted Profits Tax (“DPT”) with two limbs.

The first limb was broadly replicated in Australia by the enactment of the MAAL, the

second limb of the UK DPT addresses cross-border transactions entered into by UK

resident entities which lack economic substance and result in a 'tax mismatch' outcome.

• The new Australian DPT is based on this second limb. Legislation and administrative

guidance on the new DPT are still to be drafted, and will follow a consultation process. It

is expected that the DPT will apply to income years beginning on or after 1 July 2017.

• Like the UK tax, the proposed design of the Australian version employs a ‘pay first and

argue later’ approach. The UK DPT is designed to change the behaviour of companies

so that they pay more tax on their UK profits rather than risk paying a higher rate of

DPT.

• The Diverted Profits Amount to which a 40 per cent tax rate applies is:

− where the deduction claimed is considered by the ATO to exceed the arm's length

amount (called an 'inflated expenditure case'), 30 per cent of the transaction

expense; and

− otherwise the ATO's best estimate of the diverted taxable profit that can be

reasonably made at the time.

What is the DPT proposed for Australia?


What is the DPT proposed for Australia? (Cont’d)Similarities & Differences

Applicable from July 2017 Applicable from April 2015

Diverted profits tax rate

40%Diverted profits tax rate

25%

Businesses where UK sales

<£10 million (Excludes SME’s)

CApplies to businesses with

global turn over >$25 million

C

STransactions which create an

‘effective tax mismatch’

STransactions with ‘insufficient

economic substance’

STransactions which create an

‘effective tax mismatch’

STransactions with ‘insufficient

economic substance’

Estimated to gain $100 million

per year

$Estimated to bring in an additional

£1.3 billion by 2021

£


NO

YES

Australian

resident or PE

Are you an Australian resident or an Australia PE of a foreign

resident?

Large

multinationalDo you have annual global turnover of $1 billion or more?

ExemptionDo you have total Australian turnover of less than $25 million

and do not artificially book any income offshore?

Offshore

related parties

Do you have an arrangement that involves dealings with a

related party outside of Australia?

Effective tax

mismatch

Is the increased tax liability of your related party as a result of

the arrangement less than 80 percent of the corresponding

reduction in your Australian tax liability (i.e. 24% tax rate

compared to Australia’s 30%)?

Insufficient

economic

substance

Is it reasonable to conclude that the arrangement was

designed to secure a tax reduction and that the tax reduction

exceeds the quantifiable commercial benefits of the

arrangement?

You are caught by the DPT

You are

not caught

by the DPT

YES

YES

YES

YES

YES

NO

NO

NO

NO

NO

How is the DPT proposed to work?

Future developments


• The ATO will have an additional $678.9m over four years to establish a new Tax Avoidance

Taskforce

• The Taskforce will consist of 1,300 people, including 390 new specialised officers

• The Taskforce will focus on compliance activities targeting multinationals, large public and

private groups and high wealth individuals

• As part of the Taskforce, the ATO will form a panel of eminent former Judges which will

review any proposed settlement arrangements to ensure they are fair and appropriate

• The Tax Avoidance Taskforce will be led by the ATO Commissioner of Taxation, Chris

Jordan. The Commissioner will provide regular progress reports to Government to provide

transparency to the Australian community, with the first report to be provided before the end

of the year

• The Taskforce is expected to raise $3.7 billion in tax liabilities over four years ($5.50

returned for each $1 spent)

What is the ATO’s new Tax Avoidance Taskforce?


• The OECD 2010 Transfer Pricing Guidelines for Multinational Enterprises and Tax

Administrations (“2010 OECD Guidelines”) are already required to be considered under

Australian TP legislation.

• As part of the BEPS action items 8 to 10, the OECD has released the 2015 report, which set

out recommended amendments to various chapters of the 2010 OECD Guidelines. The

amendments address the following areas / chapters of the 2010 OECD Guidelines:

− Risk and recharacterization (chapter 1)

− Intra-group commodity transactions (chapter 2)

− Intangibles including hard to value intangibles (chapter 6)

− Services including low value-adding intra-group services (chapter 7)

− Cost contribution arrangements (chapter 8)

• The Australian Treasury has recently released a consultation paper requesting feedback on

issues that may be raised from incorporating the 2015 OECD Report into Australia’s transfer

pricing rules.

Will the updated 2016 OECD guidelines be adopted in Australia?


Part A: Tax reconciliation notes

• Reconciliation of accounting profit to tax

expense and to income tax paid/tax payable

• Material temporary and non-temporary

differences

• Accounting effective income tax rates for

Australia & globally

Part B: ‘Taxes paid’ report

• Tax policy, strategy and governance

• Total tax contribution to Australia

• International related party dealings

All businesses

with turnover of

$500 mil or more

All businesses

with turnover

of $100mil or

more

Disclosures can

be made in

GPFS, ‘Taxes

paid’ or

separate report

• Apply for 2016

financial

statements

onwards

• These are

minimum

standards

What to

consider &

action?

What is Australia’s new Voluntary Tax Transparency Code?


• Commencement:

income years

commencing on or after

1 July 2016.

• No impact for entities

reporting for financial

years ending 30 June

2016

• ATO consultation paper

is due October 2016

New law requires certain entities that previously prepared

Special Purpose Financial Statements to lodge GPFS with

the ATO

What to

consider &

action?

A corporate tax entity is affected if:

It is a ‘significant global entity’:

That is, part of a group with global annual income of $1 billion or more

It is an Australian resident; or

a foreign resident who operates an Australian PE

Does not lodge GPFS with ASIC for the year

A new General Purpose Financial Statements lodgement requirement?


Type of scheme Base Penalty Amount Voluntary disclosure

Tax avoidance scheme

(sole or dominant purpose)

• Previously: 50%

• Now: 100%(with RAP reduced to 25%)

• Previously 10%

• Now: 20%(with RAP reduces to 5%)

Profit shifting scheme

• Previously: 25%

• Now: 50%(with RAP reduced to 10%)

• Previously: 5%

• Now: 10%(with RAP reduces to 2%)

From 1 January 2016, penalties have increased for significant global entities.

Additionally, there are increased administrative penalties for significant global

entities.

• From 1 July 2017, for companies with global revenue of over $1b, penalties relating to

the lodgement of tax documents to the ATO will be increased by a factor of 100. This

will raise the maximum penalty from $4,500 to $450,000.

• This is designed to ensure that multinational companies do not opt out of their reporting

obligations (such as lodgement of CbC local file).

How have penalties increased recently?

What are the key takeaways?


New measure Date active Size requirements

CBC 1 January 2016Part of a group with global annual

income of AUD $1 billion or more

MAAL 1 January 2016 Part of a group with global annual


DPT (discussion

draft)1 July 2017

Part of a group with global annual


(de minimis exempts Australian

entities with less than $25m

turnover)

GPFS 1 July 2016 Part of a group with global annual


Voluntary tax code

Part A 1 January 2016 (recommended) $100m

Voluntary tax code

Part B1 January 2016 (recommended) $500m

When do the new measures kick in and who is affected?


Measure Test

Part IVA

Dominant purpose

“Part IVA applies if it would be concluded that a person who entered into the

scheme did so for the dominant purpose of enabling a taxpayer to obtain a tax

benefit.”

815-B

Arm’s length conditions – automatic reconstruction provisions

1. If form is different from substance

2. If independent entities would enter into different transactions

3. If independent entities would not enter into any transactions

MAAL

Principal purpose

“a scheme that was entered into or carried out for a principal purpose of, or for

more than one principal purpose that includes a purpose of obtaining a tax

benefit (or obtaining both a tax benefit and reducing a foreign tax liability)

under the scheme.”

DPT (discussion paper)

Insufficient economic substance (tax arbitrage v commercial benefit)

Determination of whether there is insufficient economic substance will be

based upon whether it is reasonable to conclude based on the information

available at the time to the ATO that the transaction(s) was designed to secure

the tax reduction and where a related party transaction is assessed to be

artificial or contrived.

How extensive are the ATO’s anti-avoidance powers?


• Do you have intra-group contacts?

• Are they up to date?

• What are the terms of these contracts – do they match the

substance and are they arm’s length?

• Does the transaction make commercial sense?

• Does your TP policy reflect the recent local and

international developments?

• Does it consider how third parties might structure

arrangements?

• Do you have the systems and processes in place to

implement the policy?

• Are there likely to be any TP adjustments or true-ups

required?

• Have you documented the commercial rationale for the TP

policies?

• Does it reflect recent legislative changes?

• Does it describe the global value chain and evidence

substance and value contributions?

• Does it adequately consider third party evidence (CUPS

and comparables)?

• Is it prepared contemporaneously to support the

disclosures on your IDS?

• Do have started implementing your plan for Country by

Country reporting (noting Australia’s differences)?

• Do you have losses or low profits?

• Do you have significant or highly structured debt (noting

recent Thin Cap safe harbour changes)?

• Have you had any business restructures?

• Do you have transactions involving IP?

• Do you have any BEPS type transactions (e.g. Digital,

offshore supply or double non taxation)?

• Do you have unique arrangements for which comparables

are hard to find?

• Have you considered anti-avoidance and reconstruction?

1. Contracts – what are the terms & conditions?

2. Transfer Pricing Policy - do you have an effective

and commercial policy?

3. Documentation - do you have adequate transfer

pricing documentation?

Navigating the change – what can you do?

4. TP Risks – have you supported any high risk

transactions?




ContactJeremy CapesPartner, Global Transfer Pricing

KPMG in Australia

T: +61 02 9335 7665




Transfer pricing developmentsin ChinaCheng Chi

Head of Global Transfer Pricing

KPMG in China

© 2016 2016 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in China. 82

Current State of Play

Rule taker to rule maker

Aggressive audit and national coordination

Monitoring and data analysis


Enforcement

Increased Tax Revenue

(Billion RMB) 2010 2011 2012 2013 2014 2015

Administration 7.2 20.8 28.3 37.7 39.6 41.0

Investigation 2.3 2.4 4.6 4.6 7.9 8.4

Service 0.8 0.7 1.7 4.6 4.8 11.6

Total 10.3 23.9 34.6 46.9 52.3 61


Announcement 42

— Applies to fiscal years beginning from January 1,

2016 onwards

— The first of a series of regulations to localize

OECD/G20 BEPS Project recommendations in China

New Abolished

Contemporaneous

documentation regulations in

Announcement 42

Chapters 2, 3,

Article 74 and

Article 89 of

Circular 2

Annual Reporting Forms on

Related Party Transactions

provided by Announcement 42

(including Segmented

Financials)

Annual Reporting

Forms on Related

Party Transactions

provided by

Circular 114

BEPS Announcement 42

Master File and Local File Contemporaneous documentation

Country-by-country (CBC)

report

Part of the Annual Reporting Forms on Related Party

Transactions (forming part of taxpayer’s corporate

income tax returns)


Announcement 42

Related-party

relationships

Further clarified the circumstances where related-

party relationships would be deemed to exist

E.g. familial relationships, having common interest

in substance

Related-party

transactions

Expanded the related-party transaction categories

E.g. transfer in equity investments (including equity

transfers), transfer in accounts payable

PRC annual reporting

forms on related-party

transactions

(2016 version)

Expanded previous “Nine Forms” to a number of

22 Forms, including both the Chinese and English

versions of the country-by-country report

Specific Segmented Financial Statements as part

of the forms

Contemporaneous

documentation

Master File

Local File

Special documentation

Key Components


Types of Documentation and Thresholds(i) Conducted cross-border related-party transaction(s) during that tax

year, and the group to which the enterprise’s ultimate holding company

(UHC) consolidating the enterprise’s financial statements belongs has

already prepared the Master File; or

(ii) Total annual amount of related-party transactions (RPT) exceeding

RMB 1 billion.

(i) Entered into or executed any cost sharing arrangement(s); or

(ii) Exceeding the thin cap debt-to-equity thresholds (5:1 for financial

institutions; 2:1 for non-financial enterprises)

Who will need to prepare a Master File

Who will need to prepare

Special Doc?

(i) Transfers of tangible assets exceeding RMB 200 million

(processing/toll manufacturing transactions calculated based on

declared value of imports and exports during the year); or

(ii) Transfers of financial assets exceeding RMB 100 million; or

(iii) Transfers of ownership of intangible assets exceeding RMB 100

million; or

(iv) The amount of other RPTs totalling RMB 40 million or higher.

Who will need to prepare a Local File

(i) Transactions covered by an APA Local File & Special Documentation Exempted

(ii) RPTs are domestic only Master File, Local File & Special Documentation Exempt(Circular 2: only applicable to companies whose foreign shareholding is less than 50 percent)


Key DeadlinesWhen

Master FileMust be prepared within 12

months of the ultimate parent’s

financial year end

Submission

deadline has

changed to 30

days as opposed

to 20 days under

Circular 2, upon

being requested

by tax authorities

Local FileMust be completed by June 30 in

the following year, i.e., June 30,

2017 for FY 2016

Special

Documentation

Must be completed by June 30 in

the following year, i.e., June 30,

2017 for FY 2016

Submission

deadline has

changed to 30

days upon being

requested by tax

authorities

CBC ReportMust be filed by May 31 in the following year, i.e.,

May 31, 2017 for FY 2016


Comparison of Requirements

Under BEPS 13 Under Announcement 42

Organizational structure Chart illustrating the MNE’s legal and ownership structure and

geographical location of operating entities. (Similar)

Group’s business

descriptions, including

business restructuring

Functional analysis including contributions to value creation by all

entities within the Group and key functions, risks and assets of each;

and description of any business or legal restructuring which occurred

during the fiscal year. (Additional)

Group’s financial

position

Name and location of the legal entity preparing and submitting the

CBC report, bilateral APAs (BEPS Action 13 Report requires the

disclosure of unilateral APAs only) (Additional)

Group’s intangibles Detailed information of R&D activities (functions, risks, assets,

personnel, etc., of the principal R&D company(ies)) (Additional)

Group’s financing

arrangements

Detailed information of how the MNE is financed. (Similar)

Compared with BEPS Action 13, the Master File contents under Announcement 42, to a certain

extent, went beyond the BEPS recommendations; therefore, if an MNE has prepared a Master

File based on BEPS recommendations, the contents may not be sufficient under the

requirements in China.

Master File – Announcement 42 vs. BEPS 13


1. Overview of local entity

2. Related-party relationships

3. Related-party transactions

(including value chain analysis)

4. Comparability analysis

5. Selection and application of

transfer pricing methods

Detailed information required in relation to

related party equity transfers and service

transactions.

Elements of value chain analysis:

1. Transaction, goods and funds flows, within

each value chain in the MNE group, leading

from initial design and development of goods,

through production, marketing, delivery and

after-sales service

2. Standalone and consolidated financial

statements for every entity within the MNE

value chain

3. Quantification and attribution of profits arising

from location specific advantages

4. An overview of the attribution of MNE global

profits to the different countries within the

MNE’s value chain, both in terms of how

profits are allocated across the value chain

and also in terms of the actual amounts of

profits earned by each value chain participant

Main Contents of Local FileLocal File requires detailed disclosure of information of

related-party transactions.


Local File – Announcement 42 vs. Circular 2Broadly follows the structure of Circular 2, except for:

“Value chain analysis” that requires the disclosure of an overview of the attribution of MNE global profits; standalone and consolidated financial statements for every entity participating in the MNE value chain; the quantification and attribution of profits arising from location specific advantages (LSAs)

LSAs including location savings and market premium and their impact on pricing must be disclosed.

Requirements to include information on the taxpayer’s contribution to the overall profits or excess profits of a MNE regardless of the choice of transfer pricing method

Prescriptive requirements on the level of disclosure required on outbound investment, related-party equity transfers, and related-party service transactions

Revenue, costs, expenses, and profits by business segment and product to the financial data are required to be included.


Special Documentation

Compared with Circular 2, one

additional disclosure

requirement is the inclusion of

expected benefit arising from

the CSA.

Cost Sharing Arrangement

Remain largely the same as

Circular 2, except the addition

to include analysis on whether

independent parties would be

able and willing to accept the

terms of the financial

transactions under analysis,

and that the debt/equity ratio

calculation that is used to

determine whether a company

needs to be prepare a thin-cap

report has changed.

Thin Capitalization

Broadly consistent with OECD framework. However:


Requirements ExemptionFiling

Deadline

Applicable to all taxpayers

(except for those who are taxed on

a deemed basis)

Replaces the old Annual Reporting

Forms on Related Party

Transactions

(9 forms) provided by Circular 114

N/A

Must be filed by

May 31 in the

following year,

i.e., May 31,

2017 for FY

2016

Filing Requirements and DeadlineExpanded previous “Nine Forms” to a number of 22

Forms, including both the Chinese and English

versions of the CBC Report


Information Circular 114 (Old Forms) Announcement 42 (New Forms)

Corporate

InformationN/A

Corporate Information Form (compulsory)

(G000000)

Related PartiesForm on Relationship between

Related Parties (Form I)

Related Party Relationship Form (compulsory)

(G101000)

Overseas Related Party Form (G112000)

Related Party

Transactions

Related Party Transaction

Summary (Form II)

Purchases and Sales Form

(Form III)

Services Form (Form IV)

Intangible Asset Transaction

Form (Form V)

Fixed Asset Transaction Form

(Form VI)

Financing Form (Form VII)

Annual Summary Form on Related Party

Transactions (compulsory) (G100000)

Transfers of Ownership in Tangible Assets

Form (G102000)

Transfers of Ownership in Intangible Assets

Form (G103000)

Transfers of Rights to Use Tangible Assets

Form (G104000)

Transfers of Rights to use Intangible Assets

Form (G105000)

Financial Assets Transaction Form (G106000)

Financing Form (G107000)

Related Party Services Form (G108000)

Equity Investment Form (G109000)

Overview of Forms


Information Circular 114 (Old Forms) Announcement 42 (New Forms)

Related-Party

Investments

Overseas Investments Form (Form VIII)

(Repealed by State Administration of

Taxation Announcement [2014] No. 38)

N/A (although some information would be covered

under G106000)

Cost Sharing

AgreementsN/A Cost Sharing Agreements Form (G110000)

Outbound Payments Overseas Payment Form (Form IX) Overseas Payment Form (G111000)

Financial Analysis

Form for Related-

party Transactions

N/A (covered by Chapter 3 of Circular 2,

requirements on the transfer pricing

documentation)

Financial Analysis Form for Related-party Transactions

(Unconsolidated) (G113010)

Financial Analysis Form for Related-party Transactions

(Consolidated) (G113020)

Country-by-Country

ReportingN/A

Form on the Global Distribution of Revenue, Tax, and

Operating Activities (G114010)

Form on the Global Distribution of Revenue, Tax, and

Operating Activities (English) (G114011)

List of Entities within the Multinational Group (G114020)

List of Entities within the Multinational Group (English)

(G114021)

Additional Information (G114030)

Additional Information (English) (G114031)

Overview of Forms (Cont’d)


CBC Report(i) The Chinese tax resident is the UHC of a MNE group and the annual consolidated

revenue of the group in the previous fiscal year exceeds RMB 5.5 billion; or

(ii) The Chinese tax resident has been designated by its MNE group as the reporting entity

for CBC Report.

When the MNE group’s UHC is a Chinese tax resident and its information involves national

security issues, part or all of the CBC Report can be exempted in accordance with relevant

regulations.

(iii) In addition, if the Chinese tax resident (1) under special tax (TP) investigation does not

fall into either of the above categories and (2) in accordance with the regulations of other

tax jurisdictions its MNE group shall prepare the CBC Report, and when any of the

following conditions is met:

- The MNE group has not provided the CBC Report to any tax jurisdiction; or

- Although the MNE group has provided the CBC Report to another tax jurisdiction, but

there is no information exchange mechanism in place for the CBC Report between the

recipient country and China; or

- Although the MNE group has provided the CBC Report and the information exchange

mechanism has been established between the recipient country and China concerning

CBC Report, but the CBC Report fails to be successfully exchanged to China in actuality.

Who needs to submit a CBC Report?


Increasing level of transparency

(more disclosure requirements,

greater emphasis on value chain of

MNEs, etc.)

Increasing monitoring level

of the tax authorities

More mature transfer pricing

environment

Higher expectation on

the transfer pricing technical

knowledge of taxpayers

What’s Next



© 2016 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in China.

ContactCheng ChiHead of Global Transfer Pricing

KPMG in China

T: +86 21 2212 3433




Update on transfer pricing in IndiaRahul Mitra

National Head of Transfer Pricing & BEPS

KPMG in India


0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

Oct‘05 Oct‘06 Oct‘07 Oct‘08 Oct‘09 Oct‘10 Oct‘11 Jan‘13 Jan‘15

Number of adjustment casesAmount of adjustment - As per CBDT Annual Report

(USD in Millions)

Amount of adjustment excluding Vodafone & Shell litigation(USD in Millions)

Jan‘14

Audit Cycle ending on

*Source : Annual Report 2013-14 and 2014-15 – Ministry of Finance

Indian TP environment – TP Adjustments*


• Marketing Intangibles Revenue paints all licensees of brands with same brush;

seeks reimbursement of excess advertisement, marketing & sales promotion (AMP)

expenses

• Procurement/ marketing functions Revenue applies “revenue linked remuneration”,

resulting in exorbitant operating profits on cost/Berry Ratio

• Extraordinarily high profit margins for IT, ITeS & KPO contract service providers

• Profit attribution to PEs Revenue applies global formulation approach in absence

of TP study by taxpayer

• Royalties/Intra group services Revenue challenges benefit of intangibles/services

• Regulatory restrictions for classical/ integrated principal structures How to

repatriate entrepreneurial/ portable profits to Principal?

Major Issues in TP in India for Foreign MNCs


Dispute Resolution Panel (DRP) introduced to mitigate TP litigation (not successful)

APA provisions introduced to provide more certainty on TP in India (good success)

Safe Harbour rules introduced (no takers due to high numbers)

APA Rollback rules announced

Final rules for application of range concept & use of multiple year data

Frame-work agreement signed with US for MAP under India-US tax treaty

Risk based TP audits announced by Revenue Board (parameters not fully laid out)

2009

2012

2013

2015

2016

Indian Government’s bid to rationalise TP


Unilateral, Bilateral & Multilateral

Pre-filing meeting, even on anonymous

basis

Formal APA application

Filing fees

Critical assumptions

Roll backWithdrawal, cancellation and revision

APA renewals

Annual compliance

report

Annual compliance

audit

APA Programme in India – global best practices


US had initially distanced itself

from bilateral APA negotiation

with India

Favourable settlement of pending

MAP cases with US in 2015

US starts accepting bilateral

APAs with India effective middle

of February, 2016

India’s policy of no bilateral APA

& MAP in absence of Article 9(2)

in tax treaty Singapore

impacted

APA (For 5 future

fiscal years)

APA Rollback

(For 4 previous

fiscal years)

FY 2015-16

FY 2013-14

FY 2014-15

FY 2017-18

FY 2018-19

FY 2019-20

FY 2020-21

Renewal of APA

(For 5 Future

Years)

FY 2021-22

APA as an option – Why?

FY 2016-17

APA as an option


1st Year of APA filings (2013) 2nd Year of APA filings (2014)

146 Applications* 232 Applications*

117Unilateral 29 Bilateral 205 Unilateral 27 Bilateral

3rd Year of APA filings (2015)

204 Applications**

192 Unilateral 12 Bilateral

Source : *Annual Report 2014-15 – Ministry of Finance **Article in Business Standard dated 18 April 2016 #CBDT Press release dated 4 August 2016

0

10

20

30

40

50

60

70

80

90

100

FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17 TOTAL

5 4

55

14

78

5 3

53

13

74

0 1 21

4

Total APA Unilateral APA Bilateral APA

Total

APAs

signed

till date#

4th Year of APA filings (2016)

130 Applications**

118 Unilateral 12 Bilateral

Status of APAs – Key Milestones


Master File

• Union Budget 2016-17 introduced effective FY 16-17

• High-level blue print of MNE group’s global operations

• Value drivers, supply chain model, etc

• Prepared centrally; submitted with Tax Authorities of all countries

• Ideally prepared by ultimate parent for consolidation

Local File

• Local country TP documentation

• To be prepared by each local entity; and

submitted to local Tax Authority

• In place in India since 2001

CbC Report

• Union Budget 2016-17 introduced effective FY 16-17

• MNEs having consolidated annual revenue > Euro 750 MN

• Summary data & economic activity in each country

• Prepared by ultimate parent for consolidation purposes

• Submitted with Tax Authority of ultimate parent

• Shared with other tax authorities through official channel

Master File & CbC reporting


• Indian Revenue consistently aggressive with mark ups around 25 to 35% for IT

& ITeS; and > 40% for KPOs

• Safe harbour regulations mark ups of 20% (annual turnover < INR 5 billion)

& 22% (annual turnover > INR 5 billion) for IT & ITeS; and 25% for all KPOs

• Safe harbour rates applied as “floors” in normal TP audits

• Evaluate safe harbour vs. unilateral APA for companies having low cost base

• Bilateral APA’s for medium & large captive service providers eliminates

double taxation

• Litigation before Tribunal provides most optimal solution

• Litigation vs. APA value for time, money & certainty

Contract Service Providers – IT, ITeS & KPO


• Major area of dispute in India

• Indian Revenue challenges contract service provider (cost plus) model

• Indian Revenue asserts economic ownership of intangibles applies profit split

• Circular/guidelines issued by Indian Revenue Board on R&D services in 2013 :

─Broadly in line with OECD guidelines on intangibles [Chapter VI]

─Emphasis on substance at level of foreign principal

─“Tests” laid down for contract service provider (cost plus) model vs. profit split

• Health check of Indian centre in line with circulars

• Final safe harbour for contract R&D services mark ups of 30% (for IT) & 29%

(for generic pharmaceuticals) without turnover threshold

• Same “going forward” strategy as for IT, ITeS & KPOs

Contract R&D service providers


• Marketing/ procurement functions under cost plus model

• Revenue Officer challenges functional profile; asserts thumb rule commission

• Resultant exorbitant Berry Ratio (even 600% in some cases)

• Agency PE Revenue attributes profits under formulatory approach

• Large scale litigation in India Tribunals & High Courts ruling favourably

• APA team open to address issues :

─Proper economic modelling with respect to intensity of functions

─Commission capped to “Berry Ratio” of commission agents/limited risk

distributors

─PE profit attribution as per TP methods with respect to significant people

functions

Marketing/procurement services & related PE risks


• Is business model in India aligned to global business/TP model?

• Entrepreneurial profits trapped in India @ 45.92%?

• Repatriation of profits not properly planned?

• Facing challenges around TP adjustments re marketing intangibles?

• Value chain transformation (VCT) projects provide solutions

• Business conversion vs. corrective measure of business model

Business Models for manufacturing & distribution


Flow of legal title of goods

Physical movement of goods

Currently not possible in India (regulatory restrictions)

Principal Co cannot raise invoice on

distributor/customer, if goods not physically imported

from outside India

Principal Co

India Sub Co 1

Contract Mfg

India Sub Co 2

DistributorIndian customer

Say, FCMU of 5 to 6% Say, ROS of 3 to 4%

Entrepreneurial results

trapped in India

FCMU = full cost mark up

ROS = return on sales

Supplier INDIA

Integrated Principal Structure – Indian customers




• Issues :

— Tendency to treat India Sub Co as “tested party”

— Entrepreneurial results of India Sub Co tested against

entrepreneurial comparables against cardinal principles

of TP

— Exposure to unnecessary marketing intangible related

adjustments

— Entrepreneurial Profits trapped in India

Supplier

Mfg

divisionSales division

India Sub Co (Licensed Mfg)

INDIA

Indian customer

Principal Co

Routine

Tech &

Brand

Royalty

Conventional model of foreign MNCs in India




Principal Co

VAE = value added expenses

ROCE = return on capital employed


Entrepreneurial

profits embedded

in import priceImport of

materials

INDIA

Indian customerAssembly

division

Say 15% of

VAE

[or 6% ROCE]

Sales division

Say 3 to 4%

ROS

India Sub Co

(Value added Distributor)

Minimal localisation – value added distributor




• Liability on account of technology Principal Co

• Principal Co advises on material sourcing, quality controls,

vendor selection, production scheduling, etc

• Residual profits repatriated as “bundled royalties”/ industrial

franchise fees same economic result of principal structure

• Depending upon strategic functions performed in India, full or

partial residual profits my be repatriated

Principal Co

Mfg

division

Say FCMU

of 5 to 6%

Sales division

Say 3 to 4%

ROS


INDIA

Indian customer

Bundled Tech & Brand Royalty;

and fees for other non-routine, value

added services (Residual Profits)

Performs less significant people

functions & assumes less risks

Performs major significant people functions & assumes major related risks

FCMU = full cost mark up


Supplier

Reasonable localisation in India limited risk licensed manufacturing model




• Significant localisation in India; also strategic functions for manufacturing

performed in India

• Difficult to segregate manufacturing & distribution functions

• India Sub Co entrepreneur, albeit licensed manufacturer

• Not proper to benchmark combined results of India Sub Co against Indian

entrepreneur comparables

• If significant intangibles not embedded in imported components, price to be

tested in hands of Principal Co on cost plus basis

• Royalty to be tested on stand alone basis, as per CUP analysis from global

royalty databases; may be corroborated by residual profit split method

Principal Co

Supplier

Tech &

Brand

Royalty

Mfg

division

Sales

division


INDIA

Indian customer

Reasonable localisation in India entrepreneurial licensed manufacturing model




ContactRahul MitraNational Head of Transfer Pricing & BEPS

KPMG in India

T: +91 98300 55281




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