The European Union passed a sixth version of its Directive on Administrative Cooperation in the Field of Taxation, known as “DAC 6” (Directive (EU) 2018/82 2), on 25 May 2018. DAC 6 introduces reporting requirements for professional intermediaries (and under certain circumstances tax payers) relating to their involvement in a wide range of cross-border arrangements and transactions featuring “hallmarks” of tax planning concerning one or more EU Member States or the UK. These are referred to in DAC 6 as “reportable cross-border arrangements“. Specific hallmarks relate to transfer pricing (category E) and they do apply without main benefit test.

Failure to comply with DAC 6 could imply significant penalties under domestic legislations of the EU member states (and the UK) as well as reputational risks for not only intermediaries ( law firms, accounting firms , banks …) but also for businesses and individuals.

Continue Reading Always More Transparency in the EU: DAC6 and Transfer Pricing

Addressing the tax challenges arising from the digitalization of the economy has been a top priority of the OECD since 2015.  In January 2019, the OECD agreed to examine proposals in two pillars.  Pillar One is focused on nexus and profit allocation whereas Pillar Two is focused on global minimum tax.  In July 2020 the OECD was mandated to produce reports on the Blueprints of Pillar One and Pillar Two by October 2020.

According to the OECD, in an increasingly digital age, businesses are able to generate profits through participation in the economic life of a jurisdiction with or without the benefit of a local physical presence, and this should be reflected in the design of nexus rules.  The Pillar One Blueprint proposes to allocate a portion of residual profit of in-scope businesses to market or user jurisdictions (“Amount A”) generally without regard to physical presence. Continue Reading Tax Challenges Arising from Digitalisation, Report on the OECD’s Pillar One Blueprint: Executive Summary

Last week, the IRS issued new guidance that addresses “telescoping” in mutual agreement procedure (“MAP”) and advance pricing agreement (“APA”) cases. Very generally, the guidance disallows (subject to a $10 million materiality exception) telescoping for tax years starting in 2018, when the Tax Cuts and Jobs Act (“TCJA”) came into effect, while continuing to allow telescoping for pre-2018 years in appropriate cases. According to the IRS’s Advance Pricing and Mutual Agreement (“APMA”) program, the new guidance was needed to address the impact of the TCJA “and its many interlocking provisions that require careful determination (and redetermination, as needed) of a U.S. taxpayer’s taxable income and tax attributes.” The new guidance has the potential to drive up compliance costs by increasing the number of tax returns that taxpayers must file to resolve MAP and APA resolutions for post-TCJA years (and resolutions spanning both pre- and post-TCJA years).

Continue Reading Telescoping into the Void

As discussed in a recent blog post, the Inland Revenue Authority of Singapore (“IRAS”) has been issuing guidance on the impact of COVID-19 on transfer pricing issues. This week, IRAS issued new forward-looking guidance on (i) the tax residency status of companies and (ii) permanent establishments. This guidance is temporary and applies for the 2021 tax year.

Continue Reading Singapore Issues New Guidance on Tax Residency & Permanent Establishments

Hold on a second. Cost sharing is a tax shelter? For over five decades, cost sharing has been a transfer pricing structure endorsed by Congress, regulated by Treasury and the OECD, agreed to by the IRS and foreign tax authorities alike, and widely embraced by taxpayers. How can it be a “tax shelter”? And yet that is precisely the headline from a recent district court decision in the Western District of Washington.

How did this happen? Is it right? And should we, as taxpayers, be worried about the reach of this holding somehow expanding to other tried-and-true vehicles similarly embraced by the tax law? Continue Reading Cost Sharing Is a Tax Shelter Now. Wait, What?

In February 2018, the OECD and Brazil started a joint project to analyze the similarities and differences between Brazilian legislation and the transfer pricing (“TP”) frameworks to assess cross-border transactions between associated enterprises from a tax standpoint. This project is within the scope of Brazil’s initiative to engage with the OECD in tax-related projects, and, in a broader respects, consistent with Brazil’s interest in initiating the process to join the OECD.

Continue Reading General View of the Project “Transfer Pricing in Brazil”

In February 2020, the Organization for Economic Cooperation and Development (“OECD”) released Transfer Pricing Guidance on Financial Transactions (“Guidance”). The Guidance is significant because it is the first time that the OECD’s Transfer Pricing Guidelines have been updated to include guidance on the transfer pricing aspects of financial transactions. The use of a cash pool is popular among multinational enterprises as a way of achieving more efficient cash management by bringing together, either physically or notionally, the balances on a number of separate bank accounts. In a typical physical pooling arrangement, the bank account balances of all the pool members are transferred daily to a single central bank account owned by the cash pool leader. In a notional cash pool, some of the benefits of combining credit and debit balances of several accounts are achieved without any physical transfer of balances between the participating members’ accounts. As cash pooling is not undertaken regularly, if at all, by independent enterprises, the application of transfer pricing principles requires careful consideration. According to the OECD, a cash pool is likely to differ from a straightforward overnight deposit with a bank in that a cash pool member with a credit position is not depositing money as a transaction with a view to a simple depositor return. Rather, the cash pool member is likely to be participating in providing liquidity as part of a broader group strategy, in which the member can have a credit or debit position. The appropriate reward of the cash pool leader will depend on the functions performed, the assets used and the risks assumed in facilitating a cash pooling arrangement. A cash pool leader may perform no more than a coordination or agency function with the master account being a centralized point for a series of book entries to meet predetermined target balances of pool members. Under these circumstances, the cash pool leader’s remuneration as a service provider will generally be limited. Where a cash pool leader is carrying on activities other than coordination or agency functions, the pricing of such transactions would be adjusted appropriately. The remuneration of the cash pool members will be calculated through the determination of the arm’s length interest rates applicable to the debit and credit positions within the pool. This determination will allocate any synergy benefits arising from the cash pool arrangement amongst the pool members and it will generally be done once the remuneration of the cash pool leader has been calculated.

Continue Reading OECD on Cash Pooling

The Inland Revenue Authority of Singapore (“IRAS”) has issued transfer pricing guidelines for companies affected by the COVID-19 pandemic, which includes guidance on documentation requirements, term-testing for related party transactions and Advance Pricing Arrangements (“APA”).

Continue Reading Singapore’s Transfer Pricing Guidelines for COVID-Affected Businesses

COVID-19 has sparked a seismic change in the workplace as many companies have found that working from home (“WFH”) has not diminished employee productivity and that employees prefer its greater flexibility. Given that—and the potential for saving on overhead costs—many companies have announced plans to adopt long-term WFH policies and close or realign office space. The OECD and several countries including the US, UK, Ireland, and Australia have issued guidance that excepts employees temporarily dislocated outside their employer’s country from creating unintended permanent establishments (“PE”)—but long-term WFH employees are not similarly excepted. The US, in particular, has thus far only officially extended PE protection for temporary dislocations of up to 60 calendar days that begin within the emergency period of February 1, 2020 through April 1, 2020.

While many employees that WFH do so from the same country as their employer, that is not always true, and so companies would be wise to perform their due diligence. To that end, this post analyzes some PE issues that a company should consider before it adopts a long-term WFH policy.

Continue Reading Work-From-Home Policies in the Post-COVID Era

On September 1, 2020, the IRS issued final regulations regarding the base erosion and anti-abuse tax (“BEAT”) codified in IRC §59A. These regulations finalize the proposed BEAT regulations published on December 6, 2019 with certain refinements. Among other guidance, the final BEAT regulations provide detailed rules that allow corporate taxpayers to waive deductions for purposes of BEAT. Although waiving deductions will likely result in additional tax costs, the waiver election may be an easier and less costly solution than the alternative of making substantive business model or supply chain changes to mitigate BEAT.

Continue Reading Waiving BEAT Deductions – The Smart Election for Multinational Taxpayers?