The acceptance and implementation of country-by-country (CbC) reporting within the Asia Pacific region have been relatively swift, with many multinational enterprises (MNEs) headquartered in countries in the region already having completed their first round of CbC reporting for the 2016 financial year. In addition, some countries have also imposed severe penalty regimes when MNEs have failed to file CbC reports in an effort to “encourage” taxpayers to behave in a manner that is first and foremost about transparency.
However, a more challenging consideration for MNEs that may have already filed their CbC reports will be how best to prepare for any potential tax authority compliance activity following the review and assessment of the information collected under CbC reports. Based on experience, MNEs' efforts can be guided by performing a value chain analysis to identify whether there are any mismatches between when economic value-added activities are being performed and when the profits are being returned. In evaluating these risk areas, transfer pricing analyses will be paramount, as tax administrations would undoubtedly identify these types of misalignments for further review.
Given that tax administrations are now equipped with data from CbC reports to review and assess arrangements within the context of the global value chain, the message is clear that MNEs need to prepare for their arrangements to face scrutiny—above and beyond what historically has been the norm. This past year has already seen an increase in transfer pricing compliance activity, coupled with an unprecedented level of media attention. As the scrutiny on transfer pricing continues to grow, it is important that MNEs be prepared and be mindful of the implications of business decisions on their overall transfer pricing arrangements. For example, an upcoming change that is expected to attract attention from MNEs and tax administrations alike is the new U.S. tax law. Many businesses will be preparing to react to the new opportunities being presented, but any business restructures in light of this new tax law will need to be thoroughly substantiated and evidenced as being consistent with arm's length principles, through contemporaneous transfer pricing analysis and documentation.
In addition, the past year also revealed developments in a number of Asia Pacific countries in relation to their transfer pricing rules. Countries such as New Zealand and Singapore have either updated or are in the process or updating their transfer pricing rules. A key feature of this updating tends to be a focus on the broader commerciality of arrangements entered into between members of MNE groups and whether independent parties would have entered into such arrangements. Given tax administrations are now armed with formal powers to effectively reconstruct arrangements, MNEs with operations in these jurisdictions will need to determine that they are sufficiently prepared to both explain and support their operations in these jurisdictions. This is also important given unilateral reconstruction could lead to double taxation outcomes that, in turn, could result in unresolved double taxation that may not be relieved by the mutual agreement procedure (MAP) regime. A question of whether more countries would enact broader powers to tax administrations across the Asia Pacific region is yet to be determined.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Australia:
Tony Gorgas | +61 2 9335 8851 | firstname.lastname@example.org
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