Happy New Year! It’s time to make your 2014 transfer pricing resolutions: read a good book, learn a new language and, of course, exercise, exercise, exercise.
2013 was a very active year from a transfer pricing standpoint, with a number of important issues being discussed– from base erosion to blocked income, and from intangible-related returns to self-initiated adjustments—and in a few cases, some were actually addressed. 2013 was also a very “public” year, with transfer pricing moving out of the technical backrooms and on to the political center stage. Transfer pricing was the focus of legislative hearings, public protest and perhaps most critically political pronouncement, in the form of a G20 commitment to combat base erosion and profit shifting (BEPS). Both the agenda and urgency of 2013, suggest that transfer pricing should be on your “to do” list for 2014.
Below are five key transfer pricing items taxpayers may want to “resolve” to pay attention to in 2014.
1. Read a Good Book (BEPS)
The biggest, most ambitious (and most visible) transfer pricing development of 2013 was BEPS.
More than just some fluff “self-help” book, BEPS, which was commissioned by the G20, is a highly targeted, integrated action “thriller” (with 15 action items, some parts fiction, some reality) intended to spur greater tax transparency, encourage closer nexus of economic substance and tax liability and in the end “save” the tax planet—or at least protect the tax base. And, lest taxpayers think they can wait for the paperback version, or catch the movie—BEPS is on a fast with seven of the 15 action items slated to be developed and reported back to the G20 leaders by September 2014.
Taxpayers are encouraged to get the book—available online in e-book format—and see what may be in store for them in 2014. Of particular, and possibly most immediate, attention may be Action 13—which proposes country by country reporting of economic activity and tax liability. Taxpayers may want to organize “book club” (with trade association or even government officials) as to how they could/could not implement such a proposal.
2. Learn a New Language (OECD Intangibles)
Having waited nearly 20 years since its initial treatise, the Organisation for Economic Co-operation and Development (OECD) this past November completed its long awaited revision of Chapter 6 of its Transfer Pricing Aspects of Intangibles. The revision expands and elaborates on a number of issues involving intangibles in an attempt to address some of the many subtleties—or what many governments perceive to be “gaps” or loopholes—regarding the transfer pricing valuation of intangibles. The result, in the view of many practitioners, has been the introduction of a number of new concepts, definitions and valuation principles that will transform transfer pricing intangible valuation into something completely different and beyond what is currently and commonly understood and accepted.
Some of the key phrases of the new intangibles language include:
“Goodwill and going concern”
“Location-specific attributes and local market premium”
“Valuation, accounting principles”
The revised Chapter 6 signals the intension on the part of tax authorities—which the UK has already formally announced—to take an expanded,and aggressive notion of the definition of intangibles, along with an expanded domain of those entitled to the fruits (profits) of intangibles.
The impact of the revised guidelines is likely to be most keenly felt in situations involving the acquisition and subsequent transfer/restructuring of intangibles in the context of a purchase price allocation. Taxpayers should resolve to study and learn the revised intangible guidelines and perhaps reexamine and re-translate recent or pending acquisitions/restructurings to determine how this new “language” may be interpreted by government officials in 2014 and beyond.
3. Get Some Exercise (Competent Authority/Dispute Resolution)
One area where governments have sought to “shape up” is the administration of their Competent Authority and Dispute Resolution processes, recognizing that increased bureaucracies and reduced efficiencies in resolving double tax and other transfer pricing issues.
In 2013, the United States continued its transfer pricing administrative “makeover” with the announcement of two new revenue procedures 2013-78 and 2013-79, regarding Competent Authority and Advance Pricing Agreements (APA) The proposed revenue procedures are the latest efforts on the part of the Internal Revenue Service (IRS) to improve the efficiency and administrability of its international dispute resolution programs.
Over the past five years, the U.S., like many other governments, has experienced increasing caseloads and cycle times, reducing taxpayers’ confidence and tax resolution. The latest regulatory prescriptions seek to formalize recent organizational/administrative changes within the IRS, intended to not only increase efficiencies, such as eliminating the bureaucratic “hand-off,” but also to expand access (e.g., taxpayer-initiated adjustments) and thereby provide for more effective, relevant and user-friendly tax administration.
Taxpayers may want to closely examine their tax situations in 2014 (both historical open years and future years) and see if either of these programs may provide a quicker, more cost-effective means to resolve their tax issues.
4. Reexamine Past Relationships (Tax Reform)
Initially proposed in advance of the BEPS and Intangibles updates, but recently re-energized as a result of both, U.S. (international) Tax Reform is back.. There are the same familiar faces and proposals from the Senate (Max Baucus, Sen. Finance, chair), House (Mark Camp, House Ways and Means, chair) and the Obama Administration, with inevitable, but not entirely, irreconcilable differences.
Some form of territorial tax system will likely emerge, with a minimum tax on intangible and/or foreign-earned income. There is also renewed interest, as a result of BEPS, in tightening restrictions on profit-shifting activities (e.g., hybrid structures), as well as CFC rules.
Taxpayers may want to review/reexamine their existing foreign tax structures to see if they may be at risk (or how much at risk) and whether (or how quickly) they can be unwound or revised and still preserve the tax rate benefits. Similarly, taxpayers may want to review their existing transfer pricing arrangements, both in terms of potentially revised structures, and also to ensure they are likely to withstand the additional scrutiny that will come with a territorial system.
5. Make a New Friend (Tax Risk Assessment)
The IRS finally appears to be coming around to a new, more modern, strategic approach to tax management involving the systematic assessment of tax risk and the corresponding targeting of resources and efforts accordingly. The “mainstreaming” of the Compliance Assurance Program (CAP) is one example of this, as is the establishment of the Transfer Pricing Field Program and the newly issued directive on Information Document Request (IDR) Enforcement Process. The approach is modeled after findings from the OECD’s tax assessment and compliance research over the last 15 years, and programs implemented in Australia and the United Kingdom.
This new approach envisions a more engaged, more “cooperative” style of examination and a greater use of prescriptive tools, including the development of profiles, or templates, of required information and/or outcomes (based on statistical and other metrics), against which taxpayers can be measured and evaluated with prescribed remedial action depending how the company matches up against the profile. Such action may include: no action, follow-up questions or a more detailed request. The IRS has indicated that they have already developed several profiles.
The expectation, based on experiences in other countries, is that companies the fit the profile, both in terms of timeliness and completeness, will receive a lighter, quicker and less costly audit touch. At the same time, such an approach is intended to more quickly identify issues, which can be given greater attention and more (and more effective) resources to hopefully resolve such issues more quickly and at less cost to both the government and the taxpayer.
Taxpayers should resolve to “strike up a conversation” with their IRS examiner and inquiry about the tax risk assessment efforts, and whether/how this might apply to their company.
Nobody said resolutions were easy, but if you stick to these, 2014 may just be the best tax year you’ve ever had!