In this issue:

• Australia - ATO’s continued focus on MNEs and arrangements with intangible assets

The Australian Tax Office (ATO) has released an updated draft Practical Compliance Guideline (PCG) on intangible arrangements for public consultation. The updated draft includes significant changes compared to the previous version released in 2021. The proposed tax integrity measures focus on multinational companies and the treatment of intangible assets, including the denial of deductions for royalties paid to low-tax jurisdictions and public disclosure of country-by-country reporting information. The draft PCG provides guidance on the ATO's compliance approach to intangible arrangements involving international parties, specifically addressing the migration of intangible assets and mischaracterization of Australian activities related to intangible asset development. The draft emphasizes the importance of supporting documentation and evidence, including commercial considerations, substance of activities, identification of intangible assets, and tax and profit outcomes. The draft PCG applies to all taxpayers and does not have a materiality threshold. Taxpayers will need to maintain a high level of analysis and documentation to support their intangible arrangements.

• Australia - Proposed interest limitation rules - all roads lead to transfer pricing?

Australia's Treasury Department has released Exposure Draft Legislation proposing changes to the country's interest limitation (thin capitalization) rules, aligning them with the OECD's recommended approach under BEPS Action 4. The changes aim to address base erosion and profit shifting (BEPS) by tackling excessive debt deductions. The proposed rules introduce new earnings-based tests to determine the disallowance of debt deductions, with transfer pricing rules applying in parallel. Taxpayers will need to satisfy both sets of rules to claim an interest deduction, potentially leading to limitations on deductibility if transfer pricing assessments are not favorable. The proposed changes will apply to income years commencing on or after July 1, 2023, and taxpayers are advised to assess the impact and gather supporting evidence.

• Canada - Comparables and COVID 19

Finding comparable data for transfer pricing analysis has become even more challenging during the COVID-19 pandemic. Historical data from the last three taxation years is used to test profits in a related-party setting, but this data may not reflect the economic conditions of the current year. The pandemic has caused significant fluctuations in company performance, with some companies adapting well and others struggling. This leads to wider and more variable comparable ranges, impacting the interpretation of the range within transfer pricing analysis. Analysts must consider these issues when benchmarking profits and interpreting the results. The mismatch between the economic circumstances of the tested party and the historical data of comparables will persist until the pandemic subsides and economic conditions stabilize.

• Canada - Finance Canada launches consultation on transfer pricing rules

Finance Canada has launched a consultation on the reform and modernization of Canada's transfer pricing rules, aligning them with the 2022 OECD guidelines. Proposed changes include increasing the transfer pricing penalty threshold, adopting the OECD's annual local file and master file requirements, focusing on conditions and comparability factors in transaction analysis, introducing a safe harbor mark-up for low-value-add services, establishing a standard return for foreign-owned corporate group distributors, and making adjustments to intercompany loan features. Taxpayers and stakeholders have until July 28 to respond to the consultation and provide input on the suggested changes. The BDO Canada Transfer Pricing Team will be participating in the consultation process.

• South Africa - Is your value chain optimised to keep up with current economic developments?

Multinational entities (MNEs) are facing challenges in optimizing their global value chains (GVCs) due to complex trade and regulatory landscapes, digital technologies, and global economic disruptions. Five megatrends are prompting MNEs to consider their GVCs: accelerating connectivity and uncertainty, shifting regulatory environment, increasing supply chain transparency, evolving customer expectations, and rising importance of ESG issues. Assessing GVCs involves aspects such as network optimization, sourcing and supplier management, financial optimization, total tax liability, digital strategy and enablement, risk management, strategic workforce analysis, and site relocation. These factors should be considered together, as changes in one area can impact others. Even if not directly related to the identified trends, MNEs should evaluate the security of their value chains, alternative supplier options, employee compliance, and global tax compliance.

• United Arab Emirates - New transfer pricing rules introduced

The United Arab Emirates has implemented transfer pricing rules as part of its new corporate tax law. These rules ensure that transactions between related parties are conducted at arm's length value. The rules align with OECD transfer pricing guidelines and include methods for calculating arm's length value. Taxpayers may be required to maintain transfer pricing documentation, including a master file and a local file, which will be specified by the Federal Tax Authority (FTA). Non-compliance with the transfer pricing conditions can result in profit adjustments, additional tax, and penalties. Free zone companies must also meet the transfer pricing conditions to be considered qualifying free zone companies. Compliance with the documentation and reporting requirements is crucial and should not be underestimated.

• United Kingdom - HMRC launches transfer pricing, PE, DPT consultation

HMRC has launched a consultation on potential reforms to UK international tax legislation, specifically in the areas of transfer pricing, permanent establishments, and diverted profits tax (DPT). The proposed changes would apply to all businesses falling under these rules. The aim of the consultation is to improve fairness, simplify existing rules, and support growth by enhancing tax certainty and attracting inward investment. Key proposals include overhauling the concept of "provision" in transfer pricing rules, amending the definition of permanent establishments, and updating DPT to align with corporation tax rules and simplify gateway tests. The consultation is open until August 14, 2023.

• United States - IRS issues guidance on review, acceptance of APA submissions

The IRS has issued interim guidance to IRS Treaty and Transfer Pricing Operations (TTPO) employees on the review and acceptance process of advance pricing agreement (APA) submissions. The goal of the guidance is to improve the quality and timeliness of the APA program and effectively allocate taxpayer and tax administration resources. The new review criteria apply to prefiling memoranda, APA requests, and APA renewal requests, and consider whether alternative workstreams like ICAP or joint audits may be more suitable. Taxpayers are encouraged to submit a prefiling memorandum for review, and the IRS estimates a four-week review period for the memorandum and an eight-week process for APA requests. The APMA program will evaluate APA requests based on criteria such as the significance of covered transactions, potential for transfer pricing compliance enhancement, suitability for alternative resolution methods, and compliance with international exchange agreements. Taxpayers should prepare comprehensive prefiling memoranda that address the criteria used by APMA to support their APA requests.

• United States - IRS’s annual report shows decline in number of executed APAs

The annual report on the IRS's advance pricing agreement (APA) program for 2022 shows a decline in the number of executed APAs compared to the previous year. Only 35 new APAs were completed in 2022 out of a total of 77 executed APAs. The number of APA applications filed increased to 183 in 2022. As a result, the number of pending APAs also increased, reaching 564 by the end of the year. The median completion time for APAs rose to 43.4 months in 2022, with the highest number of bilateral APAs involving Japan. Tangible property, services, and intangible property transactions were the most common types of covered transactions in executed APAs.

As for the OECD project, particularly Pillar One, we expect news soon as the OECD announced that an agreement in principle on Pillar One is “on track” for July 2023, after which it would be open for signature and then ratification.

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