The New Global Standard on Transfer Pricing Documentation

The OECD Releases the New Global Standard on Transfer Pricing Documentation- What do you need to do today?

On September 16 the OECD released guidance on transfer pricing topics as part of the Base Erosion and Profit Shifting (BEPS) Action Plan announced in July 2013. These topics include guidance on Action 13 on transfer pricing documentation and country-by-country reporting.

What are the implications for Australian taxpayers and what do we recommend you do now?

On September 16 the OECD released guidance on transfer pricing topics as part of the Base Erosion and Profit Shifting (BEPS) Action Plan announced in July 2013. These topics include guidance on Action 13 on transfer pricing documentation and country-by-country reporting.

The new global standard aims to provide tax authorities with unprecedented transparency regarding companies’ global transfer pricing policies and financial results. Companies may be required to implement new procedures that will allow them to locate, collect, store, validate, and assemble the information required. The increase in transparency and the greater need for global consistency will most likely require companies to expand their transfer pricing resources. This was validated with more than 50% of companies at the Asia Pacific TP Minds Conference held in Singapore 2 weeks ago expecting to increase their team.

Under Australia’s new transfer pricing legislation, the OECD transfer pricing guidelines are part of the law. Therefore, Australian taxpayers will be bound by the OECD new standard on transfer pricing legislation.
Australia is fully committed with tax transparency and with implementing the OECD’s new global standard on transfer pricing documentation. During the G20 finance ministers and central bank governors meeting in Cairns, Treasurer Joe Hockey highlighted his determination to ensure that companies and individuals pay tax in Australia; and his commitment to lead the battle against tax cheats[1]. As a result, it is expected that the Australian Taxation Office (ATO) will increase its scrutiny on transfer pricing in the coming years. Another interesting release of information was disclosure of “shortfall” of taxes paid by the top 200 companies in Australia.

http://www.unitedvoice.org.au/news/who-pays-our-common-wealth

Action 13 on transfer pricing documentation and country-by-country reporting
With the revised Chapter V of the transfer pricing guidelines the OECD has adopted a three-tiered approach to documentation that includes:

The country-by-country (CbC) reporting template intended to be used by Tax Authorities as a risk assessment tool as it provides a financial picture of the company’s global operations.

The master file intended to provide a high-level view of the company’s business operations and important information on a companies’ global transfer pricing policies on intangibles and financing.
The local file intended to provide information and support of the local company transactions with related parties

Implications for Australian taxpayers
More information required: With the new guidance taxpayers will be required to gather and provide to the tax authorities substantially more information on their global operations including where the company earns income and pays taxes. As a result, companies will be required to change their processes for preparing transfer pricing documentation and consider new ways to compile the additional information which may require substantial time and commitment of resources. Larger companies may want to consider technology solutions to collect, store, analyse and prepare the CbC template.

Consistency of information: Companies will need to ensure that the CbC template, the master file and local files provide consistent information about their global and local operations and their transfer pricing policies. This may require more effort and additional resources for companies that currently prepare decentralised transfer pricing documentation.

Updated Comparable Benchmarking Searches: The new guidance on the local file states that searches for comparable companies need to be completed every three years if the functional profile of the company has not changed. The data on comparable companies must be updated annually. The guidance also supports the preference of using local over regional comparables when local comparables are reasonably available
More guidance to come: The guidance on implementation will be provided by the OECD in January 2015 including processes for filing and sharing documentation.

Australian legislation impact: Given the OECD transfer pricing guidelines are part of the Australian’s transfer pricing legislation, the ATO will also be expected to provide guidance on how to implement the OECD new standard on transfer pricing documentation with the ATO new transfer pricing rulings.

What do we recommend you do now?

Think about preparing a “test run” of the CBC template for 2014…..
The CbC report template may highlight gaps and inconsistencies in a company’s transfer pricing policies and their implementation. Therefore, it is recommended that companies consider addressing these gaps or inconsistencies before they file their first CbC template.

[1] http://www.theaustralian.com.au/business/latest/aust-to-lead-way-hunting-tax-cheats/story-e6frg90f-1227065955196?nk=774a6c009bbea2bbcb945c3bd38339ce

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