Happy New Year!

TP Compass wishes you a Happy, Healthy, and Prosperous 2017!

This fourth quarter 2016 newsletter has a strong theme of substance versus form. Value chain analysis and challenges on the reasonableness of commercial arrangements in low-tax jurisdiction are expected to be a recurring theme in future newsletters due to increases of transparency of transfer pricing policies.

Intra-group Financing: Luxembourg's Recent Addition to their Transfer Pricing Regime

luxembourg scenic picture

Luxembourg Tax Authorities have issued a new Circular providing guidance for the fiscal treatment of intra-group financial transactions effective the first of January, 2017. Any existing transfer pricing rulings and unilateral APA are no longer valid. Also, instead of the previous rule to determine the equity at risk, the substance of the party from the functional analysis that covers the assets and risks and the commercial relationship will determine the appropriate equity level. This new circular positions substance over form.

For more information, see the PwC summary (pdf) here.


Country-by-country Guidance by the OECD

logo of the oecd

There has been a flurry of activity by numerous countries on adding the country-by-country reporting requirements to their transfer pricing regimes. The OECD has released helpful guidance that provides details on country-specific information on country-by-country implementation. This can be found here.

The OECD has also produced a short document that answers 5 questions on implementation challenges. These address complexities related to revenues that fluctuate above and under the minimum filing threshold, differences in effective dates, reporting of investment funds and partnerships, and notification requirements during the transitional phase. This document can be found here (pdf).

Jurisprudence on Toll Manufacturing

manufacturing shop floor

The Czech Republic's Supreme Administrative Court sided with the tax administration that rejected the taxpayer's position of a contract toll manufacturer's loss. During a period of low capacity, the applied transfer pricing policy that paid the contract manufacturer a per minute of manufacturing fee was insufficient to cover all the costs incurred.

With respect to the value chain of the multinational, the tax administration concluded that the contract manufacturer did not have control of the utilization. Because of this lack of control, and the lack of other risks and scope assigned to the contract manufacturer, the reassessment eliminated the loss and provided the contract manufacturer a low return.

During years of low profitability or in years where a consolidated loss occurs, multinationals often believe that these losses should be shared across several related parties involved in the full value chain. This judgement reminds us to be wary whenever a low risk entity, such as a contract manufacturer incurs a loss.

For more information, please refer to KPMG's Summary here.

Jurisprudence on Tax-Motivated Restructurings

weigh scale with form on one side and function on the other side

This last quarter has seen activity on two court that relate to challenges on corporate restructuring deemed to be solely or predominately tax-motivated.

In Canada, Cameco is involved in a high-profile appeal to the Tax Court of Canada regarding the transfer price of uranium Camco Canada sold to their Swiss Subsidiary that acts as their trading and marketing arm. The Canadian tax authorities have argued that the 17 year fixed price contract between Camco Canada and its Swiss Subsidiary is not commercially reasonably. When the market price rose above the low fixed price, the thinly staffed Swiss Subsidiary earned billions in profit while the Canadian producer of Uranium incurred substantial losses. The reassessment would result in over $2 billion in tax for Canada. The Crown is arguing that the transaction should be recharacterized and that the Swiss Subsidiary does not have the capability to market and sell the product and that the Swiss Subsidiary was solely established to avoid paying the higher Canadian tax rate.

In Norway, the Supreme Court denied interested on inter-company debt that was incurred during a restructuring involving Ikea's Norwegian real-estate portfolio. The judgement was based on the anti-avoidance rule. The court deemed that the main purpose of the reorganization was to save tax. The lack of substance was the key issue. And because of this case, any similar restructuring that involve a debt pushdown will need additional considerations to the commercial purpose.

PwC has provided a short summary of the Ikea case that contains an English translation of the judgement that can be found here (pdf).