LIVESTREAM – Transfer Pricing Update (10th November 2022)

 

VOICEOVER:

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DERREN JOSEPH:

 Thank you for sharing your time this morning. I know you; you are super busy. So welcome to those who may be watching us on the various platforms and those who are joining us here in Zoom. Thank you for sharing some of your time. So, we do this every week, HTJ.tax. So, if you want to have a look at what we are doing next week and the following week, just go to HTJ.tax/events. We’re also doing an in-person event, you know, after being locked down for so long. Next January, the end of January, we will be doing an in-person conference. We have about 20 speakers talking about the offshore world, immigration, taxation, and putting together your international package to, to, to live that international life. So, if you want to join us, just have a look at each HTJ.tax/events. We’ll be happy to welcome you and share the information that we have. Now, for those who may be joining us for the first time, understand that we are licensed tax professionals, which means that we are not here to give advice. We’re having a general conversation about general principles. And what we are hoping that you emerge with our tools and issues and ideas that you want to take to your preferred tax team. But again, we are not here to give you actionable advice. We just, you can look at it as education, although you can look at it as entertainment, it’s certainly not advisable. There’s no way we can know about your situation in, you know, just a few minutes and give you some reasonable guidance.  It just doesn’t work that way. This is being recorded. So, for those of you who are on zoom, if you do not wish your image to be reflected, just keep your cameras switched off and for those who message and say, said that they couldn’t stay for the entire thing, that’s fine. We are recording this and you for those on zoom, you would’ve got the message as you join. So, this is being recorded and it will be available on our website, HTJ.tax, as well as about 23 other platforms including YouTube or Facebook, SoundCloud, Spotify, iTunes, Amazon, and Google Play. Basically, wherever you get your favorite podcast, this will be made available. So, you can share it with your colleagues, or you can just listen to it again if you can’t stay for the entire thing. All right. So, I would like to introduce Kul, can you introduce yourself, and say a few words?

KUL MAKKAR:

 Thank you, Derren. It’s, it’s a pleasure to be on this podcast. So, I’m associated with an accounting and consulting firm. We specialize in international, international taxation in the greater Toronto area, a place called Mississauga. And in the past, I have worked with a few accounting firms with their, international tax practice specializing in Transfer Pricing. So, I’ll be happy to discuss and answer if there are any questions here.

DERREN JOSEPH:

 Okay, fantastic. So, some of you did send in questions in advance, and thank you for that, but for those who didn’t feel free to type your questions in the box below and we get to them the order in which we receive them. So, without further ado, let’s start with the easy stuff, like what exactly is transfer Pricing generally, how, how would you describe the discipline of Transfer Pricing?

KUL MAKKAR:

Yeah, it is simple, and it is difficult because it’s simple. So, when a multinational enterprise, a company corporation having offices having presence in more than one country, and they’re performing some business functions there. So, they generate an income because of those functions. So, the tax authorities now want to tax that income. And since those companies are related, there could be potentially a tendency that the profits cannot, you know, can be rather, you know, weak to look like, you know, more income in a low tax jurisdiction. That’s what the tax authorities think may not be always true, but that’s what the reason or the logic for this transfer Pricing regulations are. So, when a corporation or its multi-different group entities are producing something or providing services or generating revenues by whatever means the tax authorities want to get their fair share of profits to tax within that country.

So, what is important here is that as a Transfer Pricing consultant or as an advisor, we try and look for the functions that are being performed by that corporation in one jurisdiction. And we, and we try and split, you know, the functions which are performed in that jurisdiction compared to the other jurisdiction. So, if you allow data, I can take a quick example, again, a simpler, simpler one. So if say a manufacturing company which manufactures the computers, and now they have different functions which have to be undertaken, there are, you know, assets, there are factories, there are other manufacturing intangibles required to manufacture those computers, and then they eventually have to sell it to make the profits.

So, one company say based out of China is manufacturing components of that computer. Then their related company in the US they, they get that complete component, or they assemble it rather, I mean in the US, or they get full, you know, as a complete set of computers and they, they market it, they sell it in the US or they market in other countries as well.

So, in order for the company as a whole to get the profits, it has a manufacturing function, it has a marketing function, but those are split between different jurisdictions. So now Chinese tax authorities and the US tax authorities want to tax those profits, that the company has earned. So, part of those profits belongs to China, and another part of that belongs to the US. So these profits are split based on what is called functions, assets, and risk analysis, as somebody has to find out what functions assets, and risks were deployed in China and what others were in the US, and based on that, the profits are, you know, identified relating to that particular jurisdiction and based on that these are attacks. But I’ll be happy to discuss in more detail if there is any other related question that you have. But this is the fundamental of Pricing. It’s actually a tax-related matter, trying to tax the profits relating to tangible or intangible assets and functions, assets, and risks of each jurisdiction.

DERREN JOSEPH:

 Thank you. That’s a comprehensive introduction. So, you know, every day, as, as I share with you because we have such an online presence, we get dozens, probably like 40, 50 leads every day. And unfortunately the media, you know, people watch movies and they have this impression that, hey, I just need to look for a low tax jurisdiction, I’m going to set up a company there, and then suddenly I’m going to save all this, all this money in taxes simply because I opened an office in another jurisdiction and, and, and you know, there’s some sort of shared services or whatever, so relate to party transaction. And the reality is that yeah, you’re absolutely right. You know, tax authorities think this sound like decades ago, you just like a few decades late. They know that with related parties, there is an incentive to somehow ship the profit from a high tax jurisdiction to low task jurisdiction. So as a result, all these related party transactions must be done in such a way that their arm’s length, they can’t be anyway, it can’t appear as if you’re trying to ship profit from a high task to a low tax. So, so yeah, I mean this, you, it’s, it’s so strange, you know, people get upset that, that when you tell them stuff because you know, the media or whatever, there’s this impression that it’s so easy, but unfortunately the reality is, is a lot more complex than that. So, you mentioned, you know, the functions, assets, risk assessment, and of course there are certain transfer Pricing methodologies that are, you know, I mean of course, there are lots of them, but there are probably a few that are understood and accepted, at least within certain frameworks. Do you want to touch on those?

KUL MAKKAR:

Absolutely. So there are a few transfer Pricing methods, which are almost like globally accepted. There is OCD guidelines, which we would be referring to, mentioning, you know, repeatedly in, in this, in this discussion. But those methods are, as I said whether it is Canadian tax laws or the tax laws of the US or UK. So, these are common. So, there are about five methods that are commonly used. One is the comparable uncontrolled price method. So, this is as simple as you are selling a pen and you compare a similar pen, see if this pen is costing like $10 and the pen that your client has is, you know, costing $50, then there has to be something which is not right there. Or if broadly, you know, it is a similar thing. So since you know, this is where the characteristics of the asset or the product is compared, So this is one, one of the most difficult methods to be applied.  This is, you know, this method has the most, you know, weight because you’re comparing prices directly with the prices of the other product. But this is something which in practice is the most difficult one because you won’t get the prices, especially of the services or intangibles or other products so easily. So that is one. The other method is the resale price method. So, under this method, you know, a related, the growth profits when a resale is made are compared. So, if based on, again, that function assistant risk, the identity is performing. So, the growth profits that they’re making because of those functions, system risk, it’s compared to a similar comparable which are dealing with non-parties. So there are practical, there are certain databases which you can look at to determine those, those gross margins and those are compared, this is basically used in case of retail or retail transactions. The third one is a costless method. This is used in case of manufacturing companies, the example I gave. So again, profitability is compared with, with independent, with non-related companies. And in case the profits of a particular corporation that you’re testing is comparable to the profits made by, by, by independent companies doing those functions. That risk, you can demonstrate that your prices basically going back from, from profitability back to the profits is at arms. Then the fourth one is a profit split, as the name suggests, you determine the overall profits of the group and you split it between the related parties based on, you know, what they’re contributing, what they’re bringing to the table. Mostly intangibles are, you know, priced based using this method. The last one is a transactional net margin method here, the profitability, not of the transactions, but the entire company is compared to independent companies. So the example which I gave was where the Chinese company is manufacturing computers. So, and it is since it is selling to its real party in, in the us So if you wanna find out whether the transaction is at arm length, we determine the profitability of similar computer manufacturers basically in China or at least in Asia, and compare it with our client’s net margins and determine whether they are dealing at arms length with the party or not.

DERREN JOSEPH:

 Fantastic. Thank, thank you for that overview and going to welcome you to an informal conversation on informal chat. Nilesh great to see, Nilesh had some technical difficulty joining us, but he has finally made it welcome. Do you want to say a few words and introduce yourself? You’re in mute so you just need to mute yourself, please.

NILESH PATEL:

Thank you, Derren for inviting me. I have some technical difficulties and I have not been able to join in time, but luckily, I’ve enjoyed, I I’ve been able to join. My name is and I practice in the area of Pricing nowadays I’m based in India. I’m a CPA from USA. Earlier I worked in USA and before that I used to work in Indian Revenue service as an, as a tax officer, where I used to handle the gamut of direct taxes including Transfer Pricing and international taxation.  So that is my brief introduction, Derren.

DERREN JOSEPH:

 Fantastic, thanks for that. And so, we got, so we, here’s what we’ve done so far. We’ve just kind of done like a brief overview as to what introduction to what transfer Pricing is. And we, we touched on the key methodology, of course within the transfer Pricing world, there’s the OECD and then there’s United Nations. What is the difference between the two ni you want to kind of give us your perspective on that?

NILESH PATEL:

 Yeah, what I can say is that o basically is an organization of most developed countries. That is how we perceive in India, whereas United Nations are seek to take care of developing countries. And when we see the Trans Pricing guidelines issued by United Nations, it is titled as Transfer Pricing man, Practical Transfer Pricing manual for developing countries. That is more geared to the interests of developing countries. Mainly that profit should not be shifted from developing countries to other low-tax jurisdictions. O CD guidelines and UN guidelines for the most part do not differ except for some small things. For example, location savings where profit could be shifted from a developing country to develop the country.  So in those matters, the United Nations guidelines are a little bit in favor of developing countries. Otherwise, as far as Pricing methods are concerned, AM insulin standard is concerned how to apply the AMLIN standard, how to carry out comparability, and analysis under the AM insulin standard, all those things are almost similar.

DERREN JOSEPH:

 Right? So, OECD, there’s a UN and of course not surprisingly the United States does its own thing, right? So, I’ve seen that you are US qualified, and you comment on the US perspective.

NILESH PATEL:

Yeah, US has detailed regulations 1.482 regulations, which we call now if we see the O City guidelines, the Pricing guidelines, and US regulations, again, there are not too many differences, maybe some nomenclature here and there. For example, one method, which is very popular under the Pricing guidelines,andh is applied all over the world, we call it transactional net margin method in US regulations, it is called CPM, comparable profits method, but it works almost in a similar fashion, not much of a difference. Second thing is on services, services in track group services between associated enterprises, related parties, connected persons. The US regulations are more detailed, I would say, of course, in the latest 2017 and 2022 O Pricing guidelines. They’ve also included a detailed guideline on this in group services. But I think the US regulations are more detailed for applying it practically to remind our prices of intragroup services.

DERREN JOSEPH:

 Okay. And, and the US is also different in terms of, and guide me from, from going astray in terms of the actual documentation. So like the OECD that talk about master files and stuff like that. With the US they speak about the methodologies, but in terms of the packaging of your documents, they’re not as prescriptive in addition to which some of the forms, like the 54, 70 ones, 54, 70 twos, they have already in, in a different way facilitate the disclosure of those intercompany transactions. Do you want to comment on the documentation piece?

NILESH PATEL:

 Documentations are definitely different in different countries. So, now has recommended this what we call three-tier documentation, local file master oil and country by country reporting. That is for bigs having turned over more than seven 50 million euros. As far as local file is concerned, every country has its little bit of difference. Every country has its own regulations and there is some difference here and there. So in that sense, definitely US documentation requirements are definitely different from requirements of India, requirements of other countries, but primarily it is all this documentation is for the taxpayer to prove that my intragroup transitions are at arms price. So this taxpayer has to discharge that burden of proving that my intergroup transitions between related parties are at price as far as what evidence is to be included in the documentation. There could be some difference here and there.

DERREN JOSEPH:

 And do you want to comment on Canada? What’s the CRA’s perspective in terms of documentation? How is it different from other countries like the US?

NILESH PATEL:

 By Seattle you mean Canada Revenue Agency?

DERREN JOSEPH:

Yeah, yeah, cool. Is based in Canada, so yeah,

KUL MAKKAR:

Yeah. Hi. Yeah, I can answer if you’re okay.

NILESH PATEL:

Yeah, yeah, please.

KUL MAKKAR:

Sure. Yeah. So yes, but just listening to what Les mentioned about the US- Canada in fact is more aligned with OAC D. So, so in Canada, we definitely have those three-tier documentation requirements, which are already, has been made a part of the law and there have been detailed instructions on how those have to be completed. And if there, you know, if there are default even CRA has brought in penalties for that. So, so these three-tier, again, just a, as a repetition to what Nilesh mentioned are the master file where you generally, you know, there are defined contents, what has to be there in a master file broadly about the, about the, about the growth, about what their products are, what their services are, and then a local file is more specific to that particular jurisdiction. Where for which you’re preparing the trans Pricing document and CBC are what we call insured for, for country-by-country reporting is where you, so where you provide numbers, where you provide data relating to the sales and your workforce, your, you know, revenues and other stuff for each country that you are, you’re transacting with. Secondly, CRA in general, you know, has, has, so compared to, again, I’m sorry, I’m just trying to explain it. The way I think it’s easier for the audience is that the US has mentioned has very detailed Pricing regulations. Canada does not have. So Canada has, you know, given a overall broad structure of how the regulations should look like. And that is the reason C often have to resort to OD guidelines for additional references. So, so the Canadian jurisprudence prudence is definitely, you know, more, even in the court’s references are given relating to OD guidelines, wherever the Canadian tax regulations are kind of not very detailed or not very descriptive. So yeah, so that way can, is a little different than, than the USbut it is is very consistent with, you know, with the other countries where trans Pricing regulations are there.

DERREN JOSEPH:

Yeah, that’s, sorry, Nilesh comment?

NILESH PATEL:

 What I want to say is that documentation, whatever be the details and specific, particular sub documentation may vary across different countries, but basically what I have seen that they mainly contain these things, one is what is the transaction which occurred between the group members? Number two, what is far function, a certain risk profile of the parties engaging into that transaction, What particular transfer Pricing method, as KU was explaining earlier, out of those five or six methods, are you going to apply to remind the insulin price of the transition and why, why you are choosing and why one method out, out of those five or six methods, why you to rule out other methods. So you’d explain that in the documentation. And then for applying that to some particular method, which we call India’s most appropriate or Pricing method, what kind of exercise do you carry out? Mainly that is comparability analysis. So that entire thing, what you do while reminding the price of a transaction, that entire thing has to be documented and presented to the tax officers.

DERREN JOSEPH:

 Absolutely. You know, it’s, it’s all about the the documentation and justification. And again, you know, at the beginning I was saying that the pub general public, the average person has this unrealistic expectation because, you know, they watch movies, you know, they, they read something in the news and they see what Facebook or Apple or whatever is doing, and they think that, hey, I can just go to low tax jurisdiction, I’m going to incorporate a company and set up an office and suddenly I’ll be saving all these taxes by having these related party transactions not understanding just how much work goes into justifying every single transaction must be defended. Because the implicit assumption with a higher tax, the tax authority in the higher tax jurisdiction is, hey, there will be a natural incentive to try to shift as much profit as possible to the lower tax one. And they don’t get that. But hopefully, you know, , this sort of interaction would help shine some light on that. Now, I mentioned some of the big US tech technology firms and for a long time I know it’s no longer available to people, the media was making a big deal about the double Irish do, well I guess both of you’re familiar with it. Generally speaking, what did the double Irish entail and what did it allow certain companies to do? Do you, do you wanna comment on it?

NILESH PATEL:

 Yeah, let me recollect my thoughts because Irish, I haven’t it this European union

DERREN JOSEPH:

Yeah.

NILESH PATEL:

I’ve steps to remove it.

KUL MAKKAR:

Exactly.

NILESH PATEL:

Yeah. Anyway, let me, let try, let me try to remember double Irish.

DERREN JOSEPH:

Oh cool. It

NILESH PATEL:

Was basically, it was basically a structure where income from intangibles, income from intangibles, which is the, which is the main of the major income of this big, that was sought to be a sheltered in Ireland, mainly Ireland, which had already 12.5% tax. And for this intangible’s income, Ireland also gave, gave them special tax regimes or special tax rulings where from 12.5 could be reduced to up to five percentage

DERREN JOSEPH:

Or even zero. Yeah.

NILESH PATEL:

Yeah. Now if you are operating entities located, say somewhere in Europe, all the income from operations will be rooted through this double Irish structure. And ultimately nothing becomes taxable as far as operation is concerned. And your income from intangible will be booked in Ireland and taxed at a very low rate. And income from these operating entities are designed or structured as low, low evaluating entities, meaning that their functional profile, their asset profile risk profile is kept low. And then it is argued that because their profile is low, they are eligible for only low profit. Our profit goes to intangibles and under double Irish structure that intangible income was sometime not taxed or texted. Very

DERREN JOSEPH:

Cool. Cool comment on it. I know it’s gone.

KUL MAKKAR:

No, unless has discussed it very well. And I just wanted to add here that now od and even the tax authorities in other jurisdiction as well have come out with various tax regulations, GAR comes in then rising regulations itself are very comprehensive to kind of, you know, control these kind of structures. And now the latest, this pillar one and pillar two, which OD has just kind of, you know, have, you know, they’ve come up with these kind of broader guidelines are again, you know, in this direction only. So what any taxpayer who has an intention to, you know, set up an entity in a low tax jurisdiction and park their intangibles there and then kind of, you know, just pull in the revenues because in the name of intangibles would find it very difficult. It, it’s not going to be as easy as just kind, you know, transferring the ownership of intangibles and getting, sucking up the, the profits to that jurisdiction. So, and as you have been mentioning consistently that it’s not going to be like the movies where they say that or you pass your, you know, some few million dollars in a lower tax jurisdiction and you’re good. It,  doesn’t work that way. It is only in the movies.

DERREN JOSEPH:

 Yeah. And, and of course this, this is a great segue into the whole space of intangibles. I think that, you know, again, looking at, I remember when it first came out what, you know, it was, it was made public what Apple and Starbucks and others were doing using Ireland. And you know, because there was some parliamentary committees CEO and the CFO had to pay before certain politicians and defend what was in fact a completely legal structure at that point in time.  But it did shine the light on intangibles and how intangibles were managed in a way to reduce the, the overall tax burden out as a result of that. As you, as you guys have pointed out, there had been so many regulations internationally that had been put into place around trans Pricing and around, you know, the whole, the idea of economic substance and permanent establishment. Do you, do you want to comment on some of the recent trends? Trends that are at play right now in terms of concepts of permanent establishment, especially when you, you’re dealing with technology companies. Do you want to comment on that? I’ll start back with your English,

NILESH PATEL:

Yeah. Technology company now. Yeah. Let me also use this digital taxation.

DERREN JOSEPH:

Yes, Yes.

NILESH PATEL:

 Is that what you have in mind? Yeah, yeah, of course. For that we have this recent, recent proposals from OD pillar one pillar to what we call it, we call it B two base erosion and profiting Babs two, Babs one was in 2015.

DERREN JOSEPH:

Yeah.

NILESH PATEL:

Now it is Babs two. So there the concept is, see what was, what is a concept, it is still not changed. These are only proposals. I don’t know how many countries will adopt them today unless ANC has a permanent establishment, meaning that it participates in the economy of a country towards, to some extent, to a reasonable extent in a permanent way, then only it should be tax in that country. Permanent establishment, like we know branch dependent agents like that. Now, two things have happened because of Babs. One project, a multi-lateral instrument has been signed by many countries under that they have tried to close the loopholes of mmcs exploiting the old definition of permanent establishment to sort of argue before the countries that I don’t have any permanent establishment in your country. So I’m not taxable because of this, this reasons your treaty has this definition of permanent establishment. In Article five Samuel, I said, okay, whatever possible, we are trying to close those loopholes. And that is one part now under B’S two project digital taxation, what is proposed is that even if you don’t have any presence, no presence at all. Let me take simple example of Netflix. So Netflix has servers, let me take the host country as India or source country as India. Netflix has servers outside India, it streams, movies, shows, et cetera in India through satellite and all it has good income. Like I’m myself a i myself, a subscriber of Netflix. There are many subscribers, Netflix derives good revenue, but it doesn’t pay any tax. It says I have nothing in your country. Not even servers, no servers, no subsidiary, no branch, no people, nothing. So how to tax these people. So ods come out with pillar one, nexus rule, they said, doesn’t matter, you have nothing in that country, but you have, you are running revenue from that country. So based on that revenue, you should pay some tax. Again, it’ll be like allocated the whole, the entire group’s revenue, entire group’s profit. Some part will be relocated, not allocated, relocated from one country to the other based on revenue. So that is the concept of digital taxation, where in absence of any permanent establishment, you can still be text in the source country.

DERREN JOSEPH:

Thanks, thanks to cool comments as well.

KUL MAKKAR:

Yeah. Just to kind of add to ni mentioned, so I mean it is just kind of moving away from what you know, the source-based taxation we have been kind of hearing about since 19, early 19 hundreds where physical presence or excess used to be the basic requirement to tax particular to pay taxes in that particular country. So now the business is done very differently. These software or rather these companies employing, you know, digitization does not as mentioned, require a physical presence in a particular country and they would escape the taxation, although much part of their revenue is generated in that particular country. So that’s where this pillar one, you know, regulation, not regulations, but the guidance comes in and where, you know, the profits which are beyond which are, you know, more than the routine revenues will have to be shared with, with the source country as well.

So this is something which I know is going to get bigger because although at this point the threshold is really big and they’re targeting only the top, you know, tier companies for this, but it is going to get bigger and countries where, and especially like India or China where there is a huge consumer base, they are losing a lot of taxation because of these regulations and they would be very keenly looking at how to implement these going forward.

DERREN JOSEPH:

Yeah. So, so you know, just so the idea p establishment, it was originally born in a different age where businesses had a different structure. You know, I was, businesses tended to need a, a physical footprint and another jurisdiction in order to earn money from that jurisdiction. But now that’s no longer the case technology, the internet allows anyone to earn money in another country without physically moving there or having any presence, any related aid-dependent agents or, or whatever there. And so as you guys pointed out, hey countries, they, they, they notice this, right? And they put measures in place and, and sometimes it’s threshold is relatively low, like in Singapore, where based the so-called Netflix tax, it’s, it’s a million Singapore dollars I think it is. So probably it’s 700 or so thousand us. So it’s a moderately size company that maybe would need to be conscious of this. And, and the threshold could be even lower. I think for example, the nextdoor Indonesia, it is threshold is is considerably lower. So you may have situations where you’re an sme, you’re running a small-medium size enterprise, and by virtue of earning money online in another jurisdiction, you need to check to see whether there’s some tax consequences, even though you have no one physically there. The fact that there’s economic activity online and, and you enjoying the benefits of that there, there may be tax implications. So I’ve heard people comment going back to bs as you guys mentioned, BS base erosion and profit shifting. They’re talking about the various pillars and the, and their speculation that, you know, if countries carefully and judiciously implement the recommendations, perhaps in the future there may not be any need for transfer Pricing. What do you guys think about that?

NILESH PATEL:

They, there would be no need for transfer Pricing if, what did you say then?

DERREN JOSEPH:

Yeah, I’ve, I’ve heard someone comment that if they all the recommendations of the, you know, the various pillars under the BS initiative if they were implemented,

NILESH PATEL:

Perhaps if they’re implemented, yeah.

DERREN JOSEPH:

Yes.

NILESH PATEL:

Yeah. Let us see. Huh? Let us assume pillar one pillar implemented in the world.

DERREN JOSEPH:

Yes, correct. Yeah, yeah.

NLESH PATEL:

 Now if, let me start with pillar two briefly. Now pillar two, Yeah. Under pillar two, we have to compute effective tax rate of various entities of ANC group in different countries. And then we have to do something what they call jurisdictional blending in a country. Say there are four entities, all four will be seen together. Now to work out effective tax rate, you need to have income, taxable income. And what is a tax rate Now under taxable income to compute taxable income, pillar two clearly says in the commentary OD says that all intragroup transitions have to be carried out at price. That profit has to be worked out for intragroup transactions on the current transfer Pricing mechanism only. Nothing different.  Yeah. Now coming to pillar one, Pillar one speaks up three amounts amount A, B, C. So one can say that, I don’t know, B or C, they say that if ANC has marketing and distribution entity in a countries, then the basic return for those functions, marketing and distribution will be allocated to that country, to that entity. And if that entity is found to be adding more value or performing more functions than basic, than something more can also be allocated. So again, that is nothing but sounds surprising principles. So under pillar one and pillar two also this stands Pricing AM principle will continue, but in addition to something which we call global global formulation, because the entire global profits or income will be allocated to different entities, revenue will be allocated. So there is a mix. On one hand there is global formulation. On the other hand there is principle, both

KUL MAKKAR:

Are working together. Okay. And, and cool, were your thoughts. Yes. So this global formulary approach has in fact been there for, for a while and Brazil was one of the country where, you know, it was used as a, as a main transfer Pricing regulation and they eventually had to move away. I’m not saying, you know, that that, that there was, that was wrong, but that was something which had the challenges for them to implement, you know, for on every situation you can have formulary, a apportionment, you know, you can device formulas to allocate the profits for certain transactions, but sometimes you may not be able to do it for, for all the transactions or for, you know, all the situations.  So, so that’s where this principle comes in handy and, and agreeing with, I don’t think, you know, with this new, you know, formulas being discussed in pillar one and two, it’ll take away the A and principle at all, rather it’ll it and sync with each other. That is one. And secondly, I think just to say that pacing regulations would, would not be required or would become ineffective. It may not be, you know, in my understanding may not be the correct statement just for the reason that, you know, the tax authorities are in fact becoming more and more aggressive, more and more stringent, and they’re focusing these transactions more closely now, and they’ll, so this will trigger, you know, trigger down to the taxpayers very, very soon, if not already to have, you know, to look at their transfer Pricing regulations, to look at their trans Pricing policies, to look at their overall structures more closely. So that when, when we talk about the, again, this depth action 13, which talks about country by country reporting tax authorities are going to, you know, look at the numbers and very easily, very quickly, they’ll be able to find out that if, you know, any jurisdiction is not, not kind of, you know, reporting their profits adequately, also sufficiently because they would, they can see that, you know, what their, what is the human resource?  What is the kind of human capital that is, you know, is there, and what is the functions, assets and risks are being done in a particular jurisdiction. And based on that, you know, are they making enough profits? It’s actually the other way around. If they’re making profits, say in a low track jurisdiction with not, not a lot of activity, not a lot of substance as we call it. That’s where, you know, this country-by-country reporting is going to focus and rising is just going to get a little more complex. That’s what I see in something

NILESH PATEL:

 Briefly. Yeah, yeah. Under pillar two, minimum tax of 15% is proposed. Now, how will you d whether ANC group is paying less than 50% in a particular jurisdiction, what rate is it, is it paying in a particular jurisdiction to determine that a length this time Pricing is required?

DERREN JOSPEH:

 Yeah, I completely agree with you. So, you know, I, I’m thinking about the person, I, I went to a lecture and transfer Pricing and the lecturer did mention that, you know, I think he was being a bit provocative, but you know, I, I agree with what you guys are saying, that’s my perspective as well, that it’s the opposite. That transfer Pricing as a discipline is going to become more endemic. It’s gonna be everywhere. So once upon a time, like a few decades ago, yeah, you could set up companies related in different jurisdictions and you could to some extent do what you like unless you are US exposed, because US exposure, US exposed companies always had the 5470 ones, which imposed almost the equivalent of a country by country reporting from day, from back in the day. But other jurisdictions in rural, you could more or less do what you like with some notable exceptions. But now I think transfer Pricing even, I mean, it, it rolled out in OECD countries, but now as you guys have pointed out, the, the, even the most emerging market, the tax office is aware of transfer Pricing, the importance of arms length principles. So it’s gonna be everywhere if it not, if it isn’t already. So that leads to my next question that presents itself as a considerable burden, especially on SMEs, because in some cases the threshold is pretty low. So, you know, you’re just starting off a business and you’re trying to expand into a neighboring jurisdiction, and then suddenly you have the burden of, you know, maintaining transfer Pricing documentation. The principles is one thing. You could figure that out. But the contemporaneous documentation of all those transactions would, you know, it, it presents itself as quite a burden, not just on the company, but on the tax offices as well who have to police that, you know, how, how sustainable is that? What do you guys think about that? Nilesh, what do you think?

NILESH PATEL:

Right now? See the transfer Pricing regulations today

DERREN JOSEPH:

Yes

NILESH PATEL:

 In different countries, they are there now, pillar one, pillar two, they’re applicable, they’re applicable only to very big. Pillar one is applicable only to TOC having 20 billion turnovers per, year, two 7 million euros So SMEs are not directly covered there. So SS whatever is currently applicable in different countries, they will, they will be govern by those regulations till the time they’re changed. But I don’t see pillar one and pillar two being made applicable to SMS very soon. Okay. That will take a lot, lot, many, many years for to see pillar one and pillar two, how they’re working, whether different countries are agreeing happy with it, because pillar two means, I, you must have read that Ireland has increased it tax rate to 15%. So now a country which is a tax heaven, if I part my profits there, it’s not going to work. I have to pay 15% either in my home country or in some intermediate jurisdiction. And if that happens that no tax jurisdiction is of no value to me, so the no tax jurisdiction itself may enact 15% tax, otherwise, otherwise it, it’ll lose tax revenue to other countries.

DERREN JOSEPH:

 Yeah, but you know, I, I get what you’re saying, but there are some jurisdictions, for example, Indonesia, where there is no threshold for transfer Pricing. So like in Singapore it’s 10 million, but in Indonesia it’s zero. So everything you need to, So I’m just thinking that if more countries are as aggressive and adopt that approach and approach that basically SMEs into the TPU net, you know, that presents itself as a, as a challenge to companies. So it’s with that, with that in mind Kul, do you want to comment on that?

KUL MAKKAR:

Yes, Derren, so yes, you are right. In fact, there has to be, there has to be a balance. And I 100% agree because taxpayers, which are really small and medium enterprises, they, they definitely have a burden to kind of collect all this information and transfer Pricing is never, you know, a small bit of information. It is a compilation of a lot of information which has to go to substantiate your transactions and your prices. So one is, you know, the way you look at it Derren is that if you look at it only as a compliance, it is definitely a burden. But if you look at it again as a consultant, we, we often come across clients discussing this as well, is that if you look at as an opportunity, you inspective your, your own Pricing. So, you know, our company is performing a set of functions and because it’s a part of a multinational group, it does not know whether it is getting enough profits of its own. Because there are employees, you know, who have some profit whose remuneration is based on profit incentives. So if, you know, if everything is like a kind of, you know, looked at as a whole as a group and you know, internally within the corporation, they do not know how much profitability is earned by which company there, they won’t be able to kind of really implement any tax efficiencies, sorry, cost efficiencies. They’re, so that could be, you know, another advantage if not a direct benefit, but you know, a compliance, once you’re doing a compliance, once you are going deeper into your, you know, your functions assets and risk and trying to understand what value add is being done by a particular company and what value add is done by their corresponding, you know, related party. So that way they, they can definitely have some efficiencies. But yes, that does not undermine the statement that there should be, you know, this is a, this is a, a big collection of information which has to be compiled and presented to the tax authorities when they’re asked for it. There has to be, you know, a balance between how much efforts have to go into transfer Pricing for smaller transactions, which may not have a lot of impact on, you know, on the taxability, even may not benefit a lot to the tax authorities as well.

NILESH PATEL:

 And then in India also SMEs are within the net transfer Pricing because our thresholds are almost, it is like reporting documentation threshold.

DERREN JOSEPH:

Wow. How much is that in us?

KUL MAKKAR:

Would that’ll be about 15,000? Yeah.

DERREN JOSEPH:

 Wow. That is, you’re right, that’s pretty low. Yeah.

NILESH PATEL:

And because of that, in last 15 years, there has been a lot of litigation on Pricing in India. Lot means lot. Yeah. And you are right that because of that SMEs have suffered, of course, they’ll support the brunt of litigation and the cost of compliance documentation. Yes, yes. But that is not going to change. Now India is not going to increase the threshold remove the transfer Pricing net. We are not hearing anything of that kind.

DERREN JOSEPH:

 Yeah, I agree with you. You know, I think that yeah, you know, like country by country reporting this 50% minimum, the call, you know, it’s seven 50 million euros or whatever. But that’s just the starting point. I think over time you’ll see mission creep and you’ll see tax authorities use it as an opportunity to slowly but surely lower that threshold to bring more in the net. Because, you know, let’s face it, every, most countries in the world right now have a balance of payments, you know, sort of deficit going on, and they have expenses arising out of the, the crisis that we just emerged from. So they have a lot of expenses, they have a balance sheet to plug, so tax revenue, all eyes on tax revenue. So the more you can collect, the better and the more attractive it is from a political point of view. So yes, you may start the conversation at big multinationals, but there is a huge incentive to just lower it, to get more in that net to collect more revenue. So, so yeah, absolutely. So with with, you know, with that in mind, what, what are the key trends? If you had to pick up like three key trends within the transfer Pricing space for the future to pay attention to, what, what would you say they are? Nilesh?

NILESH PATEL:

 Yeah, what actually currently I’m practicing in India, so there the tax authorities are about looking to, looking at profit split method, which is one of those prescribed method. Seriously. Like they want to look at a method which applies, which views the transition from both sides, from the side of both the associated enterprise participating in the transaction. Whereas other methods are mostly one sided methods.

DERREN JOSEPH:

Hmm….

NILESH PATEL:

 Okay. So profit split method authorities are looking into what is the, a profit from a particular transition and how it should be split between the two and it is participating in the transaction, right? That is, I say that I would say that is one, yeah. Second would be this, of course intangibles, intangibles is always a troublesome issue. Intangibles, because of O C D guidelines, very detailed guidelines, that is something called d p, others would know DP development, exploitation protection, maintenance and enhancement of intangibles, meaning that any group entity, which is just a legal owner of the patents or the intangibles, will no longer be entitled to book all the royalties or income super income or premium income or premium profits from the exploitation of the intangibles entities who participated in this DPE functions. All those entities will be entitled to.

DERREN JOSEPH:

 Okay. So, that’s your sense as to like the key trends to pay attention to

NILESH PATEL:

 This is second and third is financial transactions, like corporate guarantees. Then because of covid, this new model has come up, they call it, what, what is the name? Intragroup Treasury management.

DERREN JOSEPH:

Yeah.

NILESH PATEL:

 And captive insurance, captive insurance.

DERREN JOSEPH:

Yes.

NILESH PATEL:

 Cause of covid, some were not able to get insurance externally at a reasonable premium. So, so they’ll set up a captive insurance.

DERREN JOSEPH:

Internally, it is.

NILESH PATEL:

 So, in India I’m seeing this, mainly these three trends which are novel new.

DERREN JOSEPH:

 Yeah. Okay, great. Great. Thank you very much and Kul what’s going on in Canada? What are the three key trends from a, a Transfer Pricing perspective that we need to keep our eyes on

KUL MAKKAR:

And yeah. So first my apologies for the wrong number. I mean, my calculations were not, one is about 35,000 us. No, it’s, yeah, it’s, it’s still a very little, small threshold, but it’s, it’s not that what I mentioned initially. Yeah. In Canada, again, that in the threshold for documentation, although that’s not your question, but is, is pretty low. So one is that there is actually no threshold for izing documentation. There are, yes, there is threshold of 1 million Canadian dollars to report those transactions in a, to the government along with the tax tax return. But most of you know, the, the taxpayers, they’re not aware that, you know, that you need to, and there are penalties if you don’t maintain, and the tax authorities, if they do adjustment adjustments beyond a, beyond 10% of your gross income, there are, there could be penalties. So Pricing documentation definitely is, is one of the factors which I would emphasize is key on, on this. And other areas which, you know, which one is, you know, ization where we, we’ve recently had important case law as well, but that is more from the tax authority side, how they look at the er Pricing mechanism structure between the entities. But from a tax base perspective in group services is something which we often come across with a lot of companies providing those services, you know, across the border or receiving it from the US. So that is one, although taxes, I mean, it is one of those which is difficult. Wear all those five methods, which we generally have in transfer Pricing, it is difficult sometimes to kind of substantiate the arms basis on using one of those methods. It is eventually, you know, which is the residual method, has to come into substantiating in group services or management services. So that is something otherwise I think has picked up very well. All these intangibles is an important one from a Canadian perspective as well. Although most of the business happening between Canada and the US, it is the US which has the headquarters and they hold the intangibles either internally or elsewhere. And Canada is more of like support, you know, functions that we see mostly, but yet in anti is something where CI has been focusing, you know, closely on. So.

DERREN JOSEPH:

 Okay. That’s good. That’s great. So, you know, from, from my point of view, I, I think, you know, absolutely most jurisdictions that typically didn’t pay attention to transfer Pricing are increasingly doing. So the, the thresholds are, some jurisdictions are high, some jurisdictions are low. Generally speaking, I see them being reduced, generally speaking, to bring more pe more businesses into the net for, for obvious reasons. And I, I think that presents itself as a greater burden of compliance for, especially for SMEs and something for them to really pay attention to because the capacity within the tax offices is in being enhanced. So the risk of audits increasing as well. And previously you can probably, in Sydney jurisdictions, you’d probably get tax officers who weren’t familiar with transfer Pricing, especially in emerging markets. But no longer the case. Increasingly they’re being trained up and they know what they’re doing, they know what they’re looking for. You can’t play games like, you know, you can’t manipulate things unnecessarily like, like you would have historically. And you know, just something to pay attention to. And in that note, thank you very much. We’ve come to the end of the hour. I really appreciate you guys sharing your time, sharing your expertise. And if someone wanted to find you, what’s the best way to reach out to you?

NILESH PATEL:

Email would be best.

DERREN JOSEPH:

Yeah, and what’s your email?

NILESH PATEL:

 Yeah. Where can I write it in the chat box?

DERREN JOSEPH:

 A lot of people are listening to this and they’re going to be seeing it. Okay. Okay. So, if you want to spell it.

NILESH PATEL:

 Yeah. Let me first speak the whole email out and then I will spell letter by letter, a voice in, and the spelling letter by letter, it’s nilesh@taxwize.in

DERREN JOSEPH:

 Thank you very much. And you Kul?

KUL MAKKAR:

Yeah, mine is, there is no space as, as you see on the screen, kulmakkar@gmail.com

DERREN JOSEPH:

 At gmail.com. Fantastic. Thank you very much, guys. It was great to chat with you. And for those who are listening, thank you for joining us. Again, we do this every week. We do a live stream every week, different topics around tax to see what’s coming up next, HTJ.tax/events. Thank you for joining us. See you next time. Bye.

NILESH PATEL:

 Bye. Thank you.

VOICEOVER:

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Table of Contents: LIVESTREAM – Transfer Pricing Update (10th November 2022)

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