Written by Philippe Neefs, KPMG Luxembourg Transfer Pricing Leader

Since 1 January 2015, Luxembourg’s transfer pricing regime has been based on article 56 of the Luxembourg Income Tax Law (LITL), which introduced the arm’s length principle into local Luxembourg law. In addition, the Luxembourg tax authorities could also refer to article 171 of the Abgabenordnung, modified by the Law of 19 December 2014, which essentially states that taxpayers should be able to provide transfer pricing documentation sustaining the arm’s length character of all intercompany transactions.

On 27 December 2016 article 56bis was introduced, together with the publication of a new transfer pricing circular for companies principally performing intra-group financing activities. This new article, applicable as from 1 January 2017, gives taxpayers and Luxembourg tax authorities more guidance on how to apply the arm’s length principle in the context of a wider value chain analysis. It focuses on the comparability analysis based on the OECD’s five comparability factors approach. The comparability factors to be taken into account are the following:

1. Contractual terms of the transaction: the contractual terms should be found not only in the legal documentation, but should also be reflected in the accounting statements.
2. Functional analysis: a wider value chain analysis, as well as the ability to control the risks, should be outlined.
3. Characteristics of goods and services: differences in quality or availability of a product or a service should be considered.
4. Economic circumstances: product life cycle, market size, and the extent of competition should be taken into consideration.
5. Business strategies: risk diversification and innovation strategies that have a possible impact on transfer pricing should be examined.

The commercial rationale behind each intercompany transaction is also of outmost importance. If the commercial rationale is lacking, then a transaction could be disregarded. This has a critical impact as taxpayers must now be prepared to be able to document the commercial rationale as part of the transfer pricing documentation. Attention will need to be paid to pre-structuring documentation. Therefore a description of the Luxembourg value chain should take any no-tax reasons into account.

The circular published on the same day as article 56bis clarifies the transfer pricing rules applicable to entities principally performing intra-group financing activities (Circulaire du directeur des contributions LIR n° 56/1-56bis/1 of 27 December 2016). The scope of the application of the circular remains the same as under the 2011 transfer pricing circulars previously applicable in Luxembourg. Notably, it applies to all entities realising intra-group financing transactions, while holding activities remain out of its scope. The definitions of “intra-group financing transactions” and “associated enterprises” remain unchanged.

In this new circular, strong emphasis is put on the analysis of the risks assumed by the companies. In that regard, different factors need to be taken into account such as the solvency of the borrower, the potential guarantees for specific financing transactions, the costs in relation to the financing transactions, and the actual value of the underlying assets.

The circular further provides that if a company has a similar functional profile to the entities regulated under EU Regulation n° 575/2013 that transposes the Basel Accords, and the company has an amount of equity complying with the solvency requirements under this regulation, then it is considered to have enough capital to support the risks assumed. Moreover, as a safe harbour, it is considered that such a company complies with the arm’s length principle if its remuneration corresponds to a return on equity equal to 10% after taxes. In practice, it is not expected that many Luxembourg companies will fall into this category due to the particular nature of the required functional profile.

All other companies should perform an analysis to determine the necessary capital at risk using the widely accepted methodologies in this area. These companies must have the financial capacity to assume such risks. The level of capital at risk should correspond to the functional profile under review, meaning that the required capital at risk should decrease when the risks borne become more limited. It must be noted that there is no reference anymore to the minimum required capital at risk of 1% of the financing volume (capped at €2 million) that could be derived from the application of the 2011 transfer pricing circulars.

Furthermore, the circular provides that in order to be able to control the risks (i.e. the decision-making capacity), the company performing the intra-group financing transaction should comply with the following substance requirements:

1. The members of the board of directors, or the managers empowered to engage the entity in particular, must be residents of Luxembourg; the majority of the board members should also be Luxembourg resident or, if non-Luxembourg resident, should be taxable for at least 50% of their income (listed in the circular) in Luxembourg.
2. The company should have qualified personnel to control the performed transactions. However, the company could outsource some functions that do not have a significant impact on the control of the risks. This latter item still under debate.
3. The entity must not be considered a tax resident of a foreign jurisdiction.

The circular additionally provides for a measure of simplification, which a taxpayer can opt for should the following conditions be fulfilled:

1. No transfer pricing study has been prepared.
2. The intra-group debt receivables are financed by intra-group debt payables.
3. The company fulfils the substance requirements (as outlined above).

It will be considered that these taxpayers comply with the arm’s length principle if their remuneration corresponds to a return on the financed assets of at least 2% after taxes. However, these cases will be subject to exchange of information.

The circular specifies that it remains possible to obtain an Advanced Pricing Agreement based on the facts and circumstances of each case if the conditions outlined in the circular are respected. It further stipulates that any Advanced Pricing Agreement issued before the entry into force of article 56bis LITL should not be binding by the Luxembourg tax authorities as from 1 January 2017 for the fiscal years following 2016.

Although it is not indicated, it can be interpreted that a Luxembourg entity carrying out an intra-group financing activity that does not have the so-called organisational and economic substance would be considered a conduit entity and that this information can be exchanged spontaneously with concerned jurisdictions. It can be anticipated that tax audits in source jurisdictions may be initiated and that the beneficial owner status of the Luxembourg entity may be questioned.

In light of these developments, previous Advanced Pricing Agreements and defensive transfer pricing documentation need to be reviewed and possibly updated.

Additionally, on 27 December 2016 the law on non-public country-by-country (CbC) reporting transposing the EU Directive 2016/881 of 25 May 2016 into domestic law was published. This measure reflects OECD/G20 BEPS Action 13. On 12 July 2017 the Luxembourg tax authorities acknowledged and explicitly referred to the OECD’s guidance on the implementation of the CbC reporting. Nevertheless, it is important to note that Luxembourg has not yet implemented any measures that would transpose the Master File and the Local File requirements under OECD/G20 BEPS Action 13. The author hopes that Luxembourg will transpose these measures into its domestic law in order to fully comply with the multi-tier transfer pricing documentation standard. This would further confirm Luxembourg’s commitment to the greater transparency that is required today.

Notably, CbC reporting requirements apply to multinational enterprise (MNE) groups whose total consolidated group revenue exceeds €750 million (or an amount in local currency approximately equivalent to €750 million) during the previous fiscal year.

As a result of this legislation, constituent Luxembourg entities must notify the Luxembourg tax authorities as to whether they are an ultimate parent entity, surrogate parent entity, or constituent entity. If the constituent entity is not the reporting entity that will be filing the group's 2016 CbC report, they must provide the identity and tax residence of the actual reporting entity to the tax authorities. MNE groups with a fiscal year-end in 2016 had to provide this notification by 31 March 2017 (instead of 31 December 2016, which was originally the deadline). This notification procedure is performed online on a specifically dedicated website of the Luxembourg tax authorities. Luxembourg's new law requires the first CbC reports to be filed for fiscal year 2016 within 12 months of the last day of the reporting fiscal year of the group (e.g. 31 December 2017 if the 2016 accounting year of the MNE group ends on 31 December 2016). Failure to do so may entail a fine of up to €250,000!

As a conclusion, the above mentioned measures are welcome on the Luxembourg market, as they provide additional guidance on the application of the arm’s length principle. The new article 56bis LITL can be seen as a transposition of OECD/G20 Base Erosion and Profit Shifting (“BEPS”) Actions 8-10. These developments mirror international and European ones, putting Luxembourg on a level playing field. The author, however, anticipates an increase in tax audits and would advise the preparation of agile transfer pricing documentation. In this respect, readers must ask themselves the following questions with respect to their Luxembourg investment structures:

• Is your company engaged in any intercompany transactions (e.g. intercompany loans, management fees, license fees, etc.)?
• Are your intercompany transactions covered by a legal arrangement/part of your transfer pricing policy and are these agreements also reflected in your accounting system?
• Is there any transfer pricing policy available on the group/local level that covers all your intercompany transactions?
• Have you entered into any Advance Pricing Agreements with the tax authorities and have you checked whether the facts are still applicable?
• Does your group qualify for the country-by-country reporting requirements?

Bermuda has won world approval of its tax information exchange practices with other jurisdictions.

A global body said this week that those practices comply with international standards.

Premier and Minister of Finance the Hon. David Burt JP MP responded to the announcement by thanking Bermuda government officials who have worked hard to make this a reality.

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) said that Bermuda was among the countries screened under a new and enhanced peer review process aimed at assessing compliance with international standards for the exchange of information on request between tax authorities.

Bermuda, Canada, Australia, Cayman Islands, Germany and Qatar were deemed to be “largely compliant”.

The new round of peer reviews – launched in mid-2016 – followed a six-year process during which the Global Forum assessed the legal and regulatory framework for information exchange (Phase 1) as well as the actual practices and procedures (Phase 2) in 119 jurisdictions worldwide.

Today’s result means that Bermuda maintains the rating obtained through Phase 1 as a jurisdiction largely compliant.

Premier Burt said, “This is tremendous news and excellent for Bermuda. My thanks to all involved in securing this important outcome.

“This result is a testament to the hard work of the team in the Ministry of Finance.

“It is good news for local industry, boosting confidence in Bermuda as an international business centre.”

The 144-member Global Forum is a leading international body for ensuring the implementation of the internationally agreed standards of transparency and tax information exchange.

The Global Forum’s new peer review process combines the Phase 1 and Phase 2 elements into a single undertaking, with new focus on an assessment of the availability of, and access by, tax authorities to beneficial ownership information of all legal entities and arrangements, in line with the Financial Action Task Force international standard.

Global Forum members are working together to monitor and review implementation of the international standard for the automatic exchange of financial account information, under the Common Reporting Standard (CRS), which will start in September 2017. The monitoring and review process is intended to ensure the effective and timely delivery of commitments made, the confidentiality of information exchanged and to identify areas where support is needed.

The Global Forum is the continuation of a forum which was created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by non-cooperative jurisdictions. The original members of the Global Forum consisted of OECD countries and jurisdictions that had agreed to implement transparency and exchange of information for tax purposes. The Global Forum was restructured in September 2009 in response to the G20 call to strengthen implementation of these standards.

(Source: The Government of Bermuda)

Grant Thornton Malta’s Tax Partner Austin Demajo is responsible for local and international tax services and has provided tax advice to international clients involved in cross-border business ventures. Here, Austin offers his insight into Malta’s taxation sector and shares his predictions for the future with us.

As a specialist within the tax arena, what would you say are the challenges of providing effective tax advice in Malta?

As with any advisory service, tax consultancy carries its challenges. I would say that mergers and acquisitions often prove to be amongst the most exigent, in view of the body of anti-avoidance provisions which are subject to interpretation due to their subjective nature. In these cases, when providing tax advice, it is opportune to place oneself in the shoes of the Commissioner and attempt to determine the matter from his perspective. In such instances, as well as in matters relating to restructuring of holdings, we always recommend that one fully understands and identifies the reasons which would have led to the enactment of relevant anti-avoidance provisions – and thus, be in a better position to address the issues.

Another taxing issue in tax matters is the creation of taxable presences in Malta, primarily by foreign investors either through a permanent establishment or branch issue. It is often unclear as to what level of business activity is needed in Malta to create a taxable presence for a foreign entity. To date, our tax legislation only provides that profits attributable to branches are taxable. This requires that each case is seen and investigated individually in great detail. Whilst certain cases are not too complex to determine, others often give rise to conflicting interpretation.

What are the complexities of operating within the taxation sector in Malta, in regards to the ever-changing regulatory environment of the field?

I do not believe that this is something unique to Malta. International taxation is currently sitting in the eye of a hurricane and there is much uncertainty as a result of different approaches and interpretations adopted by individual countries in their quest to implement, at the very least, the minimum standards established by the BEPS project.

We have recently seen more than 70 countries signing the OECD Multilateral Instrument with each jurisdiction making its own reservations and in many cases opting for different provisions as set out in the Instrument. The interpretation of tax treaties is set to become even more complex and perhaps contentious where different interpretations are adopted by countries, giving rise to tax uncertainty to businesses and individuals alike.

Within the EU, there is also huge political pressure to introduce CC(C)TB and in less than 2 years, Malta will introduce the provisions of the Anti-Tax Avoidance Directive(s). In this scenario, a tax advisor, be it in Malta or any other country operating within the EU, is obliged to include a number of caveats as a number of structures may not withstand the test of time.

How would you say has the tax system in Malta transformed throughout the years?

Specific provisions to attract economic activity to Malta have been in place since the late 1950s. The type and focus of these provisions have evolved in line with local and international developments, whilst retaining their attractiveness. Today, the Malta tax system and its extensive double tax treaty network mean that, with proper planning and structuring, investors can achieve considerable fiscal efficiency using Malta as a base. Malta has also refrained from introducing withholding taxes on outflows, such as dividends, interest and royalties making the Island an attractive location for international business.

Malta is the only EU member state operating the full imputation system of company taxation. In conjunction with this system of taxation, the Island operates a refundable tax credit system on dividends paid to shareholders and also offers a varied program of residence and citizenship options. – All this whilst being fully compliant with the EU’s non-discrimination system.

As a thought leader, do you believe there is potential for further significant legislative development in the tax field in Malta?

No legislation is set in stone and tax matters are no different. As mentioned earlier, international taxation is currently facing a number of challenges, the ripple effect of which will be felt on a local level and will eventually reflect in significant changes in Malta’s tax code especially upon the adoption of the provisions of the EU Anti-Tax Avoidance Directive.

The Government of Malta is determined to maintain the competitive edge of the Island whilst ensuring that our tax code embraces these newly adopted tax principles.

On a domestic level, attention is required to the lack of guidance notes on the interpretation of a number of subjective provisions of our tax legislation.

Way forward

A global spotlight is shining on tax like never before. More than ever, firms looking at international tax jurisdictions need to have assurance that they are paying the right amount of tax while ensuring that their stakeholders have a positive perception of their business. In a world of increasingly complex tax legislation, they need to know how the rules affect them.

Grant Thornton offers a professional advice that is reliable and personal. We take time to understand the issues that are important to our clients and from there, we can support them on every aspect of their tax affairs.

Our close collaboration with other Grant Thornton member firms ensures our services are relevant to our clients’ tax affairs, wherever they are in the world.

Contact info:

1. +356 9943 7892
2. E. Austin.demajo@mt.gt.com

HMRC has come under intense pressure to show it can be tough on tax evasion. Here are 10 ways, some high-tech, some very traditional, that HMRC can use to check if you are cheating.

With the changes to mortgage interest relief for buy-to-let landlords, many are now considering transferring their properties and are actively looking at ways to reduce their tax burden.

Below, Jonathan Amponsah of The Tax Guys looks at the pros of cons of establishing a buy-to-let business as a limited company and the tax implications you need to be aware of.

Tax rules for buy-to-let (BTL) landlords are changing – and this could mean higher tax bills.

Landlords will no longer be able to deduct all of their finance costs from their property income. The changes are being phased in between April 2017 and 2020.

However, this change doesn‘t apply to limited companies. So, unsurprisingly many BTL landlords are considering transferring their properties into a limited company, enabling them to continue to claim tax relief on all the interest and finance costs.

On the surface this decision appears to make business and financial sense. But… you may find yourself landed with unnecessary tax bills and costs.

Here are five common pitfalls to be aware of:

• Capital Gains Tax. If you transfer the property to the company, this will be treated as if you’ve sold the property to the company. If the property has gone up in value since you originally bought it, you’ll have to pay up to 28% capital gains tax on the difference, subject to any tax reliefs and allowances. If you have a few properties to transfer, seek advice about a relief you could claim to defer your capital gains tax.
• Stamp Duty Land Tax. If you transfer the property from yourself to the company (effectively the company buys the property) then the company could become liable to pay stamp duty land tax. So while you reduce income tax, you may wind up paying the same amount or more in stamp duty land tax.

These two main tax pitfalls could potentially wipe out any short term tax savings.

• Once the property is transferred, it is owned by the company, not the landlord. If something happens to the company, all its assets will be exposed including the property that you put in it.
• Your Mortgage. If your company needs a mortgage to buy the property from you then watch out as in most cases the interest rate is higher for commercial or company mortgages than it is for individuals. So, you could end up paying a lot more over the full term of the mortgage.
• At some point in the future if you sell the property the company will pay Corporation Tax on the profits and the balance of the money from the sale will remain in the company. In order to get access to the funds to enjoy you’d need to take it out of the company either as salary or dividends or other means. You’d then pay additional tax on that income. When you take the above into account the idea of transferring your BTL property into a limited company starts to sound rather bleak.

But there are some situations where you can reduce or eliminate the pitfalls above and enjoy some of the benefits of holding your properties through a limited company.

• If you’re buying a new property then a limited company could be a good idea. But if it’s an existing property and you’re only managing one or two properties, I’d say: don’t bother. You’re better off paying just a little bit of tax now instead of triggering all these taxes and then having to pay additional double tax if you sell the property in the future.
• Partnerships – If you currently run your BTL through a properly arranged partnership business, then transferring into a limited company could be a good idea because some of the tax burdens above could be reduced.
• Legacy planning. Landlords who want to leave their BTL properties to their children could consider the pros and cons of a Family Investment Company as an alternative to a Trust.

Clearly the message here is; don’t rush into it. It’s extremely unwise to move BTL properties into a company without taking professional advice. Whilst there’s no simple answer to the question and it all depends on your circumstances, as a general ‘rule of thumb’ I would say that if it‘s only one or two existing properties in your name, it‘s not a good idea. If you‘ve got 6-10 properties, it‘ might be worth your while to look at how you can enjoy the benefits of a limited company without triggering unnecssary taxes and costs.

Deloitte recently announced its alliance with Thomson Reuters to combine Thomson Reuters' global tax technology and intelligence with Deloitte's direct and indirect tax services to help companies address dynamic tax regulatory and compliance challenges.

"Technology is the centerpiece of the transformation taking place at many tax departments today," said Steve Kimble, chairman and CEO, Deloitte Tax LLP. "The emergence of new technologies allows tax departments to more effectively make use of data to develop insights for their businesses. Our alliance with Thomson Reuters will strengthen the link between tax and the broader organization, allowing the tax function to make an even greater strategic contribution to the business."

The ONESOURCE corporate tax technology platform is a critical component of the tax ecosystem, enabling tax compliance and reporting in 180 countries. Deloitte's integration of this market-leading technology platform with its tax consultancy insights will provide businesses with solutions to enhance their specific tax lifecycles. Enhancement areas include global compliance, reporting and risk management for corporate taxes, sales tax and other indirect taxes.

"In today's complex regulatory environment, tax technology enables businesses to simplify their tax processes, drive down operating costs, while simultaneously ensuring accurate and transparent global tax compliance," said Joe Harpaz, SVP and managing director, corporate segment for the tax and accounting business of Thomson Reuters. "We have joined Deloitte's alliance program to bring to market joint solutions that leverage our ONESOURCE global tax technology and applications with Deloitte's tax services to help businesses meet the current and pending challenges of multijurisdictional tax operations."

The alliance expands a longstanding relationship between Thomson Reuters and Deloitte. Deloitte is part of the Tax & Accounting Certified Implementer Program at Thomson Reuters, a training and support service for leading accounting and consulting organizations to provide implementation assistance for Thomson Reuters software products. Deloitte is certified in all of the Thomson Reuters ONESOURCE tax solutions.

Deloitte professionals have also won Thomson Reuters' annual "Taxologist of the Year – Certified Implementer" award the past two years for being the top certified implementer. Deloitte's clients have also won other categories of the Taxologist Awards through their demonstrated ability to increase tax department effectiveness using ONESOURCE.

(Source: Deloitte)

The global trend of the past few years towards a "low-rate, broad-base" business tax environment continues, as worldwide economic growth shows no signs of improving and countries introduce new or improved incentives to compete for business investment that will stimulate growth.

Canada isn't immune to global trends, but its tax policy direction is hard to predict at the moment due to the uncertainty around tax policy reforms being considered in the US. This is according to the EY Outlook for global tax policy in 2017, which combines insights and forecasts from EY tax policy professionals in 50 countries worldwide.

"Tax reforms emerging in Europe and the U.S. are putting pressure on governments to find creative ways to compete for business investment," says Fred O'Riordan, EY Canada's National Advisor, Tax Services. "Canada has improved its international tax competitiveness over a number of years, but it's at risk of losing some of this ground, in particular if the United States goes ahead with a tax reform package that includes significant rate reductions."

Competition for investment globally

With the implementation of the G20/Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) recommendations, governments are now more compelled to compete with each other and attract investment through different tax changes. According to EY's report, of the 50 countries surveyed, 30% intend to invest in broader business incentives to stimulate or sustain investment, and 22% plan to introduce more generous research and development (R&D) incentives in 2017.

But Canada is bucking the global trend of investment-stimulating policy. Here, the government has been more focused on the personal income tax side and redistributing the tax burden so the highest income earners bear more and middle income earners bear less.

Tax reform in the United States may impact Canada

An increased likelihood of tax policy reform in the US is strongly influencing both the Canadian and global tax policy outlook. With a Republican President and Republican control of both houses of Congress, the probability of a reform package being implemented is higher than in previous years. As a result, Canada and many other countries are taking a "wait and see" approach until new legislation is adopted in the US before they commit to any reforms themselves.

"A "border tax adjustment mechanism" is currently proposed as part of the tax reform package in the US," says O'Riordan. "Because our two economies are so closely integrated, this could have a significant impact on cross-border trade in both goods and services with our closest neighbour. Any Canadian company doing business with the US definitely ought to pay attention to upcoming changes in the US."

Corporate income tax rates

Of the 50 country respondents, 40 report no change or anticipated change to their national headline corporate income tax (CIT) rate in 2017, but rates continue to decline in a number of jurisdictions, particularly in Europe. Canada is one of only two countries where the rate actually increased (the average combined federal/provincial rate increased marginally -- by 0.2 percentage points). This in itself is unlikely to deter investment, but is still slightly out of step with global peers.

(Source: EY)

Androulla Soteri, tax development manager at MHA MacIntyre Hudson below discusses the consequences of the US President’s potential implementation of tax reform in the country, and the impact it could have on UK business.

Corporation Tax (CT) has been an important part of the election manifestos, and we now find ourselves in a coalition of two parties supporting a move towards lower CT rates. This makes it clear which direction the new government will decide to go in.

The main argument for dropping CT rates is to make the UK a more attractive place for multinationals to locate business. This in turn increases the job-pool which raises further tax revenue in the form of National Insurance contributions, and consequently VAT as consumers have more disposable income to play with. In over a decade, CT has never made up more than 11% of total tax take. Given its relative lack of significance, there’s a strong argument to suggest an overall benefit in reducing it.

One of the arguments against a reduction is that if big multinational companies were forced to pay their fair share of CT, this would help reduce the budget deficit and national debt, and also contribute to public services such as the NHS, schools and policing.

But it’s also worth taking a look at the US, which has one of the highest rates of CT in the world at 35%. One of Trump’s intentions is to drop the rate to 15%, to bring US companies back home. If this happens, US businesses could lose interest in investing in the UK, especially with Brexit looming on the horizon. Instead, they could look to repatriate headquarters, increasing employment of US citizens and consequent tax revenues associated with it.

If Trump’s plan is a success, the UK could be shaken hard over the next few years, especially in light of ongoing Brexit uncertainties. Lowering CT rates in the UK may therefore be an incentive for companies to remain within a benign competitive UK tax system.

The task of running the UK over the next two years is unenviable. But if the Government sticks to its plan of lower CT rates, we’ll certainly see clear evidence within the next few years of whether this is good or bad for the economy.

Kunj Vaidya has been recently given the responsibility for Price Waterhouse & Co.’s transfer pricing practice. Prior to taking over this mantle, he had been involved in setting up and establishing transfer pricing practices in Chennai and Sri Lanka, where PWC is  now established as a market leader.

Kunj has practiced transfer pricing in the USA, Australia and India. Since relocating back to India in early 2010, his primary focus has been to help clients plan well in advance and thereafter, provide certainty using various dispute resolution mechanisms. A large part of his role as the national leader will include ideating new solutions and strategies for their clients including significant use of technology, to deliver value to clients. Here Kunj tells Finance Monthly more about his new role and sheds some light on transfer pricing in India.

What is your take on Indian transfer pricing compliance? How are you advising clients on approaching this?

Traditionally, transfer pricing compliance was aimed at providing specific and largely one-sided pieces of information along with certification of reported numbers.

In October 2015, three-layered transfer pricing documentation requirements have been recommended, as part of the final reports on Base Erosion and Profit Shifting (BEPS) initiative of the OECD and G-20 countries. Most countries, including India, have adopted these requirements.

Global corporations are now required to document and present information regarding the ownership and operational structures, key transaction flows and pricing policies within the group. This documentation necessitates a holistic view to be considered by corporations, requiring involvement of their business teams.

Corporations need to consider transfer pricing while taking strategic decisions, and not as a post facto compliance exercise.

How have transfer pricing audits evolved in India?

In the last 15 years or so, the audit focus has matured from routine issues, such as requirement of high mark-ups for services and disallowances of royalties/ service charges to also complex issues like re-characterisation of transactions, valuation of intangibles, location savings, compensation for advertisement, marketing and brand promotion spends, etc.

In early 2016, the procedure for selecting cases for audits was overhauled to focus on cases with high potential of transfer pricing risk.

We are experiencing a different undertone in TP audit approach across the country. Taking guidance from the BEPS Reports, the audit approach is increasingly leaning towards understanding the business of taxpayers – including meeting with business teams. Another area is active exchange of information with overseas tax authorities.

How should the audit approach evolve from here on?

We believe that audits should happen in a more cooperative and amicable manner.

With the introduction of three-layered documentation, the ‘big picture’ of a corporation will be available to tax authorities, It is hoped that selected parts of this documentation are not used against taxpayers without appreciating the entirety of surrounding facts and circumstances.

In our ongoing recommendations to the Government, we have recommended audits to be conducted in a block of say 2-3 years to consider business life-cycles, this would provide a larger picture of the business to the authorities and would also reduce audit efforts for taxpayers.

How have outcomes been for taxpayers at higher levels in appeals?

First level appellate forums are from within the tax administration, and success rate for taxpayers at these levels has been rather low.

The second level appellate authority - the Tribunal is outside of the tax administration. Tribunal rulings have been rather rational and success rate for taxpayers across the country has been relatively very high.

How do you help companies manage transfer pricing issues and what strategies do you implement in the tax risk analysis to assist your clients effectively?

With the ever increasing focus of tax authorities globally on transfer pricing, companies need to plan transfer pricing approaches upfront, We have helped several companies in setting up transfer pricing policies to meet their business objectives, at the same time prepare them adequately from possible challenges in future.

In cases where we foresee potential risks, we believe that transparency is the best strategy. Our advice to clients has been to disclose pertinent facts and discuss relevant issues upfront with tax authorities. This is where I believe the Indian APA program has also been very helpful!

Has the Government taken any initiatives to ease transfer pricing burden on corporations? How satisfied are you with these efforts?

The Government is acutely aware of the challenging transfer pricing scenario in India, and how it has been impeding foreign investment into the country. The Government has been consciously bringing global best practices to India.

One key measure which has received resounding success in India is the APA program. The feedback from the taxpayer community for the program has been extremely positive (including Bilateral agreements with Japan, UK, US).

India also introduced safe harbour rules a few years back, but the program has had little success. However, I understand that the safe harbour rules are being revisited and rules with a more rational outlook may be issued sometime soon!

What changes do you see in the importance companies attach to transfer pricing?

We have witnessed a sea change here – from being seen as a compliance burden, increasingly, transfer pricing issues have even caught the attention of the CXO suites. In fact, corporations are increasingly realising that transfer pricing is also a reputation and governance issue for them.

What role does technology play in transfer pricing and how feasible is this for corporations to adopt?

Technology will increasingly play an important role in transfer pricing. Corporations will need to be able to use technology to build and manage frameworks to ensure that transfer pricing policies are followed, ensure compliance with terms and critical assumptions agreed in an APA, identify red flags or exceptions, and to report key indicators to the management and other stakeholders.

Use of technology in transfer pricing in the above areas could be fairly new but corporations will need to find a way to integrate technology and transfer pricing,

Another way of looking at technology is how it will play a role in the value chain of companies including those operating in traditional businesses.

As a national leader in transfer pricing - how are you developing new strategies and ways to help your clients?

Our endeavour is to help clients look around the corner and prepare them for what is to come!

In recent times, our key focus areas have been the following:

• Conceptualising and developing technology tools to help clients manage their transfer pricing function. We also help clients assess risk in their existing operations using our internally developed data analysis tools.
• Facilitating dialogue between taxpayer fraternity and the Government on transfer pricing matters.
• Helping clients understand the implications of ever-evolving legislative developments on their transfer prices, including, for instance, aligning GST and transfer pricing, understanding transfer pricing implications of migrating to Ind-AS (Indian IFRS equivalent) reporting environment, leveraging transfer pricing compliances for corporate law requirements around related party transactions, implications under General Anti Avoidance Rules (GAAR), etc.
• Strategizing transfer pricing dispute management – including litigation strategy; and proactive dispute resolution options.

What do you see as potential innovative solutions by the Government for some of the transfer pricing issues corporations are facing?

The Government is keen to improve ease of doing business in India, and give a push to some of its pet programs such as ‘Make in India’.

The Government may consider some solutions such as joint customs and transfer pricing audits for imports; joint audits by different Governments and their agreement on pricing; audits for a block of years together; settlement options for transfer pricing disputes etc. Another area, which is beginning to find acceptance in EU is the use of arbitration to resolve transfer pricing and international tax disputes!

One of the thrust areas of the BEPS initiative is effective dispute resolution. The Government should consider providing bilateral transfer pricing dispute resolution window to residents of all tax treaty partners, rather than only few countries currently.

What do you see as the future of transfer pricing?

Going forward, Governments will increasingly use technology for transfer pricing risk assessments and risk management. We have also started seeing increasing cooperation and exchange of information between Governments. There will be increased emphasis and reliance on value chain analysis and insistence on use of profit split methods, as more global information becomes readily available.

The future of transfer pricing lies somewhere in being proactive, better relationships, more transparency and cooperation between Government and taxpayers.

Business insurance firm Hiscox recently produced a resource that might be useful for businesses pre- and post-Brexit. It is a side-by-side comparison table of the UK, France and Germany and displays how easy it is to do business in each country.

It features all the main tax rates, employment laws, costs and incentives in each of the three biggest economies. The resource is designed for those businesses in the UK considering relocating to an EU country after Brexit.

You can view the full table in a pdf here.

(Source: Hiscox)

Canada’s Budget 2017 has given voice to a number of matters, but among the chaos of themes and numbers, it can be hard to keep track of the big picture. Here Joy Thomas, MBA, FCPA, FCMA, C. Dir. President and CEO of the Chartered Professional Accountants of Canada, talks to Finance Monthly about the uncertainty surrounding this year’s budget aims and tailors an overview for our readers.

Budget 2017 aims Canada toward economic renewal but does not offer a firm timetable for bringing an end to annual deficits.

The current budget plan would see the deficit peak at $28.5 billion in fiscal 2017-2018 and drop to $18.8 billion in fiscal 2021-2022.

But the deficit reduction plan stops there. Setting a target date for a return to balanced budgets would have helped guide the government in its financial planning going forward. Knowing the ultimate destination would help promote business confidence, ensure funding for essential programs, and ease the impact on future generations.

Sustaining Prosperity

Of course, sustaining a prosperous economy needs more than strong fiscal management. The budget outlines several measures to help Canadians, their families and their businesses flourish. There are investments in training, innovation and infrastructure and a recognition of the importance of lifelong learning and youth employment.

Additional support is offered to help Canada’s workforce remain competitive amid automation and technological change. CPA Canada supports the government’s focus to address how Canadians deal with the effects of these broad economic forces. Canada’s future prosperity will be directly linked to the competitiveness of its workforce.

Fighting Tax Evasion

On the tax compliance side, the budget builds on earlier announced efforts to combat tax evasion and to improve compliance. An additional $523.9 million is being invested over five years to support the Canada Revenue Agency’s crackdown on tax cheats. The CRA will use the funds to increase its verification work, improve investigations targeting criminal tax evaders, and beef up its business intelligence infrastructure and risk assessment systems.

The CRA also will hire more auditors and specialists to focus on the underground economy, a widespread problem that cost the Canadian economy some $45.6 billion in 2013, according to Statistics Canada. CPA Canada works to help the government address under-the-table dealings through our representation on the Minister of National Revenue’s Underground Economy Advisory Committee.

Altogether these measures are expected to raise an extra $2.5 billion in tax revenues over five years, for an estimated return on investment of five to one.

The government reiterated its commitment to work with international partners to ensure a coherent and consistent response to fight tax evasion. CPA Canada is dedicated to supporting the government in this effort. The government’s commitment to strengthening compliance reinforces Canada’s determination to protect the public interest.

The budget also notes that the federal government will work with the provinces to implement strong standards for corporate and beneficial ownership transparency to provide safeguards against money laundering, terrorist financing, tax evasion and tax avoidance.

Tax System Review is Long Overdue

Several budget measures resulted from a review announced in 2016 of federal tax expenditures, which the new fiscal blueprint suggests will continue. For efficiency and simplicity, this budget streamlines some personal tax credits and cuts a handful of others. Tax incentives for scientific research and experimental development will be reviewed as part of a broader review of government support for innovation.

Tax preferences for private corporations will be studied further, with a white paper promised in the coming months. The government is concerned that strategies involving private corporations are being used to inappropriately reduce the personal taxes of high-income earners. These strategies include using private companies to split income among family members and to convert investment income to lower-taxed capital gains.

At the same time, the government plans to examine whether aspects of the current taxation of private corporations adversely affect genuine business transactions involving family members. Presumably this includes tax measures that impede transfers of family businesses from one generation to the next. This will be especially important in the coming years given the high number of businesses changing hands as the Baby Boomers retire.

These limited assessments are a positive step forward but a more comprehensive review is what Canada truly needs. An extensive review can identify areas that would help in redesigning the tax system so it not only enhances efficiencies for Canadians and the business community but also plays a role in cultivating long-term, sustainable economic and social growth. This represents the Canadian ideal of good business – an equitable system that focuses on both business and social development in creating a stronger Canada.

Adapting to Climate Change

Budget 2017 includes a range of measures addressing climate change adaptation, from managing health risks to increasing resources for First Nations and Inuit communities to assessing risks to federal transportation infrastructure. Among these measures, the budget devotes $2 billion for a Disaster Mitigation and Adaptation Fund that will support the infrastructure Canada needs to deal with the changing climate’s impacts.

What’s missing, however, is a National Adaptation Plan that would coordinate these and other public and private sector initiatives. CPA Canada has urged the government to develop such a plan in consultation with Canadian businesses.

It’s Time for Action

With the current economic uncertainty south of the border, some suggest the government should take a “wait-and-see” approach. I disagree. We cannot afford to have the federal government become paralyzed in its decision making. Successful Canadian businesses must always navigate change. So too must the Canadian government, with a continued focus on strategies and measures that ensure Canada remains competitive and is able to attract and retain top talent.

Ian Borley heads up KPMG’s Leicester and Nottingham offices as East Midlands Senior Partner and he’s also head of the firm’s Enterprise practice in the Midlands. By day, he’s an audit partner and leads several of KPMG’s client relationships with a wide variety of companies across the region. He qualified as a Chartered Accountant in 1989, having joined from Leicester Polytechnic - now De Montfort University, and he has worked in the Midlands for most of his career.

KPMG has a worldwide presence as one of the Big Four professional services firms, and its network of member firms provide Audit, Tax and Advisory services. In the UK, the firm has over 600 partners and over 13,000 outstanding professionals who work together to deliver value to clients across its 22 offices.

As a professional whose extensive experience covers a number of sectors – from accounting advisory and risk consulting, to tax planning and transfer pricing – how has the financial services industry evolved in the past two decades?

The two big changes over the last twenty years have been technology and regulation. Technology continues to change the way our industry works, and this is certainly a positive. The use of data analytics, for example, makes professional services more efficient because it’s now much easier to make sense of huge amounts of client data and we can even test the whole population, rather than just samples. IT also means that we can quickly get to the relevant reference material online. Developments like these enable us to be more forward-looking for our clients, and gone are the days of using pencils, calculators and huge sheets of paper to do forecasts, or looking up tax legislation in weighty tomes.

The second major change is regulation, particularly for accountancy and audit. Compared to how it was over a decade ago, the way financial services are regulated and supervised has been completely reformed. In many ways, this is in response to some of the high profile business failures of the past and, as a result, there are numerous restrictions now in place. Although this can be frustrating sometimes, it’s definitely a good thing for our clients, their shareholders and for confidence in capital markets generally.

What are the biggest challenges that UK businesses are facing in 2017? In your opinion, what lies on the horizon for them in the near future?

While most people are probably bored of talking about Brexit, I don’t think the Sterling devaluation that resulted from the UK’s vote to leave the EU has fully come through yet. A lot of manufacturing businesses, for instance, will have had stock in warehouses or in transit that they bought at higher exchange rates earlier in 2016. They may also have hedged, but not many will have hedged into 2017. As a result, raw material inflation is starting to come through, and this will probably ring true for other industries too, so a lot will depend on companies’ ability to pass rising costs onto customers. On top of that, many businesses are wrestling with labour inflation, and things like the Apprenticeship Levy, National Living Wage and Stakeholder Pensions will all start to hit around the same time. The cumulative effect of so much happening in a short space of time could be quite severe for companies that have a big workforce.

Above all, the biggest challenge for many businesses is unpredictability. As well as Brexit, our clients are trying to predict what will happen to oil prices, trade relations with the US in a post-Trump era, and continuing political turmoil in parts of the Middle East. Nevertheless, many management teams are still investing in capital expenditure and making senior recruitment decisions, and we’re seeing that the M&A market is still very busy. This is, in part, a response to the continued resilience of the UK economy and is also encouraged by the availability of relatively cheap finance. However, it may also be that people have stopped trying to predict the unpredictable.

Why do companies need to keep pace with technology? How would you say technological change is playing its part in driving change in the services KPMG offers?

 In virtually all of our clients’ sectors, there’s some disruptor or new technology that stirs up the mix in terms of production techniques, routes to market, supply chain or customer experience. As a result, traditional business models are being challenged and people are increasingly looking all over the World to find ways to do business more efficiently.

The tailored customer experience piece is also having a massive impact, not just on consumers but for B2B businesses as well, so being able to stay ahead of the curve is really important. Indeed, this impacts on our own sector and we are continually re-evaluating what we do at KPMG, and how we do it.

You joined KPMG over 30 years ago - what were your goals in driving change within the company?

Having been a partner for 20 of those 30 years, my goals were, and still are, to offer the best possible service to our clients. To do this we need to be a firm of talented, knowledgeable and trusted advisors, and a lot of my career has been about building and developing teams with these attributes. It’s also about keeping up with the fast moving world and how we adapt to meet different client demands, while providing services in an efficient way.

The work environment has changed massively since I first started working at the firm. It was a completely different world back then. Flexible working and the benefits our people have is really important, and we’ve come a long way with diversity and inclusion, but I don’t think any organisation has completely cracked it yet. It’s not for want of trying but it certainly looks a lot better than it did in 1985.

What has the impact of your role been as a head of KPMG’s East Midlands practice to date?

 When I took over as Senior Partner for the East Midlands, we were in a position where many of the older and more experienced partners were either at or near retirement. So we had to bring new partners and directors through, and I’m delighted that most of them are home-grown. I’m pleased that we’ve invested in the team and looked after our clients, and we’re still on that journey as I’d like to build the capability of the team even more.

What goals are you currently working towards at KPMG in the East Midlands?

We have a strong market share in the region but there are hundreds of businesses that we don’t work with in the East Midlands that we could really add value to. So it’s all about being proactive and sharing ideas with them about how we can help them, and this comes back to investing and growing the team, while we develop relationships with prospective clients.

Can you tell us about your involvement in the business community?

One of the great things about KPMG is that the firm is very supportive of people giving back to the community, which is one of our core values. Over the last few years, I’ve held non-executive director positions at the National Space Centre and King Richard III Visitor Centre in Leicester, and the National Forest. For a number of years, I was chairman of Leicestershire Voice and I also sit on the CBI’s East Midlands Regional Council. I really enjoy being able to contribute something to the wider business community through these forums but it’s also been a fantastic experience for me personally, enabling me to meet some very talented people and learn new things along the way.

What is the role and importance of the SME business community in the UK?

SMEs are the cornerstone of the UK economy, and you only need to look at the statistics* to see why. There were 5.4 million SMEs in the UK in 2016, employing over 16.5 million people, accounting for 47% of the £3.8 billion turnover from private sector UK businesses.

They’re particularly good at being able to respond quickly to changes in the market and their decision-making lines are generally short. While SME businesses are almost always very impressive at what they do, they also have their own challenges. Take management bandwidth as an example; smaller teams can really be stretched when unusual situations occur, such as an acquisition or entry into a new market - they need to respond but they may not always have enough people on board, or people with the relevant experience and skills. That’s why it’s so important at times like these to have a good professional advisor on hand to help.

In the past, SMEs have also faced challenges with access to finance and they’re no stranger to the skills shortage. In comparison to their larger business neighbours, who perhaps have the back office capacity to recruit and train new talent, SMEs don’t often have the time to do so. Despite this, the SME community continues to thrive and is crucial to the success of our economy.

* Business population estimates for the UK and regions 2016 from the Department for Business, Energy & Industrial Strategy