What was the most significant development in your region/jurisdiction's transfer pricing practice in the past 12 months?
There were a number of significant developments in our region in the last year – most notably the Multilateral Instrument (MLI), new rules to resolve tax disputes, the release of a paper on coordination of TP controls, and the mandatory exchange of information:
- The MLI came into force on 1 July 2018, covering 88 jurisdictions, and aims to implement a series of tax treaty measures to update international tax rules and reduce the opportunity for tax avoidance.
- The EU Tax Dispute Resolution Directive (2017/1852) comes into effect on 1 July 2019. It sets out rules on resolving disputes between EU member states when those disputes arise from the interpretation of the application of agreements and conventions that enables the elimination of double taxation of income, and where applicable, capital. It also specifies the rights and obligations of affected persons when such disputes arise.
- A paper was released – the EU Joint Transfer Pricing Forum – to establish a coordinated approach to transfer pricing controls within the EU, to avoid double taxation or non-taxation.
- Directive 2018/822 addresses the mandatory automatic exchange of information on tax relating to reportable cross-border arrangements. Areas relating specifically to TP were:
- An arrangement involving the use of unilateral safe harbour rules;
- An arrangement on the transfer of hard-to value intangibles; and
- An arrangement on intragroup cross-border transfers of functions and/or risks and/or assets.
What was the most notable effect of that change?
For MLI, the most notable change was the inclusion of mandatory binding arbitration in cases where there is no agreement amongst Competent Authorities on double taxation (e.g. Mutual Agreement Procedure or MAP). Mandatory information exchange will provide tax authorities with an additional source of information (on top of the Common Reporting Standard/Foreign Account Tax Compliance Act exchange mechanism and the Country-by-Country report), which in turn should improve data accuracy. We expect that the new rules to resolve tax disputes will have a positive effect on avoiding double taxation. On the other side, it could also lead to simultaneous audits from different tax authorities on potentially the same issues. Getting to grips with the new rules and regulations is standard practice for Deloitte, but our controversy network and credentials have been key in assisting companies to anticipate the impact of these changes, and take action to reduce any potential exposure.
Where is the market moving in this practice area?
There is a clear trend towards greater transparency, and this will have an impact on the quantity and quality of information available to tax authorities, enabling them to establish indicators on whether certain taxpayers or transactions may pose a greater risk of tax avoidance.
In addition, it improves taxpayers' awareness about the international tax system and the regulation of cross-border transactions, in particular. For example, faced with uncertainty and/or double taxation, the taxpayer could decide to pursue an Advanced Pricing Agreement (APA) or a Mutual Agreement Procedure (MAP). These are increasing significantly.
What kind of impact will this have on your work?
Deloitte firms in Europe have been helping multinational businesses navigate the increased expectation of transparency, and with how to anticipate increased controversy in transfer pricing.
We will also see an increase in dispute resolution (MAP) and dispute prevention (APA). Deloitte's coordinated controversy network along with the industry knowledge in each field of controversy has been key to providing a quick and quality response to client needs. Our clients are aware of our capabilities in the three main phases of Tax Controversy – pre-audit, during audit, and litigation, but their main requirement so far has been for help with preparing for the pre-audit phase.
Do you anticipate any significant legislative changes in the future with a material impact on transfer pricing in your region?
The only constant has been change – and although we don't know what they will be, new rules and rule amendments are likely as a result of the OECD's quest to reform the international tax landscape. In the near term, however, the rules mentioned above are to be transposed into the national laws of the EU's member states and, consequently, these should level the playing field somewhat in the region.
If these come into force, how will the industry look in the future?
We have already seen a significant increase in tax controversy since the start of the Base Erosion Profit Shifting programme. Although it is difficult to tell whether the trend will continue, we do foresee that our controversy specialists will continue to provide advice to clients to anticipate changes and mitigate risks. We believe that in the future, our services will increase, not only in our assistance to the client during a TP Audit, but also in the proper use of the instruments available to the taxpayer in order to prevent conflicts or resolve possible double taxation. This includes planning and preparation to lessen disputes, documenting, and preparing evidence and defence files, developing global strategic controversy-aware TP policies, bilateral and multilateral APAs, advanced rulings and unilateral APAs, pre-transaction engagement with tax authorities, and ongoing proactive engagement with tax authorities. In addition, we believe that technology linked to Operational TP and managing Big Data will be key to helping clients proactively manage their controversy issues.
How would you describe the transfer pricing controversy landscape in your region/jurisdiction?
One word to describe the controversy landscape in EMEA is: "challenging!"
The revenue authorities are facing increased political and NGO pressure to become more active, and as a result, are conducting more in-depth transfer pricing audits. These audits could feature interviews, formal information requests, email exchanges and more. The region is also characterized by strong penalty regimes, and audits and litigation can be slow and time-consuming. BEPS principles are often applied retrospectively and we are already seeing the importance of MAPs and APAs for preventing or resolving tax disputes.
Do you expect transfer pricing procedures in your region to move towards common standards or diverge in the future?
The OECD, the EU, and the local country tax authorities are working to provide common standards in order to limit uncertainty and avoid double taxation. However, conflicts of interest are slowing down progress. Deloitte's controversy network monitor these divergences closely. We will also keep an eye on the pilot on cross-border joint audits – this project aims to reinforce international cooperation in tax matters and implement the recourse to joint audits by two or more tax administrations against groups or companies operating in multiple jurisdictions. Having been involved in simultaneous tax audits, we hope it will be the way to avoid double taxation and future discrepancies amongst Competent Authorities.
Is the global drive towards regulation going to affect TP practice? If yes, in which areas?
It is foreseeable that the global drive will affect the transfer pricing practice and result in a greater volume of controversy projects. Fortunately, Deloitte's controversy experience helps us partner with our clients and remain by their side throughout the process.
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