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New CbC Transfer Pricing Regulations for the US

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Country_by_Country_Reporting_USRecently, the United States Treasury put a key piece in place in the BEPS jigsaw, by unveiling final country-by-country (CbC) transfer pricing reporting regulations for certain companies in the United States.

The OECD’s BEPS project is intended to give governments "comprehensive, coherent and coordinated" solutions for closing gaps that allow corporate profits to "disappear" or be artificially shifted to low- or no-tax jurisdictions.

The final package of recommendations is divided into 15 action areas, including new standards of transparency in the area of transfer pricing.

Related: Base Erosion & Profit Sharing - An Overview

What’s Transfer Pricing?

Few people unacquainted with the esoteric world of intra-company finance will have heard of transfer pricing, let alone know what it is. But the chances are, if you’ve read the stories in the mainstream media about the avoidance strategies of big multinational companies, you’ve read about transfer pricing.

So what's transfer pricing? In short, transfer prices are the prices at which goods and services are bought and sold between companies of the same corporate group. For example, subsidiary A may charge subsidiary B a royalty for the right to use a certain piece of technology or a production process that it owns the intellectual property rights for.

However, where these widespread practices become controversial is that they often enable companies to substantially reduce their liability to tax in certain territories. This is because, using our prior example, the royalty paid by subsidiary B to subsidiary A can be considered a cost, which reduces its taxable profit.

But why would a company want to “benefit” from reducing its profits? Well in a sense, the profits haven’t been reduced at all, merely shifted from subsidiary B to subsidiary A in the form of a royalty. And if subsidiary A happens to be registered in a territory where taxes are low or non-existent, then so much the better.

It should be stressed that in the vast majority of cases these practices are perfectly legal. However, tax authorities become interested when they suspect that transfer prices are not at “arm’s length” – that is, not at the market rate that would be charged between two unrelated parties.

Related: Public Transfer Pricing Reports: A Transparency Bridge Too Far?

Transfer Pricing Documentation

Companies usually have to retain extensive records detailing their transfer pricing activities, and justifying the transfer prices they are using. These may vary greatly between different taxing jurisdictions, and tax authorities expend much time and resources on transfer pricing audits.

To make matters more transparent, the OECD has proposed that countries put in place standardised transfer pricing documentation templates which provide details on a multinational group’s activities in every jurisdiction in which it has a presence – the so called CbC reports.

These come in a three-tier format and include high-level company information in a master file; detailed transactional transfer pricing documentation in a “local file” specific to each country in which they operate; and a CbC report detailing revenue, profit before income tax and income tax paid and accrued and other indicators of economic activities.

Related: Country by Country Reporting Becoming Mandatory in EU

The US Regulations

Countries worldwide are adopting CbC regulations, including the US, where the Treasury published final CbC regulations on 30 June 2016.

These will require the parent companies of US multinational groups to file CbC reports if their annual revenues in the preceding tax year exceeded USD850m.

In their CbC reports, companies are required to report revenue, profits, taxes paid and other indicators of economic activity.

Related: CRS and Trusts

CbC Reporting – Good Or Bad?

Critics argue that CbC reporting is onerous, expensive, will damage privacy and lead to more tax audits. A price worth paying if multinationals pay their “fair share” of tax as as result?

Time will tell. 

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