l. Documentation

On January 4, 2011, the French tax authorities published guidelines on new requirements that had been introduced relating to specific transfer pricing documentation (the “Guidelines”). The new requirements, effective as of January 1, 2010, were codified under section L 13 AA of the French tax procedure code (“FTPC”) and apply to certain companies (as defined below) in respect of transactions carried out during the subsequent fiscal year. Companies should by now have already prepared the necessary documentation – since May 2011, the French tax authorities may request disclosure of such documents in the course of a tax audit of the fiscal year. In practice however, companies are likely to receive the first of such requests in the forthcoming months.

In summary, French companies whose turnover (net of taxes or total gross assets) reaches a threshold of at least €400 million will fall within the scope of these new rules. The rules provide that transfer pricing documentation should consist of two sections, based on the Code of Conduct of the European Union: the first providing general information on the group to which the relevant French company belongs; the second providing more specific information on the audited company….

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Indonesia’s Tax Office (ITO) issued a new regulation (PER-32) on November 11, 2011 that amends and clarifies the transfer pricing rules and brings them more in line with the OECD guidelines. The new rules came into effect on the date of issuance.

PER-32 aims to broaden the scope of the existing regulation on the arm’s length principle as provided in PER-43, which sets out the steps that must be taken by taxpayers engaging in transactions with related parties to demonstrate the arm’s length nature of their transactions. These steps include preparing a comparability analysis, showing how the transfer pricing methods were selected and the arm’s length price (or fair profit) determined, and the formatting of transfer pricing documentation.

One of the key revisions in PER-32 is the shift from requiring a hierarchy of transfer pricing methods to the use of the most appropriate method (similar to the new OECD transfer pricing guidelines). This will give taxpayers flexibility to select the most appropriate method to determine the price of related party transactions, and will enable Indonesia to keep up with international best practices. Other notable changes include the following:

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Danny Beeton is Head of Transfer Pricing Economics;
Rupert Macey-Dare is a member of the Dispute Resolution and Transfer Pricing practice

The trial of McKesson Canada Corporation v. The Queen commenced in the Tax Court of Canada in Toronto on October 17, 2011 and is expected to take six to seven weeks. The case concerns a related party debt factoring arrangement between McKesson Canada Corporation (McKesson) and McKesson International Holdings III S.a.r.l. (factor) resident in Luxembourg.

Certain important details of the transfer pricing arrangements and the transfer pricing arguments are not apparent from the Notice of Appeal (1) and the Reply, (2) but already it appears that certain key techniques and assumptions used in this common tax planning arrangement have been called into question and in this respect McKesson will surely join GE Capital Canada, (3) GlaxoSmithKline (4) and Alberta Printed Circuits (5) as another key source of transfer pricing case law and precedent originating from Canada.

l. General features of a debt factoring arrangement

It is worth recapping first of all the standard features of an invoicing discounting arrangement. A good source is the US Internal Revenue Service “Factoring of Receivables Audit Techniques Guide” dated June 2006 (LMSB-04-0606-004). (6) This advises that

“the factor typically charges interest on the advance plus a commission. (7) The price paid for the receivables is discounted from their face amount to take into account the likelihood of uncollectability of some of the receivables…a factor may provide any of the following services: (8)

1. Investigation of the credit risk of the client
2. Assumption of the credit risk of the customers
3. Collection of the client’s accounts receivable from the customers
4. Bookkeeping and reporting services related to accounts receivable
5. Provision of expertise related to disputes, returns and adjustments
6. Advancing or financing…

the taxpayer pays the foreign factor the following fees: a discount; administration fees; commission; and interest (9) …however, the foreign [related party] factor does not perform any of the typical services of a factor, including collection of the taxpayer’s accounts receivable. Instead, the taxpayer agrees to continue doing all or most of its own collection work on its accounts receivable.”…

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(1) McKesson Canada Corporation v The Queen, Notice of Appeal (Part 1 Reassessment), Court File No 2008-2949(IT)G, 18 September 2008 and Amended Notice of Appeal, 17 December 2010.
(2) McKesson Canada Corporation v The Queen, Amended Reply to Notice of Appeal, Court File No 2008-2949(IT)G, 12 January 2011 and Reply to Amended Notice of Appeal (Part XIII) dated 12 January 2011.
(3) 2010, Canadian Federal Court of Appeal.
(4) 2010, Canadian Federal Court of Appeal.
(5) 2011, Tax Court of Canada.
(6) N.B. This guide appears to be current as of 17 March 2011 – see IRS website page: www.irs.gov/businesses/article/0,,id=159770,00.html
(7) While the economics of factoring are somewhat akin to lending, so that the price of the receivable will include an interest-like component to compensate that factor for the time it is out of funds (i.e. the period between the purchase and the maturity date of the receivable), that is built into the discount applied by the factor in determining the purchase price – there is actually no loan or advance as such in a factoring arrangement, only the purchase of an asset (i.e. the receivable).
(8) “Managing Factoring in Banking Groups”, Discussion Paper 1/2006, Credifact April 2006, pp 5-6, observes that factoring involves a combination of receivables financing, insurance and services.
(9) See footnote 8; in practice all services are paid for through the discount.

With representatives from the IRS, high-level officials from SAT China, the Ministry of Finance of India and experts from OECD, the 5th International Taxation Conference on 1st & 2nd December 2011 in Beijing offers a valuable opportunity for MNCs and tax practitioners to interact with revenue authorities.

Major topics to be covered include:

• APA
• Profit Split
• Restructuring
• TP documentation
• Tax Treaties
• Permanent Establishment

For more information or to reserve your place, visit http://www.noppen.com.cn/upcoming/L1132/index.asp

l. Relevant tax laws and official guidelines

Regulations regarding transfer pricing documentation requirements entered into force in Finland in January, 2007.1 In addition to legislative rules, the Finnish Tax Administration provided an Official Guideline (Transfer Pricing documentation requirements, October 19, 2007) concerning how to establish, implement and document company’s transfer pricing policies….

Disclaimer

1 Relevant legislative rules are in §14 a-c, §31, §32, §75 and §89 of the Finnish Fiscal Assessment Act.

In Four Soft Private Pvt. Ltd. v. Deputy Comr. of Income Tax, decided by the Hyderabad ITAT, the tribunal rejected the transfer pricing officer’s adjustment for the taxpayer’s loan guarantee made to a bank for a related entity. The court adopted the taxpayer’s view that the corporate guarantee for a bank loan it provided to an entity in the same corporate group did not fit within the definition of “international transaction” set forth in Section 92(B)(1) of the Income Tax Act…

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On March 30, 2001 The Netherlands issued a Transfer Pricing Decree which provided policy with respect to transfer pricing: transfer prices, the application of the arm’s length principle and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), adjusted by the Decree of August 21, 2004 with respect to headquarters costs.

On January 1, 2002, The Netherlands introduced transfer pricing rules by explicitly including the arm’s length principle in article 8b of the 1969 Dutch Corporate Income Tax Act (Wet op de Vennootschapsbelasting 1969) in order to confirm the applicability of the arm’s length principle as embodied in article 9 of the OECD Model Convention and the OECD Guidelines. Although in article 9 of the OECD Model Convention, the term “enterprise” is used, the Netherlands legislature has chosen to use the term “entity”, being the term used for taxpayers under the CIT….

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Jorge Castellon, Mexico’s national transfer pricing director at E&Y, said the government’s Tax Administration Service (SAT) appealed to the Collegiate District Court in July. It could take approximately one year for the court to reach a decision, he said….

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The CRA’s latest MAP report shows that it accepted, for the 2010-11 fiscal year, ending March 31, 2011, 94 cases considered to require negotiations with a foreign tax authority, and disposed of 95 such cases. However, total MAP cases accepted for the year—which include withholding and other types of disputes considered non-negotiable—were 743, with 740 of those resolved….

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Key facts about the draft RTP Schedule include:

• It will apply to income years commencing on or after July 1, 2011.
• Initially, the schedule will only apply to certain large business taxpayers which are considered to be “higher risk” or “key” taxpayers according to the ATO’s criteria for assessing taxpayer risk….