Reaching the tipping point
The OECD’s BEPS initiative has sparked a global focus on MNEs and their transfer pricing. In recent years, writes Tony Gorgas of KPMG Australia, there has been a profound change in the ASPAC region as governments and tax administrations seek to ensure multinationals pay their fair share of tax in line with economic and value creation.
Unsurprisingly, the acceptance and implementation of country-by-country (CbC) reporting (CbCR) within the region has been relatively swift, with many MNEs headquartered in ASPAC countries already having completed their first round of CbCR for the 2016 financial year. In addition, some countries have also imposed severe penalty regimes where multinational enterprises (MNEs) fail to lodge CbC reports to 'encourage' taxpayers to behave in a manner which is first and foremost about transparency. The country updates in this year's survey address the key developments regarding CbCR in their jurisdiction. However, a more challenging consideration for MNEs who have already lodged their CbC reports will be how to best prepare for any potential tax authority compliance activity following the review and assessment of the information collected under CbCR. In our experience, MNEs' efforts can be guided by performing a value chain analysis to identify whether there are any mismatches between where economic value-added activities are being performed and where the profits are being returned. Ensuring these risk areas have robust transfer pricing (TP) analyses will be paramount, as tax administrations would undoubtedly flag these types of misalignments for further review.
Given that tax administrations are now equipped with the data from CbCR to review and assess arrangements within the context of the global value chain, the message is clear that MNEs should prepare for their arrangements to face scrutiny above and beyond what has historically been the norm. This past year we have already seen an increase in TP compliance activity, coupled with an unprecedented level of media attention. As the scrutiny on TP continues to grow, it is important that MNEs be prepared and mindful of the implications of business decisions on their overall TP. For example, an upcoming change that we expect will garner a lot of attention from MNEs and tax administrations alike is the US tax reform. Many businesses will be preparing to react to the new opportunities being presented, but any business restructures in light of this reform will need to be thoroughly substantiated and evidenced to be consistent with arm's-length principles through contemporaneous TP analysis and documentation.
In addition to the above, the past year has also seen important developments in a number of ASPAC countries in relation to their TP rules. Countries such as New Zealand and Singapore have either updated or are in the process or updating their TP rules. A key feature of this updating tends to be a focus on the broader commerciality of arrangements entered into between members of MNE groups and whether independent parties would have entered into such arrangements. Given these tax administrations are now armed with formal powers to effectively reconstruct arrangements, MNEs with operations in these jurisdictions will need to ensure that they are sufficiently prepared to both explain and support their operations in these jurisdictions. This is also important given unilateral reconstruction could lead to double taxation outcomes which could lead to unresolved double taxation which may not be able to be relieved by the mutual agreement procedure. The question of whether we will continue to see more countries enacting broader powers to tax administrations across the ASPAC region is yet to be determined.
Taking into account the above, it is clear is that we have well and truly reached the tipping point, with all eyes focused on MNEs doing the right thing. By sharing our insights into the TP developments in the ASPAC region, we hope you will be able to better understand this new TP landscape.
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Tony Gorgas is a senior partner in KPMG Australia's transfer pricing (TP) practice and KPMG's Asia Pacific leader, with 20 years of experience advising multinational groups on complex TP issues.
With prior commercial experience negotiating arm's-length pricing arrangements, Tony provides a practical interpretation of the complex technical rulebook. Tony's abilities to influence and negotiate on behalf of clients are the cornerstone of his reputation. Tony has substantial experience across the Asia Pacific region and leads TP projects for his clients regionally and globally. Tony has extensive contacts within the Australian Taxation Office (ATO), and strong working relationship within the ATO at all levels including the competent authority.
Tony is well experienced in negotiating favourable outcomes for clients, and has successfully concluded advanced pricing arrangements with key jurisdictions including the US, UK, Japan and Korea. He also has valuable experience in the resolution of mutual agreement proceedings between competent authorities. Tony assists clients across all industries in setting and reviewing global TP policies, ensuring optimal tax outcomes and successfully defending such policies with revenue authorities.