Transfer Pricing Update

February 2016 Transfer Pricing Update Audit Tax Advisory Risk Performance

Latin America Transfer Pricing Update In recent years, Latin American tax authorities have become more aware of transfer pricing issues and have implemented more comprehensive transfer pricing regimes. Chile, Colombia, the Dominican Republic, Ecuador, and Peru recently have modified and strengthened their existing transfer pricing rules and regulations, while Costa Rica and Guatemala have implemented transfer pricing regulations for the first time. Meanwhile, multinational corporations located in the region have reported increased audit activity and, in some cases, the imposition of stringent penalties for failure to comply with local regulations. Following the publication of the Base Erosion and Profit Shifting (BEPS) Action Plans by the Organisation for Economic Co-operation and Development (OECD) on Oct. 5, 2015, further changes are expected in transfer pricing rules in Latin America as is greater scrutiny of multinational companies by tax authorities in the region. In particular, Mexico already has introduced legislation that will adopt the transfer pricing documentation recommendations found in BEPS Action 13 starting in 2016, and other countries in the region are likely to follow suit. 1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published in July 2010.

Latin America Transfer Pricing Update Argentina Documentation Requirement: Transfer pricing documentation must be contemporaneously submitted with the annual corporate tax return for all transactions conducted with foreign related parties and entities located in certain noncooperating countries, as defined by the Argentinian tax authority, for fiscal purposes. Additionally, a midterm information return must be filed before the fiscal year-end. Entities also should comply with the Federal Administration of Public Revenue s (AFIP) General Resolution 1122, which requires detailed information about international transactions performed during the fiscal year with related companies located in countries of low or no taxation through submission of a transfer pricing report. There is no materiality factor applicable, so all transactions must be supported and documented. Penalties: Failure to submit transfer pricing documentation can result in a penalty between 500 Argentine pesos (US$50) and 45,000 Argentine pesos (US$4,650). The underpayment of taxes can result in a penalty of one to four times of the underpayment of tax plus 3 percent interest per month, beginning on the date of the tax return filing. At the discretion of the tax authority, providing transfer pricing documentation may decrease the penalty for the underpayment of taxes. Transfer pricing adjustments can be made for five years after the taxpayer s fiscal year-end. Recent Issues and Developments: Since June 15, 2011, taxpayers have been required to file an information return for transactions with related parties outside Argentina within 15 days after filing the corporate income tax return. Specific reporting information is required as part of the return, including client and supplier data, data on the imported goods, import declaration number, export permit number, free onboard value per unit (in U.S. dollars and Argentine pesos), product description, and quantity. Since Jan. 3, 2014, taxpayers are required to inform related entities (local or abroad) via a monthly information return about transactions carried out with local related parties and to describe certain details about the invoice. As it works toward compliance with the OECD BEPS Action Plan, Argentina is working on actions 8 through 10 and stated that the implementation of these actions will be reflected in the functional analysis of the local file. In addition, the Argentinian government is working toward applying the master file and country-by-country reporting for multinational corporations and establishing a level of materiality for those obligated to complete the master file. www.crowehorwath.com 3

Crowe Horwath LLP Brazil Documentation Requirement: Related-party transactions and transfer pricing calculations must be disclosed annually on the corporate tax return. It is important to note that Brazil does not use the arm s-length standard or adhere to the OECD guidelines for evaluating intercompany transactions. Instead, taxpayers are required to use a safe harbor or adopt statutory profit margins, which vary based on the industry and function of the company. Penalties: Upon audit, taxpayers face penalties for underpayment of tax ranging from 75 to 150 percent of the underpaid taxes. However, if income adjustments are self-reported before notice of an audit is given, the penalty is only 20 percent of the underpaid taxes. Transfer pricing adjustments can be made for five years after the timely filing of a tax return. Recent Issues and Developments: Several significant transfer pricing changes went into effect Jan. 1, 2013. Established by Brazilian federal law, the statutory margins applied under the resale price less profits method vary by the taxpayer s industry sector and range from 20 to 40 percent. Prior to adopting industry sectorspecific margin requirements, the statutory margins applied under this method ranged from 20 to 60 percent and varied by product. Another change focuses on commodities (such as gold and sugar), whereby all inbound and outbound transactions involving commodities are to be priced based on quotes from 22 international futures and commodities exchanges. The primary driver for the adoption of this method stems from imports and the inclusion or exclusion of freight and insurance costs captured within a transfer price. By referring to quotes on commodities exchanges, all transportation and insurance costs are eliminated, and a pure price can be derived to compare with an imported commodity. Brazil also introduced a minimum requirement for the application of the Brazilian uncontrolled price method (PIC) for internal comparables on imports. When a Brazilian entity uses its independent transactions as comparables, the third-party comparables must represent at least 5 percent of the amount of import transactions. However, when the minimum sample of independent transactions during the period is not achieved, transactions from the preceding year can be used, provided that the foreign exchange effects are appropriately adjusted. The transfer pricing rules for intercompany loans went into effect Jan. 1, 2013. Specifically, registering a loan with the central bank is no longer a safe harbor for intercompany loans. Law 12,766 indicates that intercompany interest deductibility amounts will be based on the following rules, plus a spread determined by the Ministry of Finance: Loans issued in U.S. dollars with a fixed interest rate will use the Brazilian sovereign bond rate for bonds issued in dollars on international markets. Loans issued in the Brazilian real with fixed interest rates will use the Brazilian sovereign bond rate for bonds issued in reals on international markets. 4

Latin America Transfer Pricing Update Loans issued in Brazilian reals with floating interest rates will be subject to the rates set by the finance minister s reference rate. All other loans will use the London Interbank Offered Rate (LIBOR) six-month rate. The applicable interest rate to determine transfer pricing obligations is defined as the date when the loan is contracted. In July 2015, the Brazilian government announced new rules that comply with BEPS Action 12. Provisional Measure 685 was introduced into law, requiring taxpayers to disclose transactions that are carried out to reduce, eliminate, or defer taxes. Once a taxpayer discloses this information, Brazilian tax authorities will examine and disregard transactions that have no business purpose other than to eliminate taxes. Chile Documentation Requirement: A transfer pricing return is to be submitted to the Chilean government in June on an annual basis. The companies that are to comply with this law are as follows: Medium- to large-size taxpayers that are registered as such with the government Companies with more than 500 million Chilean pesos (CLP) (US$700,000) in intercompany transactions Companies with subsidiaries that operate in tax havens Contemporaneous documentation must be prepared and must be available if Chilean tax authorities request it. Penalties: Prior to 2015, transfer pricing income adjustments resulted in a tax of 35 percent of the income adjustment, plus an additional 5 percent penalty and interest on the underpaid amount. Failure to submit the annual sworn statement may result in a maximum penalty of the greatest of 25 million Chilean pesos (approximately US$35,000), 15 percent of the taxpayer s financial capital, or 5 percent of its real capital. Transfer pricing documentation may, at the discretion of the tax authority, lead to a reduction in penalties on the underpayment of taxes. Transfer pricing adjustments by the Chilean tax authority must be made within three years of the tax filing date. In cases of fraud, however, the statute of limitations is extended to six years. It is also important to note that having a transfer pricing study or contemporaneous documentation does not provide complete protection against the transfer pricing penalty being applied. Recent Issues and Developments: Starting in 2015, if related-party transactions are not carried out at an arm s-length basis, companies face a 40 percent penalty rate on the resulting difference in income between the actual price paid and the price that would have been paid had it been an arm s-length transaction. This penalty rate is up 5 percent from previous years. Chile also addressed a previous issue in its tax law, modifying the second paragraph in Article 41 E to clarify that transfer pricing legislation also applies to business restructuring processes that entail a shift in assets and activities from a Chilean entity to a foreign one. www.crowehorwath.com 5

Crowe Horwath LLP Colombia Documentation Requirement: Taxpayers must file an annual informational transfer pricing return, which includes intragroup transactions, the related party, the type of transaction, and the method of analysis with results. This return must be contemporaneously submitted with the annual corporate tax return if either of the following applies: Gross equity on the last day of the tax year is equal to or exceeds 100,000 taxable value units (TVU) 1 (for fiscal year 2015, 2,827,900,000 Colombian pesos or US$943,000). The taxpayer s gross revenue exceeds 61,000 TVU (1,725,019,000 Colombian pesos or US$575,000). An annual transfer pricing study must be contemporaneously submitted when the total transactions with related parties during the relevant fiscal year exceed 61,000 TVU (US$575,000). In this case, the transactions to be analyzed are the transactions that exceed 32,000 TVU (US$300,000) during the relevant fiscal year. Penalties: Taxpayers are subject to penalties if, among other factors, the annual informational transfer pricing return or the transfer pricing study are extemporaneous, when information is omitted, or if the taxpayer does not file the transfer pricing return or study. The penalty amount depends on the severity of the omission, ranging from 10 TVU (US$95) to 20,000 TVU (US$190,000). Recent Issues and Developments: Decree 3030 of 2013 introduced new requirements. Taxpayers have to follow the transfer pricing rules if the intercompany transactions are with related parties located abroad or located in a free trade zone. Colombia has a strong focus on BEPS because the project comes at a time when the country is seeking to be accepted as a member of the OECD and, therefore, has expressed the will to take action on the initiatives arising from BEPS. Since fiscal year 2014, the transactions carried by taxpayers with entities that are domiciled residents in tax havens are subject to transfer pricing and compliance with formal obligations, regardless of the amount of revenue or equity. 1 The TVU is indexed to the inflation-adjusted Colombian peso. In 2015, one TVU was equivalent to 28,279 Colombian pesos or approximately U.S. $8.56. 6

Latin America Transfer Pricing Update Ecuador Documentation Requirement: Related-party transactions, including domestic transactions, that exceed US$5 million annually on an aggregate basis require preparation of transfer pricing documentation, which must be submitted within nine months of filing the annual corporate tax return. Since 2014, the minimum relatedparty transaction threshold increased to US$5 million from US$3 million, and the deadline was delayed to September of the following year. There is still no change caused by BEPS. Penalties: A transfer pricing adjustment that results in the underpayment of tax is subject to a 20 percent penalty. Existence of transfer pricing documentation does not reduce penalties. However, failure to submit transfer pricing documentation results in an automatic penalty of $15,000. Transfer pricing adjustments can be made for up to three years from the date of the income tax filing or six years when a tax return is not filed or only partially filed. Recent Issues and Developments: Ecuador changed its transfer pricing documentation requirement per the above section Jan. 24, 2013. In 2010, Ecuador created exemptions to transfer pricing regulations to minimize the burden to taxpayers. Taxpayers are exempt from the transfer pricing regulations if the following three criteria are met: 1. The Ecuadorian tax paid is greater than 3 percent of global taxable income. 2. Transactions do not occur with entities located in tax havens. 3. The taxpayer does not maintain an agreement with the government for exploration or exploitation of nonrenewable natural resources. www.crowehorwath.com 7

Crowe Horwath LLP Mexico Documentation Requirement: Taxpayers with foreign related-party transactions that exceed 13 million Mexican pesos (approximately US$1 million) annually are required to prepare transfer pricing documentation. The documentation is not required to be submitted unless it is formally requested by the tax authority or through an advance pricing agreement (APA) request. Additionally, an informative return outlining related-party transactions must be submitted electronically by Feb. 15. Taxpayers that are mandated to file a statutory tax audit report must complete by June 30 a set of questions about their intercompany transactions and methods used to determine pricing. Penalties: Penalties for the underpayment of tax range from 30 to 75 percent. Contemporaneous documentation shifts the burden of proof to the tax authority and can provide up to a 50 percent penalty reduction if the adjustment results in an underpayment of tax. Transfer pricing adjustments can be made for up to five years from the date of the income tax return filing. Recent Issues and Developments: According to the 2016 federal budget in Mexico (published Sept. 8, 2015), there are proposals that would expand transfer pricing disclosure requirements. In particular, a measure would require certain taxpayers that engage in transactions with related parties to submit certain countryby-country information about the taxation of their business transactions, as well as two additional files: Country-by-country report. It includes relevant information about the jurisdictional distribution of earnings, revenue, employees, and assets. Master file. It includes relevant information concerning multinational enterprises, policies, and transfer pricing agreements with the tax authorities that is available in a single document to all tax authorities when the company has significant relatedparty transactions. Local file. It includes detailed information about the local business, including payments to related parties and receipts of goods, services, royalties, and interest. 8

Latin America Transfer Pricing Update Peru Documentation Requirement: Taxpayers are required to file a transfer pricing information return (Form PDT 3560) and a transfer pricing technical study by June following the close of the fiscal year-end with the Superintendencia Nacional de Administración Tributaria (SUNAT), the Peruvian tax authority. The transfer pricing technical study requires the taxpayer to report the methodologies used in the transfer pricing analysis and any adjustments that need to be made. Penalties: Failure to file transfer pricing documentation is cause for a penalty of up to US$29,000 and may trigger an audit. Additionally, any underpayment of taxes will result in a penalty of 50 percent of the unpaid amount of tax, plus interest. Existence of transfer pricing documentation does not reduce penalties. Transfer pricing adjustments can be made for up to four years from Jan. 1 of the year following the date of the income tax filing. Recent Issues and Developments: In September 2012, the Peruvian legislature and SUNAT announced several modifications to the transfer pricing regulations: Documentation is required for all taxpayers with intercompany transactions and taxpayers with transactions with unrelated parties located in tax havens. Peru now recognizes the comparable-uncontrolled-price (CUP) method as an acceptable transfer pricing method. SUNAT considers bilateral and multilateral APAs with foreign tax authorities. However, no APA applications have been filed with SUNAT. Effective May 31, 2013, taxpayers are required to submit a transfer pricing technical study, along with transfer pricing information returns, to the tax authority. Prior to amendment of the documentation requirements, taxpayers only had to retain transfer pricing documentation to provide at the request of an auditor. In February 2015 in Lima, the Latin America and the Caribbean Regional Network on BEPS held its meeting (hosted by SUNAT) with participating tax officials from 14 jurisdictions and seven international organizations. Discussions focused on BEPS issues of particular relevance for the region, such as commodities transactions, interest deductions and difficulties in finding adequate transfer pricing comparables, as well as on the development of toolkits to assist with implementing solutions to comply with BEPS. Business and civil society representatives participated in selected parts of the meeting and provided their regional perspectives on the BEPS project. www.crowehorwath.com 9

Crowe Horwath LLP Venezuela Documentation Requirement: An informational transfer pricing return must be submitted six months after the fiscal year-end. Additionally, transfer pricing documentation must be contemporaneously prepared to substantiate the arm s-length nature of all related-party transactions included in the annual corporate tax return. Penalties: Penalties range from 100 to 300 percent of the unpaid tax, plus interest. Existence of transfer pricing documentation does not reduce penalties, but penalties can be lowered to 30 percent of unpaid tax plus interest if the taxpayer accepts the additional tax assessed and files an amended income tax return within 15 business days of being notified of the assessment. Failure to maintain or conserve transfer pricing documentation can result in the closure of the business for 10 continuous days and a penalty of $750 to $23,000. Transfer pricing adjustments can be made for up to six years from the due date of the income tax return filing. If no tax return is filed, the statute of limitations is extended to 10 years. Recent Issues and Developments: In 2011, Venezuela introduced several changes to its transfer pricing regulations: The arm s-length range will be the values found within the second and third quartiles of a range of results, and the minimum and maximum values will be excluded from the calculation of the range of the results. Any transfer pricing adjustments will be to the median value of the arm s-length range. On July 9, 2013, Venezuela implemented a program to increase the number of transfer pricing audits and to collect additional revenues as a result of these audits. Many of the audits are triggered by failure to use the CUP method or at least demonstrate that it is not possible to use the CUP method before relying on other methods. 10

European Transfer Pricing Update European Transfer Pricing Update Transfer pricing rules enacted by European tax authorities are well-established and largely follow the Organisation for Economic Co-operation and Development s (OECD) transfer pricing guidelines. 1 In light of recent high-profile, controversial tax planning strategies used by companies to minimize global taxation, transfer pricing regulations have been updated to address the modern economy by creating more stringent documentation requirements and penalties for failure to operate at arm s length. Companies need to evaluate their intercompany transactions to prepare policies and supporting documentation to limit not only transfer pricing adjustments and penalties but administrative burdens as well. 1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010. www.crowehorwath.com 11

Crowe Horwath LLP France Documentation Requirement: Transfer pricing documentation is required for entities with turnover or gross assets exceeding 400 million euros (approximately US$544 million) or that hold, either directly or indirectly, more than 50 percent of shareholder or voting rights in domestic or foreign subsidiaries. Companies meeting these requirements must submit documentation within six months of the due date of the taxpayer s annual tax return. If entities are not subject to the requirements, then transfer pricing documentation must be submitted to the French tax authorities within 30 to 60 days upon request. Penalties: Transfer pricing adjustments are subject to penalties of 40 percent of the underpaid tax in the case of bad faith and 80 percent of the underpaid tax for acts of fraud. Additional penalties apply for failure to submit transfer pricing documentation: a minimum penalty of 10,000 euros (approximately US$13,600) or up to 5 percent of the gross amount reassessed. The underpaid tax also is subject to interest charges. In cases of tax fraud, the statute of limitations for transfer pricing adjustments can be extended by French tax authorities from three to six years from the calendar year-end. Recent Issues and Developments: The French Finance Law for 2014 was published Dec. 30, 2013, and became effective Jan. 1, 2014. The bill contains changes related to transfer pricing, including: Interest related to intercompany loans no longer is deductible in situations where the tax due by the lender is not equal to at least 25 percent of the amount of corporate income tax that would be due in France. The rule is designed to prevent group companies from claiming an interest deduction in France while simultaneously earning a tax-free subsidiary dividend in a foreign country. Entities undergoing a mutual agreement procedure no longer can postpone the payment of taxes resulting from a transfer pricing adjustment until the resolution of the procedure. While under audit, taxpayers are required to supply consolidated financials to the French tax authorities. Taxpayers are required to supply detailed financial accounts to the French tax authorities while under audit if: 1) the taxpayer s main activity is the sale of goods and it has assets of at least 400 million euros (approximately US$544 million) or if the taxpayer s revenue exceeds 152.4 million euros (approximately US$207.3 million); or 2) the taxpayer s main activity is not the sale of goods and it has revenue exceeding 76.2 million euros (approximately US$103.6 million). Certain taxpayers are required to submit transfer pricing documentation to the French tax authorities within six months of submitting their annual tax return. Documentation must include a general description of the group s activities, a list of intangibles owned by the group, a description of the group s transfer pricing policies, and a summary financial statement of transactions with other related parties. 12

European Transfer Pricing Update Germany Documentation Requirement: Transfer pricing documentation must be presented within 60 days of a request from the tax authorities. Extraordinary transactions must be documented within six months after corporate year-end and presented within 30 days upon request, although exceptions may be allowed. Small enterprises with less than 5 million euros in revenue from the delivery of goods and less than 5 million euros in revenue from services are not required to prepare full transfer price documentation but may receive individual questions from the tax administration. Penalties: If a company fails to submit documentation within 60 days upon request, it is subject to a minimum late-filing fee of 100 euros (approximately US$106) per day with a maximum fee of 1 million euros (approximately US$1.06 million). Adjustments made by tax authorities will be subject to a penalty of the greater of 5,000 euros (approximately US$5,309) or 5 to 10 percent (subject to tax authorities discretion) of the underpaid tax, with a 1 million euro (approximately US$1.06 million) maximum penalty. Transfer pricing adjustments also may be subject to a 15 percent (or applicable treaty rate) withholding tax if the tax authorities characterize the adjustment as a hidden dividend distribution. If the transfer pricing adjustments are based on delivery of goods to or from outside the European Economic Community (EEC), custom duties may be involved as well. Transfer pricing adjustments may be made up to four years from the end of the tax year. Recent Issues and Developments: Since 2013, the authorized OECD approach (AOA) is implemented in the Foreign Transactions Tax Law. The AOA allocates assets and transactions between a principal and permanent establishment through: 1) performing a function and risk analysis for the principal and permanent establishment and 2) using the arm s-length standard to establish transaction pricing. The law further adds that transactions between foreign permanent establishments and domestic permanent establishments should be treated identically to transactions between two independent entities, applying the separate legal entity approach. The Federal Ministry of Finance issued a decree on the attribution of profits to permanent establishments, applicable from 2015 on. This includes regulations on dotation capital and deemed contractual relationships or dealings. First, a function and risk analysis is made for the permanent establishment, based on relevant personnel functions, assets, opportunities and risks, dotation capital, and liabilities. Second, transfer prices are determined in consideration of the arm s-length principle for the business relationships and dealings of the permanent establishment. www.crowehorwath.com 13

Crowe Horwath LLP Greece Documentation Requirement: Transfer pricing documentation must be prepared by consulting firms or freelance consultants before the issuance of the annual tax certificate and within four months from the end of the financial year if either of the following conditions exist: The company has annual revenues of less than 5 million euros (approximately US$5.4 million) and more than 100,000 euros (approximately US$107,000) in intragroup transactions. The company has annual revenues greater than 5 million euros (approximately US$5.4 million) and more of than 200,000 euros (approximately US$215,000) in intragroup transactions. Additionally, a summary information table containing the functions performed and the risks taken by the company and a list of intragroup transactions during the year under review must be submitted within four months of the end of the financial year. Penalties: If a company s summary information table is submitted late or is inaccurate or incomplete, a penalty rate of 1 percent will be applied to the company s intragroup transactions, with a minimum penalty of 500 euros (approximately US$540) and a maximum penalty of 2,000 euros (approximately US$2,150). When an amended summary information table is submitted late, the fine is imposed only if the changes refer to the amount of transactions and the overall differences are more than 200,000 euros (approximately US$215,000). If an inaccurate summary information table is submitted late, the fine is calculated on the amount of the inaccuracy and imposed only if the inaccuracy represents more than 10 percent of the total transactions for which there was a documentation obligation. Recent Issues and Developments: From January 2013 to October 2015, the Greek Parliament passed several income tax law amendments, including comprehensive changes to its transfer pricing regime. New measures include: Transfer pricing regimes instituted by the Ministry of Development, Competitiveness, and Shipping and the Ministry of Finance have been consolidated and are under the direction of the Ministry of Finance. Transfer pricing regulations apply to all intercompany transactions rather than only to the sale of tangible goods and the provision of services. All domestic intercompany transactions must be reported. Beginning Jan. 1, 2014, companies are able to enter into advance pricing agreements with tax authorities. 14

European Transfer Pricing Update Ireland Documentation Requirement: Transfer pricing documentation is not required for Ireland, but the OECD transfer pricing guidelines generally are followed. According to the Irish Revenue Commissioners (IRC), it is considered best-practice to perform a transfer pricing study at the time the terms of the transactions are agreed upon (such as a planning study). Transfer pricing regulations apply only to large companies, which are defined as either: Companies with 250 employees or more and annual revenue of 50 million euros (approximately US$53.5 million) or more Companies with 250 employees or more and annual assets greater than 40 million euros (approximately US$43 million) Under the current transfer pricing regime, effective Jan. 1, 2011, related-party transactions are subject to Ireland s corporate tax rate of 12.5 percent. However, passive income (interest payments, royalties, dividends, and rents) is excluded from the scope of transfer pricing rules and is taxable at 25 percent. The IRC recommends that taxpayers file a correct and complete tax return by contemporaneously filing their transfer pricing documentation with the submission of their annual tax returns (no later than nine months after the company s fiscal year-end). Penalties: As documentation is not required, there are no penalties for failure to present transfer pricing documentation. However, if a taxpayer fails to provide transfer pricing documentation during an audit, the burden of proof falls on the taxpayer to prove that arm slength pricing was applied. In the case of a transfer pricing adjustment, general corporate tax penalties are applied. There are three classified penalties with different tax-geared penalty rates: 1. Insufficient care (20 percent) 2. Gross carelessness (40 percent) 3. Deliberate default (100 percent) Additionally, a daily interest charge of 0.0219 percent of the underpayment of taxes is assessed. Transfer pricing adjustments may be made up to four years from the end of the year in which a return is filed. Recent Issues and Developments: The IRC has issued a Transfer Pricing Compliance Review (TPCR) to monitor transfer pricing compliance. If a company fails to perform a TPCR, the IRC may choose to initiate a transfer pricing audit of the company. When transfer pricing documentation is requested during a TPCR, companies should provide the following items within three months: A description of group structure A description of each related-party transaction and the associated companies involved The pricing structure and transfer pricing method applied A summary of functions, assets, and risks assumed for relevant parties A summary list of relevant documentation available The basis on which an arm s-length principle was established www.crowehorwath.com 15

Crowe Horwath LLP Italy Documentation Requirement: Transfer pricing documentation is not required. However, to provide penalty protection, a documentation study must be prepared contemporaneously with the filing of the corporate income tax return. Transfer pricing documentation must be submitted within 10 days of request during a tax audit. The company may benefit from penalty protection if the taxpayer discloses that transfer pricing documentation was prepared on its tax return and the transfer pricing documentation complies with the relevant Italian transfer pricing regulations. Penalties: An inaccurate tax return, including failure to disclose the existence of transfer pricing documentation or the amount of intercompany transactions, is subject to tax penalties ranging from 258 euros (approximately US$360) to 2,065 euros (approximately US$2,875). Additionally, transfer pricing penalties range from 100 to 200 percent of the underpayment of taxes until Dec. 31, 2015. Starting Jan. 1, 2016, penalties will range from 90 to 180 percent. In addition to penalty protection derived from transfer pricing documentation, there are three opportunities for taxpayers to lower penalties: 1. Note of inspection. If the taxpayer accepts the adjustment in full and pays the additional tax due, the penalty is one-sixth of the underpaid taxes. 2. Voluntary assessment procedure. If the taxpayer negotiates the assessment with tax authorities and agrees to the revised adjustments, the penalty is one-third of the underpaid taxes due. 3. Judicial conciliation. If the taxpayer reaches an agreement with tax authorities during litigation, penalties are reduced by 40 percent of the minimum penalty (if the agreement is reached during the first instance; in second instance, penalties are reduced by 50 percent). Transfer pricing adjustments generally may be made for four years from the date the tax return is filed. Recent Issues and Developments: A draft legislation, as part of a major tax reform currently in progress, has been issued to revitalize Italian tax rules. In particular, the legislation aims to: Reshape the rules applicable to cross-border transactions and arrangements Redefine the concepts of abuse of law and tax avoidance Expand the scope of advance rulings Introduce a cooperative compliance program to enhance relationships between taxpayers and the tax administration 16

European Transfer Pricing Update Following the BEPS Action Plan 1, the Italian government also is considering introducing a 25 percent withholding tax on payments made to foreign multinationals deemed to have a virtual permanent establishment in Italy in order to address the challenges raised by the digital economy. Furthermore, Italy has introduced a patent box regime based on the nexus approach followed by the OECD. The new regime will grant an exemption from both corporate tax (IRES) and local tax (IRAP). Regulations still are expected in order to provide a definition of total qualifying research and development activities and costs and to understand exactly how the provisions will apply. The Netherlands Documentation Requirement: Companies are required to state the presence of intercompany transactions in the annual Dutch corporate tax return and provide a brief description of the relevant transactions. Transfer pricing documentation is required for all applicable transactions defined under the OECD transfer pricing guidelines. Documentation is to be prepared contemporaneously and submitted to the Dutch tax authority (DTA) within 30 days of being requested, with a possible extension of three months. On Nov. 27, 2013, the Dutch Ministry of Finance released a transfer pricing decree regarding intragroup services, nonbusiness motivated profit shifting, guarantees, and financial transactions. The decree addresses the following issues: Intragroup services. The decree addresses a list of nonexhaustive activities being performed in a shareholder capacity (such as preparation and organization of a meeting of shareholders, preparation and approval of annual accounts, tax compliance, and issuance of securities and listings). Tangible and intangible fixed assets. The transfer of assets with no added value to an acquiring group does not have to follow an arm s-length standard. Central purchasing. A cost-plus method generally should be applied for activities (such as support or services) performed by local unassociated purchasing agents and should be based on an analysis of the multinational entity s functions and commercial rationale for establishing central purchasing activities. Internal insurance and reinsurance activities. Taxpayers that own internal insurance or reinsurance companies must substantiate and document reasoning for the company s setup and functionality. Under the new decree, these internal insurance and reinsurance companies should be treated as providing an administrative function and receive no more than a limited payment for the activities provided. www.crowehorwath.com 17

Crowe Horwath LLP Guarantees. Under the new decree, a guarantee will be provided in a shareholder capacity if an entity is unable to receive a loan independently. In addition, implicit guarantees made during intercompany loans are not considered to be chargeable group services. Therefore, fees for an explicit guarantee only can be applied if the explicit guarantee exceeds the value of the implicit guarantee. Financing transactions. Terms of intercompany loans must be evaluated to determine if they are consistent with an arm s-length interest rate, taking into consideration the credit rating of the borrower. Under the new decree, the burden of proof for borrowers and lenders will increase. Penalties: If a taxpayer fails to submit transfer pricing documentation when requested, the tax authorities can adjust applied transfer prices at their own discretion and the burden of proof falls to the Dutch taxpayer to prove that an arm s-length price was applied. There are no specific transfer pricing penalties in the Netherlands. If transfer pricing adjustments are made, general tax penalties up to 100 percent of the additional tax owed can be applied. Penalties are determined at the discretion of the DTA based on the severity of the underpayment. Interest is owed to the DTA on the additional tax due. Transfer pricing adjustments may be made for five years from the date on which a tax return is filed. In certain international cases, this may be extended to 12 years. Recent Issues and Developments: Following Action 13 of the BEPS project, the 2016 Dutch tax plan (currently under discussion in Dutch parliament) aims to implement country-by-country reporting for multinationals. Country-by-country reporting applies to multinationals with turnover exceeding 750 million euros (approximately US$820 million). In this report, the multinational has to report the income before tax, the taxes paid, the number of employees, the value of assets, and the activities of the multinational for each country in which the multinational is present. The country-by-country report has to be provided to the DTA within 12 months after the end of the fiscal year. This will apply to an estimated 150 Dutch companies. Another proposed law currently under discussion in Dutch parliament applies to Dutch resident taxpayers that are part of a group with a consolidated turnover of more than 50 million euros (approximately US$54.5 million). The taxpayer needs to document a master and a local file. In the master file, information about the transfer pricing methods used and the worldwide allocation of income has to be included. In the local file, the taxpayer has to report information that is relevant for intragroup pricing in relation to transactions performed by the Dutch taxpayer and its affiliated entities. The master and local file have to be available at the filing deadline of the corporate income tax return. These documentation requirements will apply to an estimated 8,000 Dutch companies. 18

European Transfer Pricing Update Norway Documentation Requirement: Norwegian companies and permanent establishments are required to submit form RF-1123, Controlled Transactions and Accounts Outstanding, with the annual tax return, provided that intragroup transactions exceed 10 million Norwegian kroner (approximately US$1.6 million) in aggregate or the total amount of outstanding accounts receivable is greater than or equal to 25 million kroner (approximately US$4 million). There is no requirement for companies to contemporaneously prepare transfer pricing documentation. RF-1123 reporting entails listing of intragroup transactions and their value. However, taxpayers with combined entity revenue of 400 million kroner (approximately US$67 million) or more, 250 employees or more, or assets in excess of 350 million kroner (approximately US$58 million) must submit transfer pricing documentation within 45 days if requested by tax authorities while under audit. Penalties: Transfer pricing adjustments are subject to penalties up to 30 percent of the underpaid tax or up to 60 percent of the underpaid tax in cases of gross negligence. The underpayment of tax also is subject to interest. Contemporaneous transfer pricing documentation may reduce the penalties related to the underpayment of tax at the Norwegian s tax authorities discretion. Transfer pricing adjustments may be made for 10 years from the tax year-end; however, if the taxpayer includes an appendix to its tax return containing factual information on its transfer pricing, adjustments can be made up to two years from the tax year-end. Recent Issues and Developments: The Norwegian government presented its state budget Oct. 7, 2015. Important changes proposed related to transfer pricing include a reduction in the corporate tax rate from 27 to 25 percent, effective Jan. 1, 2016. This is a first step toward ultimately reducing the rate to 22 percent between 2016 and 2018. In addition, there is a proposal to further reduce the deduction for interest costs paid to related parties. Currently, interest costs paid to related parties are limited to 30 percent of earnings before interest, taxes, depreciation, and amortization (according to tax regulations), provided that total interest costs exceed 5 million kroner (approximately US$578,000). The proposal is to reduce the limit to 25 percent. Because the country has a minority government, the changes described are expected to be adopted. The Norwegian government also presented its planned legislation for implementing the OECD BEPS initiative. The Norwegian government will focus on measures on the following topics: Source tax on interests Royalty and certain rent payments Regulations on tax residence for corporations (if incorporated in Norway, the entity shall be considered a tax resident in Norway) Norwegian tax liabilities for nonresident entities, in light of eventual changes by the OECD to the permanent establishment concept Country-by-country reporting will be suggested if group consolidated income exceeds 750 million euros. The specific proposals are expected to be presented between 2016 and 2018. www.crowehorwath.com 19

Crowe Horwath LLP Spain Documentation Requirement: Transfer pricing documentation should be prepared contemporaneously with the tax return, which is due six months and 25 days from the fiscal year-end. Transfer pricing documentation should be submitted to the Spanish tax agency (AEAT) only upon request. Transfer pricing documentation should include transactions among related entities that exceed 250,000 euros (approximately US$267,500). Penalties: Failure to prepare transfer pricing documentation in the case of a tax audit results in a penalty of 15 percent of the amount that results from the adjustments applied by the tax authorities. This applies for each instance of missing data. However, if no adjustments are made, a fixed fine of 1,000 euros (approximately US$1,075) per data item and 10,000 euros (approximately US$10,750) per group of data is applied for failure to comply with documentation requirements. The underpayment of taxes also is subject to interest penalties. Transfer pricing adjustments can be made for up to four years from the due date of the tax return. Recent Issues and Developments: On March 15, 2013, AEAT created the National Bureau of International Taxation (ONFI) to focus on international operations and transfer pricing for entities within multinational groups. ONFI was created to prevent the erosion of the corporate tax base through the shifting of profits offshore. It has the authority to set transfer pricing guidelines regarding the taxpayers selected for inspection, develop regulatory proposals, and issue technical reports. Recent major tax reform in Spain has introduced transfer pricing requirements related to the BEPS initiative, like the countryby-country reporting, and more in-depth documentation, including a detailed business, intangible, and financial policy description. 20

European Transfer Pricing Update Switzerland Documentation Requirement: Transfer pricing documentation is not required. However, it is recommended to submit transfer pricing documentation to the Federal Tax Administration (ESTV) in accordance with the OECD guidelines upon request. Contemporaneous evidence should be collated to support that pricing policies are arm s length. It generally is regarded as best-practice to prepare a transfer pricing report to support transfer pricing arrangements. Penalties: Transfer pricing adjustments are subject to general tax penalties only in cases of tax fraud or other criminal proceedings. Penalties range from 100 to 300 percent of the underpaid tax. Additionally, adjustments can be treated as a hidden profit distribution subject to an additional 35 percent withholding tax (or applicable treaty rate). Transfer pricing adjustments by tax authorities can be made for 10 years following the tax year-end. Recent Issues and Developments: As of 2013, income from intellectual property is taxed at the cantonal level regardless of whether it is foreign or domestically sourced. Additionally, the ESTV may deny any corresponding adjustments, resulting in the possible double taxation of income related to intellectual property. United Kingdom Documentation Requirement: Transfer pricing documentation is not required; however, contemporaneously prepared documentation can reduce or eliminate penalties related to a transfer pricing adjustment at the tax authority s discretion. Penalties: Transfer pricing adjustments are subject to a penalty of up to 100 percent of the underpaid amount in cases of deliberate understatement and concealment. Penalties for deliberately understating taxes without concealment are up to 70 percent of the underpaid amount and up to 30 percent in cases resulting from the failure to take reasonable care. The underpaid tax also is subject to interest charges. Transfer pricing adjustments by tax authorities can be made for up to two years following the tax year-end (except in cases of fraud or carelessness). Recent Issues and Developments: In April 2015, the United Kingdom (U.K.) introduced a 25 percent diverted profits tax. The rules are complex but can apply broadly when arrangements have been made to avoid a U.K. taxable presence or when there are connected-party transactions that lack economic substance. The U.K. also has introduced a framework to enable country-by-country reporting requirements and has endorsed the OECD BEPS recommendations. www.crowehorwath.com 21

Crowe Horwath LLP Asia-Pacific Transfer Pricing Update Transfer pricing requirements and audits in the Asia- Pacific region are becoming more comprehensive, thus obligating taxpayers to assess their transfer pricing risks. As a result of numerous high-profile transfer pricing disputes and declining government revenues amid the global economic slowdown, tax authorities have become more aware of transfer pricing issues. While tax authorities continue to use procedures, such as transfer pricing audits, to increase tax revenue, there also has been a steady refining of rules and guidelines concerning transfer pricing matters. Following the publication of the Base Erosion and Profit Shifting (BEPS) Action Plans by the Organisation for Economic Cooperation and Development (OECD) on Oct. 5, 2015, further changes are expected in transfer pricing rules in Asia-Pacific as is greater scrutiny of multinational companies by tax authorities in the region. This update discusses the latest transfer pricing developments in the Asia-Pacific region, including new regulations and recommendations resulting from the BEPS Action Plans. 22

Asia-Pacific Transfer Pricing Update Australia Documentation Requirement: The preparation of transfer pricing documentation is not mandatory; however, there is a statutory requirement to retain any documents that are relevant for the purposes of ascertaining the taxpayer s income and expenditures for at least five years. 1 This means that if transfer pricing documentation is not prepared and retained, then the taxpayer is in breach of its recordkeeping obligations. Australian regulations require transfer pricing documentation in order to obtain a reasonably arguable position (RAP) that can provide penalty protection in the case of a transfer pricing adjustment. Documentation must be prepared before the income tax return is filed. It should be in English (or easily convertible) and must be in the entity s possession or readily available to the entity. Penalties: Failure to support a transfer pricing position with an RAP will result in a minimum 25 percent penalty on any subsequent adjustment to taxable income imposed by the Australian Taxation Office (ATO). The maximum penalty can be up to 60 percent on additional tax payable if the sole or dominant purpose was to obtain the transfer pricing benefit, the taxpayer did not have an RAP, and the taxpayer was not cooperative in the course of the ATO review. The penalty rate can be reduced (to as low as 2 percent) when a taxpayer: Has an RAP Does not have a sole or dominant purpose Makes a voluntary disclosure (The effect of the disclosure will depend on whether it was made during or before examination.) Recent Issues and Developments: Following the enactment of new transfer pricing laws in 2013, 2 the ATO in late 2014 released formal guidance regarding the application of the new rules. The guidance included two tax rulings related to the application of the new laws reconstruction provisions and guidance on preparing transfer pricing documentation compliant with Subdivision 284-E of Schedule 1 of the Tax Administration Act 1953 (applicable for the penalty protection eligibility). Additionally, the ATO released two practice statements on the application of penalties under the new rules, as well as new guidance on eligibility criteria for simplified transfer pricing recordkeeping available to certain categories of taxpayers or in relation to certain dealings (such as routine service transactions and low-value loans). 1 Calculated from the date the records were prepared or obtained or from the date the transactions or acts to which the records relate were completed, whichever is later. 2 Applicable to income tax years commencing on or after July 1, 2013. www.crowehorwath.com 23

Crowe Horwath LLP China Documentation Requirement: Chinese taxpayers must prepare contemporaneous documentation by June 20 of the subsequent tax year. A relatedparty information return must be submitted with annual tax returns by May 31. Tax authorities, however, have the right to request the related-party information earlier. In addition to information returns, Chinese taxpayers must prepare contemporaneous transfer pricing documentation and maintain it for 10 years. Related-party tangible goods transactions of more than 200 million renminbi (US$32 million) per year in aggregate and other related-party transactions of more than 40 million renminbi (US$6.4 million) per year are required to submit documentation. Additionally, if a multinational company sets up an enterprise with limited functions and risks in China solely for performing manufacturing, processing, distribution, or contract research and development and incurs a loss, the company is required to file transfer pricing documentation by June 20 of the subsequent year. Penalties: Failure to file the related-party information return or prepare the contemporaneous documentation is penalized with a fine up to 10,000 renminbi (approximately US$1,600). Although transfer pricing adjustments are not subject to specific penalties, the underpayment of taxes is subject to interest (at the renminbi benchmark rate) plus 5 percent on the underpaid portion if documentation is not in place by the June 20 filing date. Recent Issues and Developments: On Sept. 17, 2015, China s State Administration of Taxation (SAT) issued long-awaited draft special tax administrative measures for public comment. Comments were due by Oct. 16, 2015. The draft covers transfer pricing, advance pricing arrangements (APAs), cost-sharing agreements, controlled foreign corporations, thin capitalization, and general antiavoidance measures. It would replace the trial special tax administrative measures under Guo Shui Fa [2009] 2 (Circular 2) issued by the SAT on Jan. 8, 2009. Related-Party Transactions Covered The draft adds the transfer of financial assets (for example, accounts receivable, notes receivable, loans, other receivables, stock and debt investments, and assets from derivative financial instruments) and the transfer of equity investments to the scope of related-party transactions covered by the special tax adjustment measures. Currently, the trial measures cover only the transfer or license of tangible and intangible assets, financing, and services. Contemporaneous Documentation Taxpayers carry the burden of preparation and disclosure of contemporaneous transfer pricing documentation at global and local levels. 24

Asia-Pacific Transfer Pricing Update The required global-level documentation should include: The organizational chart and geographical location of all members of the multinational corporate group of the local Chinese company that is subject to the contemporaneous documentation requirement The business operations of the group The intangible assets of the group Financing arrangements under the group The group s financial and tax performance and results The required local-level documentation would be similar to the current documentation required by Circular 2. However, the local documentation would have three additional disclosure requirements: 1) an analysis of the group s global value chain, including its approach and the result of profit allocation within the group; 2) the disclosure of equity transfers between related parties, including a due diligence report and an asset valuation report; and 3) the disclosure of various information about outbound investments. The provision of any related-party services, the implementation of a costsharing agreement, and the violation of the debt-to-equity ratio standard under the thin capitalization rules all would be subject to the preparation of special contemporaneous transfer pricing documentation. In addition, a company with limited functions and risks that incurs a loss in a tax year would be required to prepare contemporaneous documentation for that tax year. Consistent with Circular 2, the draft measures would require that a company functioning as a simple manufacturer, distributor, or contractual researcher and developer for a foreign related party maintain a reasonable profit level. The submission of false or incomplete contemporaneous documentation would be treated as a failure to submit the documentation. Transfer Pricing Methods The draft measures state that the transfer pricing methods would include the comparable uncontrolled price method, the cost-plus method, the resale price method, the profit split method, and the transactional net margin method, among others. For the first time, the term other methods would be defined to include, for example, the value contribution and allocation method and the valuation methods, which consist of the cost method, the market price method, and the income approach (discounted cash flow method). Under the draft measures, the income approach could be applied to determine the value of an enterprise or an intangible asset. www.crowehorwath.com 25

Crowe Horwath LLP Transfer Pricing Investigation The scope of transfer pricing investigation targets would be broadened to include: Enterprises with large related-party transaction amounts or diversified related-party transactions Enterprises with long-term losses or thin or inconsistent profits Enterprises with profits that fall below the average profit level for the same industry Enterprises with profit levels that obviously do not match their functions and risks or whose benefits received do not match their costs shared Enterprises that perform transactions with related parties located in low-tax jurisdictions Enterprises that fail to report their related-party transactions or that fail to prepare contemporaneous documentation in accordance with tax rules Enterprises with debt-to-equity ratio for the debts received from related parties that exceeds the debt-to-equity standard established in the thin capitalization rules Enterprises that incorporate controlled foreign corporations (CFCs) in low-tax jurisdictions Enterprises that participate in an arrangement without reasonable business purposes Enterprises that violate any other arm s-length principle The Chinese tax authorities would be empowered to require an investigated Chinese company s ultimate foreign controlling shareholder to submit specific information under some circumstances. Enterprises with cross-border transactions would be subject to transfer pricing risk analyses by the Chinese tax authorities before the enterprises could be liquidated. During the analyses, the tax authorities would focus in particular on taxpayers that transferred intangibles to foreign parties for a low price or free of charge. The 10-year statute of limitation, under which the tax authorities have the right to make special tax adjustments to any arrangement lacking a reasonable business purpose, would apply from June 1 of the year following the end of the tax year in which the arrangement subject to the special tax adjustment occurs. The tax investigation notice must be delivered to the taxpayer before the statute of limitation expires. Intangible Assets The draft measures would require that the allocation of benefits from intangible assets between or among related parties be based on their respective economic activities and value contribution, taking into account: The functions performed by the related parties regarding the development, value increase, maintenance, protection, application, and promotion of the intangibles The risks assumed by the related parties The contribution of necessary funds, manpower, and other resources by the related parties and the approach of realization of the value of the intangibles 26

Asia-Pacific Transfer Pricing Update To determine the benefits of intangibles, an overall analysis of the global business operations of the corporate group of the enterprise and of the interaction between the intangibles and other assets, functions, and risks in the global business operations would be performed, taking into account geographical factors, such as market premium and location savings, and value creation factors, such as the interaction of related companies. Adjustments to royalties paid for the use of intangibles between related parties would be adjusted if any of the following occurs: The value of the intangibles has changed substantially. The license agreement allows such an adjustment under the normal business practice. The performance of functions and assumption of risks by the related parties have changed in the course of the use of the intangibles. The licensee of the intangibles subsequently develops, increases the value of, maintains, protects, applies, or promotes the intangibles. Related-Party Services If a company (service recipient) pays a service fee to a related party (service provider), the services must be beneficial to the service recipient, and the payment must be at arm s length. The services would be beneficial to the service recipient if the recipient directly or indirectly receives economic benefits from the services or if an independent party under the same or similar circumstance would voluntarily purchase the services. The services would not be beneficial to a service recipient if any of the following is true: They already have been purchased by the service recipient from a third party or performed by the service recipient itself. They are related to the control, management, or supervision of the service recipient and are provided by a related party to the service recipient to ensure investors direct or indirect investment benefits. The service recipient benefits from the affiliation of a corporate group but does not receive any specific services from a related party. The service provider has received compensation from any other related-party transactions with the recipient. The services are unrelated to the performance of functions and assumption of risks by the service recipient or are unnecessary to the service recipient s business operation. The service recipient does not receive any direct or indirect benefits from the related-party services under any other circumstances, or an independent party under the same or similar circumstances would be unwilling to receive the services or perform the services by itself. www.crowehorwath.com 27

Crowe Horwath LLP Any payments made by an enterprise to a related party for services that are not beneficial to that enterprise could be subject to a special tax adjustment by the Chinese tax authorities and thereby would be nondeductible from taxable income, according to the draft measures. The Chinese tax authorities also would have the right to make special adjustments to payments between related parties for services that are beneficial to the service recipient if the payments are not at arm s length. Hong Kong Documentation Requirement: Hong Kong does not have specific legislation to regulate intercompany transactions. Nevertheless, the Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Notes (DIPN) No. 46, Transfer Pricing Guidelines Methodologies and Related Issues, in December 2009, which set out the IRD s views and practices on the methodologies of transfer pricing and related issues. Under DIPN 46, the IRD would seek to apply the principles in the OECD Transfer Pricing Guidelines except where they are incompatible with the express provisions of the Inland Revenue Ordinance (IRO). Transfer pricing documentation is not mandatory under the IRO. However, enterprises are encouraged to engage in transfer pricing documentation. Penalties: There is no prescribed transfer pricing penalty. However, underpaid tax is subject to up to 300 percent in penalties. Recent Issues and Developments: In March 2012, the IRD released DIPN 48, Advance Pricing Arrangement (APA). APAs are available on a bilateral, multilateral, and (in special circumstances) unilateral basis. The IRD has set minimum transaction levels to apply for APAs. The minimum threshold for the purchase of tangible goods is HK$80 million (US$10.3 million). If the transaction involves services or intellectual property, the minimum threshold is HK$40 million (US$5.2 million) and HK$20 million (US$2.6 million), respectively. However, these thresholds can be waived by the commissioner of the IRD. APAs will be effective for three to five years. 28

Asia-Pacific Transfer Pricing Update India Documentation Requirement: Details of all international transactions with related parties must be furnished in a transfer pricing report and certified by an accountant (in the accountant s report). The report must be filed by Nov. 30 of the succeeding financial year. Penalties: Penalties range from 100 to 300 percent of the additional tax due resulting from a transfer pricing adjustment. Additional penalties of 2 percent of the international transaction value can be levied for failure to submit documentation (such as revenue from intercompany transactions) and 100,000 rupees (approximately US$1,850) can be levied for failure to submit an accountant s report. Recent Issues and Developments: Effective for fiscal years that began April 1, 2012, India has changed its method of calculating an arm s-length range. The range has been narrowed from the arithmetic mean plus or minus 5 percent to the arithmetic mean plus or minus 3 percent. This new range will be subject to change on a year-toyear basis. On April 15, 2013, the Indian tax authority announced that the arm s-length range for wholesale traders will be the arithmetic mean plus or minus 1 percent. The tolerance band remains at 3 percent for all other companies. On Aug. 30, 2012, India also introduced rules governing APAs. The rules on APAs mainly are in line with international practices, but a provision in the rules allows the tax authorities to revise agreements if there is a change in law. The provision reduces the tax certainty gained from an APA and might deter companies from pursuing such agreements. As with most APA programs, there are no strict rules preventing the tax authority from using information it receives during the APA process in a tax assessment, thus allowing the tax authority to use the data to make an adjustment. On Oct. 19, 2015, the Central Board of Direct Taxes (CBDT) released a notification of final rules pertaining to Indian transfer pricing, including a new rule, 10 CA, Computation of Arm s Length Price in Certain Cases. This rule can be applied in determining a range of arm s-length prices, which elaborates that a data set should be constructed by placing the prices in an ascending order and the arm s-length price shall be determined on the basis of the data constructed as such. Rule 10 CA goes on to say that multiple-year data now can be used. 3 3 The current year and up to two years preceding the current year. www.crowehorwath.com 29

Crowe Horwath LLP Japan Documentation Requirement: Effective Jan. 1, 2015, Japan put into place transfer pricing regulations that require all intercompany transactions to be carried out at arm s length with contemporaneous documentation accompanying these transactions. Penalties: There are no specific transfer pricing penalties put in place. However, penalties may range from 10 to 35 percent of the underpaid amount of tax plus interest charges. Recent Issues and Developments: In 2014, the Japanese government announced that Japan would be in compliance with the authorized OECD approach to the taxation of permanent establishments. This method dictates that an arm s-length principle will be applied to the taxation of intercompany transactions between a related party and its parent company. Compliance with this method is required as of April 1, 2016. Malaysia Documentation Requirement: Transfer pricing documentation must be prepared contemporaneously with a company s tax return (due within seven months of the company s fiscal year-end) and made available to the tax authority, Inland Revenue Board of Malaysia (IRBM), upon request. To comply with the contemporaneous documentation requirement under the transfer pricing rules put in place in 2012, taxpayers should have documentation in place upon developing or implementing a controlled transaction. When the transaction is reviewed and there are material changes, the documentation should be updated prior to the due date for furnishing the tax return for that year of assessment (seven months after the taxpayer s financial year-end). Penalties: The director general of IRBM may substitute transfer prices that do not meet the arm s-length standard. Furthermore, adjustments that result in the underpayment of taxes are liable for penalties up to 100 percent of the adjustment. Penalties often are reduced when contemporaneous documentation is in place. According to Malaysia s 2012 transfer pricing guidelines, penalties are 35 percent of the underpaid tax if documentation is not in place and 25 percent if documentation is in place but not in alignment with the guidelines. If contemporaneous documentation is prepared in accordance with the guidelines, then no penalty likely will be applied in the case of an adjustment. Recent Issues and Developments: Effective for the 2014 tax year and each succeeding tax year, the IRBM requires all corporate taxpayers with controlled transactions to make a written declaration in their corporate tax returns on whether transfer pricing documentation was prepared in accordance with the requirements of the transfer pricing guidelines. 30

Asia-Pacific Transfer Pricing Update Singapore Documentation Requirement: On Jan. 6, 2015, the Inland Revenue Authority of Singapore (IRAS) issued revised transfer pricing guidelines that introduced the requirement to prepare contemporaneous transfer pricing documentation with immediate effect. Such documentation should be prepared either at the time at which the transaction takes place or before the tax return for the financial year is filed. The transfer pricing documentation also must be dated. Penalties: With the revision of the transfer pricing guidelines, the IRAS has introduced an SGD$1,000 (approximately US$700) penalty for nonsubmission of transfer pricing documents. In addition, under the corporate tax law, general tax penalties resulting from the underpayment of taxes of up to 400 percent may apply. Recent Issues and Developments: Following are some of the significant developments that have taken place in Singapore: Formal introduction of a transfer pricing audit program Detailed guidance on making self-initiated retrospective transfer pricing adjustments Guidance on IRAS position on attribution of profits to permanent establishments Under its revised transfer pricing guidelines, the IRAS also strengthened its position on intercompany loan transactions by requiring credit ratings to be undertaken on a stand-alone basis for each borrower. With the global focus on BEPS, the IRAS has been studying and evaluating the BEPS Action Plans and recommendations. However, to date no changes mirroring the BEPS recommendations have been implemented. www.crowehorwath.com 31

Crowe Horwath LLP South Korea Documentation Requirement: Transfer pricing documentation must be contemporaneously submitted with the corporate tax return. Penalties: A penalty of up to 100 million Korean won (approximately US$92,000) is applied if a taxpayer fails to submit transfer pricing documentation. Additionally, a penalty of 10 percent is applied to any underpayment of taxes when contemporaneous documentation is not submitted. If the tax is found to be intentionally reduced, the penalty is the greater of 40 percent of the underpaid tax or 0.14 percent of the underreported tax base. An interest penalty of 10.95 percent per year applies to the underpayment of taxes. Recent Issues and Developments: On Aug. 6, 2015, the Ministry of Strategy and Finance announced a tax law change to transfer pricing regulations to be implemented in 2016. In line with the OECD s BEPS project, the proposed tax law change imposes a new documentation requirement for certain multinational companies to submit information on international transactions. The proposed revision to the Law for the Coordination of International Tax Affairs (LCITA) requires a multinational enterprise (MNE) with a certain size of transactions and assets (to be defined) to submit additional transfer pricing documentation (such as a comprehensive report on cross-border transaction information), which would address management information and the current status of cross-border transactions of the MNE. To be specific, the following information should be included in the comprehensive report on cross-border transaction information: Description Report I (Master File) Report II (Local File) Main Contents Comprehensive legal ownership structure and location of subsidiaries or offices of the MNE Details of top five goods or services covering 5 percent of the MNE group s revenue Explanation of major business restructuring, share acquisition, or sale of business Detailed explanation of business and business strategies of local subsidiaries Explanation of major related parties and circumstances leading to related-party transactions List of related parties involved and indication of relationship by the type of related-party transactions Once the proposed bill is sanctioned by the National Assembly, an MNE s tax reporting burden would increase considerably going forward. 32

Asia-Pacific Transfer Pricing Update Vietnam Documentation Requirement: An annual declaration of related-party transactions and transfer pricing methodologies used is required to be filed together with the annual corporate income tax return. A filing company also must prepare and maintain contemporaneous transfer pricing documentation that must be submitted to the tax authority within 30 working days of a request. Penalties: A 20 percent penalty will be imposed on any underpaid taxes and may result in up to three times the underpaid taxes in the case of evasion or fraud. In addition, late payment of taxes is subject to interest, which typically is charged on a daily basis at 0.05 percent. Recent Issues and Developments: An APA mechanism was introduced in 2012 and became effective Feb. 5, 2014. Taxpayers are allowed to agree on a unilateral, bilateral, or multilateral basis with the relevant tax authority on the pricing of their related-party transactions, in advance, for a period of not more than five years. The pilot APA applications recently have been made available. However, the final result and the success of the practical implementation of the guidance remain to be seen. On July 29, 2015, the Ministry of Finance issued two consecutive decisions on the establishment of a transfer pricing inspection department at the General Department of Taxation and at the provincial tax department level, including main cities such as Hanoi, Binh Duong, Dong Nai, and Ho Chi Minh. www.crowehorwath.com 33

Crowe Horwath LLP Contact Information Barry Freeman, Ph.D. Principal, Crowe Horwath LLP barry.freeman@crowehorwath.com +1 212 572 5597 Latin America Argentina Claudia Ortiz claudia.ortiz@crowehorwath.com.ar +54 11 43948091 Brazil Monica Bendia monica.bendia@crowehorwath.com.br +55 21 3385 4662 Chile Sergio Bascunan sergio.bascunan@crowehorwath.cl +562 26076704 Colombia Jairo Rojas jairo.rojas@crowehorwath.com.co +57 1 606 7500 Ecuador Alberto S. Rosado alberto.rosado@crowehorwath.ec +593 (4) 256-0655 Mexico Daniel Cano daniel.cano@crowehorwath.com.mx +52 01 (55) 5343 9611 Peru Hugo Paniague hugo.paniague@crowehorwath.pe +(51)(1) 476-6944 Venezuela Richard Kauffman richard.kauffman@crowehorwath.com.ve +58 (261) 797-2866 European France Véronique Habe vhabe@fidurevison.fr (+33) 03 89 44 55 55 Germany Wolfgang Kirschning wolfgang.kirschning@rwt-gruppe.de +49 7121 489-265 Greece Dimitris Sigalos dsigalos@solcons.gr +30 216 9000 717 Ireland Grayson Buckley grayson.buckley@crowehorwath.ie +353 1 448 2200 Italy Michele Ghiringelli michele.ghiringelli@crowehorwath.it +39 06 69 77 5761 Netherlands Hans Missaar hans.missaar@crowehorwath.nl +31 (0)20 4260600 34

Transfer Pricing Update Norway Roger Drage roger.drage@crowehorwath.no +47 23 23 90 90 Spain Jesus Romero jesus.romero@crowehorwath.es +34 932 448 900 Switzerland Luca Soldati luca.soldati@crowehorwath-ti.ch +41 91 910 47 00 United Kingdom Paul Fay paul.fay@crowehorwath.co.uk +44 (0) 20 7842 7163 Asia-Pacific Australia Alexey Belousov alexey.belousov@crowehorwath.com.au +61 2 9619 1654 Sam Neale sam.neale@crowehorwath.com.au +61 2 9619 1963 China Klaus Chen klaus.chen@chcncpa.com +86 (10) 8821 0177 Hong Kong Wilson Tam wilson.tam@crowehorwath.hk +852 2894 6888 India V. Raghavendran raghavendran.v@crowehorwath.in +91 (22) 6631 1480 Japan Sachiyo Hotta sachiyo.hotta@crowehorwath.com +1 (212) 572-5519 Malaysia Foo Meng Huei menghuei.foo@crowehorwath.com.my +6 03 2788 9898 Singapore Sowmya Varadharajan sowmya@crowehorwath.com.sg +65 6223 7757 South Korea Sung Hyun Park sh.park2@crowehorwath.co.kr +82 2 3166 630 Vietnam Nguyen Quynh Nam Nam.nguyen@crowehorwath.vn +(84-4)2220 8334 www.crowehorwath.com 35

About Us Crowe Horwath LLP (www.crowehorwath.com) is one of the largest public accounting, consulting, and technology firms in the United States. Under its core purpose of Building Value with Values, Crowe uses its deep industry expertise to provide audit services to public and private entities while also helping clients reach their goals with tax, advisory, risk and performance services. With offices coast to coast and 3,000 personnel, Crowe is recognized by many organizations as one of the country s best places to work. Crowe serves clients worldwide as an independent member of Crowe Horwath International, one of the largest global accounting networks in the world. The network consists of more than 200 independent accounting and advisory services firms in more than 120 countries around the world. www.crowehorwath.com When printed by Crowe Horwath LLP, this piece is printed on Mohawk Color Copy Premium, which is manufactured entirely with Green-e certified wind-generated electricity. In accordance with applicable professional standards, some firm services may not be available to attest clients. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. 2016 Crowe Horwath LLP, an independent member of Crowe Horwath International crowehorwath.com/disclosure TAX-16006-000A