The COVID-19 pandemic has hit almost every country in the world. As the COVID-19 crisis has major economic consequences for most countries, governments are facing huge costs to finance economic stimulus packages of an unprecedented volume. To make things worse, tax revenues are declining rapidly as a result of the economic downfall.
At some time in the future, the COVID-19 bill will however have to be paid. Most likely, governments will then turn to their taxpayers and in doing so, they will also request a “fair share” from multinational enterprises (“MNEs”). The first steps are currently already being taken. For example, the European Commission presented on 27 May its recovery plan for Europe. In order to finance this recovery plan, the European Commission calls for the introduction of new own resources, including tax measures. The European Commission calls for example for a contribution that will affect companies that draw huge benefits from the EU single market. Also, an EU digital tax for companies with a turnover above EUR 750 million is proposed.
Furthermore, it is of course likely that tax authorities will seek to optimize existing tax resources and will make optimal use of all available instruments to monitor taxpayers. A useful tool in this respect is the information that will become available to tax authorities as a result of the EU Mandatory Disclosure rules.
EU Mandatory Disclosure – a perfect start for controversy
The Mandatory Disclosure Directive that was adopted in 2018 introduced new minimum rules for the disclosure of potentially aggressive cross-border tax planning arrangements. The mandatory disclosure rules oblige tax intermediaries that are involved in the set-up of certain tax arrangements to report these transactions to the tax authorities. If no intermediary is involved – or if no EU based intermediary is involved – the taxpayer itself will have to report the tax arrangement to the tax authorities.
Although the European Commission has postponed the reporting deadline to November 2020 due to the COVID-19 crisis, taxpayers already have to take the mandatory disclosure requirements into account. The directive applies to all hallmarked transactions of which the implementation started after 25 June 2018, so the directive materially has a retroactive effect.
Once the actual reporting process starts, tax authorities will be presented with information on a variety of tax and TP arrangements. Taxpayers can expect that tax authorities will examine this information closely and will use this information as a starting point for tax audits. Taxpayers that are involved in various arrangements that have been hallmarked as potentially aggressive are obviously more likely to be scrutinized than taxpayers that are not involved in any reportable arrangements.
It is therefore essential that taxpayers make sure that they have a proper tax risk strategy in place. If certain structures in which the company is involved are no longer in line with the company’s risk appetite, the company has to take the proper steps in order to realign its structure with its tax risk strategy. In any case, companies will have to make sure that they properly document hallmarked transactions, for example in a defense file.
TP risk management is key
The transfer pricing position of the company is a key element in assessing any tax risk strategy. Although most of the mandatory disclosure requirements apply to arrangements of which the main benefit is the obtaining of a tax advantage, certain transfer pricing transactions will have to be reported in all cases – even if there is no tax planning involved at all.
This is for example the case if functions or risks are transferred within a group and such transfer results in a decrease of the EBIT of the transferring company of at least 50%. Even if there are sound business reasons for such restructuring, the transaction still has to be reported under the disclosure rules. The same applies to the intercompany transfer of hard-to-value intangibles, or when the company applies unilateral safe harbor rules.
It is very likely that these hallmarked transactions will function as a perfect start for a tax audit – and possibly in more than one country. Taxpayers should therefore be aware that the mandatory disclosure requirements that are being implemented EU-wide are likely to lead to controversy discussions with tax authorities in the various EU countries involved.
Companies should therefore wait no longer and carry out an adequate TP risk assessment, in order to be prepared for controversy discussions.
Taxpayers should therefore:
(i) Define their risk appetite;
(ii) Determine their TP risk strategy accordingly;
(iii) Review their current TP position;
(iv) If necessary, make the proper adjustments;
(v) Draft proper TP documentation and defense files.
Your Quantera Global advisor can help you with your TP risk assessment.
If you would like to know more on controversy in the post-COVID-19 era, we kindly invite you to join our webinar on this topic on Thursday, 4 June 2020. Registration is possible through the following link: Controversy in a post-Corona era