It is already October, one of the last months of what has been a challenging year so far. 2020 has been characterized by the rapid spread of COVID-19, along with the economic downturn as a result of this spread. In these times of economic adversity governments worldwide have granted relief measures to help companies. While survival is currently the main point of attention, recovery will soon become increasingly important. It is expected that the huge increase in government expenditure will result in both higher and new taxes and an increase in tax audits. It is expected that MNEs in particular will be affected as taxation of MNEs is a popular theme among politicians and a quick way to refill the Treasury.
In this blog, but also in the subsequent webinar that will be held on Thursday 22 October, we will talk about important developments and topics that companies need to be aware of during the last 2.5 months of 2020. Especially year-end-corrections and the increased compliance burden are important. We will also discuss developments that will be introduced in the coming year.
COVID-19 has been a sudden and unexpected hit for the economy. Most companies never assumed that a global pandemic would bring large parts of the economy to a standstill. This can also be reflected in the way certain subsidiaries, especially Low-Risk Distributors (i.e. LRDs), are remunerated. These companies usually receive a fixed arm’s length remuneration, regardless whether the residual profit turns out positive of negative. However, in these extraordinary times, unrelated companies entering into comparable transactions could agree to also share losses in order to survive together. This means that the result of LRDs in your organisation might become break-even or even negative for 2020. These losses might then be offset against profits from earlier years, what would lead to a significant amount of cash and tax savings in a time in which cash is king.
Due to the arm’s length principle such positions must of course be substantiated. During this process of substantiation certain questions may arise. The first question is how to benchmark the profit margin of comparable uncontrolled transactions. If a company claims that third parties would agree to share the losses in comparable transactions, the tax authorities may want data that back your claim. The problem is there is not much data available at this point that reflect uncontrolled transactions during a pandemic.
Another question that may arise is how to implement these year-end-adjustments. It might be useful to already start gradually changing your profit during 2020. When the year-end-changes are carried out after the books have been closed, this likely results in a discussion with a number of tax authorities of some countries. Sometimes, such changes, although completely in line with the arm’s length principle, can lead to tax authorities classifying this as a dividend payment. Instead of lowering the profit, your company might be faced with withholding taxes.
We have broad experience in dealing with such corrections and are pleased to provide support.
Since there are still 2.5 months left until the end of the year, it is also important to look at certain compliance requirements. Non-compliance may be considered low-hanging fruit for tax authorities to fill the Treasury.
Since the BEPS-project of 2015 many countries have started to require CbCR-reports, Local and Master Files. Whereas these documents sometimes must be provided upon a few days of request, other countries demand that these files are filed at the end of the year. Besides these documents, companies will always have to substantiate the arm’s length nature of the intercompany transactions they enter in. Non-compliance can lead to large fines, the reversal of the burden of proof and even director’s liability.
Financial transactions guidance
Last February, the OECD finally released its newest chapter of the Transfer Pricing Guidelines, in which guidance for intercompany financial transactions is provided. This clears the way for tax authorities to start new tax audits into intercompany financial transactions. With the new guidance, the treasury policy and related substance must be analysed as well as current and new intercompany loans and guarantees and other financial instruments as cash pools and captive insurances.
Either this year or early 2021, the Mandatory Disclosure Rules/DAC6 will become effective in most jurisdictions. Cross-border arrangements that meet certain hallmarks must be reported. Depending on the situation, the reporting obligation lies on your company or your intermediary.
Conclusion and support
Taking care of your compliance requires an investment up front but can in many situations save a considerable amount of both funds and time in the near future. Based on your company’s profile and risk appetite, our team at Quantera Global can guide you through the different Transfer Pricing documentation requirements in the countries where you are active and provide a suitable documentation strategy. We can also help you to become more efficient and in control with the Transfer Pricing Automation and Monitoring Tool named Coperitas. Coperitas enables you to be in control of your Transfer Pricing requirements around the world and has various add-ons, for example in relation to Mandatory Disclosure.
The end of the year is near, which is a great time for MNEs to check whether they are in control of their taxes. In a time where cash is king, it is crucial to look at ways how your company can save on (cash) taxes. Year-end-corrections are in the light of COVID-19 a great way to improve your cash position. In the long run it is also important to start preparing for an increase in tax audits. It is important to make a risk-analysis, to determine whether your company might be at an increased risk of such an audit. It is expected that governments worldwide will increase such audits to cover the expenses made in 2020 and 2021 to help companies and civilians in need. The 2.5 months until the end of 2020 will partially determine your assets in 2021.
At Quantera Global we use both our expertise and experience to guide you through the last months of this tumultuous year. To further talk about the year-end-topics, we have a free-of-charge webinar scheduled on Thursday 22 October, from 9:00 – 10:00 CET. Our experts Rudolf Sinx and Maikel Verhoeven will dive deeper into the current Transfer Pricing developments and year-end-topics. You can register sending a short e-mail to QGAcademy@quanteraglobal.com and we will send you the dial-in link accordingly. For more information on our Webinars, you can click here.