Noteworthy rule changes impacting transfer pricing documentation requirements for fiscal year 2020 and beyond
2020 has been an unprecedented year filled with many uncertainties. In the transfer pricing world, the OECD has been busy addressing transfer pricing implications of the coronavirus disease 2019 (COVID-19) and Digital Services Taxation, and countries continued to implement changes to their respective transfer pricing documentations rules. This motivation stems from the long-term trend to strengthen documentation standards globally to better enforce transfer pricing rules. Documentation standards are one of the key enforcement tools for tax authorities, and as transfer pricing is the leading source of international tax adjustments, countries are continually seeking to improve their documentation standards.
Evident from these updates, more countries are adopting a “more is better” mentality, requiring either mandatory submission of relevant transfer pricing documentations (e.g., Chile and Denmark) or further evidence of contemporaneous documentation (e.g., Italy). Previously, transfer pricing documentation was generally required to be prepared and kept on file by the taxpayers and only submitted upon request by a tax authority. As tax authorities around the world shift towards targeted audit and risk-based audit, lack of transfer pricing documentation compliance is an easy way to attract unwarranted attention, raising red flags and triggering potential audits. Therefore, as best practice for compliance, multinational enterprises (MNE) should incorporate these new requirements as part of their due diligence to prepare audit-ready transfer pricing documentation package that includes up-to-date intercompany agreements, contemporaneous transfer pricing documentation and other supporting documents.
As an aid for your planning of Master File, Local File and/or local transfer pricing documentation for the 2020 reporting year, in this alert, we compiled a highlight of these key transfer pricing documentation updates from various countries that are effective for fiscal year beginning on or after January 1, 2020.
- CHILE: Effective for fiscal year ended December 31, 2020, Chile has aligned transfer pricing documentation requirements with BEPS Action 13 by further introducing Annual Master File Affidavit (Form 1950) and Annual Local File Affidavit (Form 1951). If specified criteria for the respective affidavits are met, the respective affidavits are required to be submitted electronically by the last business day of June following end of reporting year.
- CYPRUS: Cyprus is expected to pass the draft bill that introduces broader transfer pricing legislation and documentation requirements. The draft bill has a retroactive effective date that applies to fiscal years beginning on or after January 1, 2020. The updated transfer pricing documentation rules are expected to cover all intercompany transactions and should be based on the OECD Transfer Pricing Guidelines.
- DENMARK: For fiscal years beginning on or after January 1, 2021, Danish tax payers are required to submit the transfer pricing documentation package (Master File, Local File) to the Danish tax authority no later than 60 days after the tax return deadline (i.e., 60 days after June 30 of the year following year-end).
- INDIA: Indian transfer pricing reports are required to be prepared contemporaneously with the filing of Form 3CEB, now due by October 31, 2021 for the 2020-2021 reporting year. Indian taxpayers should have Indian transfer pricing reports prepared by October 31, 2021 for the 2020-2021 reporting year, instead of the previous timeline of November 30 following the end of reporting year.
- IRELAND: Effective for fiscal years beginning on or after January 1, 2020, Ireland has implemented changes to Irish transfer pricing rules contained in Section 835C of the Taxes Consolidation Act of 1997 to align with the 2017 OECD Transfer Pricing Guidelines. As a result, if specified thresholds are met, Master File and Local File are required to be prepared contemporaneously with the filing of the corporate tax return and must be submitted within 30 days upon a request by Irish Revenue Commissioner.
- ITALY: In November 2020, Italy aligned its domestic transfer pricing legislation to the 2017 OECD Guidelines and BEPS Action 13 by making material changes to the "appropriate" transfer pricing documentation. These significant changes, including the introduction of Master File and Local File, established new requirements for opting into the Italian penalty protection regime. Furthermore, for penalty protection, Italy also requires contemporaneous documentation via the electronic signature of the legal representative of the Italian entity.
On August 31, 2020, Chile Internal Revenue Service issued Resolution No. 101 and introduced two new affidavits – Annual Master File Affidavit (Form 1950) and Annual Local File Affidavit (Form 1951) – as part of Chile transfer pricing documentation requirements. With the newly implemented Master File and Local File Affidavits and the country-by-country reporting (CbCR) rules already in force, Chile is effectively aligned with OECD BEPS Action 13 project’s three-tiered transfer pricing documentation approach.
Annual Local File Affidavit (Form 1951)
The Annual Local File Affidavit (Form 1951) is required for taxpayers that meet all of the following conditions:
- Considered a large-size company as of December 31 of the reporting year,
- The parent or controlling entity of the MNE group had to file the CbCR in Chile or abroad, and
- Carried out transactions with cross-border related parties for amounts greater than 200 million Chilean pesos.
Exceptions include credit operations of money or financial operations, which must be reported regardless of their amount.
The Annual Local File Affidavit requires information on the Chilean taxpayer, including:
- Background of the Chilean entity, including employee headcounts, organizational divisions, business reorganizations during the reported year, and advance pricing agreements (APAs) in force,
- Details of the transactions with cross-border related parties, including transaction amounts, existence of intercompany agreements and the transfer pricing analysis information (e.g., interquartile range, number of comparable companies and use of comparability adjustment), and
- Entity financial information, such as income and operating costs, administrative and sales expenses, and operating results.
Effective fiscal year ended December 31, 2020, the Annual Local File Affidavit is required to be submitted electronically by the last business day of June following the end of the reporting year. The Annual Local File Affidavit is an additional requirement and separate from transfer pricing documentation, which is only required to be submitted upon request by the tax authorities. Transfer Pricing documentation is required to be prepared contemporaneously with the filing of the affidavits or the existing transfer pricing return (Affidavit No. 1907) and only required to be submitted upon request by the tax authority. The contents within the transfer pricing documentation (e.g., benchmark analysis) will be needed to fill out the Annual Local File Affidavit.
Annual Master File Affidavit (Form 1950)
The Annual Master File Affidavit (Form 1950) is required for taxpayers that meet either one of the following conditions:
- MNE Group’s parent or controlling entity report consolidated income of the MNE Group is at least EUR750 million or
- The Chilean resident entity belonging to the MNE Group has been designated as the surrogate to file the CbCR, on behalf of the parent or controlling entity.
The Annual Master File Affidavit requires the following information:
- Organization structure, including the names of all MNE Group entities, countries and ownership percentages,
- Intercompany agreements and APAs in force, and
- Other background information, such as business reorganizations, transfer of intangibles and transfer pricing policies.
In 2021, Cyprus is expected to pass a draft bill to introduce broad transfer pricing legislation and documentation requirements. The draft bill will apply retroactively and apply to fiscal years beginning on or after January 1, 2020. The updated transfer pricing documentation rules are expected to cover all intercompany transactions and be based on the OECD Transfer Pricing Guidelines. For reporting years up to 2019, Cyprus transfer pricing documentation requirements are limited to intercompany loans financed by debt. For the 2019 reporting year, embedded intellectual property income is also subject to Cyprus transfer pricing documentation requirements.
Pursuant to the draft legislation, Cypriot companies that are not the ultimate parent entity of the MNE groups are exempt from preparation of the Master File. Further, Cypriot companies that have intercompany transactions of EUR750,000 or higher in aggregate amounts per type of transaction are expected to prepare a Local File. If required, Master File and/or Local File documentation should be prepared within 12 months from the respective reporting year end.
For fiscal years beginning on or after January 1, 2021, Danish tax payers are required to submit their transfer pricing documentation package (Master File, Local File) to the Danish tax authority no later than 60 days after the tax return deadline (i.e., 60 days after June 30th of the year following year-end, or August 29th). If the taxpayer fails to submit the required transfer pricing documentation by the deadline, the Danish tax authority may assess the taxable income by means of a discretionary assessment. Previously (up to fiscal years ended December 31, 2020), the TP documentation was only required to be prepared contemporaneously and only required to be submitted upon request by the tax authorities.
For each reporting year, India taxpayers are required to file an accountant’s report (Form 3CEB) to disclose international transactions and certain specified domestic transactions. Up to reporting year 2018-2019, India related party transaction form 3CEB was due November 30 after the fiscal year end. Effective reporting year 2019-2020, Form 3CEB’s due date was accelerated to October 31 after the fiscal year end. Since India transfer pricing reports are required to be prepared contemporaneously with the filing of Form 3CEB, India taxpayers should plan accordingly to have reports prepared by October 31, 2021, instead of the previous timeline of November 30.
For accounting periods beginning on or after January 1, 2020, Ireland has implemented changes to Irish transfer pricing rules contained in Section 835C of Taxes Consolidation Act 1997 to follow the OECD Transfer Pricing Guidelines. Master File is required for taxpayers that belong to MNE group with EUR250 million or more of annual group consolidated revenue. Local File is required if the taxpayer is part of the MNE group with EUR50 million or more of annual group consolidated revenue. The OECD Master File and Local File report format align with Irish transfer pricing documentation requirements.
The transfer pricing documentation should be prepared contemporaneously with the filing of the corporate tax return and must be submitted within 30 days upon a request by Irish Revenue Commissioner.
Ireland’s Department of Finance has indicated that the transfer pricing rules may extend to small and medium-sized enterprises (SMEs), companies with fewer than 250 employees and either consolidated revenue of less than EUR50 million or consolidated assets of less than EUR43 million, in the future through Ministerial Commencement Order. The transfer pricing documentation requirements for SMEs are expected to be simplified.
On November 23, 2020, the Italian Revenue Agency issued Act of the Director of the Revenue Agency No. 360494 (New Act) that introduced significant and material changes to the rules related to "appropriate" transfer pricing documentation, which effectively established the new requirements for opting-in the Italian penalty protection regime. The New Act replaces the Act of the September 29, 2010 and aligns the domestic transfer pricing legislation to the OECD Guidelines.
For penalty protection, in addition to the requirement for contemporaneous preparation of Master File and Local File, the electronic signature of the legal representative or their delegate of the Italian entity jointly with a digital time stamp is required to be executed no later than the date of the filing of the relevant corporate income tax return. Further guidance from the Italian tax authorities is needed to clarify the parameter of the data and documents that must be certified with the digital time stamp.
With respect to penalty protection, the New Act allows the taxpayers to determine the parameters of intercompany transactions to be included in the Master File and the Local File by preparing the transfer pricing documentation with references only to some of the intercompany transactions. Therefore, penalty protection is granted on a transaction-by-transaction basis with reference to the covered transactions and for which the information provided is considered compliant with the New Act requirements.
In addition to the general information already required by the previous Act related to the Italian entity (i.e., history, recent evolution, reference market and operating structure) and to each covered transaction (i.e., the nature of the transaction, amount, counterparties, comparability analysis and transfer pricing method applied), the Local File should also include the following, if applicable:
- A description of the reporting lines for the personnel employed in each local Italian entity,
- A description of any reorganization or transfers (including intangible assets) that affected the local Italian entity,
- A description of the rationales for performing a multi-year analysis and of any comparability adjustment,
- A description of the "critical assumptions" adopted in the application of the transfer pricing method,
- Financial data information on financial data (e.g., annual financial statement, information, financial data used for the application of the transfer pricing method and financial data for comparable companies selected in the analysis), and
- A copy of the unilateral, bilateral or multilateral APAs and of the cross-border rulings for which the local Italian entity is not a party to but is related to the covered transactions described in the Local File.