Countries take diverse transfer pricing approaches to financial transactions, profit attributions

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By Doug Connolly, MNE Tax

Updated transfer pricing country profiles released by the OECD on August 3 include for the first time information on 20 reviewed countries’ transfer pricing rules applicable to financial transactions and their approach to the attribution of profits to permanent establishments.

In addition to including the expanded information for 17 previously reviewed countries, the latest updates also add three new country profiles for Angola, Romania, and Tunisia. The additions increase to 60 the total number of countries covered in the profiles.

The 17 jurisdictions with updated profiles are Argentina, Australia, Colombia, Costa Rica, Czech Republic, Denmark, India, Japan, Netherlands, New Zealand, Nigeria, Norway, Russia, Slovak Republic, Spain, Switzerland, and Turkey.

The OECD will update over the next year the remaining 40 existing country profiles to include the new information on financial transactions and the attribution of profits.

Financial transactions

Regarding financial transactions, the 20 new and updated profiles now include information detailing whether the country has in place domestic transfer pricing rules specific to financial transactions. It also includes information on any other rules that are relevant for the tax treatment of financial transactions (e.g., interest deduction limitation rules).

Seven of the 20 reviewed countries have specific transfer pricing rules applicable to financial transactions: Argentina, Colombia, Denmark, Japan, Romania, Russia, and Tunisia.

A further 11 countries do not have transfer pricing rules specific to financial transactions but have other applicable rules in place: Australia, Costa Rica, Czech Republic, India, the Netherlands, New Zealand, Nigeria, Norway, Slovak Republic, Spain, and Turkey.

Out of the 20 countries, only two – Angola and Switzerland – have no relevant rules for financial transactions.

Attribution of profits

With respect to the attribution of profits to permanent establishments, the new and updated profiles include information regarding whether the country follows the authorized OECD approach. It also specifies the number of treaties in which the country follows this approach. The profiles further list whether the country follows any other approach.

A slight majority of the reviewed countries – 12 of 20 – follow the authorized OECD approach: Angola, Argentina, Denmark, Japan, the Netherlands, Norway, Romania, Russia, Slovak Republic, Spain, Switzerland, and Tunisia.

Colombia follows the authorized OECD approach in some tax treaties and another approach in other treaties.

Australia, India, and New Zealand follow a different approach than the authorized OECD approach.

Costa Rica, the Czech Republic, and Nigeria neither follow the authorized OECD approach nor have in place another approach.

Information on the attribution of profits approach for Turkey was lacking.

Oman suspends local filing transfer pricing reporting requirement

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By Nour Ali, regional tax consultant at DNV, Dubai

On 7 July, the Oman tax authority published an announcement suspending the country-by-country local filing requirement until further notice. All relevant entities operating in Oman are required to continue to comply with all other obligations under the country-by-country reporting requirement.

Additionally, on 13 July, the Oman tax authority published an alert that clarifies the announcement made on 7 July and asserts that the suspension of local filing applies only to country-by-country reports filed by multinational enterprise groups with an ultimate parent entity outside of Oman. (Accordingly, the suspension does not apply to a multinational enterprise group with an ultimate parent entity inside of Oman). Moreover, the alert affirms that the country-by-country notification requirement shall continue to apply.

Country-by-country reporting requirement in Oman

On 27 September 2020, Oman introduced the country-by-country reporting requirements via Oman Tax Authority Chairman Decision No. 79 of 2020 by virtue of the Income Tax Law issued by Royal Decree No. 28 of 2009 and Royal Decree No. 24 of 2020 ratifying the Convention on Mutual Administrative Assistance in Tax Matters.

The country-by-country reporting requirements apply for reporting years beginning on or after 1 January 2020. As a general rule, the country-by-country reporting requirements apply to entities that are tax resident in Oman and are part of a multinational enterprise group with consolidated group revenues equal to or exceeding 300 million Omani Riyal (i.e., approximately USD 780 million) in the financial year preceding the reporting year.

The Chairman’s Decision requires local tax resident entities in Oman to submit a country-by-country notification if it is the ultimate parent entity or elected as a surrogate parent entity. If the local tax resident entity is not the ultimate parent entity or elected as a surrogate parent entity, then, it shall submit a country-by-country notification declaring the identity of the ultimate parent entity or the elected surrogate parent entity, which will submit the country-by-country report on behalf of the group no later than the last day of the reporting year of such multinational enterprise group.

Furthermore, the Chairman’s Decision stipulates a local filing requirement. Under this requirement, local tax resident entities in Oman (i.e., constituent entities) of a multinational enterprise group exceeding the threshold of 300 million Omani Riyal (which are not the ultimate parent entities or the surrogate parent entities) are required to submit a country-by-country report to the Omani Tax Authority under certain conditions specified in Article 3 of the Chairman’s Decision (i.e., when the Oman tax authority is unable to receive the country-by-country report from any other country through the automatic exchange of information).

Oman position on activated exchange relationships for country-by-country reporting

As per the latest update made on the activated exchange relationships for country-by-country reporting maintained by the OECD, Oman has activated exchange relationship with 27 countries. These exchange relationships are all non-reciprocal, meaning Oman will only send country-by-country reports to the 27 countries, it will not receive any country-by-country reports from them.

The existing non-reciprocal relationships became active starting from 1 January 2021. In that sense, the vast majority of multinational enterprise groups operating in Oman may have been required to undertake local filing of the country-by-country report in Oman.

In addition, according to the OECD’s handbook on effective implementation of country-by-country reporting, published 29 September 2017, in cases where the country can be construed as being a non-reciprocal country, local filing requirement shall not apply.

Concluding thoughts

The Oman tax authority’s suspension of local filing shall not apply to multinational enterprise groups with an ultimate parent entity in Oman. Such multinational enterprises are still required to fully comply with the country-by-country reporting, as well as the country-by-country notification requirement.

Multinational enterprises groups with an ultimate parent entity outside of Oman are still required to comply with the country-by-country notification requirement.

It is expected that further alerts and announcements might be communicated by the Oman tax authority to provide further guidance or to clarify certain elements with respect to the development of the situation surrounding the local filing requirement, as well as the non-reciprocal relationship status of Oman.

—Nour Ali is a regional tax consultant at DNV, Dubai.

US IRS explains tax rules for MNE branch income in a foreign currency

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A practice unit published by the US Internal Revenue Service on July 26 describes the rules applicable to US multinational enterprises that enter into foreign currency transactions through certain branches or disregarded entities referred to as “qualified business units.”

US companies doing business through foreign branches generally recognize under Internal Revenue Code Section 988 transactional foreign currency gains and losses that result from fluctuations in the value of the applicable foreign currency to the US dollar.

However, such companies may avoid recognizing IRC 988 gain or loss by entering into foreign currency transactions through a qualified business unit under IRC 989. A qualified business unit is a branch or disregarded entity that maintains separate books and records and has activities that rise to the level of a trade or business.

Qualified business units are subject to IRC 987, under which income or loss is generally computed separately in the qualified business unit’s functional currency and is translated into the owner’s functional currency at the appropriate exchange rate. Certain transfers from the qualified business unit to the owner may constitute remittances requiring the owner to recognize foreign currency gain or loss under IRC 987.

The practice unit explains the rules under IRC 987 for determining the qualified business unit’s taxable income and earnings and profits and translating them into the owner’s functional currency. It also addresses the rules on computing foreign currency gain or loss on remittances. As noted in the practice unit, there are several possible methodologies for complying with IRC 987, which have been issued through different sets of regulations.

IRS practice units are internal training materials developed for agency employees.