Transfer Pricing: Foreign Rules and Practice Outside of Europe, Part 2 —written by Woo Taik Kim, Tax Attorney and CPA; Dong Jun Yeo and Unghwan Rap Choi, both of Kim & Chang; Peter Blackwood and David Lewis, both of Deloitte Touche Tohmatsu; and Lionel Bonner Nobre of BDO Seidman LLP—presents the rules and practice related to transfer pricing in Korea, Australia, and Brazil. This detailed analysis makes up Chapters 34, 35, and 36 of Bloomberg BNA’s Tax Management Transfer Pricing Portfolio Series.
Chapter 34, Transfer Pricing Rules and Practice in Korea, describes the sources and scope of Korean transfer pricing rules, the approved transfer pricing methodologies and priorities, and the documentation required to support transfer prices under those rules. This chapter also analyzes the procedures and strategies available in dealing with the Korean tax authorities on transfer pricing issues, and discusses the availability of and experience with joint U.S.-Korean action in connection with the mutual assistance provision of the U.S.-Korean income tax treaty and in connection with bilateral advance pricing agreements.
Chapter 35, Transfer Pricing Rules and Practice in Australia, describes the transfer pricing rules in Australia and discusses the way in which those rules are applied by the Australian tax authorities. This chapter addresses the expectations of taxpayers with respect to the documentation of transfer pricing arrangements, the manner in which taxpayers are selected for examination, the penalty regime, and defenses against transfer pricing adjustments. The treatment of tax losses, reliance on experts, Competent Authority processes, the relationship between transfer pricing and customs issues, and the limited case history in Australia are also discussed.
Chapter 36, Transfer Pricing Rules and Practice in Brazil, describes the transfer pricing rules in Brazil, their practical application to Brazilian taxpayers, and the effect of those rules in competent authority proceedings. This chapter places particular emphasis on a comparison of those rules with the OECD transfer pricing guidelines and discusses in detail the likely legality of the rules as currently written under the Brazilian Federal Constitution.
Transfer Pricing: Foreign Rules and Practice Outside of Europe, Part 2 allows you to benefit from:
This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.
Detailed Analysis
Chapter 34: TRANSFER PRICING RULES AND PRACTICE IN KOREA by Woo Taik Kim, Dong Jun Yeo, and Unghwan Rap Choi Kim & Chang Seoul, Korea
34:I. Overview of Korean Tax System and Administration
A. Income over Which Korea Asserts Tax Jurisdiction
1. Income Derived by U.S.-Based Entities from Transactions Involving Korean Activities or Payments
2. Income Derived by Korean-Based Entities from Transactions Involving Foreign Activities or Payments
B. Tax Administration Organization
C. Audit Procedures
D. Complaint Against Notice on Outcome of Tax Audit
E. Assessment of Corporation Tax
1. Payment Notice
2. Payment Suspension and Collateral
F. Administrative Appeal of Disputed Tax Assessments
1. NTBL Appeals
2. BAIL Appeals
3. Comparison of the Two Procedures
G. Judicial Appeal of Disputed Audit Findings
H. Mutual Agreement Procedures
I. Burden of Proof
1. Administrative Proceeding
2. Court Proceedings
34:II. Basic Korean Transfer Pricing Rules
A. Introduction
B. Transactions Affected
1. Overview
2. Tangible Property Transactions Subject to Transfer Pricing Rules
a. All Types of Tangible Property Covered
b. Types of Tangible Property Transactions Covered
3. Intangible Property Transactions Subject to Transfer Pricing Rules
a. Types of Intangible Property Covered
b. Types of Intangible Property Transactions Covered
c. Recognition and Treatment of Research and Development Cost Sharing Arrangements
4. Services
5. Loans
C. Definition of Foreign Related Parties
2. Definition of Special Relationship under ITCL
a. 50% Parent-Subsidiary Relationship
b. 50% Brother-Sister Relationship
c. Constructive and Indirect Ownership
3. Detailed Definition of Special Relationship Under ITCL-ED
a. Inbound Investment Situations
b. Outbound Investment Situations
c. Common Ownership Situations
d. Effective Control Circumstances
4. Extent to Which Indirect Relationships May Be Taken into Account
5. Third Party Intervention
D. Transfer Pricing Methodology
1. Most Reasonable Method
2. Types of Transfer Pricing Methods
a. Comparable Uncontrolled Price (CUP) Method
b. Resale Price Method
c. Cost Plus Method
d. Other Reasonable Methods
(1) Profit Split Method
(2) Transactional Net Margin Method ("TNMM")
(3) Other Methods Deemed Reasonable
3. Guidance in the Basic Guideline
c. Use of Transactions Between Related Parties
d. Berry Ratio
e. Use of Interquartile Range
4. Selection Criteria
a. Comparability
b. Data Availability and Accessibility
c. Economic Circumstances
d. Sensitivity to Error
5. Setoffs
6. Economic Databases
a. Korea Investors Service, Inc. (KIS) Line
b. Korea Management Consulting & Credit Rating Corp. (KMCC) Line
c. Korea Credit Information (KCI) Line
d. Annual Corporation Reports (ACR)
e. Comments
7. Supplement to Arm's-Length Price Method
8. Comments on Honoring Form of Transaction
E. Intragroup Service Charges
1. Basic Guideline
2. Appeal Cases
F. Sources of Transfer Pricing Rules
1. Statutes and Guidelines
a. International Tax Coordination Law
b. ITCL Enforcement Decree
c. ITCL Enforcement Regulations
d. Basic Guidelines
2. Administrative Regulations
a. NTA Notice 98-12
b. International Tax Administrative Regulation
c. Priority of Transfer Pricing Methods
d. Influence of OECD Standards (Including Most Recent Draft Guidelines)
e. Likely Reaction to U.S. Commensurate-With-Income Standard for Intangibles
f. Applicability of Profit Split Methods
g. Use of Expert Economic or Industry Evidence in Establishing "Correct" Transfer Prices
h. Availability of Entity-Based Methods, Such as Comparable Profits Method (and Comparison to Transactional Net Margin Method)
3. Defenses Against Transfer Price Adjustments
a. Prudent Business Behavior or Motivation
b. Market Share Strategies
c. Set-Offs
4. Judicial Decisions
a. M Case - Commission
b. F Case - Parts Purchases
c. T Case - Semiconductor Sales
d. A Korean Parent Company - Sales of Alternators
e. UIP/CIC Case - Royalties for Use of Theatrical Films and Video Films
G. Corresponding Adjustments
1. ITCL Provisions
2. Secondary Adjustments
a. ITCL Provisions
b. Return of Income
c. Statutory Background
3. Characterization of Unrepatriated Adjustments
a. Foreign Related Party Is Shareholder
b. Foreign Related Party Is Subsidiary
c. Foreign Related Party Is Not Direct or Indirect Shareholder nor Direct or Indirect Subsidiary
4. Treatment of Repatriation of Adjustments
5. Corresponding Adjustments to Korean Parent
6. CTL Enforcement Decree
34:III. Penalties, Tax Amnesty and Interest on Additional Corporation Tax Due Based on Transfer Pricing Related Income Adjustments
A. Gasanse
1. Additional Tax for Underreporting of Income
2. Additional Tax for Arrearage
3. Additional Tax for Failure to Pay Withholding Tax
B. Gasangum and Jung Gasangum
C. Interest Equivalent Amount
D. Kwataeryo
1. Imposition
2. Appeals Procedure
34:IV. Dealing with the Korean Tax Administration on Transfer Pricing Issues
A. Advance Pricing Approval Procedures
1. Application
2. Confidentiality
3. Review Process
4. Bilateral Arrangement
5. Termination of the NTS's Review
6. Annual Report
7. Approval
B. APA Practice
1. Considerations in Deciding Whether to Obtain Ruling on Transfer Pricing Standards
2. Ease or Difficulty in Obtaining Rulings
3. Extent to Which APA Binds a Taxpayer and the Tax Administration
4. No Additional Tax Applies for Underreporting of Income
C. Korean Government Participation in U.S. APA Process
D. Reporting International Transactions
1. Schedule of International Transactions
a. Form No. 1 Report
b. Transaction Summary Report
c. Submission of Financial Information for Foreign Related Parties
d. Domestic and Foreign-Based Documents - Inventory Transactions
e. Domestic-Based Documents - Other than Inventory
2. Reporting Certain Inter-Branch Transactions
3. Reporting Differences Between Transaction Price and Reported Price
4. Justification of Transfer Pricing Method
5. Related Party's Income Statement
a. Overall
b. Inventory
c. 1998 Rule as Revised by 2003 Rule
E. Transfer Pricing Audits
1. Information Requests by the Tax Administration
2. Penalties for Failing to Comply with Information Requests
3. Establishment of Special Transfer Pricing Teams
4. Guidelines or Practical Rules Used by Korean Tax Examiners for Identifying Potential Transfer Pricing Issues
5. Types of Information Used in Transfer Pricing Audits
6. Authority of the Tax Administration to Require Taxpayer to Create Documents Regarding Profitability
F. Refund Claims Following U.S.-Initiated Allocations of Income from Korean Entities to U.S. Taxpayers
1. Refund Procedure
2. Background
3. Forms to Be Used
G. Negotiated Settlements of Korean-Initiated Adjustments
34:V. Practical Aspects of the Competent Authority Process
A. Application for Korean Competent Authority Assistance
1. Mechanics of Application
2. Request of Assistance from NTS
B. Degree of Foreign Taxpayer Involvement with Korean Competent Authority
C. Korean Competent Authority's Willingness to Deviate from Korean Transfer Pricing Rules
D. Korean Competent Authority's Willingness to Deviate from Korean Rules on Penalty and Interest (Including Interest on Refunds)
E. Arbitration Possibilities
1. Korean Arbitration Rules
2. Other Arbitration Rules
34:VI. Information Reporting and Recordkeeping
A. Practical Applications of Exchange of Information Agreements
B. Korean Rules on Confidentiality of Information
C. Taxpayers' Bills of Rights under the NTBL
D. Defenses Against Information Requests by Foreign Governments
34:VII. Coordination of Transfer Pricing with Korean Customs Declarations
A. Customs Valuation Rules
B. Customs Valuation vs. Transfer Pricing of Imported Goods
C. Six Valuation Methods
1. First Method: Transaction Value of the Goods
2. Second and Third Methods: Transaction Value of Identical or Similar Goods
3. Fourth Method: Deductive Value
4. Fifth Method: Computed Value
5. Sixth Method: Reasonable Value
6. Report of Customs Value
D. Practical Aspects
Chapter 35: TRANSFER PRICING RULES AND PRACTICE IN AUSTRALIA by Peter Blackwood and David Lewis Deloitte Touche Tohmatsu Sydney, Australia
35:I. Overview of Australian Tax System and Administration
Introductory Material
A. Income Over Which Australia Asserts Taxing Jurisdiction
1. Income Derived by Australian-Based Entities from Transactions Involving Foreign Activities or Payments
2. Income Derived by U.S.-Based Entities from Transactions Involving Australian Activities or Payments
B. Assessment of Income Tax - Self-Assessment
C. Consolidation
D. Audit Procedure
1. Forward Audits
2. Post-Filing Audits
E. Administrative Appeals of Disputed Audit Findings
F. Judicial Appeals of Disputed Audit Findings
35:II. Basic Australian Transfer Pricing Rules
A. Overview of Legislative Framework
1. Division 13 of Part III of Income Tax Assessment Act 1936
a. Interpretation of the Term "Taxpayer"
b. Interpretation of the Term "International Agreement"
c. Interpretation of the Term "Property"
d. The Arm's Length Principle â€" Section 136AD
(1) Overview
(2) Meaning of Arm's Length
(3) Discretion to Deem an Amount to Be the Arm's Length Consideration - Subsection 136AD(4)
(4) Source of Income & Profit Allocation Within Same Legal Entity - Section 136AE
(5) Consequential Adjustments â€" Section 136AF
(6) Denial of Franking Credits for Additional Tax Paid Pursuant to a Transfer Pricing Adjustment - Subsection 160APAAA(2)
2. Double Tax Agreements (Treaty Provisions)
3. Part IVA of Income Tax Assessment Act 1936
4. Part X of Income Tax Assessment Act 1936
5. Subdivision C of Division 2, Part III of Income Tax Assessment Act 1936
B. Transactions Subject to Rules
2. Intra-Company Transactions
3. Transfers or Licensing of Intangible Property
4. Loans and Other Financing Arrangements
5. Performance of Services
C. Definition of Related Parties Subject to Transfer Pricing Rules
2. Relevance of Related Party Status
a. Domestic Law Provisions
b. Treaty Provisions
c. Interaction of Domestic Law and Treaty Provisions
3. Dealings Between Unrelated Parties
4. Dealings Between Related Parties
D. Transfer Pricing Standards
1. ATO Discretion to Apply Transfer Pricing Rules
2. Self-Assessment of Transfer Pricing Adjustments
3. Consequential Adjustments
4. No Statute of Limitations for Transfer Pricing Adjustments
5. Denial of Franking Credits for Additional Tax Paid on a Transfer Pricing Adjustment
E. Administrative Interpretations and Practice
1. Taxation Rulings
a. TR 94/14 - Basic Concepts
b. TR 97/20 - Methodologies
(2) Interaction with the OECD Guidelines
(3) Use of Indirect and Hybrid Methodologies
(4) Approach to Comparability
(a) Standard of Comparability
(b) Factors Affecting Comparability
(c) Business Sense
(d) Use of Related Party Data
(e) Market Indices
(f) Reliability of Potentially Comparable Data
(5) Segregation Versus Aggregation of Transaction Groups
(6) Construction of an Arm's Length Range
(7) Priority of Methods
(8) Multiple Year Data
(9) Applications of Transaction-Based Methods, i.e., CUP, RP and CP Methods
(a) CUP
(b) RP Method
(c) CP Method
(10) Application of Entity-Based Methods, i.e., Profit Split
(11) Transactional Net Margin Method (TNMM)
c. TR 98/11 - Documentation, Audit Risk Assessment, Access to Information, etc.
d. TR 92/11 - Loan Arrangements and Credit Balances
e. TR 1999/1 - Intra-Group Services
f. TR 98/16 - Penalties
g. TR 95/23 - Advance Pricing Arrangements ("APA")
h. TR 1999/8 - The Effects of Determinations Made Under Division 13 of Part III, Including Consequential Adjustments Under § 136AF
i. TR 2000/16 - Transfer Pricing and Profit Reallocation Adjustments, Relief from Double Taxation and the Mutual Agreement Procedure
j. TR 2001/11 Operation of Australia's Permanent Establishment Attribution Rules
k. TR 2004/1 - Cost Contribution Arrangements
l. TR 2005/11 - Branch Funding for Multinational Banks
2. Use of Experts or Industry Evidence to Establish "Correct" Transfer Prices
a. Use of Experts
b. Industry Evidence
3. Marketing Intangibles
4. Attributing Profits to a Dependent Agent Permanent Establishment
5. Defenses to Transfer Price Adjustments
a. Business Behavior
c. Setoffs
6. Treatment of Tax Losses from Prior Years or Losses Within the Company Group
F. Australian Transfer Pricing Case Law
35:III. Transfer Pricing Reporting and Documentation Requirements
A. Reasons for Keeping Documentation
1. The Risk of Audits and Adjustments
2. Contemporaneous Documentation
3. How Much Documentation Is Enough?
4. Documentation Relevant to the Application of Particular Pricing Methodologies
a. CUP Method
b. Resale Price Method ("RP Method")
c. Cost Plus Method ("CP Method")
d. Profit Split Method ("PS Method")
e. Transactional Net Margin Method ("TNMM")
5. Documentation for Certain Business Strategies
6. Sustained Losses
7. Market Penetration
8. Documentation Issues for Small Business Taxpayers/Low Levels of Dealings
9. Penalties
B. Coordination with U.S. Documentation Requirements
1. U.S. Documentation Requirements
2. Alignment of U.S. Documentation with Australian Requirements
35:IV. Penalties, Tax Amnesty, and Interest on Additional Income Taxes Based on Transfer Pricing Income Reallocations (Including Taxation Ruling TR 98/16)
A. Overview
B. Penalties
C. Interest
35:V. Dealing with Australian Tax Authorities on Transfer Pricing Issues
A. Advance Rulings
1. Advance Pricing Arrangements
2. Extent to Which Rulings Bind the Taxpayer or the Australian Tax Authorities
B. Australian Government Participation in the U.S. APA Process
C. Transfer Pricing Audits
1. ATO Audit Teams - Structure, Authority, Scope of Industry Coverage
2. Guidelines Used by ATO Audit Teams
3. Information Normally Required to Be Presented by a Taxpayer to an ATO Audit Team
4. Requirements for Creation of Documents
D. Refund Claims Following U.S.-Initiated Allocations of Income from Australian Entities to U.S. Entities
E. Negotiated Settlements of Australian-Initiated Adjustments
35:VI. Practical Aspects of the Competent Authority Process
A. Application for Australian Competent Authority Assistance
2. When Assistance Can Be Requested
B. Degree of Foreign Taxpayer Involvement with Australian Competent Authority
C. Australian Competent Authority's Willingness to Deviate from Australian Transfer Pricing Rules
D. Australian Competent Authority's Willingness to Deviate from Australian Penalty and Interest (Including Refund Interest) Rules
E. Arbitration
35:VII. Information Disclosure
A. Practical Application of Exchange of Information Agreements
B. The Existence and Effect of Australian Secrecy Rules
C. Defenses to Information Requests by Foreign Governments
35:VIII. Interaction of Transfer Pricing, Customs Valuation, and Anti-Dumping Rules
A. Customs Value
B. Anti-Dumping
C. Service Charges and Intangibles
D. Rebates
E. Collaboration
F. The Human Factor
Chapter 36: TRANSFER PRICING RULES AND PRACTICE IN BRAZIL by Lionel Bonner Nobre BDO Seidman LLP Miami
36:I. Introduction
36:II. Overview of the Brazilian Tax System and Administration
A. History of the Brazilian Tax System
1. The National Tax Code
2. Tax Reform under the 1988 Constitution
B. Income Over Which Brazil Asserts Taxing Jurisdiction
1. Brazilian Tax Residents
2. Foreign Tax Residents
36:III. Basic Brazilian Transfer Pricing Rules
A. Background to Brazilian Transfer Pricing Control Rules
B. Legislative History of Law nr. 9.430/96 and the Supporting Regulations
C. Definition of a Controlled/Related Party Subject to Transfer Pricing Control Rules
D. Transfer Pricing Control of Transactions with Tax Haven Residents
E. Transfer Pricing Methods for Imports
F. Transfer Pricing Methods for Exports
G. Transfer Pricing Methods for Loans and Financial Transactions
H. Transfer Pricing Methods for Intangibles and Non-Traditional Assets
36:IV. Other Important Pricing Control Rules
A. Average Price Calculation
B. Divergence Margin Safe Harbor
C. Best Method Rule
D. Documentation
E. Advanced Pricing Agreements
F. Special Situations Regarding Market Penetration
G. Tax Treaties, Competent Authority, and Secondary Adjustments
36:V. Enforcement of Transfer Pricing Control by the Tax Authorities and Transfer Pricing Audits
A. Enforcement Agency
B. Audits, Secret Comparables and Penalties
C. Administrative Jurisprudence on Transfer Pricing Control in Brazil
D. Important Accounting Aspects Regarding Transfer Pricing Control in Brazil
36:VI. Other Rules Relating to Transfer Pricing
A. The Application of the Arm's Length Principle in Brazil
1. Introduction
2. The Arm's Length Principle in Current Transfer Pricing Control Rules
3. The Arm's Length Principle as a Constitutional Tax Principle
B. Transfer Pricing Control and Brazil's DDL Regime
1. The Concept of Related Party for DDL Purposes
2. Instances of DDL
3. The Concept of Market Value
4. Flexibility in the Measurement of Market Price and Proof of DDL
C. Transfer Pricing Control and Tax Arbitration
D. Transfer Pricing and Customs Valuation in Brazil
1. Customs Valuation Methodology
2. Resolving the Conflict between Brazil's Customs Valuation and Transfer Pricing Control
36:VII. The OECD's Comments on the Brazilian Transfer Pricing Control Rules
36:VIII. Controversial Legal Aspects of Brazil's Transfer Pricing Control
A. Creation of a Fictitious Taxable Event (Juridical Fiction) and an Absolute Legal Presumption
B. Reversal of the Burden of Proof
C. Freedom of Enterprise and Freedom of Competition
D. Non-Compliance with Tax Treaties
36:IX. Suggested Applicability of the Transfer Pricing Control Rules in Brazil
A. Practical Considerations: Preliminary Transfer Pricing Verification Questions
B. Preparing the Annual Income Tax Return, Transfer Pricing Adjustments, and Related Party Transaction Disclosure
C. Attempts to Amend Law nr. 9.430/96
Working Papers
Table of Worksheets
CHAPTER 35 - AUSTRALIA
Worksheet 1 Forms Attached to International Taxation Administrative Regulations Notice No. 1039 (March 10, 1989), as amended by NTA Notice 1387 (August 20, 1999)
Worksheet 2 NTA Notice 98-12, superseded by NTS Notice 2003-5, superseded by NTS Notice 2005-1 (January 11, 2005)
Worksheet 3 Summary Profit and Loss Statement of Foreign Related Party
Worksheet 4 Form No. 1 - Report on Calculation Method of Arm's Length Price
Worksheet 5 Form No. 2 - Report of Transaction Price Adjustment
Worksheet 6 Form No. 3 - Application for Advance Approval on Calculation Method of Arm's Length Price
Worksheet 7 Form No. 4 - Application for the Commencement of Mutual Agreement Procedures
Worksheet 8 Form No. 5 - Application for Extension of the Period to which the Advance Approved Calculation Method of Arm's Length Price Applies
Worksheet 9 Form No. 6 - Confirmation of the Return of the Transferred Income Amount
Worksheet 10 Form No. 7 - Application for the Special Income Calculation
Worksheet 11 Form No. 8 - Detailed Schedule on International Transactions
Worksheet 12 Form No. 9 - Application for Extension of the Due Date for Data Submission
Worksheet 13 Form No. 10 - Notice of the Approval on an Extension of the Due Date for Data Submission
Worksheet 14 Form No. 11 - Schedule of Overseas Investment
Worksheet 15 Form No. 12 - Confirmation for the Application of the Special Rules Concerning the Statute of Limitation
Worksheet 16 Form No. 13 - Applicant's Opinion regarding the Proceeding Period of the Mutual Agreement Procedures
Worksheet 17 Form No. 14 - Application for Special Suspension of Time to File (Decide) Appeal Claim
Worksheet 18 Form No. 15 - Application for Special Suspension of Tax Collection
Worksheet 19 Form No. 16(1) - Notice on the Closing of the Mutual Agreement Procedures Case [Use for Imposition in Korea]
Worksheet 20 Form No. 16(2) - Notice on the Closing of Mutual Agreement Procedures Case [Use for Foreign Imposition]
Worksheet 21 Working Arrangement Between the United States Internal Revenue Service and the Republic of Korea National Tax Administration
Worksheet 22 Glossary
Worksheet 41 Excerpts of Law nr. 9.430 of December 16, 1996 Applicable to Transfer Pricing Control in Brazil
Worksheet 42 Finance Ministry Ordinance nr. 95, of April 30, 1997 (Published May 5, 1997)
Worksheet 43 Normative Instruction 243 of November 11, 2002
Worksheet 44 Normative Instruction 321 of April 14, 2003
Worksheet 45 Normative Instruction 382 of December 30, 2003
Worksheet 46 LIST OF ABBREVIATIONS AND ACRONYMS
Bibliography
OFFICIAL
Statutes:
(Chapter 34: Korea)
(Chapter 35: Australia)
(Chapter 36: Brazil)
Legislative Materials:
Administrative Pronouncements:
ATO Booklets:
Cases:
UNOFFICIAL
Websites
Articles:
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