What are Comparative approaches to TP controversies and transparency in key jurisdictions?

By Prof Dr Daniel N Erasmus

Comparative approaches to transfer pricing controversies and transparency can vary significantly across key jurisdictions due to differences in legislation, enforcement intensity, and administrative practices. Here’s an overview of the approaches in several key jurisdictions:

United States:

• Approach: The U.S. uses a robust and detailed approach to TP documentation, emphasizing comparables and the arm’s length principle. The Internal Revenue Service (IRS) has significant enforcement capabilities and actively pursues TP audits.
• Transparency: The U.S. requires detailed annual reporting of international transactions on forms such as the 5471, 5472, and 8865. The Country-by-Country (CbC) reporting requirements align with OECD BEPS Action 13.

European Union (EU):

• Approach: The EU member states generally follow the OECD TP Guidelines, with an increased focus on substance-over-form and the economic reality of transactions.
• Transparency: The EU has strong transparency initiatives, including the automatic exchange of information between member states and public disclosure of certain tax arrangements under the DAC6 directive.

United Kingdom:

• Approach: The UK adheres to the OECD TP Guidelines and has specific legislation detailing TP documentation requirements. HM Revenue & Customs (HMRC) is active in TP audits and encourages cooperative compliance through programs like the “Profit Diversion Compliance Facility.”
• Transparency: The UK has implemented CbC reporting and requires large businesses to publish their tax strategies, promoting transparency in tax planning.

Canada:

• Approach: The Canada Revenue Agency (CRA) follows TP principles similar to the OECD and emphasizes thorough documentation and economic analysis.
• Transparency: Canada requires extensive TP documentation and has CbC reporting obligations for large multinational enterprises (MNEs).

Australia:

• Approach: The Australian Taxation Office (ATO) is known for its aggressive approach to TP and uses sophisticated data matching and analytics to identify risks.
• Transparency: Australia has rigorous TP documentation requirements, CbC reporting, and a public report on corporate tax information for significant global entities.

Japan:

• Approach: Japan’s National Tax Agency (NTA) follows the OECD TP Guidelines, focusing on detailed TP documentation and a strict approach to related-party transactions.
• Transparency: Japan requires CbC reporting and detailed disclosure of related-party transactions in tax filings.

Brazil:

• Approach: Brazil has a unique TP system that uses fixed margins for certain methods, which can differ from the arm’s length principle as defined by the OECD.
• Transparency: The Brazilian Federal Revenue requires TP adjustments to be reported annually, with documentation to support the pricing policies.

India:

• Approach: The Indian tax authorities have a reputation for assertive TP audits, with a focus on complex transactions involving intangibles and intra-group services.
• Transparency: India requires detailed TP documentation, including a Master File and CbC reporting for large MNEs.

China:

• Approach: China emphasizes substance in TP, particularly the functions performed, and is focused on value creation within its jurisdiction.
• Transparency: China requires a three-tiered TP documentation approach, including a Master File, Local File, and CbC reporting.

South Africa:

• Approach: South Africa is aligned with the OECD TP Guidelines and has been increasing its enforcement activities, with a particular focus on transactions involving African countries.
• Transparency: South African Revenue Service (SARS) requires extensive TP documentation, and CbC reporting is mandatory for large MNEs.

In all these jurisdictions, the trend is towards greater transparency and stricter enforcement of TP regulations. Taxpayers are expected to maintain detailed and contemporaneous documentation to substantiate their TP policies. The increasing adoption of CbC reporting reflects a global move towards greater disclosure of tax and financial data to combat tax avoidance and ensure that profits are taxed where economic activities occur and value is created.

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