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A summary of transfer pricing (TP) guidelines

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A summary of transfer pricing (TP) guidelines
  • Introduction 

Further to our newsletter of March 2018 we are now reverting with the second part for the summary of the transfer pricing guidelines as these are in place since July 2017.  In short, transactions between related parties are reviewed under Transfer Pricing Guidelines in order to identify the tax treatment and compute any tax amounts.

  • Intangibles 

Intangibles in terms of Transfer Pricing Guidelines have the following characteristics:

  • Not a physical or financial asset;
  • Capable of being owned or controlled for use in commercial activities;
  • Its use or transfer is being compensated, in case the transaction would be between independent parties.

In the case of intangibles, consideration as to the TP methods and arm’s length pricing application is required.  Comparable uncontrolled price method (CUP) and transactional profit split method are the methods that most likely will prove to be useful in matters involving transfers of intangibles.

Other methods may be considered depending on each case.  In cases where it is hard to value intangibles, i.e. there is no reliable comparable and the future cash projections are highly uncertain, then a possibility for “ex post” adjustment is expected to be included in the TP agreement.

  • Business Restructuring

Business Restructuring includes reallocation of functions, assets and risks within multinational enterprises (MNEs) with the profit potential attached to them.

Article 9 of the OECD model is discussing whether such business restructuring and hence reallocation of profits is in line with the arm’s length principle.  In general, in such cases the arm’s length principle treats the entities in the group as separate members.

  • Intra Group Financing
  1. The following criteria shall be met in order to qualify for intra group financing:
  • Financing should be out of funds raised from financial means and instruments;
  • It should be remunerated by interest;
  • The intermediary financing company shall be a Cyprus tax resident one; and
  • Back to back test should apply.
  1. Approach to TP study (TPS) includes:
  • Identification of commercial or financial relations between related entities and determination of economically significant conditions and circumstances;
  • Analyse the contractual terms and the actual conduct of the parties;
  • Functional analysis;
  • Analysis of risks in financial relations;
  • Comparability analysis.
  1. Simplification measures:
  • There are conditions for intra group financing transactions which include – (a) back to back loans, (b) loans made from third parties and provided to related persons, and (c) loans made from shareholders and given to related persons, in order for the simplification measures to apply.
  • There are two simplification measures – (a) the application of 10% return after tax on equity (11.43% before tax) and (b) the application of 2% return after tax (2.286% before tax) on the loan balance.
  • Provided that particular provisions are met, there is no need to proceed with a full TPS but only with a functional analysis is required showing that compliance.

 

  • Arm’s Length Financing Arrangements

Arm’s Length Financing Arrangements include:

  1. Financing arrangements and arm’s length interest rate;
  • External information and aspects are influencing the interest rate:
  • CUP method is usually used to identify an arm’s length interest rate;
  • LIBOR, SIBOR, etc. provide a general guidance of the basic interest rates for the countries of the borrower.
  • Other conditions regarding a specific loan, should include the reason of the loan, the market conditions, amount, duration and other terms, currency, security and guarantees, etc.
  • Cost and other benefits over and above the interest are also factors to consider
  1. Other financing transactions;
  • There are cases that the underlying economic element of a transaction aligns more with a different categorisation.
  • The actual nature of a transaction may be disregarded and replaced by an alternative transaction when it will be viewed in its totality.
  • For a Bona fide debt transaction certain factors need to be met. and
  1. Other transactions in investment
  • One tier structure
  • Two tier structure
  • Guarantees on financing transactions of an associated company

 

  • Conclusion

As you understand, transfer pricing is a very big and complex chapter.  During our first article we intended to provide a general knowledge of the requirements, and we briefly describe TPS requirements.  TPS requires specialized knowledge and expertise in order to be prepared.  This article intended to provide more information on specific type of transactions such as intangibles, restructuring and financing.

Savva & Associates aims to work with clients to ensure their Cyprus, international and personal structures are established and administered to the highest level of international standards. Our highly experienced and qualified team will ensure the correct structuring of your Companies and provide comprehensive advice in all VAT and Tax matters.

For further information please contact Mr Charles Savva at [email protected] who will be happy to further assist you.

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 1

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 2

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 3

By Devika Krishna Kumar

NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.

Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.

This week, both benchmarks had climbed to the highest in more than a year.

“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.

“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.

Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.

(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)

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