2014

Jim Flaherty, Canadian finance minister, continued the theme of recent yearswhen he delivered his 2014 Budget speech lastweek, focusing on improving the integrity of the country's tax system. He also announced measures that could see Canada acting unilaterally on issues being discussed at OECD level.

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The top tax executives from four major U.S. companies said a lower corporate tax rate is essential and Congress shouldwork to ensure corporations can remain competitive as discussions of a tax overhaul continue on Capitol Hill.
Representing FedEx Corp., Ford Motor Corp., Johnson & Johnson and Exxon Mobil Corp., the four officials shared a panel at a Feb. 19 Tax Council Policy Institute's tax policy and practice symposium.
Michael Fryt, corporate vice president of tax for FedEx, said a lower U.S. corporate tax rate is critical to help companies compete in an increasingly global economy. He said FedExwants to see a tax rate of 25 percent or lower, alongwith "strong capital investment incentives," such as 100 percent expensing.

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Lastweek Oregon Sen. Ronwyden became the chairman of the Senate Finance Committee. Even as a liberal Democrat, he has supported two key goals of corporate tax reform: reducing the U.S. corporate tax rate and repatriating corporate profits held abroad. Sen.wyden's challengewill be implementing these goalswithout increasing the federal debt.
Rather than fighting about political untouchables, legislators should change the tax treatment of foreign profits of U.S. corporations. Under current law, foreign profits are subject to a 35% U.S. tax, but that tax may be deferred indefinitely if those profits are kept abroad. U.S. corporations are sheltering almost $2 trillion in profits abroad, according to Audit Analytics.

For the op-ed, go here.

Finance ministers from France and Germany met in Paris today to discuss the future of the financial transaction tax (FTT).

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Ending deferralwould be best for broadening the tax base, but Option Y as proposed in the Senate Finance Committee international tax reform discussion draftwould be better than shifting to a territorial tax system, international tax practitioner Jeffrey M. Kadet said in one of seven letters to the committee commenting on the draft.

For the letter, go here.

"There is a concern that transfer pricing isn't always able to be enforced."
What is surely the understatement of the yearwas uttered by Stevewrappe of EY at the International Tax Institute lunch in New York on February 18,where Natalie Hodapp, supervisory tax law specialist (transfer pricing), IRS Large Business and International Division,was the government guest.

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The Organization for Economic Development and Cooperation's base erosion and profit shifting project,while potentially controversial, should preserve the arm's-length principle and many other elements of U.S. law, an Internal Revenue Service transfer pricing official said.
Speaking Feb. 18 in New York at an International Tax Institute program, Natalie Hodapp, a supervisory tax law specialist in the IRS Transfer Pricing Practice, faced questions from practitioners onwhether the BEPS process for coordinating enforcement and improving transparencywould hurt U.S. interests.
However the BEPS process develops, Hodapp said, itwill "still be aligned by the arm's-length standard,"which should serve as its "primary driver."

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The Indian Revenue authorities have been trying to allege that contract service providers operating in India,whether providing IT, ITeS, BPO, contract manufacturing or toll manufacturing services, on a standalone basis or by themselves, constitute permanent establishments (PEs) of their foreign principal companies. This allegation is directed towards creating taxable income,which is over and above the income being generated by the contract services providers, and is despite the fact that their operations are being undertaken on a principal-to-principal basis.

In this backdrop, the Indian High Court's ruling in the case of e-Funds Corporation, USA and e-Funds IT Solutions Group, Inc., USA (hereinafter collectively referred to as 'e-Funds USA' or 'the foreign companies') comes as a silver lining. The foreign companieswere engaged in providing IT and IT enabled services, in respect ofwhich back office contract serviceswere performed by e-Funds International India Private Limited (e-Funds India) for the foreign companies, under a 'cost-plus' remuneration model. Overturning the decision of the Indian Income-tax Appellate Tribunal (the Tribunal), the High Court (HC) has ruled in favour of e-Funds USA and against the formation of any PEs,whatsoever, of the foreign companies in India.

For the report, go here.

The Organisation of Economic Cooperation and Development on February 13, 2014 released the Common Reporting Standard (CRS),which seeks to establish a new global standard for automatic exchange of financial account information between Governments.

Aswith the Foreign Account Tax Compliance Act, the CRS model imposes obligations on financial institutions (FIs) to identify reportable accounts and obtain the accountholder identifying information that is required to be reported for such accountswith their local tax administration. It also provides the scope of the information to be collected and exchangedwith the accountholder's residency country.

While the documents released do not include any specific timelines,we understand that FIs in countrieswhich adopt the standardwill be required to undertake the necessary due diligence obligations in 2016with reporting starting in 2017.

For the report, go here.

In 2009, Carl C. Icahn bought a stake in Forest Laboratories, then a struggling drug maker. Last September, Forest hired a new chief executive, Brenton L. Saunders. Now, less than a half-year after taking the helm, Mr. Saunders, at the urging of Mr. Icahn, has agreed to sell Forest for $25 billion in cash and stock. The buyer is Actavis, one of the pharmaceutical industry's most aggressive acquirers. Actavis, based in Dublin but operating from Parsippany, N.J.,will pay $26.04 in cash and 0.3306 of one of its shares for each share of Forest, for total consideration of $89.48 a share.
Thiswas the first major deal Actavis announced since completing its takeover ofwarner Chilcott last year for about $5 billion. That deal allowed Actavis to complete a so-called tax inversion, relocating its headquarters to Ireland and escaping the American tax regime.
One big advantage of tax inversions, besides a lower statutory tax rate, is that deals can become more affordable. Once inverted, companies can more easily use overseas cash to pay for a deal, and the earnings from any acquired company are also taxed at the company's new, lower rate. In this case, Forest's earnings,which had been getting taxed at a higher United States rate,will eventually be taxed at the lower Irish rate currently paid by Actavis,which executives estimated to be 16 percent. Tax savingswill amount to at least $100 million, the companies said.

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Pascal Saint-Amans called the OECD's Common Reporting Standard,whichwas published on February 13, "the multilateralisation of FATCA".

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Susan C. Morse proposes a simpler corporate transition tax to dealwith the large amounts of cash parked offshore by multinational companies.

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You might not expect City fund managers to feature very prominently among the growing ranks of tax activists, but times are changing,writes Mike Lewis of ActionAid.

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Costs and confidentiality are the top concernswith the OECD's discussion draft on transfer pricing documentation and country-by-country (CbC) reporting, practitioners said during separate PricewaterhouseCoopers LLP and Deloitte LLPwebcasts on February 13.
During itswebcast, PwC polled its audience, and nearly half of the respondents said the cost of compliance is their biggest concern. "This iswhere the biggest gap lies at the OECD," said Annie Devoy of PwC. "I don't think the OECD has any idea of the challenges, time, and costs itwill take to be able to complywith the new disclosure requirements."

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G20 Leaders at their meeting in Russia in September 2013 fully endorsed the OECD proposal for a truly global model of automatic exchange and invited the OECDworkingwith G20 countries to present such a new single standard for automatic exchange of information in time for the February 2014 meeting of the G20 Finance Ministers and Central Bank Governors.
The standard contained in this report and released in preparation for that meeting calls on jurisdictions to obtain information from their financial institutions and automatically exchange that informationwith other jurisdictions on an annual basis.
The new standard draws extensively on earlierwork of the OECD in the area of automatic exchange of information. It incorporates progress madewithin the European Union, aswell as global anti-money laundering standards,with the intergovernmental implementation of the US Foreign Account Tax Compliance Act (FATCA) having acted as a catalyst for the move towards automatic exchange of information in a multilateral context.

For the report, go here.

The ownership nationality of large US multinational companies plays an implicit but important role in the current debate over how such companies should be taxed. This paper identifies that role and investigateswhat is actually known aboutwhere these companies' shareholders reside.

For the paper, go here.

The Internal Revenue Service has released its long-awaited road map of the transfer pricing examination process.

The road map is a 26-page outline of the transfer pricing audit stages that emphasizes up-front planning and a fact-based, open-minded approach for examiners. According to the road map, "effective presentation" can make or break a case.

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The OECD on February 13 unveiled a new global standard for the automatic exchange of financial account information that itwill formally present to the G-20 finance ministers at their February 22-23 meeting in Sydney.

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Proposed global country-by-country reporting requirements are unlikely to improve the U.S.'s tax enforcement capability because the U.S. has adequate disclosure rules already in place, Samuel Maruca, director of transfer pricing for the Internal Revenue Service, said.

Maruca, in a Feb. 12webcast organized by Deloitte LLP, said he still supports the Organization for Economic Cooperation and Development's efforts to enhance global reporting requirements, as it could benefit other countrieswith less sophisticated tax enforcement agencies.

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The Organization for Economic Cooperation and Development released the first half of its model framework for automatic exchange of tax information,which the U.S. and other major countries have touted as a majorweapon to fight offshore tax evasion.
The "Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard, "issued Feb. 13, establishes a standardized form that banks and other financial institutionswould be required to use to gather a broad range of client account and transaction data to submit yearly to their domestic tax authorities.
The tax authoritieswould in turn exchange this information automatically, either bilaterally or multilaterally depending on the kind of agreements they have in place, said Pascal Saint-Amans, the OECD's top tax official,while presenting the model to reporters.

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The European Commission has pledged to get to the bottom of corporate tax loopholes, as it combs through findings from a tax investigation into Ireland, the Netherlands and Luxembourg. Our corporate tax regime has been under informal investigation by the EUfor the last six months – and now comments by one of Brussel's most senior officials show just how seriously the matter is being treated. Speaking to a conference, EU Competition Commissioner Joaquin Almunia compared legal loopholes that help companies to lower their taxeswith illegal state aid.

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To solidify the foundations of Japan's economic growth, the nation's tax system needs to be revamped in away that can exert the hidden vitality of companies. The government should speed up discussions on the issue.

Under the initiative of Prime Minister Shinzo Abe, talks regarding corporate tax reformwill shift into high gear at the government's Tax Commission and other institutions. "Wewill put tax incentives into place in away completely different from before," Abe said at January's meeting of theworld Economic Forum in Davos, Switzerland. Abe also pledged to "make the tax system for companies internationally competitive."

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François Hollandeis to press Barack Obama on tax avoidance by big Silicon Valley companies such as Google, saying that the practice of shifting tax liabilities aroundEuropewas "not acceptable". Hollandewill meet Obama on Monday as part of a two-day trip duringwhich hewill also meet firms including Google, Facebook and Twitter in Silicon Valley. The French president,who has sought higher taxes for big earners, said Francewould not continue to tolerate large companies' tax optimisation strategies.

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For much of the past year, European officials have been calling for measures to clamp down on practices they say have allowed big companies to shirk their contributions by planting their profitswhere they are least likely to be taxed.

Now, the head of the European Commission's antitrust agency says that not only are these tax avoidance practices keeping governments away from much needed revenue, but they may constitute actual "state aid."

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An overhaul of the tax code faces not just technical and political difficulties, but also fundamental problems, as key arguments behind the initiative are being challenged, according to a Bloomberg Government analysis.

Bloomberg Government tax policy analysts Patrick Driessen and Tiffany Young said in a Feb. 10 report that one problem for those seeking to build momentum behind a tax code revamp is that the corporate tax is becoming less important to the economy. The share of corporate tax revenue as a percentage of total federal revenue has been shrinking for decades. The Congressional Budget Office forecasts that in 10 years corporate tax receiptswill equal 1.8 percent of overall U.S. economic output and 10 percent of all tax revenueÔøΩboth numberswould be near all-time lows, the analysts said.

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The Organization for Economic Cooperation and Developmentwill unveil a proposal Feb. 13 setting out a global framework for facilitating automatic exchange of information in tax matters, according to an official following the discussions.

The official,who spoke on condition of anonymity, said the OECD proposalwill set out the common reporting standard as the global framework for automatic information exchange. Under this framework, banks and other financial institutionswould submit yearly standardized reports to their home country authorities containing client account and transaction details.

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Lastweek, CTJ published its finding that International Business Machines (IBM) has paid U.S. federal corporate income taxes equal to just 5.8 percent of its $45.3 billion in pretax U.S. profits over the five year period from 2008 through 2012. Today IBM responded by trying to change the subject towhat it paid in one single year, andwhat it may or not pay in future years.

For the article, go here.

The OECD's recently released draft country-by-country reporting standards are beyondwhat governments need for transfer pricing risk assessment, Peter Steeds of HM Revenue & Customs said February 10 in London. Action 13 of the OECD base erosion and profit-shifting action plan merely calls for an aerial view ofworldwide multinational group structure, he said.

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Tax transparency is lauded as an unequivocal good. But is it really this clear-cut? Matthew Gilleard explores the negatives as he ventures into the dark side of transparency.

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Does the OECD's discussion draft on transfer pricing country-by-country reporting achieve the uniformity and simplicity itwants?

For the article, go here.

There is not much debate anymore that the OECD's base erosion and profit-shifting project is about getting U.S. multinationals to pay some tax to European market countries. Even if that premisewere debatable, it is not debatable in the case of hybrids. U.S. multinationals have some hybrid capabilities -- bestowed by U.S. law -- that their European counterparts do not have.

Hybrids are a clear case of U.S. companies stripping other countries' tax bases. There's no right of multinationals to strip income out of other countries, even in the indulgent international consensus. There's no defense their home government can present. If the United Stateswants to continue to use the OECD as a vehicle for its needs, it can't be too defensive about the hybrid antics that U.S. administrative rules permit.

This article describeswhatwe know about the leaked BEPS hybrid draft,whichwould implement action 2 of the BEPS action plan and follows up on the OECD's 2012 hybrid reportwith proposed solutions. That report concluded that the specific hybrid mismatch rules already adopted by several European countries are effective.

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The recent revelation that many multinational enterprises (MNEs) pay very little tax to the countries they operate in has led to various proposals to change theways they are taxed. Most of these proposals, however, do not address the fundamental flaws in the international tax regime that allow companies like Apple or Starbucks to legally avoid taxation. In particular, the Organization for Economic Cooperation and Development (OECD) has beenworking on a Base Erosion and Profit Shifting (BEPS) project and is supposed to make recommendations to the G20, but it is not clear yetwhether thiswill result in a meaningful advance toward preventing BEPS. This paperwill advance a simple proposal thatwill allow OECD member countries to tax MNEs based in those countrieswithout impeding their competitiveness. The key observation is that in the 21st century unilateral approaches to tax corporationswhose operations span the globe are obsolete, and a multilateral approach is both essential and feasible. The paper therefore proposes that each OECD country commit to taxing its multinationals fully on a current basis, since such a multilateral approach eliminates all the usual arguments against current taxation.

For the paper, go here.

This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. The authors construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, they find find that thin capitalization rules significantly affect multinational firm capital structure. Overall, their results show than thin capitalization rules,which thus far have been understudied, have a substantial effect on the capital structurewithin multinational firms,with implications for the firm's market valuation.

For the paper, go here.

Canada is losing its appeal as a destination for business investment. Its ability to compete against other countries for investment slipped considerably this year in our global tax competitiveness ranking, down six spots among OECD countries, and down 11 spots among the 90 countries.while many governments around theworld responded to the fallout of the global recession by significantly reducing corporate tax rates, certain policy moves in Canada have us headed in the opposite direction.

For the paper, go here.

The goal of this article is to provide a guide to addressing tax and spending policies in an era of increasing inequality of income andwealth. This is challenging because it requires a good understanding of inequality and economic mobility, the changing role of taxes and government social spending, the constraints on policy options, and the possible misconceptions that may influence tax and spending policies.

Inequality in the United States has increased dramatically over the last 30 years. Perhaps even more troubling than the rise in inequality may be the persistence of high levels of poverty and the decline in economic mobility. The same thirty-year period duringwhich inequality has increased, poverty levels have not declined, and economic mobility has decreased has seen major changes in fiscal policy. Tax law changes have altered the relative tax rates, the relative revenue contributions from different tax instruments, and the tax burdens of different income groups. Government spending on social programs has increased substantially, but perhaps not inways one might expect. The United States likely has a smaller percentage of government social spending going to the needy than other developed countries. In recent decades, an increasingly larger percentage of social spending has been directed to the elderly (without regard to need) and to the upper-half of the income distribution through tax subsidies for healthcare, education, housing, and retirement savings.

For the paper, go here.

Depending on how it's measured, the U.S. economy might suffer from a revenue-neutral tax code revision, according to a recent Congressional Research Service report.

Financing lower statutory income tax rates by broadening the tax base may either spur growth or trigger a contraction, CRS senior economic policy analyst Jane Gravellewrote in a report dated Jan. 24.

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As President Barack Obama renewed his criticism of tax laws that "reward companies that keep profits abroad," the government he leads is taking a more subtle approachÔøΩone that's helping some of those companies.

The U.S. isworkingwith other major economies to curb corporate tax avoidance, an issue that has become a popular political cause in the U.K. and France. The Obama administrationwants to prevent U.S. companies from being singled out by European regulators and to ensure that the U.S. doesn't miss out on any taxes its companies start paying.

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As non-EU based businesses broaden their markets and their offerings, businesses are increasingly finding that the indirect tax consequences of selling into the EU, the US and Australia create potential barriers to smooth international trading, explain Richardwoolich, Hugh Goodwin, and Matthew Cridland of DLA Piper.

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International tax reform is likely to move forward in 2014 given the reaction to recent draft reform proposals, Ray Beeman, Houseways and Means Committee majority tax counsel and special adviser for tax reform, said February 4.

Beeman told participants at a District of Columbia Bar Taxation Section luncheon that reaction to the international tax reform discussion draft released in 2011 byways and Means Committee Chair Dave Camp, R-Mich., has left a good sense ofwhere "pressure points" exist for international reform.

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The check-the-box rules are too flexible in the international context and play a major role in the tax mismatch of hybrid arrangements, according to Kentwisner of Alvarez & Marsal Taxand LLC.

Wisner, a panelist at the Pacific Rim Tax Institute conference in Palo Alto, Calif., on January 31, discussed steps in the OECD's base erosion and profit-shifting action plan to neutralize the potential for double nontaxation of hybrid entities and financial instruments.

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Transfer pricing and defining permanent establishment are the most challenging base erosion and profit-shifting issues, panelists said January 31 at the Pacific Rim Tax Institute conference in Palo Alto, Calif.

"Permanent establishment is one of the most challenging action items that faces OECD policymakers," said Manal Corwin of KPMG LLP. Corwin, former Treasury deputy assistant secretary for international tax affairs, said thatwhile PE is the center of public controversy, it raises an issue that the OECD is reluctant to discuss.

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Multinational enterprises (MNEs)will face materially increased compliance burdens as a result of the hotly debated proposals to report to tax administrations, on a country-by-country basis, extensive details of their income, taxes, and business activities. Further, extensive changes to the current requirements for transfer pricing documentation reportingwill also add to this burden. These are the broad consequences of the proposals made by the Organisation for Economic Cooperation and Development (OECD) in a discussion draft released on 30 January 2014.

For the PwC Insight, go here.

A practitioner discussing a coming report on tax challenges arising from the digital economy said January 30 that thework of the OECD's Task Force on the Digital Economy is "the OECD version of crowd sourcing."

Gary D. Sprague of Baker & McKenzie, moderator of a panel on intellectual property, intangibles, and digital economy tax issues at the Pacific Rim Tax Institute conference in Palo Alto, Calif., noted that Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, has stated that hewants a consensus about how to tax the digital economy, not just among OECD member countries, but among the non-OECD G-20 members aswell.

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Practitioners and government officials discussed the issues of harmful tax practices and country-by-country reporting addressed in the OECD action plan to combat base erosion and profit shifting during a panel at the Pacific Rim Tax Institute conference in Palo Alto, Calif., January 30.

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The total tax contribution of the UK's biggest companies rose by £500 million ($820 million) on 2012, despite corporation tax revenues falling sharply. And, for the first time, employers' national insurance contributions overtook corporation tax as the biggest source of tax revenue from the 100 Group of Britain's biggest companies.

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Spain is continuing to reform its tax code. Increasing revenue collection is one goal, and the largest companieswill be footing the bill.

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The Organization for Economic Cooperation and Development has released a milestone discussion draft thatwould require companies for the first time to complete a template providing tax administrationswith exhaustive details of how they allocate their income, taxes and business activities on a country-by-country basis.

David Ernick of PricewaterhouseCoopers LLP inwashington, D.C., told Bloomberg BNA that the significance of the Jan. 30 draft shouldn't be underestimated.

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Spain should have to pay the European Commission ÔøΩ50 million ($68 million) and the costs of the case for failing to implement a European Court of Justice (ECJ) decision against tax incentives in good time.

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The French governmentwants to cut VAT on digital content. The European Commissionwants France to raise its already reduced rate for e-books. Let battle commence.

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The OECD's initial discussion draft on revised guidance on transfer pricing documentation and country-by-country reporting, released January 30, received a mostly lukewarm response from practitioners,who said they found several flaws in the draft's proposals.

The discussion draft,which represents item 13 of the OECD's July 19, 2013, base erosion and profit-shifting action plan,would replace Chapter V of the current Transfer Pricing Guidelines,whichwas adopted in 1995. At the time, Chapter V lacked clarity aboutwhich documents should be included in a transfer pricing documentation package, according to the draft's authors. Chapter V also lacks clear guidance on the relationships among documentation, penalty administration, and burden of proof.

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