Advanced Dispute Resolution Workshop
TP Minds Africa
23 November 2015
Presented by: Dr. DN Erasmus & Prof A Venter
WORKSHOP CONTENT
1. Tax
Administration
2. Technical
considerations
4. Case Study
3. APAs & MAPs
TAX
ADMINISTRATION
TAX ADMINISTRATION
CONSTITUTION
DETAILED TP
GUIDANCE/
REGULATIONS
DOMESTIC TP
LEGISLATION
TAX ADMIN
FRAMEWORK
AUDIT
PROCEDURE
ADMIN
CONSTITUTION
FOUNDATION OF LAW AND
PROCEDURE




All law and conduct must
conform
Sets out fundamental rights
Determines administrative
justice
International law and
interpretation
TAX ADMIN FRAMEWORK
 ADMINISTRATIVE JUSTICE PRINCIPLES
 DETERMINES FAIR AND VALID
CONDUCT BY ADMINISTRATIVE
OFFICIALS
 GIVES EFFECT TO FUNDAMENTAL
RIGHTS
AUDIT ADMIN PROCEDURES
 LAW, REGULATIONS OR REVENUE
AUTHORITY SERVICE CHARTER
 PROTECTS THE TAXPAYER’S RIGHTS
 WHAT TO EXPECT DURING AN AUDIT
 PARAMETERS FOR CONDUCT AND
SERVICE DELIVERY
DOMESTIC TP LEGISLATION
SPECIFIC SCOPE AND POWER




POWER TO ADJUST INCOME
SCOPE OF TP LEGISLATION
ONUS
ARM’S LENGTH
REQUIREMENT OR ANTIAVOIDANCE ADJUSTMENT
DETAILED GUIDANCE OR REGULATIONS
OECD
GUIDANCE
DOMESTIC
RULES
NO DETAILED
GUIDANCE
TECHNICAL
CONSIDERATIONS
TECHNICAL CONSIDERATIONS
Intangibles
Guidance
Case Law
Management
Fees
INTANGIBLES – GUIDANCE
INTANGIBLES – OECD PAR 6.38 ANALYSIS
CONTEXT: No reimbursement
ISSUE: Extent of the ability of the marketer to share in benefit from activities
CRITERIA: Substance of the rights of the parties
EXAMPLE: COMPARABLE RETURN
EXAMPLE: ADDITIONAL RETURN
LONG TERM, SOLE RIGHTS
BENEFIT THROUGH SALES AND
MARKET SHARE
• COMPARABLE: DISTRIBUTOR WITH SIMILAR
CIRCUMSTANCES
•
•
LOW RISK EXAMPLE
TERM/LENGTH
•
•
•
•
EXTRAORDINARY EXPENDITURE
DECREASED PRODUCT PRICE OR
DECREASED ROYALTY RATE
WILL NOT OBTAIN EXPECTED BENEFIT
WITHOUT ADDITIONAL COMPENSATION
HIGH RISK EXAMPLE
PROTECTION
LEVEL OF EXPENDITURE
INTANGIBLES – OECD PAR 6.38 ANALYSIS
BENCHMARK:
Level of marketing investment: 2% of sales
Period: 10 years
Protection: sole rights
EXPECTATION: marketing investment of R100 000 will generate sales of R 5 million
This will be achieved over 10 years if sole distribution rights are obtained.
EXAMPLE: COMPARABLE RETURN
• Contracts of no less than 10 years: sufficient
opportunity to gain benefit through sales
• Contracts with the at least sole distribution rights:
Allowed the necessary market share to be developed
to obtain the expected benefit
• Contracts with an expectation of marketing
Investment of no more than 2% of sales
LOW RISK EXAMPLE
EXAMPLE: ADDITIONAL RETURN
• Contracts of less than 10 years: at risk of
not generating R 5 m in sales due to time
constraints
• Contracts with non-exclusive rights:
insufficient protection to develop the expected
market share.
• Contracts with an expectation of investment
of more than 2% of sales: risk of lower profit
HIGH RISK EXAMPLE
INTANGIBLES – CASE LAW
SONY
ERICSSON
CASE
DHL CASE
GLAXO CASE
BMW CASE
LG
ELECTRONICS
CASE
INTANGIBLES – EXAMPLE
STAGE 2:
SPLIT THE
COMBINED
PROFITS
STAGE 1:
DETERMINE
COMBINED
TRANSACTIONAL
PROFITS
ROYALTY
1. Excess Profits
2. Attributable to Brand
STEP 1:
INTANGIBLE
EARNINGS
(EXCESS PROFITS)
FORMULA:
Profit after Tax
LESS: capital charge (Capital employed x WACC)
= Economic Value add (EVA)
(page 36)
STEP 2:
BRAND
EARNINGS
(Brand contribution
to excess profits)
FORMULA:
Intangible earnings (STEP 1)
X Role of Brand (35%)
(page 36-40)
Brand Earnings
Total average 3,3% of
revenue
(page 15 and 39)
STAGE 1:
DETERMINE
COMBINED
TRANSACTIONAL
PROFITS
STAGE 2:
SPLIT THE
COMBINED
PROFITS
ROYALTY
LICENSEE PROFIT
STEP 1:
INTANGIBLE
EARNINGS
STEP 2:
Intangible
earnings x
Role of
Brand
Excess Profit:
Intangibles
Earnings
Excess Profit
from other
Intangibles (65%)
Excess Profit
from Brand
specifically (35%)
Brand Earnings
Normal Profit
TRANSACTIONAL
PROFITS
TO BE SPLIT
(BRAND EARNINGS)
STAGE 1:
DETERMINE
COMBINED
TRANSACTIONAL
PROFITS
STEP 1:
INTANGIBLE
EARNINGS
STEP 2:
BRAND
EARNINGS
Brand Earnings
STAGE 2:
SPLIT THE
COMBINED
PROFITS
ROYALTY
STEP 1
Benchmarking
(CUPs)
AL royalty range
(0,25% - 1,6%)
STEP 2
Brand Strength Index
(Position Brand in
royalty range (2% max
rate)
(CONTROVERSIAL)
Determine the
licensor’s portion by
using benchmarking:
1%
(30% of the full 3,3%
brand earnings)
SERVICES - GUIDANCE
OECD
AND BEPS
DOMESTIC
LAW
UN MANUAL
MAPs & APAs
MAPs & APAs
Settlements
APAs
MAPs
SETTLEMENTS
 When to consider a
settlement?
 Key success factors
ADVANCED PRICING ARRANGEMENTS
(APA)




Timing
Criteria in regulations
Implementation
Risks
MUTUAL AGREEMENT PORCEDURES
(MAPs)
 Double Tax Agreements: Section 25
and Section 9
 MAPS and Domestic Remedies
 Triggers
 Procedure
 Arbitration
CASE STUDY
MANAGEMENT
FEES
TRADEMARK
COMPANY ZZ
SUBSIDIARY Z
KENYA
SUBSIDIARY Z
MALAWI
SUBSIDIARY Z
ZIMBABWE
PENALTY
SUBSIDIARY Z
BOTSWANA
SUBSIDIARY Z
TANZANIA