TRANSFER PRICING CASE STUDIES
WORKSHOP
SAN JOSE
31 MARCH - 4 APRIL 2014
5-c. Case Study - Overview of issues
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GM Group sets up IP Holding
company in Genovia
Action –subsidiary set up in Genovia
Why?
• to take advantage of tax treatment such as
amortisation of intangible assets
• to take advantage of treaty network (so
that interest and royalty payments into
Global Medical IP Holdings attract no, or
reduced rate, withholding tax)
2
GM IP Holdings’ Board Meetings
Action - Global Medical IP Holdings Board
members are not resident in Genovia, but
they travel there in order to hold their
quarterly Board meetings.
Why? – this may be to decrease the risk of
Global Medical IP Holdings being treated
as tax resident elsewhere.
3
Risk stripping
Action - commercial risks associated with R&D
are shifted to Global Medical IP Holdings –
which meets the costs of the R&D
programme.
Why? – this may be to shift profit away from
Country A to a low tax jurisdiction –
attempting to make Global Medical (A)’s
R&D function “low risk” and thus
benchmarkable.
4
Intellectual Property (IP)
planning
Actions:
• Legal title to intangibles assigned to Global
Medical IP Holdings
• Global Medical IP Holdings to meet costs of
developing future IP by funding the R&D (thus
bearing the financial risk of developing IP.)
• Why? - To allow any income arising from IP, or
any increase in value of IP, to be recognised in a
low tax jurisdiction.
5
Maintaining ownership of existing
product IP in CE Corporation
Action - Global Medical IP Holdings will take
ownership of newly created product IP (such
as patents), but existing product IP was not
transferred.
Why? - This is likely to be to avoid a tax
liability (either capital or income) in Global
Medical (A) arising from the disposal of IP to
Global Medical IP Holdings.
6
Additional borrowing by Global
Medical (A)
Action – Global Medical (A) takes on new
bank debt.
Why?
• This may be to allow deductions for
interest paid to be relievable against
Global Medical (A)’s profit
7
Use of preference shares to
capitalise GM Finance
Action –Global Medical (A) capitalises GM Finance
with preference shares
Why? This may allow distributions made by GM
Finance to be treated as payments of interest
(and thus deductible) and distributions received
by CE Corporation to be treated as dividends
(and may not be taxable).
If so – this is a hybrid instrument.
8
Purchase of Ordinary Shares in GM
Insurance
Action – Global Medical (A) borrows from a third party
bank and purchases equity capital in a tax haven
subsidiary, which deposits the funds in a third party
bank.
Why? – Interest deduction obtained in Global Medical
(A); but there is no corresponding taxable receipt until
dividends are received (which may in any case be
exempt).
- Interest received by the tax haven country from
funds deposited in the bank will be subject to no or
low tax.
Setting up a captive insurance
company in Cayman Islands
Action –group company set up in a low tax regime
to provide insurance to Global Medical group
members
Why? – may be to shift profit from Global Medical
group members in normal-rate countries to lowrate countries. Deductions for premiums will be
paid by group companies in higher-tax countries
(such as Country A) and receipts will be received
in a low-tax regime.
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Step 5
Negotiation
11
Role play
This step is in two parts.
In the first part, you are asked to form groups each
representing the Country A auditors examining
the 2011 accounts of Global Medical (A).
In the second part, one of the auditors from each
group will meet with the tax managers/advisors
to tell them of any concerns they have and to
make proposals for dealing with those concerns.
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Country A tax auditors
You should decide:
• On which issues you would challenge Global Medical (A) and seek an
adjustment to its 2011 taxable profits?
• What taxation measures would you take to mount any challenges and
what arguments would you raise?
• What do you consider are the strengths and weaknesses of your case?
• What do you expect the taxpayer’s response to be to your proposals and
how you might deal with those responses.
After discussion, you will be meeting the tax manager of Global Medical
(A) and his/her advisors. You should appoint one representative who,
at that meeting, should:
• Inform Global Medical (A) which issues concern you, and why.
• Propose how you intend to deal with these issues, specifying the
proposed approach you intend to pursue and, where possible, the next
step you propose.
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