Gary Thomas, White & Case, Tokyo
Sam Sim, Standard Chartered Bank, Singapore
Clemens Thyme, S&P Capital IQ, Hong Kong
Michael Quigley, White & Case, Washington DC
TRANSFER PRICING IN ASIA:
THE GROWING ACCEPTANCE OF THE
ARM’S LENGTH PRINCIPLE
Asia Tax Forum 2012
Raffles Hotel, Singapore
May 9-10, 2012
TOPICS
INTRODUCTION
II.
MATURING OF THE ARM’S LENGTH PRINCIPLE IN JAPAN: A
LESSON FOR THE REST OF ASIA?
III. COMPETENT AUTHORITY AND TRANSFER PRICING: HOW IS IT
WORKING IN ASIA?
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES
V. TRANSFER PRICING – CREDIT RISK ASPECTS
VI. CURRENT ISSUES BEING RAISED IN LITIGATION
VII. CUSTOMS AND TRANSFER PRICING: WHAT YOU SHOULD BE
AWARE OF
VIII. FUTURE OF TRANSFER PRICING IN ASIA
IX. QUESTIONS
I.
May 9, 2012
2
I. INTRODUCTION
Introduction of Panelists
Overall Panel Topic: “Growing Acceptance of the Arm’s Length Principle” in
Asia
1.
2.
1)
2)
3.
4.
5.
6.
7.
8.
Merits – The Arm’s Length Principle is accepted!
Demerits – The Arm’s Length Principle (whatever it is) is required!
Using Japan as an Example of How Application of Arm’s Length Principle Has
Evolved Over Time
Competent Authority: Is It Working in Asia?
Special Challenges in Financial Services
Applying the Arm’s Length Principle to Intra-Group Loans and Guarantees
Recent Litigation Issues
Transfer Pricing and Customs
May 9, 2012
3
II. MATURING OF THE ARM’S LENGTH PRINCIPLE IN JAPAN: A
LESSON FOR THE REST OF ASIA
A. Outline
 Historical Background
 Recent History
 Application of the Arm’s Length Principle Over the Years
 Advance Pricing Arrangements
 New Transfer Pricing Enforcement Approach in Japan: Focus on Taxpayer
Voluntary Compliance
 Japan as a Lesson for the Rest of Asia?
May 9, 2012
4
Historical Background of Transfer Pricing Enforcement in Japan
 Adoption of Transfer Pricing Rules in 1986
 Reaction to US Internal Revenue Service assessments against US subsidiaries of major
Japanese corporations from early 1980s
 Transfer Pricing Rules Take Effect in 1987
 Initial NTA Enforcement Policies (1987-1989)
 Collection of Information by Survey
 “Soft Touch” Enforcement Approach
 Adoption of “Centralized Management” by International Examination Section in NTA
 Early Japanese Transfer Pricing Cases Focused on Foreign-Based Firms (1989



1996)
Expansion of Focus Toward Japanese Firms’ Outbound Transactions (from 1996)
Impact of APA Program in Recent Years in Reducing Number of Audits
Continuing Aggressive Audit Activity
Impact of Introduction of Transfer Pricing Documentation Requirements in 2010
May 9, 2012
5
Recent History in Transfer Pricing Compliance Rules
 Release of NTA Transfer Pricing Guidelines (2001)
 Addition of Transfer Pricing Provisions for Consolidated Corporations (2002)
 Requirement of Disclosure of Transfer Pricing Methodologies in Schedule 17-3







(2003)
Introduction of Transactional Net Margin Method (“TNMM”) (2004)
Expansion of Coverage of “Foreign Related Parties” (2005)
Introduction of the Profit Methods (TNMM and PSM) in Presumptive Taxation
(2006)
Introduction of Tax Payment Suspension Regime Specifically for Transfer
Pricing Assessments in Competent Authority (2007)
Expansion of Exchange of Information Rules (2009)
Codification of Transfer Pricing Documentation Requirements (2010)
Introduction of “Most Appropriate Method Rule” (2011)
May 9, 2012
6
Transfer Pricing Assessments Since FYE 1999
Historical Chart of Transfer Pricing Assessment in Japan since FYE 1999
(unit: JPY billion)
300
160
283.6
146
140
250
133
216.8
134
120
119
200
101
100
100
169.6
82
150
62
59
100
80
62
105.1
60
85.7
38
58.9
45.4
50
39
43
72.5
75.8
68.7
69.8
40
38.1
28.6
20
0
0
1999
2000
(Source: NTA Press Release)
2001
2002
2003
2004
2005
Assesssment amount (total)
2006
2007
2008
Number of cases
2009
2010
2011
*Each fiscal year shows FYE June XXX
May 9, 2012
7
Threshold Question: Is Comparability of “Transactions” to be
Based on Single Transactions or Groupings of Transactions?
 Historical NTA Position: Singular and strictly transactional, with
aggregations within product group or business segment permitted in
limited circumstances
 “where setting of price is performed taking into consideration transactions
belonging to same product group …or same business segment”
 Use of “mini-baskets” in practice – but no overall company comparisons
were accepted
 Historical NTA Position: There is only one arm’s length price. Japanese
transfer pricing law does not recognize ranges
 But, in recent practice, NTA accepts overall company comparisons and
considers the use of ranges
May 9, 2012
8
Comparable Uncontrolled Price Method
 Early application of secret comparables based on “single transaction”
interpretation
 Failure of NTA to disclose identity of comparable product, comparable
transaction or comparable company – “secret comparables”
 Taxpayer was prevented from performing an effective comparability analysis.
 Failure to make appropriate adjustments for differences in commercial
level, transaction volume and other factors, such as business strategies
 Subsequent difficulty to sustain secret comparables in competent
authority negotiations
 Use of CUP now seems to be the exception.
May 9, 2012
9
Resale Price Method
 Singular or Plural?
 NTA officials originally interpreted the Resale Price Method provisions as
referring to “transactions” in the “singular,” resulting in application on a strictly
transactional, “product-by-product” basis, with no aggregations of products and
transactions recognized.
 Criticisms of strict transactional approach
 Taxpayers without “internal” comparables could not use the Resale Price Method unless
they could identify (from information on competitors) specific gross margins of specific
competing products which are similar to the Taxpayer’s products (and will be considered
“similar” by the NTA on audit) and make necessary adjustments for differences in functions
or other matters in regard to such specific transactions.
 Requires use of “secret comparables” by tax authorities
 Gradual adoption of company-wide comparison approach
 Ultimately, difficult to sustain in competent authority negotiations
 NTA now accepts company-wide comparison approach and has become more flexible in
applying the Resale Price Method
May 9, 2012
10
Profit Split Methods
 Early preference for profit split methods in US/Japan competent authority
cases
 Development of conceptual arguments for applying profit splits
 Early criticism of “one-sided” approaches and concern for “income creation”
 NTA Guidelines instruct examiners to compare Japanese profits vs.
foreign profits
 In past, NTA favored “contribution profit split” and use of two factors
indicating relative value added: depreciation expense and personnel
expense
 Critics argue that Japanese Contribution Profit Split fails to take into account the value
of intangible property embedded in products provided by foreign suppliers.
 NTA has also used advertising and promotion expenses and other selling expenses of
Japanese subsidiary of foreign based firm, resulting in high allocations of overall profits
to Japan.
May 9, 2012
11
Profit Split Methods (cont’d)
 NTA adopted “residual profit split” and “comparable profit split” by
circular based on OECD Transfer Pricing Guidelines
 NTA sometimes applied Residual Profit Split but ignored contracts and
legal ownership to attribute high value to alleged “marketing intangibles”
in Japan.
 More recently, NTA has favored use of Residual Profit Split on outbound
intangible transactions of Japanese companies
 Document requirements included disclosure of foreign segment profitand-loss data.
 Recent defeat in court case involving profit splits
May 9, 2012
12
Transactional Net Margin Method
 NTA historical antipathy toward TNMM
 History of US assessments against Japanese firms based on Comparable
Profits Method (CPM) and “income creation” issue
 Active Japan involvement in drafting OECD 1995 Transfer Pricing
Guidelines paragraphs limiting use of TNMM
 Gradual acceptance from late 1990’s of “modified resale price method”
to resolve MAP cases and reach bilateral APAs
 TNMM finally adopted into Japanese tax law in 2006
 Policy objective seemed to be to apply to Japanese firms’ outbound
transactions.
 But adoption occurred at same time as agreement to revise US/Japan
income tax treaty
 TNMM was positioned as an “other method” with lesser priority than RPM
or other basic methods
May 9, 2012
13
Transactional Net Margin Method (cont’d)
 NTA was reluctant to apply TNMM in transfer pricing audits just after its
introduction in 2004
 But from 2006 or so, NTA increasingly accepted TNMM in bilateral APAs
and unilateral APAs and later on in audits as well
 TNMM was included as a presumptive taxation method in 2006.
 It is expected that TNMM will be applied more extensively going forward,
although tax authorities’ views on comparables will likely be different
from those of taxpayers.
May 9, 2012
14
Seeking Certainty:
Advance Pricing Arrangements Become More Prevalent
 Advance Pricing Arrangements (APA) confirm that, once a tax authority
evaluates the transfer pricing methodology and its validity, and accepts them
as reasonable, as long as the firm conducts transactions according to the
contents under certain preconditions, there would be no taxation on transfer
prices.
 Principal merits and demerits
 Merit: Secure predictability in transfer pricing
 Merit: Mitigate the transfer pricing risks (presumptive taxation, secret comparables
and penalty)
 Merit: More flexibility in applying methods as compared to an audit
 Demerit: Required to submit much information to tax authorities for APA review,
which can be like an audit
 Demerit: Administrative burdens and expenses
 On balance: Should now be seriously considered!
May 9, 2012
15
Trends in Bilateral APAs in Japan
 Increasing number of APA applications
Trends in Bilateral APA Cases
350
305
312
300
261
250
222
191
200
170
100
50
149
143
150
129
88
88
42
25
4747
2002
2003
92
80
39
63
49
135
128
130
105
84
113
82
Cases Received
Cases Disposed
Cases Carried Over
105
91
65
0
2004
2005
2006
2007
2008
2009
2010
2011
(Source: NTA Press Release)
May 9, 2012
16
Trends in Bilateral APAs in Japan
 Increased number of APAs with Asian countries
140
120
36
100
23
14
80
11
9
60
17
20
24
18
50
47
42
2010
2011
36
34
25
39
43
41
2007
2008
2009
27
5
26
18
2
5
35
Other
Asia/Oceania
Americas
3
6
40
14
16
20
2004
2005
29
0
2002
2003
2006
(Source: NTA Press Release)
May 9, 2012
17
Trends in Bilateral APAs in Japan
 Significant increase in application of TNMM in recent years
90
78
80
70
6161
60
50
50
40
30
25
19
20
13
15
8
10
4
25
22
18
17
16
8
8
4
0
FYE2002
FYE2007
FYE2008
FYE2009
FYE2010
FYE2011
13
11
7
2 3
5
7 7
5
8
0
0
CUP
(Source: NTA Press Release)
RP
CP
PS
TNMM
May 9, 2012
18
New Transfer Pricing Enforcement Approach:
Voluntary Compliance as a Matter of Corporate Governance
Public announcement at a Tax Seminar in Tokyo on April 24, 2012
 Mr. Toshiyuki Fushimi, Director, Large Enterprise Examination and Criminal Investigation Department
National Tax Agency of Japan
International Trends in Tax Enforcement
Efforts to Enhance Corporate Governance Concerning Taxes
Efforts to Maintain and Enhance Tax Compliance in Transfer Pricing
Key Actions Expected of Enterprises to Prevent Occurrence of Transfer Pricing Problems
“Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing”
May 9, 2012
19
International Trends in Tax Enforcement:
Meeting of the Forum on Tax Administration in January 2012
1. The January 2012 meeting in Buenos Aires of the Forum on Tax Administration brought
together the heads of the tax administrations from 43 countries under the auspices of the
OECD and concluded with a unified and strengthened commitment to combat offshore tax
abuse.
2. The tax administrators focused on the need to work smarter in times of shrinking budgets,
and how to strengthen their relationship with large corporations through efficient and
effective strategies that benefit both the taxpayer and taxing authority.
3. “Although there have been some high-profile successes in the fight against offshore tax
abuse, resulting in significant additional tax revenues and real improvements in transparency
and exchange of information, it is far too soon to declare victory.”
4. The tax administrations agreed that collaboration must now include coordinated actions by
countries to finally put an end to offshore non-compliance.
May 9, 2012
20
International Trends in Tax Enforcement:
Meeting of the Forum on Tax Administration in January 2012
5.
A key agreed objective was to promote the relationship between tax
administrations and Large Business Taxpayers
“An adversarial relationship between tax administrations and multinational corporate
taxpayers serves neither of our purposes well and is contrary to our common goals,
which are earlier and greater certainty, consistency, and efficiency.”
“We will pay particular attention to the process of conducting and resolving transfer
pricing cases. Overall, we intend to move away from a hide and seek approach to one
based on greater transparency on the part of both taxpayers and tax administrations. As
more companies put good tax compliance at the heart of their corporate governance,
this will be easier to achieve.”
May 9, 2012
21
International Trends in Tax Enforcement:
OECD Guidelines for Multinational Enterprises - 2011
Part I : Recommendations for responsible business conduct in a global
context
Section XI - Taxation
1.“Tax compliance includes such measures as providing to the relevant authorities
timely information that is relevant or required by law for purposes of the correct
determination of taxes to be assessed in connection with their operations and
conforming transfer pricing practices to the arm’s length principle.” (Para 1)
2.“Enterprises should treat tax governance and tax compliance as important elements
of their oversight and broader risk management systems. In particular, corporate
boards should adopt tax risk management strategies to ensure that the financial,
regulatory and reputational risks associated with taxation are fully identified and
evaluated.” (Para 2)
May 9, 2012
22
International Trends in Tax Enforcement:
OECD Guidelines for Multinational Enterprises - 2011
Part I, Section XI - Taxation
3.In the case of enterprises having a corporate legal form, corporate boards are in a position
to oversee tax risk in a number of ways. For example, corporate boards should proactively
develop appropriate tax policy principles, as well as establish internal tax control systems so
that the actions of management are consistent with the views of the board with regard to tax
risk. (Para. 102)
4.Tax authorities may need information from outside their jurisdiction in order to be able to …..
determine the tax liability of the member of the MNE group in their jurisdiction. Again, the
information to be provided is limited to that which is relevant to or required by law for the
proposed evaluation of those economic relationships for the purpose of determining the
correct tax liability of the member of the MNE group. MNEs should co-operate in providing
that information. (Para. 103)
May 9, 2012
23
International Trends in Tax Enforcement:
OECD Guidelines for Multinational Enterprises - 2011
Part I, Section XI - Taxation
5.Application of the arm’s length principle avoids inappropriate shifting of profits or losses and
minimises risks of double taxation. Its proper application requires multinational enterprises to
cooperate with tax authorities and to furnish all information that is relevant or required by law
regarding the selection of the transfer pricing method adopted for the international
transactions undertaken by them and their related party. (Para. 104)
6.The OECD Transfer Pricing Guidelines aim to help tax administrations (of both OECD
member countries and non-member countries) and multinational enterprises by (partially
omitted) minimising conflict among tax administrations and between tax administrations and
multinational enterprises and avoiding costly litigation. Multinational enterprises are
encouraged to follow the guidance in the OECD Transfer Pricing Guidelines, as amended
and supplemented, in order to ensure that their transfer prices reflect the arm’s length
principle. (Para. 106)
May 9, 2012
24
Efforts to Enhance Corporate Governance Concerning Taxes
“From the perspective of the maintenance and improvement of the level of tax
reporting throughout Japan, it is important to maintain and improve tax compliance by
large business taxpayers.”
1. The economic activities of large business taxpayers occupy a large portion of the economy
in Japan and the amount of their reported income is high.
2. For example, large business taxpayers comprise 0.02% of the number of corporations, but
26% of the reported income of all corporations.
3. Large business taxpayers lead industries and regions. Tax compliance by large business
taxpayers greatly affects tax compliance by their enterprise groups as well as small to
medium taxpayers and individual taxpayers.
4. When the tax compliance by large business taxpayers, which require significant
administrative resources in tax examinations, is enhanced, the tax administration will be able
to allocate more administrative resources to the corporations with a high level of need to be
examined and to plan for improvement in their level of reported income.
May 9, 2012
25
Results of Enhancing Corporate Governance Concerning Taxes
“It is beneficial for both enterprises and the tax administration when tax compliance is
improved through the enhancement of corporate governance.”
1.
Benefits for Enterprises
1) Minimizing tax risks
2) Minimizing the burden of audit defenses in tax examinations.
2.
Benefits for the Tax Administration
1) Greater focus on tax examinations of corporations with a high need for examinations
May 9, 2012
26
Efforts by the National Tax Authorities*
“The national tax authorities will maintain and improve tax compliance through the
enhancement of corporate governance by large business taxpayers, by confirming
the status of corporate governance concerning taxes by large business taxpayers
during tax examinations and carrying out exchanges of views with top management.”
1. Conducting of Orientation Sessions
“In meetings attended by top management of large business taxpayers, we will encourage the
enhancement of corporate governance concerning taxes (such as by introducing examples of
effective efforts).”
* “National tax authorities” refers to regional taxation bureaus, which have jurisdiction over large
business taxpayers.
May 9, 2012
27
Efforts by the National Tax Authorities
2.
Approaches towards Individual Enterprises
1)
During the opportunity of a tax examination by Special Examiners in the Large Enterprise
Examination Department in each regional tax bureau, the national tax authorities will
confirm the status of the corporate governance concerning taxes by large business
taxpayers through a request to them to describe the current status of their corporate
governance including the involvement and direction by top management and the
maintenance of an organization and functions in the finance and audit departments, in a
“Confirmation Sheet on Corporate Governance Concerning Taxes”.
2)
Upon the closing of a tax examination, the top management of a large business taxpayer
and the top officials of a regional tax bureau will exchange views for the enhancement of
corporate governance concerning taxes (such as by introducing examples of effective
efforts).
May 9, 2012
28
Efforts by the National Tax Authorities
3. Use in Determining the Need for an Examination
“Going forward, when determining the need for an examination, the national tax authorities
will utilize the status of corporate governance concerning taxes as an important decisionmaking material and will allocate tax examination resources more heavily toward
corporations with a high need for an examination.”
4. Efforts in Transfer Pricing
“Also on transfer pricing, in order to maintain and improve tax compliance, the national tax
authorities will carry out a detailed plan as part of its efforts for the enhancement of
corporate governance concerning taxes.”
May 9, 2012
29
Efforts to Maintain and Enhance Tax Compliance
in Transfer Pricing
“In order to prevent the occurrence of problems concerning transfer pricing, the national tax
authorities will promote the voluntary and appropriate actions of enterprises through
cooperation between the national tax authorities and the enterprises.”
o Merits for both the enterprises and the tax authorities through maintaining and enhancing
tax compliance in transfer pricing
Benefits for enterprises
 Minimizing tax risks
 Minimizing the burden of audit defenses in tax examinations
Benefits for the tax authorities
 Greater focus on tax examinations of corporations with a high need for an examination
 Preventing the problem of international double taxation (Mutual Agreement Procedures
with foreign tax authorities)
May 9, 2012
30
Particular Compliance Concerns in Transfer Pricing
1.
In a self-assessment system, the taxpayer is required to themselves calculate the arm’s
length prices for their transfer pricing and to file tax returns based on such calculations.
2.
Because transfer pricing issues involve huge risks and costs, it requires even more
voluntary and appropriate actions by the enterprises.
3.
The importance of improving tax compliance, including transfer pricing, has been
highlighted as an international trend.
4.
In foreign countries, the enforcement of transfer pricing rules has been strengthened,
and it is expected that transfer pricing assessments (double taxation) and the
competent authority negotiations resulting from the same will increase. Accordingly,
there is an increased need to consider measures, etc. for advance prevention of double
taxation.
May 9, 2012
31
Particular Compliance Concerns in Transfer Pricing
5.
Currently, the national tax authorities are moving ahead with efforts toward the
enhancement of corporate governance concerning taxes, and it is possible to
characterize the measures for transfer pricing as one part of such efforts.
6.
In addition, in the 2010 tax reforms, the scope of required transfer pricing documentation
was clarified, and the environment for the preparation of transfer pricing documentation
was improved.
7.
This means that the “documents that are recognized to be necessary for the purpose of
computing arm’s length prices” were clarified in the ministerial order that sets for the
“presumptive taxation” rules, which could be invoked if the tax administrations are not
able to obtain the taxpayer’s cooperation through providing such necessary documents.
May 9, 2012
32
Key Actions Expected of Enterprises to Prevent Occurrence
of Transfer Pricing Problems
1.
2.
3.
4.
5.
6.
7.
Knowledge of Transfer Pricing Legislation
Involvement of Top Management
Recognition of Status and Problem Areas in Foreign Related Party Transactions
Implementation of Global Transfer Pricing Policies
Transaction Price Setting Taking into Account Transfer Pricing Methodologies
Transfer Pricing Compliance of Related Parties Overseas (Governance by Parent
Company)
Communications with the Tax Administration
Based on the above, a “Check Sheet to Confirm the Status of Efforts Concerning Transfer
Pricing” should be prepared.
May 9, 2012
33
Efforts to Maintain and Improve Compliance in Transfer Pricing
“As part of their efforts directed toward the enhancement of corporate governance
concerning taxes, the national tax authorities will encourage enterprises to
themselves plan for the maintenance and improvement of tax compliance in transfer
pricing, while confirming the status of the efforts of the enterprises concerning
transfer pricing.”
1.
Facilitation through Orientation Sessions
“Along with an explanation of the domestic and foreign trends in transfer pricing, the national tax
authorities will explain the importance for enterprises to themselves maintain and improve
their tax compliance in transfer pricing.”
May 9, 2012
34
Efforts to Maintain and Improve Compliance in Transfer Pricing
2.
Facilitation through Individual Contacts with Enterprises
1)
The national tax authorities will confirm the status of efforts on transfer pricing through a
request to fill in a “Check Sheet to Confirm the Status of Efforts Concerning Transfer
Pricing.”
2)
As the time of exchanges of views between the top management of the enterprises and
the tax bureaus with regard to corporate governance concerning taxes, the national tax
authorities will also exchange views concerning transfer pricing.
3)
Views will be exchanged between the enterprises and the tax officials in charge of transfer
pricing, based on the contents of the “Check Sheet to Confirm the Status of Efforts
Concerning Transfer Pricing.”
May 9, 2012
35
Japan as a Lesson for the Rest of Asia?
1. What can we learn from Japan’s history of attempting to
apply the Arm’s Length Principle using the various transfer
pricing methods?
2. What have the Japanese tax authorities told other
governments in Asia over time and now today about Japan’s
experience?
3. What are the implications of Japan’s new transfer pricing
enforcement approaches seeking greater taxpayer
compliance based on corporate governance objectives?
May 9, 2012
36
III. COMPETENT AUTHORITY AND TRANSFER PRICING: HOW
IS IT WORKING IN ASIA?
Panel Discussion
 Gary Thomas, White & Case, Tokyo
 Sam Sim, Standard Chartered Bank, Hong Kong
 Clemens Thyme, S&P Capital IQ, Hong Kong
 Michael Quigley, White & Case, Washington DC
May 9, 2012
37
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL
SERVICES IN ASIA – THE BIG PICTURE
IPO Volume 2011
Financial Sector FDI 2011
May 9, 2012
38
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL
SERVICES IN ASIA – CONTRASTING FLAVOURS
Some Macro Factors Impacting Level of Cross-border Activity





Crisis, really?
European withdrawal vs Regionals Stepping up
Bank Finance to Capital Markets
Simpler Products vs Increasing Sophistication
Increased Regulations vs Internationalization

Ring-fencing liquidity vs Outlet for excess savings
Asia cross-border FS has vast room for growth
But so does sophistication of authorities & TP rules !
May 9, 2012
39
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL
SERVICES IN ASIA – DIFFERENT STROKES
A. Familiar Global Themes…
Challenge to management fees/Head-office charges
 Related party lending, capital, liquidity and guarantee fees
 Increased documentation & reporting/compliance burden
 Regulatory change and restructuring

B. More so in Asia…
Intervention/influence of prudential regulators
 Sophistication of tax authorities, advisors and taxpayers

- Target vs Principles based; Cultural aspects
Bespoke & evolving business/product/pricing models
 Legislative framework is young and in flux (Treaties/APA/MAP, TP jurisprudence)
 Beyond OECD?: BRIIC, UN model
 Implications of state ownership

May 9, 2012
40
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL
SERVICES IN ASIA - MORE SPICE TO THE POT
A. APA/MAPs
-Are they worth the trouble?
-First in class? Do you have the resources?
B. Reconciling Differences
-Different TP methods and mark-ups; Global consistency vs Local appropriate
-Tax/TP vs Accounting (Financial vs Management view)
C. GAAR, Thin-Cap, Indirect Taxes & TP
-Interaction of such evolving tax principles with transfer pricing
D. Branch banking to Subsidiaries
-Subsidarisation, Securities companies, SPEs
E. TP Infrastructure
-Tax vs Finance: Roles & Responsibilities
-Outsourcing
May 9, 2012
41
V.
TRANSFER PRICING – CREDIT RISK ASPECTS
 Transfer pricing standards require financial transactions such as
loans and guarantees between related entities to utilize arm’s
length pricing.
 Key question: At what rate could a subsidiary fund itself if it
were an independent entity?
May 9, 2012
42
Establish a Risk Based Framework
Initial
Scoring and Sensitivi
for Intercompany Loans and
Guarantees
Scoring unrated subsidiaries of
 Use a risk based approach that
Example: Coca-Cola
Description
S&P Rating
The Coca-Cola Co.
A+
Coca-Cola Hellenic Bottling Co. S.A.
A
Coca-Cola Enterprises Inc.
A+
Coca-Cola Femsa S.A.B. de C.V.
A-
Coca-Cola Amatil Ltd.
A-
Coca-Cola Enterprises Inc. fka International CCE Inc.
BBB+
Coca-Cola Bottling Co. Consolidated
BBB
Coca-Cola Icecek A.S.
UNRATED
 Use globally consistent methodology
Coca-Cola HBC Finance B.V.
UNRATED
Coca-Cola Amatil (Australia) Pty Ltd.
UNRATED
Coca-Cola Erfrischungsgetraenke AG
UNRATED
 Document sound economic theory
Hokkaido Coca-Cola Bottling Co., Ltd.
UNRATED
Coca-Cola Amatil (N.Z.) Ltd.
UNRATED
Coca Cola Embonor S.A.
UNRATED
Coca-Cola West Co., Ltd.
UNRATED
Coca-Cola Beverages Ltd.
UNRATED
Coca-Cola Central Japan Co., Ltd.
UNRATED
Johnston Coca Cola Bottling Group Inc.
UNRATED
Coca-Cola HBC Finance PLC
UNRATED
Mikuni Coca-Cola Bottling Co., Ltd.
UNRATED
Embotelladoras Coca Cola Polar S.A.
UNRATED
Coca-Cola Bottling Group Southwest Inc.
UNRATED
… and additional subsidiaries
UNRATED
differentiates credit quality
 Find appropriate comparable market
rates for interest spreads or guarantee
fees
around assessments
S&P Capital IQ scoring solutions
allow43 y
May 9, 2012
Credit Risk Scores at the Core of Setting the Cost of Capital
Moving from Fundamentals to Credit Risk Based Approaches
Fundamentals only comparables methods frequently fall short when attempting to
generate comparables for money/guarantee transference pricing terms. Size bias and
the complexity in the interactions of financial ratios in determining credit quality
render this method inaccurate in most instances
As shown in the
example, wide
dispersion of
Ebitda levels
proves not to be a
good indicator of
credit quality
comparability
May 9, 2012
44
Classification - Credit Assessment Methodologies
Internal or Third Party
Ratings
Method
Sector,
Size
Input
Output
Advantage
Limitation
Public and
Private Ratings
All
3 years
financials,
management
meeting
Rating
- Easy to access and
interpret
- Additional coverage
through Private Estimates
- Limited coverage
- No standalone
assessments of subs
- Costs of Individual
assessments
Credit
Scorecard
All
Current
Quantitative
and Qualitative
Data
Score that can
be mapped to a
rating
- Comprehensive sector
coverage (Corp, FI, Ins)
-Requires qualitative &
quantitative analysis
- If outsourced, cost of
individual assessment
Credit Model –
rating score
US$ 2050M and
above
Current
Quantitative
Data
Score that can
be mapped to a
rating
- Quantitative and objectified
information only
- Large numbers of subs can
be assessed quickly
- Links to Ratings data
-Limitation in sectors, as
some are hard to
quantitatively model and
size over USD c20m
Credit Model
SME
(US$1M
and
above)
Current
Quantitative
Data
Probability of
Default
- Direct and quantified
default measure
- Smaller entities with USD
1-100m revenue
- Requires comprehensive
empirical datasets including
local/regional default data,
which is hard to obtain
- PD
May 9, 2012
45
Credit Risk Proxies for Allocating Cost Of Capital
Using Internal Rating for Affiliates as a Benchmark
Business Risk
Top Down Sector
Based View
Financial Risk
Bottom Up
Fundamentals
Build
fundamentals
Build fundamentals
driven
initial
driven comparables
comparables
Credit Assessment
Determine an Internal
Rating (Score)
aaa
aa+
aa
aaa+
a
abbb+
bbb
bbbbb+
bb
bbb+
b
bc
Low Risk Affiliates
Market
Based
Reference
Pricing
High Risk Affiliates
S&P Capital IQ to Produce Internal Ratings for
Establish consistent approach for internal ratings on subs:
& approach
Subsidiaries:
•Affiliates
Model based
(most objectified, limitations)
• Internal
Ratings Based
approach
(most detailed, expensive)
• Quantitative
Scoring
Models
• Internal vs. external assessment
Generate custom
Generate custom
transparent yield
comparable yield
curves
curves
• Expert Judgment Credit Assessment Templates
• Outsource score generation task to S&P Capital IQ
May 9, 2012
46
Building Robust Market Based Refere
Calculate Yield Curves for Custom Pool of Co
Alternatives in Establishing Effective
Reference Prices
The
app
and
app
Empirical Term Structure
7
6
• B
b
u
a
5
Yield (%)
Establishing a market based
comparable requires:
• Transparent methodology
• Appropriate segmentation
(geography, industry, credit
rating, duration, etc.)
• Cover all risk factors
(sovereign risk, T&C)
• Strong grounding on empirical
data
4
3
Median
2
• P
in
th
Upper Quartile
Lower Quartile
1
Exposure Weighted Average
0
0
5
10
15
20
25
30
Term (years)
Credit Spread Models
Note: Graph contains hypothetical data.
May 9, 2012
47
VI. CURRENT ISSUES BEING RAISED IN LITIGATION AND
WHAT THIS MEANS FOR ASIA
A. Status of Selected Recent Cases
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
US: Medtronic Inc. v. Comm’r
US: Guidant LLC v. Comm’r, T.C. No. 5989-11
US: Veritas Software Corp. v. Comm’r
US: Xilinx, Inc. v. Comm’r
US: Intersport Fashions West Inc. v. United States
Australia: SNF (Australia) Pty. Ltd. v. Comm’r
Canada: GlaxoSmithKline Inc. v. The Queen
Canada: The Queen v. General Electric Capital Canada Inc.
Canada: Alberta Printed Circuits Ltd. v. The Queen
India: Vodafone
Spain: Roche Vitamins Europe Ltd.
Russia: Gazprom Extraction Astrakhan LLC
Toyota Argentina SA c/AFIP-DGI
B. What These Cases Mean for Asia
May 9, 2012
48
Medtronic Inc. v. Comm’r, T.C. No. 6944-11
SUMMARY:
 Leads and devices adjustment: $1.2 billion
 The IRS challenged payments from Medtronic Puerto Rico (“PR”) to
Medtronic U.S. for the use of patents and other IP and to purchase medical
device components. PR used the components to assemble finished
products, which it sold to Medtronic USA Inc., another U.S. affiliate that
distributed the products in the U.S. and abroad.
 Medtronic used a CUT as its primary method, with a profit split as a
corroborating method.
 IRS argument in the alternative: significant value transferred under 367(d)
 Medtronic also challenges a royalty true-up in the amount of $4
 Swiss Supply Agreement Issue: $39 million
 Under the agreement, Medtronic’s Swiss subsidiary assists PR by
manufacturing and supplying the U.S. with devices to meet excess U.S.
demand.
 The Swiss subsidiary pays the leads and devices royalty and the trademark
royalty that PR would have paid if it had manufactured the product itself.
May 9, 2012
49
Medtronic Inc. v. Comm’r, T.C. No. 6944-11
 Spinal Screw Operations: $90 million
 Medtronic claims that the IRS improperly treated its PR as a contract
manufacturer rather than a risk-bearing, autonomous manufacturer
 Interest Income from Prior Buy-In Case: $14 million
 In 2010, Medtronic and the IRS signed a closing agreement to resolve a
2008 Tax Court case (Medtronic Inc. v. Comm’r, T.C. No. 17488-08) relating
to the buy-in paid by Medtronic’s Swiss subsidiary for the right to use
preexisting intangibles.
 Medtronic disputes the inclusion of the interest amounts in its 2005-2006
returns because it has a competent authority request pending pursuant to
the U.S.-Switzerland treaty.
May 9, 2012
50
Medtronic Inc. v. Comm’r, T.C. No. 6944-11
STATUS:
 Medtronic Inc. filed a petition in the Tax Court on March 23, 2011,
challenging $2.7 billion in upward income adjustments to its 2005 and
2006 taxable years.
 Approximately $1.4 billion of the adjustments were transfer pricing
adjustments related to licensing and manufacturing transactions with
Medtronic’s affiliates in Switzerland and Puerto Rico.
 The case is currently scheduled for trial on May 21, 2012 in the Tax
Court, although the parties have moved for a continuance.
May 9, 2012
51
Guidant LLC v. Comm’r, T.C. No. 5989-11
SUMMARY:
 Like Medtronic, involves licensed IP and manufacturing arrangements:
 Guidant’s Irish affiliate purchased components from Guidant U.S. and used the
components to manufacture units that generate pulses in pacemakers
 Guidant Ireland sterilized and packaged the finished products, then sold them
back to Guidant U.S., foreign related parties, and third-party distributors
 IRS challenged royalties for use of licensed intangibles, prices of
components, and intercompany sales of finished products in transactions
with Irish and Puerto Rican affiliates
 The IRS used a CPM and concluded that a cost plus 13.9 percent markup (Puerto
Rico) and a cost plus 11 percent markup (Ireland) should be applied to labor and
overhead
 The IRS did not calculate a markup on other costs
 Guidant claims that the IRS did not specify the portions of the adjustment
attributable to the individual affiliates
 As in Medtronic, the IRS argued in the alternative that the transferred
intangibles should be taxed under Section 367(d).
May 9, 2012
52
Guidant LLC v. Comm’r, T.C. No. 5989-11
STATUS:
 Guidant LLC, which was acquired by Boston Scientific Corporation in
2006, filed a petition in the Tax Court on March 11, 2011, challenging $1
billion in transfer pricing adjustments to its 2001 and 2002 taxable
years.
 The adjustments related to technology licenses and manufacturing
arrangements between Guidant U.S. and its subsidiaries in Puerto Rico and
Ireland.
 The case is currently pending in the Tax Court and is scheduled to be
tried on June 18, 2012.
May 9, 2012
53
Veritas Software Corp. V. Comm’r, 133 T.C. 297(2009)
SUMMARY:
 Valuation dispute over Veritas U.S.’s buy-in payment under a costsharing arrangement (“CSA”) from its Irish subsidiary.
 Veritas U.S. reported a $166 million lump-sum buy-in payment from Veritas
Ireland on its 2000 return.
 In 2002, Veritas U.S. amended its 2000 return to reduce the payment to
$118 million.
 During audit, the IRS proposed an adjustment to increase the buy-in to $2.5
billion but at trial, the IRS reduced the proposed buy-in to $1.675 billion.
 In Veritas Software Corp. v. Comm’r, 133 T.C. 297 (2009), the Tax Court
held for the Taxpayer
 Upheld the Taxpayer’s use of CUTs to value the contributed intangibles
May 9, 2012
54
Veritas Software Corp. V. Comm’r, 133 T.C. 297(2009)
 On December 6, 2010, the IRS issued an Action on Decision, AOD 2010-
05, 2010-49 I.R.B.
 The IRS declined to appeal the Tax Court decision but characterized it as
erroneous
 IRS announced that it will continue to litigate cost sharing cases using
approaches to valuation that distinguish between make-sell rights (to preexisting intangibles) and platform rights (to technology developed in the
future)
May 9, 2012
55
Veritas Software Corp. V. Comm’r, 133 T.C. 297(2009)
 Issue was valuation of intangibles conveyed in a CSA
 Veritas U.S. contributed pre-existing computer software programs to the CSA,
including the right to further develop the programs.
 Veritas used CUTs to value the intangibles contributed to the CSA using
licenses to unrelated original equipment manufacturers such as HP and Dell
 The IRS rejected comparables as involving make-sell rights to preexisting
intangibles rather than platform rights to future developed intangibles
 Court accepted licenses as comparables under a functional, rather than
contractual, analysis
 The IRS valued the intangibles as having perpetual useful lives and in the
aggregate, rather than individually
 Treated the contribution as “akin to a sale” of Veritas U.S.’s business to its Irish
affiliate
 Court rejected this approach
May 9, 2012
56
Xilinx, Inc. v. Comm’r, 598 F.3d 1191 (9th Cir. 2010)
SUMMARY:
 Issue was proper cost base to be used in a qualified cost-sharing
arrangement (“QCSA”) for Xilinx’s 1997-1999 taxable years
 The Tax Court held in favor of Xilinx. Xilinx, Inc. v. Comm’r, 125 T.C. 37
(2005).
 In Xilinx I, 567 F.3d 482 (9th Cir. 2009), the Ninth Circuit reversed in
favor of the IRS.
 In Xilinx II, 598 F.3d 1191 (9th Cir. 2010), the Ninth Circuit withdrew its
opinion in Xilinx I and affirmed the Tax Court’s decision in favor of the
taxpayer.
 The IRS issued an Action on Decision, AOD 2010-03, I.R.B. 2010-33, in
which it acquiesced in result only because the 2003 amendment of the
regulations rendered the decision moot for subsequent years.
May 9, 2012
57
Xilinx, Inc. v. Comm’r, 598 F.3d 1191 (9th Cir. 2010)
 While a QCSA between Xilinx and its Irish subsidiary was in effect, Xilinx granted
stock options to its employees, which they exercised.
 The IRS claimed that stock-based compensation should have been included in the
cost-sharing pool.
 Xilinx’s position was that uncontrolled parties engaging in comparable transactions
would not share the cost of the stock options.
 Competing rules:
 Cost-sharing rules provided that QCSA participants must share “all costs”
 But the arm’s length standard is a general standard to be applied “in every case”
 Xilinx I: held for IRS
 Cost-sharing rules were specific rules that trumped general Section 482 rule
 Xilinx II: held for Xilinx
 Resolve ambiguity by looking at:
 Purpose of regulations – parity between controlled and uncontrolled transactions
 Consistency with U.S.-Ireland treaty
May 9, 2012
58
Veritas and Xilinx after the 2011 Cost-Sharing Regulations
STATUS:
 In April 2012, the IRS warned that taxpayers entering into CSAs should
not rely on Veritas or Xilinx now that the final 2011 cost-sharing
regulations are in force.
 “As we transition to the 2008 temporary and 2011 final cost-sharing
regulations, we will be moving beyond the reach” of Veritas and Xilinx.
- Joseph Tobin, IRS Office of Associate Chief Counsel (International)
(published in Tax Notes Today, April 23, 2012).
 Citing the Supreme Court’s decision in Mayo, the IRS has said that its
new cost-sharing regulations were specifically and intentionally drafted
to resolve the issues raised in Veritas and Xilinx.
 In Mayo, the Supreme Court held that Treasury regulations that have been
subject to a notice and comment period are entitled to Chevron deference.
May 9, 2012
59
Intersport Fashions West Inc. v. United States, 2012 TNT 30-21
(Fed. Cl. 2012)
SUMMARY:
 Subsidiary of German motorcycle apparel company not permitted to
claim refunds for restructuring expenses incurred by its parent
because the expenses were not claimed on a timely filed return.
STATUS:
 Government prevailed on motion for summary judgment – a taxpayer
cannot affirmatively invoke Section 482. See Treas. Reg. 1.482-1(a)(3).
May 9, 2012
60
SNF (Australia) Pty. Ltd. v. Comm’r, [2010] FCA 635
SUMMARY:
 SNF Australia, decided on June 25, 2010, is the Federal Court of Australia’s first written
guidance on the application of the transfer pricing methods in Australia.
 Facts:
 SNF Australia imported polyacrylamide products from affiliates in France, the U.S., and China,
and then sold these products to Australian customers.
 SNF Australia used the CUP method, with sales of products by SNF France to non-Australian
third parties as comparables.
 SNF Australia reported losses back to 1998 despite evidence of sales growth. SNF Australia
explained these as resulting from poor management, high levels of competition, low sales per
salesperson, and excessive stock levels.
 The Australian Tax Office used the TNMM (with an operating profit of 1.7 percent) to
adjust SNF Australia’s income upwards.
 The Australian Tax Office challenged SNF Australia’s use of the CUP, arguing that the French
sales were not comparable.
 The Court rejected the use of the TNMM, faulting it and other profits-based methods for
“inevitably attribut[ing] any loss to the pricing”
 The Court accepted SNF Australia’s CUP analysis and its evidence demonstrating that the
losses were caused by poor management and not by its transfer prices
 The Australian Tax Office appealed the decision to the Full Federal Court.
May 9, 2012
61
SNF (Australia) Pty. Ltd. v. Comm’r, [2011] FCAFC 74
STATUS:
 On June 1, 2011, the Full Federal Court dismissed the Commissioner's appeal.
 The Court conducted a re-examination of much of the evidence presented by the taxpayer to
support its pricing under the CUP method and concluded that, in light of the following factors,
comparability had been established:
 characteristics of the property
 the functions (activities of the companies conducting the comparable transactions)
 the contractual terms and conditions in the comparable transactions
 economic circumstances of the markets in which the transactions took place and
 Business strategies of the respective parties
 The Court concluded that there was a single global market, leading to its acceptance of
comparable data from different geographic markets.
 In its Decision Impact Statement dated November 7, 2011, the ATO narrowly
interpreted the impact of the Court’s decision.
 The ATO also alluded to proposed legislation to reform the transfer pricing rules, in which
case the legal position would probably be materially different.
May 9, 2012
62
GlaxoSmithKline Inc. v. The Queen, [2010] FCA A-345-08
SUMMARY:
 On July 26, 2010, the Federal Court of Appeal issued a taxpayer-favorable decision
in GlaxoSmithKline.
 At issue were Glaxo’s Canadian subsidiary’s payments to a related Swiss
distributor for the active pharmaceutical ingredient in Zantac during the company’s
1990-1993 taxable years.
 Glaxo used the resale price method, which produced prices ranging from $1,512 - $1,615
 The Canadian tax authorities used the CUP method, which produced prices ranging from
$194 - $304 using prices paid by unrelated generic manufacturers for the same
ingredient.
 The Tax Court of Canada largely upheld the assessments.
 On appeal to the Federal Court, Glaxo argued that a license agreement, by which it
used the Zantac trademarks, must be considered in evaluating its transfer prices.
 Glaxo’s position was that no third party could sell Zantac without the license agreement
 The CRA argued that only the supply agreement should be considered in determining
what was “reasonable in the circumstances.”
May 9, 2012
63
GlaxoSmithKline Inc. v. The Queen, [2010] FCA A-345-08
 The Federal Court of Appeal upheld the use of the CUP but agreed with Glaxo that the
valuation must consider the license agreement and all other relevant circumstances.
 The Tax Court of Canada largely upheld the assessments.
 The Federal Court of Appeal upheld the use of the CUP but adjusted the pricing
determination to account for the Zantac brand name.
STATUS:
 The Supreme Court granted the parties’ motions for leave to appeal and cross appeal
and the appeal was heard on January 13, 2012.
 During the hearing, several judges asked whether it made a difference that the active
ingredient purchased by Glaxo Canada was to be marketed and sold as “Zantac,” a branded
product that would yield a higher retail price than the generic product.
 The Chief Justice asked about bundling and its relationship to transfer pricing – if the price
included something other than the substance (IP), why was withholding tax not remitted?
 A decision is not expected before the end of the year.
May 9, 2012
64
The Queen v. General Electric Capital Canada Inc., [2010] FCA 344
SUMMARY:
 On December 15, 2010, the Federal Court of Appeal upheld the Tax Court of
Canada’s taxpayer-favorable decision in GE Capital Canada Inc. (“GECCI”).
 Facts:
 GECCI is a financial services company doing business in Canada. It financed much of its
business with debt guaranteed by its U.S. parent company. Beginning in 1995, GECCI
paid a guarantee fee of 1% of the principal amount of the debt outstanding during the
year to its U.S. parent.
 GECCI deducted the guarantee fees in its 1996 through 2000 tax returns, totalling
approximately $136.4 million in deductions
 The CRA disallowed the deductions, claiming that the 1% guarantee fee exceeded an
arm’s length price.
 The Tax Court of Canada held for the taxpayer, finding that the U.S. parent’s
“implicit support” should be taken into account in determining the guarantee fee.
May 9, 2012
65
The Queen v. General Electric Capital Canada Inc., [2010] FCA 344
 The Federal Court of Appeal upheld the Tax Court’s decision:
 Held that “implicit support” must be taken into account in evaluating transfer
prices because an arm’s length party “standing in the shoes” of the taxpayer
would consider it relevant.
STATUS:
 The CRA is attempting to re-litigate the case after denying General Electric Canada
Company (“GECC”), successor by amalgamation to GECCI, a deduction for these
same fees paid to the U.S. parent corporation. (2010-3493(IT)G and 20103494(IT)G).
 In December 2011, the Tax Court denied GECC’s motion that res judicata prevented the
re-litigation of this issue.
 Although the issues are similar, the Tax Court denied the motion because there are
different taxpayers and different tax years involved.
May 9, 2012
66
Alberta Printed Circuits Ltd. v. The Queen, 2011 TCC 232 (June
2011)
SUMMARY:
 APC manufactured custom circuit boards for customers in Canada and
the U.S., and for several years many of the design and setup services
were performed by a Barbados company controlled by a key employee
of APC. The founders of APC and the key employee had interests in
both APC and the Barbados company, but there was no common legal
control of the two entities.
STATUS:
 However, the Tax Court held that the two companies did not factually
deal with one another at arm’s length and were thus subject to
Canada’s transfer pricing rules.
May 9, 2012
67
India – Vodafone Int’l Holdings B.V. v. Union of India (Supreme
Court, Jan. 20, 2012)
SUMMARY:
 Vodafone, a U.K. telecommunications company, purchased an Indian mobile
phone company from a Hong Kong-based company for $11.2 billion in 2007.
 Indian tax authorities assessed $2.2 billion in capital gains tax against Vodafone
in connection with the transaction, claiming that
 The Bombay High Court ruled in favor of the CBDT in 2010.
STATUS:
 In January 2012, the Supreme Court reversed, holding that in the absence of a
specific look-through provision in India’s domestic law, a sale of shares by
companies outside of India cannot be taxed by India simply because the
underlying assets are located in India.
 The Supreme Court stated that allowing taxation under these circumstances
“would amount to imposing capital punishment for capital investment since it
lacks authority of law.”
May 9, 2012
68
India – Vodafone Int’l Holdings B.V. v. Union of India (Supreme
Court, Jan. 20, 2012)
AFTERMATH:
 On February 17, 2012, Indian tax authorities filed a petition with the
Supreme Court requesting a review of the January decision. The
Supreme Court rejected the petition on March 20, 2012.
 However, in March 2012 the government proposed amendments to the
Income Tax Act that would permit the retroactive taxation of crossborder transactions involving assets located in India.
 Separately, in December 2011, Vodafone was subject to a $1.7 billion
transfer pricing assessment in India. It recently filed an appeal citing
certain favorable observations in the above-mentioned Supreme Court
decision.
May 9, 2012
69
Roche Vitamins Europe Ltd, Supreme Court of Spain, Case No.
1626/2008 (Jan. 11, 2012).
SUMMARY:
 The Supreme Court affirmed the National Court’s holding that Roche Europe, a
Swiss company, had a PE in Spain through its “stripped risk subsidiary,”
Roche Spain.
 Roche Spain was a contract manufacturer receiving a cost plus 3.3 percent
markup and also served as a sales representative for Roche Europe, for which
it received a commission of 2 percent of sales in Spain.
 Roche Spain had no authority to negotiate the terms of sale or to conclude
contracts, it merely represented, protected, and promoted the interests of
Roche Europe.
 The National Court concluded (and the Supreme Court affirmed) that although
Roche Spain’s facilities were not a “fixed place of business” of Roche Europe,
Roche Spain was a dependent agent because it was legally and economically
dependent on Roche Europe, which both directed and controlled all relevant
activities of Roche Spain and bore all economic risks associated therewith.

May 9, 2012
70
Roche Vitamins Europe Ltd, Supreme Court of Spain, Case No.
1626/2008 (Jan. 11, 2012).
TRANSFER PRICING :
 The Supreme Court also addressed the “attributable income” issue, which has
transfer pricing implications.
 Practitioners typically argue that , even if there is a PE in a country from which risk




has been stripped, a transfer pricing analysis would conclude that the fees allocated
to the stripped-risk affiliate are adequate to compensate it for its “routine” functions.
But the Court held that Roche Spain was not adequately compensated for all of the
functions it was performing for Roche Europe.
The Court concluded that product sales in Spain were taxable to Roche Europe’s PE
and Roche Spain should take into account a portion of European sales for this it had
assisted in promotion.
The Court held that. under Paragraph 34 of the OECD Commentary to Article 5, once
a PE is established, it exists to the extent that the agent acts for the principal, not
only to the extent of the agent’s contracts.
As a result, all of the economic activity conducted by Roche Spain on behalf of
Roche Europe is part of the PE.
May 9, 2012
71
Gazprom Extraction Astrakhan LLC, Federal Arbitration Court
(Russia), Case No. KA-A40/13304-10 (June 2011)
SUMMARY:
 The Russian tax authorities attempted to apply the “net-back approach”
(an adjusted CUP method) to Gazprom’s sales of sulfur to a related
party outside of Russia.
STATUS:
 The court rejected the Russian tax authorities attempt because the
method is not mentioned in the Russian Tax Code’s transfer pricing
article.
May 9, 2012
72
Toyota Argentina SA c/AFIP-DGI, Argentina National Tax Court
(April 28, 2011)
SUMMARY:
 The tax authorities had retroactively applied new transfer pricing rules
to reject the taxpayer’s transfer pricing study and methodology.
STATUS
 National Tax Court found for the taxpayer and revoked a notice of
deficiency.
May 9, 2012
73
VI. CURRENT ISSUES BEING RAISED IN LITIGATION – WHAT IT
MEANS FOR ASIA
B. Is Litigation a Viable Method for Managing Transfer Pricing Risks?
1. Are transfer pricing disputes about the facts, the applicable law and/or the
“economics?”
2. Can courts be expected to find the “right answer?”
3. What about the path forward after litigation?
C. Impact of Litigation Elsewhere on Transfer Pricing in Asia
1. Precedential value?
2. Highlighting issues for potential local enforcement?
3. Greater likelihood of litigation in the courts to resolve disputes?
May 9, 2012
74
VII. CUSTOMS AND TRANSFER PRICING: WHAT YOU
SHOULD BE AWARE OF

Customs Taxes: Valuation methods – transfer pricing rules vs. customs valuation rules




Joint OECD/WCO conferences in 2006 and 2007






“Transfer pricing rules” acknowledge “modern” transactions involving tangibles, intangibles and services,
while “customs” valuation rules are item-based and “old school.”
‘Transaction values” supported by OECD “arm’s length pricing” study should be accepted as showing no
related party influence, so customs officials should accept “arm’s length pricing” adjustments or at least
accept some mechanism to consider same.
“Customs” reactions




“Transfer pricing” – OECD, tax advisors and industry representatives
“Customs” – WCO, country representatives, customs advisors
2006 – optimism for convergence between the two sets of rules; but in 2007, did reality set in?
“Transfer pricing” positions


“Arm’s length price” under OECD TP guidelines as acceptable “transaction value method?”
“Resale price method” vs. deductive value method”
“Cost-plus method vs. “constructed value method”
Importance of well-accepted customs rules adopted on multilateral basis under GATT
Skepticism of “profit methods” in transfer pricing
Most inter-company transactions are accepted under “transaction value” method anyway.
Specific challenge: Use of profits-based method (e.g., TNMM) that requires prospective or
retroactive pricing adjustments to reach profit targets. Acceptable for customs? What procedures?
Any convergence in transfer pricing and customs practices in Asia countries?
May 9, 2012
75
VIII. FUTURE OF TRANSFER PRICING IN ASIA
 Where are we headed during the next 5 years?
PANEL DISCUSSION
 “Most Appropriate Method” Rule
 Use of Comparative Methods vs. Profit Methods
 Documentation Requirements
 Enforcement Approaches
 Cooperation Among Tax Authorities
 Litigation
 MAPs and APAs
 Transfer pricing and customs
May 9, 2012
76
IX. Q & A
 Questions?
May 9, 2012
77
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May 9, 2012
78