FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™ ™ Transfer Pricing Audit Management Transfer Pricing Associates Steef Huibregtse and Richard Slimmen 13 April 2012 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™ ™ Introduction The Transfer Pricing Process is all about treating transfer pricing and the business risks around it as a business process. The steps in this process are illustrated in the following diagram: ™ OUTPUT: B INPUT: COMPANY’S BUSINESS MODEL A MANAGEABLE AND DEFENSIBLE TRANSFER PRICING SYSTEM DESIGN & IMPLEMENT DOCUMENTATION How to design your transfer pricing system CONTROVERSY/ DISPUTES CAPTURE THE DYNAMICS IN INDUSTRY AND BUSINESS MODEL Addressing the following key issues: 1. How to identify the relevant business context 2. How to design an appropriate transfer pricing system and arrange for proper implementation 3. How to document the transfer pricing system 4. How to manage (pre-) controversy of the transfer pricing system FINANCE & STRATEGY PRACTICE BY PROPER PREPARATION AND GUIDANCE Through conflict avoidance Pre-audit/ provisioning Audit Through process management Through Conflict resolution Addressing the following key issues: 1. What are the options available? 2. What is your ‘risk appetite’? 3. What is your best controversy strategy? 4. How to best negotiate with tax authorities? APA MAP Litigation How to deal with transfer pricing controversy FINANCE AND STRATEGY PRACTICE ™ Tax Director Roundtable™ U.S. transfer pricing controversy issues FINANCE & STRATEGY PRACTICE U.S. Issues – Part 1 ™ • Form 5701 (a) Respond to 5701 (b) Hot Interest (c) Fast Track Settlement (d) Early Referral to Appeal • IRS appeals (a) Review of Transfer Pricing Cases (b) Simultaneous Appeals and Competent Authority (c) Post Appeals Mediation (d) Arbitration • Competent authority (a) Introduction - Potential Double Tax Cases - Fiscal Residence Cases (b) Inventory of Double Tax Cases- Adding Insult to Injury (c) Persuasive Information (d) Effect of Agreements or Judicial Determinations (e) Determination of Creditable Foreign Taxes (f) Arbitration FINANCE & STRATEGY PRACTICE U.S. Issues Part 2 ™ • U.S. Advance Pricing Agreement program (a) Jurisdictional Matters - Section 482 and Treaty Cases - PE Allocations and Other Collateral Issues (b) Nature of APAs (c) Benefits of Advance Pricing Agreements • Litigation (a) Taxpayer Cannot Resolve Case Through Administrative Channels (b) Prior to Paying the Tax (c) Untimely Filing of Petition or Avoiding the Tax Court • Simultaneous examination program (a) Renewed Interest in SEP (b) TIEAs • Pre-filing agreements (a) PE and US Trade or Business (b) Related Pricing Through APA • FINANCE & STRATEGY PRACTICE Compliance assurance process (a) Scope (b) Participation (c) Transfer Pricing Elements Key Issues ™ 1. What risk mitigation instruments fix your defense strategy? 2. What percentage of your risk management is TP controversy based? 3. Who is responsible in your company to run these risk processes? 4. How to deal with more than 2 countries on TP matters at the same time and comply with rules of full transparency towards all stakeholders? FINANCE & STRATEGY PRACTICE FINANCE AND STRATEGY PRACTICE ™ Tax Director Roundtable™ EU transfer pricing controversy issues FINANCE & STRATEGY PRACTICE Controversy landscape ™ • Topics covered: intangibles, valuation, PE risks, sales commission, duplication, business restructuring, marketing spend, head quarter charges, intercompany loans and guarantee fees; • Hotspots of aggression: Germany, Denmark, France, Italy, Canada, USA, Australia, Korea, China, India, Indonesia and Brazil. • Countries where we have seen activity: 15 countries in Europe, Australia, Indonesia, China, Vietnam, USA, Canada. FINANCE & STRATEGY PRACTICE ™ Germany/Switzerland: audit on royalty and marketing intangibles Switzerland Germany Royalty charge • German marketing intangibles • Royalty payment non-deductable • Rejection 50% of German marketing spend FINANCE & STRATEGY PRACTICE Court case on business restructuring moving intangibles ™ • After business restructuring with selling of assets to Swiss entity Before business restructuring List of IP • Technology • Patents • Know-how IP owner Denmark R&D Centre R&D agreement Distribution agreement Profit Center IP owner Switzerland R&D agreement Production & supply agreement Purchase of goods Sale of goods Contract manufacturer Denmark Sale of goods R&D Centre Sales company Country 1 Sales company Country 2 Sales company Country 3 Sales company Countries X Distribution agreement Sales companies Sales company Country 1 Sales company Country 2 Sales company Country 3 Sales companies • Acceptable valuation method, • The use of the expert witness • Seller’s vs. buyer’s perspective FINANCE & STRATEGY PRACTICE Sales company Countries X ™ Italy/US: audit on royalties and service fees US Parent European headquarter IP related services IP Italian distributor • IP = know-how • Duplication issues • Provision of services versus provision of know how FINANCE & STRATEGY PRACTICE ™ US/Denmark: APA in Denmark on commissionaires + buy-sell model Production of patented drags Danish distribution company Production of generic drags • Critical conditions • Allocation issues • Combined APA vs. separate APAs FINANCE & STRATEGY PRACTICE Customer UK/Germany: audit on German branch of UK Head office ™ Japanese HQ UK regional HQ Distributor German Customers German Branch Sales support Sales or Sales support? • Services versus sales • Key accounts vs. local customers • Cyclical nature of industry FINANCE & STRATEGY PRACTICE ™ Switzerland/Row: Multi-country APA approach together with the Swiss tax authorities Swiss parent company Intercompany transactions Local countries • Teaming model with Swiss tax authorities • Unilateral vs. bilateral (MAP) FINANCE & STRATEGY PRACTICE ™ Netherlands/Row: joint audits platform to settle European cases on I/C transactions involving the Netherlands • OECD report • Field officer vs. ministry of finance • Joint audit vs. EU Arbitration Convention FINANCE & STRATEGY PRACTICE India/Japan: marketing intangibles ™ • Suzuki, a Japanese company, owned over 50% of Maruti Suzuki India (“Maruti”), an Indian company. • India’s tax authority stated that Maruti should be compensated by Suzuki for developing a “marketing intangible” (beyond a routine distributor’s role & responsibility). • High Court of Delhi found in favor of the defendant Maruti and the name was within the discretion of Maruti and not granted to Suzuki or contained in any legal agreement. FINANCE & STRATEGY PRACTICE FINANCE AND STRATEGY PRACTICE ™ Tax Director Roundtable™ TPA’s recommended approach to transfer pricing FINANCE & STRATEGY PRACTICE ™ 5 step approach to manage your tax risk and controversy • Adopt a global approach to tax risk and controversy management; • Evaluate global resources, processes and systems for tax risk management; • Address tax risk and controversy at a strategic level; • Make strong corporate governance in tax a priority; • Stay connected with global legislative, regulatory and tax administration change. FINANCE & STRATEGY PRACTICE Issues to tackle today ™ • Tax authorities around the world become more aggressive and focused: see our hot spots! • High pace of legislative change creates more risk and uncertainty: each week a new set of TP legislation and/or updates are published; • Growing disclosure and transparency requirements: being exposed! • Expansion in emerging markets is creating tax risk and uncertainty: how will the BRIC act? • A new breed of tax activism emerges: the fatal impact of media on corporate image! • Enhanced relationships opportunities are spreading: how do you communicate and interact with your tax inspector? FINANCE & STRATEGY PRACTICE TPA’s recommended approach ™ • Define areas of 'dispute' in transfer pricing, customs and/or valuation matters; • Agree with client on 'case management' plan to resolve the 'dispute'; • Determine a 'critical time path' to get to a resolution; • Choose the 'best available controversy toolbox' and 'controversy team' to handle the case; and • Leverage from own resources and 'extended global controversy network' offered by a firm like TPA. FINANCE & STRATEGY PRACTICE Options to consider ™ • High level TP risk scan • TP Risk Management Strategy • TP Audit defense • Joint audit • Advance Pricing Agreement • Mutual Agreement Procedure • Arbitration • Mediation • 2nd Opinion FINANCE & STRATEGY PRACTICE About Transfer Pricing Associates ™ About Transfer Pricing Associates Transfer Pricing Associates is the leading independent provider of global transfer pricing and valuation services and part of the Transfer Pricing Associates Global group. The Transfer Pricing Associates Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs services, headquartered in Amsterdam and with our own offices and coverage in over 50 countries around the world. Transfer Pricing Associates provides high quality transfer pricing advice and assistance to multinationals of all sizes, wherever they are located. For more details of our innovative services, please visit our website at www.tpa-global.com FINANCE & STRATEGY PRACTICE © 2012 The Corporate Executive Board Company. All Rights Reserved. CATnumber/version 24 CORPORATE EXECUTIVE BOARD WWW.EXECUTIVEBOARD.COM ™ For further information please contact: Cody Villella 571.303.6609 cvillella@executiveboard.com