FINANCE AND STRATEGY PRACTICE
Tax Director Roundtable™
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Transfer Pricing Audit Management
Transfer Pricing Associates
Steef Huibregtse and Richard Slimmen
13 April 2012
FINANCE AND STRATEGY PRACTICE
Tax Director Roundtable™
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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:
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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
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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
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Tax Director Roundtable™
U.S. transfer pricing controversy
issues
FINANCE & STRATEGY PRACTICE
U.S. Issues – Part 1
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• 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
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U.S. Issues Part 2
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•
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
•
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Compliance assurance process
(a) Scope
(b) Participation
(c) Transfer Pricing Elements
Key Issues
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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?
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Tax Director Roundtable™
EU transfer pricing controversy
issues
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Controversy landscape
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• 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
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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
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Court case on business restructuring
moving intangibles
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• 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
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Sales company
Countries X
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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
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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
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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
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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
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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
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India/Japan: marketing intangibles
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• 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.
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Tax Director Roundtable™
TPA’s recommended approach to
transfer pricing
FINANCE & STRATEGY PRACTICE
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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.
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Issues to tackle today
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• 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?
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TPA’s recommended approach
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• 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.
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Options to consider
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• 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
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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
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© 2012 The Corporate Executive Board Company. All Rights Reserved. CATnumber/version
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CORPORATE EXECUTIVE BOARD
WWW.EXECUTIVEBOARD.COM
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For further information please contact:
Cody Villella
571.303.6609
cvillella@executiveboard.com