European Banking
Federation
BEPS and TP
2 February 2016
Agenda
Introduction to Actions 810
Risk allocation
1
2
Intangibles
Re-characterisation
3
4
5
February 2016
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2
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Introduction to Actions 8 - 10
Applying the arm’s length principle – focus on
substance
BEPS Actions 8-10 - final OECD
guidance
• Aims to align transfer pricing
outcomes with value creation
Legal
agreements
• Focus on:
• Intangibles
Conduct
• Risk allocation
• Other high-risk areas
• Outcome: update of OECD TP
Guidelines
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February 2016
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Risk and Capital
(BEPS Action 9)
New Risk Analysis Framework
Identify
Economically
Significant Risks
with specificity
Step 3
Step 2
Step 1
Determine how
specific,
economically
significant risks are
contractually
assumed under the
terms of the
transaction.
Perform detailed functional
analysis of economically
significant risks to determine
which entity:
1.
2.
3.
Economically
significant risks
Determine
Contractual
Allocation of
Risk
Identify
Economically
Significant Risks
Perform
Functional
analysis
Step 5
Decide whether the
contractual
assumption of risk
identified in Step 2 is
consistent with the
entities’ conduct
identified in Step 3.
Is Conduct
consistent with
contract?
Step 6
Re-allocate risk
to the party that
assumes it based on
conduct in Step 3
Perform TP analysis
based on the
delineated
transactions after
re-allocating risk.
Re-allocate Risk
TP Analysis
No
Yes
No further analysis
required
Non-significant risks
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Performs control and risk
mitigation functions.
Encounters upside or
downside consequences of
risk outcomes.
Has the financial capacity
to assume the risk.
Step 4
Perform TP analysis based on
contractual allocation of
risk .
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Meaning of “control” over risks
3 elements of
risk
management
Conditions
required to
evidence control
“Control” is
where there is:
Decision-makers should:
1
2
3
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Take on, lay
off or decline
risk bearing
opportunity
Responding to
risks
associated
with the
opportunity
Mitigating
risk
Capability to
make decisions
and actual
performance of
decision
making
functions
Capability to
make decisions
and actual
performance of
decision
making
functions
Performance
of (or oversight
of parties)
performing
day to day risk
mitigation
•
Understand the risk by
analysing the information
required for assessing the
foreseeable downside and
upside risk outcomes.
•
•
Have the competence
and experience in the
area of the particular risk and
have an understanding of the
impact on the business.
Step 3
Have access to relevant
information either by
gathering the information
themselves or through subcontractors.
Items which are not
sufficient to evidence
control
Formalising the
outcome of the decision
making process in the form of:
- Meetings organised for
formal approval of decisions
made elsewhere;
- Minutes of board meetings;
- Signing of documents
relating to the decision.
Setting the overall
policy environment at a group
level
Two scenarios where risk
management may be
outsourced without loss of
control: i) information gathering;
and ii) day to day risk mitigation.
In such cases risk owner must:
•
Determine the objectives of
the outsourced activities.
•
Hire the sub-contractor
•
Assess if objectives are met.
•
Decide to adapt or terminate
the contract.
February 2016
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What are the concerns for the banking sector?
Role of
capital
Clash with
regulation
3
Practical
difficulties
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As the FS sector is heavily regulated, the ability for non-commercial
tax driven transactions is restricted
2
Compliance
Ongoing
management
It has not been sufficiently acknowledged that capital plays a critical
role in the FS industry
1
4
5
Increased scrutiny from tax authorities and a higher compliance
burden on taxpayers is expected in terms of documentation of
transactions and risks to a very granular level
Lack of guidance on how to determine (in practice) an appropriate
allocation of risk based on the risk analysis framework provided
There is a clear divorce between the assumption of risk and the
ongoing management e.g. loan originated in one territory, but booked
and managed on an ongoing basis in another
February 2016
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Intangibles
(BEPS Action 8)
New OECD intangibles guidance – focus on
substance
“Legal ownership of
intangibles, by itself, does not
confer any right ultimately to
retain returns derived by the
MNE group from exploiting the
intangible”
Exploitation
“The arm’s length
principle…requires that all members
of the group receive appropriate
compensation for any functions
they perform, assets they use, and
risks they assume in connection
with the development,
enhancement, maintenance,
protection, and exploitation
(“DEMPE”) of intangibles.
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Enhancement
Development
Protection
“not only the legal ownership
of the intangible…but also the
degree of contribution…to
the…formation, maintenance,
or development of the
intangible…need to be taken
into account”
Maintenance
“in assessing the degree of the
contribution...functions…such
as decision making,
rendering of services,
bearing of costs, and risk
management, shall be taken
into account comprehensively”
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How should transactions involving intangibles be
analysed? – six-step process
• Aligned with risk analysis framework
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Step 1:
Identify the intangibles used or transferred in the transaction with specificity
Step 2:
Identify the full contractual arrangements with special emphasis on determining the
legal ownership of intangibles
Step 3:
Identify parties performing functions, using assets and assuming risks related to
DEMPE of the intangibles through a functional analysis
Step 4:
Confirm consistency between the terms of the contractual arrangements and the
actual conduct of the parties (based on steps 1-3)
Step 5:
Delineate actual controlled transactions in light of the legal ownership, other relevant
contractual relations and the actual conduct of the parties
Step 6:
Where possible, determine arm’s-length prices consistent with each party’s
contribution of functions performed, assets used and risks assumed
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What is an intangible?
“Something which is not a physical asset or a financial asset, which is capable of
being owned or controlled for use in commercial activities and whose use or
transfer would be compensated had it occurred in a transaction between
independent parties in comparable circumstances”
No precise classes or categories of intangibles are defined – broadly split into:
- “marketing intangibles”: trademarks, trade names and brands
◦ For FS brands, foreign MNEs often compete with extremely strong local
brands, making it difficult to substantiate the value/benefit (i.e. market
recognition) of the global brand
- “trade intangibles”: patents, know-how and trade secrets, rights under
contracts and government licenses
Important to distinguish intangibles from “location savings” or “local market
features” that are not capable of being owned or controlled
Benefits of MNE group synergies attributed to deliberate concerted group actions
should be shared in proportion to the contribution to the creation of the synergies
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February 2016
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What are intangibles in the banking industry?
Hybrid
intangibles
Star trader/manager
“Movers & Shakers”
Trading
platforms
Market intangibles
Franchise
models
Trademarks/trade
names/brand
Clearing &
settlement
systems
Customer/distribution lists
Algorithms
Local marketing
intangibles
Liquidity
Trade intangibles
Know how
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Patents/
designs
Computer
software
February 2016
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Re-characterisation
Accurate delineation of the transaction/ Re-characterization
Careful delineation of actual transactions between associated enterprises is
required, by analysing the contractual relations between the parties in combination
with conduct of the parties.
Parties’ conduct will supplement or replace the contractual
arrangements if the contracts are incomplete or are not supported by the conduct.
Where transactions between associated enterprises lack commercial rationality,
the guidance continues to authorise disregarding of the arrangement for transfer
pricing purposes.
The goal is to achieve an allocation of profits to the enterprises that conduct the
corresponding business activities.
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February 2016
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BEPS Actions 8-10 (cont’d)
Options realistically available
• Independent enterprises, when evaluating the terms of a potential
transaction, will compare the transaction to the other options realistically
available to them
• Independent enterprises will generally take into account any economically
relevant differences between the options realistically available to them
(such as differences in the level of risk) when valuing those options.
• Therefore, identifying the economically relevant characteristics of the
transaction is essential in accurately delineating the controlled
transaction and in revealing the range of characteristics taken into account
by the parties to the transaction.
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Q&A
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David Ledure, PwC Belgium
Director Transfer Pricing and International Tax
david.ledure@be.pwc.com
Tel: +32 (0) 2 710 73 26
PwC
February 2016
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