Complying with the new
information reporting
standards and getting
comparable information for
transfer pricing analysis
Vienna, 13 -14 April 2015
Jeffrey Owens
Table of Contents:
• Country by Country Reporting:
BEPS
EU
EITI
Dodd Frank Act
Technological Framework
•
•
•
•
•
• Transfer Pricing:
Arm’s length Principle
Conducting the Studies
Databases
Recent developments in Transfer Pricing
Key Changes
•
•
•
•
•
•
Conclusion
SEITE 2
Country by Country (CbC)
Reporting
TP
Master
file
CbC reporting: getting a good look inside
What it is: Companies will have to provide tax authorities with countryspecific allocation of profits, revenues, employees and assets; worldwide
adoption expected by 2017, though specific adoption deadlines will vary
by country.
What it is not:
Not intended as a substitute
for a full transfer pricing
analysis, nor is it intended
for use in formulary
apportionment-based
adjustments. But it will feed
into tax audits.
Next steps:
CbC
Reporting
TP
Local
file
CbC
report
Why this is an early focus:
Because of the level of complexities
involved with cross-border
transactions, and data collection and
management, many companies
should begin preparing now, testing
and validating processes and
technologies. This will allow time to
take mitigating steps – e.g., ensuring
profit margin consistency (InterCompany Effectiveness) and
minimizing potential controversy.
Fully understand the requirements and how those requirements could be met with your current reporting
efforts. Do a thorough analysis to understand what reporting gaps you might have and devise a strategic
plan that allows enough time to ensure proper and accurate reporting.
Country by Country (CbC)
Reporting
Key considerations
 How to source the data
 How to assess the data – the search
for anomalies. For example:

 Rapid flow of new reporting and
disclosure requirements have left both
tax departments and software houses
rushing to catch up
Should parent company or local company
GAAP be used as a basis for reporting?

How can the company avoid
misinterpretation of data, such as reporting
ordinary profits in addition to profits after
extraordinary items?

Does the company have accurate
information on global operations - including
headcount, revenues and profits by country?
 Vendor market will catch up

 Moving from year 1 to sustainability –
investment, integration, analytics
Has the company identified features listed as
potentially indicative of transfer pricing risk?

Does the company have significant
transactions with a low tax jurisdiction?

Does the company have transfers of IP to
related parties?

Has the company experienced a business
restructuring?
 Many companies approaching on a
phased basis (Excel spreadsheet
versus systems integration)
OECD CbC template – main reporting table –
country aggregated data
Revenues
Tax
jurisdiction
Unrelated
party
Related
party
Total
Profit (loss)
before
income tax
Cash tax
paid (CIT
and WHT)
Current year
tax accrual
Stated
capital
Accumulated
earnings
1.
2.
3.
4.
5.
6.
7.
Etc.
Notes:
►
►
►
►
►
►
►
►
►
Aggregated rather than consolidated data
Flexibility in data sources allowed
Entity data aggregated on the basis of tax residence
Revenue defined to include turnover, royalties, property, interest
Revenue specifically excludes intercompany dividends
Profit/loss before income tax includes extraordinary items
Cash tax paid includes tax withheld by other parties on payments to the constituent entity
Current year tax accrual is tax on current year operations only
Number of employees may include external contractors
Tangible
assets other
than cash and
cash
equivalents
Number of
employees
OECD CbC template – table 2 –
entity details
1.
2.
3.
1.
2.
3.
Etc.
Notes:
►
►
Constituent entities rather than legal entities
Multiple activities may be chosen
Other
Dormant
Holding shares or other
equity instruments
Insurance
Regulated financial
services
Internal group finance
Provision of services to
unrelated parties
Admin., mgmt or
support services
Sales, mktg or
distribution
Mfg or production
Purchasing or
procurement
Holding or managing IP
Tax
jurisdiction
Constituent
entities
resident in
the tax
jurisdiction
Tax
jurisdiction of
organization
or
incorporation
if different
from tax
jurisdiction
of residence
R&D
Main business activity(ies)
Master file – information required
Organizational
structure
Structure chart:
► Legal
ownership
► Geographic
location
Intercompany
financial activities
Financial and
tax positions
Overall strategy
description
Financing
arrangements for
(related and
unrelated) lenders
Annual consolidated
financial statements
Supply chain of:
► Five largest products/
services by turnover
► Products/services generating
more than 5% of sales
List of important
intangibles and legal
owners
Identification of
financing entities
List and description
of existing unilateral
APAs and other tax
rulings
Main geographic markets
of above products
List of important
intangible
agreements
Details of financial
transfer pricing
policies
List and brief description of
important service arrangements
R&D and intangible
transfer pricing
policies
Functional analysis of principal
contributions to value creation by
individual entities
Details of important
transfers
Business description
Intangibles
Important drivers of business profit
Business restructuring/
acquisitions/divestitures
during fiscal year
Master
file
CbC
report
Local file
Other analysis
►
►
Global footprint by business
activity
Comparison of profit margins
►
►
►
Income per head
Tax rate comparison
Related-party revenues
►
►
Pie charts to illustrate
“absolute amounts”
Filters
CbC Reporting under different
frameworks: BEPS

Under BEPS: Transmission process to occur via tax treaties;

Slow Process, excludes developing countries with a small
network
CbC Reporting under different
frameworks: EU









Article 89 of Directive 2013/36/EU (CRD IV) introduces a new country-by-country
public reporting obligation for banks and investment firms:
Starting from 1 Jan 2015, these institutions will have to report annually, for each
country in which they have an establishment, data on:
(a) name(s), activities, geographical location
(b) turnover
(c) staff numbers
(d) profit or loss before tax
(e) tax on profit or loss and
(f) public subsidies received.
It also requires the Commission to conduct a general assessment as regards
potential negative economic consequences of the public disclosure of country-bycountry data, including the impact on competitiveness, investment and credit
availability and the stability of the financial system.
CbC Reporting under different
frameworks: EU
►
EU: The Directive 2013/34/EU regulates how EU firms, including micro-companies,
are to draw up their annual financial statements. It sets out new rules on:
►
country-by-country reporting for the extractive (mining, oil, gas, etc) and logging
sectors
►
non-financial information to be provided by large EU companies.
►
The 2002 International Accounting Standards Regulation and its implementing
acts endorsing International Financial Reporting Standards stipulate that EU firms
listed on regulated markets must prepare their consolidated financial statements
in line with international standards designed by the IFRS.
CbC Reporting under different
frameworks: EITI


Extractive Industry Transparency Initiative:
The EITI requires the production of comprehensive EITI Reports that include full
government disclosure of extractive industry revenues, and disclosure of all
material payments to government by oil, gas and mining companies. Full
disclosure of the taxes paid by licensed companies, as well as the corporate
structure of the entity engaged in extractive industry is required.

The Standard requires the disclosure of beneficial ownership information, and
the maintenance of a “beneficial ownership registry” in the member
jurisdiction.
CbC Reporting under different
frameworks: Dodd Frank Act



Dodd Frank Act, Section 1504 requires all companies in the extractive industries
to report all payments made to governments;
Any oil, gas and mining company reporting to the SEC have to disclose
payments: American and foreign companies
Scope:

Company branches;

Consolidated entities of the covered company, including the company’s
subsidiaries.

“Entities under the control” of the covered company. For example, a joint
venture in which the company has the right to control operations and
policies.
CbC Reporting under different
frameworks: Dodd Frank Act


Information published:

Taxes (levied on profits, corporate income, and production)

Royalties

Fees (including license fees)

Production Entitlements

Bonuses

Payments in kind

Dividends

Infrastructure Improvements (“ ex. building a road”)

Disclosure of social payments encouraged
Reportable payments: Payments made to:

foreign government : including states, provinces, counties, districts,
municipalities, territories, a department; agency; instrumentality; or a company
owned by a foreign government.
CbC Reporting under different
frameworks: What does it mean?

Multitude of systems increases compliance costs;

Makes it more difficult to have a common technical platform;


How to establish a single system of coordination to be shared by all the different
players?
Is one single reporting framework possible?
CbC Reporting: The role of
Technology


Technology can help obtain grater synergies
One single registry point to verify company’s substance and identify the members
in a group?

Cloud computing: Data could be fed into a cloud to store MNE’s information;

New software base will have to be developed in order to support country files;

How to guarantee that all this data will be stored over a long-term period without
any leak? Safety is the biggest concern
Transfer Pricing: The Arm’s
Legnth Principle
Comparability
Factors
Transfer Pricing
Methods
• Characteristics of
property or services
• Functional analysis
• Contractual terms
• Economic
circumstances
• Business strategies
• Comparable Uncontrolled
Price (“CUP”) Method
• Resale Price method
• Cost plus method
• Transactional Net Margin
Method (“TNMM”)
• Profit Split Method
SEITE 17
Conducting Transfer Pricing
Study
Identifying
Inter-company
Transactions
• Goods
Substantiation
Transfer prices
(documentation)
• Services
• Intangibles
• Financial transactions
Financial
analysis
Industrial
analysis
• Characteristics
Company- and
functional
analysis
Selection of
Transfer Pricing
method
Comparability
analysis
•
•
•
•
•
SEITE 18
Comparable Uncontrolled
Price
Resale price
Cost Plus
Transactional Net Margin
Method
Profit split
Identification of
Comparables
Internal/external
goods / services
• Functions / risks /
assets
• Contractual terms
• Economic
circumstances
• Business strategies
Databases
• OECD TP Guidelines 3.30
• “A common source of information is commercial databases,
which have been developed by editors who compile accounts
filed by companies with the relevant administrative bodies
and present them in an electronic format suitable for
searches and statistical analysis. They can be a practical and
sometimes cost-effective way of identifying external
comparables and may provide the most reliable source of
information, depending on the facts and circumstances of
the case.”
• For example, Bureau van Dijk: public and private company
data in comparable formats across 200 countries. Detailed
financial data on 17 million companies across the globe and
other functions.
SEITE 19
Comparables Searches:
Database Challenges
• OECD TP Guidelines 3.31-3.34
• In practice, level of information on five comparability factors
is less detailed for uncontrolled transactions
• Limitation of databases - inaccuracy and incompleteness of
trade descriptions, rigid format and limited information
• Requirements for comparables (characterizations) - contract
manufacturer, limited risk distributor, commissionaire, etc.
• Database search versus other information and data sources
(e.g. internet, trade/industry associations, industry guide)
SEITE 20
Foreign Source Comparables
• OECD TP Guidelines 3.35
• Taxpayers do not always perform searches for comparables on
a country-by-country basis, e.g. in cases where there are
insufficient data available at the domestic level.
• Non-domestic comparables should not be automatically
rejected just because they are not domestic.
SEITE 21
Databases
•
The following databases are often used to search for external
comparables:
•
TNMM (comparable companies):
•
•
•
Amadeus
•
Oriana, Orbis
•
US: Compustat, Mergent, OneSource
•
Russia: Ruslana
External CUP – loan interest rates, guarantees:
•
LoanConnector / DealScan
•
Thomson Reuters
•
Moody’s RiskcalcTM
External CUP – royalties:
•
SEITE 22
Power K, ktMINE, RoyaltyStat
Amadeus
•
•
•
A database of comparable financial information for public and private
companies across Europe
Amadeus contains comprehensive information on around 19 million
companies across Europe.
What information does Amadeus contain?
•
Company information for both Western and Eastern Europe,
with a focus on private company information
•
Company financials in a standard format so you can compare
companies across borders
•
Financial strength indicators
•
Directors
•
Images of report and accounts for listed companies
•
Detailed corporate structures
•
Business and company-related news
•
M&A deals and rumors
SEITE 23
Consider Before Starting the
Research
 Who is the tested party (functions, risks, assets employed)?
 Which rejection criteria shall be used?
 Which factors drive revenue/profit?
 What are industry factors?
 Which database(s) should be searched?
 What about alternative data sources? Which ones are relevant?
 What verification of comparable data should be undertaken?
 What years should be included in analysis?
SEITE 24
Recent Developments in
Transfer Pricing
►
1.
2.
3.
BEPS Action 8, 9 and 10 aim to assure that transfer pricing
outcomes are in line with value creation. These include the
development of:
Rules to prevent BEPS by transferring risks among, or allocating
excessive capital to, group members;
Rules to prevent BEPS by engaging in transactions which would
not, or would only very rarely, occur between third parties,
including implementing transfer pricing rules or special measures
to clarify the circumstances in which transactions can be recharacterized; and
Transfer pricing rules or special measures for transfers of hard-tovalue intangibles.
SEITE 25
Recent Developments in
Transfer Pricing
Key features of the proposed guidance include:
► Updated guidance on the identification of the commercial
or financial relations;
► New guidance on identifying risks in commercial or
financial relations;
► New guidance on the interpretation of the actual
transaction;
► Updated guidance on re-characterization or nonrecognition of a transaction; and
► Options for potential special measures to reduce the
possibilities for BEPS.
SEITE 26
Key changes (1)
 Identify commercial or financial relations: use of
comparability factors to accurately delineate the
controlled transaction
 Actual transaction based on actual conduct
 Contractual terms versus factual substance
 Functional analysis: focus on activities and capabilities
 Allocation of risk: who is actually managing the risk
 Assumption of core risks – rooted in functions
 Risk management:

(i) Decision making capacity to take on or decline a risk-bearing opportunity;

(ii) Decision making capacity on whether and how to respond to risks; and

(iii) the capability to mitigate risk.
 Examples: price risk raw materials, asset owning company
SEITE 27
Key changes (2)
 Less emphasis on financial capacity
 Risk Transfers
 Limited for core risks
 Likely only if transferee is well or better placed to manage
risks
 Non-recognition: lacking fundamental economic attributes
 each of parties reasonable expectation to enhance or protect
their commercial or financial positions on risk-adjusted basis,
compared to other opportunities realistically available to
them
SEITE 28
Summary
 Even with proposed changes certain BEPS risks may remain
and transfer pricing outcomes may not be aligned with value
creation.
 Main issues
 Information asymmetries between tax payers and tax administrations
 Relative ease of allocating capital to low taxed minimal functional entities
 Part II of the Draft presents five options for potential special
measures to counter BEPS and align transfer pricing
outcomes with value creation.
 No indication at this stage whether within or outside ALP
 Close interaction with action 3 (CFC) and action 4 (interest)
SEITE 29
Thank you!
THE AUTHOR WOULD LIKE TO THANK TATIANA SAMPAIO OCTAVIANO FALCAO FROM EY FOR HER HELP IN
PREPARING THESE SLIDES
SEITE 30