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2014 B d t S i
www.pwc.com.sg
2014 Budget Seminar
Transfer pricing –Transfer pricing Overcoming the storm
Chai Sui Fun and Falgun ThakkargPwC Singapore
Agenda
1. Update on global transfer pricing developments
T f i i d t ti i Si2. Transfer pricing documentation in Singapore
3. Strategies for dispute resolution
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Q&AQ1 Which of the following best describes transfer pricing for
Q&AQ f f g f p g fyou?
a) A vague concept only relevant to professional advisors
b) A way to artificially shift profit to low tax locations
c) A management accounting technique
d) The application of arm's length principle to transactions between companies in our group
e) Never heard of it
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Update on global transfer pricing Update on global transfer pricing developments
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Global transfer pricing developmentsH dli i h Headlines in the news
Report: MacDonald confirmed tax inspectors visited its French HQ after French media reported that it had transferred 22 billion euros abroad since 2009 to transferred 2.2 billion euros abroad since 2009 to dodge taxes but firmly denied the accusation
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Global transfer pricing developmentsH dli i h Headlines in the news
Developed Developed countries
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Global transfer pricing developmentsE d d S k h ldExpanded Stakeholders
• Base Erosion and Profit
• Aggressive enforcement
• Differing definitions of key concepts such as PE i t ibl tP li k D l i
Shifting (BEPS) Initiative
• Country by country reporting
• Chapter IX: Business Restructuring and
PE, intangibles, etc.
• Increased complexity overall
Policy maker initiatives
Developing economies
Intangibles draft
• UN TP Manual with country modules
• Exchange of information
• Arbitration Arm’s length
• Political, media & Developed NGO / Public
• Arbitration
• Scrutiny of tax payers
Arm s length principle will still
prevail
Political, media & social pressures
• Economic pressures
• Attack on income migration
Developed countries
NGO / Public perspectives
y p yby general public
• Political representatives questioning
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Global transfer pricing developmentsWh hi f Si
• BEPS developments redefine the parameters of tax planning and documentation requirements
What this means for Singapore
• Tax functions - exchange of information demands between sovereigns will likely be expanded.
i l i ill b h i• Dispute resolution will be on the increase. Singapore will need to focus more resources to enforcing and defending its
principles of value creation in international forums and competent authority discussions.
i ill d “ lf h l ” d li Singapore taxpayers will need to step up “self-help” to demonstrate compliance with arm’s length standard with substance and robust documentation
T d R t ti M t ith Transparency and Reputation Management with Diverse Stakeholders
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Transfer pricing documentation in Transfer pricing documentation in Singapore
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Q&AQ2: How regularly does your company prepare transfer
Q&A
pricing documentation?
a) Contemporaneously
b) Every 2 to 3 years
c) As per local country requirements
d) Nd) Never
e) When tax authorities come knocking on your door
f) Othersf) Others
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Singapore Transfer Pricing Landscape
• IRAS launched Transfer Pricing Consultation in 2008
• Before TPC
• Early days after TPC...
• Recent trend…
• What is your recent experience?
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Some recent examples (facts are simplified)C Case 1
IRAS AUDIT: Enquired on related party transactions referred to in
Subcontract C A
Coy Bparty transactions referred to in notes to accounts
Subcontract Country A
Singapore TRANSFER PRICING ADJUSTMENT: PROFITS
Coy A
ADJUSTMENT: PROFITS ESTIMATED FOR COY A
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Some recent examples (facts are simplified)C Case 2
IRAS Audit: IRAS not convinced that the two transactions (T1 and
Sale (T1)
Coy Bthat the two transactions (T1 and T2) are different
Coy A
Service (T2)
Coy C
TRANSFER PRICING ADJUSTMENT –
TRADING PROFITS Singapore Other countries IMPUTED TO COY A
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Some recent examples (facts are simplified)C Case 3
Coy B IRAS AUDIT: Related party
iUse of IP
Coy B(Principal)
transactions
Coy A(Principal)
C C
Sale of Goods (IP embedded)
TRANSFER PRICING Owns IP Coy C(Limited risk distributor)
Si Oth t i
TRANSFER PRICING ADJUSTMENT –
ROYALTY IMPUTED TO COY A Singapore Other countries TO COY A
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Some recent examples (facts are simplified)C Case 4
Conclusion of contracts – DEPENDENT AGENT PE
Coy A
AGENT PE
IRAS AUDIT: Challenge COST PLUS transfer pricing methodology
HQ (Country C)
Singapore Conclude contracts on behalf of Coy A – cost plus
Coy BInternal COMPARABLES
found – PROFITS ATTRIBUTED TO COY B
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Some recent examples (facts are highly simplified)C Case 5
IRAS AUDIT: Enquired on business
Country D
Coy B
IRAS AUDIT: Enquired on business and transfer pricing model that resulted in payment to Coy B
PaymentCountry D
Singapore
DEDUCTION Coy A
DEDUCTION DISALLOWED
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Singapore Transfer Pricing Landscape
• IRAS has stepped up enforcement of arm’s length standard (and more stringently)
Observations from recent adjustment cases
g y)
• CITQs on related party transactions are now very common Expect to be asked questions, rather than not
• IRAS does not hesitate to make transfer pricing adjustments where one or a combination of the following elements applies: Inability to convince related parties deal with each other at arm’s length based on
d t f ti iti / l ti id dconduct of activities/ explanation provided Robust documentation and analysis to support related party transaction pricing
lacking/ inadequate Timeliness of documentation and analysis
• Communication with IRAS Do not be complacent Always strive to provide clear and comprehensive explanation to eliminate doubts
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upfront Build trust during engagement (having sound documentation is first step)
17
Singapore Transfer Pricing Landscape
• Possible changes to transfer pricing regime ?
Recent Developments
g p g g
• Implications from international developments on Transfer Pricing Documentation and Country-by-Country Reporting?
• IRAS’ TP Roundtable Discussion – prelude to ... ?
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Overcoming the Transfer Pricing Storm
• Take the first steps (if have not already done so):
Have sound transfer pricing policies that align with business model
Have robust Transfer Pricing Documentation to support the policies
• Take these additional steps (if have done the above):
Review and strengthen existing transfer pricing policies and Transfer Pricing Documentation
Explore other transfer pricing risk mitigation approaches (e.g. APAs)
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Transfer pricing documentationPl i l b l t f i i liPlanning your global transfer pricing policy
Contractual terms clearly define the allocation of risks
Actual conduct of the related parties i i li i h h
Align transfer pricing policy with
OECD Transfer Pricing Guidelines
UN Transfer Pricing is in line with the contractual terms
p g p ythe group’s
business model
gDevelopments
Country specific transfer pricing requirements
Appropriate transfer pricing d i
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documentation
Importance of transfer pricing documentation in SiSingapore
“Taxpayers should exert reasonable efforts to undertake sound transfer pricing analysis to ascertain the arm’s length pricing as well as to p g y g p g
demonstrate that such analysis has been performed”
–TP guidelines published by IRAS on 23 February 2006
Increase in transfer pricing related queries and supporting details requested issued by IRAS to taxpayers. Examples:
• Explain the circumstances under which the inter-company transactions arose• Provide the name, addresses and the specific amounts paid to related companies which the
Company had transactions with• Whether the amounts are reflective of the arm’s length amount and the reasons for saying so• Show the basis of charge for the inter-company payments• Explain the rationale of the Company’s transfer pricing policyExplain the rationale of the Company s transfer pricing policy
IRAS has increasingly been scrutinising the substance and arm’s length nature of inter-company transactions
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Transfer pricing documentation in SingaporeTh ’ l th i i l
• IRAS endorses the arm’s length principle as the standard to guide transfer pricing. It is also the standard adopted by many Member and non-Member countries of the OECD.
The arm’s length principle
• As the arm’s length principle is also adopted by most tax jurisdictions, this reduces the incidence of transfer pricing adjustments and improves the resolution of transfer pricing disputes.
• A 3-step approach is recommended by the IRAS for the application of the arm’s length principle:
Step 1Comparability
analysis
Step 2Identify the
appropriate TP method and tested
Step 3Determine the
arm’s length resultsanalysis method and tested party
arm s length results
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Transfer pricing documentation in SingaporeK b fitKey benefits
• Clear definition of business model and
• Reasonable efforts of company to model and
transfer pricing policies
company to substantiate its position
Onus of Clarity of Onus of proof
Clarity of model
Harmony of business
and tax model
First line of defence
• Documentary proof to show harmony of business model
• In case of audit, to defend the transfer pricing position
model
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and tax modelp
Transfer pricing documentation B t ti d t ti
• Increasingly crucial to document the commercial rationale behind a
Legal
Best practice documentation
business model / restructuring and prepare transfer pricing documentation to support it
• Important to provide substance to
Legal agreements
Transfer pricing RACI Matrix/ KPIs/ control Important to provide substance to
the commercial rationale as it is required to evidence which entity has the control of functions and risks and the ability to service those risks
Transfer pricing documentation
(local)
KPIs/ control over risk
Behaviour of parties
• If a structure fails the substance test, IRAS can disregard certain transactions or even question the entire structure, leading to transfer
i i dj
Transfer pricing documentation
(central)
Implementation paper
(in accordance with Chapter IX)
pricing adjustments
Commercial rationale paper Alignment of tax model with
business model
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business model
Strategies for dispute resolutionStrategies for dispute resolution
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Strategies for dispute resolutionSt t i APA tl k i A i d Si
Overall objective
T i i i t f i i i k f b i i Si d l b ll i th
Overall objective
T i i i t f i i i k f b i i Si d l b ll i th
Strategic APA outlook in Asia and Singapore
To minimise transfer pricing risk for business in Singapore and globally in the most cost efficient manner
To minimise transfer pricing risk for business in Singapore and globally in the most cost efficient manner
Key considerations:i ifi f b i
Factors to evaluate options:• Significance of business
presence in Singapore / local countries
• Complexity of the transfer
options:• Increased certainty
provided by APAs• Information flow control
Option 1:Reactive approach
(i e Status p y
pricing model (in case of restructuring of business, then pre and post restructuring
to tax authorities• Resources requirement
in dealing with tax authorities
(i.e. Status Quo)
Option 2:Proactive g
• Audit history for business in Singapore / local countries
• Aggressiveness of tax authorities
authorities• Potential to leverage from
tax authorities’ existing knowledge
Proactive approach
(i.e. APAs)
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authorities• Release of tax provisions
Strategies for dispute resolutionAd i i t i Si
Advance Pricing Arrangement (APA)
Advantages:• Obtain certainty of tax treatment
Advance pricing arrangement in Singapore
(APA)• Determines in advance an
appropriate set of criteria to ascertain the transfer prices of specified related party transactions over a specified
• Obtain certainty of tax treatment relating to transfer prices
• Efficient way to resolve complex transfer pricing disputes
party transactions over a specified period of time.
• May involve agreement between Singapore and one or more of its tax t t t
• Avoid transfer pricing audits • Avoid potential double taxation
C id itreaty partners.• Once agreed, binding on the tax
authority and taxpayer, subject to qualifications stated in the APA.
Considerations:• Outcome is not guaranteed• Time and resource intensive• Expect significant flow of information to • Expect significant flow of information to
tax authorities
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Transfer pricing practice in SingaporeI
IRAS has adopted some of the best international practices on
In summary
• Staying ahead of the curve hen it comes to appl ing the
b ptransfer pricing
when it comes to applying the arm’s length principle in a fair and reasonable manner
• Balancing its image as an investor friendly jurisdiction
IRAS participates in OECD working committee
discussions, seeks to follow best practices from OECD
IRAS has been involved in a number of bilateral APA and
MAP cases
in the region at the same time
IRAS demonstrates its position on safeguarding its p g g
tax base (transfer pricing consultation process)
Tax policy changes in Singapore in the future?
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Tax policy changes in Singapore in the future?
Questions?Questions?
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Upcoming events
March 2014
Management fee recharges and tax deductibility in local countries
April 2014
Building blocks – Transfer pricing documentation
May 2014
Transfer pricing certainty – Your dispute resolution strategyTransfer pricing certainty Your dispute resolution strategy
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Let’s Talk !Let s Talk !Your Presenters
Chai Sui FunPartner, PwC Singapore+65 6236 3758
i f h i
Chai Sui FunPartner, PwC Singapore+65 6236 3758
i f h [email protected]@sg.pwc.com
Falgun ThakkarSenior Manager PwC SingaporeFalgun ThakkarSenior Manager PwC SingaporeFalgun ThakkarSenior Manager PwC SingaporeSenior Manager, PwC Singapore+65 6236 [email protected]
Senior Manager, PwC Singapore+65 6236 [email protected]
Senior Manager, PwC Singapore+65 6236 [email protected]
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Thank you!Thank you!
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision q y y g g p ybased on it.
© 2013 PricewaterhouseCoopers LLP and PricewaterhouseCoopers Services LLP. All rights reserved. In this document, "PricewaterhouseCoopers" or “PwC” refers to PricewaterhouseCoopers LLP and/or PricewaterhouseCoopers Services LLP, both of which are member firms of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
