CbC reporting and transitioning to the new global master file · Kelly Grady . Ernst & Young LLP ... budget and/or forecast ... CbC reporting and transitioning to the new global master

CbC reporting and transitioning to the new global master file

Page 2 Annual Transfer Pricing Conference | New York | 16 March 2015

Disclaimer

► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

► This presentation is © 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.


Today’s presenters

Lisa Blanchard Ernst & Young LLP Boston, MA

Kelly Grady Ernst & Young LLP Stamford, CT

Shoichi Murai Ernst & Young LLP New York, NY

Natalia Perez Ernst & Young LLP New York, NY

Pino Cristallo Ernst & Young LLP New York, NY

Daniela Ahrling Ernst & Young LLP New York, NY


Agenda

► Transfer pricing (TP) life cycle ► Trends ► Organisation for Economic Co-operation and

Development (OECD) Base Erosion and Profit Shifting (BEPS) and country-by-country reporting (CbCR) ► Master file ► Local file ► Country-by-country reporting

► Key questions to consider


Transfer pricing life cycle

► Alignment and visibility with business

► Transfer price setting and monitoring based on budget and/or forecast

► Alignment with risk profile

► Sustainable value

► Riskidentification and management

► Easy access to audit-ready documentation

► Feedback to planning and compliance process

External influences

► Intercompany accounting captures attributes for reporting

► Accurate, supportable transfer prices; effective tax rate (ETR);and cash tax forecasts

► Automation toolsand technology

Regulatory

Economic

Industry

Strategy

Enterprise

Governance

Internal influences

► Analysis of impacts due toOECD Base Erosion and ProfitShifting (BEPS) initiatives, including country-by-country reporting (CbCR)

► Reuse data for transfer pricing documentation

► Consistent global process visibility and status reporting

► Automation and

Alignment with

ready

► Consistent global process visibility and status reporting


Major world economies with effective documentation rules

1994–1997 1998–2000 2001–2002 2003–2004 2005–July 2014 • US • Australia • France • Mexico • Brazil

• US • Australia • France • Mexico • Brazil • Canada • S. Korea • UK • Denmark • Venezuela • S. Africa • Germany • Belgium

• US • Australia • France • Mexico • Brazil • Canada • S. Korea • UK • Denmark • Venezuela • S. Africa • Germany • Belgium • Japan • Poland • Kazakhstan • India • Portugal • Argentina • Colombia • Netherlands • Thailand

• US • Australia • France • Mexico • Brazil • Canada • S. Korea • UK • Denmark • Venezuela • S. Africa • Germany • Belgium • Japan • Poland • Kazakhstan • India • Portugal • Argentina • Colombia • Netherlands • Thailand • Malaysia • Indonesia • Norway • New Zealand • Peru • Spain • Taiwan • Hungary • Lithuania

• US • Australia • France • Mexico • Brazil • Canada • S. Korea • UK • Denmark • Venezuela • S. Africa • Germany • Belgium • Japan • Poland • Kazakhstan • India • Portugal • Argentina • Colombia • Netherlands • Thailand • Malaysia • Indonesia • Norway • New Zealand • Peru • Spain • Taiwan • Hungary • Lithuania

• Ecuador • Philippines • Vietnam • Singapore • Sweden • Israel • Slovak

Republic • Finland • Croatia • Estonia • Kenya • Turkey • China • Hong Kong • Italy • Romania • Greece • Austria • Russia • Egypt • Latvia • Uruguay • Switzerland • Ireland • El Salvador • Panama • Luxembourg • Uganda • Dominican

Rep.

• Macedonia • Honduras • Guatemala • Ghana • Nigeria • Ukraine • Chile • South Africa • Costa Rica • Angola • Georgia • Iceland • Tanzania • Albania • Bolivia

On 16 September 2014, OECD released transfer pricing documentation and CbCR recommendations.

UN continues to work on the Transfer Pricing Practical Manual for Developing Countries, including a TP documentation chapter.


Transfer pricing documentation trends

► Most companies are monitoring BEPS initiatives on CbCR and TP documentation to: ► Prepare for overall increased reporting ► Be cognizant of individual country

enactment of BEPS TP documentation regulations

► Proactively manage global TP controversy ► OECD’s 16 September 2014 deliverables

provide recommendations on TP documentation and CbCR.

► Some countries are already taking action with respect to BEPS transfer pricing documentation and other action items, such as recent legislative activity in Australia, Mexico, Greece and France.

“Effective implementation of the new reporting standards and reporting rules will be essential. Additional work will be undertaken over the next several months to identify the most appropriate means of filing the required information with and disseminating it to tax administrations.” OECD (2014), Guidance on Transfer Pricing Documentation and Country-by-Country Reporting, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing.


“The new template will show tax administrations ‘quite clearly where your profit is,’ Saint-Amans said, as well as ‘where your turnover is, where your taxes are, where your people are, and that may help tax administrations understand the overall picture of the tax standing of the Company.’” BNA, 23 Transfer Pricing Report 643, 18/9/14.

OECD BEPS and CbCR Impact and actions required of companies

► Considered part of three-tier transfer pricing documentation package

► Report will be used for high-level transfer pricing risk assessment

► “Window” into other BEPS-related risks ► Corporate accounting data or local statutory

accounting data can be used ► Information to be included:

► Unrelated and related-party revenue, profit, income taxes paid and accrued, stated capital, accumulated earnings, number of employees and tangible assets ► List of all entities in each tax

jurisdiction and main business activity description must be provided

► What should multinational corporations (MNCs) do now?

► Companies should perform BEPS risk assessment to drive understanding of their broader BEPS pressure points and strategic responses – initial view of data/systems enhancements most likely needed


Action 13 Transfer pricing documentation and CbCR

Master file High-level information about the MNC’s business, transfer pricing policies and agreements with tax authorities in a single document

available to all tax authorities where the MNC has operations

Local file Detailed information about the local

business, including related-party payments and receipts for products,

services, royalties and interest.

Country-by- country report

High-level information about the jurisdictional allocation of profits, revenues, employees

and assets


Action 13 Master file

TP documentation master file

Next steps: Guidelines on implementation and filing

When: Content final; finalization of implementation approach early 2015; adoption by countries will vary

Why: Consistency in information gathering by tax authorities; increased overall information for tax authorities; encourage attention by companies to transfer pricing

What: TP policies; legal entity charts; supply chain mapping for largest products or services; functional analysis of individual entities; list of intragroup service arrangements; list of intangible property (IP), IP ownership and intragroup IP arrangements; description of internal and external financing arrangements; list and brief description of unilateral advance pricing agreements (APAs) and other tax rulings relating to allocation of income among countries


Action 13 Local file

TP documentation local file

Next steps: Finalized

When: Content final; adoption by countries will vary

Why: Detailed information on specific intercompany transactions; ensure taxpayer has complied with arm’s- length principle in respect of specific jurisdiction

What: Relevant financial information in respect of transactions; comparability analysis; selection and application of most appropriate TP method; description of local management structure, business strategy, related-party payments and receipts for products, services, royalties, interest, etc. (per jurisdiction); intercompany agreements; functional analysis of related parties with which local party transacts, etc.; APAs (uni-, bi- and multilateral) as well as rulings for other countries that are connected to transactions of local entity


Action 13 Country-by-country report

Country-by- country report

Next steps: Guidelines on implementation and filing

When: Content final; finalization of implementation approach early 2015; adoption by countries will vary

Why: Information to tax authorities to conduct broad risk assessment; not a substitute for transfer pricing analysis

What: Revenue (related and unrelated party), profit before tax, income tax paid and accrued, stated capital and accumulated earnings, number of employees and tangible assets; per year and per jurisdiction; identification of core activities per entity


TP documentation considerations

Gather or create ► TP policies ► Entity organizational chart ► Functional analysis per entity ► Related-party transactions ► Mappings

► Supply chain ► Treasury ► Services ► IP and IP functions

Ensure consistency ► TP policies and documentation ► APAs and rulings ► Financial results

► Process around adjustments Perform gap analysis

Provide insight into ► Business processes ► Most relevant markets

Explain deviations ► Different businesses? ► Different markets? Perform test runs ► Anticipate where tax authorities are likely

to have questions ► Consider

► Change of process ► More robust documentation ► Other remediation

Presentation Data/information

Alignment with country-by-country report

Master file and local file, including comparables, to be updated annually


Master/local file


Global information – master file

► Global information is aimed at providing a clear understanding of MNC operations.

► OECD asserts current documentation practice typically does not provide “big picture” for risk assessment purposes.

► Particular focus on attributes that may indicate significant transfer pricing risk: ► Significant transactions with a low-tax jurisdiction ► Transfers of intangible property to related parties ► Business restructurings ► Specific types of related-party payments ► Year-on-year loss-making ► Poor or non-existent documentation ► Excessive debt

► Master file likely to be required to be prepared contemporaneously with tax return (although CbCR template may be permitted to be filed with a one-year lag).


Organizational structure

Business description Intangibles Intercompany

financial activities Financial and tax positions

► Structure chart: ► Legal

ownership ► Geographic

location

► Important drivers of business profit

► Supply chain of: ► Five largest products

and services by turnover

► Products and services generating more than 5% of turnover

► Main geographic markets of above products

► List and brief description of important service arrangements

► Functional analysis of principal contributions to value creation by individual entities

► Business restructuring, acquisitions, divestitures during fiscal year

► Overall strategy description

► List of important intangibles and legal owners

► List of important intangible agreements

► R&D and intangible transfer pricing policies

► Details of important transfers

► Financing arrangements for the group (related and unrelated lenders)

► Identification of financing entities

► Details of financial transfer pricing policies

► Annual consolidated financial statements

► List and description of existing unilateral advance pricing agreements (APAs) and other tax rulings

Master file – information required


Country-specific information – local file

► Aimed at providing local country transactional information ► Detailed information to determine whether a specific

transaction is at arm’s length ► Robust functional analysis by transaction ► Method selection ► Comparables analysis

► Relevant financial data for local entities also included


Local entity Controlled transactions Financial information

► Management structure

► Local organization chart

► Details on individuals to whom local management reports

► Description of business and business strategy pursued

► Details of business restructurings and intangible transfers

► Key competitors

► Description of material, controlled transactions and context in which they take place

► Identification of associated enterprises party to controlled transactions and relationship

► Functional analysis

► TP methods used

► Comparables and details of methodology

► Amounts of intragroup payments and receipts for controlled transactions (i.e., products, services, royalties, interest)

► Unilateral and bilateral or multilateral APAs and other tax rulings related to the controlled transactions

► Local entity financial statements

► Reconciliation to show how financial data used in applying the TP method ties to the financial statements

► Summary of relevant financial data for comparables and sources from which data was obtained

► R&D and intangible TP policies

► Details of important transfers

Local file – information required


EY’s approach: gap analysis

► Review of existing documentation and consider what needs updating and what additional information is needed to meet new OECD proposals

► Understand how much additional information will need to be gathered and where to obtain it

► Identify any significant gaps where information may be challenging to obtain but is required under the new proposals

► Gap analysis template – we have prepared a spreadsheet to assist us to identify gaps in existing documentation compared to the proposed OECD requirements


TP gap analysis template – master file


TP gap analysis template – local file


Country-by-country reporting


Benefits of CbCR assessment exercise

► Understanding how financial data will appear to, and potentially be interpreted by, tax authorities

► Assessment and identification of potential attention points for tax authorities before CbCR comes into force

► Preparatory analysis of metrics that could be the focus for tax authorities: ► Global metrics: Revenue/profit splits and ranking; industry effective tax

rate (ETR) metrics (i.e., comparative benchmarking between groups) from our experience

► Interaction of metrics: Revenue ranking compared to ETR ranking; earnings before taxes (EBT) ranking compared to cash taxes paid ranking; income per employee

► Individual rankings: EBT margin ranking by country ► Assessment of processes and systems readiness in producing data


OECD CbCR template Main reporting table – country aggregated data

Tax jurisdiction

Revenues Profit (loss) before

income tax

Cash tax paid (Corporate

income tax and withholding tax)

Current year tax accrual

Stated capital

Accumulated earnings

Tangible assets other than cash

and cash equivalents

Number of employees Unrelated

party Related

party Total

1.

2.

3.

4.

5.

6.

7.

Etc …

Notes: ► Aggregated rather than consolidated data ► Flexibility in data sources allowed ► Entity data on the basis of tax residence ► Revenue defined to include turnover, royalties,

property and interest income ► 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 ► Separate line for nonresident entities


Notes: ► Constituent entities rather than legal entities

► Multiple activities may be chosen

► Nonjurisdiction entities will be visible per entity

OECD CbCR template Table 2 – entity details

Tax jurisdiction

Constituent entities

resident in the tax

jurisdiction

Tax jurisdiction

of organization

or incorporation

if different from tax

jurisdiction of residence

Main business activity(ies)

R&

D

Hol

ding

or

man

agin

g IP

Purc

hasi

ng o

r pr

ocur

emen

t

Mfg

. or p

rodu

ctio

n

Sale

s, m

arke

ting

or

dis

tri.

Adm

in.,

mgm

t. or

su

ppor

t ser

vice

s

Prov

isio

n of

se

rvic

es to

un

rela

ted

part

ies

Inte

rnal

gro

up

finan

ce

Reg

ulat

ed fi

nanc

ial

serv

ices

Insu

ranc

e

Hol

ding

sha

res

or

oth

er e

quity

in

stru

men

ts

Dor

man

t

Oth

er

1.

2.

3.

1.

2.

3.

Etc.


Suggested sources to obtain the data for CbCR assessment

► A degree of pragmatism is required; shortcuts may be necessary in the interest of time. Flexibility regarding the source of data and accounting standards used: ► Either, a consolidated trial balance – we need the data for each entity to be before

eliminations for intercompany transactions. If necessary, an explanation of how interco eliminations are handled should be given

► Alternatively, the workings to produce the consolidated financial statements (i.e., a fairly detailed income statement and balance sheet per entity plus eliminations to get to the consolidated financial statements)

► Organization chart or some other way to identify the country of operation and type of entity (corporate, branch, partnership, dual resident entity, etc.)

► Activity of each entity ► Data that would be nice to have but is unlikely to result in significantly different

conclusions for this analysis exercise is: ► Headcount per entity (or employee expenses as a proxy) ► Consolidated cash flow statements or tax working papers in order to obtain cash tax paid

per entity (if not available, then use the income statement tax charge)


Key questions to consider


Key questions to consider for CbCR and documentation

► Do you have accurate information on global operations (e.g., headcount, revenues, profits by country)?

► Have you identified features listed as potentially indicative of TP risk, such as business restructuring and intangible asset transfers?

► Do you have amounts and supply chain charts for material TP transactions? ► What percentage of transactions do you currently cover in documentation? ► How does your global footprint compare to your global tax footprint?

► Do you have more than half of your profits outside jurisdictions where revenue is earned?

► Do you have aligned assets, functions and risks in your principal company? ► Is IP aligned with business substance?

► Do you earn consistent returns on similar transactions? ► How do your financials for product or business unit analysis compare to

analyst reports being provided? ► Did you consider the full set of potentially comparable agreements in your

analysis?


Increased reporting and transfer pricing documentation

► Transfer pricing master file/local file framework ► Difference from conventional documentation ► Focus on intangibles and intragroup financing ► Requires global consistency

► CbCR ► Focus on “stateless” income ► Decision on information source ► Strategic approach must be taken – with view to use by tax

authorities ► Complex systems and process issues – get an early start


Questions?


Contacts

Lisa Blanchard Ernst & Young LLP | Boston, MA +1 617 375 8362 [email protected]

Kelly Grady Ernst & Young LLP | Stamford, CT +1 203 674 3464 [email protected]

Shoichi Murai Ernst & Young LLP | New York, NY +1 212 773 3439 [email protected]

Natalia Perez Ernst & Young LLP | New York, NY +1 212 773 8154 [email protected]

Pino Cristallo Ernst & Young LLP | New York, NY +1 212 773 0258 [email protected]

Daniela Ahrling Ernst & Young LLP | New York, NY +1 212 773 4752 [email protected]

Documents

CbC reporting and transitioning to the new global master file · Kelly Grady . Ernst & Young LLP ... budget and/or forecast ... CbC reporting and transitioning to the new global master