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PwC
Agenda
November 2017Indirect Tax Forum
2
What is operational transfer pricing?
Key VAT issues arising from transfer pricing adjustments
1 2
Scenario 1: Procurement and global purchasing model
Scenario 2: Global business models – sales and distribution 3 4
Scenario 3: Supply chains, goods and true-up calculations
5
PwC
PwC
• Operational TP is the implementation of TP policy in the books and records of MNE groups
• Execution of goods, services, royalties and financing transactions in line with “arms-length standard”
• Requirement is to implement pricing in ERP, monitoring, true-ups, reporting and controversy (the “TP lifecycle”)
• With BEPS, many groups are reassessing their TP polices and CbCR will certainly lead to increased controversy (good or bad?)
• Some Groups are looking for increased frequency/accuracy over price setting, monitoring and true-ups and moving to prospective as opposed to retrospective adjustments
• VAT and customs requirements are a key considerations
What is operational transfer pricing?
November 2017Indirect Tax Forum
4
PwC
Transfer Pricing adjustments – fundamental VAT questions
November 2017Indirect Tax Forum
6PwC
• Is a supply taking place for VAT purposes?
• What is the value of the supply?
• What is the nature and VAT liability of the transaction?
• What is the place of supply?
• What is the time of supply?
Some indirect tax rules to consider:
- Price adjustment/true-up takes place – VAT and Customs Duties valuation?
- Valuation – do any special rules apply?
- Tax points – do any special rules apply?
- Reverse charge and anti avoidance provisions
PwC
Challenges we often see
November 2017Indirect Tax Forum
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7 2
6 3
5 4
8 1
Availability of data – ease of identifying TP adjustments
Is the TP adjustment cash settled or a tax return adjustment
Complex value chains with multiple group entities involved
Charges to and from a centralised budget location can create additional indirect tax cost
Transaction involves an establishment of a UK VAT group member
Pass through costs and supplies for VAT purposes
Aligning TP adjustments and intra-group documentation
Identifying any netting off of TP adjustments
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Global functions and procurement models
November 2017Indirect Tax Forum
9
UK Head Office/UK Regional Hub
Overseas Head Office/Overseas Regional Hub
• Purchases goods and services in the UK from local and overseas suppliers
• Costs and VAT incurred in the UK
• Is it a pass through or a recharge of costs plus a mark up to branches and subsidiaries (reflecting a service)?
• VAT recovery entitlement, cost base for mark-up (gross/net)?
• Cost allocation models (e.g. waterfall)
• Further indirect tax incurred locally?
• Receiving establishment cost plus?
• Purchases goods and services outside the UK
• Centralised functions – e.g. CEO, Group Legal
• Costs plus a mark up recharged into the UK
• Identifying and valuing for UK reverse charge purposes, netting
• Allocation of cost incurred and VAT recovery entitlement
1 2
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Global procurement models
November 2017Indirect Tax Forum
10
• Analysis of services and costs
• VAT incurred and VAT recoverable
• Location of cost and budget
• Transfer of budget versus charge for services
• True-up adjustments, timing and value of VAT accounted for
• Identifying transactions for VAT purposes - CCAs
• Global contracts – recharges, Zurich, ‘use and enjoyment’
• Is local billing preferable?
Potential Options
PwC
Global sales and distribution models
November 2017Indirect Tax Forum
12
May include the following operational roles:
• Transaction sold by relationship manager in Country A
• Transaction executed in Country B
• Transaction income booked in Country C
Charging models:
• Cost plus mark up
• Revenue share or profit split
• Minimum return/’top slice’ models
PwC
Key VAT considerations
November 2017Indirect Tax Forum
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2
1
3
• Is there a supply for VAT purposes?
• Fee for services or CCA?
• VAT registration liabilities?
• What is the value of the supply?
• Minimum return/’top slice’ payments – different VAT treatment?
• Netting?
• Where is the place of supply for VAT purposes?
• Force of attraction rules?
• VAT treatment and reporting of charges?
PwC
November 2017
Scenario – Goods: Sales Principal Models and true-up calculations
Indirect Tax Forum
14
PwC
November 2017Indirect Tax Forum
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Principal Models - Buy-sell
Some key features
Procurement Principal
• Spend owners (strategic supply, buyers) centralised
• No impact on customer relations
• Interim step for fuller supply chain
Sales Principal
• Toll/Contract manufacturers are rewarded for their services with a benchmarked cost plus return.
• Ability to limit the risk borne by Distributors – balancing payments
Local distribution entity
Local customer
Territory 3Territory 1
Territory 2
Supply of goods/legal title flow
Flow of goodsRoyalty
Payments
Balancing payments
ForeignPrincipal (FP)
Manufactures (M)
IP Owner
PwC
Principal model – Buy/Sell
November 2017Indirect Tax Forum
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VAT Customs Duties
• Where do VAT registration obligations exist?
• Which party is transporting the goods? Application of Zero Rating
• Fixed establishment of Principal in the Distributor country?
• Application of domestic reverse charge provisions – cash flow issue for the Principal?
• Do balancing payments impact whether the distributors are making supplies for VAT purposes?
• Invoicing/billing
• Does this model increase the value for customs duty purposes?
• What is the impact for preference rates?
• Is the royalty dutiable?
• Identifying the value for export from the manufacturer?
• Who needs authorisation for warehousing/ manufacturing/reliefs?
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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, PricewaterhouseCoopers LLP, 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 based on it.
© 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and may sometimes refer to the PwC
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170905-121153-CS-OS