Permanent Establishment and Transfer Pricing

8/15/2019 Permanent Establishment and Transfer Pricing

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INTERNATIONAL TAX

361200 – Timothy Jevon Lieander 361225 – Claudia Alexandra Kuswanto365461 – Denisha Muliasari

Permanent Establishmand Transfer Pricing:CASE – DECONSTRUCTING CHEVRON TRAN


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PERMANENT ESTABLIS

• Permanent Establisment or Badan Usaha Tetap is establishmentused by an individual who does not reside in Indonesia or inIndonesia less than 183 days within a period of twelve months, orentities not established or domiciled in Indonesia, to run thebusiness or activities in Indonesia

• A Permanent Establishment implies the existence of a place ofbusiness is a facility that can be land and buildings as well asmachinery, equipment, warehouse and computer or electronicagent or automated equipment that is owned, leased, or usedby providers of electronic transactions to run business activitythrough the Internet.


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• The term “Permanent Establishment” includes especially:

a). a place of management;

b). a branch;

c). an office;

d). A factory;

e). a workshop;

f). a mine, an oil or gas well, a quarry or any other place of extraction of naturalresources.g). fisheries , animal husbandry, agriculture, farms or forestry;

h).construction, installation or assembly project;

i).provision of services in any form by an employee or by anyone else , all made morethan 60 days within a period of 12 months;

j).agent or employee of an insurance company that is not established or domiciled in

Indonesia who received the insurance premium or risk in Indonesia


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TAX OBJECT

a. income from business or activities of the PE and from property owned orcontrolled;

b. headquarters income from business or activity, the sale of goods orprovision of services in Indonesia similar to the ones performed or carriedout by the PE in Indonesia;

c. income as stated in PPh 26 that is received or obtained


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TAX CALCULATION

• Taxable income after deducting income tax from a PE in Indonesia , will besubject to PPh 26 amounted to 20 %

• Except, they want to reinvested the taxable income in Indonesia, they won’tget cut from PPh 26


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QUES

Taxable income of PT Foodz-Indonesia as a PE in Indonesia in 2013 isRp20.500.000.000,00• Calculate the PPh 26 that PT Foodz-Indonesia have to pay!


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Taxable Income Rp20.500.000.000,00

Income tax:25% x Rp20.500.000.000,00 =

Rp 5.125.000.000,00 (-)

Taxable income afterdeducted from income tax Rp15.375.000.000,00

PPh 26 payable:20% x Rp15.375.000.000

Rp 3.075.000.000,00


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QUES

Coca Cola Indonesia pays royalties to the PT . Coca -Cola in the USA on thelicenses issued amounting to Rp 1,000,000,000 . How much income taxwithheld on the royalties ?


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20% x 1.000.000.000= Rp 200,000,000


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WHAT IS TRANSFER PR

• Inter-company transactions take place throughtransfers of tangible and intangible property, theprovision of services, as well as inter-companyfinancing, rental and leasing arrangements, or even

an exchange of, for example, property for servicesor the issue of sweat equity.• The basis for determining proper compensation is the

arm’s -length principle.


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ARM’S-LENGTH PRI

• The amount charged by one related party toanother for a given product must be the same as ifthe parties were not related.

• An arm's-length price for a transaction is thereforewhat the price of that transaction would be on theopen market.

• It determines how much of the profits should beattributed to one entity.


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CATEGORIES OF INTER-COMTRA

• Sales of tangible property• Sales of machinery and equipment• Sales of inventory• Transfer of intangible property• The provision of services• Financing transaction


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TRANSFER PRICING GUIDAND MET

• The tax authorities in the United States and a handful ofother countries started to pay considerable attention totransfer pricing in the 1960s and 1970s.

• The Organization for Economic Co-operation andDevelopment (OECD) was established in 1961 andproduced the OECD report and Guidelines on transferpricing which were first issued in 1979 and weresubsequently revised and updated in 1995 and again in2010.


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• Comparable uncontrolled price method•

compares the price charged for goods or servicestransferred in a controlled transaction to the pricecharged for property or services transferred in acomparable uncontrolled transaction.

• Resale price method•

deducting an appropriate discount for the activities of thereseller from the actual resale price.• Cost plus method

• The cost plus method determines the arm’s -lengthby adding an appropriate mark-up to the cost of

production


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• Profit spit method• Dividing the profits of a multinational enterprise in a

way that would be expected of independententerprises in a joint- venture relationship.

• Transactional net margin method•

Looks at the net profit margin relative to anappropriate base (e.g. costs, sales, assets) that ataxpayer makes from a controlled transaction.


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CASE OF THE CHAPTER : CHEDeloitte - Deconstructing the Chevron Transfer Pricing C


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WHAT IS CHEVRON CORPORA


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CHEVRON INCORPOR• A United States Headquartered Firm• Publicly Traded in NYESEor the New York Stoc

the Biggest Stock Exchange Exists on Earth with its tname NYSE:CVX

• Founded 1879 as Pacific Coast Oil Company1984 as Chevron Corporation.

•

It serves the World Wide area .• Its headquarter is situated in San Ramon, Cal• Its Products are known as the Petroleum, Nat

other Petrochemicals.• Employs approximately 65,000 people• Subsidiaries: Texaco, Inc and Citgo Petroleum Co


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Deloitte - Deconstructing the Chevron Transfer Pricing Ca


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CHEVRON CASE OVE• The Federal Court issued its much anticipated d

Chevron Australia Holdings Pty Ltd v Commissioner Taxation ([2015] FCA 1092) on 23 October 201

• Robertson J upheld transfer pricing assessmentsChevron Australia Holdings Pty Ltd (CAHPL )interest payments made to its US subsidiaryTexaco Funding Corporation (CFC ), under an

intercompany loan arrangement.• Agreement was equal to or less than arm’s length

CAHPL therefore did not prove that the ameassessments imposed by the Commissioner underDivision 13 were excessive


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CHEVRON CASE OVE• The Chevron case should be seen in context as the firs

big dollar transfer pricing case taken by the AustralTaxation Office (ATO) to the Federal Court .first test of the retrospective Subdivision 815-A lawsintroduced by the Australian Government in 2012explicitly on the request by the ATO to shoreAustralia’s transfer pricing regime .

•

The Court’s view on all of the above issues ,potentially the views of the Full Federal Courtis appealed , may have resonance with the OECfurther considers (in the context of the BEPS project)application of the arm’s length principle to intrafinancing arrangements in 2016.


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FACTS OF THE CHEVRO• CFC was a wholly owned subsidiary of CAHPL

appears to be a resident of the United Statesresident of Australia.

• CFC borrowed an amount of USD2.5 billioncommercial paper market at rates of interest aUSD LIBOR (approximately 1 to 2%)

• CFC obtained a guarantee from Chevron Incultimate parent of the group

• CFC provided an intercompany loan to CAHPLAUD equivalent of USD2.5 billion , under the agreement

• The interest rate under the Credit Facility agAUD LIBOR plus 4.14%

USD 2.5 billionat 1% to 2%interest rate

AUD at USD2.5 billionat LIBOR +4.14% interestrate


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FACTS OF THE CHEVRO• CAHPL drew down funds of approximately U

in two tranches . Interest payments were alsthrough “debits to the US dollar bank account…calculated by reference to the AUD principal amoborrowed”

• It appears that there was no interest withholdinthe interest payments from CAHPL to CFCa result of Section 128F(8)

• During cr oss-examination , it was indicated thawas not taxable in the US ” on the interest in

• As a result of the interest differential , CFC gprofits and it paid dividends to CAHPL , whiexempt from tax in Australia

• CAHPL in turn paid dividends to its shareholder

Interest Rate ExpenseCalculated by CHPL to CFC =7.46% (LIBOR at 3.32% + 4.14%)

Interest Rate paid by CFC in theUS at 1% to 2%

Actual Interest Rate Expensepaid by CFC in the US = 5.96%

(7.46% - 1.5% (average US rate))Intercompany Interest ProfitSpread for CFC = 5.96%* US$ 2.5bi

Intercompany Interest ProfitSpread for CFC = US$ 149 millionequivalent with IDR 2.033 Trillion


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MANAGING

PERMANENTESTABLISHMENT RISK

https://www.youtube.com/watch?v=VGuBbMflZUPwC Belgium’s video regarding to thePermanent Establishment, and its risks.

https://www.youtube.com/watch?v=VGuBbEMflZUhttps://www.youtube.com/watch?v=VGuBbEMflZUhttps://www.youtube.com/watch?v=VGuBbEMflZU


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PWC - TRANSFERPRICING

https://www.youtube.com/watch?v=IvXQ0wbyII

The basic purpose of the TransferPricing law is to make sure that thetransaction between related parties isat arm's length price ('Market price').Now that we have basic idea about TP,

discover what it means for you, whathappened in Luxembourg and more.

https://www.youtube.com/watch?v=IvXQ0QwbyIIhttps://www.youtube.com/watch?v=IvXQ0QwbyIIhttps://www.youtube.com/watch?v=IvXQ0QwbyII


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We are Claudia Alexandra, Timothy Jevon and Denisha Muliasari for FEB UGM and SpecialThanks for the PwC and Deloitte for the valuable insights given.


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THE ENDThanks a lot for the attention that has beengiven to our Presentation

Documents

Permanent Establishment and Transfer Pricing