Transfer Pricing 2014 - bvd · TRANSFER R 2014 Luis Carrillo is a transfer pricing specialist with 14 years of ... on Indian and Cross-border tax and transfer pricing issues, including

Transfer Pricing 2014

virtual round table

2 3

ROUND TABLE: TRANSFER PRICING 2014

Luis Carrillo is a transfer pricing specialist with 14 years of advisory experience, including Big Four and Software. He’s the director of Transfer Pricing Solutions at Bureau van Dijk (BvD)

and is responsible for guiding BvD’s value proposition in the transfer pricing market, which includes tax authorities, advisory firms and multinational corporations. He also conducts transfer pricing trainings with numerous tax authorities on the use of BvD’s tools and transfer pricing best practices. Mr. Carrillo is often a speaker at world-renowned transfer pricing seminars and has appeared in business publications relating to transfer pricing.

Prior to BvD, Mr. Carrillo worked as a transfer pricing advisor at KPMG, Arthur Andersen and Ernst & Young, focusing on transfer pricing planning and compliance, and intangible property valuations and projects relating to cost sharing arrangements, supply-chain transformations and mergers-and-acquisitions integrations. Mr. Carrillo holds a Bachelor’s degree in Economics from the University of California, Santa Cruz.

r. Richard Boykin is a principal economist in Baker & McKenzie’s Global Transfer Pricing group, based in Washington, DC and Palo Alto, CA. Prior to joining Baker & McKenzie Consulting LLC, Dr.

Boykin held a variety of leadership and client service positions with one of the Big Four accounting firms, including global head of transfer pricing. He also worked for a large economic consulting firm where he provided consulting services and expert testimony on price, cost and labor market issues, and managed the econometric modelling and forecasting efforts for key products and engagements.

Dr. Boykin taught graduate and undergraduate courses at the University of Maryland, including microeconomics, macroeconomics, industrial organization, time series statistical methods and strategic planning.

Dr. Boykin’s experience in transfer pricing includes several substantial intercompany pricing dispute resolution cases and dozens of transfer price planning and documentation projects. He has also worked on the valuation of intangible assets in the food, apparel, electronics, scientific instruments, hotel, restaurant, financial services and software industries.

ate Carden is a tax partner focusing on matters of transfer pricing, operational tax planning and tax controversy. He represents corporate clients across many industries, with a particular focus

on life science and health care companies.

Mr. Carden’s transfer pricing and operational planning practice focuses on planning and pre-audit issues arising from cross-border intangible property, service and financing transactions.

ilton is a Senior Manager in the Transfer Pricing division of Ernst & Young Argentina. Since he joined Ernst & Young, his function has been advising multinational Companies with business in Latin

America about transfer pricing issues, with special focus in Argentina, Chile, Colombia, Mexico, Peru and Uruguay. Milton obtained a B.A. in Economics at the Universidad Nacional del Sur (Bahia Blanca, Argentina) and completed a Master of Science in Economics and Finance at Universitat Pompeu Fabra (Barcelona, Spain). He has participated in seminars and conferences about economics and taxes. He has taught Economics to undergraduate students in Argentina and Spain. He has written articles for economic journals and tax publications. He regularly lectures in numerous seminars on economics and tax issues. Milton is a member of ADE (Argentine Association of Enterprise Executives).

MEET THE

Milton Gonzalez Malla, Ernst & YoungT: +54 11 4318 1602E: [email protected]: www.ar.ey.com

M

Luis Carrillo, Bureau van DijkT: +44 (0) 20 7549 5000E: [email protected]: www.bvdinfo.com

Richard Boykin, Baker & McKenzieT: +1 202 835 6158E: [email protected]: www.bakermckenzie.com

Nathaniel Carden, SkaddenT: +1 312 407 0905E: [email protected]: www.skadden.com

EXPERTS

D

D

N

4 5


MEET THEEXPERTS

endy Nicholls is an experienced partner and leads Grant Thornton’s transfer pricing practice and is based in the London office. Wendy has over 25 years’ international tax experience advising clients in

the UK and overseas, and leads our transfer pricing practice, who were named 2012, 2013 and 2014 UK Transfer Pricing Firm of the Year at the International Tax Review European Tax Awards. Prior to joining Grant Thornton in October 2009, she worked for a ‘big 4’ firm, responsible for transfer pricing for the South of England.

She is a member of the Grant Thornton International Global Transfer Pricing Leadership team and is acknowledged in the Legal Media Guide as one of the World’s Leading Transfer Pricing Advisers and the World’s Leading Women in Business Law. She is on the Business and Industry Advisory Committee to the OECD, and presented at the recent OECD meetings on Intangibles.

Wendy advises clients in a wide range of industries on transfer pricing planning, dispute resolution, Advance Pricing Agreements, compliance and documentation. She is a regular speaker and author and has acted as an expert witness in relation to transfer pricing for a large Pension Fund. Wendy Nicholls has a particular expertise in sectors where intellectual property is important, including technology and brands.

Her recent projects have included transfer pricing advice to a major international retailer, royalty planning for a technology group, co-ordinating benchmarking studies across several countries for a FTSE100 industrial products group, and managing an enquiry into attribution of profits to permanent establishments. Wendy Nicholls plays a leading role in Grant Thornton’s patent box specialism and was involved in the consultation process with HM Treasury and HMRC.

artner in True Partners Consulting (UK) LLP – the London office of True Partners Consulting LLC.

• Over 30 years of tax compliance and transfer pricing experience.• Ex Big 4 experience.• Wide range of experience across industry sectors and size of companies.• Number of lecturing activities and published a number of articles.

Main Practice Experiences

• Planning and structuring of international and UK domestic transfer pricing systems (the UK changed its rules in 2004).

• Migration of intellectual property and tax efficient structures.• Transfer pricing analysis for IP licences and structure. • Transfer pricing documentation and global documentation systems for all types of

businesses and structures. • Coordination of international transfer pricing documentation projects and supply chain

management.• Liaison with in-house legal teams and external lawyers to prepare appropriate agreements. • APA’s and advance clearances on thin capitalisation.• Defense of transfer prices in tax enquiries.• Maintaining a team of tax compliance personnel that currently prepare tax computations

for both foreign owned and domestic groups including 4 UK public groups

His dispute resolution practice emphasizes the representation of corporate taxpayers in pre-audit, audit, administrative appeal and litigation proceedings and involves resolving substantive tax disputes and addressing discovery and evidentiary privilege issues arising from financial audits, IRS examination and litigation.

Wendy Nicholls, Grant ThorntonT: +44 (0)20 7728 2302E: [email protected]: www.uk.gt.com

Les Secular, True Partners Consulting (UK) LLPT: +44 (0) 20 7868 2431E: [email protected]: www.tpctax.co.uk

W

P

6 7


ith over 14 years of experience, Vishnu specializes in advising clients on Indian and Cross-border tax and transfer pricing issues, including structuring inbound and outbound investments. He has worked with

a wide range of multinational and Indian clients encompassing diversified industry verticals and has been working very closely with early stage ventures in shaping their tax and transfer pricing policies. He is also focused on analyzing the tax implications under the new generation business models including ecommerce and comes with a fair experience in the sector.

His other credentials include being functionally designated as a Global Partner and an advisory board member at TPA Global. He is also an Executive Committee Member at the Bangalore Chapter of the International Fiscal Association.

His previous experiences include 6+ years in the Global Tax Advisory Services vertical at S R Batliboi (a member firm of Ernst & Young), where apart from managing global transfer pricing engagements, Vishnu also assisted in establishing the transfer pricing practice management framework.

MEET THE

Vishnu Bagri, Accretive SDU member of TPA GlobalT: +91 80 2226 1371E: [email protected]: www.accretiveglobal.com

EXPERTS

W ames Tng is a partner at UHY Haines Norton Perth, one of the leading accounting and business advisory firms for small to medium businesses in Western Australia. He has extensive experience in tax and business

advice to migrants, overseas and Australian businesses and government agencies.

For more than 15 years, James has helped clients overcome major obstacles, deal with tough decisions and capitalise on new opportunities to generate tangible results.

He is currently responsible for the specialist tax services and international tax division, along with the superannuation advisory section. James assists larger clients with complex tax issues by providing strategic financial know-how and applying his extensive knowledge of tax systems.

He regularly presents for the Institute of Chartered Accountants and Tax Institute of Australia.

Qualifications: Bachelor of Commerce, Chartered Accountant (Fellow), Chartered Tax Advisor, Registered Tax Agent.

James Tng, UHY Haines Norton PerthT: +61 89444 3400E: [email protected]: www.uhyhn.com.au

J

8 9


1. What benefits does a firm receive in hiring a transfer pricing

specialist?

Boykin: Assuming that the firm is large enough and has sufficiently material intercompany transactions, it is likely that the transfer pricing specialist hiring decision passes a basic cost-benefit test. From my experience with clients who have decided that the circumstances do warrant in-house capabilities, the transfer pricing specialist or team will:

• manage the documentation effort, either by supervising the outside advisor or taking over the task completely; • manage the document request response process when tax audits focus on transfer pricing; and • when the firm engages in tax structuring, transfer pricing will likely be at the centre of that effort, and the in-house specialist is a useful member of the planning team.

But more generally, I think the real benefit comes from the specialist

combining an understanding of transfer pricing with a deeper knowledge of his or her firm and its workings than an outside advisor will be able to bring to the table.

Carrillo: Not every firm would benefit from having an in-house transfer pricing specialist. Only multinational firms with a high volumes of transfer pricing issues and with a certain level of risk around transfer pricing would benefit from such a resource. The benefits to this type of firms include gaining internal expertise in this ever-growing area of taxation, a greater degree of control over transfer pricing risk, and greater efficiencies when working with external advisors – all of which result in cost savings in the long run.

Malla: Transfer pricing has become an issue of growing interest to tax authorities of developed and several emerging countries. Tax Payers should pursue tax certainty and evaluate Advance Price Agreements and rulings more than ever to better manage the growing geographic footprint of transfer

pricing requirements, as well as the additional risk of controversy, adjustments and penalties. In this environment, where Tax authorities continue to add staff devoted to transfer pricing, the advantages of having a Transfer Pricing Specialist, becomes a business strategy plan.

Our Tax practice in EY is organised across geographic areas and business lines to deliver services seamlessly to our clients. This network, connected on line across regions and service lines, enables us to render world-class services on time, helping our clients in areas such transfer pricing planning, global documentation, tax effective supply chain management (TESCM) and transfer pricing controversy and risk management, among others.

Carden: Practitioners focused on transfer pricing typically serve many clients in similar industries, which means the specialist’s advice to one taxpayer is informed by how other taxpayers approach transfer pricing. Possessing the ability to assess how one taxpayer’s approach compares

Transfer Pricing 2014

with another’s is important because navigating the transfer pricing rules involves many judgment calls and being an outlier company could result in an unfavourable result. Additionally, many transfer pricing specialists are intimately familiar with all stages of a controlled transaction’s lifecycle, from planning to audit to litigation, as well as how transfer pricing structures may affect M&A transactions and other corporate initiatives (e.g., reductions or realignments of staff). Former government officials in private practice can provide additional perspective on how rules are intended to operate and how to handle a controversy. Finally, in my experience tax authorities are likely to assign more weight to transfer pricing documentation prepared by an outside advisor than documentation prepared internally.

Secular: Hiring a transfer pricing specialist demonstrates two main things. First, the firm is up to date with the changes in tax legislation and practice and is aware of the areas that could affect its clients

In this roundtable we spoke with eight experts from around the world to discuss the latest changes and developments in Transfer Pricing. Our chosen experts waded into the base erosion debate, analysed the latest OECD revisions & G20 BEPS initiative and outlined the current transfer pricing landscape in their jurisdictions.

10 11


the WP’s deliberations reflects the thought process of taxing authorities in countries with developing or fast growing new economies that are otherwise very attractive to MNCs and may pose compliance challenges that materially raise the cost of doing business in some locales.

In addition, after WP #6 commenced its work, the BEPS initiative was launched, and now the two projects have been comingled to the detriment of the intangible assets re-draft. Even worse, from the standpoint of multinationals is that the two efforts, taken as a whole, have let a whole assortment of bad ideas out of the shadows such that, regardless of the WP #6 and BEPS outcomes, those bad ideas will be reflected in some country’s approaches to enforcement.

Carrillo: The current transfer pricing landscape is significantly more complex than it was nearly 20 years ago. To begin with, there are now approximately 70 countries with transfer pricing requirements in place, versus the five countries that had requirements in the mid-1990s. Moreover, the types of intra-group relationships that fall under transfer pricing scrutiny

and “warn” them in advance of the consequences of proposed actions. Secondly, it demonstrates that the firm appreciates that, as businesses expand internationally, their clients and prospective clients will require specialised advice and is evidence that they can provide such advice, safeguarding their relationships with clients.

Tng: Transfer pricing is a specialist area of tax. The landscape has changed, now more than ever transfer pricing is becoming a focus of revenue authorities. Recent changes in Australia have tightened the rules, and the Australian Taxation Office is more rigorously enforcing compliance, at both the large business and SME level. The recent media focus on base erosion has also brought the integrity of the country’s tax base under scrutiny, thus transfer pricing is seen as a measure to ensure Australian companies pay their “fair share” of tax.

2. Can you talk us through the current transfer pricing

landscape?

Nicholls: The transfer pricing landscape is rapidly changing.

Many tax regimes that previously had no or limited TP legislation are introducing rules. In addition, the OECD and G20 BEPS initiative is expected to result in major developments in TP documentation guidelines and the taxation of intangible assets. The latter is already a regular feature of tax enquiries and given the emphasis on ‘significant functions’ (with a potentially reduced focus on ownership, capital and risk). I envisage this will give rise to even more cross-border tax disputes going forward.

Bagri: In the Indian context, transfer pricing (‘TP’) continues to be one of the top tax litigated issues. Last year the TP regulations were extended to include domestic related party and intra-unit transactions in select situations. Given the experience on TP with respect to cross-border transactions, there is a sense of anxiety amongst taxpayers on how the tax authorities would view the arm’s length principle in the domestic context.

The focus of TP on the cross-border controlled transactions have extended beyond the conventional transactions involving flow of goods and services. Today, there

is an increasing attention on the arrangements involving fund flows such as capital financing, deferred payments; intangible transfers such as assembled/trained workforce, location advantages, processes and business restructurings or reorganisations.

An encouraging trend has been the increased TP knowledge base within the tax authorities and the Court decisions acknowledging the underlying economic concepts in TP.

Boykin: The current OECD Working Party #6 efforts to clarify the contours - or perhaps redraw the map as regards intangible assets – has significant potential to complicate our lives. The WP represents extremely disparate interests, some of whom favour source-based taxation to an extent not consistent with the arm’s-length standard as currently applied to entitlements with respect to income arising in intangible property. To the extent this view prevails when the OECD Guidelines are updated to reflect the WPs conclusions, multinationals may well face multiple local claims on shares of the income arising in centrally-owned IP. This pressure on

12 13


Tng: Globally there has been an increase in enforcement, but the most significant changes in Australia recently have been the more formal adoption of the OECD methods, expansion of the international dealings schedule and requirement that a transfer pricing policy be in place and documented before the lodgement of the tax return for that year.

As far as the landscape for business goes, the limelight on transfer pricing means smaller businesses that felt they may be “below the radar” must now be more conscious of transfer pricing and having the appropriate policy in place.

3. Have there been any recent regulatory changes, tax treaties or

interesting developments in your jurisdiction?

Nicholls: The most material regulatory change in UK TP legislation recently was the introduction of a restriction to the compensating adjustment claim that was available for UK transfer pricing. On 25 October 2013, HMRC issued draft legislation preventing future claims for compensating adjustments by any

now include transfers of intangibles (in which case an undefined list of intra-group relationships can be covered, like work-force in place), the provision of intra-group services (which also include relationships not previously considered, like financial guarantees for intra-group financing), as well as intra-group financing itself. Disparities in the way countries interpret the OECD Guidelines add further complexity, and increase the risk of double taxation for multinational firms.

Malla: Several tax administrations around the world have enhanced tax enforcement. Moreover, some of them have also started to challenge that corporations not only pay “legally constituted taxes” (i.e. taxes established by law), but also “reasonably moral taxes” (i.e. that they share through taxes a reasonable portion of profits). In consequence, the global tax agenda has recently been focused on the tax risks that base erosion and profit shifting (BEPS) create as a result of the strategies carried out by multinational corporations in order to minimise their tax burden. In this sense, within the OECD Report on BEPS, transfer pricing has been identified as one of the main areas

to deal with.

Carden: In the United States, MNEs find their transfer pricing under pressure from many sides. For U.S.-based multinationals, U.S. tax authorities are often focused on transfer pricing with respect to intangibles. This focus, which is reflected in the pronouncements of senior U.S. officials as well as the cases that the U.S. government has chosen to litigate, is based on a concern that U.S. companies inappropriately shift income outside of the U.S. tax net through the use of intangible transfers and licences. At the same time, other jurisdictions—especially European countries—have focused on the income attributable to sales and distribution activities that these multinationals report in local markets. Adding to this, countries in which multinationals have substantial research, engineering, or support service functions, such as India, maintain that local service affiliates should receive greater returns than have traditionally been associated with these functions. Consequently, all parts of these multinationals’ value chains may be under transfer pricing pressure. Finally, in addition to pressure from tax authorities, multinationals face

criticism from both elected officials in the U.S. Congress and U.K. parliament, as well as U.S. media.

Secular: The transfer pricing landscape changes constantly as tax authorities become aware that businesses are becoming more sophisticated and multi-national and realise that their current tax legislation may not deal appropriately with cross border business, particularly online business . Previously, business was tangible but with technological changes and the growth of the internet, virtual outlets exist, and downloads and online shopping enable people in any jurisdiction to transact business internationally. Tax authorities struggle to keep up with the tax consequences of internet business and how to reflect in legislation the pronouncements of the OECD in this area. In addition, governments are carefully monitoring the allocation of profits and losses to their jurisdiction, and striving for a balance between business-friendly tax measures and those that maintain the level of tax revenues needed to meet public spending - this increases the pressure on businesses to pay their fair share of taxes.

14 15


into force 30 days after the exchange of ratification instruments between the governments. The provisions will apply in relation with Permanent Establishment (PE) provisions for any fiscal year beginning on or after 1 January of the year following its entry into force. During the period in which the Treaty is not in force, the domestic rules would apply.

Carden: In the U.S, recent legislative changes and other developments have focused on other parts of MNCs’ international tax policies. Some of these changes have been legislative—including rules governing the availability of foreign tax credits for international operations (the so-called “anti-splitter” rules). Others have been regulatory—including guidance regarding corporate transactions that allow companies to more efficiently deploy offshore earnings (the 2012 Notice governing cross-border reorgansations). Finally, the increasing number of corporate mergers that result in U.S. multinationals being acquired by non-U.S. entities have drawn legislative proposals intended to stop or slow such combinations. These changes do not directly affect transfer pricing, but can dramatically impact the overall global tax effect of

person within the charge to income tax other than a company, where the counterparty to the transaction is a company. This legislation effectively means that, as of 25 October 2013, individuals and partnerships will no longer be able to claim compensating adjustments, where the counterparty to the transaction is a company. Significantly, the restriction will not be limited to tax avoidance arrangements and there will be no exceptions for genuine commercial arrangements.

Bagri: On transfer pricing, the APA program introduced last year appears to have been reasonably successful. Amongst the 146 applications filed in the first year of APA regime, the first batch of five unilateral APAs were signed.

On the treaty front, India has entered into an agreement for exchange of tax information with Gibraltar (published 1 April 2013) and is in discussions with few other jurisdictions. India has also blacklisted Cyprus for non-co-operation in providing information; with this transfer pricing provisions have been triggered on all transactions with Cyprus entities, rate of with-holding tax has been

increased to 30 per cent on all payments etc.

Key regulatory changes are expected with the new Government having taken office and expected to announce its tax proposals in July 2014.

Malla: On 7 January 2014, Argentina’s Federal Tax Authorities (AFIP) published a new list of the countries, jurisdictions, territories and tax systems that are considered “cooperators for purposes of fiscal transparency.” Originally, the Argentine Government had issued Decree 589/2013, published in the Argentine Official Gazette on 30 May 2013. The Decree modified the Argentine rules on low or nil tax jurisdictions (tax havens). Up to that date, the Regulatory Decree to the Income Tax Law (ITL) had contained a list of 87 countries, jurisdictions and territories considered as tax havens for tax purposes. Decree 589/2013 eliminated the list from the Regulatory Decree and the AFIP were empowered to establish a new list, which includes the countries, jurisdictions, territories and tax systems that will be considered as “co-operators for purposes of fiscal transparency.” Accordingly, the

AFIP have issued General Resolution 3576/2013 (published in the Official Gazette on 31 December 2013), establishing that from 1 January 2014 the new list will be available through the AFIP’s website.

On the controversy side there has been an intense activity of the Argentine Tax Authorities in terms of aggressive transfer pricing audits imposed on taxpayers, in particular to the Agribusiness industry. Main grain and related products exporters and agriculture manufacturers have experienced challenging transfer pricing audits and a heavy scrutiny on its intercompany transactions, in its exports when an international intermediary is involved. Likewise, during the last times there has been a regular activity in terms of jurisprudence including rulings on transfer pricing disputes within industries such as Pharmaceutical, Oil & Gas, Automotive, and Services, besides the already mentioned Agribusiness.

Finally, a Double Taxation Treaty with Switzerland was signed on 20 March 2014 and has not entered into force yet. The Argentine Congress and Swiss Parliament have to approve the Treaty and it will enter

16 17


Malla: In Argentina some industries gets important tax incentives; an example is the Mining Investments Law No. 24,196, which sets forth a series of benefits for companies that carry out mining activities. These among others, include: Total tax burden stability for 30 years, double income tax deduction, Income tax exemption regarding income from mining contributions and rights, exemption from the payment of customs duties related to the entry of capital goods, system to request VAT credits resulting from imports and purchases of goods and services intended for use in mining activities.

Another example is the Software Industry Promotion Regime under Laws No. 25,922 and No. 26,692, which gives companies tax benefits for the creation, design, development, production, implementation and tuning-up software systems.

Carden: While there has been significant discussion of preferential treatment for certain types of intangible-related income (especially where the intangibles are used outside of the U.S. market), there are currently no material incentives in the U.S. that are specifically related to transfer

an MNC’s transfer pricing policies.

There has not been significant legislative change specific to transfer pricing in the United States yet, but several developments suggest it may be coming. Transfer pricing has taken centre stage in tax reform debates in Congress. The Senate has conducted high profile investigations on the tax strategies of multinationals, resulting in many of those strategies becoming front-page news in mainstream newspapers. In addition, the OECD continues its pro base erosion and profit shifting initiative, which could result in legislative changes in some countries.

Secular: The most significant change in tax legislation in the UK is the introduction of the patent box regime. Commencing in April 2013, it introduced a reduced tax rate on profits from patented innovations and certain other innovations. The relief is phased in such that the 10% rate will not apply in full until 1 April 2017 but each year from 1 April 2013 the tax rate is gradually reduced. The UK company could be a member of a multi-national group and have either developed the IP portfolio itself or be actively

managing it. As one would expect there are a number of conditions to be met.

Tng: Australia has concluded a number of important free trade agreements with key trading partners Japan and Korea recently, and is looking to conclude one with China in the short term. This interacts with the double tax treaties and predicted increase in activity between these key trading partners. Those doing cross border business in these countries need to look at the tariff reductions, margins and tax considerations.

Our recent budget also sees the gulf between the top tax rate (effectively 49% for those earning more than $180,000 per annum) and a proposed reduced corporate rate of 28% widening. This is likely to increase the motivation to aggressively tax plan.

The recent budget has also re-ignited the debate on how the government should be addressing the budgetary deficits, namely the Goods and Services Tax (GST), which to date neither political party has had the appetite to tackle with voters.

4. Are there any attractive incentives for multinational

corporations (“MNCs”) in your jurisdiction?

Nicholls: Yes. The UK is an open economy and seeks to be ‘open for business’. There is an SME regime which provides a conditional exemption from the TP regimes for small or medium sized groups. More widely, the UK has an attractive patent box and R&D tax regime. Under the patent box legislation, profits that are attributable to sales of items including qualifying patents will be subject to a corporation tax rate as low as 10%. An important aspect is that the patent box rules can apply even where R&D tax relief has already been claimed on a project to develop the IP. The UK will have a single 20% corporate tax rate from April 2015 and has also modernised its Controlled Foreign Company (CFC) rules. At the same time it has introduced a new Finance Companies regime enabling certain income to be taxed at an effective rate of 5%. Capital gains and dividends in relation to subsidiaries are generally tax free as well, and there is an extensive treaty network, making the UK an excellent location for group holding companies.

18 19


vi. Residuary or Other Method.

In the absence of any internal comparable data, the most widely used method is the TNMM. The differences in functional comparability and data availability issues are the key factors influencing the selection of TNMM as the most appropriate method. We are observing a few instances where the CUP method is being relied upon. Recently, an Indian High Court held that quotations which are “reliable and authentic” can be considered as comparable under CUP.

Further, in relation to the non-routine transactions, tax payers are increasingly considering the use of the “Other Method” involving the use of valuation reports and quotations.

Carrillo: Transfer pricing methods generally fall in two categories: transaction-based methods and profit-based methods. Transaction-based methods generally determine the arm’s length nature of the intra-group transaction by comparing against comparable transactions with unrelated third parties. These methods generally provide the most direct way to ascertain arm’s length

pricing. That said, the U.S. will often continue to allow the use of other incentives and helpful provisions (such as the credit for research and development and flexibility with respect to entity classification, or “check the box”) notwithstanding a company’s transfer pricing policies. These rules at least generally allow MNCs to maintain the structures and incentives that they have irrespective of their transfer pricing policies.

Secular: The reduction in corporate tax rates (to 20% ultimately) are designed to encourage MCN’s to invest in the UK and to establish holding companies and headquarters here. The Patent Box regime, designed to reduce the tax rate to 10%, is further encouragement. The amendments to the Controlled Foreign Companies (“CFC”) legislation are designed to encourage UK companies that shifted their headquarters outside of the UK a few years back because of the restrictive CFC regime to move back to the UK. The lowering of the highest rate for personal tax (reduced from 50% to 45%) is also designed to encourage companies to shift their headquarters and senior staff to the UK.

Tng: The recent proposal to drop the corporate tax rate to 28.5% is a deliberate tactic by the Australian government to make Australia more attractive to multinational corporations. Within the region, there are many competing economies that offer a lower corporate tax rate, but few can match Australia’s combination of, stable government, low sovereign risk and being resource rich. The government has also committed to streamline the process for approvals so that multinational corporations can more quickly commence business in Australia.

UHY as a global group recently conducted a study into the ease of doing business and Australia finished in 6th place, quite a result for a developed economy.

As far as specific tax incentives go, Australia is unique in offering a Research and Development (R&D) incentive that is refundable for cash for small businesses (consolidated revenues of less than $20m per annum). Foreign companies conducting R&D in Australia through an Australian subsidiary company, also qualify for this refund. The recent budget has reduced the

refund percentage, but it is still very attractive at more than 40c in the dollar.

5. Can you outline the various transfer pricing methodology and analyse which are most effective?

Nicholls: The OECD transfer pricing guidelines (‘Guidelines’) are included, by statute, into the UK tax legislation. As such, the TP methodologies are those set out in these Guidelines. It is not possible to say which are the most effective as the “most appropriate” method should be applied to the tested facts and circumstances. In practice though, transactional net margin methods are probably the most commonly applied to test the arm’s length nature of an intercompany relationship.

Bagri: Indian transfer pricing regulations have prescribed six methods for determining the arm’s length price: i. Comparable Uncontrolled Price method (CUP), ii. Resale Price Method (RPM), iii. Cost Plus Method (CPM), iv. Profit Split Method (PSM), v. Transactional Net Margin Method (TNMM), and

20 21


under the UN Manual for TP –Country Practices.

Boykin: As noted above, the planned OECD revisions to Chapter 6 of the OECD Guidelines, an entirely worthy and necessary updating of the 1995 version, has been hugely complicated by (1) the quite disparate interpretations of how intangible asset profit entitlements should be determined, and (2) the Base Erosion and Profit Shifting (BEPS) initiative spurred by the G20. These two sets of influences are said to have also raised questions among the working parties about Chapter 9 of the Guidelines (Business Restructuring), which was itself a very difficult undertaking and one that was eased into harbour two years ago to a collective sigh of relief from tax professionals everywhere.

If the new Chapter 6 stays true to the arm’s-length standard as generally understood, the impact will be largely positive for those countries that rely on the Guidelines, as the existing intangible assets guidance is basically useless. If the new Chapter is seen to stray from the standard, the result will be problematic for MNCs. Regardless of the actual result, especially as regards entitlement

prices. These are, nonetheless, rare in practice and, even when a transaction with a third party exists, it seldom meets the comparability requirements necessary to make reliable use of this data.

Profit-based methods determine the arm’s length nature of the intra-group transaction by comparing against the profitability of independent third parties engaged in comparable uncontrolled transactions. These methods rely on statistical sampling of results and numerous assumptions, which can yield less reliable results compared to transactional methods. However, given the availability of reliable external company data, the lack of internal transaction-based comparables and the ease of application of these methods across the organisation as a whole make these methods the most widely used in practice.

Tng: There aren’t necessarily any methodologies that are more effective than the other; it is actually a matter of choosing a methodology that is most appropriate for the nature of the business and transaction. Australian revenue authorities are leaning towards methods that result

in a split of profit between each of the countries.

6. What impact will the new OECD revisions to transfer

pricing guidelines have?

Nicholls: In relation to documentation, the masterfile: local file documentation concept is already accepted within the EU, although the version proposed by the OECD is slightly different. The issue is that other countries including those in the OECD and G20 may not adopt the new approach and/or will not repeal their own country specific rules, thus adding to the compliance burden for businesses. The country by country reporting schedule is a new development and a data collection exercise that Tax and Finance directors will need to address with their IT departments and Financial Analysts. Business representatives have expressed concern about confidentiality; tax administrations which obtain information from taxpayers about their global operations must show that they will keep all taxpayers’ affairs confidential. The potential for this to generate an increase in tax authority audits and cross

border disputes is a concern for many taxpayers.

Bagri: India is not a member country of OECD and thus the revisions do not mandate any change in the Indian regulations. However, the persuasive influence that it has cannot be understated. Indian tax administration has also been actively participating in the OECD forums and tracking developments, as well as in the UN sub-committee contributing towards the BEPS project.Indian tax administration believe that the OECD guidelines do not fully reflect the perspectives of a developing nation. One of the divergent approaches is reflected in the approach on taxation in the digital economy. The BEPS project aims at ensuring that income is taxed in the jurisdiction performing economic activity and creating value, while Indian tax administration believe that economic value is also created by the purchasing power of the market consuming goods/services. We think that this divergent viewpoint is a critical area requiring consensus amongst all jurisdictions to reduce risks of double taxation in the times to come. The views have also been voiced in its statements

22 23


TP documentation assists with consistency in its preparation and can reduce potential conflict in pricing policies or interpretation. However, as just mentioned, many tax jurisdictions have specific local TP reporting and documentation requirements. Hence additional local documentation is often required to support a global policy and meet relevant compliance obligations.

Bagri: In our view, the management of transfer pricing documentation should have a local, regional and global focus. With tax administration in all jurisdictions stringently enforcing transfer pricing for protecting their respective tax base, it is important to have robust documentation clearly substantiating the value creation processes across the jurisdictions. The prominently adopted ‘master file’ and ‘local file’ approach, as also advocated by OECD in its BEPS draft report, has strong merits from an efficiency and consistency perspective. Recommended approach is to show complete supply chain context in master file, and the local file in turn substantiates the value addition, rationale for the share of profit and also complies with local regulations.

to profits form intangible property, the combined effect of the ideas surfaced in WP #6 and the BEPS projects has so far not been positive. A US tax official speaking recently at a gathering of professionals put it best when he alluded to “BEPS-type self-help” actions popping up here and there, as taxing authorities pick and choose what they like from the extended deliberations to date, regardless of the ultimate official OECD acceptance or rejection of the ideas and concepts.

Carrillo: I think we need to draw a distinction between the various initiatives currently under way at the OECD in relation to transfer pricing. To begin, the new OECD guidelines issued in 2010 had the impact of providing greater clarity on the way transfer pricing analysis should be conducted and on the transfer pricing methods to be used in establishing an arm’s length standard.

Currently, the OECD is engaged in projects to simplify transfer pricing documentation, to address the base-erosion and profit-shifting observed by governments as a result of transfer pricing, and to address the topic of intangibles.

The impact of these initiatives will, hopefully, be greater clarity around the topic of intangibles and the attribution of profits without increasing the risk of double taxation and violating the arm’s length principle; and a reduction in the overall burden on taxpayers to satisfy documentation requirements globally.

Malla: Amid some changes in the tax global agenda, the OECD registered an important activity issuing several documents deepening in some important aspects the Transfer Pricing Guidelines published in 1995 and expanding its opinion to undeveloped areas. In this regard, the revised OECD Guidelines were approved in 2010. In particular, some highlights deserve special attention: Chapters I-III of the Guidelines were substantially revised, business restructuring’s aspects arose as a renewed concern and intangibles were identified as a new key issue to analyse, among others. Further documents made advances in some areas like safe harbours, permanent establishments, timing issues, etc. In addition, letters issued on revised OECD Guidelines provide important interpretive guidance on the guidelines.

More recently, the OCDE has taken a number of transfer pricing initiatives consistent with the base erosion and profit shifting initiative commented previously. In particular, on January 2014 the OECD published a draft of the Country by Country reporting template for public comment. This provides the first concrete indications of what information likely will be required to be reported to tax authorities. After a small window where business is requested to comment on a series of key issues (deadline 23 February), the OECD expects to complete its work on the Country by Country template by May 2014 for public release by the due date of September 2014.

Tng: Australia has chosen to embody the OECD methodologies in legislation, so revisions to the guidelines have a direct impact on transfer pricing in Australia.

7. Is it better to manage transfer pricing documentation locally,

regionally or globally?

Nicholls: This depends very much on how centralised the business is, and the territories in which it operates globally. Generally speaking, global management of

24 25


Furthermore, taxpayers are required to keep an annual transfer pricing study for cross border transactions with related parties, deemed related parties and independent parties located at tax havens.

Carden: In my experience, this tends to be very company-specific and many MNCs often take a hybrid approach. The ideal structure for managing documentation depends largely on a company’s operating footprint, available resources and overall transfer pricing approach. For companies with business models under which most affiliates are acting solely as distributors in their local markets, it is often simpler to have a global policy (e.g., a range of arm’s length returns) that is supported by a general functional and industry analysis, as well as potentially a common set of comparable companies, but with a locally prepared analysis of the affiliate’s performance, often relying on local statutory financials. This approach is particularly appropriate for companies that have significant differences between local financials and the parent company’s GAAP, since local expertise may be required to identify and understand these differences. It also requires

A local approach is imperative to ensure appropriate compliance with the local regulations e.g. need for data pertaining to financial years in which the transactions occur and insistence on use of local comparables by authorities. Further, having a master file with overall group focus is beneficial even in terms of managing TP audits globally. The master file shall assist the local entities in substantiating the global value chain with documentation maintained and used in various geographies coupled with ease and speed of accessibility to the data at the time of assessment.

Boykin: This is a question about which a fair amount has been written. I think a consensus has developed in the advisory community that the documentation needs to be centrally managed with local input and review. The central management element is necessary for a variety of reasons—avoiding duplication of effort, leveraging past work, managing the costs of compliance, keeping the company’s functional story to one version, responding promptly to government inquiries, and satisfying the company’s financial auditors that the files are present

and complete, just to name a few. Local review contributes knowledge of affiliate country taxing authority peculiarities and any special factual circumstances that may need to be taken into account in telling the taxpayer’s story.

Carrillo: The decision on which approach to take depends on each individual firm’s internal risk assessment. What is true is that it is better – to the degree one faces material transfer pricing risk – to manage transfer pricing documentation proactively, rather than reactively. Having a global transfer pricing policy that can be rolled out regionally and adapted locally is a growing best practice among multinationals with transfer pricing risk. This is largely due to the fact that multinational businesses, today, operate in a much more integrated manner than a few decades ago. Most multinational firms follow a global business strategy. It follows that transfer pricing policies should also be laid out on a global scale with adaptability for local variances.

Malla: Increasingly MNEs are becoming more aware that transfer pricing is one of the key tax issues today. In this line, taxpayers are

taking a more coordinated and globalised approach to transfer pricing documentation. As one the world’s most globally coordinated tax practices, we take part of extensive global and regional transfer pricing documentation projects where controlled transactions are analysed and documented considering each part to the transaction and keeping the arm’s length standard in place in every tax jurisdiction. Important emphasis must be given to global transfer pricing documentation since it gives, among others advantages, a framework to avoid double taxation and documents transactions granting consistency at the same time.

Notwithstanding the above, local transfer pricing documentation plays an important role and most probably may not be replaced by global or regional documentation when it comes to compliance with local regulations. In the case of Argentina, local Transfer Pricing rules entail extensive contemporaneous documentation. Taxpayers are required to keep and eventually submit all the documents evidencing that prices, amounts received and profit margins have been established on an arm’s length basis.

26 27


The taxpayers’ basic concern is that different rules and standards, as applied by the two departments, lead to effective double taxation that might create barriers to trade and investment.

With respect to payment of royalties, the tax authorities are applying the ‘benefit test’ to ascertain the arm’s length price. Income tax authorities are contesting the need for royalty payments, on the other hand customs authorities are contesting that the transactions involving import of goods are undervalued since it does not factor the consideration payable for use of intangibles belonging to the foreign enterprise.

Further for transactions involving royalty and service fee, Indian regulations require the recipient to remit service tax (on specified services and royalty) at the rate of 12.36% and deduct WHT at the rate of 25%. The WHT can be reduced to 10 to 15% by claiming benefit of tax treaty. However, credit in home jurisdiction for WHT is ambiguous where with-holding is not in accordance with treaty such as deduction of tax at 25% (if Permanent Account Number is not obtained India or Tax Residency

significant local finance resources, so it is of course more appropriate for companies with substantial global footprints.

That said, in my experience the trend among MNCs is toward global documentation with local tailoring as required. This will often involve a global “master file,” which contains the basic financial information, accounting rules, and transfer pricing policies necessary to determine tentative results in each market. The master file information is often used for making in-period transfer pricing adjustments as well. Local tailoring can then occur after the year is over. The advantage to this approach is that it ensures that each affiliate is using financial information that reflects its taxable income (sometimes required and almost always preferable for local purposes), while at the same time ensuring that policies are applied consistently worldwide. Consistent application is particularly important both for MNC rate forecasting and because of increasing international audit cooperation and information exchange; it also often alleviates local country concerns to know that policies are applied consistently worldwide.

Secular: Although MCN’s should consider the global aspects of their business and endeavour to have global policies that apply for all their inter-connected transactions, they do have to bear in mind the differences that occur locally/regionally and adjust their transfer pricing documentation accordingly. Although most countries adopt the OECD guidelines, they are just guideline and tax authorities are free to interpret them as they want and adjust their tax legislation accordingly. Consequently, subtle differences can arise and could have an impact on what documentation is required to prevent local penalties arising. Whilst global documentation will go a long way to resolving significant issues, MCN’s must be aware of local nuances and have risk awareness strategies in place.

Tng: Transfer pricing documentation needs to be managed on a global basis through advisors with global reach. A transfer pricing dispute is likely to involve revenue authorities in more than one country, so it is important that advisors on both sides have developed the policies and reached a compromise that will satisfy the requirements of each country.

8. How much of a factor do custom duties, royalties and

withholding taxes have on the way firms work?

Nicholls: Customs Duties and withholding taxes can become a cash tax cost if not carefully managed and planned. The larger advisory firms including Grant Thornton employ specialists in these areas to assist clients with their obligations and many larger multinationals will employ their own staff to ensure compliance and claim the appropriate reliefs. The development and maintenance of group IP and associated royalties for its exploitation is another key area for the on-going success of multinational business. It is also being considered in the BEPS project and new guidance will be issued shortly on the transfer pricing considerations in this area to provide greater clarity to tax administrations and taxpayers.

Bagri: These factors have a significant impact on the way firms are operating in India. We are yet to see much progress for a coordinated approach between income tax and customs authorities in the review of related party transaction values.

28 29


is essential that withholding taxes are considered especially as many jurisdictions apply “treaty shopping” criteria that eliminate the benefits of double tax treaties.

Tng: Global business is not limited to transfer pricing and income taxes, but a raft of other duties and taxes that apply differently in each country, and in some instances, differently in different parts of the same country.

The viability of a business can hinge on whether withholding taxes and royalties apply, because these are applied to gross revenue and, dependent upon profit margins of the business, withholding taxes or royalties could erode the profits. This becomes an even greater problem for start-up businesses where tax credits for withholding tax have little value (there may be no profit to begin with).

Advice on “taxable presence” from global advisors who can provide the perspective of home country and other country is very important.

9. What transfer pricing challenges and risks exist for high

tech companies?

certificate from home jurisdiction is not furnished) or on purchase of software (since it is considered as royalty in India). Further, no compensating adjustments or reversals of WHT is undertaken when a transfer price for payment transaction is lowered by virtue of TP audits.

Malla: In general, Latin American countries pose high withholding tax rates on royalties and payments for services with foreign entities (especially when no Double Taxation Treaty exists). In consequence, an efficient business structure may not disregard the associated costs.

In the current economic and political atmosphere local companies need to align their international trade activities, foreign exchange market involvement and transfer pricing policies in order to have their businesses running. In this line, our clients may take advantage on a fully integrated TESCM approach. We work with them to understand the business strategy, to assess the location of productive entities and to identify the existence and allocation of intangible property, making possible for us to propose alternative structures which minimise their

taxation and ease their operations.

Carden: I usually see customs and withholding issues arise in connection with (often very contentious) audits, so I strongly encourage MNCs to try to reconcile, to the extent possible, the prices charged for customs and transfer pricing purposes. From my perspective, this avoids having to explain inconsistent positions to authorities within the same jurisdiction. Moreover, it often promotes better internal controls, since one set of policies can be used in companies’ ERP and other IT systems. This can ensure that local customs and finance teams understand the transfer pricing policies and that those responsible for setting and monitoring those policies are synchronised with customs requirements. The resulting product-level invoicing usually ends up being more reliable as well.

That said many MNCs separately manage tax and customs, which can make coordination difficult. Also, where transfer pricing policies are intended to produce targeted returns for entities that serve multiple markets (e.g., regional contract manufacturers that sell at a mark-

up on total costs), it may not be possible to have policies that meet the customs rules of each market, which may depend on local market third party prices. Finally, there are certain instances where customs valuation rules explicitly do not follow the arm’s length standard or local transfer pricing rules. However, in my experience it is often relatively easy to reconcile the approaches and the differences tend to be more a matter of terminology and method than result.

Secular: Transfer pricing specialists cannot consider direct tax consequences only and must work together with custom duty colleagues, VAT colleagues and expat tax colleagues. There is little point in devising supply chain structures that save significant levels of direct tax if it leads to the organisation suffering higher custom duty, increased VAT exposure (and penalties for failure to register for VAT locally, and higher employee costs if key staff are relocated and the company has a tax equalisation policy in place (or having key employees facing higher personal tax liabilities if no policy exists). In addition, when moving assets around and/or changing the direction of income streams, it

30 31


Nicholls: The main challenge for tech companies is that it can be difficult to pinpoint where their value drivers and IP reside. The current moves on intangibles may result in countries which have many workers, or a large market, arguing for a share of intangible returns, when the original risk and financing of the underlying R&D was met from investment elsewhere. Some of the BEPS actions (notably the digital economy review) may result in additional risks for technology businesses such as deemed Permanent Establishments, although currently the OECD (and EU) working parties seem inclined to accept the general view that the ‘digital economy’ is not separate from the economy as a whole, and should not be subject to an entirely separate regime.

Bagri: High tech companies are facing serious TP challenges in India. The tax authorities allege disparity between the functional and risk profile of the captive technology centres in form vis-à-vis in substance. Indian tax authorities have expressed (as per the UN TP Manual – Country Practices) that decision making by skilled manpower of captive centre reflects

that the risks are being controlled by the captive centre in conduct irrespective of it being compensated at cost plus mark-up remuneration for all its services.

Further, Indian tax authorities have been contending that a portion of location savings derived by the MNE group should be attributed to the Indian captive centre. Indian tax authorities have also sought to contend that the activities of the captive centre results in intangible transfers involving location savings, assembled/trained workforce, processes thereby requiring additional compensation.

With the future entailing more electronic commerce and collaborative work, the application of the transfer pricing principles by the Indian tax authorities, given their views on the nexus theory, is expected to provide further challenges.

Boykin: Among the various questionable concepts that have bubbled up in the WP #6 and more especially the BEPS initiatives, we have the report to the French Minister for Economy and Finance on how the value created from a user

rests in the intangibles behind their products or services. One of the biggest challenges in transfer pricing for high tech companies is conveying to tax authorities the nature of their intangibles and why these drive so much of the value of the business. Having clearly defined intangibles, with a clear attribution of value and a clear definition of functions and risks associated with the development and maintenance of these intangibles is the best way to tackle this challenge.

Tng: This is a loaded question, to an extent. E Commerce has changed the way business is conducted globally and the tax laws are still playing catch up. The jurisdiction that has taxing rights over a tech business is always a question and not something that can be easily addressed. Italy tried this recently and was not very successful.

The recent media sensationalism of the issue of “base erosion” has brought this debate into the public domain and to the forefront of the mind of revenue authorities. The problem is, “morality in taxation” is not a notion the majority of tax advisors subscribe to. Applying a “moral” standard to taxation

base or even a simple web search should fall under the local tax net. This report’s concepts are now part of the BEPS action plan list—it is Action 1:

“Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties,… Issues to be examined include,…the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products,…”

In short, there is the prospect that an array of digital commerce enterprises could not only end up with multiple instances of new tax nexus, but also be somehow taxed on the value of the information accumulated from user bases. It is hard to imagine a worse potential tax threat then this in the high tech sphere.

Carrillo: The vast majority of the value in the products or services offered by high tech companies

32 33


the problem arises in the application of these to a new “unique” set of business circumstances.

11. As the global economic outlook improves, many

companies will seek growth through mergers & acquisitions.

What transfer pricing considerations need to be

accounted for?

Bagri: Indian TP regulations specifically require the TP filings to disclose the transactions involving business restructuring and reorganisations irrespective of whether or not the same have an effect on the profits of the Indian entity.

Typically, in mergers and acquisitions, there are internal transfers of shares. In cases including the transfer of shares of an Indian entity or its parent (which derives value from assets substantially located in India), the transaction triggers both capital gains tax and TP provisions in India. In these circumstances, the transactions need to substantiate compliance with arm’s length standard.

The other issues which are likely to

is difficult, as developing and developed economies operate in very different dynamics and provide tax incentives for many different reasons; you cannot apply a moral standard to this.

The broad consensus is better policing of the transfer pricing framework should see better collection of taxes. If governments demand greater collections of tax, they will need to legislate for this, rather than expect a corporation to adopt a “moral standard” of sorts.

10. What are the transfer pricing implications of cloud computing?

Bagri: Cloud computing has created a new borderless business environment in which tax authorities are doing their best to keep up with changes in technology. There are quite a few unanswered corporate tax and indirect tax issues with the emerging models around the cloud. In principle the TP implications will be similar to the implications for a conventional business model. However there exists complexity in identifying the value creation process and the value of the role performed by the participating entities in the process. In light

of the same, analysis the business model around the following questions would help: Is the ‘cloud’ the key value or is it merely proving incremental value through enabling efficiencies within an existing business? What are the key decision making functions performed by the various supply chain participants accessing the cloud from different locations?

The global fluidity of cloud results in tax risks and also opportunities for multinational groups providing cloud services, either internally or externally, to consider a tax efficient structure/strategy for the provision of such service. Accordingly, we believe that a case specific review of the global value creation process and the role of the cloud therein is the fundamental base for designing a robust transfer pricing policy. A critical conceptual issue needing consensus with the tax authorities is whether in a virtual business, running through the cloud, are the risks and assets actually following the functions?

Carden: Cloud computing raises many of the same transfer pricing challenges that other MNCs face, but with the added complication

of underdeveloped principles governing the location to which income should be attributed and the returns that should flow to different functions. As with other businesses, this has led to competing pressures on cloud computing business models from different jurisdictions. Some locations focus heavily on developed intangibles and software engineering, while others are increasingly focused on their residents’ use of cloud services and “free” service offerings that cloud providers make available in order to increase advertising or other third party revenue earned in other jurisdictions.

Tng: Cloud computing is the tip of the iceberg in terms of the globalisation of business and the outsourcing model. In the pursuit of profits corporations are looking to leverage on cloud computing to diversify their workforces and access the best talent at the lowest cost.

Consequently, this creates a new series of challenges over where work is done, what value should be attributed to this and how much value is added in the process. The current transfer pricing framework provides the tools and methodologies to apply,

34 35


offset by a removal of another. We can always hope!

Bagri: We do believe the coming year could be very exciting. We have a new Government in India which is expected to present its tax proposals in July. There is a strong expectation from the businesses that this Government would review some of the retrospective amendments on taxation of software/digital transactions, indirect transfer of shares and time-lines for introduction of the General Anti-avoidance Regulations.

On the transfer pricing front, there is a high likelihood of more unilateral APA being executed and maybe even bilateral APAs. We would like guidelines from the tax administration on the transactions involving intangibles and business reorganisations and the determination of the arm’s length price for the same. It would help to speed-up the participation of industry experts and economists as expert witnesses. While the tax administration has expressed its intent of involving them, we are yet to experience its implementation on ground. The participation of expert witnesses would bring in more

trigger are in case of movement of functions, risk and assets within the group. Though the TP regulations require identification and disclosure of these, the manner in which an exit tax could be levied is yet unclear since in many situations the reorganisation may not result in an income chargeable to tax.

Another area which needs consideration is the financing models. Though incorrectly, in recent times there have been some cases where the tax authorities have alleged that the value of shares issued to its foreign parent was deflated. The difference between the transfer price determined and the transaction value was considered as notional loan given to parent thereby triggering a notional interest charge.

Carrillo: The main considerations from a transfer pricing perspective include (i) having a thorough understanding of any intangibles associated with the products/services offered by the acquired/merged companies; (ii) having a thorough understanding of the international operating structures of the companies involved; (iii) having a thorough understanding of the global transfer pricing policies

(and ascertaining the existence thereof) for the companies involved; and (iv) identifying any synergies that might exist between the companies’ international operating structures, their intangible property structures and their global transfer pricing policies.

Secular: As companies grow through mergers and acquisitions, the issue of transfer pricing becomes greater. There could be new jurisdictions in which business is transacted in the enlarged group requiring knowledge of the local transfer pricing rules and documentation requirements. Also, where there is an amalgamation of entities in a jurisdiction there could be different policies applied and changes will be necessary to reflect an appropriate group policy going forward. As part of the due diligence, a review of the transfer pricing policies of the target is essential not only to identify potential changes but also to identify potential exposures for prior years. The UK provides exemptions for SME’s that meet certain criteria and a merger or acquisition could remove the exemption for the enlarged organisation and require an immediate review of transactions that will now be within the transfer

pricing legislation.

Tng: Transfer pricing applies to related party international transactions. Through a merger or acquisition entities that were not previously related will become related and the question of commerciality of some business transactions may arise.

12. What key trends do you expect to see over the coming year and in an ideal world what would

you like to see implemented or changed?

Nicholls: The BEPS initiatives are proceeding apace and the action plan has an ambitious timeframe such that it is due to be in place by the end of 2015. However, the change will probably not be adopted in full by many countries which have nevertheless had influence on the wording. In an ideal world I would say countries should not be able selectively to implement changes to the OECD guidelines and that there should be convergence of TP rules to avoid ‘cherry picking’ by governments and tax administrations. I’d also like to see every new compliance requirement on businesses being

36 37


transparency and remove influence of biased positions by taxpayers or tax administrators. Malla: Four main issues are on top at worldwide level: in the first instance, taxpayers are urged to recognise that they need more resources with increased geographic reach and some non-traditional skills. Secondly, companies are recommended to pursue tax certainty and evaluate APAs and rulings more than ever. This will help them better manage the growing geographic footprint of transfer pricing requirements, as well as the additional risk of adjustments and penalties. Thirdly, the discussion of intangible assets will have an even more relevant role in the transfer pricing arena. Finally, companies should continue to adopt new approaches to consistent global documentation and benchmarking to remain efficient and cost-effective when preparing transfer pricing documentation.

Particularly in Argentina, the trends observed during the year 2014 will persist and increase in the current year. Actions taken by the tax authorities regarding transfer pricing controversy are expected to continue.

Tng: We expect continued focus and scrutiny on the transfer pricing practices of businesses large and small to continue. The base erosion debate will no doubt continue to be at the forefront of discussion. One hopes all countries adopt a level headed, common sense approach to this and not bow to political pressure, which will result in practices that push business to countries where business is not so difficult.

Documents

Transfer Pricing 2014 - bvd · TRANSFER R 2014 Luis Carrillo is a transfer pricing specialist with 14 years of ... on Indian and Cross-border tax and transfer pricing issues, including