Transfer Pricing And Dispute Resolution: - IFA-UK
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Transcript Transfer Pricing And Dispute Resolution: - IFA-UK
Transfer Pricing And Dispute Resolution:
The Past, Present And Future
A Lawyer’s Perspective
Peter Nias
Joint Meeting IFA, HM Treasury and HMRC
Friday 25 June 2010
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TRANSFER PRICING – THE PAST
Old Regime (prior to 1998) - sc 770 Taxes Act 1988
• Direction (No penalties)
• Accounting: FRS 8 “material” related party transactions
New Regime – Sch 28AA Taxes Act 1988
– Accounting Periods ending on/after 1st July 1999
Adopts OECD Model (Article 9) and Guidelines (as at 30th April 1998)
Wide ambit: wording obscure and complex
Documentation: production and retention requirements
HMRC: Guidance on documentation and penalties
– Measured
– Recognised potential of new regime
APA Regime
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TRANSFER PRICING - AMBIT
“provision…has been made or imposed as between any two
persons…by means of a transaction or series of transactions”
Sc 147(1)(a) Taxation (International and Other Provisions) Act 2010
“provision…”
–
the overall situation brought about by the transaction or series of transactions; not
provision as in term, or condition in a contract
“as between…”
–
demonstrates that the parties to the transaction or series of transactions
do not need to be those between whom provision is made or imposed
“transaction or series of transactions”
– arrangements, understandings, mutual practices whether or not enforceable
– series: widely defined
Discussions on draft legislation: HMRC/Parliamentary Counsel/Law Society
DSG decision: no surprise
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EXAMPLE: UK Sub Borrows to make minority
investment in French Sub at request of US Parent
Guarantee
US Parent
100%
75%
UK Sub
Loan
25% Investment
French Sub
Issues:
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Is bank interest deductible? Even where no parent guarantee?
Should UK Sub charge fee to US Parent for making investment?
Should investment be re-characterised as loan?
3rd Party
UK Bank
DSG CASE
warranty
Customers
Dixons
Finance
reinsurance/
insurance
commission
commission
Cornhill/ASL
(agent)
premium
Goods
Dixons
DSG Retail
Note: Point of Sale Advantage
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admin/
repairs
premium/fee
Dixons
Mastercare
Dixons
DISL
TRANSFER PRICING – THE PRESENT
10 years experience
Multinational Planning
– Functional analysis
– Deconstruct supply
Impact
– Distribution/sales agency
– Manufacturing
– IP ownership
The “undistributed middle”
HMRC developments
– Risk assessment (Tax Bulletin 60, August 2002)
– Transferring risk (International Manual, 465030)
HMRC Cross-Directorate TP Group
– TP specialists
– Structured governance procedure
– Focus/targeted approach
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TRANSER PRICING – THE PRESENT
Revenue needs
– Income for authorities
– Cost for multinationals
Planning and audit challenges
– Sophisticated
– Detailed
– Aggressive?
– Potential for litigation
HMRC litigation and settlement strategy
– Non-confrontational/collaborative resolutions without dispute (para 4)
– “Avoidance” cases?
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TP – THE PRESENT
Litigation position – increasing trend?
Up to 2008: 4 cases (2 procedural)
Beecham Group Plc v CIR (1992)
Glaxo Group Ltd and others v CIR (1995)
Ametalco Ltd v CIR (1996)
Waterloo (2002)
Since 2008
DSG case (2009)
Astra Zeneca case (2010)
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TRANSFER PRICING – THE FUTURE
OECD Developments
Permanent Establishment Issues
– Profit attribution
– Existence
– SPF (significant people function)
Restructuring Paper (Sept 2008)
– restructuring not an asset in itself requiring compensation
– no “industrial intangible”
– non recognition of transactions: dealt with by pricing adjustment
– acceptable to be tax motivated provided non tax business purpose
TP Guidelines, Proposed Revision of Chapters 1-111 (Sept 2009)
– more flexible/pragmatic approach to transactional profit methods
– all methods recognised
– Emergence of residual profit split; no longer last resort
International Disputes Mechanisms
– Competent authority procedure
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TRANSFER PRICING – THE FUTURE
Old TP studies too superficial/mechanical
More detailed TP analysis expected by HMRC
– Fact/Law/Documentation
SPF impact on functional analysis: who has control over risk
“Capacity to make decisions to take on the risk (to put capital at risk) and … whether and how to
manage the risk, internally or using an external provider”
OECD Restructuring Paper, para 30
DSG case implications
- technical arguments
- document content
- negotiation process
- robustness of pricing method
- importance of “bargaining power”
Increasing need for certainty in tax treatment
– APA/ATCA
– Provision/reserve in accounts
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TRANSFER PRICING – POST
ACQUISITION RESTRUCTURING
US INC
UK TARGET
CO
IP Licence Royalty
EXISTING OPERATING
SUBS
IP Licence
Royalty
NON-UK IP
HOLDING AND
MANAGEMENT CO
UK/NON UK
SUBSIDIARIES
R&D Contract
IP Transfers Sale/Licence
Lump Sum Payment
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TRANSFER PRICING – POST
ACQUISITION RESTRUCTURING
Principal issues:
– IP assets transferred – TCGA or Sch 29 (part 8 CTA 209)
– Purpose behind transactions
– Accountancy treatment of licence back
• Finance lease under UK GAAP? Or Sch 29?
– Sch 28AA (part 4 TIOPA 2010)
• Arms length transaction
– Valuation principles – sale and licence back
Other issues:
– SSE Relief
– Business Hive Up
– Consolidation/streaming of losses
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TRANSFER PRICING – THE FUTURE
Real time negotiation; pre return/filing agreement
APA/ATCAs
HMRC powers (and discretion)
“collection and management of revenue”, sc 5 CRCA 2005
Improving dispute resolution; HMRC Review (July 2009)
– Litigation expensive in terms of time and legal fees
– More time on fact-finding
– Focus on working relationships with customers/agents
– New HMRC supervisory review function?
– Consider ADR techniques
EU Arbitration Convention 90/463/EEC – 15 years; 2 cases
MAP – arbitration provisions in Treaties
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TRANSFER PRICING – THE FUTURE
Use of mediation
– Facilitative – steering process, improving communication
– Evaluative – offering views on merits and outcomes
Issues
– Joint appointment – costs shared
– Legal basis is contractual
– Both sides must engage
– Mediation can build sense of trust and co-operation
– Facts (as well as law)
– Confidential
– Timing
Suitable for Transfer Pricing
– Not binary; Not just issues of law
Process and Governance Issues
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CONCLUDING REMARKS
Early Discussion
“Cards face up on table”; two way process
Transfer pricing disputes
- no right answer
- compromise
Advisers – Help/Hindrance?
Role for lawyers
Transfer Pricing:
– Inherently factual, but
– Legal analysis important
Legal professional privilege – both sides
Judges …. are lawyers!
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