Transcript None - India Branch

Global Transfer Pricing Perspective
Shyamal Mukherjee
April 23, 2010
PricewaterhouseCoopers
Agenda
• Global Transfer Pricing Landscape
• Significant Developments
• Key Global Issues
• Best Practices
PricewaterhouseCoopers
April 2010
Slide 2
Global Transfer Pricing Landscape - Global Economy
Global transfer pricing landscape…..a function of state of the global economy
•
Global economy beginning to pull out of
recession
•
Main burden to support demand has been
falling on fiscal policy
•
Public Finances will go through a trade-off
between short-term expansionary policies and
reassurance for medium-term prospects:
-
Fiscal deficits to remain high in next years
-
Rise in public debt creates market concerns
about sustainability of public finances
Fiscal and debt pressures in the coming years will lead governments
to focus on revenues enhancement, with Transfer Pricing as
a “hot topic” on the agenda
PricewaterhouseCoopers
April 2010
Slide 3
Global Transfer Pricing Landscape - MNC Challenges
•
Competitive pressures vs shareholder expectations
•
Entry to new geographic markets and introduction of new products/ services
•
Constant and stringent regulatory changes
•
New, varied and complex intra-group transactions
•
Increased intra-group financing transactions
•
Optimization of global effective tax rate
India MNCs are facing similar challenges
PricewaterhouseCoopers
April 2010
Slide 4
Global Transfer Pricing Landscape – Audit Environment
•
Increasing and aggressive tax audits - developed and emerging countries
•
Introduction and/or provision of detailed guidance of TP rules/documentation in
several countries – burdensome, rigorous enforcement, penalty exposure
•
Cooperation and competition among nations and tax administrations
•
Coordinated global action to prevent income shifting to tax havens
•
Increased inventory of APAs and competent authority/MAP cases
•
Surging controversies vs. new dispute resolution techniques
•
Harmonization of customs and TP regulations?
MNCs world over facing a "Perfect Storm"
in managing Transfer Pricing Audits
PricewaterhouseCoopers
April 2010
Slide 5
Role of OECD and United Nations – Key Initiatives
OECD
• Revision of Transfer Pricing
Guidelines (Chapters I –III)
- priority of methods
- comparability tests/data
- guidance on application of
TNMM/PSM
• Attribution of profits to Permanent
Establishments – Article 7
• Permanent Establishment threshold
issues – Article 5
• Discussion draft on Business
Restructuring – application of arms’
length principle/ TP rules upon and/
or after business restructurings
United Nations
• Transfer Pricing Practical Manual for
Developing Countries
- approach to be used by
developing countries tax
policymakers and administrators
- discussions on issues including
market penetration strategies,
business restructurings,
intangibles, intra-group finance
structures
• Revised commentary to article 7
(OECD report on attribution of profits
to PE) of OECD Model may have
implications for countries using the UN
Model
Convergence of OECD approach and UN approach – Need of the hour
PricewaterhouseCoopers
April 2010
Slide 6
Significant Developments – US
IRS issues
Final Service Regulations
(effective July 31, 2009)
- Service Cost Method
- Benefits Test
- Stewardship activities
- Ownership of intangible property
(legal vs economic)
- IRS to impute contractual terms
for consistency with economic substance
- Cost definition
(stock based compensation)
IRS Transfer Pricing Practice
Provide/ develop expertise on TP issues
Develop risk assessment techniques
Develop examination best practices
Obama proposals on IP
To limit shifting of income through
IP transfers
Alternative dispute resolution
“Mandatory binding arbitration” in five
US treaties: Belgium, Canada, France,
Germany, Switzerland
PricewaterhouseCoopers
Splitting of losses
US Competent Authority is meeting
with Competent Authorities of UK,
Canada, and Australia to discuss and
strategize this issue
April 2010
Slide 7
Significant Developments – Other Countries
Canada’s “ACAP Program”
provides for resolution of a MAP case
to be applied to subsequent years
through use of
Accelerated Competent
Authority Procedure (“ACAP”)
European Commission’s
proposed revised Code of Conduct
Facilitate MAP and arbitration process
Reduce corporate double taxation
ATO’s Strategic Compliance
Initiative
German Government’s
Business Restructuring Rules
– requires exit taxes for transfer of
businesses out of Germany
– valuation of and what constitutes a
“transfer package”
- intra-group financing
- business restructuring
- IP related transactions
- arrangements with
businesses in tax havens
- low profit/ loss makers
ATO’s Draft Rulings and
Practice Statement on
Thin Capitalization Rules
Interaction between Transfer Pricing
and Double Tax Agreements
PricewaterhouseCoopers
April 2010
Slide 8
Significant Developments – India
Dispute Resolution Panel
A time bound alternative
dispute resolution mechanism
Safe Harbour Rules
Rules being framed for
specific industries including IT and ITES
Advance Pricing
Arrangement (proposed)
General Anti-Avoidance Rules
(GAAR)
Likely to be effective April 2011 under
new DTC
To be invoked where primary motive
of an arrangement is to obtain tax
benefit and inter-alia the arrangement
lacks commercial substance
PricewaterhouseCoopers
Likely to be effective April 2011
under new DTC
- Unilateral APA
- Valid for up to 5 years
Others
- DTC
- IFRS
- GST
- New Companies Bill
- Competition Bill
April 2010
Slide 9
Key Global Issues – Business Restructuring
Issues
Procurement
company
Single entity
•
Application of TP rules upon and/or after
conversion
IP company
•
Recognition
transactions
•
Re-characterization of transactions – even
piece-meal re-characterization of individual
contractual terms
•
Profit potential – is it an asset?
•
Recognition that AEs may engage in
transactions that independent enterprises
would not undertake
•
Importance of economic substance
Entrepreneur
Toll
Manufacturer
Contract
manufacturer
Commissionaire
Limited risk
distributor
Limited risk
service provider
or
non-recognition
of
Conversion to alternate models
Migration of functions
Migration of intangibles
PricewaterhouseCoopers
April 2010
Slide 10
Key Global Issues – Intra-group Financing
What makes this significant:
•
Increasing cross border acquisitions
funded vide inter-company loans/ guarantees
•
Typically high value transactions
•
Thin capitalization rules
•
Credit Rating
Pricing - requires expertise and structured
approach, is yet subjective, owing
Analysis of
to lack of guidance from authorities
Loan
Issues:
Arms’
Length
Interest Rate
Bloomberg
Benchmarking
Compare
S&P Industry
Ratios
Analysis of
Variance
Use Moody’s
RiskCalc
Rating
Analysis of
Financials
History of
Capital
Structure
Computation
of Key Ratios
Agreement
•
Interest rates appearing higher than local benchmarks - reliability of LIBOR
•
Benchmarking from lender’s rather than borrower’s end
•
A high guarantee fee, or the lack of it – GE Capital
•
Loans out of sync with peer group debt-equity ratios and thin-cap norms
•
Transactions not supported by appropriate written contracts
•
Impact of market conditions – fixed vs floating rates, credit rating of borrower,
market borrowing cost, prepayment options, etc.
PricewaterhouseCoopers
April 2010
Slide 11
Key Global Issues – Intra-group Financing
Recent Developments:
•
Impact of “Passive Association”–growing controversy–case of GE Capital
-
•
Banks and rating agencies consider financial stability and willingness of the
parent in estimating the credit strength of subsidiaries (“implicit support”)
Explicit guarantee provides stronger protection and legally enforceable
recourse to lender (“explicit support”)
ATO’s Practice Statement on “Rule of Thumb” - Taxpayers will be at low risk if they
price debt using parent’s weighted average cost of debt. Evident drawbacks
include:
-
Attributes parent’s financial position to subsidiary
-
Outcome inconsistent with arm’s length principle as it may not have nexus with
terms and conditions of actual loan
-
No adjustment for different geographical markets, Fx, etc
-
Could lead to double taxation issues
PricewaterhouseCoopers
April 2010
Slide 12
Key Global Issues – Marketing Intangibles
Issues:
•
Legal vs. economic ownership
•
Analysis of contractual terms – nature of rights, term of the contract, responsibility
split, etc.
•
Analysis of actual conduct relating to marketing activities, analysis of:
-
roles and responsibilities,
costs and risks,
benefits and rewards,
assets owned/ utilised/ developed
•
Distinguish between routine business expenditure/ investment and return for
distribution operations vs. additional expenditure/ investment and return for brand
building (Bright Line test)
•
Evaluate possibility of reimbursing “excessive” marketing spend
Significant International Rulings – DHL and Glaxo
Significant Indian Rulings – Fosters and Nestle
PricewaterhouseCoopers
April 2010
Slide 13
Key Global Issues – Others
•
Stock Based Compensation
•
Carbon Credits
•
Procurement
•
IFRS
PricewaterhouseCoopers
April 2010
Slide 14
Best Practices
The Transfer Pricing Value Chain
Corporate tax function would need to manage all elements of the transfer
pricing value chain so as to mitigate associated transfer pricing risks
PricewaterhouseCoopers
April 2010
Slide 15
Thank You
© 2010 PricewaterhouseCoopers. All rights reserved. ”PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.
PricewaterhouseCoopers