Transcript Transfer Pricing – Industry Perspective

Transfer Pricing –
Industry Perspective
Residential Refresher Course
IFA-India (WRC)
Presentation by :
Kaushal Kapadia
Introduction
"This incident, in which I
almost lost my life, involved an
encounter with a primitive
ruthless creature who stalks the
ocean depth...A Great White
Shark."
Agenda








Setting the context
Environment – external & internal
Managing your risk
Top audit triggers
Setting TP policies
TP documentation
Practical difficulties
Some common issues
Example – Bitt & Co
Large MNC with operations in 120 countries
 Listed in the US & Luxembourg Stock Exchange
 6 main segments, 54 profit centers, 145,000 SKUs, 12 brands
 Functional management style
 Group has centralised Treasury, Financing & Trading ops in NY
 1200 legal entities in the group
 40% of trade/services & all financing is inter-co
 Profits $6bn, Sales $50bn, Assets $20bn
 Bitt & Co has acquired 3 large MNEs in the last 10 years
 Systems have not yet been integrated with the last 2 acquisitions
 TAX department of 300+ people in 40 countries
 YOU – are the head of transfer pricing within TAX

Setting the context
Brand IP
R&D
Captive Forward trading
insurance
Share options
Intra-group
financing
Product flows
Asset
optimisation
Supply Chain
Centralised
recharges
De-centralised
recharges
Need to price at “Arm’s Length” terms & maintain a defence file
Risks
•Costs of defending
•Penalties
•Costs of arbitration &/or competent authority
•Double taxation
•Financial reporting mis-statement
•Reputation risk
Benefits
•Maximise utilisation of group tax attributes
•Losses
•Foreign tax credits
•Low tax jurisdictions
•Cash tax savings
•Manage tax charge in financial reports
TP’s a fine balancing act…
Country A
Country B
Income tax
Customs duty
Fiscal
requirements
Business
constraints
Risk
Opportunity
Environment - external





WTO estimates 50% of global trade in Inter-co
transactions
25% of M&A estimated to be cross-border
New investment is going mainly to emerging economies
of the world – they are looking for more revenues
Corporate sector continues to remain key tax target
around the world
Attention of the regulators


More effort into TP laws & audits
Growing need for transparency in multi-nationals

SOX compliance on controls & financial reporting
Environment - internal





Business models/pricing change constantly
Cost pressure
CFO & CEO are looking for more assurances –
no “surprises” !
Mistakes are costly & distracting
TP remains a key tax issue for most tax
managers
Managing your risk








Knowing what you don’t know..
Portfolio effect in a large business
Materiality is key
Tax exposure - reporting process
How much to provide for tax exposures ?
Looking at risk - local v/s central perspective
Fallout of Country A audit on Country B
Be aware that what you document is
discoverable
Top audit triggers








Increase in the enforcement & audit targets
Changes in transfer pricing
Monetary volume of transactions
Changes in taxable income of the company
Past history of issues
New legislation in a country
Restructuring of business/operations
Complexity of transactions
Setting TP policies




Written policy statement
Who is responsible for setting policy ?
Periodic review of policies
Managing changes to TP policies



When ? Why ? How ? Effect ?
Policy implementation ??
Spreading & sharing the knowledge
TP documentation








Minimum documentation standards
Local v/s central approach
Who’s responsible for what ?
Your “Defense file”
How & where do you store it ?
“Fit for purpose’’ in the transaction context
Avoid duplication of efforts
In house or external effort ?
Practical difficulties






TP is subjective – there is no right answer !
Getting quality comparable data
Unique business models
Making “the right choices”…
Differences in laws/approach of tax authorities
Impact on MI & Performance Metrics


JV operations




Eg, Royalty or Product trading
Eg, Management services from HO
Resources - managing multiple priorities
Leakage of important pricing data to competition
Genuine losses
Common Issues - Intangibles



Definition of what is the intangible ?
Who owns it ?
How much is it worth ?



Parent
Approaches to benchmarking value
Accretions to the cost/value of the
intangible
Barriers to moving ownership to a
tax favorable location – practical ?
IPCo
Sub
Common Issues – InterCo service



Is it really a service ?
Benefit analysis from a local lens
Mark-up or cost

Mark-up on what ?

Allocation Keys

Cost to provider or recipient ?
Problems of using CCAs
Contemporaneous arrangement ?
IP & Shareholder costs
Consistency in approach




Parent
Sub1
Sub1
Questions ?