Transfer Pricing Manual. Technical Editor: Gareth Green

Transcription

1 Transfer Pricing Manual Technical Editor: Gareth Green

2 Contents List of abbreviations xiv List of contributors. xvii Foreword xxvii Preface xxxiii Part A: General principles 1 Introduction 3 Gareth Green TRANSFER PRICING SOLUTIONS, UK 1.1 The evolving importance of transfer pricing Why is transfer pricing such a major issue? Alternatives to the arm's length principle Nomenclature Conclusion 10 2 The arm's length principle 11 Koichiro Fujimori DELOITTE TOUCHE TOHMATSU, TOKYO 2.1 OECD efforts to create a harmonised principle Interpretation of the arm's length principle Associated enterprise Factors distorting the arm's length principle Application of the arm's length principle Conclusion 20

3 vi Contents 3 Transfer pricing methods 21 Carsten Kratzer ROLFSPARTNER, DUSSELDORF 3.1 Introduction Overview of methods Selection of a transfer pricing method Comparable Uncontrolled Price method Application Types of Comparable Uncontrolled Price method Comparability Strengths and weaknesses Resale Price method Application Types of Resale Price method Comparability Strengths and weaknesses Cost Plus method Application Types of Cost Plus method Comparability Strengths and weaknesses Transactional Net Margin method Application Procedure Example of application Comparison with the Comparable Profits method Strengths and weaknesses Unspecified methods 54 4 Profit Split methods 55 Dr Alexander Voegele NERA, GERMANY 4.1 Application of Profit Split methods Forms of the Profit Split method Overall Profit Split method Comparable Profit Split method Residual Profit Split method OPSM for the determination of IP royalties Selected method: Overall Profit Split method The Overall Profit Split method Strengths and weaknesses of profit splits 73

4 Contents vii 5 Permanent establishments and profit apportionment 75 Andrew Senior RABOBANK INTERNATIONAL, LONDON BRANCH 5.1 Introduction The technical and practical landscape Domestic law and Article 7, OECD Model Treaty UN model treaty The two treaty concepts in practice OECD principles Accounts of the PE Avoidance of double taxation Financial institutions Agency Live issues and some practical examples Introduction Separate entity hypothesis and independent dealings Inventory transfer The treatment of fixed assets Intangibles Finance costs Business reorganisations Provision of services involving PEs Practical issues in implementing a transfer pricing study 105 Dick de Boer PRICEWATERHOUSECOOPERS, AMSTERDAM 6.1 Key message Introduction Guide to the reader Definition of transfer pricing implementation Potential implementation issues Financial/administrative issues Operational issues Transfer pricing in a changing business environment Corporate governance rules Changing attitude of tax authorities Financial reporting requirements Steps to implementation of a transfer pricing system COSO enterprise risk management Steps to achieve a TP control framework Conclusions and recommendations 232

5 viii Contents 7 Practical issues in carrying out a transfer pricing study 133 Leslie Prescott-Haar ERNST & YOUNG, NEW ZEALAND 7.1 Design and compliance objectives Design and planning documentation Compliance documentation Unilateral or multilateral documentation Planning a transfer pricing study Understand the objective of the study Scoping the study The ideal transfer pricing team Contents of transfer pricing document Business overview and financial analysis Industry analysis Functional analysis Economic analysis Comparability considerations and issues Finding benchmarking information Level of comparability achievable in practice Practical view on adjustments in a TP context Importance of comparable data vs. other factors Interquartile outside the USA Post-completion stage 167 Part B: Types of transactions 8 Intra-group services 171 Peter Male TRANSFER PRICING SOLUTIONS, UK 8.1 Introduction The OECD Guidelines What constitutes an intra-group service? Has there been a supply of intra-group services? Determining the arm's length price Direct charge method Indirect charge method Situations for an indirect charging method Use of allocation keys Calculating the arm's length price To profit or not to profit? The "no profit" concession Pass-throughs Some practical aspects 188

6 Contents ix Benchmarking of management services Intra-group service contracts Operating an intra-group services charging system US code for controlled services transactions Introduction and background The Regulations The methods Conclusion Intra-group financing 201 Alfredo J. Urquidi MARSH & MCLENNAN COMPANIES, INC., USA 9.1 Introduction Definition and scope Loans OECD perspective US perspective Thin capitalisation Guarantee fees Overview Is an arm's length charge warranted? Pricing financial loan guarantees Conclusion Intangible property 223 Michael Heimert CETERJS, INC., CHICAGO 10.1 What is intangible property? Identification of intangible property Legal versus economic ownership Transferring intangible property Licence agreements Royalty payments Lump sum payments Cross-licensing Bundled payments Valuation of intangible property CUP method Transactional Net Margin method Profit Split methods Other methods Implementation Developing inter-company agreements Creating documentation 237

7 x Contents Monitoring inter-company payments "Commensurate with income" concerns Conclusion Cost contribution agreements 241 Stephane Gelin CMS BUREAU FRANCIS LEFEBVRE, PARIS 11.1 Introduction Definition of cost contribution agreements OECD/US definition CCA vs. other forms of joint venture Alternatives to CCA: licensing model CCA vs. licensing model Creation of a cost contribution agreement Participants Definition of costs Allocation of costs Contributions and balancing payments Management of cost contribution agreement Ownership of intangibles Buy-in and buy-out payments CCA as a tax optimisation tool "Cost sharing out" technique Hurdles Challenging a cost contribution agreement Adjusting contributions Disregarding the agreement Termination of a cost contribution agreement Surrendering interest: tax treatment Sharing intangibles Documentation of a cost contribution agreement Terms of the CCA Documents outside cost contribution agreement US Documentation specific to CSA 265

8 Contents xi Part C: Planning and controversy 12 Considering transfer pricing in tax planning 269 Dick Clark, Arindam Mitra and Jeff Mensch DELOITTE TAX LLP, WASHINGTON DC AND PITTSBURGH 12.1 Considering changes to transfer pricing charges Tax attributes and profiles Transfer pricing considerations Implementation hurdles Planning for the future state Use of central entrepreneur structures Opportunities arising from business changes Typical structural elements Implementation hurdles Planning for an alternative future state Eliminating double taxation 283 John Hobster and Sean Trahan ERNST & YOUNG, LONDON AND ATLANTA 13.1 What gives rise to double taxation? Overview of available remedies Mutual Agreement Procedure (MAP) Internal transfer pricing adjustment mechanisms Common forms of transactions challenged Profile of transfer pricing audits European Arbitration Convention OECD and arbitration Global legislative and enforcement trends Practical examples EU guidance: code of practice Advance pricing agreements Legal framework Frequency and availability Coverage and duration APAs as a dispute resolution tool Appetite of taxpayers to use APAs What type of APA? Litigation Conclusion 299

9 xii Contents Part D: Specific industries 14 Banking and global trading of financial instruments 303 Sherif Assef CETERIS, NEW YORK 14.1 Introduction Commercial banking Investment banking Trading of financial instruments Typical transfer pricing issues Commercial banking Investment banking Trading Common issues Applicable methods and data Commercial banking Investment banking Trading Common transfer pricing issues Insurance and investment management 323 Stephen Labrum, Martin Zetter, Jenny Coletta, Jonathan Thompson ERNST & YOUNG, LONDON AND TOKYO 15.1 Introduction Insurance Objectives of section Industry developments - insurance Common issues in the insurance industry Leading practices in TP methods Case study Conclusion - insurance Investment management Objectives of section Industry developments Common issues in investment management industry Case study Conclusion - investment management Summary Telecommunications 359 Ted Keen and Anjali Bhasin CRAI, WASHINGTON DC 16.1 An overview of the industry and the players Wireline Wireless 362

10 Contents xiii Telecom equipment The evolving competitive landscape Transfer pricing models in the telecom industry Shared entrepreneurial risk model Service provider model Hybrid model Cost-sharing arrangements Professional services and global contracts 377 Gareth Green TRANSFER PRICING SOLUTIONS, UK 17.1 Scope Subcontracted work and global contracts Pricing of subcontract work Referrals Write-offs A Global contracts Secondments Pricing Interaction with OECD Model DTA A Issues for partnerships Introduction Shareholder costs Charging for partners A A Branches of partnerships Network benefits Transfer pricing treatment Pricing Conclusion Pharmaceuticals 403 Herve Couttier and Molly Minnear DELOITTE, AUSTRALIA AND CRAI, WASHINGTON DC 18.1 Background Introduction Research and development 406 ISA Clinical trials Manufacturing Pre-launch and launch expenses Marketing Generics Conclusions 419 Index 421