Management Fees. Base Erosion or Sound Transfer Pricing - Action 10 Developments. Margreet Nijhof Rafael Triginelli Miraglia Benchi Klaver

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1 Management Fees Base Erosion or Sound Transfer Pricing - Action 10 Developments Margreet Nijhof Rafael Triginelli Miraglia Benchi Klaver

2 Management Fees Lay of the Land Guidance / regulation in the field of management fees: OECD Chapter VII Transfer Pricing Guidelines OECD Draft on Low-Value Intragroup Services EU JTPF Guidelines on Low Value Adding-Group Services US Service Regs Dutch TP Decree UN TP Manual Jurisdictions often scrutinizing management fees: Brazil, Russia, India, China, Italy 2

EU JTPF Guidelines on Low Value Adding-Group Services US Service Regs Dutch TP Decree UN

3 OECD Draft Main Aspects Simplified TP approach for low-value intragroup services Key features of the proposed guidance: A standard definition Clarifications on shareholder activities and duplication Appropriate mark-ups Appropriate cost allocation methodologies Simplified benefit test Guidance on documentation Discussion draft is not a consensus document 3

activities and duplication Appropriate mark-ups Appropriate cost allocation methodologies

4 Headquarter OECD Draft Thought Process Shareholders activities Non chargeable costs Duplicative Grey Area Incidental benefits Total costs Has a service been rendered? Intra-group services (benefits test) Chargeable costs Low valueadding intra-group services Others Direct Indirect Direct Indirect No benchmark needed. Simplified determination of arm s length charges Cost base Mark-Up Allocation Key Benchmark needed usually CUP, COST + or ROTC Documentation and reporting 4

Intra-group services (benefits test) Chargeable costs Low valueadding intra-group services Others Direct Indirect

5 OECD Draft 5 Step Approach 1. Have intra-group services been rendered (benefits test)? 2. Are the intra-group services performed low valueadding? 3. Have the low value-adding services identified been directly or indirectly rendered? 4. Application of the simplified determination of arm s length charges 5. Documentation and reporting 5

6 Benefits Test General «depend on whether the activity provides a respective group member with economic or commercial value to enhance or maintain its commercial position». Proposed guidance unchanged but simplified test for low value-value adding services Not considered as intra-group services: Shareholders activities Duplication Incidental benefits 6

Proposed guidance unchanged but simplified test for low value-value adding services Not

7 Benefits Test Shareholders Activities Examples (proposed additions) are costs relating to: the juridical structure of the parent company itself (expanded) reporting requirements of the parent company (expanded) raising funds for acquisitions and investor relations (new) tax compliance of the parent company (new) the corporate governance of the MNE as a whole (new) Safeguard clause Developing countries view? 7

company (expanded) raising funds for acquisitions and investor relations (new) tax compliance of the

8 Benefits Test Duplication Proposed addition: «Examination of information provided by the taxpayer may determine that the intra-group services are different, additional, or complementary to the activities performed in-house. The benefits test would then apply to those non-duplicative elements of the intra-group services». Developing countries view? 8

complementary to the activities performed in-house.

9 Benefits Test Incidental Benefits Generally no changes See revised Chapter 1 of the OECD Transfer Pricing Guidelines on synergies 9

10 Benefits Test Form of the Remuneration Remuneration already incorporated in the transfer price for another service or product On call services 10

11 Determining an Arm s Length Charge Proposed guidance largely unchanged Direct / in-direct charges Comparability adjustments to cost base Pass-through costs Cost sharing arrangements View of other countries? 11

Comparability adjustments to cost base Pass-through

12 Examples of Intra-Group Services R&D Facts and circumstances: can involve highly skilled personnel vary considerably both in its nature and in its importance to the success of the group +/- discretion to work within broadly defined categories identifying commercially valuable areas and assessing the risk of unsuccessful research can be a critical factor in the performance of the group as a whole consideration of options realistically available to the principal relevant Amended guidance to better align with new Chapter VI. 12

commercially valuable areas and assessing the risk of unsuccessful research can be a critical factor in the performance of the group

13 Headquarter OECD Draft Thought Process Shareholders activities Non chargeable costs Duplicative Grey Area Incidental benefits Total costs Has a service been rendered? Intra-group services (benefits test) Chargeable costs Low valueadding intra-group services Others Direct Indirect Direct Indirect No benchmark needed. Simplified determination of arm s length charges Cost base Mark-Up Allocation Key Benchmark needed usually CUP, COST + or ROTC Documentation and reporting 13

14 Low-Value Intra-group Services Definition «services performed by one member or more than one member of an MNE group on behalf of one or more other group members which are of a supportive nature, are not part of the core business of the MNE group, do not require the use of unique and valuable intangibles and do not lead to the creation of one, and do not involve the assumption or control of substantial risk and do not give rise to the creation of a significant risk». 14

MNE group, do not require the use of unique and valuable intangibles and do not lead to the creation of one, and do

15 Low-Value Intra-group Services Black & White List Not low-value services Black List Services also rendered to unrelated customers of the members of the MNE => internal CUPs. Services constituting the core business of the MNE R&D Manufacturing and production Sales, marketing and distribution Financial transactions Extraction, exploration, or processing of natural resources Insurance and reinsurance Likely low-value services White List Accounting and auditing Processing and management of accounts receivable and accounts payable HR activities Monitoring and compilation of data relating to health, safety, environmental and other standards regulating the business IT services Internal and external communications and PR support Legal and tax Other services of an administrative nature Services of corporate senior management 15

resources Insurance and reinsurance Likely low-value services White List Accounting and auditing Processing and management of accounts receivable and accounts payable HR activities Monitoring and

16 Low-Value Intra-group Services Simplified Determination Optional approach Cost of entry: simplified method to be applied on a consistent, group wide basis Simplified: Benefit test Cost allocation Mark-up Documentation 16

simplified method to be applied on a consistent, group

17 Headquarter Questions? Shareholders activities Non chargeable costs Duplicative Grey Area Incidental benefits Total costs Has a service been rendered? Intra-group services (benefits test) Chargeable costs Low valueadding intra-group services Others Direct Indirect Direct Indirect No benchmark needed. Simplified determination of arm s length charges Cost base Mark-Up Allocation Key Benchmark needed usually CUP, COST + or ROTC Documentation and reporting 17

18 Contact Margreet Nijhof Partner Tax Rafael Triginelli Miraglia Associate Tax Benchi Klaver Associate Tax

Rafael.TriginelliMiraglia@bakermckenzie.

19 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, 19 or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.

In accordance with the common terminology used in professional service organizations, reference to a

Release of BEPS discussion draft: Proposed modifications to Transfer Pricing Guidelines relating to low

Release of BEPS discussion draft: Proposed modifications to Transfer Pricing Guidelines relating to low value-adding intra-group services 5 November 2014 In brief On 3 November 2014, the OECD published