8/29/2013. KPMG TaxWatch Webcast: authorities know before your documentation submission. Disclaimer

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1 KPMG TaxWatch Webcast: Transfer Pricing - What Tax authorities know before your documentation submission August 29, 2013 Disclaimer ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 1 1

2 Speakers Carolyn D. Fanaroff, Director, Transfer Pricing Dispute Resolution Services, KPMG LLP Paul Lynch, Partner, Tax, KPMG in Canada Rohan Phatarphekar, Tax Partner, Global Transfer Pricing Services, KPMG in India Cameron Taheri, Senior Manager, Transfer Pricing Dispute Resolution Services, KPMG LLP François Vincent, Global Leader, Transfer Pricing Dispute Resolution Services, KPMG in France 2 Agenda Introduction OECD Risk Assessment and BEPS issues U.S. - IRS Increased Report and Resource Deployment Canada s T-106, and IDRS India s Form No. 3CEB Q&A 3 2

3 OECD: Risk Assessment and BEPS François Vincent France, KPMG Organisation for Economic Co-operation and Development (OECD) Risk Assessment A Draft Handbook on Transfer Pricing Risk Assessment (TPRA) was circulated for public consultation on April 30, Comments are expected by September 13, Preliminary high-level observations about the TPRA include: Concerns about waste of resources when adjustments cannot ultimately be sustained in MAP Better selection of cases via a risk assessment system will mean better use of resources Unfortunately, when deciphered, TPRA seems to indicate that only transactions that are not cause for concern (and not necessary to select for further audit) are low value routine transactions where the other jurisdiction involved is a high-tax jurisdiction 5 3

4 OECD Risk Assessment (cont d) Chapter 4 of the TPRA lists sources of information for conducting a risk assessment: Specific tax return disclosures (information returns) Contemporaneous transfer pricing documentation Questionnaires issued to selected taxpayers Taxpayer s file and audit records of previous years Publicly available information (taxpayer s websites, government agency databases, commercial databases, press reports, trade magazines, securities analysts reports, etc.) Site visits and meetings with company personnel Customs data Patent office Exchange of information under tax treaties 6 CPE Question #1 According to the TPRA, should the risk assessment process be limited initially to reviewing the taxpayer s transfer pricing documentation? Yes or no? 7 4

5 CPE Question #1 Answer: No. 8 OECD BEPS On July 19, 2013, the OECD released its Base Erosion and Profit Shifting (BEPS) action plan. The BEPS action plan contains 15 specific actions to counter base erosion and profit shifting. A few of these actions could have some impact on information available to tax authorities: Action 5 Counter harmful tax practices more effectively, taking into account transparency and substance: priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes Action 11 Establish methodologies to collect and analyze data on BEPS and the actions to address it: identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and microlevel data (e.g. from financial statements and tax returns) Action 12 Require taxpayers to disclose their aggressive tax planning arrangements: putting in place enhanced models of information sharing for international tax schemes between tax administrations. Action 13 Re-examine transfer pricing documentation: provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. 9 5

6 CPE Question #2 BEPS will really have no impact on the information available to tax authorities in respect of transfer pricing. True or false? 10 CPE Question #2 Answer: False. 11 6

7 5471/5472, Tiered issues/ipns, TPP, U.S. Information Sharing Cameron Taheri Washington, KPMG LLP IRS Increased IRS Increased Reporting 7

8 Internal Revenue Service: Increased Reporting Required Increased reporting requirements provide IRS additional information on taxpayer s transfer pricing Forms 5471/5472 Platform contribution transaction payments paid/received and cost sharing transactions payments paid/received must now be reported on forms Forms 5471/5472 are used by the IRS as a roadmap for taxpayer s intercompany transactions, including foreign to foreign transactions. Schedule UTP Beginning with Tax Year 2010, Schedule UTP was a new schedule that certain corporations used to report uncertain tax positions Transfer pricing among the leading issues included in initial disclosures Taxpayer filings of Schedule UTP have not provided much workable information according to Sam Maruca 14 IRS Resource IRS Resource Deployment 8

9 Internal Revenue Service: Strategic Alignment of Resources Deputy Commissioner (International) Sam Maruca Director, Transfer Pricing Operations APMA Director West Central East Combined MAP/APA team Transfer Pricing Practice Transfer Pricing Practice Transfer Pricing Practice 16 New IRS Transfer Pricing Enforcement Structure The Internal Revenue Service Large Business and International (LB&I) division has created an advisory group named the transfer pricing practice. The IRS s goal is to create an integrated transfer pricing practice within LB&I. In certain cases, the transfer pricing practice will work shoulder-to-shoulder with the international examiners and exam teams to develop the very best case we can based on the facts. The transfer pricing practice has been actively assessing the current inventory of transfer pricing cases, including cost sharing cases, and will soon focus on future inventory and decide how the IRS will tailor its various risk assessment tools. The new managers and their teams in the field have been working closely with APMA leadership to develop models for audits and to coordinate with the field There are now three teams of transfer pricing specialists in the field who are led by experienced managers: Tom Ralph (Central), Nancy Bronson (West) and Matt Hartman (East Region). 17 9

10 CPE Question #3 The Internal Revenue Service has formed a new advisory group focused on transfer pricing termed the transfer pricing practice. True or false? 18 CPE Question #3 Answer: True

11 Internal Revenue Service: Strategic Alignment of Resources In August 2012, the IRS announced it was abandoning Tiered Issues Process Instead, the IRS is piloting Issue Practice Groups (IPG) and International ti Practice Networks (IPN), modeled d after practices of accounting and legal firms, as a means to access advice and expertise during Examination While an agent is not obligated to follow the advice, a technical advisor can influence the outcome. Questions about taxpayer visibility into the new processes 2 IPNs under Transfer Pricing Operations Outbound and Inbound Income Shifting 20 Goals for the International Practice Networks Tap into Technical Expertise Facilitate the knowledge management model to broaden technical expertise and increases technical advice output Coordinate and support identification and publication of guidance Expand Collaboration Facilitate and engage additional resources to identify expertise throughout LB&I and the IRS to augment the development of technical positions. IPNs do not command or control issues Improve Quality and Institution Building Sharing institutional knowledge and best practices to improve quality across the organization Concurrent opportunities to teach and learn Improve Line of Sight LB&I is emphasizing line-of-sight into technical positions and consistent application of issue guidance across the organization 21 11

12 Treaty Information Internal Revenue Service: Exchange of Information Increased cooperation between tax authorities G-8 Communiqué in June We commit to establish the automatic exchange of information between tax authorities as the new global standards. IRS s EOI Office JITSIC Joint Audits 23 12

13 Canada s T-106, IDRS, etc Paul Lynch Ottawa, Canada Canada Revenue Agency: Clear Audit Direction More focused audits; more revenue expected Federal Budget 2013 confirms that the Canada Revenue Agency (CRA) will implement transformational changes to its compliance programs that will improve effectiveness and help to preserve the integrity of the tax system through targeting non-compliance in the highest-risk areas. The CRA will make greater use of advanced data analysis to improve identification of incidences of non-compliance and will deploy teams of specialists to pursue tax evaders. These changes are expected to result in the collection of additional revenues amounting to $550 million per year by

14 Canada Revenue Agency: Clearer Audit Selection Maximize resources; more targeted audit selection The CRA is implementing a new approach to large business compliance that will be phased in over several years. The goal is to optimize the use of compliance resources and lower the compliance burden for large file entities that behave transparently, and that demonstrate a history of managing their tax affairs responsibly. The CRA's approach to this sector is an example of how we are moving towards managing compliance more intelligently 26 Canada Revenue Agency: Transfer Pricing Risk Assessment Form T106 An annual information return used for reporting non-arm s length transactions between Canadian taxpayers and non-resident persons Introduced in 1988 to combat abuses in transfer pricing CRA has a T106 Management System database and a T106 Audit Guide CRA has an additional audit focus on tax haven issues related to information reported on the T

15 Canada Revenue Agency: Transfer Pricing Risk Assessment (cont.) Key focus/risk areas (from T106 data) Transfer pricing methodology used and changes to transfer pricing methodology Preparation of contemporaneous documentation Transactions for non-monetary or nil consideration Financing transactions sales of financial property/lease payments/securities lending Derivative contracts interest rate/forex/credit/equity/commodity/index/fees y and commissions 28 Canada Revenue Agency: Transfer Pricing Risk Assessment (cont.) Key focus/risk areas (arising indirectly from T106 data) Quality of disclosure is an indicator of underlying data (no changes to methodology after T106 filing, no changes to figures provided) First line of defense to potential CRA examination Adequate attention to this form is very important 29 15

16 CPE Question #4 Data analysis and risk assessment The Canada Revenue Agency is using the data provided on Form T106 to assess taxpayer risk for audit selection purposes. True or false? 30 CPE Question #4 Answer: True

17 Canada Revenue Agency: Exchanges of Information Aggressive tax planning driving information exchange Aggressive tax planning schemes are complex and constantly changing. The CRA relies on two primary tools to combat ATP: the knowledge and technical skills of our people, and the possession of accurate and current intelligence. The CRA supports our highly skilled auditors through training and by sharing the latest information that has been gathered on ATP schemes and tactics. We gathered much of this intelligence by working collaboratively with other tax jurisdictions and international organizations. The CRA engages g other tax jurisdictions in bilateral and multilateral forums to improve information and intelligence-sharing, to discuss best practices, and to develop strategies to address known tax havens that sometimes support ATP schemes. The intelligence that is gathered is also used to close tax loopholes and strengthen existing legislation. 32 Canada Revenue Agency: Exchanges of Information Expanding to the point of becoming routine JITSIC TIEAs Joint Audits Shared CRA audit / IRS examination queries - example 33 17

18 Information on Form No.3CEB Rohan K. Phatarphekar India, KPMG India - Increased Transfer Pricing (TP) Reporting Requirements Indian TP laws require an Accountant s Report in Form No.3CEB to be obtained by every person entering into an international transaction Report to be filed by the due date prescribed for filing corporate tax return, i.e. by November 30, following the end of the relevant financial year Report is required to be issued by a Chartered Accountant opining whether prescribed documents have been maintained and the particulars in the Report are true and correct In June 2013, Notification* issued revising the Form comprising: 25 clauses in place of the earlier 13 clauses Requires reporting aggregate value of international transactions and Specified Domestic transactions (SDTs) as per taxpayer s financial statements * Notification No.41/2013/F.No.142/42/2012 dated June 10,

19 Revised Reporting for International Transactions Following International Transactions are required to be reported separately Guarantees received or given Issue / buyback of equity shares/ convertible preference shares/ convertible debentures Purchase/Sale of marketable securities Capital financing transactions including receivables Any transaction arising out of business restructuring or reorganization Deemed International Transactions required to be reported 36 Specific Reporting for Deemed International Transactions What is a Deemed International Transaction Determination of terms Prior agreement A s Parent 3rd party A s Parent 3rd party A A Transaction between A and Third party subject to transfer pricing norms, if: a prior agreement exists between A s parent and Third party; or terms of transaction are determined in substance by A s parent and Third party 37 19

20 CPE Question #5 The TP Report is to be filed by the due date prescribed for filing corporate tax return. True or false? 38 CPE Question #5 Answer: True

21 Intangibles Scope Expanded Inclusive definition of Intangible property relating to Human capital Technology Marketing Engineering Customer Contract Location Goodwill Any other similar item that derives its value from its intellectual content rather than its physical attributes 40 Non-compliance May Lead to Penalty Exposure Onus is on taxpayers to identify and report all relevant transactions Existing penalty provisions Additional penalty provisions 2% of Transaction Value for: 2% of Transaction Value for: Non-maintenance of documents Non-submission of documents In case of adjustment 100% to 300% of additional tax Non-reporting of transaction For incorrect maintenance/submission of documents 41 21

22 Polling Question Would you like a KPMG professional to contact you regarding the topics discussed today? Yes No 42 Q&A 22

23 Q&A (continued) Today s Presenters Carolyn Fanaroff cfanaroff@kpmg.comcom Cameron Taheri ctaheri@kpmg.com Paul Lynch plynch@kpmg.ca François Vincent fvincent1@kpmg.fr Rohan Phatarphekar rohankp@kpmg.com 44 For the latest insights on Tax Transparency, visit /tax-transparency.aspx Thank you for joining us. Please send any questions to us-taxwatch@kpmg.com t 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). 23