Transfer Pricing Audit Management

Transcription

1 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable Transfer Pricing Audit Management Transfer Pricing Associates Steef Huibregtse and Richard Slimmen 13 April 2012

2 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable Introduction

3 The Transfer Pricing Process is all about treating transfer pricing and the business risks around it as a business process. The steps in this process are illustrated in the following diagram: B INPUT: COMPANY S BUSINESS MODEL OUTPUT: A MANAGEABLE AND DEFENSIBLE TRANSFER PRICING SYSTEM How to design your transfer pricing system DESIGN & IMPLEMENT DOCUMENTATION CONTROVERSY/ DISPUTES CAPTURE THE DYNAMICS IN INDUSTRY AND BUSINESS MODEL Addressing the following key issues: 1. How to identify the relevant business context 2. How to design an appropriate transfer pricing system and arrange for proper implementation 3. How to document the transfer pricing system 4. How to manage (pre-) controversy of the transfer pricing system

4 BY PROPER PREPARATION AND GUIDANCE How to deal with transfer pricing controversy Through conflict avoidance Pre-audit/ provisioning APA Through process management Audit Through Conflict resolution MAP Litigation Addressing the following key issues: 1. What are the options available? 2. What is your risk appetite? 3. What is your best controversy strategy? 4. How to best negotiate with tax authorities?

5 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable U.S. transfer pricing controversy issues

6 U.S. Issues Part 1 Form 5701 (a) Respond to 5701 (b) Hot Interest (c) Fast Track Settlement (d) Early Referral to Appeal IRS appeals (a) Review of Transfer Pricing Cases (b) Simultaneous Appeals and Competent Authority (c) Post Appeals Mediation (d) Arbitration Competent authority (a) Introduction - Potential Double Tax Cases - Fiscal Residence Cases (b) Inventory of Double Tax Cases- Adding Insult to Injury (c) Persuasive Information (d) Effect of Agreements or Judicial Determinations (e) Determination of Creditable Foreign Taxes (f) Arbitration

7 U.S. Issues Part 2 U.S. Advance Pricing Agreement program (a) Jurisdictional Matters - Section 482 and Treaty Cases - PE Allocations and Other Collateral Issues (b) Nature of APAs (c) Benefits of Advance Pricing Agreements Litigation (a) Taxpayer Cannot Resolve Case Through Administrative Channels (b) Prior to Paying the Tax (c) Untimely Filing of Petition or Avoiding the Tax Court Simultaneous examination program (a) Renewed Interest in SEP (b) TIEAs Pre-filing agreements (a) PE and US Trade or Business (b) Related Pricing Through APA Compliance assurance process (a) Scope (b) Participation (c) Transfer Pricing Elements

8 Key Issues 1. What risk mitigation instruments fix your defense strategy? 2. What percentage of your risk management is TP controversy based? 3. Who is responsible in your company to run these risk processes? 4. How to deal with more than 2 countries on TP matters at the same time and comply with rules of full transparency towards all stakeholders?

9 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable EU transfer pricing controversy issues

10 Controversy landscape Topics covered: intangibles, valuation, PE risks, sales commission, duplication, business restructuring, marketing spend, head quarter charges, intercompany loans and guarantee fees; Hotspots of aggression: Germany, Denmark, France, Italy, Canada, USA, Australia, Korea, China, India, Indonesia and Brazil. Countries where we have seen activity: 15 countries in Europe, Australia, Indonesia, China, Vietnam, USA, Canada.

11 Germany/Switzerland: audit on royalty and marketing intangibles Switzerland Royalty charge Germany German marketing intangibles Royalty payment non-deductable Rejection 50% of German marketing spend

12 Before business restructuring Court case on business restructuring moving intangibles After business restructuring with selling of assets to Swiss entity R&D Centre R&D agreement IP owner Denmark List of IP Technology Patents Know-how R&D agreement Production & supply agreement Profit Center IP owner Switzerland Distribution agreement Sale of goods Purchase of goods Sales company Country 1 Sales company Country 2 Sales company Country 3 Sales company Countries X R&D Centre Contract manufacturer Denmark Distribution agreement Sale of goods Sales companies Sales company Country 1 Sales company Country 2 Sales company Country 3 Sales company Countries X Acceptable valuation method, The use of the expert witness Seller s vs. buyer s perspective Sales companies

13 Italy/US: audit on royalties and service fees US Parent IP European headquarter IP related services Italian distributor IP = know-how Duplication issues Provision of services versus provision of know how

14 US/Denmark: APA in Denmark on commissionaires + buy-sell model Production of patented drags Production of generic drags Danish distribution company Customer Critical conditions Allocation issues Combined APA vs. separate APAs

15 UK/Germany: audit on German branch of UK Head office Japanese HQ UK regional HQ Distributor German Customers German Branch Sales support Sales or Sales support? Services versus sales Key accounts vs. local customers Cyclical nature of industry

16 Switzerland/Row: Multi-country APA approach together with the Swiss tax authorities Swiss parent company Intercompany transactions Local countries Teaming model with Swiss tax authorities Unilateral vs. bilateral (MAP)

17 Netherlands/Row: joint audits platform to settle European cases on I/C transactions involving the Netherlands OECD report Field officer vs. ministry of finance Joint audit vs. EU Arbitration Convention

18 India/Japan: marketing intangibles Suzuki, a Japanese company, owned over 50% of Maruti Suzuki India ( Maruti ), an Indian company. India s tax authority stated that Maruti should be compensated by Suzuki for developing a marketing intangible (beyond a routine distributor s role & responsibility). High Court of Delhi found in favor of the defendant Maruti and the name was within the discretion of Maruti and not granted to Suzuki or contained in any legal agreement.

19 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable TPA s recommended approach to transfer pricing

20 5 step approach to manage your tax risk and controversy Adopt a global approach to tax risk and controversy management; Evaluate global resources, processes and systems for tax risk management; Address tax risk and controversy at a strategic level; Make strong corporate governance in tax a priority; Stay connected with global legislative, regulatory and tax administration change.

21 Issues to tackle today Tax authorities around the world become more aggressive and focused: see our hot spots! High pace of legislative change creates more risk and uncertainty: each week a new set of TP legislation and/or updates are published; Growing disclosure and transparency requirements: being exposed! Expansion in emerging markets is creating tax risk and uncertainty: how will the BRIC act? A new breed of tax activism emerges: the fatal impact of media on corporate image! Enhanced relationships opportunities are spreading: how do you communicate and interact with your tax inspector?

22 TPA s recommended approach Define areas of 'dispute' in transfer pricing, customs and/or valuation matters; Agree with client on 'case management' plan to resolve the 'dispute'; Determine a 'critical time path' to get to a resolution; Choose the 'best available controversy toolbox' and 'controversy team' to handle the case; and Leverage from own resources and 'extended global controversy network' offered by a firm like TPA.

23 Options to consider High level TP risk scan TP Risk Management Strategy TP Audit defense Joint audit Advance Pricing Agreement Mutual Agreement Procedure Arbitration Mediation 2nd Opinion

24 About Transfer Pricing Associates About Transfer Pricing Associates Transfer Pricing Associates is the leading independent provider of global transfer pricing and valuation services and part of the Transfer Pricing Associates Global group. The Transfer Pricing Associates Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs services, headquartered in Amsterdam and with our own offices and coverage in over 50 countries around the world. Transfer Pricing Associates provides high quality transfer pricing advice and assistance to multinationals of all sizes, wherever they are located. For more details of our innovative services, please visit our website at The Corporate Executive Board Company. All Rights Reserved. CATnumber/version 24

25 CORPORATE EXECUTIVE BOARD For further information please contact: Cody Villella