Transfer Pricing Workshop

Transcription

1 BLANK Transfer Pricing Workshop Paul Reck Gerard Feeney Tadhg O Connell John Stewart Austin McGlade Antonio Pina Liz Donoghue March 2014

2 TOPIC 1 How to satisfy Irish transfer pricing documentation requirements including implementation and monitoring Deloitte Development LLC. Private and confidential.

3 Contents Introduction Grandfathering of pre 1 July 2010 transactions SME considerations Reliance on counterparty documentation Preparing Irish transfer pricing documentation Issues to consider if preparing transfer pricing reports for other jurisdictions True ups and year end adjustments VAT & Customs interaction with transfer pricing Policy implementation and technology solutions to support monitoring of transfer pricing policies

4 Introduction Transfer pricing legislation introduced in Ireland with effect from 1 January Companies that are taxed at the 12½% corporation tax rate in Ireland within scope. (Irish branches also within scope where they trade with other group companies). Irish regime is aligned with the OECD Transfer Pricing Guidelines. Grandfathering of pre-existing arrangements before 1 July 2010 out of scope. Counterparty documentation may suffice provided it is current. Self-assessment: onus on taxpayer to demonstrate related party pricing is at arm s length.

5 Grandfathering of pre 1 July 2010 transactions Deloitte Development LLC. Private and confidential.

6 Grandfathering of transactions Arrangements (written and unwritten) in place before 1 July 2010 specifically fall outside the scope of Irish transfer pricing law. Effectively only means that the transaction(s) fall outside the documentation requirements. Other tax provisions still applicable: eg. Section 81 TCA 1997 ( wholly and exclusively ). Four years since companies undertook grandfathering exercise how long can an arrangement remain unchanged commercially?

7 Grandfathering of transactions Revenue Operational Manual 35A issued in November 2012 on grandfathering: Transactions (referred to in the legislation as arrangements) all the terms of which were agreed before 1 July 2010 are not subject to the rules, and are grandfathered. In deciding whether, in relation to an arrangement, the terms were agreed before 1 July 2010 it should be established that (a) the relevant agreement envisaged the arrangement or transaction concerned; (b) the relevant agreement provides the price; and (c) the relevant agreement is not merely an agreement for future agreements.

8 Grandfathering of transactions Issues to consider when considering if existing arrangement still grandfathered : o introduction of new products and services o amendment in pricing o renewal of agreement automatic and optional renewal o assignment Transfer of trade in the course of a scheme of reconstruction / amalgamation How to demonstrate a tax inspector that existing arrangement still grandfathered: o written legal agreement in place entered into before 1 July 2010 o board minutes / s where parties agree pricing o transfer pricing policy document o journal entries

9 SME exemption Deloitte Development LLC. Private and confidential.

10 SME exemption Taxpayers that meet the SME exemption are outside the scope of the Irish transfer pricing legislation. Consider other domestic provisions such as S81 TCA Certain thresholds to be met in order to fall within definition of SME exemption. Headcount And less than or equal to one of the following limits: Annual turnover Balance sheet total < m 43m

11 SME exemption Staff and financial data of connected and associated enterprises are included in determining the limits. Definition of staff includes employees, owner managers, partners and individuals seconded to work for a business. Irish Revenue interpret the definition of employees as not including contractors. Balance sheet total is gross rather than net asset value. Test is an annual test. UK companies relying on SME exemption - /UK FX movements.

12 Counterparty documentation Deloitte Development LLC. Private and confidential.

13 Reliance on counterparty documentation Irish transfer pricing regime allows counterparty documentation to satisfy the Irish documentation requirement. Care to be taken if availing of a related party s documentation: o last update of counterparty documentation o translation required o sufficient detail in relation to the Irish company s activities included o transaction at arm s length from foreign affiliate s perspective but not necessarily for the Irish company

14 Preparing Irish transfer pricing documentation Deloitte Development LLC. Private and confidential.

15 Preparing Irish transfer pricing documentation Level 1 Level 2 Level 3 Approach to Transfer Pricing Documents Separate country Transfer Pricing documentation Centrally-prepared Masterfile Local country rules Centrally-prepared Masterfile OECD Guidelines Functional Analysis Local functional analysis Local or regional functional analysis Local or regional functional analysis Economic analysis Local comparability analysis Local or regional comparability analysis Local or regional comparability analysis Local country involvement Locally-performed analysis that leverages centrally- prepared core information Local participation in fact gathering and review Restricted local involvement Deliverable Locally-prepared documentation report (incorporating centrally prepared core elements) Centrally-prepared masterfile & separate country file including review by local affiliate Centrally-prepared, OECDbased documentation report with restricted local review Relative cost High Medium Low Level of comfort Penalty-resistant Penalty-resistant Customisation needed in the event of a tax audit

16 Preparing Irish transfer pricing documentation Scoping and planning Identify transactions Risk rating Prepare documentation Project execution Functional analysis Economic analysis Monitoring and adjustment Execute transfer pricing policy strategy Identify enhancements and improvements

17 Preparing Irish transfer pricing documentation process Functional analysis Establish the functions undertaken, risks assumed, assets employed and capital committed by each business entity, and the relative importance of each. Benchmarking Select comparables (internal or through databases) Gather Background Information Gathering of qualitative and quantitative data Documentation Record each stage of the process to form a defence document in support of future tax filings.

18 Preparing Irish transfer pricing documentation functional analysis Documentation of the transactions, functions and risks of the entities involved Functional analysis impacts: o choice of transfer pricing method o choice of comparables chosen o audit issues Identification of key personnel in organisation to interview. Advance preparation use of questionnaires (see attached IRS questionnaire in pack). Ensure risks and assets (in particular intangibles) are covered.

19 Preparing Irish transfer pricing documentation economic analysis Determine appropriate transfer pricing method based on fact pattern in functional analysis. Transfer pricing methods (see worked examples in your pack). Undertake benchmarking process internal comparables or use of a third party database. Determine any necessary adjustments to comparable data. Form conclusion from comparison of controlled and uncontrolled results.

20 Preparing Irish transfer pricing documentation documentation package contents

21 Issues to consider if preparing transfer pricing reports for other jurisdictions Deloitte Development LLC. Private and confidential.

22 Preparing transfer pricing reports for other jurisdictions Overview of differences in domestic laws

23 USA Does not follow OECD Guidelines but own domestic laws. 2 categories of documentation needed principal and secondary documentation. Local comparables preferred. UK SME exemption applies but not for transactions to a nonqualifying territory. Preference for UK comparables but Pan-European accepted. Germany Documentation must be in German but approval can be obtained to prepare in English. Tighter independence criteria 25%. Tax authorities require use of the interquartile range. Special rules on business restructuring. China Documentation must be in Chinese. Certain thresholds apply before documentation is required. Loss making companies, no matter the size, must prepare documentation. Local comparables preferred but may accept foreign (Asian) comparables. Some local issues to watch out for! France Tax authorities can request documentation in French. Contemporaneous requirement. Additional documentation to be provided within 6 months of tax return. Pan-European comparables acceptable if include meaningful subset of local companies. Bad faith penalties may preclude access to MAP Italy Follows OECD principles but with enhanced local documentation requirements. Italian masterfile required in certain cases. Must include details of all I/C transactions even if not material. Required to sign every page and store on CD. No obligation to accept reports in a foreign language Benchmarking needed annually for large companies Must declare availability of documentation in tax return for penalty protection. Spain Definition of associated enterprise is 5%. If documentation required for evidence in courts, needs to be translated into Spanish. In principle, Pan-European comparables accepted, but if results of local comparables benefit STA, they may prefer these. Transactions over a certain threshold to be disclosed in tax return. Bad faith penalties may preclude access to MAP (eg. if no documentation).

24 True ups and year end adjustments Deloitte Development LLC. Private and confidential.

25 Why make post transaction transfer pricing adjustments? Year end adjustments are being made with increasing frequency o results are not consistent with projections o new or overlooked transactions o late implementation of planned changes Required for documentation o most countries require results to be within the range to avoid documentation penalties Exploring and making transfer pricing adjustments before year-end allows greater flexibility: o reduce tax authority exposure to transfer pricing adjustments o monitor profits and losses arising across multiple jurisdictions - reasonableness test

26 Timing of transfer pricing adjustments Year end Closing of books Filing of return Create transactions Make adjustments and avoid book-tax differences Make adjustments after statutory accounts finalised Amend return

27 Aspects of year end adjustments Size of adjustment which point within the interquartile range to target? Does the intercompany legal agreement allow for adjustments? Acceptance under domestic law Process of making adjustment: o booked in financial system (Period 13?) o o o o issue invoice? provisions employee participation VAT and customs implications

28 VAT and customs interaction with transfer pricing Deloitte Development LLC. Private and confidential.

29 VAT and customs interaction with transfer pricing VAT Contractual agreement Other items Acceptance under domestic law Documentation Aspects of yearend adjustments Customs Employee Participation Inventory valuation Impact on management accounts Provisions 2010 Deloitte Development LLC. Private and confidential.

30 VAT aspects of year end adjustments An increase / decrease in the transfer price of a transaction can result in additional consideration or credit direct link between the consideration and the transaction to be established. VAT treatment follows the treatment applied to the original supply. Requirement to issue an invoice / credit note time limits. Statistical reporting implications Deloitte Development LLC. Private and confidential.

31 Customs issues relating to year end adjustments Transfer pricing rules for direct tax purposes and customs valuation rules based on OECD guidelines but with some important differences. Direct tax authorities focus on the accuracy of a transfer price as reflected on a tax return (aggregated income across the entire business). Customs authorities focus on the determination of the value of goods at the time of entry into their customs territory (transaction-by-transaction and product-by product) Deloitte Development LLC. Private and confidential.

32 Customs issues relating to year end adjustments Where a year end adjustment is linked to the importation of goods from a non EU country, the following issues should be considered; o Does the customs value change due to the year-end adjustment?. o What is the appropriate rate of duty for the goods? o If there is an increase does it give rise to a liability? o If there is a decrease is it possible to get a of refund of customs duty paid? 2010 Deloitte Development LLC. Private and confidential.

33 Customs issues relating to year end The Link Between Transfer Pricing and Customs Valuation 2014 Country Guide Published by Deloitte s global CGT practice. Updated annually. Provides information on how over 40 countries treat transfer prices and adjustments from a Customs and VAT perspective. Link to download the latest version Deloitte Development LLC. Private and confidential.

34 Policy implementation and technology solutions to support monitoring of transfer pricing policies Deloitte Development LLC. Private and confidential.

35 From policy to practice a holistic framework Tax / Transfer Pricing: development of transfer pricing policies producing transfer pricing documentation defending policies against tax authority challenge Interface: implementation data gathering monitoring identifying changes of fact Accounting / Finance: production of management accounts for business legal entity reporting

36 Common problems with implementation and monitoring Intercompany legal agreements not completed / inadequate. Costs omitted and not recharged creating non deductible costs. Incorrect costs included. Flow through costs incorrectly allocated a mark-up. Anticipated results / budgets used to determine margins so inaccurate that even true up gives non-arm's length results. Policies not aligned with accounting system and manual calculations required - increased risk of human error, staff continuity and lack of audit trail. Business entities not aligned with recharges and refuse some element of recharge.

37 Technology solutions options Specialised software solutions

38 Technology solutions where following issues arise Significant number of intercompany transactions. History of year-end transfer pricing adjustments and/or difficult audits due to transfer pricing issues. Manual/spreadsheet processes for calculating transfer pricing. Delays in the accounting close process due to intercompany accounting. Non-centralised accountability for transfer pricing.

39 TOPIC 2 Finance and treasury transfer pricing: What you need to know Deloitte Development LLC. Private and confidential.

40 Contents Introduction Loan pricing Provision of guarantees Cash pooling

41 Introduction Type of transactions to consider include: o Intercompany loans o Guarantees o Cash pooling o Long-term intercompany balances o Short term accounts receivable/payable consistent with third-party credit terms? Trading versus non-trading activities o Non-treasury companies can still provide interest free loans as not within the scope of transfer pricing. Other pricing considerations o Section 247 loans normal commercial rate of return o Requests from third parties for support for intercompany financial arrangements e.g. banks, M&A, due diligence etc. o Robust grandfathering documentation?

42 Loan pricing Deloitte Development LLC. Private and confidential.

43 Loan pricing - Introduction Applicable where a company is paying interest for which a trading deduction is being sought or where interest is taxable as a trading receipt. Need to ensure that the interest received or paid is arm s length. Ensure there sufficient documentation to support the arm s length nature of the interest rate. Normally considered on a transaction by transaction basis but large groups may use a pooled approach to determining interest rates on intercompany borrowings.

44 Loan pricing Stages in a transfer pricing analysis

45 Loan pricing Key terms of a loan agreement Borrower / credit rating Ranking / Structural Subordination Loan Effective Date Tenure / Term Details on security or collateral attached, if any Guarantees Purpose Features/options, if any (e.g., prepayment rights, etc.) Currency Type of loan (i.e., term loan, revolving facility, etc.) Loan Amount Interest rate (if any at this stage) Principal Repayment (at maturity, amortising, etc.) Interest Payments (monthly, quarterly, annually, at maturity, etc.)

46 Loan pricing Synthetic credit rating tools Moody s RiskCalc Online tool which uses financial ratio analysis to generate a probability of default for the borrower company over 1 and 5 years. Various models available for different jurisdictions. Moody s Rating Methodologies Methodology papers that explain how credit ratings are derived across different industries by Moody s. Provides ratios, benchmarks and weights. Uses qualitative as well as quantitative data. Notching Assigning the subsidiary a credit rating based on the rating of the parent. This method is generally used if the subsidiary is a core or strategic component of the parent s business.

47 Loan pricing Financial information required for credit analysis Generally, historical financial data is preferred over projected financial data Historical The actual financial statements for the year in which the loan was taken out Latest full-year actual financial statements Financial statements needed for a credit rating analysis: o Aggregate financial statements of the Borrower and its subsidiaries o Balance sheet o Income statement Projected Projected financial statements may be used if: o You are undertaking a planning study o Historical/actual financial data are not available o The most recent financial statements do not reflect normal or reasonably expected business operations o In cases of mergers or acquisitions, should consolidate financial statements of the companies and reflect and other structural changes

48 Loan pricing Market data for analysis Thomson Reuters DealScan DealScan is a database of historical funding deals executed on the global loan markets It covers wide-ranging terms and conditions on over 220,000 loan and bond transactions Bloomberg Professional Bloomberg Professional is a large data stream program offering historic and current market information across a number of different securities including fixed income, equities, derivatives, commodities and foreign exchange

49 Loan pricing Typical adjustments Seek to obtain a sample of loans and bonds with similar terms and conditions to the tested loan but not always possible so adjustments are usually required in order to improve comparability. o Maturity Adjustment o Credit Rating Adjustment o Fixed vs. Floating Rate Adjustment o Currency Adjustment o Country risk adjustments o Put/Call options Important to ensure that any adjustments can be defended and are applied consistently. Tax authorities becoming more sophisticated with regards to the transfer pricing aspects of intercompany financing.

50 Loan pricing Documentation and ongoing monitoring Preparation of transfer pricing documentation report for presentation to tax authority on request. Regular review of intercompany pricing arrangements o Ensure terms of the loan agreement are being followed o If the agreement contains an early repayment clause, would a third party have exercised this clause and refinanced due to falling rates? Potential advantages to refinancing loans, increase/ reduce interest to low/high tax jurisdictions.

51 Financial guarantees Deloitte Development LLC. Private and confidential.

52 Provision of guarantees - Introduction A guarantee is a contract to assume economic liability if the guaranteed party should default on their obligations. A guarantee enables the guaranteed entity to borrow funds at lower interest rates than it would have been able to borrow as a stand-alone enterprise. To determine whether a guarantee has value, it must be shown that the standalone enterprise, in the absence of the guarantee, would have faced a higher rate of interest or not been able to access funds in the absence of the guarantee. It is a contingent liability for the guarantor and the entity providing the guarantee should be compensated for providing same even if the guarantee is not called upon. More focus from tax authorities on guarantees in recent years.

53 Provision of guarantees Transfer pricing approaches Yield approach - Determine a credit rating for the debtor on a stand-alone basis and perform a loan pricing analysis to determine their borrowing rate. We then compare the stand alone borrowing rate with the rate achieved with the guarantee. The interest saved by the borrower is the maximum amount that they are willing to pay to obtain the guarantee. Insurance approach This gives the minimum fee that the guarantor would be willing to accept for issuing a guarantee. It is comprised of the estimate probability of default multiplied by the guarantor's required rate of return on the additional capital requirement from providing the guarantee. Credit default swaps ( CDS ) - A CDS is a contract that provides insurance against the risk of a default by particular company. CDS transactions are similar to guarantees in substance. Data on CDS are publically available and can be used as a benchmark for intercompany guarantees. CUP Third party information may be available in relation to guarantees provided to the borrower by third-party financial institutions.

54 Provision of guarantees Passive association GE Capital Canada Case Court found that when estimating the credit rating of a borrower, a third-party financial institution would take account of the fact that the borrower was part of a larger group of companies. Even in the absence of an implicit guarantee, the standalone credit rating of the borrower would be uplifted by simply being a member of a group. Implicit support not widely endorsed in other jurisdictions as not strictly inline with the arm s length principle.

55 Cash pooling Deloitte Development LLC. Private and confidential.

56 Cash pooling - Introduction MNCs increasingly establish cross-border cash pooling systems Aggregating and offsetting cash-flows within one common cash pool generates benefits o Improved liquidity management o Interest savings through reduced borrowings or obtaining cheaper funds in the market o Transaction cost savings

57 Cash pooling A cash pool is a master account through which a group can coordinate group liquidity The organiser of the master account is often called the cash pool header ( CPH ) to distinguish it from pool participants Cash Pool Header Cash- Inflow Cash- Outflow Cash Providers = Creditors Cash Consumers = Debtors

58 TOPIC 3 Current hot topics Deloitte Development LLC. Private and confidential.

59 Contents Transfer pricing compliance reviews Foreign tax authority audits Base erosion and profit shifting ( BEPS )

60 Transfer pricing compliance reviews Deloitte Development LLC. Private and confidential.

61 Transfer pricing compliance reviews by Irish Revenue The TPCR program allows authorised officers from the Irish Revenue to send out notifications to selected taxpayers inviting them to self-review their transfer pricing and report back to the Irish Revenue within three months. Letters issued under the TPCR have been for a specific accounting period. The report to be provided to the Irish Revenue based on this self-review will address: o The group structure; o Details of transactions by type and associated companies involved; o Pricing and transfer pricing method for each transaction or group of transactions; o Functions, assets, and risks of the parties involved; o List of documentation available or reviewed by the taxpayer; and o The basis for establishing if the arm s length standard has been satisfied. In most circumstances, an existing transfer pricing study should suffice. The TPCR process is not a formal tax audit

62 Foreign tax authority audits Deloitte Development LLC. Private and confidential.

63 Tax Authority Audit Environment: Recent Survey

64 Foreign Tax Authority Audits Country-specific positions / trends Italy, Spain and France Italy Spain France Rise in number, complexity and aggressiveness of tax audits (especially transfer pricing audits) conducted by the tax authorities Rise in bad faith penalties (France & Spain) and criminal investigations (Italy) Raids conducted by the tax authorities in order to collect evidence without notice X X X X X X X X X Use of tools in tax audits X (public databases for transfer pricing benchmarks) X (computerized tax audits) X (computerized tax audits) Recommendation to criminally prosecute X X Tax officers have received transfer pricing training and special teams dedicated to cross-border transactions have been created at the tax offices directorates of each region and province X X

65 Spain Tax Periods Tax Audits Assessments Raised ( m) Tax Crime Cases Statistics ,923 6, ,199 5, ,772 6, Tax Audit Procedure Framework Statute of limitation: 4 years from the filing of the relevant tax return Selection of taxpayers: General programs and yearly guidelines detailing the action priority areas (transfer pricing, International Reorganizations) Spanish electronic notification system (NEO): The system obliges taxpayers to check an electronic inbox at least every ten days. Where the taxpayer does not access the electronic inbox, the notification is deemed to be validly made, and therefore, filing deadlines, appeals, etc. run from that date Notification to the taxpayer: Partial or general tax audit Tax audit term: Maximum 12 months from the notification. Can be extended up to a maximum 24 months in case of special complexity Termination: Different type of assessments (Agreement vs. Disagreement)

66 Italy - Statistics Large businesses ( > 100m) Tax Periods Tax Audits Assessments Raised ( m) Average Settlement ,609 5,490 2, ,763 5,532 2,0 Medium businesses ( > 10m and < 100m) Tax Periods Tax Audits Assessments Raised ( m) Average Settlement ,524 6,300 0, ,080 7,700 0,478 Small businesses ( < 10m) Tax Periods Tax Audits Assessments Raised ( m) Average Settlement ,878 12,600 0, ,273 13,600 0,076

67 Italy - Tax Audit Procedure Framework Statute of limitation: 4 calendar years from FY of filing of the relevant tax return (can be doubled in case a criminal violation is suspected in one of the FY audited). Selection of taxpayers: General programs and yearly guidelines detailing the action priority areas (transfer pricing, Black-list, Business Restructurings - BEPS, transfer of the tax residence abroad, VAT) Notification to the taxpayer: With minimum notice (if any), 15 days max for both partial and general tax audit. Tax audit scope usually extended during audit itself. Tax audit term: 30 working days of physical presence at the taxpayer s premises (in practice, can last forever!). Can be extended up to a maximum of another 30 days in cases of special complexity Termination: a Tax auditor s report is issued to both the taxpayer and the tax office; the latter, will have to make a decision on whether or not issuing a tax assessment notice totally or partially consistent with the tax auditors findings. Cooperative Compliance : a pilot program of ex-ante tutorship has been introduced for a selection of large taxpayers, to work hand in hand with the Tax Office in determining the correct way of calculating the taxable income and avoid future tax assessments.

68 UK HMRC Transfer Pricing Statistics Year 2007/8 2008/9 2009/ / / /13 Total amount 519m 1,595m 1,039m 436m 1,095m 504m Large business service 494m 1,564m 973m 273m 944m 251m Local compliance 25m 31m 66m 163m 151m 253m

69 Issues in tax audits Inappropriate benchmarking (comparables are scrutinised) Permanent establishment ( PE ) Exit charges and reorganisations involving the transfer of functions, business units and intangibles Head Office Charges ( management fees, shared service centres, etc.) Financial transactions (e.g., debt pricing) The payment of brand royalties / creation of local marketing intangibles

70 Base Erosion and Profit Shifting (BEPS) Deloitte Development LLC. Private and confidential.

71 OECD / G20 BEPS Project Organisational Structure

72 Action 13: Re-examine transfer pricing documentation

73 Action 13: Discussion draft proposals & two tier approach

74 Action 13: Country By Country Reporting Template

75 Action 13: Country By Country Reporting Template

76 Action 13: Country By Country Reporting Template

77 Action 13: Recent Survey

78 Action 13: Recent Survey

79 Action 8: Transfer Pricing Aspects of Intangibles Last discussion draft issued in July Final version to issue in early Summer Legal ownership Costs & Risks Key Functions Legal ownership is the starting point in determining entitlement to intangible related returns. However, the location of important IP related functions is key. Legal ownership is separate to remuneration under the arm s length principle. Outsourcing of most or all important functions may impact entitlement to intangible related returns. Company should bear the costs incurred to develop, enhance, maintain and protect the intangibles. Bearing these costs does not, in and of itself, create an entitlement to intangible returns. Company should generally bear and control the risks of development, enhancement, maintenance and protection including: o the risk of R&D or marketing activities; o product obsolescence; o infringement risk; o product liability. Company should, with its own employees, perform the important functions related to the oversight of the development, enhancement and maintenance of intangibles including design, control over and decision making relating to the following: o research and marketing programmes; o budgets; o development programs; o defence and protection of intangibles; o ongoing quality control of all relevant functions.

80 Activities not undertaken by IP owner a framework

81 BEPS A Tax Executive s Response In this dynamic environment, a tax executive will need to respond by: Identifying those BEPS initiatives that may challenge important tax benefits to the company in the short, medium, and long term Measuring the impact of proposed BEPS reforms Prioritising the action items based upon the OECD s timing and the tax benefit for those provisions that are most important to the company Communicating with key stakeholders in this process Developing restructuring options Consider accelerating planning underway IDENTIFY MEASURE PRIORITISE COMMUNICATE

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