New BEPS Country-by-Country Reporting Requirements: International Tax Reform Planning and Compliance Challenges

Transcription

1 FOR LIVE PROGRAM ONLY New BEPS Country-by-Country Reporting Requirements: International Tax Reform Planning and Compliance Challenges THURSDAY, JUNE 2, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 New BEPS Country-by-Country Reporting Requirements June 2, 2016 Susan Fickling-Munge, Managing Director Duff & Phelps, Chicago Mark C. Gasbarra, CPA, National Managing Director Forte International Tax, Evanston, Ill.

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS 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.

5 BEPS Country-By-Country and International Tax Reform Mark C. Gasbarra, CPA Forte International Tax, LLC Susan Fickling-Munge, CBE Duff & Phelps, LLC Any tax advice included in this communication is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Forte International Tax, LLC All rights reserved

6 Objectives Understand the global tax trends affecting: Multinational enterprises. Small to midsized firms with international operations. Educate clients on how to: Optimize their historic tax attributes. Plan for increased tax transparency and tax law changes. Prepare clients on how to meet the challenges ahead, including: Potential international tax reform. BEPS/other reporting requirements. 6 6

7 Like 3-Dimensional Chess! 7 7

8 Forte International Tax and VantagePoint LEVERAGING TECHNOLOGY TO DELIVER TAX SAVINGS AND PROCESS IMPROVEMENTS International tax consulting practice founded in 2004 and headquartered in Chicago (Evanston); has been listed on Inc. Magazine s 500 Fastest Growing Private Companies in America. VantagePoint Global Tax SaaS Platform dynamically supports global tax planning and advisory services using a single integrated database. Core competencies include repatriation planning, the U.S. foreign tax credit, transfer pricing, and U.S. manufacturing and export tax incentives. Plans for major changes immediately facing the global/international tax environment and identifies tax and savings opportunities for clients. 8 8

9 Mark Gasbarra, CPA National Managing Director Previously international tax practice leader for E&Y and international tax partner at PWC Developed ITMS/FTMS at PWC now owned by Thomson Tax attribute database for planning at EY Forte s VantagePoint Global Tax Advisory Platform Service specialties include the full range of international tax services including structuring, transfer pricing, foreign tax credit utilization and U.S. manufacturing and export tax incentives ( IC-DISC ) 9 9

10 Forte s Strategic Mission Help clients achieve global tax efficiency at the lowest possible cost by leveraging international tax expertise through a shared technology platform. VantagePoint accesses a single integrated global tax database to support multiple purposes, including: Global Tax Analytics transfer pricing, repatriation, effective tax rate. Tax Optimization export, domestic production, foreign tax credit. Tax Reporting financial reporting and electronic filing. VantagePoint interfaces with and supplements financial reporting and tax compliance software

11 Susan Fickling-Munge, CBE Managing Director, Valuation Advisory Services Susan Fickling-Munge is a managing director in the Chicago office of Duff & Phelps. She is a member of the Transfer Pricing practice, leveraging more than 20 years of transfer pricing and valuation experience. Susan has worked closely with global companies in a vast range of industries, assisting them with transfer pricing planning, documentation and defense. Susan has extensive experience in international and multistate tax planning projects, employing various transfer pricing techniques to help support her clients tax strategies. She has also assisted clients on unilateral advance pricing agreements. She has helped to develop real options models and valuation techniques to support complex transfer pricing and tax structuring scenarios. Susan has assisted numerous retailers and consumer products companies with transfer pricing planning for the intercompany use of brand names, Before joining Duff & Phelps, Susan was a vice president of transfer pricing for Charles River Associates, a transfer pricing manager in the international tax division of Arthur Andersen LLP and a transfer pricing consultant at KPMG LLP. Susan earned her MBA at the University of Chicago Booth School of Business and her BA from Scripps College. She also studied at the Universidad San Francisco de Quito in Quito, Ecuador, and is fluent in Spanish. Susan is also a Certified Business Economist

12 Duff & Phelps Size and Scale Leading independent valuation and corporate finance advisor More than 1,000 employees in over 30 offices globally Largest independent valuation advisory firm Largest integrated valuation and transfer pricing practice in North America Global footprint enables rapid deployment of resources with local market knowledge to meet client needs Technical Expertise Interrelated disciplines of valuation, taxation, transfer pricing, transaction advisory and investment banking are seamlessly aligned to provide maximum benefit to our clients Our Office of Professional Practice informs our professionals of realtime financial reporting and tax developments impacting our clients. Deep knowledge of corporate finance principles and valuation implications of accounting and tax rules Solid, defensible analyses Our Professionals Deep technical and industry expertise Strong analytical, modeling and consulting skills Reliable and highly responsive Independent, objective and free from conflicts of interest Majority of our senior professionals have Big Four accounting firm experience Market Leadership Leading provider of valuation advisory services Transfer pricing leadership continuously recognized as world s leading transfer pricing advisors Serve 57% of the Fortune 100 companies and nearly 70% of the top PE firms and hedge funds Routinely advise regulatory bodies on valuation implementation issues and best practices Recognized transfer pricing thought leader as well as other valuation disciplines 12 12

13 Discussion Topics U.S. International Tax System Overview/Historical Perspective BEPS Action Items Country-by-Country Reporting Requirements Data Required, Other Potential Uses, Overlap with Other Disclosures U.S. International Tax Reform Camp, Administration, Bipartisan Support, Predictions Global Tax Analytics Q&A 13 13

14 Background U.S. International Tax System

15 U.S. International Tax System Overview Worldwide vs. Territorial Evolution Sixteenth Amendment TRA 1986 Path Act Major Components Foreign Tax Credit, Deferral/Anti-Deferral/APB23 DISC/FSC/ETI/DPAD R&D and Intellectual Property Implications 15 15

16 U.S. International Tax Milestones 1913 Sixteenth Amendment Revenue Act of 1913 (WW) 1918 Foreign Tax Credit to Avoid Double Taxation 1934 Arm s Length Transfer Pricing Standard 1962 Subpart F to Tax Highly Mobile Low-taxed Income 1972 Domestic International Sales Corporation 1977 Allocation/Apportionment Regulations (861-8) 1986 TRA 1986 Major Changes with Increased Complexity 1996 Check-the-Box Regulations Entity Classification 16 16

17 Deferral and Anti-Deferral Foreign Corporations are generally entitled to deferral until repatriation U.S. GAAP ASC 740/APB 23 Indefinite Reversal Criterion Subpart F Rules Enacted in 1962 Categories of Subpart F Income Passive Foreign base Company Income Rents, Royalties, Interest and Dividends Foreign Base Company Income Investments in U.S. Property Exceptions high-taxed or Same Country Exceptions to the Exceptions payments that reduce Subpart F Active Financing Section 954(c)(6) Indirect Foreign Tax Credit 17 17

18 U.S. Foreign Tax Credit Milestones 1918 Foreign Tax Credit to Avoid Double Taxation 1921 Overall Limitation and Source Rules 1932 Lesser of Per Country or Overall Limitation 1954 Per country Limitation Only 1960 Irrevocable Election Overall or Per country 1962 Separate Basket for Passive Income 1976 Elimination of Per Country Rules 1977 Allocation/Apportionment Regulations (861-8) 1986 TRA 1986 Multiple Baskets 2004 Reduced Baskets to Active and Passive 18 18

19 U.S. Transfer Pricing Milestones 1934 Arm s Length Standard 1968 Transactional Methods CUP, Resale Price, Cost Plus 1982 Section 936(h)(3)(B) Intangible Property Income 1982 Section 367(d) Transfers of Intangible Property 1986 Section 482 Commensurate with Income Standard 1994 Detailed Contemporaneous Documentation Regulations 1995 Cost Sharing Regulations 1996 Final Penalty Regulations 2009 New Services Regulations 2011 Final Cost Sharing Regulations 19 19

20 Focus on Transfer Pricing $100 Trillion Worldwide Product 80% G20 Countries Share of the world economy EU/UK, US, China approximately $50 Trillion Japan, Germany, France, Brazil, India, Italy, Russia, Canada, Australia, South Korea, Mexico, Indonesia, Turkey, Saudi Arabia, Argentina, South Africa approximately $30 Trillion $18 Trillion Annual Worldwide International 60-70% through Intercompany Transactions Governments Want More Revenue 20 20

21 G20/OECD BEPS Action Items

22 The BEPS Environment Recent key Developments OECD / BEPS Rapid electronic dissemination of CbC reports March 2015 The exchange of the CbC reports is envisaged to be automatic under the 3 agreements covering this (in respect of DTCs, TIEAs and the MAAC the Multilateral Convention for Mutual Administrative Assistance in Tax Matters) OECD Country by Country ( CbC ) Reporting (Action Item 13) Sept 2013 & Feb 2015 OECD released a guidance on implementing the CbC reporting template, master file and local file for multinational companies. CbC reporting is recommended to be required for tax years beginning on or after January 1, 2016 for multinational companies with consolidated revenues over 750 million (~$840 million). Discussion Draft on BEPS Actions 9 and 10 (including Risk, Recharacterisation, and Special measures) Dec 2014 & Feb 2015 New OECD measure requiring economic substance to be associated with intercompany agreements. Focus shifts from intercompany pricing to intercompany agreement substance. OECD Revised DRAFT Transfer Pricing Aspects of Intangibles (Action Item 8) Sept 2014 OECD released a Revised Discussion Draft on intangibles related to transfer pricing that tries to address correct allocation of return related to an intangible. US IRS/ Congress US Corporate Income Tax Overhaul Congress unlikely to make comprehensive tax revisions in 2015 due to many pressing funding deadlines and 2016 presidential election. US to Implement CbC Reporting Template US expected to develop a form for taxpayers to file that looks like CbC reporting template and could require companies to file the first template for tax years beginning on or after January 1, Unilateral BEPS Measures UK Diverted Profit Tax announced Dec 2014 The proposed Diverted Profit Tax will assess 25 percent tax on profits deemed to have been artificially diverted out of the UK. China Using BEPS to Support Profit Splits Public comments indicate that China is using BEPS drafts to support positions applying profit splits and to downplay the role of capital. Issued GAAR in Dec 2104 and re-drafting Circular 2 containing China s TP rules. March 2015 release of Public Notice 16 calls for elimination of deduction for outbound payments made to entities without substance. India Challenging Contract R&D Arrangements India has issued circulars stating that contract R&D arrangements should not be respected if the contracting party has no substance. Thus, intangible related returns should accrue to the Indian entity

23 BEPS Timeline & Unilateral Actions Taken CbC and information sharing Hybrid mismatches Master File TP Doc Oct 2014: Draft Action 7 (PE) Dec 2014: Drafts Actions 4, 8, 9, 10 and 14 (TP, Value, Risk Profit split) Dec 2014: UK announces Diverted Profits tax Mar 2015 China issues service fee payment rules Cost Contribution arrangements Difficult to Value Intangibles CFC Rules Financial Transactions Multilateral instrument Dispute Resolution?? Data collection and analysis July 2013 OECD BEPS Launched (15 Actions) Dec 2015 OECD BEPS Target Completion Sept 2014: Drafts of 7 of 15 actions released (including intangibles) Nov 2014: Draft Action 6 (treaty abuse) Dec 2014: China issues GAAR Jan 2015 Singapo re issues TP doc Master File require ment UNILATERAL ACTIONS Revised China TP rules (Circ 2) Internet taxation PE SPECIAL MEASURES 23 23

24 Risks and Impacts of BEPS MNC Entity HQ / Parent Corporation Holding Company IP Company Principal Local Operations Low-tax Finco Permanent Establishment consideration s (e.g., location of management) Review of hybrid financing transactions Alignment of intangible value and use of intangibles Alignment of functions and risks with intercompany transactions Increased local scrutiny on transfer pricing issues from tax authorities Review of hybrid financing transactions Disclosures Reporting Documentation Master File / Local Documentatio n Requirements Treaty abuse Hybrid structures Treaty abuse Potential entity recharacterizations Limitations on Base Erosion CFC rules in various jurisdictions Challenges on R&D ownership Challenges on residual profit earned by principal Increased disclosures Additional TP requirements for financial transactions Conflict Resolution Delays Hybrid structures Permanent establishments Treaty abuse 24 24

25 BEPS Overview Source: The Revenue Effects of Multinational Firm Income Shifting, Kimberly Clausing, Tax Notes, March

26 BEPS Overview Source: The Revenue Effects of Multinational Firm Income Shifting, Kimberly Clausing, Tax Notes, March

27 BEPS Action Items Action Item OECD Recent Actions Action 1 Address the tax challenges of the digital economy Draft Discussion Delivered December 2014 Action 2 Neutralize the effects of hybrid mismatch arrangements Draft Discussions Delivered September 2014 Action 3 Strengthen CFC rules Draft Discussion Expected April 2015 Action 4 Limit base erosion via interest deductions and other financial payments Draft Discussion Delivered December 2014 Action 5 Counter harmful tax practices more effectively, taking into account transparency and substance Draft Report Delivered September 2014 (Revisions to Existing Criteria expected by December 2015) Action 6 Prevent treaty abuse Draft Discussion Delivered November 2014 Action 7 Prevent the artificial avoidance of PE status Draft Discussion Delivered October 2014 Action 8 Assure that transfer pricing outcomes are in line with value creation: intangibles Report Delivered September 2014 Action 9 Assure that transfer pricing outcomes are in line with value creation: risks and capital Draft Discussion Delivered December 2014 Action 10 Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions Action 11 Establish methodologies to collect and analyze data on BEPS and the actions to address it Draft Discussion Delivered December 2014 Request for Public Opinions Issued August 2014; Discussion Draft expected April 2015 Action 12 Require taxpayers to disclose their aggressive tax planning arrangements Draft Discussion Expected March 2015 Action 13 Re-examine transfer pricing documentation (CbC) Draft Discussion Delivered February 2015 Action 14 Make dispute resolution mechanisms more effective Draft Discussion Delivered December 2014 Action 15 Develop a multilateral instrument OECD Proposing an International Tax Conference starting in December

28 Direct Effects of OECD BEPS / Action Items Compliance/Documentation Requirements: Action item 13 changes documentation guidance from Chapter V. The CBCR template is, in particular, a new component of documentation requirements. OECD countries have agreed that only MNEs with consolidated revenues in excess of 750 million Euro in the prior year will need to file the template. The first year of such a requirement for countries adopting CBCR will be for tax years beginning on or after January 1, The deadline for filing the CBC report will be one year after the end of the tax year in question. Potential fundamental changes in transfer pricing guidance As countries adopt BEPS-driven measures into law (including incorporation of revised OECD Transfer Pricing Guidelines, by reference), there may be major changes in interpretations of the arm s length standard across a number of important topics. Note: even in the absence of explicit regulatory incorporation, guidelines may come into play in the resolution of double tax cases between treaty partners. For instance, PATA countries agree to resolve transfer pricing double tax cases using OECD Guidelines. Other treaty protocols for interpretation of arm s length standard under article IX may make direct reference to OECD guidelines

29 Direct Effects of OECD BEPS / Action Items Substantial potential for increase in double tax cases under current draft guidance. Even if adopted worldwide, guidance in current form would be likely to result in substantial increase in disagreements between revenue authorities Current draft guidance appears to be far from a consensus document. Indications are that US does not support risk draft. If drafts are adopted only partially or only by a subset of countries, fundamentally different interpretations of the arm s length standard might result, leading to a sharp increase in double tax cases. Increase in Unilateral BEPS measures: Many countries are enacting (or attempting to enact) BEPS-prevention measures unilaterally in advance of finalization of the OECD action item reports. Examples include: Diverted Profits Tax which will assess 25 percent tax on profits deemed to have been artificially diverted out of the UK Indications that China is using BEPS drafts to support positions applying profit splits and downplay role of capital, and assign partial ownership of IP to contract entities in China, even in spite of clear contracts India has issued circulars stating that contract R&D arrangements should not be respected if the contracting party has no substance in these cases, intangible related returns should accrue to the Indian entity

30 Brief TP Action Item Summaries

31 Action Item 8 (Intangibles) Draft guidance suggesting the mere funding does not entitle a party to residual returns from intangibles. It is important to consider performance, control, and management in assessing which entities are entitled to routine returns. Draft guidance suggesting that transactions may be disregarded or re-characterized if economically rational independent parties wouldn t engage in the transactions entered into by the related parties. Guidance reasserting the advantages of transactional methods (when available) for intangible transfers, coupled with more explicit recognition that finding reliable transactional comparables may not be feasible. May be difficult for database comparables to be reliable transactional comparables Acquisition prices may provide basis for transactional methods in some cases. PPA values are not determinative guidelines are generally dismissive of PPA values 31 31

32 Action Items 8-10 (Intangibles, Risk, Re-characterization) Delineating (i.e., describing or portraying) the transaction Accurately delineating a transaction requires identifying the economically relevant characteristics (e.g., contractual terms, functions performed, assets employed, risks assumed and managed, characteristics of property transferred or services provided, economic circumstances of the parties and market, and the business strategies of the parties). Examining the actual conduct of the parties in addition to what is stated in the contract. When a contract is incomplete or contradicts the actual conduct of the parties, the actual conduct of the parties should be used to delineate the transaction. Identifying risks in commercial or financial relations Goes hand-in-hand with identifying functions and assets. Actual conduct of the parties must be examined to determine the actual allocation of risk, with particular attention paid to how the parties actually manage the risk identified

33 Action Items 8-10 (Intangibles, Risk, Re-characterization) Two main economic frameworks underlie the OECD s draft discussion on risk moral hazard and the risk-return trade-off. 1. Moral Hazard Moral hazard exists when a party that controls a risk is not the party that bears the burden of that risk (e.g. insurance). Concept that unrelated parties would seek to avoid scenarios in which one party assumed a risk without being able to manage the behavior of the party creating the risk. Imposes the moral hazard framework on related party transactions, and emphasizes the need to align risks (and therefore expected returns) with the parties that are controlling and managing those risks. 2. Risk-Return Trade-Off Establishes equivalence on a present value basis between a higher but less certain stream of income and a lower but more certain stream of income. Supports the idea that it is economically rational to take on (or lay off) risk in return for higher (or lower) anticipated nominal income

34 Action Items 8-10 (Intangibles, Risk, Re-characterization) Risk is defined as the effect of uncertainty on the objectives of the business. It includes strategic and marketplace risks, infrastructure or operational risks, financial risks, transactional risks, and hazard risk, among others. Risk management is defined as the capability to: (1) make decisions regarding riskbearing opportunities; (2) make decisions on whether and how to respond to the risks associated with the opportunity; and (3) mitigate (i.e., manage) risk. In a group situation, risk management may be carried out at several levels and not solely by the legal entity that incurs risk through its operations. Performance of risk management may have an important effect on determining arm s length pricing. The parties contractual assumption of risk, even if followed, does not in itself determine that they should be allocated the risk for transfer pricing purposes. Need to assess how the risks are controlled and which party s functions enable it to face and mitigate the risks associated with business activities. Consideration should be given to where the capability and functionality exist in the group to manage the risks. Does not assign any meaningful role to capital as a determinant of which parties bear risk, and consequently, as a driver of expected returns. Capital alone would not be allocated any risk (and associated expected return) absent there being risk management functions related to that contribution of capital

35 Action Items 8-10 (Intangibles, Risk, Re-characterization) Non-Recognition Sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded/re-characterized for transfer pricing purposes. Non-recognition provision should not be used simply because a transaction is difficult to price. Rather, it will occur when an intercompany transaction does not have the fundamental economic attributes of arrangements between unrelated parties. An arrangement exhibiting the fundamental economic attributes of arrangements between unrelated parties would offer each of the parties a reasonable expectation to enhance or protect their commercial or financial positions on a risk-adjusted basis compared to their realistically available alternatives. Note that it does not need to be a transaction that is actually observed between unrelated parties

36 Part II: Special Measures OECD believes there is a need for special measures because of the potential for systematic mispricing where no reliable comparables exist, where assumptions used in valuation are speculative, and where information asymmetries are acute. Option 1: Hard-to-Value Intangibles (HTVI) Options 2 and 3: Independent Investor and Thick Capitalization Option 4: Minimal functional entity Option 5: Ensuring appropriate taxation of excess returns 36 36

37 BEPS Action Item 10 Profit Splits Functional Matrices Functional matrix to weight contributions of related parties with respect to value creation seems to indicate use of a Profit Split. RACI Responsible, Accountable, Consulted, Informed Potential pitfalls Does the approach provide for appropriate consideration of quantitative calculations? Can the analysis factor in the Purpose of a structure, historical contributions, use on a prospective basis? Assignment of categories and weights is subjective. Categorization and magnitude of attributes are not standard among practitioners. Stakeholders may have different thresholds on what constitutes responsibility. Is the CPM really broken for transactions with limited risk entities? 37 37

38 BEPS Action Item 10 Ex Ante Considerations Profit split approaches have been suggested as a way to address significant differences between ex ante and ex post results. In reality: Both anticipated and unanticipated events can lead to profitability that is different that anticipated (ex ante). Ex post results may appear unfair in hindsight, but arm s length results are often not fair. At arm s length, most negotiation and agreement on the mechanism for splitting profits takes place ex ante, when many important considerations are still unknowns: Actual costs; Consumer demand; Development success; Competitor moves; Regulatory changes; Profit Splits are to be performed on the basis of information known or reasonably foreseeable by the associated enterprises at the time transactions are entered into. The avoidance of hindsight is extremely challenging once uncertainties have been resolved

39 Action Item 13: CBCR / Documentation

40 Action 13 Overview Goals 1. To ensure taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns 2. To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment 3. To provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of certain entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses

41 Action 13 Masterfile / Local File Masterfile Requirements The master file should provide an overview of the MNE group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. Transfer pricing policies; Legal entity charts; Supply chain mapping for largest products/services; Functional analysis of individual entities; List of intragroup service arrangements; List of IP; IP ownership and intragroup IP arrangements; Description of internal and external financing arrangements; and, List and brief description of unilateral APAs and other tax rulings relating to allocation of income among countries

42 Action 13 Local File / Masterfile Local File Requirements The local file provides more detailed information relating to specific intercompany transactions. The information required in the local file supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm s length principle in its material transfer pricing positions affecting a specific jurisdiction. Relevant financial information in respect of transactions; comparability analysis; selection and application of most appropriate transfer pricing method; Description of local management structure, business strategy, related party payments and receipts for products, services, royalties, interest, etc. (per jurisdiction); intercompany agreements; functional analysis of related parties with which local party transacts, etc.; APAs (uni/ and bi/multilateral) as well as rulings for other countries that are connected to transactions of local entity

43 Action Steps

44 Future of TP Data Transparency for FYE 2016 and Beyond 44 44

45 Evaluating Global Value Chain Analysis Assess Alignment of Global Business Activities with TP Policies 45 45

46 Internal Value Drivers BU Segment 1 BU Segment 2 BU Segment 3 BU Segment 4 BU Segment 5 Corporate Strategy Corporate Services Manufacturing Transportation Processing Financing / Loans / Global Infrastructure Procurement R&D Services Distribution Brokerage Intangible Assets Physical Assets Financial Assets Risks Meant to capture 100% of the global profits by segments and corresponding functions, risks and assets 46 46

47 Global Functional, Risk and Intangible Asset Matrix (New Functional Analysis Process) Business Segments Transactions BU Segment 1 BU Segment 2 BU Segment 3 Bu Segment 4 Bu Segment 5 Operational Transactions Sale of Semi-finished Products 3P & IC 3P & IC 3P & IC 3P & IC -- Sale of Finished Products 3P & IC 3P & IC 3P & IC 3P & IC -- Provision of Toll/Contract Manufacturing Services IC IC -- Provision of Sourcing and Procurement Services IC -- IC Provision of Sales and Promotion Services IC -- IC IC -- Provision of R&D (Application Development) IC -- Licensing of IP IC -- Support Transactions Provision of Other Technical Services IC IC IC IC -- Provision of Corporate Services IC IC IC IC IC Provision of Financing and Insurance Services IC Assets and Risks Embedded within pricing of transactions 47 47

48 Benefits of Proactive TP BEPS Process Opportunities & Risk Management Risk management Compliance with OECD BEPS guidance and resultant country requirements Raise awareness within organization Prepare accounting departments for CbC reporting template Meet expected compliance requirements for Master File / Local documentation and CbC reporting templates Financial statement and SOX risks Review CBCR and value chain for opportunities to strengthen structure and reduce controversy risks Anticipate and address position, financial statement risk, external auditor concerns and manage ASC reserves Audit support Be prepared for potential audit information requests, questions and transfer pricing controversy Demonstrate good faith in complying with OECD-pattern disclosure and documentation requirements Articulate substance of intercompany transactions Avoid tax firedrills and focus on business Increase quality control and easier tracking of material prepared at the local level Manage risk of local country audits and double taxation 48 48

49 U.S. International Tax Reform

50 U.S. International Tax Reform Mega Trends Driving Bipartisan Support BEPS, $2.5 Trillion Lockout, and Inversions Territorial, Worldwide or Hybrid End Deferral? Expand Subpart F? What happens to DPAD? Will we have a Patent Box Regime? Repatriation Holiday or Toll Charge Camp, Administration s FY 2016 Proposal, Senate Working Group, and the Bipartisan Framework And, of course the Presidential Hopefuls 50 50

51 Corporate Tax Rates 51 51

52 G20 Corporate Tax Rates 2015 Graphic from A guide to UK taxation. Published March 2013 by UK Trade & Investment 52 52

53 Inversions In The Press 53 53

54 U.S. International Tax Reform Mega Trends Driving Bipartisan Support BEPS, $2.5 Trillion Lockout, and Inversions Territorial, Worldwide or Hybrid End Deferral? Expand Subpart F? What happens to DPAD? Will we have a Patent Box Regime? Repatriation Holiday or Toll Charge Camp, Administration s FY 2016 Proposal, Senate Working Group, and the Bipartisan Framework And, of course the Presidential Hopefuls 54 54

55 President s Framework Strengthen the International Tax System To Encourage Domestic Investment 28% = Top Corporate 19% = Minimum Tax on Foreign Earnings (no deferral) Less Foreign Tax Credit = 85% pre-country average effective tax rate 14% = One-Time Tax on Unrepatriated Foreign Earnings Less Proportional Foreign Tax Credit (14/35 = 40%) Increase the Domestic Production Activities Deduction 10.7% to bring the effective tax rate to 25% 55 55

56 Global Tax Analytics Base Case Assessment

57 Global Tax Analytics Study Base Case Assessment BEPS Country-by-Country Report Local Country Transfer Pricing Financial Metrics Historic Tax Attributes Foreign E&P/Tax Pools Foreign Tax Credit Position Global Effective Tax Rate Accessing Global Tax Analytics Protecting Tax Assets Mitigating Tax Risk and Optimizing Favorable Tax Attributes 57 57

58 Global Tax Analytics Requirements Global Legal/Tax Structure Accesses and Utilizes Historical Tax Attributes Flexible Parameter Driven Supports alternative tax positions, structural and tax law changes Multi-Jurisdictional Multi-year Analysis Multi-Purpose (Book and Tax) Supports Planning, Provision and Compliance Legal/Tax Structural and Transactional Analysis M&A, Supply Chain, Transfer Pricing, Repatriation 58 58

59 Data Elements Legal/Tax Structure U.S. and Local Jurisdiction Classifications Income Tax Rates Country & Extra-jurisdictional Historical Tax Attributes E&P/Tax Pools/Layers, NOL, ODL, OFL, Carryovers ASC 740/APB 23 Position Financial Information Current Year and Forecast Income Statement and Balance Sheet Tangible and Intangible Property Income Taxes Paid and Accrued Intercompany Transactions and Agreements Look-thru payments and Supply Chain 59 59

60 Global Tax Analytics What is the tax impact of alternative transfer pricing positions? What is the impact of E&P planning, including check-the-box elections? How would supply chain changes impact my selection of profit level indicators? How will tax reform impact repatriation planning and APB23 assertions, and our domestic production activities deduction? How will my repatriation plans impact my DPAD results? How will changes be reflected in the client s country-by-country report? What is the impact on the global effective tax rate? Result identify/quantify risk & optimize tax attributes

61 Global Tax Analytics Reports Organization Structure Display Effective Tax Rate Effective Tax Rate By Entity, By Country E&P Summary Report All CFC s & Switzerland Country-by-Country Report Table 1, Table 2 Local Country File Profit Level Indicators Transfer Pricing Adjustments Repatriation Analysis ASC 740 Roll-up Deferred Tax Liability 61 61

62 Organization Chart & Effective Tax Rate 62 62

63 E&P & Tax Pools All CFCs 63 63

64 E&P/Tax Pools Switzerland 64 64

65 Country-by-Country Report Table

66 Country-by-Country Report Table

67 Local Country File Profit Level Indicators 67 67

68 Transfer Pricing - Adjustments 68 68

69 Repatriation Analysis 69 69

70 ASC 740 Roll-Up DTL 70 70

71 Scenario Comparison Report 71 71

72 Wrap-Up - Q&A BEPS is the Advent of Global Tax Transparency Global Transfer Pricing Documentation Standards U.S. International Tax Reform Uncertain but Inevitable Protect Your Tax Assets (FTC, DPAD, ETR) Global Tax Analytics - Requirements A Strong Foundation Base Case Assessment Powerful comprehensive calculation engine Questions? Thank you! 72 72

73 Questions and Contact Information For additional questions on topics related to this discussion, please contact: Mark Gasbarra, CPA National Managing Director Forte International Tax, LLC (847) forteintax.com Susan Fickling-Munge, CBE Managing Director Duff & Phelps, LLC Chicago (312) DuffandPhelps.com 73 73