www.pwc.com/sg Striking the right balance PwC Budget Seminar 1 March 2013 Transfer pricing plenary

www.pwc.com/sg Striking the right balance PwC Budget Seminar 1 March 2013 Transfer pricing plenary

Q&A Q1 Which of the following best describes transfer pricing for you? a) A vague concept only relevant to professional advisors b) A way to artificially shift profit to low tax locations c) A management accounting technique d) The application of arm's length principle to transactions between companies in our group e) Never heard of it PwC 2

Recent trends OECD report on base erosion and profit shifting marks new discussion of tax reform International Tax Review 12 February 2013 A debate at the Centre for the Study of Financial Innovation yesterday concluded that the international tax system is at risk of breaking apart under the strain of aggressive tax competition and avoidance. The OECD BEPS report is the first step towards fixing this PwC 3

Global developments OECD s Base Erosion and Profit-shifting ( BEPS ) Report Purpose and concept of the OECD BEPS report: Addressing perception that governments lose substantial corporate revenue because of tax planning aimed at eroding the taxable base of a company and shifting profits to lower-tax jurisdictions A result of the changing business environment and ease of doing business across borders There are six key pressure areas mentioned in the BEPS report, one of which is transfer pricing. Key pressure area: Transfer pricing, particularly in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents OECD needs to address the perception that transfer pricing is a tool for profit shifting and base erosion - Pascal Saint-Amans, Director of OECD Centre for Tax Policy and Administration PwC 4

Q&A Q2: Which of the following transfer pricing related issues have you encountered in your dealings with the tax authorities in the region? a) Choice of transfer pricing methodology b) Comparable companies c) Management fee deductibility d) Royalty charge e) Market premium f) Others PwC 5

Q&A Q3: How regularly does your company prepare transfer pricing documentation? a) Contemporaneously b) Every 2 to 3 years c) As per local country requirements d) Never e) When tax authorities come knocking on your door f) Others PwC 6

Managing transfer pricing risks Various types of transfer pricing documentation Commercial rationale paper Legal agreements Transfer pricing documentation (local) Besides transfer pricing documentation, other forms of documentation should be kept to support transfer pricing arrangements Increasingly crucial to document the commercial rationale behind a business transformation Chapter IX paper Transfer pricing documentation (masterfile) Important to evidence substance behind the commercial rationale i.e. evidence which entity has the control and management of functions and risks and the ability to service those risks RACI Matrix/ Job descriptions If a structure fails the substance test, tax authorities can disregard certain transactions or even question the entire structure PwC 7

Managing transfer pricing risks Transfer pricing as a planning tool High A B Do nothing Not acceptable Risk E D C Country Documentation Regional Documentation Commercial Agreement Specific compliance requirements If no transfer pricing documentation requirements Documentation to manage compliance risks To actively strategise and manage tax risk - consider approaching the tax authorities Low F Bilateral APA Unilateral APA Costs / regulatory issues Change in business models or for gaining certainty Cost High Low PwC 8

Alternative risk management strategies MAP vs APA What are some of the solutions to manage transfer pricing disputes which can result in economic double taxation for a Group? Mutual agreement procedures (MAP), a reactive approach Advance pricing arrangements (APA), a proactive approach There are now more than 130 completed APAs per year from Japan, the US, Australia, and Korea alone, up from less than 90 in 2003 APAs growing in popularity in Asia, with long-established regimes in Japan and Australia; growing regimes in Korea, China and other countries; and unilateral and bilateral APA programs in India scheduled to start soon PwC 9

Alternative risk management strategies PwC Singapore s tax controversy and dispute resolution experience PwC Singapore has assisted clients in negotiating and concluding more than 15 bilateral APAs / MAPs and is currently assisting with 11 more bilateral cases, out of approximately 50* cases in Singapore. Further, PwC Singapore has concluded 4 unilateral APAs with the IRAS and is assisting in two on-going cases. First bilateral APA with UK Completed 1 In progress 1 Total - 2 First MAP with France Completed 1 Total 1 First bilateral MAP with Indonesia In progress 2 Total 2 First bilateral APA with China Completed 1 In progress 1 Total 2 First bilateral APA with Korea In progress 1 Total 1 First bilateral APA and MAP with Japan Completed 10 In progress 4 Total 14 First bilateral APA with Taiwan Completed 1 In progress 1 Total - 2 First bilateral APA with Australia Completed 1 Total - 1 Bilateral APA with Thailand In progress 1 Total - 1 *This is not an official public figure, but is based on our understanding from the tax authorities PwC 10

Vision of the future Formulary apportionment? Disregard for contractual migration of risks substance over form? Significant people functions? Top level decision makers? Or Second tier operating management team? Profit split methodology? Adoption of UN TP Manual? PwC 11

Thank you The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Services LLP ( PwC ). Before taking any action, please ensure that you obtain advice specific to your circumstances. The materials contained in this presentation were assembled on 28 February 2013 and were based on information available at that time. 2013 PricewaterhouseCoopers Services LLP. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. PwC 12