The TPA Global Services

The TPA Global Services Theme 2012: Effective Tax Risk Management

Transfer Pricing Associates is a member of TPA Global. TPA Global is a global alliance network that provides international businesses with integrated and value-added solutions in improving financial performance, operational efficiency, strategic development and talent coaching. tpa-global.com

What are the 2013 trends and topics for transfer pricing Managing your effective corporate income tax rate, i.e. for both overall profit and loss consolidated results. Aggressive tax authorities due to budget deficits. Need for control framework, i.e. talk to your business and IT professionals. Interplay TP and customs / VAT / sales tax / withholding taxes. Special considerations for developing countries. Majority of transfer pricing documentation not (fully) aligned with multinationals business model. High tax authority s awareness on complex topics, e.g. business restructurings and intangibles. Special expertise requested by multinationals: year-end adjustment manuals, TP software, cash pool, funding/treasury etc. www.tpa-global.com 3

The TPA Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs, headquartered in Amsterdam and with our own offices and coverage in over 50 countries around the world. Who we are Independent Global Specialist TPA is an independent firm No audit/attest work is carried out, only transfer pricing, customs and valuations No conflicts of interest or corporate governance issues with Transfer Pricing Associates TPA is present in 50+ countries through own offices and strategic alliances Global teaming/sharing model to allocate best expertise to projects/ clients - reduce delivery times Globally consistent top quality Continuity in leadership and project teams Running a steady, legally and operationally integrated network Each TPA professional has at least 5 years of dedicated transfer pricing experience in: Big 4 Industry Boutique consulting firms Global knowledge sharing Commitment to technical excellence What are your benefits? Superior client service with quick turnaround Senior professionals involvement throughout projects A hands on approach to implementation issues Consistent global approach and performance Your best choice for global transfer pricing, tax valuation and customs solutions Coaching role: moves intelligence to corporates Low overheads and competitive pricing Unique selling points Independent Global reach & staffing Senior staff at competitive fee Quick turnaround www.tpa-global.com 4

Where we are Senior professionals 200+ Transfer Pricing 50+ countries Valuations 15+ countries Customs 15+ countries Americas Argentina; Belize; Brazil; Canada; Chile; Columbia; Costa Rica; Ecuador; El Salvador; Guatemala; Honduras; Mexico; Nicaragua; Panama; Peru; USA Europe/Africa Austria; Belgium; Denmark; Egypt; Estonia; Finland; France; Germany; Israel; Hungary; Italy; Kenya; Latvia; Lithuania; Luxembourg; Netherlands; Poland; Portugal; Romania; Russian Federation; South Africa; Spain; Switzerland; Turkey; Ukraine; United Kingdom Asia/Pacific Australia; Cambodia; China; Hong Kong; India; Indonesia; Japan; Laos; Myanmar; Singapore; Thailand; Vietnam www.tpa-global.com 5

Transfer Pricing What we do Design of Transfer Pricing System Global Benchmarking Platform Controversy Year-end Adjustments Transfer Pricing Control Framework Valuation Valuation Services Purchase Price Allocations (PPAs) Customs Implementation & Compliance Services Policies and Compliance Tasks Transfer Pricing and VAT Transfer Pricing and Withholding Taxes Transfer Pricing in developing countries Corporate Perspective Supply Chain Intangibles Substance Treasury Procurement Captive Insurance www.tpa-global.com 6

The Transfer Pricing Process developed by Transfer Pricing Associates 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: 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 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 www.tpa-global.com Transfer Pricing Design of Transfer Pricing System 7

How to meet your benchmarking needs Through a Global Benchmarking Platform (GBP) high quality benchmarking solutions across every continent The benefits of a GBP include: a. A broad range of databases providing multinationals with access to the most comprehensive benchmark solutions for a particular country, region, or the world. b. Follows best practice approach to benchmarking established by Transfer Pricing Associates professionals through many years of experience and constant dialogue with the major stakeholders - the business community, the tax authorities and the OECD. c. Highly flexible solution that can be used to support your in-house tax resources or as a fully outsourced benchmarking system. d. TPA also provides benchmarking studies to support a range of treasury and financing activities of MNCs and financial institutions, including interest spreads/margins and guarantee fees, utilising applicable databases such as LoanConnector/DealScan. e. A global group of more than 50 senior benchmarking professionals at your service. 1. Do you outsource or insource benchmarks? 2. Are benchmarks parts of your TP control framework? 3. What is the frequency of performing benchmarking studies? 4. How do you reconcile regional versus local benchmarks? www.tpa-global.com Transfer Pricing Global Benchmarking Platform 8

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 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? www.tpa-global.com Transfer Pricing Controversy 9

How to deal with Year-end Price Adjustments Fields of Expertise Services Transfer pricing and corporate income tax Customs VAT IT Feasibility assessments Set-up of internal controls and programs Implementation procedures Year-end Adjustments manual 1. How to deal with price / profit adjustments when your financial results depart from targeted arm s length outcomes? 2. How to structure and implement internal procedures and controls to comply with arm s length standard world-wide? 3. How to build an integrated legal and financial framework to address global year-end adjustment challenges from a multiple perspective: corporate tax, transfer pricing, customs duties and VAT? 4. How to align Year-end Adjustment looking at the following 3 perspectives: transfer pricing, customs and VAT? www.tpa-global.com Transfer Pricing Year-end Adjustments 10

By applying a multiple perspective approach People a. Performance measurement b. Geographical spread of knowledge workers c. Knowledge sharing d. Succession planning e. Experience level f. Number of TP knowledge workers Workflow a. Global benchmarking process b. Document management process c. Financial data retrieval and conversion process d. Aligned formatting TP relevant data How to set up a transfer pricing control framework Internal communication with business External communication with stakeholders e.g. tax authorities Software a. Most relevant functionality b. TP specific storage platform c. Alternative software solutions Reporting a. Checks & balances on TP risks b. Interaction central TP local TP team c. TP dashboard for CFO d. Responsibility/accountability e. TP policy paper 1. What is your optimum in-house knowledge workers configuration? 2. How many of the TP relevant processess are in place? 3. What is your 1 to 2 years TP software strategy? 4. How is your segregation of duties & responsibilities defined for transfer pricing? www.tpa-global.com Transfer Pricing Transfer Pricing Control Framework 11

What events trigger valuation Tax / Transfer Pricing Accounting Legal Ante E V E N T Post Business valuation (Intangible) asset valuation Purchase Price Allocation Impairment test Forensic valuation Expert witness Support price negotiations Pre-filing / APA Part of transfer pricing project Financial reporting purposes Court cases (multidisciplinary approach) 1. What valuation methods to use? 2. How to align valuations from different perspectives (accounting, tax, transfer pricing)? 3. How to use valuations to actively manage intangibles and create value? 4. When does transfer pricing legislation overlap with valuation of intangibles? www.tpa-global.com Valuation Valuation Services 12

In case the definition of intangibles for accounting purposes does not match your definition for tax/transfer pricing purposes. Weighted Return of Assets 16% x 200 / 1000 12% x 150 / 1000 8% x 500 / 1000 Goodwill Intangibles PP&E Enterprise Value 1000 (Equity + Financial Debt) WACC = 10% How does your PPA influence your future state transfer pricing 5% x 150 / 1000 NWC 1000 1000 Weighted Return of Assets WACC 1. How to treat goodwill from an accounting versus tax/transfer pricing perspective? 2. How to treat embedded workforce from both perspectives? 3. How to deal with different ownership concepts? 4. What to do in case goodwill allocation to local group company does not match local earning capacity? www.tpa-global.com Valuation Purchase Price Allocations (PPAs) 13

value, origin and formalities) Legacy Customs Value Classification Duty Rate Origin / Preference Rules/Risk Factors Related party tests; Royalties & license fees; R&D; Debit/credits Tariff Rules; Form vs. Function; Changes in composition inconsistencies Qualification rules; Added value; Direct transport; Direct sale Business Model/ Risk Factors TP; Royalties; Waivers; Invoices; Declaration process New product coding; Materials; Formulation Changes Origin commitments in pricing negotiations How to deal with customs planning and risk management Reliefs / Drawbacks Authorization; Economic Justification; Conditions; Discharge/reconciliation Process Definition and Awareness Analyze & Deliver New Supply Chain Security Some specific (e.g. US: C-TPAT and EU: AEO), EU Proposals Policies and standards practice; IT lead times; Reactivity Supply chain optimization through customs planning Customs compliance and software solutions Litigation (classification, custom Non-tax measures 1. How to identify strengths/weaknesses against customs rule base and external threats? 2. How to mitigate trade impasses, fines/penalties, seizure of goods, legal proceedings and criminal charges? 3. Do you integrate 3rd party and country considerations e.g. some countries known to act inconsistently with WCO/WTO custom rules? 4. What are your considerations on systems development which can significantly enhance compliance and security www.tpa-global.com Customs 14

Through implementation and compliance Implementation Draft, sign & implement an intellectual property policy Compliance Provide and assess country risk for all countries (country risk matrix) How to implement and maintain inter-company transactions Draft, sign & implement a transfer pricing policy Draft, complete and sign all relevant transfer pricing compliance forms on a country-by-country basis Draft, sign & implement a year-end adjustment manual Annual check and updates of intercompany agreements Draft, sign & implement a (series of) intercompany agreement Draft, assess & implement managerial aspects of transfer pricing systems (e.g. KPIs for bonus) Align legal reality with economic reality i.e. business model Customs scan and audit program (e.g. CTPAT & AEO) 1. Does your IT system support your TP system? 2. What (amendments of) legal agreement/s are needed? 3. How to monitor compliance? 4. How to keep track of relevant business developments? www.tpa-global.com Implementation & Policies and Compliance Services Compliance Tasks 15

What VAT implications are transfer pricing related Intercompany delivery of goods Year-end adjustments Reverse charge mechanism Triangular deliveries Reclaim of input VAT Customs impact Intercompany delivery of Year-end adjustments Reverse charge mechanism Reclaim of input VAT Determine type of service delivered (VAT vs. TP classifications) Limitations on VAT reclaimable portion for financial and other similar 1. How to optimize the transfer pricing transaction and billing route without any VAT leakage? 2. How to streamline your intra-group logistics and reduce the working capital locked up into VAT positions? 3. What are your major risk areas where you cannot reclaim input VAT or only with significant delays? 4. Are you able to reclaim VAT already paid in case of a year-end adjustment for transfer pricing purposes? Implementation & www.tpa-global.com Compliance Services Transfer Pricing and VAT 16

Through the following type of intercompany transactions Where do TP and WHT interact Label Interest Royalty Dividend Services /other Parties Beneficial owner Substance Ranking Local regulations < > Treaty Tax Accounting Tax credit < > Tax cost Addressing the following questions: 1. Does your TP label also apply for treaty application? 2. How does the WHT crediting option interact with TP analysis? 3. What WHT rates apply, local or treaty? 4. What formalities need to be taken into account? Implementation & Transfer Pricing and www.tpa-global.com Compliance Services Withholding Taxes 17

What are the practical hurdles when dealing with transfer pricing in developing countries * = Until 1 April 2012 X = based on TPA/alliances partner s experience in the last 12 months Transfer pricing and related matters: some typical risks and considerations Transfer Pricing Brazil Russia India China South Africa Statutory profit mark-up margins X - - - - OECD guidelines are not followed X X X - - Functions/risks not relevant for tp rules X X - - - Secondary tax when actual charge is not made - X - X - Year end adjustments not allowed - - - X X* Corporate taxation Withholding tax on overseas payments X X X X X Business tax on - - - X - Thin capitalization X - - X X Custom Duties Potential duties on re-import of finished goods X X X X - Central excise on goods manufactured - - X - - Valuation issues X X X X - Relatively high import duties / tax audit activity X X X X X Inconsistency with transfer pricing X X X X - VAT Registration issues X X X X X VAT refund and leakage X - X X - Permanent establishment issues PE concept not well-defined X X - X - Various deficiences from regular approach - - X X - Legal, regulatory, foreign exchange Authorization industry or business license X - - X - Exchange control or remittance restrictions X - X X X Cap on royalty payments X - - - X Implementation & Transfer Pricing in www.tpa-global.com Compliance Services developing countries 18

How to determine your supply chain strategy Through logistic planning Overall Market-to-market Process z e r b a i j a Azerbaijan n Overall Market-to-market Process Overall Market-to-market Process Sales & Operations planning Project driven demand Sales & Marketing Demand management Supply Chain Set service levels and strategy R&D Admin Local Group Co. Manufacturing Contract Manufacturer (Tolling) Sales Co Sell goods Economic sales effect Distribution & Logistics Sell goods & after sales service CUSTOMERS Inventory strategy Headquarters Technology Centre Shared Services R&D Admin Management SUPPLIERS Purchase materials legal title physical flow SCM Principal company Manufacturing Deliver materials Deliver goods Distribution Centre Local supply chain Local supply chain Industrial Site Local supply chain Industrial Site Technology Centre Purchase materials Contract Manufacturer (Tolling) Processing Services Sales Co Sell goods & after sales service Sell goods Economic sales effect Distribution & Logistics CUSTOMERS Headquarters Management Technology Centre Shared Services R&D Admin SUPPLIERS Purchase materials Deliver materials Deliver goods Distribution Centre legal title physical flow SCM Principal company Manufacturing Contract Manufacturer (Tolling) Processing Services Sales Co Sell goods & after sales service Sell goods Economic sales effect Distribution & Logistics CUSTOMERS Deliver goods Through tax/legal/ transfer pricing optimization Distribution Centre 5 Production planning Inventory strategy Shared Services SUPPLIERS legal title physical flow Set service levels and strategy Production planning Production planning Inventory strategy Through organizational design Supply planning Supply planning Supply Chain Supply Chain Supply planning Deliver materials Master planning Master planning Set service levels and strategy Management Project driven delivery Demand management Industrial Site Sales & Marketing Project driven delivery Master planning Headquarters Sales & Operations planning Project driven demand Sales & Operations planning Project driven demand Project driven delivery Demand management Azerbaijan Sales & Marketing A 5 5 1. Which location strategy fits your business? 2. How to align your organizational design with your flow of goods? 3. How to optimize tax implications? 4. How to ensure your tax/legal/transfer pricing optimization are IT embedded solutions? www.tpa-global.com Corporate Perspective Supply Chain 19

Cost Center contractors Manufacturing R&D Logistics Supplier Profit Center + Investment Center Revenue Center sales/ hubs Sales/Marketing Repair & Warranty Call Center Customer How to locate intangibles in your value chain Packaging SSC Supplier IP Company / Investment Center IP creation & management access to residual result no access to residual result Royalty Cost Center contractors Manufacturing R&D Logistics Packaging SSC 1. What labels are used to address intangibles? 2. How do you recognize intangibles? 3. How to determine ownership of intangibles? 4. How to price/value any transfer of intangibles? Profit Center Dashboard/Matchmaker Revenue Center sales/ hubs Sales/Marketing Repair & Warranty Call Center Customer www.tpa-global.com Corporate Perspective Intangibles 20

Through determining a policy for single versus shared ownership Example: product intangibles How R&D activities lead to ownership of intangibles R&D Cost Centralized Decentralized R&D Activities Centralized Decentralized Sole owner Sole owner + contract R&D Cost contribution/ Cost sharing Cost contribution/ Cost sharing 1. How do you protect your product and process intangibles? 2. What single versus multiple ownership definition do you use? 3. What type of intercompany agreements are in place for R&D activities? 4. How do you deal with geographies transfers of R&D activities? www.tpa-global.com Corporate Perspective Ownership of Intangibles 21

How to deal with substance issues for IP companies Do s Identify key decision makers Sufficient physical presence, Home base Payroll On site decision making Through defining do s and dont s Dont s Minimize key decision makers Make binding decisions abroad unless proper authori zation procedure Split payroll if not consistent with physical presence Minimize physical presence of key personnel Be inconsistent with own policies Through appropriate audit trails (paper and digital) Decision making policy Individual decision making Agreements Authority /responsibilities Pricing policy Activity Minutes of meetings/agenda s Negotiations Phone bills Travel document Digital agenda 1. How to ensure a critical mass of key decision makers to geographically anchor IP ownership? 2. How can IT support or undermine your case? 3. How to deal with modern ways of communications and commuting? 4. How to manage behavioral aspects? www.tpa-global.com Corporate Perspective Substance 22

How to deal with your inhouse treasury function Through proper pricing of the following intercompany financial transactions Group guarantor Provision of guarantee Cash pool leader Short-term funding through the cash pool Group companies Banks/Lenders Facility Agreements On-lending of funds sourced from banks/lenders Long-term funding Group lender (Long term loans) 1. How to deal with intermediate finance companies? 2. How to determine intercompany guarantee fees? 3. How to allocate the benefit in a groupwide cash pool structure? 4. How to price long term loans? www.tpa-global.com Corporate Perspective Treasury 23

Through analyzing your global procurement management team Purchase Management Functions in one or more locations Company name Managing stock level Initiating purchase orders Determine sales prices Managing quality issues FTEs engaged in Weighting Relative weights A x x x x 10.5 12 126 B x x - x 3 7 21 C x x - x 0.5 6 3 How to measure and remunerate procurement management functions Value of ABC Procurement Team* 16% * Expressed as percentage of annually recurring savings on procured value of goods/ 1. How to remunerate a centralized procurement function? 2. How to distinguish and remunerate headquarters role versus subsidiaries? 3. Does your centralized purchasing hub employ unique professionals? 4. Does your centralized purchasing hub generate its own intangibles (content/platform)? www.tpa-global.com Corporate Perspective Procurement 24

First Model Second Model Third Model Criteria Diversification of risk No Yes Yes Outcome of the test Captive is making key No No Yes decisions Captive possesses adequate capital to absorb insurance and insured risks No No Yes Responsibility of the Captive N/A Cost Center Profit Center Typical transfer pricing model Through a function/risk/equity analysis N/A Cost plus (on Captive s operating expenses) CUP or Premium calculation based on: 1. Risk adjusted return on capital 2. Loss predictions 3. Compensation for the Captive s operating expenses What business model applies to my group captive 1. How can I prove that my captive has a key decision role with respect to key policies relating to the self-insurance process? 2. Would a monthly conference call chaired from the captive premises and addressing key policies be enough to state that the captive has a key decision role on those? 3. How can I verify the arm s length nature of our internal methodology used to calculate the premium to be paid by each insured affiliate to the captive? 4. How can I efficiently document the transfer pricing system of my captive having transactions with its 40 plus affiliated companies? www.tpa-global.com Corporate Perspective Captive Insurance 25