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transcript
15th AnnualConferenceMaximise
Managing TP risk inThailand in time ofchange
www.pwc.com/th
MaximiseShareholder Valuethrough EffectiveTAX Planning 2014 29-30 October 2013
TP legislation – the rat race
1994 or 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007earlier
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Slide 229-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Agenda
Section one: Transfer Pricing Policy – Practical Considerations
Section two: Managing ChangesSection two: Managing Changes
PwC Slide 329-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – PracticalConsiderations
PwC Slide 429-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsCharacterization of businesses
In transactions between two independent parties, compensation usuallywill reflect the functions that each party performs (taking into accountwill reflect the functions that each party performs (taking into accountrelated assets used and risks assumed).
Thus, characterization of the related parties is an important componentto a transfer pricing analysis. Characterization of businesses meansmaking comparisons of the functions and risks of the related partiesunder review and comparing those to independent parties that exist inthe same or similar industry.
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the same or similar industry.
Slide 529-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsCharacterization of businesses
Characterization of manufacturing entities
Contract Manufacturer
• Takes title
• Does not own technology
• Little risk
• Little discretion inproducing scheduling
• Does not totally controlequipment selection
Fully-fledged Manufacturer
• Takes title
• Owns technology
• Full risk of manufacturing
• Purchasing
• Production scheduling
• Select own equipment
• Direct control over quality
Toll Manufacturer
• Does not take title
• Does not own technology
• No purchasing
• Little risk
• Little discretion inproducing scheduling
• Does not totally control
PwC Slide 629-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
• Quality control usuallydictated by customer
• Usually manufacturinghigh volume, matureproducts
• Direct control over quality
• Manufacturing products at allstages of product life cycle
equipment selection
• Quality control dictatedby customer
• Usually manufacturinghigh volume, matureproducts
Transfer Pricing Policy – Practical ConsiderationsCharacterization of businesses
Characterization of distribution/ selling entities
Manufacturer’srepresentative
• Does not take title
• No credit risk
• No inventory risk
• No marketingresponsibilities
• No FX risk
Limited riskDistributor
• Takes title
• Credit risk minimal/parent controlspolicy
• Inventory riskminimal
• Marketing
Distributor
• Takes title
• Credit risk
• Inventory riskminimal
• Marketingresponsibilitieslimited
Marketer/Distributor
• Takes title
• Credit risk
• Inventory risk
• Total marketingresponsibilities
• May or may nothave FX risk
PwC Slide 729-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
• Marketingresponsibilitieslimited
• No FX risk
limited
• May or may nothave FX risk
have FX risk
Risk Return Trade-off
Transfer Pricing Policy – Practical ConsiderationsCharacterization of businesses
Inc
re
as
ing
pr
ofi
tp
ote
nti
al
0
15
30
45
60
75
PwC Slide 829-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
TOLLMANUFACTURER
CONTRACTMANUFACTURER
FULL FLEDGEDMANUFACTURER
MANUFACTURINGREPRESENTATIVE
DISTRIBUTORMARKETER
DISTRIBUTORLIMITED
DISTRIBUTOR
Increasing functions, risks, and assets
0
Transfer Pricing Policy – Practical ConsiderationsBusiness Models and Profit Allocation
“Expected”Residual
Profit/Loss
TotalProfit/Loss
“Expected"RoutineProfits
= +
PwC Slide 929-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsBusiness Models and pricing policy
Contractmanufacturer
Principaldistributor
Customer
Principal Distributor:Cost Plus
Suppliermanufacturer distributor
Fully Fledgedmanufacturer
Limited riskdistributor
Customer
Principal Limited risk CustomerContract
Principal Model:
Principal Manufacturer:Resale Price
Cost Plus Resale Price
Supplier
Supplier
PwC Slide 1029-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Principalentity
Limited riskdistributor
CustomerContractmanufacturer
Risk-takingmanufacturer
Risk-takingdistributor
Customer
Shared-risk Model:Cost Plus or Resale Price with Negotiation
Supplier
Supplier
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
FAR spectrum:
Toll manufacturer /Manufacturer
representatives
Fully-fledgedmanufacturer /
MarketerContract manufacturer / Limited distributor
Routine entities? Principals?
Low FAR High FAR
PwC Slide 1129-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Are you an intangible property (“IP”) owner?
What is an IP?What is an IP?
According to the OECD:
“Something which is not a physical asset or a financial asset, and which iscapable of being owned or controlled for use in commercial activities”
2 general categories of IPs
1. Manufacturing intangibles - patents, formula, manufacturing know-how,etc.
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etc.
2. Marketing intangibles such as trademark, trade names, business rights, etc.
IPs are often owned by the parent company, regional HQs, and/or central IPentity. However, IP owners are not always the sole Principal of the supply chain.
Slide 1229-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Are you the “strategic decision maker”?
Levels of decision makingLevels of decision making
• Strategic decisions:
These decisions affect and shape the direction of the business. (e.g. identifyingthe target markets, what R&D are to be undertaken, etc.)
• Control decisions:
These involve making decisions to keep the business on track. (e.g. decisionsabout taking actions when there are budget variances, production falling behindschedule, etc.)
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schedule, etc.)
• Operational decisions:
These are frequently made decisions and relate to the management andsupervision of activities. (e.g. ordering new stock, creating a production schedule,etc.)
Slide 1329-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Are you the “strategic decision maker”?
Under the arm’s length principal, YOU will be responsible for theconsequences of the decisions YOU make.
PwC Slide 1429-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Example: (OECD Guidelines paragraph 9.26)
Employer (IP owner)
Risks of Loss in failure of the research
• Makes decision to hire the researcher• Makes decision on the type of research
that should be carried out• Assign Objectives to the contract
researcher
Researcher
Operational Risks (possibility of losingits client, suffering penalty in case of
negligence )
• Report regularly to the investor• Makes decision on how to carry on the
research
PwC Slide 1529-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
researcher• Allocate the budget for the search• Able to assess the outcome of the
research conducted by researcher• Own the outcome of the research
research• Makes decision on how to use the
budget• Makes decision on hiring research staffs
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Example: (OECD Guidelines paragraph 9.25)
Investor
Risks of Loss in value of investment
• Makes decision to hire fund manager• Makes decision of the extent of the
authority it gives to the fund manager• Assigns Objectives to the fund manager
Fund Manager
Operational Risks (possibility oflosing its client)
• Makes decision on investmentalternatives
• Picks stocks• Report regularly to the investor
PwC Slide 1629-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
• Assigns Objectives to the fund manager • Report regularly to the investor
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Example: (OECD Guidelines paragraph 9.27)
Distributor
Risks of Loss in failure of the product
• Owns the technology and designs• Makes decision on whether to hire the
manufacturer• Makes decisions on the type of
products to be manufactured
Manufacturer
Assume risk from idle capacity andproduction efficiencies
• Make decisions on productionscheduling
• Is guaranteed that productsmanufactured will be sold to distributor
PwC Slide 1729-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
products to be manufactured• Makes decision on the technical
specifications of the products• Makes decision on the volume of
products and time of delivery• Be able to assess the manufacturing
activities of manufacturer, e.g. quality
manufactured will be sold to distributor• Manufacture according to technical
specifications of the distributor.
Transfer Pricing Policy – Practical ConsiderationsHow to identify your business model?
Control over risk (OECD Guidelines paragraphs 1.49 and 9.22)
In arm’s length transactions, it generally makes sense for parties to beallocated a greater share of the risks, and hence expected returns, overwhich they have relatively more control.
The party with greater control over risk should be allocated for thegreater risks and hence greater share of profits/losses.
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greater risks and hence greater share of profits/losses.
Slide 1829-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Transfer Pricing Policy – Practical ConsiderationsBusiness Models and Profit Allocation
Low to no control High control over
“Expected”Residual
Profit/Loss
TotalProfit/Loss
“Expected"RoutineProfits
= +
Low to no controlover risk, smallershare of profits or
losses
High control overrisk, greater share of
profits or losses
PwC Slide 1929-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing Changes
PwC Slide 2029-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesAltering TP policy
Business models should dictate the transfer pricing policy and hencethe allocation of profits.the allocation of profits.
If the current risk, hence profit, allocation between related parties is notin line with its respective business model, the related parties shall alterthe transfer pricing policy to appropriately reallocate the profits amongrelated parties participating in the same supply chain.
PwC Slide 2129-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Altering TP policy
• Transfer pricing review of the entities functional profiles and the• Transfer pricing review of the entities functional profiles and theappropriate benchmarking study;
• ‘Big bang’ or gradual;
• Manage transfer price within a range;
• Policy should be monitored regularly so that changes can be madeprospectively.
PwC Slide 2229-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Altering TP policy
Nevertheless, if the current allocation of profit is already in line with thebusiness model of the entities under the supply chain, altering thebusiness model of the entities under the supply chain, altering thetransfer pricing policy could only be achieved by altering the currentallocation of functions, risks, and assets between the entities under thesupply chain (i.e. business restructuring).
PwC Slide 2329-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – examples
1. Business restructuring1. Business restructuring
2. Inter-company charges
PwC Slide 2429-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Business restructuring
Customers
IP owner FFM
CustomersIP owner
PrincipalCM
LRD
Customers
ManufacturingLicense
ManufacturingLicense
Sale F/GManufacturing
License
Sale F/G Sale F/G
Sale F/G
Sale F/G
Sale F/G
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distribution
Slide 2529-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
FFM Customers
CM LRD CustomersSale F/G
Sale F/G Sale F/G
Sale F/G
Managing changesManaging risks in Thailand – Business restructuring
• Business driven• Business driven
• Economic substance
PwC Slide 2629-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
Inter-company charges are being introduced or increased as the taxInter-company charges are being introduced or increased as the taxauthorities of the home countries of the parent companies are no longerprepared to allow the costs incurred as tax deductible expenses.
PwC Slide 2729-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
Issues in relation to inter-company charges
Step 1:Are there substance and benefitfrom the charges?
Step 2:If yes, are the transfer pricesappropriate?
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Managing changesManaging risks in Thailand – Inter-company charges
Substance and benefit
With inter-company charges, there must be economic or commercialWith inter-company charges, there must be economic or commercialbenefit provided to group members.
An economic or commercial benefit is provided when the recipientwould have been willing to pay for if performed for it by anindependent party or perform it in-house.
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Increase in inter-company charges must come with increase in theeconomic or commercial benefit.
Slide 2929-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
Non tax deductible charges
Shareholder costs (OECD Guidelines paragraph 7.10)Shareholder costs (OECD Guidelines paragraph 7.10)
Activity that group member (usually the parent company or a regionalHQ) performs solely because of its ownership interest in one or moreother group companies, i.e. as a shareholder.
PwC Slide 3029-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
Non tax deductible charges
Duplicative services (OECD Guidelines paragraph 7.11)Duplicative services (OECD Guidelines paragraph 7.11)
Activities undertaken by one group member that merely duplicate aservice that another group member is performing for itself, or that isbeing performed for such other group member by a third party.
PwC Slide 3129-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
Non tax deductible charges
Incidental benefits (OECD Guidelines paragraph 7.12)Incidental benefits (OECD Guidelines paragraph 7.12)
Activities performed by group members that may produce economicbenefits for other members not involved in the object of the decision.Economic benefit could consist of e.g. increased efficiencies oreconomies of sale.
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The activities producing the benefits would not be ones for which anindependent enterprise ordinarily would be willing to pay.
Slide 3229-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
Appropriateness of the transfer prices
Transfer pricing benchmarking study to prove that the transfer pricesadhered to arm’s length standard
PwC Slide 3329-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Managing changesManaging risks in Thailand – Inter-company charges
• Documents supporting the substance and benefit• Documents supporting the substance and benefit
• Arm’s length pricing
PwC Slide 3429-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
PwC Slide 3529-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
TP to Go
PwC Slide 3629-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Contact
Peerapat PoshyanondaPartnerPartnerTel: +66 (0) 2344 1220peerapat.poshyanonda@th.pwc.com
Janaiporn KhantasomboonPartnerTel: +66 (0) 2344 1437
PwC
Tel: +66 (0) 2344 1437janaiporn.khantasomboon@th.pwc.com
Slide 3729-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014
Thank you
© 2013 PricewaterhouseCoopers Legal & Tax Consultants Ltd. All rights reserved.'PricewaterhouseCoopers' and/or 'PwC' refers to the individual members of thePricewaterhouseCoopers organisation in Thailand, each of which is a separate andindependent legal entity. Please see www.pwc.com/structure for further details.