| Date post: | 23-Dec-2015 |
| Category: |
Documents |
| Upload: | sabrina-dennis |
| View: | 215 times |
| Download: | 2 times |
Gary Thomas, White & Case, TokyoSam Sim, Standard Chartered Bank, SingaporeClemens Thyme, S&P Capital IQ, Hong KongMichael Quigley, White & Case, Washington DC
Asia Tax Forum 2012Raffles Hotel, SingaporeMay 9-10, 2012
TRANSFER PRICING IN ASIA: THE GROWING ACCEPTANCE OF THE
ARM’S LENGTH PRINCIPLE
May 9, 2012 2
TOPICS
I. INTRODUCTION
II. MATURING OF THE ARM’S LENGTH PRINCIPLE IN JAPAN: A LESSON FOR THE REST OF ASIA?
III. COMPETENT AUTHORITY AND TRANSFER PRICING: HOW IS IT WORKING IN ASIA?
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES
V. TRANSFER PRICING – CREDIT RISK ASPECTS
VI. CURRENT ISSUES BEING RAISED IN LITIGATION
VII. CUSTOMS AND TRANSFER PRICING: WHAT YOU SHOULD BE AWARE OF
VIII. FUTURE OF TRANSFER PRICING IN ASIA
IX. QUESTIONS
May 9, 2012 3
I. INTRODUCTION
1. Introduction of Panelists
2. Overall Panel Topic: “Growing Acceptance of the Arm’s Length Principle” in Asia
1) Merits – The Arm’s Length Principle is accepted!
2) Demerits – The Arm’s Length Principle (whatever it is) is required!
3. Using Japan as an Example of How Application of Arm’s Length Principle Has Evolved Over Time
4. Competent Authority: Is It Working in Asia?
5. Special Challenges in Financial Services
6. Applying the Arm’s Length Principle to Intra-Group Loans and Guarantees
7. Recent Litigation Issues
8. Transfer Pricing and Customs
May 9, 2012 4
II. MATURING OF THE ARM’S LENGTH PRINCIPLE IN JAPAN: A LESSON FOR THE REST OF ASIA
A. Outline Historical Background Recent History Application of the Arm’s Length Principle Over the Years Advance Pricing Arrangements New Transfer Pricing Enforcement Approach in Japan: Focus on Taxpayer
Voluntary Compliance Japan as a Lesson for the Rest of Asia?
May 9, 2012 5
Historical Background of Transfer Pricing Enforcement in Japan
Adoption of Transfer Pricing Rules in 1986 Reaction to US Internal Revenue Service assessments against US subsidiaries of major
Japanese corporations from early 1980s Transfer Pricing Rules Take Effect in 1987 Initial NTA Enforcement Policies (1987-1989)
Collection of Information by Survey “Soft Touch” Enforcement Approach Adoption of “Centralized Management” by International Examination Section in NTA
Early Japanese Transfer Pricing Cases Focused on Foreign-Based Firms (1989-1996)
Expansion of Focus Toward Japanese Firms’ Outbound Transactions (from 1996) Impact of APA Program in Recent Years in Reducing Number of Audits Continuing Aggressive Audit Activity Impact of Introduction of Transfer Pricing Documentation Requirements in 2010
May 9, 2012 6
Recent History in Transfer Pricing Compliance Rules
Release of NTA Transfer Pricing Guidelines (2001) Addition of Transfer Pricing Provisions for Consolidated Corporations (2002) Requirement of Disclosure of Transfer Pricing Methodologies in Schedule 17-3
(2003) Introduction of Transactional Net Margin Method (“TNMM”) (2004) Expansion of Coverage of “Foreign Related Parties” (2005) Introduction of the Profit Methods (TNMM and PSM) in Presumptive Taxation
(2006) Introduction of Tax Payment Suspension Regime Specifically for Transfer
Pricing Assessments in Competent Authority (2007) Expansion of Exchange of Information Rules (2009) Codification of Transfer Pricing Documentation Requirements (2010) Introduction of “Most Appropriate Method Rule” (2011)
May 9, 2012 7
Transfer Pricing Assessments Since FYE 1999
58.945.4
38.1
85.772.5 75.8
216.8
283.6
105.1
169.6
28.6
68.7 69.8
59
38 3943
62 62
82
119
101
133 134
100
146
0
50
100
150
200
250
300
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(unit: JPY billion)
0
20
40
60
80
100
120
140
160
Assesssment amount (total) Number of cases
Historical Chart of Transfer Pricing Assessment in Japan since FYE 1999
*Each fiscal year shows FYE June XXX(Source: NTA Press Release)
May 9, 2012 8
Threshold Question: Is Comparability of “Transactions” to be Based on Single Transactions or Groupings of Transactions?
Historical NTA Position: Singular and strictly transactional, with aggregations within product group or business segment permitted in limited circumstances
“where setting of price is performed taking into consideration transactions belonging to same product group …or same business segment”
Use of “mini-baskets” in practice – but no overall company comparisons were accepted
Historical NTA Position: There is only one arm’s length price. Japanese transfer pricing law does not recognize ranges
But, in recent practice, NTA accepts overall company comparisons and considers the use of ranges
May 9, 2012 9
Comparable Uncontrolled Price Method
Early application of secret comparables based on “single transaction” interpretation
Failure of NTA to disclose identity of comparable product, comparable transaction or comparable company – “secret comparables”
Taxpayer was prevented from performing an effective comparability analysis. Failure to make appropriate adjustments for differences in commercial
level, transaction volume and other factors, such as business strategies Subsequent difficulty to sustain secret comparables in competent
authority negotiations Use of CUP now seems to be the exception.
May 9, 2012 10
Resale Price Method
Singular or Plural? NTA officials originally interpreted the Resale Price Method provisions as referring
to “transactions” in the “singular,” resulting in application on a strictly transactional, “product-by-product” basis, with no aggregations of products and transactions recognized.
Criticisms of strict transactional approach Taxpayers without “internal” comparables could not use the Resale Price Method unless they
could identify (from information on competitors) specific gross margins of specific competing products which are similar to the Taxpayer’s products (and will be considered “similar” by the NTA on audit) and make necessary adjustments for differences in functions or other matters in regard to such specific transactions.
Requires use of “secret comparables” by tax authorities Gradual adoption of company-wide comparison approach
Ultimately, difficult to sustain in competent authority negotiations NTA now accepts company-wide comparison approach and has become more flexible in
applying the Resale Price Method
May 9, 2012 11
Profit Split Methods
Early preference for profit split methods in US/Japan competent authority cases
Development of conceptual arguments for applying profit splits Early criticism of “one-sided” approaches and concern for “income creation”
NTA Guidelines instruct examiners to compare Japanese profits vs. foreign profits
In past, NTA favored “contribution profit split” and use of two factors indicating relative value added: depreciation expense and personnel expense
Critics argue that Japanese Contribution Profit Split fails to take into account the value of intangible property embedded in products provided by foreign suppliers.
NTA has also used advertising and promotion expenses and other selling expenses of Japanese subsidiary of foreign based firm, resulting in high allocations of overall profits to Japan.
May 9, 2012 12
Profit Split Methods (cont’d)
NTA adopted “residual profit split” and “comparable profit split” by circular based on OECD Transfer Pricing Guidelines
NTA sometimes applied Residual Profit Split but ignored contracts and legal ownership to attribute high value to alleged “marketing intangibles” in Japan.
More recently, NTA has favored use of Residual Profit Split on outbound intangible transactions of Japanese companies
Document requirements included disclosure of foreign segment profit-and-loss data.
Recent defeat in court case involving profit splits
May 9, 2012 13
Transactional Net Margin Method
NTA historical antipathy toward TNMM History of US assessments against Japanese firms based on Comparable
Profits Method (CPM) and “income creation” issue Active Japan involvement in drafting OECD 1995 Transfer Pricing
Guidelines paragraphs limiting use of TNMM Gradual acceptance from late 1990’s of “modified resale price method”
to resolve MAP cases and reach bilateral APAs TNMM finally adopted into Japanese tax law in 2006
Policy objective seemed to be to apply to Japanese firms’ outbound transactions.
But adoption occurred at same time as agreement to revise US/Japan income tax treaty
TNMM was positioned as an “other method” with lesser priority than RPM or other basic methods
May 9, 2012 14
Transactional Net Margin Method (cont’d)
NTA was reluctant to apply TNMM in transfer pricing audits just after its introduction in 2004
But from 2006 or so, NTA increasingly accepted TNMM in bilateral APAs and unilateral APAs and later on in audits as well
TNMM was included as a presumptive taxation method in 2006. It is expected that TNMM will be applied more extensively going forward,
although tax authorities’ views on comparables will likely be different from those of taxpayers.
May 9, 2012 15
Seeking Certainty: Advance Pricing Arrangements Become More Prevalent
Advance Pricing Arrangements (APA) confirm that, once a tax authority evaluates the transfer pricing methodology and its validity, and accepts them as reasonable, as long as the firm conducts transactions according to the contents under certain preconditions, there would be no taxation on transfer prices.
Principal merits and demerits Merit: Secure predictability in transfer pricing Merit: Mitigate the transfer pricing risks (presumptive taxation, secret comparables
and penalty) Merit: More flexibility in applying methods as compared to an audit Demerit: Required to submit much information to tax authorities for APA review,
which can be like an audit Demerit: Administrative burdens and expenses
On balance: Should now be seriously considered!
May 9, 2012 16
Trends in Bilateral APAs in Japan
Increasing number of APA applicationsTrends in Bilateral APA Cases
42 47
8063
92105 113
130149
135
25
4739
4965
84 8291
105
128
88 88
129143
170
191
222
261
305 312
0
50
100
150
200
250
300
350
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Cases Received
Cases Disposed
Cases Carried Over
(Source: NTA Press Release)
May 9, 2012 17
Trends in Bilateral APAs in Japan
Increased number of APAs with Asian countries
1824
16 2029
39 43 4147 425
17
18
26
27
34 2536
35 50
2
6
5
3
9
1114
14
23
36
0
20
40
60
80
100
120
140
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Other
Asia/Oceania
Americas
(Source: NTA Press Release)
May 9, 2012 18
Trends in Bilateral APAs in Japan
Significant increase in application of TNMM in recent years
0
16
85
0
13
2522
7
25
15
811
7
50
4 4
17
5
61
8
2
7
18
61
19
3
13
8
78
0
10
20
30
40
50
60
70
80
90
CUP RP CP PS TNMM
FYE2002
FYE2007
FYE2008
FYE2009FYE2010
FYE2011
(Source: NTA Press Release)
May 9, 2012 19
New Transfer Pricing Enforcement Approach: Voluntary Compliance as a Matter of Corporate Governance
Public announcement at a Tax Seminar in Tokyo on April 24, 2012 Mr. Toshiyuki Fushimi, Director, Large Enterprise Examination and Criminal Investigation Department
National Tax Agency of Japan
International Trends in Tax Enforcement
Efforts to Enhance Corporate Governance Concerning Taxes
Efforts to Maintain and Enhance Tax Compliance in Transfer Pricing
Key Actions Expected of Enterprises to Prevent Occurrence of Transfer Pricing Problems
“Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing”
May 9, 2012 20
International Trends in Tax Enforcement:Meeting of the Forum on Tax Administration in January 2012
1. The January 2012 meeting in Buenos Aires of the Forum on Tax Administration brought together the heads of the tax administrations from 43 countries under the auspices of the OECD and concluded with a unified and strengthened commitment to combat offshore tax abuse.
2. The tax administrators focused on the need to work smarter in times of shrinking budgets, and how to strengthen their relationship with large corporations through efficient and effective strategies that benefit both the taxpayer and taxing authority.
3. “Although there have been some high-profile successes in the fight against offshore tax abuse, resulting in significant additional tax revenues and real improvements in transparency and exchange of information, it is far too soon to declare victory.”
4. The tax administrations agreed that collaboration must now include coordinated actions by countries to finally put an end to offshore non-compliance.
May 9, 2012 21
International Trends in Tax Enforcement:Meeting of the Forum on Tax Administration in January 2012
5. A key agreed objective was to promote the relationship between tax administrations and Large Business Taxpayers
“An adversarial relationship between tax administrations and multinational corporate taxpayers serves neither of our purposes well and is contrary to our common goals, which are earlier and greater certainty, consistency, and efficiency.”
“We will pay particular attention to the process of conducting and resolving transfer pricing cases. Overall, we intend to move away from a hide and seek approach to one based on greater transparency on the part of both taxpayers and tax administrations. As more companies put good tax compliance at the heart of their corporate governance, this will be easier to achieve.”
May 9, 2012 22
International Trends in Tax Enforcement:OECD Guidelines for Multinational Enterprises - 2011
Part I : Recommendations for responsible business conduct in a global contextSection XI - Taxation
1.“Tax compliance includes such measures as providing to the relevant authorities timely information that is relevant or required by law for purposes of the correct determination of taxes to be assessed in connection with their operations and conforming transfer pricing practices to the arm’s length principle.” (Para 1)
2.“Enterprises should treat tax governance and tax compliance as important elements of their oversight and broader risk management systems. In particular, corporate boards should adopt tax risk management strategies to ensure that the financial, regulatory and reputational risks associated with taxation are fully identified and evaluated.” (Para 2)
May 9, 2012 23
International Trends in Tax Enforcement:OECD Guidelines for Multinational Enterprises - 2011
Part I, Section XI - Taxation
3.In the case of enterprises having a corporate legal form, corporate boards are in a position to oversee tax risk in a number of ways. For example, corporate boards should proactively develop appropriate tax policy principles, as well as establish internal tax control systems so that the actions of management are consistent with the views of the board with regard to tax risk. (Para. 102)
4.Tax authorities may need information from outside their jurisdiction in order to be able to ….. determine the tax liability of the member of the MNE group in their jurisdiction. Again, the information to be provided is limited to that which is relevant to or required by law for the proposed evaluation of those economic relationships for the purpose of determining the correct tax liability of the member of the MNE group. MNEs should co-operate in providing that information. (Para. 103)
May 9, 2012 24
International Trends in Tax Enforcement:OECD Guidelines for Multinational Enterprises - 2011Part I, Section XI - Taxation
5.Application of the arm’s length principle avoids inappropriate shifting of profits or losses and minimises risks of double taxation. Its proper application requires multinational enterprises to cooperate with tax authorities and to furnish all information that is relevant or required by law regarding the selection of the transfer pricing method adopted for the international transactions undertaken by them and their related party. (Para. 104)
6.The OECD Transfer Pricing Guidelines aim to help tax administrations (of both OECD member countries and non-member countries) and multinational enterprises by (partially omitted) minimising conflict among tax administrations and between tax administrations and multinational enterprises and avoiding costly litigation. Multinational enterprises are encouraged to follow the guidance in the OECD Transfer Pricing Guidelines, as amended and supplemented, in order to ensure that their transfer prices reflect the arm’s length principle. (Para. 106)
May 9, 2012 25
Efforts to Enhance Corporate Governance Concerning Taxes
1. The economic activities of large business taxpayers occupy a large portion of the economy in Japan and the amount of their reported income is high.
2. For example, large business taxpayers comprise 0.02% of the number of corporations, but 26% of the reported income of all corporations.
3. Large business taxpayers lead industries and regions. Tax compliance by large business taxpayers greatly affects tax compliance by their enterprise groups as well as small to medium taxpayers and individual taxpayers.
4. When the tax compliance by large business taxpayers, which require significant administrative resources in tax examinations, is enhanced, the tax administration will be able to allocate more administrative resources to the corporations with a high level of need to be examined and to plan for improvement in their level of reported income.
“From the perspective of the maintenance and improvement of the level of tax reporting throughout Japan, it is important to maintain and improve tax compliance by large business taxpayers.”
May 9, 2012 26
Results of Enhancing Corporate Governance Concerning Taxes
1. Benefits for Enterprises1) Minimizing tax risks2) Minimizing the burden of audit defenses in tax examinations.
2. Benefits for the Tax Administration1) Greater focus on tax examinations of corporations with a high need for examinations
“It is beneficial for both enterprises and the tax administration when tax compliance is improved through the enhancement of corporate governance.”
May 9, 2012 27
Efforts by the National Tax Authorities*
1. Conducting of Orientation Sessions
“In meetings attended by top management of large business taxpayers, we will encourage the enhancement of corporate governance concerning taxes (such as by introducing examples of effective efforts).”
“The national tax authorities will maintain and improve tax compliance through the enhancement of corporate governance by large business taxpayers, by confirming the status of corporate governance concerning taxes by large business taxpayers during tax examinations and carrying out exchanges of views with top management.”
* “* “National tax authorities” refers to regional taxation bureaus, which have jurisdiction over large National tax authorities” refers to regional taxation bureaus, which have jurisdiction over large business taxpayers.business taxpayers.
May 9, 2012 28
Efforts by the National Tax Authorities
2. Approaches towards Individual Enterprises
1) During the opportunity of a tax examination by Special Examiners in the Large Enterprise Examination Department in each regional tax bureau, the national tax authorities will confirm the status of the corporate governance concerning taxes by large business taxpayers through a request to them to describe the current status of their corporate governance including the involvement and direction by top management and the maintenance of an organization and functions in the finance and audit departments, in a “Confirmation Sheet on Corporate Governance Concerning Taxes”.
2) Upon the closing of a tax examination, the top management of a large business taxpayer and the top officials of a regional tax bureau will exchange views for the enhancement of corporate governance concerning taxes (such as by introducing examples of effective efforts).
May 9, 2012 29
Efforts by the National Tax Authorities
3. Use in Determining the Need for an Examination
“Going forward, when determining the need for an examination, the national tax authorities will utilize the status of corporate governance concerning taxes as an important decision-making material and will allocate tax examination resources more heavily toward corporations with a high need for an examination.”
4.Efforts in Transfer Pricing
“Also on transfer pricing, in order to maintain and improve tax compliance, the national tax authorities will carry out a detailed plan as part of its efforts for the enhancement of corporate governance concerning taxes.”
May 9, 2012 30
Efforts to Maintain and Enhance Tax Compliance in Transfer Pricing
o Merits for both the enterprises and the tax authorities through maintaining and enhancing tax compliance in transfer pricing
Benefits for enterprises Minimizing tax risks Minimizing the burden of audit defenses in tax examinations
Benefits for the tax authorities Greater focus on tax examinations of corporations with a high need for an examination Preventing the problem of international double taxation (Mutual Agreement Procedures
with foreign tax authorities)
“In order to prevent the occurrence of problems concerning transfer pricing, the national tax authorities will promote the voluntary and appropriate actions of enterprises through cooperation between the national tax authorities and the enterprises.”
May 9, 2012 31
Particular Compliance Concerns in Transfer Pricing
1. In a self-assessment system, the taxpayer is required to themselves calculate the arm’s length prices for their transfer pricing and to file tax returns based on such calculations.
2. Because transfer pricing issues involve huge risks and costs, it requires even more voluntary and appropriate actions by the enterprises.
3. The importance of improving tax compliance, including transfer pricing, has been highlighted as an international trend.
4. In foreign countries, the enforcement of transfer pricing rules has been strengthened, and it is expected that transfer pricing assessments (double taxation) and the competent authority negotiations resulting from the same will increase. Accordingly, there is an increased need to consider measures, etc. for advance prevention of double taxation.
May 9, 2012 32
Particular Compliance Concerns in Transfer Pricing
5. Currently, the national tax authorities are moving ahead with efforts toward the enhancement of corporate governance concerning taxes, and it is possible to characterize the measures for transfer pricing as one part of such efforts.
6. In addition, in the 2010 tax reforms, the scope of required transfer pricing documentation was clarified, and the environment for the preparation of transfer pricing documentation was improved.
7. This means that the “documents that are recognized to be necessary for the purpose of computing arm’s length prices” were clarified in the ministerial order that sets for the “presumptive taxation” rules, which could be invoked if the tax administrations are not able to obtain the taxpayer’s cooperation through providing such necessary documents.
May 9, 2012 33
Key Actions Expected of Enterprises to Prevent Occurrence of Transfer Pricing Problems
1. Knowledge of Transfer Pricing Legislation2. Involvement of Top Management3. Recognition of Status and Problem Areas in Foreign Related Party Transactions4. Implementation of Global Transfer Pricing Policies5. Transaction Price Setting Taking into Account Transfer Pricing Methodologies6. Transfer Pricing Compliance of Related Parties Overseas (Governance by Parent Company)7. Communications with the Tax Administration
Based on the above, a “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing” should be prepared.
May 9, 2012 34
Efforts to Maintain and Improve Compliance in Transfer Pricing
1. Facilitation through Orientation Sessions
“Along with an explanation of the domestic and foreign trends in transfer pricing, the national tax authorities will explain the importance for enterprises to themselves maintain and improve their tax compliance in transfer pricing.”
“As part of their efforts directed toward the enhancement of corporate governance concerning taxes, the national tax authorities will encourage enterprises to themselves plan for the maintenance and improvement of tax compliance in transfer pricing, while confirming the status of the efforts of the enterprises concerning transfer pricing.”
May 9, 2012 35
Efforts to Maintain and Improve Compliance in Transfer Pricing
2. Facilitation through Individual Contacts with Enterprises
1) The national tax authorities will confirm the status of efforts on transfer pricing through a request to fill in a “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing.”
2) As the time of exchanges of views between the top management of the enterprises and the tax bureaus with regard to corporate governance concerning taxes, the national tax authorities will also exchange views concerning transfer pricing.
3) Views will be exchanged between the enterprises and the tax officials in charge of transfer pricing, based on the contents of the “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing.”
May 9, 2012 36
Japan as a Lesson for the Rest of Asia?
1. What can we learn from Japan’s history of attempting to apply the Arm’s Length Principle using the various transfer pricing methods?
2. What have the Japanese tax authorities told other governments in Asia over time and now today about Japan’s experience?
3. What are the implications of Japan’s new transfer pricing enforcement approaches seeking greater taxpayer compliance based on corporate governance objectives?
May 9, 2012 37
III. COMPETENT AUTHORITY AND TRANSFER PRICING: HOW IS IT WORKING IN ASIA?
Panel Discussion
Gary Thomas, White & Case, Tokyo Sam Sim, Standard Chartered Bank, Hong Kong Clemens Thyme, S&P Capital IQ, Hong Kong Michael Quigley, White & Case, Washington DC
May 9, 2012 38
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA – THE BIG PICTURE
Financial Sector FDI 2011IPO Volume 2011
May 9, 2012 39
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA – CONTRASTING FLAVOURS
Some Macro Factors Impacting Level of Cross-border Activity Crisis, really? European withdrawal vs Regionals Stepping up Bank Finance to Capital Markets Simpler Products vs Increasing Sophistication Increased Regulations vs Internationalization
Ring-fencing liquidity vs Outlet for excess savings
Asia cross-border FS has vast room for growth
But so does sophistication of authorities & TP rules !
May 9, 2012 40
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA – DIFFERENT STROKES
A. Familiar Global Themes… Challenge to management fees/Head-office charges Related party lending, capital, liquidity and guarantee fees Increased documentation & reporting/compliance burden Regulatory change and restructuring
B. More so in Asia… Intervention/influence of prudential regulators Sophistication of tax authorities, advisors and taxpayers
- Target vs Principles based; Cultural aspects Bespoke & evolving business/product/pricing models Legislative framework is young and in flux (Treaties/APA/MAP, TP jurisprudence) Beyond OECD?: BRIIC, UN model Implications of state ownership
May 9, 2012 41
IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA - MORE SPICE TO THE POT
A. APA/MAPs-Are they worth the trouble?-First in class? Do you have the resources?
B. Reconciling Differences
-Different TP methods and mark-ups; Global consistency vs Local appropriate-Tax/TP vs Accounting (Financial vs Management view)
C. GAAR, Thin-Cap, Indirect Taxes & TP-Interaction of such evolving tax principles with transfer pricing
D. Branch banking to Subsidiaries-Subsidarisation, Securities companies, SPEs
E. TP Infrastructure-Tax vs Finance: Roles & Responsibilities-Outsourcing
May 9, 2012 42
V. TRANSFER PRICING – CREDIT RISK ASPECTS
Transfer pricing standards require financial transactions such as loans and guarantees between related entities to utilize arm’s length pricing.
Key question: At what rate could a subsidiary fund itself if it were an independent entity?
May 9, 2012 43
Use a risk based approach thatdifferentiates credit quality
Find appropriate comparable marketrates for interest spreads or guarantee fees
Use globally consistent methodology Document sound economic theory
around assessments
Establish a Risk Based Framework for Intercompany Loans and Guarantees
S&P Capital IQ scoring solutions allow you to generate stand alone scores for unratedaffiliates, to use as internal ratings to match with external reference prices. The scenarioanalysis capabilities are also useful for strategic tax planning purposes
Initial Scoring and Sensitivity Analysis Scoring unrated subsidiaries of large MNE
Source: Global Credit Portal ® and CreditModel® as of 7th March, 2012. - For illustrative purposes only.
Description S&P Rating
The Coca-Cola Co. A+
Coca-Cola Hellenic Bottling Co. S.A. A
Coca-Cola Enterprises Inc. A+
Coca-Cola Femsa S.A.B. de C.V. A-
Coca-Cola Amatil Ltd. A-
Coca-Cola Enterprises Inc. fka International CCE Inc. BBB+
Coca-Cola Bottling Co. Consolidated BBB
Coca-Cola Icecek A.S. UNRATED
Coca-Cola HBC Finance B.V. UNRATED
Coca-Cola Amatil (Australia) Pty Ltd. UNRATED
Coca-Cola Erfrischungsgetraenke AG UNRATED
Hokkaido Coca-Cola Bottling Co., Ltd. UNRATED
Coca-Cola Amatil (N.Z.) Ltd. UNRATED
Coca Cola Embonor S.A. UNRATED
Coca-Cola West Co., Ltd. UNRATED
Coca-Cola Beverages Ltd. UNRATED
Coca-Cola Central Japan Co., Ltd. UNRATED
Johnston Coca Cola Bottling Group Inc. UNRATED
Coca-Cola HBC Finance PLC UNRATED
Mikuni Coca-Cola Bottling Co., Ltd. UNRATED
Embotelladoras Coca Cola Polar S.A. UNRATED
Coca-Cola Bottling Group Southwest Inc. UNRATED
… and additional subsidiaries UNRATED
Score
Scenario Analysis
Example: Coca-Cola
May 9, 2012 44
Credit Risk Scores at the Core of Setting the Cost of CapitalMoving from Fundamentals to Credit Risk Based Approaches
Fundamentals only comparables methods frequently fall short when attempting togenerate comparables for money/guarantee transference pricing terms. Size bias andthe complexity in the interactions of financial ratios in determining credit qualityrender this method inaccurate in most instances
As shown in the example, wide dispersion of Ebitda levels proves not to be a good indicator of credit quality comparability
May 9, 2012 45
Classification - Credit Assessment Methodologies
Method Sector,
Size
Input Output Advantage Limitation
Public and
Private Ratings
All 3 years
financials,
management
meeting
Rating - Easy to access and interpret
- Additional coverage through Private Estimates
- Limited coverage- No standalone assessments of subs - Costs of Individual assessments
Credit
Scorecard
All Current
Quantitative
and Qualitative
Data
Score that can
be mapped to a
rating
- Comprehensive sector coverage (Corp, FI, Ins)
-Requires qualitative & quantitative analysis- If outsourced, cost of individual assessment
Credit Model –
rating score
US$ 20-
50M and
above
Current
Quantitative
Data
Score that can
be mapped to a
rating
-Quantitative and objectified information only
- Large numbers of subs can be assessed quickly
- Links to Ratings data
-Limitation in sectors, as some are hard to quantitatively model and size over USD c20m
Credit Model
- PD
SME
(US$1M
and
above)
Current
Quantitative
Data
Probability of
Default
- Direct and quantified default measure
- Smaller entities with USD 1-100m revenue
- Requires comprehensive empirical datasets including local/regional default data, which is hard to obtain
Ratin
gsIn
tern
al o
r Thi
rd P
arty
May 9, 2012 46
Credit Risk Proxies for Allocating Cost Of CapitalUsing Internal Rating for Affiliates as a Benchmark
Business Risk
Financial Risk
Credit AssessmentTop Down Sector Based View
Determine an Internal Rating (Score)
Low Risk Affiliates
High Risk Affiliates
Bottom Up Fundamentals
aaaaa+aaaa-a+aa-
bbb+bbbbbb-bb+bbbb-b+bb-c
MarketBased
Reference Pricing
Build fundamentals driven initial comparables
Generate custom transparent yield curves
S&P Capital IQ to Produce Internal Ratings for Affiliates & Subsidiaries:
• Quantitative Scoring Models
• Expert Judgment Credit Assessment Templates
• Outsource score generation task to S&P Capital IQ (Ad-hoc credit assessments)
Build fundamentals driven comparables
Establish consistent approach for internal ratings on subs:• Model based approach (most objectified, limitations)• Internal Ratings Based approach (most detailed, expensive)• Internal vs. external assessment
Generate custom comparable yield curves
May 9, 2012 47
The reliance on empirical basedapproaches assures transparencyand trustworthiness of the pricingapproach• Build custom empirical yield curves
based on actual historical data only,utilizing typical polynomial or moreadvanced approaches
• Pre-generated templates allow you toinstantly review relevant statistic onthe a custom yield curve
Note: Graph contains hypothetical data.
Building Robust Market Based Reference PricingCalculate Yield Curves for Custom Pool of Comparables
Empirical Term Structure
0
1
2
3
4
5
6
7
0 5 10 15 20 25 30
Term (years)
Yie
ld (
%)
Median
Upper Quartile
Lower Quartile
Exposure Weighted Average
Establishing a market based comparable requires:• Transparent methodology• Appropriate segmentation
(geography, industry, credit rating, duration, etc.)
• Cover all risk factors (sovereign risk, T&C)
• Strong grounding on empirical data
Alternatives in Establishing Effective Reference Prices
Credit Spread Models
May 9, 2012 48
VI. CURRENT ISSUES BEING RAISED IN LITIGATION AND WHAT THIS MEANS FOR ASIA
A. Status of Selected Recent Cases 1. US: Medtronic Inc. v. Comm’r
2. US: Guidant LLC v. Comm’r, T.C. No. 5989-11
3. US: Veritas Software Corp. v. Comm’r
4. US: Xilinx, Inc. v. Comm’r
5. US: Intersport Fashions West Inc. v. United States
6. Australia: SNF (Australia) Pty. Ltd. v. Comm’r
7. Canada: GlaxoSmithKline Inc. v. The Queen
8. Canada: The Queen v. General Electric Capital Canada Inc.
9. Canada: Alberta Printed Circuits Ltd. v. The Queen
10. India: Vodafone
11. Spain: Roche Vitamins Europe Ltd.
12. Russia: Gazprom Extraction Astrakhan LLC
13. Toyota Argentina SA c/AFIP-DGI
B. What These Cases Mean for Asia
May 9, 2012 49
Medtronic Inc. v. Comm’r, T.C. No. 6944-11
SUMMARY:Leads and devices adjustment: $1.2 billion
The IRS challenged payments from Medtronic Puerto Rico (“PR”) to Medtronic U.S. for the use of patents and other IP and to purchase medical device components. PR used the components to assemble finished products, which it sold to Medtronic USA Inc., another U.S. affiliate that distributed the products in the U.S. and abroad.
Medtronic used a CUT as its primary method, with a profit split as a corroborating method.
IRS argument in the alternative: significant value transferred under 367(d) Medtronic also challenges a royalty true-up in the amount of $4
Swiss Supply Agreement Issue: $39 million Under the agreement, Medtronic’s Swiss subsidiary assists PR by
manufacturing and supplying the U.S. with devices to meet excess U.S. demand.
The Swiss subsidiary pays the leads and devices royalty and the trademark royalty that PR would have paid if it had manufactured the product itself.
May 9, 2012 50
Medtronic Inc. v. Comm’r, T.C. No. 6944-11
Spinal Screw Operations: $90 million Medtronic claims that the IRS improperly treated its PR as a contract
manufacturer rather than a risk-bearing, autonomous manufacturer Interest Income from Prior Buy-In Case: $14 million
In 2010, Medtronic and the IRS signed a closing agreement to resolve a 2008 Tax Court case (Medtronic Inc. v. Comm’r, T.C. No. 17488-08) relating to the buy-in paid by Medtronic’s Swiss subsidiary for the right to use preexisting intangibles.
Medtronic disputes the inclusion of the interest amounts in its 2005-2006 returns because it has a competent authority request pending pursuant to the U.S.-Switzerland treaty.
May 9, 2012 51
Medtronic Inc. v. Comm’r, T.C. No. 6944-11
STATUS:Medtronic Inc. filed a petition in the Tax Court on March 23, 2011, challenging $2.7 billion in upward income adjustments to its 2005 and 2006 taxable years.
Approximately $1.4 billion of the adjustments were transfer pricing adjustments related to licensing and manufacturing transactions with Medtronic’s affiliates in Switzerland and Puerto Rico.
The case is currently scheduled for trial on May 21, 2012 in the Tax Court, although the parties have moved for a continuance.
May 9, 2012 52
Guidant LLC v. Comm’r, T.C. No. 5989-11
SUMMARY:Like Medtronic, involves licensed IP and manufacturing arrangements:
Guidant’s Irish affiliate purchased components from Guidant U.S. and used the components to manufacture units that generate pulses in pacemakers
Guidant Ireland sterilized and packaged the finished products, then sold them back to Guidant U.S., foreign related parties, and third-party distributors
IRS challenged royalties for use of licensed intangibles, prices of components, and intercompany sales of finished products in transactions with Irish and Puerto Rican affiliates
The IRS used a CPM and concluded that a cost plus 13.9 percent markup (Puerto Rico) and a cost plus 11 percent markup (Ireland) should be applied to labor and overhead
The IRS did not calculate a markup on other costs Guidant claims that the IRS did not specify the portions of the adjustment attributable to
the individual affiliatesAs in Medtronic, the IRS argued in the alternative that the transferred intangibles should be taxed under Section 367(d).
May 9, 2012 53
Guidant LLC v. Comm’r, T.C. No. 5989-11
STATUS:Guidant LLC, which was acquired by Boston Scientific Corporation in 2006, filed a petition in the Tax Court on March 11, 2011, challenging $1 billion in transfer pricing adjustments to its 2001 and 2002 taxable years.
The adjustments related to technology licenses and manufacturing arrangements between Guidant U.S. and its subsidiaries in Puerto Rico and Ireland.
The case is currently pending in the Tax Court and is scheduled to be tried on June 18, 2012.
May 9, 2012 54
Veritas Software Corp. V. Comm’r, 133 T.C. 297(2009)
SUMMARY:Valuation dispute over Veritas U.S.’s buy-in payment under a cost-sharing arrangement (“CSA”) from its Irish subsidiary.
Veritas U.S. reported a $166 million lump-sum buy-in payment from Veritas Ireland on its 2000 return.
In 2002, Veritas U.S. amended its 2000 return to reduce the payment to $118 million.
During audit, the IRS proposed an adjustment to increase the buy-in to $2.5 billion but at trial, the IRS reduced the proposed buy-in to $1.675 billion.
In Veritas Software Corp. v. Comm’r, 133 T.C. 297 (2009), the Tax Court held for the Taxpayer
Upheld the Taxpayer’s use of CUTs to value the contributed intangibles
May 9, 2012 55
Veritas Software Corp. V. Comm’r, 133 T.C. 297(2009)
On December 6, 2010, the IRS issued an Action on Decision, AOD 2010-05, 2010-49 I.R.B.
The IRS declined to appeal the Tax Court decision but characterized it as erroneous
IRS announced that it will continue to litigate cost sharing cases using approaches to valuation that distinguish between make-sell rights (to pre-existing intangibles) and platform rights (to technology developed in the future)
May 9, 2012 56
Veritas Software Corp. V. Comm’r, 133 T.C. 297(2009)
Issue was valuation of intangibles conveyed in a CSA Veritas U.S. contributed pre-existing computer software programs to the CSA,
including the right to further develop the programs. Veritas used CUTs to value the intangibles contributed to the CSA using licenses
to unrelated original equipment manufacturers such as HP and Dell The IRS rejected comparables as involving make-sell rights to preexisting
intangibles rather than platform rights to future developed intangibles Court accepted licenses as comparables under a functional, rather than
contractual, analysis The IRS valued the intangibles as having perpetual useful lives and in the
aggregate, rather than individually Treated the contribution as “akin to a sale” of Veritas U.S.’s business to its Irish
affiliate Court rejected this approach
May 9, 2012 57
Xilinx, Inc. v. Comm’r, 598 F.3d 1191 (9th Cir. 2010)
SUMMARY:Issue was proper cost base to be used in a qualified cost-sharing arrangement (“QCSA”) for Xilinx’s 1997-1999 taxable yearsThe Tax Court held in favor of Xilinx. Xilinx, Inc. v. Comm’r, 125 T.C. 37 (2005).In Xilinx I, 567 F.3d 482 (9th Cir. 2009), the Ninth Circuit reversed in favor of the IRS.In Xilinx II, 598 F.3d 1191 (9th Cir. 2010), the Ninth Circuit withdrew its opinion in Xilinx I and affirmed the Tax Court’s decision in favor of the taxpayer.
The IRS issued an Action on Decision, AOD 2010-03, I.R.B. 2010-33, in which it acquiesced in result only because the 2003 amendment of the regulations rendered the decision moot for subsequent years.
May 9, 2012 58
Xilinx, Inc. v. Comm’r, 598 F.3d 1191 (9th Cir. 2010)
While a QCSA between Xilinx and its Irish subsidiary was in effect, Xilinx granted stock options to its employees, which they exercised.
The IRS claimed that stock-based compensation should have been included in the cost-sharing pool.
Xilinx’s position was that uncontrolled parties engaging in comparable transactions would not share the cost of the stock options.
Competing rules: Cost-sharing rules provided that QCSA participants must share “all costs” But the arm’s length standard is a general standard to be applied “in every case”
Xilinx I: held for IRS Cost-sharing rules were specific rules that trumped general Section 482 rule
Xilinx II: held for Xilinx Resolve ambiguity by looking at:
Purpose of regulations – parity between controlled and uncontrolled transactions Consistency with U.S.-Ireland treaty
May 9, 2012 59
Veritas and Xilinx after the 2011 Cost-Sharing Regulations
STATUS:In April 2012, the IRS warned that taxpayers entering into CSAs should not rely on Veritas or Xilinx now that the final 2011 cost-sharing regulations are in force.
“As we transition to the 2008 temporary and 2011 final cost-sharing regulations, we will be moving beyond the reach” of Veritas and Xilinx.
- Joseph Tobin, IRS Office of Associate Chief Counsel (International) (published in Tax Notes Today, April 23, 2012).
Citing the Supreme Court’s decision in Mayo, the IRS has said that its new cost-sharing regulations were specifically and intentionally drafted to resolve the issues raised in Veritas and Xilinx.
In Mayo, the Supreme Court held that Treasury regulations that have been subject to a notice and comment period are entitled to Chevron deference.
May 9, 2012 60
Intersport Fashions West Inc. v. United States, 2012 TNT 30-21 (Fed. Cl. 2012)
SUMMARY: Subsidiary of German motorcycle apparel company not permitted to
claim refunds for restructuring expenses incurred by its parent because the expenses were not claimed on a timely filed return.
STATUS: Government prevailed on motion for summary judgment – a taxpayer
cannot affirmatively invoke Section 482. See Treas. Reg. 1.482-1(a)(3).
May 9, 2012 61
SNF (Australia) Pty. Ltd. v. Comm’r, [2010] FCA 635
SUMMARY:SNF Australia, decided on June 25, 2010, is the Federal Court of Australia’s first written guidance on the application of the transfer pricing methods in Australia.Facts:
SNF Australia imported polyacrylamide products from affiliates in France, the U.S., and China, and then sold these products to Australian customers.
SNF Australia used the CUP method, with sales of products by SNF France to non-Australian third parties as comparables.
SNF Australia reported losses back to 1998 despite evidence of sales growth. SNF Australia explained these as resulting from poor management, high levels of competition, low sales per salesperson, and excessive stock levels.
The Australian Tax Office used the TNMM (with an operating profit of 1.7 percent) to adjust SNF Australia’s income upwards.
The Australian Tax Office challenged SNF Australia’s use of the CUP, arguing that the French sales were not comparable.
The Court rejected the use of the TNMM, faulting it and other profits-based methods for “inevitably attribut[ing] any loss to the pricing”
The Court accepted SNF Australia’s CUP analysis and its evidence demonstrating that the losses were caused by poor management and not by its transfer prices
The Australian Tax Office appealed the decision to the Full Federal Court.
May 9, 2012 62
SNF (Australia) Pty. Ltd. v. Comm’r, [2011] FCAFC 74
STATUS:On June 1, 2011, the Full Federal Court dismissed the Commissioner's appeal.
The Court conducted a re-examination of much of the evidence presented by the taxpayer to support its pricing under the CUP method and concluded that, in light of the following factors, comparability had been established:
characteristics of the property the functions (activities of the companies conducting the comparable transactions) the contractual terms and conditions in the comparable transactions economic circumstances of the markets in which the transactions took place and Business strategies of the respective parties
The Court concluded that there was a single global market, leading to its acceptance of comparable data from different geographic markets.
In its Decision Impact Statement dated November 7, 2011, the ATO narrowly interpreted the impact of the Court’s decision.
The ATO also alluded to proposed legislation to reform the transfer pricing rules, in which case the legal position would probably be materially different.
May 9, 2012 63
GlaxoSmithKline Inc. v. The Queen, [2010] FCA A-345-08
SUMMARY:On July 26, 2010, the Federal Court of Appeal issued a taxpayer-favorable decision in GlaxoSmithKline. At issue were Glaxo’s Canadian subsidiary’s payments to a related Swiss distributor for the active pharmaceutical ingredient in Zantac during the company’s 1990-1993 taxable years.
Glaxo used the resale price method, which produced prices ranging from $1,512 - $1,615 The Canadian tax authorities used the CUP method, which produced prices ranging from
$194 - $304 using prices paid by unrelated generic manufacturers for the same ingredient.
The Tax Court of Canada largely upheld the assessments.On appeal to the Federal Court, Glaxo argued that a license agreement, by which it used the Zantac trademarks, must be considered in evaluating its transfer prices.
Glaxo’s position was that no third party could sell Zantac without the license agreement The CRA argued that only the supply agreement should be considered in determining
what was “reasonable in the circumstances.”
May 9, 2012 64
GlaxoSmithKline Inc. v. The Queen, [2010] FCA A-345-08
The Federal Court of Appeal upheld the use of the CUP but agreed with Glaxo that the valuation must consider the license agreement and all other relevant circumstances.
The Tax Court of Canada largely upheld the assessments. The Federal Court of Appeal upheld the use of the CUP but adjusted the pricing determination
to account for the Zantac brand name.
STATUS: The Supreme Court granted the parties’ motions for leave to appeal and cross appeal and
the appeal was heard on January 13, 2012. During the hearing, several judges asked whether it made a difference that the active ingredient
purchased by Glaxo Canada was to be marketed and sold as “Zantac,” a branded product that would yield a higher retail price than the generic product.
The Chief Justice asked about bundling and its relationship to transfer pricing – if the price included something other than the substance (IP), why was withholding tax not remitted?
A decision is not expected before the end of the year.
May 9, 2012 65
The Queen v. General Electric Capital Canada Inc., [2010] FCA 344
SUMMARY:On December 15, 2010, the Federal Court of Appeal upheld the Tax Court of Canada’s taxpayer-favorable decision in GE Capital Canada Inc. (“GECCI”).Facts:
GECCI is a financial services company doing business in Canada. It financed much of its business with debt guaranteed by its U.S. parent company. Beginning in 1995, GECCI paid a guarantee fee of 1% of the principal amount of the debt outstanding during the year to its U.S. parent.
GECCI deducted the guarantee fees in its 1996 through 2000 tax returns, totalling approximately $136.4 million in deductions
The CRA disallowed the deductions, claiming that the 1% guarantee fee exceeded an arm’s length price.
The Tax Court of Canada held for the taxpayer, finding that the U.S. parent’s “implicit support” should be taken into account in determining the guarantee fee.
May 9, 2012 66
The Queen v. General Electric Capital Canada Inc., [2010] FCA 344
The Federal Court of Appeal upheld the Tax Court’s decision: Held that “implicit support” must be taken into account in evaluating transfer
prices because an arm’s length party “standing in the shoes” of the taxpayer would consider it relevant.
STATUS: The CRA is attempting to re-litigate the case after denying General Electric Canada
Company (“GECC”), successor by amalgamation to GECCI, a deduction for these same fees paid to the U.S. parent corporation. (2010-3493(IT)G and 2010-3494(IT)G).
In December 2011, the Tax Court denied GECC’s motion that res judicata prevented the re-litigation of this issue.
Although the issues are similar, the Tax Court denied the motion because there are different taxpayers and different tax years involved.
May 9, 2012 67
Alberta Printed Circuits Ltd. v. The Queen, 2011 TCC 232 (June 2011)
SUMMARY: APC manufactured custom circuit boards for customers in Canada and
the U.S., and for several years many of the design and setup services were performed by a Barbados company controlled by a key employee of APC. The founders of APC and the key employee had interests in both APC and the Barbados company, but there was no common legal control of the two entities.
STATUS: However, the Tax Court held that the two companies did not factually
deal with one another at arm’s length and were thus subject to Canada’s transfer pricing rules.
May 9, 2012 68
India – Vodafone Int’l Holdings B.V. v. Union of India (Supreme Court, Jan. 20, 2012)
SUMMARY:Vodafone, a U.K. telecommunications company, purchased an Indian mobile phone company from a Hong Kong-based company for $11.2 billion in 2007.
Indian tax authorities assessed $2.2 billion in capital gains tax against Vodafone in connection with the transaction, claiming that
The Bombay High Court ruled in favor of the CBDT in 2010.
STATUS:In January 2012, the Supreme Court reversed, holding that in the absence of a specific look-through provision in India’s domestic law, a sale of shares by companies outside of India cannot be taxed by India simply because the underlying assets are located in India.
The Supreme Court stated that allowing taxation under these circumstances “would amount to imposing capital punishment for capital investment since it lacks authority of law.”
May 9, 2012 69
India – Vodafone Int’l Holdings B.V. v. Union of India (Supreme Court, Jan. 20, 2012)
AFTERMATH:On February 17, 2012, Indian tax authorities filed a petition with the Supreme Court requesting a review of the January decision. The Supreme Court rejected the petition on March 20, 2012. However, in March 2012 the government proposed amendments to the Income Tax Act that would permit the retroactive taxation of cross-border transactions involving assets located in India. Separately, in December 2011, Vodafone was subject to a $1.7 billion transfer pricing assessment in India. It recently filed an appeal citing certain favorable observations in the above-mentioned Supreme Court decision.
May 9, 2012 70
Roche Vitamins Europe Ltd, Supreme Court of Spain, Case No. 1626/2008 (Jan. 11, 2012).
SUMMARY:The Supreme Court affirmed the National Court’s holding that Roche Europe, a Swiss company, had a PE in Spain through its “stripped risk subsidiary,” Roche Spain. Roche Spain was a contract manufacturer receiving a cost plus 3.3 percent markup and also served as a sales representative for Roche Europe, for which it received a commission of 2 percent of sales in Spain. Roche Spain had no authority to negotiate the terms of sale or to conclude contracts, it merely represented, protected, and promoted the interests of Roche Europe. The National Court concluded (and the Supreme Court affirmed) that although Roche Spain’s facilities were not a “fixed place of business” of Roche Europe, Roche Spain was a dependent agent because it was legally and economically dependent on Roche Europe, which both directed and controlled all relevant activities of Roche Spain and bore all economic risks associated therewith.
May 9, 2012 71
Roche Vitamins Europe Ltd, Supreme Court of Spain, Case No. 1626/2008 (Jan. 11, 2012).
TRANSFER PRICING : The Supreme Court also addressed the “attributable income” issue, which has
transfer pricing implications. Practitioners typically argue that , even if there is a PE in a country from which risk
has been stripped, a transfer pricing analysis would conclude that the fees allocated to the stripped-risk affiliate are adequate to compensate it for its “routine” functions.
But the Court held that Roche Spain was not adequately compensated for all of the functions it was performing for Roche Europe.
The Court concluded that product sales in Spain were taxable to Roche Europe’s PE and Roche Spain should take into account a portion of European sales for this it had assisted in promotion.
The Court held that. under Paragraph 34 of the OECD Commentary to Article 5, once a PE is established, it exists to the extent that the agent acts for the principal, not only to the extent of the agent’s contracts.
As a result, all of the economic activity conducted by Roche Spain on behalf of Roche Europe is part of the PE.
May 9, 2012 72
Gazprom Extraction Astrakhan LLC, Federal Arbitration Court (Russia), Case No. KA-A40/13304-10 (June 2011)
SUMMARY: The Russian tax authorities attempted to apply the “net-back
approach” (an adjusted CUP method) to Gazprom’s sales of sulfur to a related party outside of Russia.
STATUS: The court rejected the Russian tax authorities attempt because the
method is not mentioned in the Russian Tax Code’s transfer pricing article.
May 9, 2012 73
Toyota Argentina SA c/AFIP-DGI, Argentina National Tax Court (April 28, 2011)
SUMMARY: The tax authorities had retroactively applied new transfer pricing rules
to reject the taxpayer’s transfer pricing study and methodology.
STATUS National Tax Court found for the taxpayer and revoked a notice of
deficiency.
May 9, 2012 74
VI. CURRENT ISSUES BEING RAISED IN LITIGATION – WHAT IT MEANS FOR ASIA
B. Is Litigation a Viable Method for Managing Transfer Pricing Risks?
1. Are transfer pricing disputes about the facts, the applicable law and/or the “economics?”
2. Can courts be expected to find the “right answer?”
3. What about the path forward after litigation?
C. Impact of Litigation Elsewhere on Transfer Pricing in Asia
1. Precedential value?
2. Highlighting issues for potential local enforcement?
3. Greater likelihood of litigation in the courts to resolve disputes?
May 9, 2012 75
VII. CUSTOMS AND TRANSFER PRICING: WHAT YOU SHOULD BE AWARE OF
Customs Taxes: Valuation methods – transfer pricing rules vs. customs valuation rules “Arm’s length price” under OECD TP guidelines as acceptable “transaction value method?” “Resale price method” vs. deductive value method” “Cost-plus method vs. “constructed value method”
Joint OECD/WCO conferences in 2006 and 2007 “Transfer pricing” – OECD, tax advisors and industry representatives “Customs” – WCO, country representatives, customs advisors 2006 – optimism for convergence between the two sets of rules; but in 2007, did reality set in?
“Transfer pricing” positions “Transfer pricing rules” acknowledge “modern” transactions involving tangibles, intangibles and services,
while “customs” valuation rules are item-based and “old school.” ‘Transaction values” supported by OECD “arm’s length pricing” study should be accepted as showing no
related party influence, so customs officials should accept “arm’s length pricing” adjustments or at least accept some mechanism to consider same.
“Customs” reactions Importance of well-accepted customs rules adopted on multilateral basis under GATT Skepticism of “profit methods” in transfer pricing Most inter-company transactions are accepted under “transaction value” method anyway.
Specific challenge: Use of profits-based method (e.g., TNMM) that requires prospective or retroactive pricing adjustments to reach profit targets. Acceptable for customs? What procedures?
Any convergence in transfer pricing and customs practices in Asia countries?
May 9, 2012 76
VIII. FUTURE OF TRANSFER PRICING IN ASIA
Where are we headed during the next 5 years?
PANEL DISCUSSION
“Most Appropriate Method” Rule Use of Comparative Methods vs. Profit Methods Documentation Requirements Enforcement Approaches Cooperation Among Tax Authorities Litigation MAPs and APAs Transfer pricing and customs
May 9, 2012 77
IX. Q & A
Questions?
May 9, 2012 78
Thank you for your attention
