International Strategy for Transfer Pricing Compliance Samir Gandhi & Bhupendra … ·...

International Strategy for Transfer

Pricing Compliance

Samir Gandhi & Bhupendra Kothari

7th March 2015Private and Confidential

For Discussion Purposes Only

©2015 Deloitte Touche Tohmatsu India Private Limited

• Transfer Pricing Regime

• Emerging Issues

• Developments

• Ensuring Global Compliance

Contents

Transfer Pricing Regime


Countries where TP Regulations are in existence

Argentina Australia Austria Bangladesh Belgium

Brazil Canada Chile China Colombia

Croatia Czech Republic Denmark Dominican

Republic

Ecuador

Egypt Estonia Finland France Germany

Hong Kong Hungary India Indonesia Ireland

Isarel Italy Japan Kenya Korea, North

Korea, South Latvia Lithuania Luxembourg Malaysia

Mexico Namibia Netherlands New Zealand Norway

Oman Panama Peru Philippines Poland

Portugal Romania Russia Singapore Slovakia

Slovenia South Africa Spain Sweden Switzerland

Taiwan Thailand Turkey United Kingdom United States

Uruguay

Transfer Pricing (“TP”) regulations in the world

4


Countries where TP Regulations are still emerging

Algeria Angola Armenia Aruba Belarus

Bolivia Botswana Bulgaria Burkina Faso Cambodia

Cote d'Ivoire Cyprus El Salvador Ethiopia Gambia

Georgia Ghana Greenland Iceland Kazakhstan

Kuwait Liberia Libya Macedonia Malawi

Mali Mauritania Mauritius Mongolia Morocco

Mozambique Netherlands Antilles Nicaragua Nigeria Pakistan

Papua New

Guinean

Qatar Senegal Sierra Leone Sri Lanka

Trinidad and

Tobago

Ukraine Uzbekistan Zimbabwe &

Zambia

TP regulations in the world

5


Indian Transfer Pricing Regime

• TP Regulations (“TPR”) enacted in 2001

‒ Broadly based on OECD TP guidelines

‒ Comprehensive legislation including

• Mandatory compliance to maintain “contemporaneous documentation”

• Annual filing of “information form” on intercompany transactions

• Separate cell to carry out Transfer Pricing audits

‒ Increased sophistication of data gathering

‒ Increased resources and training for tax officers

‒ Exchange of information between tax and custom authorities

‒ Aggressive views/positions taken

• Extension of the scope of TP provisions in The Finance Act 2012 to cover Specified

Domestic Transactions (“SDT”)

• Introduction of Advance Pricing Agreement (“APA”) rules in August 2012 and Safe Harbor

Provisions in September 2013

6


Indian Transfer Pricing Regime – Developments over

couple of years

• Threshold of SDT proposed to be increased from INR 5 crore to INR 20 crore with effect

from Assessment Year 2016-17

• Risk based approach :- CBDT has dropped the 15 crore threshold for referring compulsory

scrutiny of transfer pricing cases and has moved towards adoption of risk based approach

to identify international transactions prone to tax evasion

• Restructuring of the Dispute Resolution Panel (“DRP”) wherein panels shall now

comprise of commissioners stationed at the respective panel locations making them

available all the time

• Introduced the concept of range and use of multiple year data (both yet to be notified)

while determining arm‟s length price of international transactions

• Proposed Amendment of section 6 of the income tax act 1961: A company shall now be

considered to be a resident in India if its Place of Effective Management (“POEM”) is in

India at any time during the relevant Financial Year

• Introduction of roll back provisions in APA

7

Emerging Issues


Currently MNCs are facing a number of new challenges, including:

This new global tax environment has resulted in the following actions – a Global Tax

Revolution:

Emerging Issues - Global

Perception that

MNCs are not paying

fair share of taxes

Loss of trust between

tax authorities and

business

Loss of trust between

tax authorities in

different countries

Change in tax

authorities‟

approach to

interpretation

of tax law and

tax treaties

Changing

behaviours of

tax authorities

re tax treaties

and tax laws

OECD‟s

BEPS* project

* Base Erosion and Profit Shifting

9


Emerging Issues - Global

• Structures that results in no current tax and have the effect of shifting income to a

jurisdiction where no tax is imposed

• More compliance requirements, audits, adjustments and penalties

• Global hot spots

‒ Americas : United States and Canada

‒ EMEA : Germany, France, Denmark

‒ APAC : India, Japan, China

• Business restructurings and Intangibles

• Location savings

• Profit attribution on complex financial industry products

• Guarantee pricing

• No movement of MAP - Disconnect between Competent Authorities

10


What Tax Authorities are looking at - Americas/EMEA

Canada

• Management fees and royalties

• Tangible goods

• Financial transactions

• Business restructurings

• Cost sharing

Germany

• Intangible, royalty payments

• Relocation of functions

• Recurring loses

• Financing transactions

• Specific industries under focus: Oil, motor

vehicles, pharmaceuticals, distributors,

banking and insurance

USA

• Cost Share Arrangement (“CSA”)

and buy-in payments

• Royalties or management fees

to affiliates

• Inbound companies with recurring losses

• Companies that do not have TP

documentation

UK

• Enquiries into acquisitions, disposals,

reorgs and (of course) tax avoidance

schemes

• Complex structures identified for audits –

audits to be completed within 18 to 36

months

• Enquiries into the extent, nature and

reliability of systems and controls

11


What Tax Authorities are looking at – India

• Payment for Intangibles

• Intragroup financing – loans and guarantees – conflicting judgments

• Capital financing transactions - Issue of shares

• Transactions with party located in tax haven; notified jurisdiction

• Payment towards royalty

• Location Savings

• Assessment of foreign companies (Mirror transactions)

• Non acceptance of other adjustments – Capacity utilization, Risk adjustments

• High margin adjustment for service companies

• Shared service and HO allocation/ other cost recharges

• Benchmarking directors‟ remuneration in case of SDT

• The assessment of SDT are on round of the corner to begin.

12


Emerging Issues - India

Case Laws Issues Covered

Bharti Airtel (Delhi ITAT);

Videocon Industries Ltd Vs ACIT

Deleted adjustment on account of guarantee fee;

by upholding that guarantee is not an international

transaction

Watson Pharma (Mumbai ITAT) Held that where the operating margin earned by a

taxpayer is at arm‟s length based on local market

comparables operating in similar economic

conditions as that of the taxpayer, and the taxpayer

and AE operate in a perfectly competitive business

environment, any further return on account of

location savings is not permissible

Vodafone India Services Private Limited (Bombay

High Court)

Held that issue of shares at a premium by

assessee in favor of its Associated Enterprise did

not give rise to any income from international

transaction and there is no need to invoke TP

provisions

13


• Nine years of TP audit completed – trends indicate greater scrutiny, ever increasing

adjustments and resultant litigation

• Increased resources and training for tax officers

• Trends of TP adjustment:

Indian TP Landscape

Intensity and magnitude of TP audits in India is increasing with every passing year!!

Assessment

Year

TP Audit

Year

No. of TP Audits

completed

No. of adjusted

cases

Cases adjusted

(%)

Estimated addition

(INR Crores)

2002-03 2005-06 1,061 239 23% 1,220

2003-04 2006-07 1,501 337 22% 2,287

2004-05 2007-08 1,768 471 27% 3,432

2005-06 2008-09 1,945 754 39% 7,754

2006-07 2009-10 1,830 813 44% 10,908

2007-08 2010-11 2,368 1,207 ~51% 24,111

2008-09 2011-12 2,638 1,343 ~51% 44,532

2009-10 2012-13 3,171 1,686 ~53% 70,016

2010-11 2013-14 3,617 1,920 ~53% 59,602

14

Developments


Global TP Trends

• The Inland Revenue Authority of Singapore (“IRAS”) on 6th January, 2015 released

revised TP guidelines

- Comprehensive guidelines to replace TP guidelines issued in 2006;

- Requirement of TP documentation on contemporaneous basis.

• The Finance Bill 2015 of France increases penalties for failure to comply with TP

documentation rules

• Australian tax office (“ATO”) on 12th November, 2014 issued guidance on Australia‟s

new TP „Reconstruction provisions‟

• The ATO recently released an important package of guidance dealing with TP

documentation, administration of TP Penalties, and TP record keeping

• TP provisions in Bangladesh effective from 1st July, 2014 require taxpayers to comply

with contemporaneous TP documentation requirements for cross border transactions

with associated enterprises

• Renewed dialogue started between India and US competent authority

- Welcome change given the earlier broken process

16


Introduction to BEPS

• 19 July 2013: OECD released its Action Plan in regard to Base Erosion and Profit Shifting

(BEPS), to coincide with the G20 Finance Leaders meeting in Moscow

• Action Plan:

‒ Is ambitious : it consists of 15 specific actions “to prevent corporations from paying

little or no tax” (OECD press release)

‒ Is consensus-based : it has been “signed off” (at the political level) by all 34 OECD

member countries and the 8 G20 countries which are not OECD members

‒ Has a relatively short timetable : all actions are to be completed by December 2015

(with many of the actions having earlier deadlines)

17


BEPS Action Plan: Overview

Action 1:

Address the tax challenges of the digital economy

“Gaps” “Frictions” “Transparency”

i. Establishing international

coherence of corporate

income taxation

ii. Restoring the full effects and

benefits of international

standards

iii. Ensuring transparency while

promoting increased certainty and

predictability

Action 2:

Neutralize the effects of hybrid

mismatch arrangements

Action 6:

Prevent treaty abuse

Action 11:

Establish methodologies to collect and

analyze data on BEPS and the actions

to address it

Action 3:

Strengthen controlled foreign

company (CFC) rules

Action 7:

Prevent the artificial avoidance of

PE status

Action 12:

Require taxpayers to disclose their

aggressive tax planning arrangements

Action 4:

Limit base erosion via interest

deductions and other financial

payments

Assure that

transfer

pricing

outcomes

are in line

with value

creation

Action 8:

Intangibles

Action 13:

Re-examine transfer pricing

documentationAction 9:

Risk and capitalAction 5:

Counter harmful tax practices

more effectively, taking into

account transparency and

substance

Action 14:

Make dispute resolution mechanisms

more effective Action 10:

Other high-risk

transactions

Action 15: Develop a multilateral instrument

17


OECD moving fast….

• Guidance on implementation of Transfer Pricing documentation andCountry – by – Country (“CbC”) reporting

6th February,2015

• Guidance on Transfer Pricing documentation and Country – by – Country reporting

• Guidance on Transfer Pricing Aspects of Intangibles

16th September, 2014

• Over 330 senior tax officials from more than 110 jurisdictions and internationalorganizations met in Paris during the 3rd Annual Meeting of the Global Forumon Transfer Pricing. The meeting was especially targeted at discussingsolutions to BEPS and participants discussed the challenges faced bydeveloping countries in targeting BEPS.

26-28 March 2014

• Paper on TP comparability data and developing countries released forcomment – written comments / suggestions to be submitted by 11 April 2014

11 March 2014

• Discussion Draft on TP documentation and country-by-country reportingreleased for public comment – comments received published on 3 March2014

30 January 2014

19


CbC ReportingNew guidelines adopt 3-tiered approach

Country-by-CountryTemplate

• Key financial information on all group members on an aggregate country basis with an activity code for each member

Master File

• Key information about the group's global operations including ahigh-level overview of a company’s business operations along with important information on a company’s global TP policies with respect to intangibles and financing

Local File

• Information and support of the intercompany transactions that the local company engages in with related parties

Local law will determine the language in which the documentation must be submitted.

Countries are encouraged to permit filing in commonly used languages and request

translation after submission.

20


Master File & Local File (content and interrelation)

© 2014 Deloitte Tax & Consulting

Master File

1. Organizational Structure

• Chart with Group legal & ownership structure and geographical

location of operating entities

2. Description of the Group’s Business(es)

• Important drivers of business profits

• Description of important business restructuring transactions

• Description of supply chain for 5 largest products / services

• List and brief description of important group service arrangements

• Brief functional analysis describing the principal contributions to

value creation by individual group entities

4. Group Intercompany Financial Activities

• Group‟s financing arrangements and related TP policies

• Identification of central financing entities

5. Group’s Financial & Tax Positions

• List of relevant APAs and tax rulings relating to the allocation of

income among countries

• Annual consolidated financial statement

1. Local Entity

• Local organization chart and management structure

Local File

• Detailed description of the business and business strategy

pursued (including business restructurings or intangible transfers)

• List of key competitors

2. Controlled Transactions (not exhaustive)

• Amount of intra-group payments and receipts involving the local entities

broken down by jurisdiction of the foreign payer / recipient

• List of associated enterprises involved in controlled transactions and

relationships

• Detailed comparability & functional analysis with copies of all material

intercompany agreements

• Indication of the most appropriate TP method selected

• List and description of selected comparable uncontrolled transactions

relied on in the TP analysis and possible adjustments performed

• Copy of APAs or tax rulings to which local tax jurisdiction is not a party

but impacting relevant controlled transactions

3. Group’s Intangibles

• Description of the overall strategy for development and exploitation

of intangibles including Group TP policies re R&D and intangibles

• List of important Group intangibles with the list of (a) entities legally

owning them and (b) important intragroup agreements

• Important transfers of interests in intangibles within the Group

3. Financial Information

• Annual local entity financial accounts

• Information and allocation schedules showing link between financial

data used in TP method and annual financial statements

• Summary schedules and sources of relevant financial data for

comparables used

21


Information/ documents required under Rule 10D

Rule Information/ documents

10D (1) (a) Ownership structure of the taxpayer

10D (1) (b) Profile of the multinational group

10D (1) (c) Broad description of the business and industry

10D (1) (d) Details of intra-group transactions

10D (1) (e) Function, assets and risks analysis

10D (1) (f)Supporting documents for the inter-company transactions such as agreements, official publications, reports, studies, market quotations, results of market research, letters in respect of negotiations, etc.

10D (1) (g)

Comparability analysis, including description and reason for selection of a particular TP method, alongwith the record of actual working carried out to determine the arm‟s length price

10D (1) (h)

10D (1) (i)

10D (1) (j)

10D (1) (k)Assumptions, polices and price negotiations, if any, which have critically affected the determination of the arm‟s length price

10D (1) (l) Details of adjustment made to transfer prices to align them with arm‟s length price, if any

10D (1) (m) Any other information/ document relevant to the determination of arm‟s length price

22


Master File compared with Rule 10D

Constituents of Master File Presence in Rule 10D

Organizational structure of the MNCBroadly covered under Rule 10D (1) (a), Rule 10D (1) (b) and Rule 10D (1) (c)

Description of MNC‟s business

MNC‟s intangibleNot specifically covered under Rule 10D, however, intangibles relating to the Indian operations are required to be described under Rule 10D (1) (e)

MNC‟s inter-company financial activities Not covered under Rule 10D

MNC‟s financial and tax position Not covered under Rule 10D

23


Local File compared with Rule 10D

Constituents of Local File Presence in Rule 10D

Information relating to local entity Broadly covered under Rule 10D (1) (a), Rule 10D (1) (b) and Rule 10D (1) (c)

Information relating to controlled transactions of the local entity Covered under Rule 10D (1) (d) to Rule 10D (1) (m) -

except details relating to unilateral/ bilateral APAs and similar rulings

Financial information of the local entity

24


CbC Reporting

Recent OECD Guidance on CbC Reporting Implementation

• The guidance on the implementation of TP documentation and CbC reporting answers to

taxpayers‟ questions regarding the:

− timing of preparation and filing of the CbC report

− which companies will be subject to the reporting requirements

− the use of the CbC report by jurisdictions

− the mechanisms for government-to-government exchange of CbC reports

Key Considerations/ Implications

• Presents organized view of where the MNC earns income and pays taxes

• Presents where people and assets are located in relation to the income earned and taxes

paid

− High priority for countries that cannot get information under current rules

− Intended for risk assessment

• Will template result in

− Value chain analysis with people and tangible assets as the driver?

− Greater use of profit splits?

− Increased emphasis on Location Specific Advantages?

− Profit comparison between countries with similar functional and risk profile?

25


BEPS Scorecard for India

Interestingly, India has not reacted officially so far or provided its comments on BEPS

though it has signed off on the same being an OECD non-member country

Current legislative position

• There have been no changes in tax laws specifically

related to BEPS

• GAAR provisions: new rules have been introduced,

However applicability of the same is deferred to 2

years

Perspective of Government

• The Indian government has not indicated their attitude on

specific action points though speeches, interviews or

draft budget proposals

Perspective of the public• There is definitely a sense of awareness with the public

in general; all actions are being closely followed

Unilateral BEPS actions• No clear signs of tougher BEPS views during tax audits

or litigation

26


RPTs to be at Arm‟s Length

New RPTs and modification of existing RPTs

require prior Audit Committee approval

Material RPTs to be disclosed in the

Board‟s Report

Key Implications: RPT Provisions

(Companies Act, 2013)

Prior approval of Board for RPTs that are not

ALP/Ordinary Course of Business (“OCB”)

Prior approval of shareholders for RPTs that are not

ALP/OCB and exceeding specified threshold

Arm’s Length Price in India – Companies Act 2013

27


Arm’s Length Price in India – Companies Act 2013

As per explanation (b) to section 188 of 2013 Act, the expression “arm‟s length transaction

means transaction between two related parties that is conducted as if they were unrelated so

that there is no conflict of interest

No specific guidance provided by 2013 Act as regards the application of the term “arm‟s length

transaction”

While interpreting the definition, it would be pertinent to keep in perspective the objective of

2013 Act that has laid emphasis on corporate governance:

‒ Aim is to protect the interest of the company and its shareholders

‒ Enhancing self–regulation

‒ Ensure that there is no prejudice to shareholder of either of the parties to the transaction and

that such transactions do not result in misstatements of accounts

• Having regard to the above, it may be vital to demonstrate the commercial expediency of a

transaction along with that the underlying contract does not result into a conflict of interest

between the two parties

• Further, it is important to maintain consistency in concluding arm’s length price for a

transaction from both Companies Act and TP perspective

28

Ensuring Global Compliance


Compliance Issues

Compliance Issues

Penalties

Confidentiality

Other Issues

Contemporane-ous

Documentation

TimeframeMateriality

Retention of Documents

Frequency of Documentation

Updates

Language

30


Compliance Issues

Differing Substantive TP Rules

Differing TP Documentation Rules

Differing Administrative Approaches

31


TP Documentation

Basic need for multi-country compliance

Significance of Documentation

• Is generally a part of legal regulations

• Enables discharge of burden of proof

• Indispensable in multiple audits

• Protection against penalty

Supporting documents

• Inter-company agreements

• Evidence(s) of business reasons i.e. limited risks, market penetration etc, used to negotiate or set TP

• Documents generated as daily business processes

• Trail of negotiations with Associated Enterprise e.g. mail trail documenting reasons for price fluctuations

• Segmental / transactional profitability

A Robust TP Global Policy Report

• Analyses functions, assets & risks in the

context of business model

• Considers alternate arguments / positions

• In sync with website/public information

• Evidences global consistency

OECD recent guidance on TP documentation and country-by-country reporting (master file / local file)

32


Why take the effort

Commercially Realistic

Less than Commercially

Realistic

Returns Consistently

Losses

Very High

Low

Medium

Low to Medium

High

Medium to High

High quality of process and documentation

Low quality of process and documentation

Risk of Audit of Transfer

Pricing Outcomes

Profitability Level

33


Why take the effort

• To avoid penalties

• To be prepared for a TP examination

• As a contemporaneous record

• To present data and decisions in the best light

• To demonstrate how these decisions were made

• To show that you searched for independent comparables

While documentation, whether global, regional, or local, is required as a compliance tool, it is

also an asset to, and a planning vehicle for, a multinational, as well as a guideline for a review

of its financial performance by one or more tax authorities.

Multinationals should consider their documentation not as something routine and

standardized, but rather as a protective tool requiring careful analysis and judgment.

prepared, it can save the multinational significant tax dollars, internal headaches, and

compliance costs.

34

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