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Harry L. GutmanPrincipal
Washington National TaxDecember 5, 2008
Harry L. GutmanPrincipal
Washington National TaxDecember 5, 2008
TRANSFER PRICING AND CORPORATE
GOVERNANCEFoundation for International TaxationInternational Tax Conference –2008Mumbai, India
Harry L. Gutman Director – KPMG Tax Governance Institute, USA
Tax
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ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) A VOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (i i)
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KPMG and the KPMG logo are registered trademarks of KPMG International.
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Discussion Topics Discussion Topics
Tax Risk in GeneralTax Risk in GeneralTax Risks in the International Business Tax Risks in the International Business ContextContextIdentification and Management of Transfer Identification and Management of Transfer Pricing RisksPricing RisksGoverning Tax RiskGoverning Tax Risk
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KPMG and the KPMG logo are registered trademarks of KPMG International.
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Tax Risk DefinedTax Risk Defined
Tax risk encompasses all sources of risks that Tax risk encompasses all sources of risks that may create an unexpected outcome from a tax may create an unexpected outcome from a tax position. Sources of tax risk include:position. Sources of tax risk include:
Operational riskOperational risk
Transaction riskTransaction risk
Compliance riskCompliance risk
Financial accounting riskFinancial accounting risk
Controversy riskControversy risk
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
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How Tax Risks Affect A CompanyHow Tax Risks Affect A Company
Source: KPMG LLP’s Tax Risk and Responsibility publication
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KPMG and the KPMG logo are registered trademarks of KPMG International.
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Tax Risks in the International Business ContextTax Risks in the International Business Context
Permanent Establishment (PE) RisksPermanent Establishment (PE) RisksOrganization, Acquisition and Disposition Organization, Acquisition and Disposition (M&A) Risks(M&A) RisksTax Return Financial Data RisksTax Return Financial Data RisksTransfer Pricing RisksTransfer Pricing Risks
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
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Identification and Management of Transfer Pricing RisksIdentification and Management of Transfer Pricing Risks
Why is Transfer Pricing Important for Why is Transfer Pricing Important for Corporate BoardsCorporate BoardsIdentifying Transfer Pricing RiskIdentifying Transfer Pricing RiskQuantifying the RiskQuantifying the RiskManaging the Risk in Advance of a Managing the Risk in Advance of a ControversyControversySettling ControversiesSettling Controversies
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Why Care? Global Transfer Pricing Rules and EnforcementWhy Care? Global Transfer Pricing Rules and Enforcement
1994 or 1994 or earlierearlier
19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002 20032003 20042004 20052005 20062006 20072007
AustraliaAustraliaCzech Czech RepublicRepublicFranceFrance
AustraliaAustraliaCzech Czech RepublicRepublicFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanLatviaLatvia
AustraliaAustraliaAustriaAustriaCzech Czech RepublicRepublicFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea
AustraliaAustraliaAustriaAustriaBrazilBrazilChileChileCzech Czech RepublicRepublicFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexico
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexico
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexicoNew ZealandNew ZealandOECDOECDPhilippinesPhilippines
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexicoNew ZealandNew ZealandOECDOECDPhilippinesPhilippinesPolandPoland
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexicoNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandRussiaRussia
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLuxembourgLuxembourgMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRussiaRussiaSerbiaSerbia
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRussiaRussiaSerbiaSerbia
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBelgiumBelgiumBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublic
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBelgiumBelgiumBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEcuadorEcuadorEgyptEgyptEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublicSloveniaSlovenia
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBelgiumBelgiumBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEcuadorEcuadorEgyptEgyptEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaIsraelIsraelItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublicSloveniaSloveniaSouth AfricaSouth AfricaSpainSpainSri LankaSri Lanka
ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBelgiumBelgiumBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss
Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEcuadorEcuadorEgyptEgyptEstoniaEstoniaFinlandFinlandFranceFranceGermanyGermanyGreeceGreeceHong KongHong KongHungaryHungaryIndiaIndiaIndonesiaIndonesiaIreland Ireland (Republic of)(Republic of)IsraelIsraelItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublicSloveniaSloveniaSouth AfricaSouth AfricaSpainSpainSri LankaSri LankaSwedenSwedenSwitzerlandSwitzerland
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Identifying Transfer Pricing (TP) RiskIdentifying Transfer Pricing (TP) Risk
Corporate Control ProcessesCorporate Control ProcessesIdentifying material intraIdentifying material intra--group transactionsgroup transactions
Relationship with the business sideRelationship with the business side
Relationship with finance functionRelationship with finance function
Managerial vs. Legal Entity AccountManagerial vs. Legal Entity Account
Understanding the TP environment in countryUnderstanding the TP environment in country
SOX 404SOX 404
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Quantifying Transfer Pricing (TP) RiskQuantifying Transfer Pricing (TP) Risk
Corporate perspectiveCorporate perspectiveEffective tax rate impact; FIN 48Effective tax rate impact; FIN 48
Tested party resultsTested party results
Price adjustmentsPrice adjustments
Double tax vs. Differential tax ratesDouble tax vs. Differential tax rates
DisclosureDisclosure
ReputationReputation
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Managing Transfer Pricing (TP) Risk before the ControversyManaging Transfer Pricing (TP) Risk before the Controversy
TP Policies and ModelsTP Policies and ModelsInteraction with business objectives and incentivesInteraction with business objectives and incentives
Locus of risk and intellectual property Locus of risk and intellectual property
Hub and spoke model (trade flow consolidation)Hub and spoke model (trade flow consolidation)
Interaction with other taxes, e.g. VAT, and customsInteraction with other taxes, e.g. VAT, and customs
ImplementationImplementationIntercompany Agreements/ContractsIntercompany Agreements/Contracts
SystemsSystems
Legal entity accountingLegal entity accounting
TrueTrue--upsups
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Settling Transfer Pricing (TP) ControversiesSettling Transfer Pricing (TP) Controversies
Choice of forum Choice of forum –– single tax reliefsingle tax reliefAuditAudit
Administrative AppealsAdministrative Appeals
LitigationLitigation
Alternative Dispute Resolution MechanismsAlternative Dispute Resolution Mechanisms
Choice of forum Choice of forum –– double tax reliefdouble tax reliefCompetent AuthorityCompetent Authority
APA and rollbacksAPA and rollbacks
ArbitrationArbitration
Factors to consider to choosing the right Factors to consider to choosing the right forumforum
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Governing Tax RiskGoverning Tax Risk
““ How ToHow To ””The Role of the Audit CommitteeThe Role of the Audit CommitteeThe Role of the Tax DepartmentThe Role of the Tax Department
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”How To””How To”
Identify Company's Risk Tolerance Identify Company's Risk Tolerance Policy for TaxesPolicy for TaxesAnnounce or Implement the Agreed Announce or Implement the Agreed Upon PolicyUpon PolicyExecute the Agreed Upon PolicyExecute the Agreed Upon PolicyPeriodic Monitoring and RemediationPeriodic Monitoring and RemediationPeriodic Assessment and BenchmarkingPeriodic Assessment and Benchmarking
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
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The Role of the Audit CommitteeThe Role of the Audit Committee
The Audit Committee needs to The Audit Committee needs to understandunderstand who who is responsible for key tax functions and how is responsible for key tax functions and how tax risks are:tax risks are:
IdentifiedIdentified
Communicated Communicated
AssessedAssessed
Controlled, managed and monitoredControlled, managed and monitored
Accounted forAccounted for
DisclosedDisclosed
AuditedAudited
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
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The Role of the Audit CommitteeThe Role of the Audit Committee
Tax Risk Assessment ProcessTax Risk Assessment ProcessAudit CommitteeAudit Committee’’s oversight process over taxes should s oversight process over taxes should take into consideration key elements of effective take into consideration key elements of effective oversight, including:oversight, including:
The depth and experience of the tax personnel involved (internalThe depth and experience of the tax personnel involved (internal and and external)external)
ManagementManagement’’s processes to assess and evaluate compliance with tax s processes to assess and evaluate compliance with tax laws and regulationslaws and regulations
The strength and completeness of internal controls over tax accoThe strength and completeness of internal controls over tax accounting unting and risk mitigationand risk mitigation
Significant tax judgments and estimates Significant tax judgments and estimates
The adequacy of external and internal audit activities associateThe adequacy of external and internal audit activities associated with tax d with tax issuesissues
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
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The Role of the Tax DepartmentThe Role of the Tax Department
Formal reporting on tax risk to Audit Formal reporting on tax risk to Audit Committee, including:Committee, including:
CompanyCompany’’s current overall tax postures current overall tax posture
Significant risks and potential impactSignificant risks and potential impact
How tax risks are strategically aligned with overall How tax risks are strategically aligned with overall corporate risk profile corporate risk profile
Key tax procedures and controls over tax accounting Key tax procedures and controls over tax accounting
Review of companyReview of company’’s financial statement tax footnotes financial statement tax footnote
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
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The Role of the Tax DepartmentThe Role of the Tax Department
The Tax Department needs to proactively The Tax Department needs to proactively execute identification, assessment, execute identification, assessment, management of tax risksmanagement of tax risks
Both Both ““ownedowned”” and and ““not ownednot owned”” by Tax Departmentby Tax Department
Take lead in communications and mitigationTake lead in communications and mitigation
““Share the burdenShare the burden”” of tax risks with managementof tax risks with management
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International.
Presenter’s contact detailsHarry L. Gutman
KPMG LLP202-533-3044