Transfer Pricing, BEPS, Tax Policy and Sustainable...

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Transfer Pricing, BEPS, Tax Policy andSustainable Development

An Internationally Focused SeminarMarch 4, 2014



Opening Comments

• Patrick Chevalier, Director, Strategic Outreach andPartnerships Division, Natural Resources Canada –Vice Chair, IGF

• Invited Ministers• Kate Dilworth, Adjunct Professor Beedie School of

Business, Assistant Director Learning and Education,CIIEID

• Bruce Sprague, Partner and National Mining Leader,Canada, Ernst and Young LLP


Part I:Transfer Pricing for Mining, Minerals and

MetalsPresented by



IntroductionsJohn OatwayPartner, Canadian Transfer Pricing Market leader, Ernst and Young LLP, Toronto / Ottawa

§ John has over 30 years of experience in international tax

§ With over 23 years of experience with the Canada Revenue Agency, John was recognized as oneof the CRA’s leading authorities and one of Canada’s leading experts in transfer pricing

Tina BerthaudinSenior Manager, Transfer Pricing, Ernst and Young LLP, Vancouver

§ Tina has more than seventeen years experience in international tax, of which 10 years relatedirectly to transfer pricing

§ Tina spends the majority of her time working with companies in the mining sector to developtransfer pricing policies, APAs, and resolve CRA transfer pricing audits both domestically andthrough MAP

Tara Di RosaSenior Manager, Transfer Pricing, Ernst and Young LLP, Toronto

§ Tara has over eleven years of experience in transfer pricing

§ Tara has significant experience assisting clients in the practical development of intercompanytransfer pricing policies, preparation of documentation, planning transfer pricing audits,competent authority resolutions and APAs. Tara has experience in a number of industriesspecializing in the mining sector


Transfer Pricing for Mining,Minerals and Metals

• The first part of the session provides an overview of thebasic transfer pricing principles and a review of the keytypes of intercompany transactions that typically occur inthe extractive industry.

• We will focus on:vWhat is Transfer Pricing and why is it important?v Key considerations on pricing typical intercompany transactionsv Limitations for extractive industries with immovable resource

assetsv Use of transfer pricing safe harbors to protect wealth extraction

vs. arm’s length / free-market principles


How familiar are you with transferpricing?

A. Expert levelB. Working knowledgeC. Some what familiarD. Little or no

knowledge


What is transfer pricing?• What is transfer pricing?

v Establishes prices charged for cross-border transactions betweenrelated party enterprises

v Transfer of goods, services, assets (tangible and intangible), funds(capital transactions or financing transactions)

• Why is it important?v Establishes how a MNE will allocate income and expenses to various

membersv Tax administrations and MNEs are equally interestedv To avoid multiple taxation of the same incomev Globalization and rapid growth of intercompany trade


What is transfer pricing?• Organisation for Economic Co-operation and Development’s Transfer

Pricing Guidelines for Multinational Enterprises and Tax Administrations(the OECD Guidelines)v Related taxpayers to set transfer prices for inter-company transaction

as if they were unrelated entities but all other aspects of therelationship were unchanged

v Article 9 of the OECD Model Tax Convention forms the basis of manybilateral tax treaties

• United Nations Practical Manual on Transfer Pricing for DevelopingCountries (UN Manual)v Transactions within a group are compared to transactions between

unrelated entities under comparable circumstances to determineacceptable transfer prices

v Article 9 of the UN Tax Convention serves as a guide for applying arm’slength principle for developing countries


What is transfer pricing?• Arm’s length principlevTreats a group of parties not dealing at arm’s length as if

they operate as separate entities rather than asinseparable parts of a single unified business

vRelated persons are deemed not to deal at arm’s length

vIs generally based on a comparison of:o Prices of transactions between non-arms’ length parties

(‘controlled transactions’) witho Prices for similar transactions between arm’s length parties

(‘uncontrolled transactions’)


Major world economies with effectivedocumentation rules* as of 2013


What is the biggest transfer pricingchallenge in your country?

A. No transfer pricingrules

B. Transfer pricingrules that are hardto implement andenforce

C. Non-compliance ofcompanies

D. Other


Challenges faced by MNEs

Resource nationalism

Margin protection and productivity improvement

Limitations for extractive industries withimmovable resource asset

Capital allocation and capital access

Social license to operate

Skills shortage

Price and currency volatility

Capital project execution

Sharing the benefits

Challenges faced by Governments

Lack of financial resources for development

Ring fencing

Fiscal regime balance

Shortage of resources

Pricing of unrefined mineral products

Pricing of unrefined mineral products

Natural resource extraction inherently local, cannot be “moved” and non-renewable

Reclamation


Mining industry value chain

Key functional activities

Rights acquisition,exploration and

planningMining operations Risk management

and logisticsSales, marketing anddivestment process

Key functional activities Key functional activities Key functional activities

Obtaining mine rights

Explore for/ locate viabledeposits

Feasibility study for miningproject

Develop mine plan

Obtain financing

Construction of miningfacilities

Procurement of equipment

Extraction of resource body

Processing of resourcebody

Logistics scheduling

Beneficiation

Risk management andhedging

Physical transportation

Marketing and sales

Trading in resource body

Continuing cost/ benefitanalysis

Ultimate curtailment ofoperations

Transfer pricing considerations• Key mining activity and related mining intangibles are geographical• In which entity/jurisdiction are the services undertaken?• Where is the value created and who benefits?• How should these services be priced?


Key considerations for pricing typicalintercompany transactions

• Typical intercompany transactions in the miningindustry:vTechnical servicesvExecutive and administrative servicesvSales and marketingvTolling or contract processingvDevelopment, sale or use of intellectual propertyvIntercompany loansvIntercompany guarantee fees


Which type of related party transactionare you most familiar with?

A. Sale of mined resourceB. Technical servicesC. Admin/exec servicesD. Sales & marketingE. Tolling or contract

manufacturingF. R&D, Sale or use of IPG. Interco loansH. Interco guarantees


►Mine is fixed and immovable►Mine development functions often a separated

entity and located in a foreign jurisdiction► Intra-group services often provided include:

► Technical services: geology, engineering andenvironmental’

►Non-technical support services: executivemanagement finance, human resources,information technology, and legal services; and

►Other support services: procurement andcontract negotiation, commercial and businessdevelopment, sales and marketing, assetmanagement, and community affairs, health &safety.

Overview

Considerations

►Whether services have been provided;►How to determine an appropriate charge for such

services in accordance with the arm’s lengthprinciple

►Determination of the cost base►Allocation methodology

Issues

Parent

Foreign Mining Co.

Provision of intra-groupservices

Mine asset

► Transfer/use of valuable intangibles?

► Ensure no duplication of charges (i.e., chargesfor services and the use of intangibles)

Key considerations for pricingintercompany service fees


How effective do you perceive thearm’s length principle to be?

A. Very effectiveB. Somewhat effectiveC. Not effectiveD. Unsure


• Due to administrative burden, some countriesconsider safe harbor rules appropriate for transferpricing

• Transfer pricing complexities may putdisproportionate burden on small and mid-sizedMNEs

• A safe harbour is a statutory provision for a givencategory of taxpayers that provides relief forcertain obligations otherwise imposed by the taxcode by substituting usually simpler obligations

Use of transfer pricing safe harbours vs. arm’slength principles to protect wealth extraction


vSimplify and reduce compliance costs

vIncreases taxpayer certainty for prices and compliance

vReduce administrative costs of fiscal collection and allowresources to be directed to more complex transactions

vTax administrations are required to monitor taxpayer’scompliance with respect to procedural rules

vPotential double taxation or double non-taxation issues

vSafe harbours can produce prices or results that may beinconsistent with arm’s length principles

Use of transfer pricing safe harbours vs. arm’slength principles to protect wealth extraction


Q&A


Part II:International Focus on Base Erosion &

Profit Shifting (BEPS) including OECD & UNDevelopments

Presented by



Matthew SambrookPartner, Transfer Pricing, Vancouver, Ernst and Young LLP, Canada§ Matthew has worked exclusively in transfer pricing since 1999 in both the United Kingdom and in Canada

§ Matthew has advised multinational companies with respect to multi-jurisidictional transfer pricingcompliance and frequently assisted with trans-national dispute resolution

§ Matthew’s recent experience has been largely focused in in the Mining and Metals sector

John HobsterPartner, Head of Global Accounts for Transfer Pricing, Ernst and Young LLP, London, UK§ John has more than 17 years of experience providing strategic transfer pricing advisory services to major

multinational companies in a variety of industries, including Mining and Metals

§ John is a former Investigation Manager and Competent Authority within the UK Inland Revenue (now HMRC)Transfer Pricing Division

Introductions


International Focus on Base Erosion & ProfitShifting (BEPS) including OECD & UN

Developments• This section session focuses on more advanced issues as

they relate to transfer pricing in the current environment,from the perspective of domestic tax policyadministrations, the OECD, the UN and industry.

• We will focus on:v Why is the discussion around BEPS happening now?v Social contract with “fair share” of tax leading to

greater transparencyv Lack of development in international tax framework

to address technological revolutionv Do we expect a more fragmented appproach to

international tax?


Why is the discussion around transferpricing happening now?

• We will focus on:v ?


International Organizations andTransfer Pricing

ATAF

PATAIMF/

WorldBank

EuropeanUnion

UnitedNations

TransferPricing

OECD


Overview of OECD BEPS project• Growing perception governments are losing corporate tax

revenue due to planning that erodes tax base and shiftsprofits to low-tax jurisdictionsv Global economic slowdown increased attention on income equality

and tax fairnessv MNC tax issues that have been in the headlines around the worldv OECD’s Action Plan on Addressing Base Erosion and Profit Shifting

(BEPS) is aimed at updating international tax frameworkv G8 and G20 governments have endorsed OECD’s work on BEPS and

have committed to individual country actionv Major developing (non-OECD) countries, including China and India,

are actively participating in BEPS projectv OECD BEPS agenda is ambitious in both scope and timing, the

issues are complex, but there is a distinct political imperativev Responsive changes over the next several years will differ by

countries in specifics and in timing, reflecting each country’sparticular circumstances


OECD Action Plan on BEPS

• The OECD’s first report “Addressing BaseErosion and Profit Shifting” wasreleased on 12 February 2013v Report was issued in connection with G20

Finance Ministers meeting on 15-16 February2013

v Report provided background information onBEPS concerns, identified six key pressureareas, and set the stage for substantive workby OECD in those areas

• The OECD “Action Plan on Base Erosionand Profit Shifting” was released on 19July 2013v Action Plan was issued in connection with the

G20 Finance Ministers meeting on 19-20 July2013

v Plan sets forth 15 Action areas where theOECD will focus work over the next 2 ½ years


Specific OECD BEPS target areas

• OECD’s BEPS work plans in 15 target areas:1) Tax challenges of the digital economy –

March 2014

2) Hybrid mismatch arrangements – April2014

3) CFC rules – Sept 2015

4) Deductibility of interest and other financialpayments – Sept /Dec 2015

5) Harmful tax practices of countries – Sept2014/Sept 2015/Dec 2015

6) Treaty abuse – March 2014

7) Artificial avoidance of permanentestablishment status – Sept 2015

8) Transfer pricing for intangibles – May 2014

9) Transfer pricing for risks and capital – Sept2015

10) Transfer pricing for other high-risktransactions – Sept 2015

11) Development of data on BEPS and actionsaddressing it – Sept 2015

12) Disclosure of aggressive tax planningarrangements – Sept 2015

13) Transfer pricing documentation – Feb 2014

14) Effectiveness of treaty dispute resolutionmechanisms – Sept 2015

15) Development of a multilateral instrument foramending bilateral tax treaties – Sept2014/Dec 2015


OECD Action Plan on BEPS

• OECD work in the Action areas will proceed over the next2½ years

• The OECD project outcomes will include:v Reports and analysisv Changes to the OECD Transfer Pricing Guidelinesv Changes to the OECD Model Treatyv Recommendations regarding the design of domestic rulesv Development of a multilateral instrument

• Once the OECD makes its recommendations, significantwork at the individual country level will be required todetermine whether, when, and how to implement therecommendations


To what degree does the OECD BEPSAction plan address the needs of

developing countries?A. Addresses major

concernsB. Addresses some but

not all of concernsC. Does not address

the concernsD. May disadvantage

developingeconomies


UN Developments

• The United Nations Committeeof Experts on InternationalCooperation in Tax Mattersbegan its work on the PracticalManual on Transfer Pricing forDeveloping Countries in 2009

• Most recently updated in June2013


UN Developments

• The Subcommittee was to develop a Practical Manual onTransfer Pricing for Developing Countries, which would:v follow the “arm’s length principle” adopted in Article 9 of the UN Model

Double Taxation Convention between Developed and DevelopingCountries (the UN Model), which is consistent with the OECD Model TaxConvention on Income and on Capital (the OECD Model);

v reflect the realities of developing countries, at their relevant stages ofcapacity development;

v pay special attention to the practical experience of developingcountries;

v draw upon the work being done in other fora, in particular the OECD.

• Manual in effect provides a needs-based approach to explainwhat it means for developing countries, and how they can beapplied in practice in a way that responds to their prioritiesand realities


UN Developments

• Key notable differences to OECD:v (Local) marketing intangibles – especially with respect to subsidiaries exercising

marketing activities or paying locally to increase local brand loyalty etc.v Location specific advantages/location savings – Economic benefits resulting from a

particular location (a location “pension”)v Local market premium – some countries achieve higher profit margins than

developed countries created due to supply and demand – excess profits should stayv Absence of reliable comparative data – can look to different geographic marketsv Risk distribution and synergies within the group – are “limited-risk” companies really

limited and is the complete allocation of risk to one entity doubted

• Concerns:v Potential double-taxation arising from divergence from the OECD Guidelinesv Driving additional uncertainty from at least two sets of different TP guidelinesv Treatment of limited-risk structures (sales and marketing, R&D) which country is

entitled to tax profits arising from location savings, and what should be done ifcomparables are absent

v Many unresolved matters (services, intangibles, restructuring)


Do we expect a more unified or morefragmented approach to international tax

• What are the differences between approaches?

• Illustrative examples• Different transfer pricing methods• OECD vs. UN approaches



MNE global system profit

Subject to taxin country A

Scenario #1 – CUP

Hypothetical situation- MNE remunerates head-office operations in country A on a cost plus 5% basis

Is it BEPS? Is it fair?- If MNE operates a limited-risk service provider in country A?- If country A contributes significant capital- If country A owns valuable intangible assets or mining know-how- If country B now earns less than spot market price for output


Subject to tax in country B

Subject to taxin country A

Scenario #2 – Cost Plus


Hypothetical situation- MNE remunerates Country B mining operations based on prevailing spot

market price for output

Is it BEPS? Is it fair?- If country A contributes significant capital and assumes investment risk- If country A provides geological expertise and executive management- If country A owns valuable intangible assets or mining know-how



Hypothetical situation- MNE uses 50/50 profit split to allocate income between jurisdictions

(either based on profit split method or formulary apportionment)

Is it BEPS? Is it fair?- If countries A and B have equivalent tax rates?- If country B has a lower tax rate than country A?- If MNE has losses in Country A?- If Country A has a limited degree of functions, risks and assets?



Subject to tax in country A

Scenario #3 – Profit split

Hypothetical situation- Tax authority in country B asserts that the market price of the

commodity should be used. Tax authority in country A accepts originalCost Plus as filed.

Is it BEPS? Is it fair?- If country A contributes capital, bears investment risk and provides

services to extract resources ?- If country B has no tax treaty with country A

MNE global system profitSubject to tax in

country B

Subject to tax in country A

Scenario #4 – Tax Authority Reassessment

Subject to doubletaxation


Who benefits from greater taxtransparency?

A. Governments to assesseffectiveness of domesticpolicies and internationalcompetitiveness

B. Tax authorities to performmore detailed riskassessments andinvestigative audits

C. Public to be assured thatMNCs have nowhere tohide

D. MNCs to facilitate a levelplaying field


Tax Transparency

• How to achieve greater tax transparency?

• Who is tax transparency for?

• Balancing information required to perform tax riskassessments vs. compliance burden for MNCs


OECD discussion draft on transfer pricingdocumentation and CbC reporting

• OECD discussion draft issued 30 January 2014• Intended as replacement to Chapter V

of the OECD Transfer Pricing Guidelines• Structured as a two-tier approach to transfer

pricing documentation that is intended to bestandardized across countriesv Masterfile with global information across MNCv Local country file with transactional information

relevant to the local entity• Provides a draft of the template for Country-by-Country (CbC)

reporting• Discussion draft “does not necessarily reflect consensus views” of the

OECD working groups involved• OECD considering whether information relevant to other aspects of tax

administration and the BEPS action plan should be added to template


Transparency with CbC Reporting

• We will focus on:v ?


Transparency with CbC Reporting• Draft template requires reporting for each entity in MNC group

arranged by country of organization, with branches treated asentities for this purpose, including:

• Space provided for any brief information that taxpayerconsiders necessary to facilitate taxpayers’ understanding

• Entire template, with all entity and country information, may beobtained by the tax authority in each country in which the MNChas an entity or branch

v Place of effective managementv Business activity codesv Revenuesv Earnings before income taxesv Income tax paid on cash basis to

the country of organization and toall other countries

v Total withholding tax paidv Stated capital and accumulated

earnings

v Number of employees and totalemployee expense

v Tangible assets (other than cash orcash equivalents)

v Royalties paid to and received fromrelated entities

v Interest paid to and received fromrelated entities

v Service fees paid to and receivedfrom related entities


Tax Transparency

• Should Mining MNCs have a social contract in thejurisdictions they operate?

• How to balance increased tax transparency vs.company confidentiality?

• Increased tax reporting to help tax authorities, butwill it assuage current public perceptions?

• What are other potential approaches ?


Q&A


Part III:International Tax Policy Administration for

Sustainable Resource DevelopmentPresented by



International Tax Policy Administration forSustainable Resource Development

• An international panel discussion on International TaxPolicy for Sustainable Resource Development which willaddress international tax policy development andadministration as it pertains to developing countries

• Some of the topics that we hope to address:v What can governments and tax policy administrations do to

ensure sustainable resource development?v How can governments and tax policy administrations maintain a

balance between attracting investment for resourcedevelopment compared to wealth extraction?

v How would policy development differ between UN followers vs.OECD followers?

v Which tax policies could provide the greatest net economicbenefit to a country with natural resources?


International Panel Discussion

Matthew SambrookPartner, Transfer Pricing, Ernst and Young LLP, Canada§ Matthew has worked exclusively in transfer pricing since 1999 in both the United Kingdom and in Canada§ Matthew has advised multinational companies with respect to multi-jurisidictional transfer pricing

compliance and frequently assisted with trans-national dispute resolution§ Matthew’s recent experience has been largely focused in in the Mining and Metals sector

John HobsterPartner, Head of Global Accounts for Transfer Pricing, Ernst and Young LLP, UK§ John has more than 17 years of experience providing strategic transfer pricing advisory services to major

multinational companies§ John is a former Investigation Manager and Competent Authority within the UK Inland Revenue (now HMRC)

Transfer Pricing Division

Andy MillerPartner, Americas Mining & Metals Sector Leader, Ernst and Young LLP, USA§ Andy has over 30 years of experience with a focus on corporate tax services serving several large

multinational energy and natural resource clients§ Formerly served as EY’s Global Co-Leader and America’s Area Leader for Power & Utility Industry Tax

Services

Fred O’RiordanNational Advisor, Tax Services and Canadian Leader, Economics & Analytical Services, Ernst and Young LLP,Canada§ Fred is the National Advisor for Tax Services and Canadian Leader, Economics & Analytical Services§ Prior to his career with EY, Fred was the Assistant Commissioner of the Appeals Branch at the Canada

Revenue Agency and also served as the Director General of the International and Large Business Directoratewhere he was the delegated Competent Authority for Canada


Q&A


Thank You!

Kristina HenrikssonDirector Learning and Education

Canadian International Institute for ExtractiveIndustries and [email protected]

www.ciieid.org

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