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Transfer Pricing Audit Management Transfer Pricing AssociatesSteef Huibregtse and Richard Slimmen13 April 2012

FINANCE AND STRATEGY PRACTICE

Tax Director Roundtable™

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Introduction



FINANCE & STRATEGY PRACTICE

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DESIGN &IMPLEMENT DOCUMENTATION CONTROVERSY/

DISPUTES

How to design your transfer

pricing system

The Transfer Pricing Process is all about treating transfer pricing and the business risks around it as a business process. The steps in this process are illustrated in the following diagram:

OUTPUT: INPUT:

A MANAGEABLE AND

COMPANY’S

DEFENSIBLE TRANSFER

B BUSINESS MODEL

PRICING SYSTEM

CAPTURE THEDYNAMICS IN INDUSTRY AND BUSINESS MODEL

Addressing the following key issues:1. How to identify the relevant business context2. How to design an appropriate transfer pricing system and arrange for proper implementation3. How to document the transfer pricing system4. How to manage (pre-) controversy of the transfer pricing system

Addressing the following key issues:1. What are the options available?2. What is your ‘risk appetite’?3. What is your best controversy strategy?4. How to best negotiate with tax authorities?

BY PROPER PREPARATION AND GUIDANCE

Audit

Pre-audit/ provisioning

MAP

APA

Litigation

Through conflict avoidance

Through process management

Through Conflict resolution

How to deal with transfer pricing

controversy


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U.S. transfer pricing controversy issues




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• Form 5701(a) Respond to 5701(b) Hot Interest(c) Fast Track Settlement(d) Early Referral to Appeal

• IRS appeals(a) Review of Transfer Pricing Cases(b) Simultaneous Appeals and Competent Authority(c) Post Appeals Mediation(d) Arbitration

• Competent authority(a) Introduction

- Potential Double Tax Cases- Fiscal Residence Cases

(b) Inventory of Double Tax Cases- Adding Insult to Injury(c) Persuasive Information(d) Effect of Agreements or Judicial Determinations(e) Determination of Creditable Foreign Taxes(f) Arbitration

U.S. Issues – Part 1


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• U.S. Advance Pricing Agreement program(a) Jurisdictional Matters

- Section 482 and Treaty Cases- PE Allocations and Other Collateral Issues

(b) Nature of APAs(c) Benefits of Advance Pricing Agreements

• Litigation(a) Taxpayer Cannot Resolve Case Through Administrative Channels

(b) Prior to Paying the Tax(c) Untimely Filing of Petition or Avoiding the Tax Court

• Simultaneous examination program(a) Renewed Interest in SEP(b) TIEAs

• Pre-filing agreements(a) PE and US Trade or Business(b) Related Pricing Through APA

• Compliance assurance process(a) Scope(b) Participation(c) Transfer Pricing Elements

U.S. Issues Part 2


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1. What risk mitigation instruments fix your defense strategy?

2. What percentage of your risk management is TP controversy based?

3. Who is responsible in your company to run these risk processes?

4. How to deal with more than 2 countries on TP matters at the same time and comply with rules of full transparency towards all stakeholders?

Key Issues


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EU transfer pricing controversy issues




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Controversy landscape

• Topics covered: intangibles, valuation, PE risks, sales commission, duplication, business restructuring, marketing spend, head quarter charges, intercompany loans and guarantee fees;

• Hotspots of aggression: Germany, Denmark, France, Italy, Canada, USA, Australia, Korea, China, India, Indonesia and Brazil.

• Countries where we have seen activity: 15 countries in Europe, Australia, Indonesia, China, Vietnam, USA, Canada.


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Germany/Switzerland: audit on royalty and marketing intangibles

Royalty charge

Switzerland Germany

• German marketing intangibles• Royalty payment non-deductable• Rejection 50% of German marketing spend


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Court case on business restructuring moving intangibles

Sales companies

Sales companyCountry 1

Sales companyCountries X

IP ownerDenmark



R&D Centre R&D agreement

Sale of goods

Distribution agreement

Sales companies


Sales companyCountries X

Contract manufacturerDenmark

Profit CenterIP owner

Switzerland



R&D Centre

Distribution agreement

Sale of goods

Purchase of goods

Production & supply agreement

R&D agreement

Before business restructuring• After business restructuring with selling

of assets to Swiss entity

List of IP• Technology• Patents• Know-how

• Acceptable valuation method, • The use of the expert witness• Seller’s vs. buyer’s perspective


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Italy/US: audit on royalties and service fees

IP related services

US Parent

European headquarter Italian distributor

IP

• IP = know-how• Duplication issues• Provision of services versus provision of know

how


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US/Denmark: APA in Denmark on commissionaires + buy-sell model

Production of patented drags

Production of generic drags

Danish distribution

companyCustomer

• Critical conditions• Allocation issues• Combined APA vs. separate APAs


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UK/Germany: audit on German branch of UK Head office

• Services versus sales• Key accounts vs. local customers• Cyclical nature of industry

Japanese HQ

UK regional HQDistributor

German Branch

Sales support

GermanCustomers

Sales

????

Sales or Sales support?


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Switzerland/Row: Multi-country APA approach together with the Swiss tax authorities

• Teaming model with Swiss tax authorities• Unilateral vs. bilateral (MAP)

Swiss parent company

Local countries

Intercompany transactions


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Netherlands/Row: joint audits platform to settle European cases on I/C transactions involving the Netherlands

• OECD report

• Field officer vs. ministry of finance

• Joint audit vs. EU Arbitration Convention


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India/Japan: marketing intangibles

• Suzuki, a Japanese company, owned over 50% of Maruti Suzuki India (“Maruti”), an Indian company.

• India’s tax authority stated that Maruti should be compensated by Suzuki for developing a “marketing intangible” (beyond a routine distributor’s role & responsibility).

• High Court of Delhi found in favor of the defendant Maruti and the name was within the discretion of Maruti and not granted to Suzuki or contained in any legal agreement.


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TPA’s recommended approach to transfer pricing




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5 step approach to manage your tax risk and controversy

• Adopt a global approach to tax risk and controversy management;

• Evaluate global resources, processes and systems for tax risk management;

• Address tax risk and controversy at a strategic level;

• Make strong corporate governance in tax a priority;

• Stay connected with global legislative, regulatory and tax administration change.


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Issues to tackle today

• Tax authorities around the world become more aggressive and focused: see our hot spots!

• High pace of legislative change creates more risk and uncertainty: each week a new set of TP legislation and/or updates are published;

• Growing disclosure and transparency requirements: being exposed!

• Expansion in emerging markets is creating tax risk and uncertainty: how will the BRIC act?

• A new breed of tax activism emerges: the fatal impact of media on corporate image!

• Enhanced relationships opportunities are spreading: how do you communicate and interact with your tax inspector?


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TPA’s recommended approach

• Define areas of 'dispute' in transfer pricing, customs and/or valuation matters;

• Agree with client on 'case management' plan to resolve the 'dispute';

• Determine a 'critical time path' to get to a resolution;

• Choose the 'best available controversy toolbox' and 'controversy team' to handle the case; and

• Leverage from own resources and 'extended global controversy network' offered by a firm like TPA.


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Options to consider

• High level TP risk scan

• TP Risk Management Strategy

• TP Audit defense

• Joint audit

• Advance Pricing Agreement

• Mutual Agreement Procedure

• Arbitration

• Mediation

• 2nd Opinion


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24© 2012 The Corporate Executive Board Company. All Rights Reserved. CATnumber/version

About Transfer Pricing Associates

Transfer Pricing Associates is the leading independent provider of global transfer pricing and valuation services and part of the Transfer Pricing Associates Global group. The Transfer Pricing Associates Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs services, headquartered in Amsterdam and with our own offices and coverage in over 50 countries around the world.

Transfer Pricing Associates provides high quality transfer pricing advice and assistance to multinationals of all sizes, wherever they are located. For more details of our innovative services, please visit our website at

www.tpa-global.com

About Transfer Pricing Associates

CORPORATE EXECUTIVE BOARD

WWW.EXECUTIVEBOARD.COM

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For further information please contact:Cody [email protected]

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