beps & transfer pricing · assure that transfer pricing outcomes are in line with value...

BEPS & transfer pricingMay 2015

Suchint Majmudar, Taxand India

Amit Rana, GE

Polly Mak, Michelin

Tim Wach, Taxand Global

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1. Introduction: background to BEPS

2. What is BEPS?

3. Key BEPS concerns

4. BEPS Action 8 – Intangibles

5. BEPS Action 9 – risk and capital

6. BEPS Action 10 low value adding intra-group services

7. BEPS Action 13 country-by-country reporting

8. Taxand’s Take

Contents

Quality tax advice, globally

Introduction:Background to BEPS

3

Introduction: the background to BEPS

Evolution of BEPS

Globalisation and technological advances, increased

pace of integration of national economies and evolution

of new business models

Shift from country specific business models to global

models

4

Introduction: the background to BEPS

Evolution of BEPS

Domestic laws of countries do not consider tax systems

of other countries - gaps remain in international

standards (say in bilateral agreements)

Exploitation of the legal arbitrage opportunities and

boundaries of acceptable tax planning to minimise tax

burden (say Double Irish Dutch Sandwich)


What is BEPS?

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What is BEPS?

Shifting of profits / income to low-tax jurisdictions or other

locations enabling a more favorable tax treatment

Arrangements involving double non-taxation or less than

single taxation

Transfer of intangibles to favorable tax jurisdictions

Stripping legal entities of business functions, assets and

risks

7

What is BEPS?

Use of “tax attributes” such as tax credits, loss-carry

forwards, etc

Use of intermediary companies / jurisdictions in

investment and financing structures

Use of hybrid arrangements to exploit mismatches in tax

treatment


Key BEPS concerns

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Harm to governments

Loss of substantial corporate tax revenues

High cost of tax administration

Undermines integrity of tax system

Tax fairness issue

Critical under-funding of public investment

Key BEPS concerns

10

Harm to individual tax payers

To bear a greater share of tax burden

Harm to businesses

Significant reputational risk for MNEs whose effective tax rate is low

Competitive disadvantage for domestic businesses

Risk of unilateral actions by certain tax jurisdictions

Key BEPS concerns


BEPS Action 8 -Intangibles

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Assure that TP outcomes are in line with value creation -

intangible

Develop rules to prevent BEPS by moving intangibles

among group members, including:

Broad and clearly delineated definition of intangibles

Ensure that profits associated with the transfer and

use of intangibles are appropriately allocated in

accordance with (rather than divorced from) value

creation

Develop TP rules or special measures for transfers of

hard-to-value intangibles and

Update the guidance on Cost Compensation

Agreements (CCAs)

BEPS Action 8 – Intangibles

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Locations savings – savings attributable to working in a

particular market

Whether locational savings exist?

Amount of location savings

Extent to which savings are retained or passed on

to customer

Where savings are not passed on - allocation of net

retained locational savings

BEPS Action 8 – Intangibles (scope / coverage)

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Assembled workforce

Existence of uniquely qualified or experienced

employees

Such workforce impact arm’s length price on

account of efficiency with which services are

provided or goods produced

Transfer of such employees may necessitate

comparability adjustment in the form of time and

expense savings

BEPS Action 8 - Intangibles (scope / coverage)

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MNE group synergies

Distinction between incidental benefits and benefits

arising on account of deliberate group actions

Incidental benefits require no compensation (eg non

explicit guarantee on loan)

Deliberate group action related synergies to be

shared in proportion of contribution to its creation (eg

group wide centralised purchasing)


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Identification of intangibles – broad definitions

Ownership of intangibles – legal versus contributions

Marketing intangibles and R&D – risk assumed by each

party towards creation of intangibles

Determination of arm’s length conditions – consider

realistically available options



BEPS Action 9 -Risk and capital

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Assure that transfer pricing outcomes are in line with value

creation

Action 9 – Risks and capital

Shareholders activities

“Develop rules to prevent BEPS by transferring risks

among, or allocating excessive capital to, group

members. This will involve adopting transfer pricing

rules or special measures to ensure that inappropriate

returns will not accrue to an entity solely because it has

contractually assumed risks or has provided capital.

The rules to be developed will also require alignment of

returns with value creation. This work will be

coordinated with the work on interest expense

deductions and other financial payments”

BEPS Action 9 – Risk and capital

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Part 1

Updated guidance on the identification of the

commercial or financial relations

New guidance on identifying risks in commercial or

financial relations

New guidance on non-recognition of a transaction

Part II

Potential special measures to reduce possibilities for

BEPS

Discussion draft of revised section D, chapter 1

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Agreement terms ambiguous … transaction deduced

from the conduct

Functional analysis to focus on parties actions /

capabilities

Characteristics of property / services (unchanged)

Economic circumstances of the parties / market

(unchanged)

Business strategies (unchanged)

Identification of commercial or financial relations

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Nature of risk

Allocation of risk

How risks are assumed

Risk management

Actual conduct vs arrangements

Impact of ‘moral hazard’ and ‘risk-return trade-off’

Identifying and allocating risks

22

Transactions lacking economic attributes

Do not enhance commercial / economic position

Not conducted between 3rd parties (not an essential

condition)

Illustration … S1 (high-taxed) transfer TM to S2 (low

taxed) to manage risk and enhance value by marketing,

exploitation of TM by S1

Non recognition / re-characterisation

23

Hard to value intangibles

Independent investor

Thick capitalisation

Minimal functional entities

Taxation of excess (low-taxed) returns

Potential special measures


BEPS Action 10low value adding intra-group services

25

Draft aims to tackle excessive management fees and

head office expenses

Defines low value-adding intra-group services which

warrants limited mark-up on cost

Application of a consistent allocation key for all service

recipients

Specific reporting requirements in determining specific

cost pool

BEPS Action 10: Low value-adding intra-group services

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Low value-adding intra-group services

Supportive in nature

Not a part of the core group business

Do not require or lead to creation of intangibles

Do not assume or create significant risk


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Specifically excluded

Services constituting core business

Research and development

Manufacturing and production

Sales, marketing and distribution

Financial transactions

Extraction, exploration, or processing or natural

resources

Insurance and reinsurance

Services of corporate senior management


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Benefit testing

Asia tax environment continues to change rapidly

Specifically excluded:

Independent enterprise in comparable circumstances

would have been willing to pay or perform for itself

Shareholders activities

“Performs solely because of it’s ownership interest in

one or more other group members” v “stewardship

activity”

Duplication

“activities that duplicate what another group member is

performing itself or is being by a third party”


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Mark up

Cost plus or CUP is acceptable

Cost

Direct and indirect (subject to allocation using methods

chosen consistent with would be acceptable in 3rd party

situation)

Simplified benefits test

Prove benefits by categories of services as opposed to

a specific charge

Documentation

BEPS action 10: Low value-adding intra-group services

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Paper discusses various aspects of risks but does not

define “high risk transactions”

Should “high risk transactions” be defined, paper also

does not specify any particular treatment

What does that mean to taxpayer?

Continue what is normally expected to support arm’s

length principle such as proper transfer pricing

documentation until further clarification is available.

Action 10 – other high risk transactions


BEPS action 13country by country reporting

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6 February 2015, OECD releases “Guidance on the

Implementation of Transfer Pricing Documentation and

Country-by-Country Reporting”

Follows CbC report issued on 16 September 2014

Action 13: Country by country reporting

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One of the BEPS objectives is transparency / greater

information for tax administrators

CbC fits this objective

The others are:

Action 5: Counter harmful tax practices more

effectively, taking into account transparency and

substance

Action 11: Establish methodologies to collect and

analyse data on BEPS and the actions to address it

Action 12: Require taxpayers to disclose their

aggressive tax planning arrangements


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The purpose of CbC reporting is risk assessment

Intent is to give tax authorities an overview of where

the profits, sales, employees, and assets are located –

where taxes are paid

Intended to serve as an initial high-level risk

assessment to make a decision about where the tax

authority should allocate its limited resources – what

should be reviewed further, where to focus


35

The 6 February 2015 Guidance

Still some practical implementation issues to be

determined

Guidance provides answers to:

which companies are subject to reporting

requirements

timing of preparation and filing of the CbC report

use of the CbC report


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The 6 February 2015 Guidance indicates that:

CbC reporting will be required only of MNEs with annual

consolidated group revenues that exceed €750 million

OECD has indicated that this will exclude about 85-90% of

all MNE groups, but it covers MNE groups that control

about 90 % of all corporate revenue


37

The 6 February 2015 Guidance indicates that:

first CbC reports must be filed for MNE fiscal years

beginning on or after January 1, 2016. Given the

recommendation in the September 2014 report that

MNEs be allowed one year from the close of the fiscal

year to which the CbC report relates to prepare and file

the CbC report, the first reports are due December 31,

2017


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Concerns?

OECD has stated that CbC should not be used for a

formulary apportionment approach

Reports will be a mix of tax information and financial

information – so could be misleading

Some public interest groups have been pushing for public

disclosure of CbC-type information

With greater dissemination of confidential information,

there is inherently greater risk


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Comments

CbC should not be a mindless exercise

Just as with any documentation, you need to think about

how your information might be misread or misconstrued

In particular, think strategically about what you say under:


Additional information: Please include any

further brief information or explanation you

consider necessary or that would facilitate

the understanding of the compulsory

information provided in the country by

country template.

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Status:

German: Federal Ministry of Finance recently introduced

plans for the implementation of CbC reporting

India: Country-by-country reporting has been proposed,

and will likely coincide with the implementation of other

BEPS actions in 2017


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Status:

Spain: The Minister for Finance announced that country-

by-country reporting obligations will be introduced in the

legislature soon

UK: Will adopt the OECD’s CbC reporting template

effective from 1 January 2016


42

Status:

US: Has made an informal commitment to introducing

country by country reporting in the near future, although a

formal discussion of timetables and structure is yet to

occur



Taxand’s Take

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Taxand’s Take

OECD’s work on intangibles is commendable and sheds

to light some of the thorny issues of transfer pricing

Practical illustrations have been provided at several

instances which take root from matters litigated in India

and elsewhere

It is expected that OECD shall deal with pending issues

including re-characterisation and guidance on hard to

value intangibles by September 2015

45

Much deliberations amongst stakeholders (consultants,

industry, government) shall continue before finalisation

CbC is coming - so start preparing

Consider what your group will look like under CbC –

prepare a pro forma now

Start thinking about what “additional information” you

will provide

Taxand’s Take (cont)

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