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TRANSFER PRICING AS THE TOOL FOR AVOIDING EROSION OF THE TAX BASE
Promoting Voluntary Tax Compliance as a Common Priority of Slovakia and the EU
17. 05. 2013, Hotel Bôrik
INTRODUCTION
Recent works of the OECD and the EU Joint Transfer Pricing Forum (JTPF) have established that the successful resolution of Transfer Pricing disputes rely on: Developing a targeted knowledge strategy Systematic use of appropriate techniques and
methodologies Identifying Best practices and adopting good
governance processEU JTPF – October 2012 - Transfer Pricing Risk management : http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2012/jtpf_019_2012_en.pdf
EU JTPF – June 2012 – Discussion Paper on further Work in the Area of Transfer Pricing Risk assessment: http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2012/jtpf_011_2012_en.pdf
OECD Draft Handbook on Transfer Pricing Risk assessment (April 2013): http://www.oecd.org/tax/transfer-pricing/Draft-Handbook-TP-Risk-Assessment-ENG.pdf
OECD – Dealing Effectively with the Challenges of Transfer Pricing : http://www.oecd.org/site/ctpfta/49428070.pdf
WHY AND HOW TO MAKE TOOLS EFFICIENT?
Finite Resources for the Tax Administration to balance with complex issues and significant Tax Base erosion risks
An effective and efficient management of transfer pricing cases meets the common interest of Taxpayers and Tax Administration: key for a successful outcome for the Tax Administration and legal certainty/possible neutralization of the tax assessment for the Taxpayers
TOOLS FOR EFFICIENT TRANSFER PRICING AUDITS
Risk assessment and risk management: Risk factors and quantification
Recurring transactions Large & complex « one time » transactions
Risk indicators Profitability Transactions with related Parties in low-tax jurisdictions Intra-group service transaction Marketing or procurement companies abroad Excessive debt/interest expenses Transfer or use of intangibles to a related Party CCA Business restructurings
Sources of information: contemporaneous TP documentation, Questionnaires, Information returns, Public data and registers
Governance tools: Risk assessment process and Risk assessment reports
TOOLS FOR EFFICIENT TRANSFER PRICING AUDITS
Conducting the audit: Follow-up of pre-audit phase: Case
selection and selection of fields with high reassessment probability
Assessment of the quality of the transfer pricing documentation
Function & risk matrix analysis Value chain Segment-analysis Interviews
VALUE CHAIN ANALYSIS - EXAMPLE
Source: UN - Eighth Session of the Committee of Experts on International Cooperation in Tax Matters15–19 October 2012, Geneva
FUNCTION AND RISK MATRIX - EXAMPLE
Source: UN - Eighth Session of the Committee of Experts on International Cooperation in Tax Matters15–19 October 2012, Genevahttp://www.un.org/esa/ffd/tax/eighthsession/Appendix-II_Documentation%20with%20ICC%20doc_20121007_v5_ML.pdf
Design & product definition
R&D strategy
Product development
Manufacturing
Assembly of goods
Inventory warehousing
WW marketing & marketing strategy
Local sale network development and animation/local marketing/local advertising
Logistic/Billing/Cash collection/Credit management
Sale
After-sale support
Administrative functions
RISKS Company A Company B Company C
R&D risk
Market& price risk
Warranty risk
Credit risk
Currency risk
Product liability risk
ASSETS Company A Company B Company C
Manufacturing facilities and equipments'ownership
Intangible assets
Marketing assets
FUNCTIONS Company ACanada
Company BSlovak Republic
Company CGermany
SEGMENT ANALYSIS: EXAMPLE
Source: UN - Eighth Session of the Committee of Experts on International Cooperation in Tax Matters15–19 October 2012, Geneva
TOOLS FOR DISPUTE AVOIDANCE OR ALTERNATIVE DISPUTE RESOLUTION
Advance Price Agreements (APAs) Alternative administrative procedures,
e.g. Safe harbors « Enhanced engagement approach »:
the UK and Netherlands examples
UK EXAMPLE
Source: HMRC site - International Manual at INTM480540 et seq. http://www.hmrc.gov.uk/manuals/intmanual/intm480540.htm
THE NETHERLANDS EXAMPLE
Source: HM Site – Horizontal monitoring within the Medium to Very Large Business Segment http://download.belastingdienst.nl/belastingdienst/docs/horizontal_monitoring_very_large_businesses_dv4061z1pleng.pdf
RECENT RECOMMENDATIONS
Observation: overall effect of BEPS structures is to associate more profit with legal constructs and intangible rights and to shift risk intra-group, reducing share of profit associated with substantive operations
Improvements or clarifications to transfer pricing rules to address specific areas where current rules produce « undesirable results from a policy perspective »
Current project on intangibles Simplified appication of the TP guidelines Documentation requirements
Measures in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities: Germany and Sweden examples
See Business restructurings and Transfer Pricing in Sweden and Germany hj.diva-portal.org/smash/get/diva2:159038/FULLTEXT01 - Företagsomstruktureringar och internprissättning i Tyskland och Sverige
GERMAN LEGISLATION ON SHIFTING OF FUNCTIONS - EXAMPLE
Event characterizing a "Relocation of functions" (§1 of the Decree Law FVerIV)
Yes
General TP principles apply
TaxPayer prove that no Essential Intangible asset & advantages are transferred or that individual prices
complies with the overall value
Package deal assumed – Transfer Package valuation required
Available Comparables for the transfer package as a whole?
Taxpayer has to determine the range of agreement based on the profit
expectations of both parties
Most reliable price in the range as substantiated by Tax Payer,
otherwise mean value
No
General TP principles apply
Yes
Evidence that "Overall result of individual prices = value of the
package as a whole"?
Base the Transfer Package valuation on
comparables
If no adjustment clause has been agreed upon, the provision on assuming such clause apply. Assumption can be refuted by
Tax payer
Yes
No
Yes
Relocation of Functions (sec. 1 par 3 sentences 9-10 FTA)
Source: Germany's Transfer Pricing Provisions;: A conflict with Internationally Agreed Principles? Hartmut Förster Tax Management Jan. 28, 2010
CONSENSUS ON EXCHANGE OF INFORMATON
EU approach: exchange of information, simultaneous audits
The examples of BRICs and Australia
« SIDE » MEASURES
How to adjust and adopt a consistent approach in terms of penalties
How to manage double taxation issues
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