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BEPS in Action:Transfer Pricing Actions

November 2015

Sanjay Tolia

Price Waterhouse & Co. LLP

01 Setting the Context

02 Case Studies

03 What Next?

Outline

Slide 2November 2015BEPS in Action


Setting the Context

Section 1




15 Actions around 3 main pillars

1 2 3Coherence Substance Transparency

• Hybrid MismatchArrangements (2)

• CFC Rules (3)

• Interest Deductions (4)

• Harmful Tax Practices(5)

• Preventing Tax TreatyAbuse (6)

• Avoidance of PE Status(7)

• TP Aspects ofIntangibles (8)

• TP/Risk and Capital (9)

• TP/High RiskTransactions (10)

• Methodologies andData Analysis (11)

• Disclosure Rules (12)

• TP Documentation (13)

• Dispute Resolution(14)

Digital Economy (1) Multilateral Instrument (15)


Place ofvalue

creationmost

important


Actions 8 to 10 – Key Takeaways

1 2 3 4 5

Substance Control overrisks & return

on capital

Intangiblesand theirvaluation

Discouragingcash boxes

Guidance onHigh Risk

Transactions



Actions 13 – Key Takeaways

Master File – A globalconsistent overview

● Group organizationalstructure

● Description of global valuechain

● Intangibles

● Financing activities

● Global Transfer pricingpolicies

Local File – Specificincountry analysis

● Description of Inter-company transactions

● Comparability analysis

● Selection and Application ofTransfer Pricing Method(s)

● Financial Information

CbCR – key data pointsfor each group entity

● Main business activity

● Capital & Assets

● Revenue (AE & Non-AE),Profits, Taxes

● Number of Employees

● Tax jurisdiction


Master File &Local File to befiled with eachtax jurisdiction

CbCR to be filedwith taxjurisdiction ofultimate parent

CbCR mandatory ifconsolidatedturnover > EUR750 mn (approx.INR 5300 Cr.)

CbCR to be usedonly for riskassessment; notfor concludingaudits


The Indian journey to BEPS…so far


Circular 6 of

2013 / Tribunal

decision of GE

R&D Centre

Marketing

intangibles /

HC decision of

Sony Ericsson

Location

Savings /

Tribunal

decisions of

GAP and

Watson

Transfer of

hard to value

intangibles /

Tribunal

decision of

Tally

Documentation

for

Management

charges

/Various

decisions


Case Studies

Section 2




Captive service providers

Focus areas, goingforward

• AE’s functionsincluding riskmanagement

• Whether AE merecash box?

• Who is entitled toresidual profits?

Broadly aligned withCircular 6

XYZ SoftwareIreland Ltd.

XYZ Software IndiaPvt. Ltd.

100% Costplus20%

IP Holding

Captive SoftwareDevelopment

Current focus areas

• India’s functions

• Contractual risks

• Comparables – is20% enough?

• Operating vs non-operating

• Pass-through costs

• Comparabilityadjustments



Distributors

STU Fashions SA,France

STU Fashions IndiaPvt. Ltd.

100% Import price basedon targetoperating margin

Distribution in India

Brand, Technology,Manufacturing

Current focus areas

• Selection of RPM vsTNMM for imports

• AMP as a separatetransaction/BrightLine Test

Focus areas goingforward

• Overall compensationrelevant

• AMP part of FARanalysis

• Find appropriatecomparables

• Consider profit splitwhere distributorcontributessignificantly tomarket development

Broadly aligned withwith Delhi HC



Start-ups: Hard to Value Intangibles

Focus areas goingforward

• Arm’s length behavior

- Short termagreement

- Contingent payments

- Renegotiation clause

• Use of ex-post data bytax authorities

- Presumptiveevidence of ex-antearrangement

- Documentation tosupport ex-anteanalysis

- Permissible variancepegged at 20%

PQR Online UAELLC

PQR Online IndiaLtd

100%

• One-timepayment forworld rights

• Ongoingdevelopment &support on costplus

Overseas Exploitationof technology

• Newly set-up• Strategic &

Management team• Rest of the World

Rights wef 1st April2016

Developer ofblockbuster mobile

technology

• India rights forTechnology

• Platformdevelopment andmaintenance

Taxpayer Proposal

• Transfer of semi-developed technologyto PQR UAE

• PQR UAE to own restof the world rights toexploit the technology

Issue: Valuation ofIntangible

Taxpayer suggestion

• DCF Method

• Excess earningsmethod

• Relief from royaltymethod



TaxJurisdiction

Name (MainBusiness)

Revenue PBT Head-count

India ABC HQ90,000 18,000 2,000

India ABC R&D5,000 1,000 500

India ABC Trading45,000 2,000 2

USA ABC Manufacture43,000 (2,000) 1,000

Netherlands ABC Finance25,000 20,000 6

Luxemborg ABC IP Owner24,000 18,000 1

UAE ABC Trading35,000 21,000 2

Consolidated78,000

Indian outbound - CbCR Data analysis

Risk assessments

• Return on R&Dactivities

• Return on financing;CFC rules;correspondinginterest deductions

• Evaluating POEMexposure

• Vastly differenttrading returns forgroup entities subjectto different tax rates(in India and UAE)

• Audit triggers in theUS?



What Next?

Section 3




Response of Indian Officials

High taxcomplianceburden butnecessary

Companies would have todevise new systems tohandle new reporting

Mere capitalwill notattract income

Final reportsreflect what Indiahas been saying for20 years

There will be achange in businessprocesses and insystems


CbCR Legislationwill be introducedin budget 2016…will cover FY 2016-17 onwards


Key takeaways


Focus on transactions in, orinvolving intangibles

Tax authorities worldwide will exchangeinformation more proactively – Transparency willbe the best policy!

Focus on substance and actualconduct rather than contracts

Risks and rewards do not followcapital absent Control

Transfer Pricing compliance will besignificantly more onerous going forward


Thank You

Slide 16

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BEPS in Action November 2015

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