transfer pricing and corporate governancefitindia.org/downloads/harry_gutman_2008.pdf ·...

1

Harry L. GutmanPrincipal

Washington National TaxDecember 5, 2008

Harry L. GutmanPrincipal

Washington National TaxDecember 5, 2008

TRANSFER PRICING AND CORPORATE

GOVERNANCEFoundation for International TaxationInternational Tax Conference –2008Mumbai, India

Harry L. Gutman Director – KPMG Tax Governance Institute, USA

Tax

©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDE D OR WRITTEN BY KPMG TO BE USED, AND CANNOT BY USED, BY A CLIENT OR

ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) A VOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (i i)

PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PAR TY ANY MATTERS ADDRESSED HEREIN.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDE D OR WRITTEN BY KPMG TO BE USED, AND CANNOT BY USED, BY A CLIENT OR

ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) A VOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (i i)

PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PAR TY ANY MATTERS ADDRESSED HEREIN.

3

All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.



4

Discussion Topics Discussion Topics

Tax Risk in GeneralTax Risk in GeneralTax Risks in the International Business Tax Risks in the International Business ContextContextIdentification and Management of Transfer Identification and Management of Transfer Pricing RisksPricing RisksGoverning Tax RiskGoverning Tax Risk



5

Tax Risk DefinedTax Risk Defined

Tax risk encompasses all sources of risks that Tax risk encompasses all sources of risks that may create an unexpected outcome from a tax may create an unexpected outcome from a tax position. Sources of tax risk include:position. Sources of tax risk include:

Operational riskOperational risk

Transaction riskTransaction risk

Compliance riskCompliance risk

Financial accounting riskFinancial accounting risk

Controversy riskControversy risk



6

How Tax Risks Affect A CompanyHow Tax Risks Affect A Company

Source: KPMG LLP’s Tax Risk and Responsibility publication



7

Tax Risks in the International Business ContextTax Risks in the International Business Context

Permanent Establishment (PE) RisksPermanent Establishment (PE) RisksOrganization, Acquisition and Disposition Organization, Acquisition and Disposition (M&A) Risks(M&A) RisksTax Return Financial Data RisksTax Return Financial Data RisksTransfer Pricing RisksTransfer Pricing Risks



8

Identification and Management of Transfer Pricing RisksIdentification and Management of Transfer Pricing Risks

Why is Transfer Pricing Important for Why is Transfer Pricing Important for Corporate BoardsCorporate BoardsIdentifying Transfer Pricing RiskIdentifying Transfer Pricing RiskQuantifying the RiskQuantifying the RiskManaging the Risk in Advance of a Managing the Risk in Advance of a ControversyControversySettling ControversiesSettling Controversies

9

Why Care? Global Transfer Pricing Rules and EnforcementWhy Care? Global Transfer Pricing Rules and Enforcement

1994 or 1994 or earlierearlier

19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002 20032003 20042004 20052005 20062006 20072007

AustraliaAustraliaCzech Czech RepublicRepublicFranceFrance

AustraliaAustraliaCzech Czech RepublicRepublicFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanLatviaLatvia

AustraliaAustraliaAustriaAustriaCzech Czech RepublicRepublicFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea

AustraliaAustraliaAustriaAustriaBrazilBrazilChileChileCzech Czech RepublicRepublicFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexico

ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss

Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexico


Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexicoNew ZealandNew ZealandOECDOECDPhilippinesPhilippines


Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexicoNew ZealandNew ZealandOECDOECDPhilippinesPhilippinesPolandPoland


Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaMexicoMexicoNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandRussiaRussia


Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLuxembourgLuxembourgMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRussiaRussiaSerbiaSerbia


Republic of)Republic of)Czech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRussiaRussiaSerbiaSerbia

ArgentinaArgentinaAustraliaAustraliaAustriaAustriaBelgiumBelgiumBrazilBrazilCanadaCanadaChileChileChina China (People(People’’ss

Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublic


Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEcuadorEcuadorEgyptEgyptEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublicSloveniaSlovenia


Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEcuadorEcuadorEgyptEgyptEstoniaEstoniaFranceFranceGermanyGermanyHungaryHungaryIndiaIndiaIndonesiaIndonesiaIsraelIsraelItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublicSloveniaSloveniaSouth AfricaSouth AfricaSpainSpainSri LankaSri Lanka


Republic of)Republic of)ColombiaColombiaCzech Czech RepublicRepublicDenmarkDenmarkEcuadorEcuadorEgyptEgyptEstoniaEstoniaFinlandFinlandFranceFranceGermanyGermanyGreeceGreeceHong KongHong KongHungaryHungaryIndiaIndiaIndonesiaIndonesiaIreland Ireland (Republic of)(Republic of)IsraelIsraelItalyItalyJapanJapanKorea Korea (Republic of)(Republic of)LatviaLatviaLithuaniaLithuaniaLuxembourgLuxembourgMalaysiaMalaysiaMexicoMexicoMontenegroMontenegroNetherlandsNetherlandsNew ZealandNew ZealandOECDOECDPeruPeruPhilippinesPhilippinesPolandPolandPortugalPortugalRomaniaRomaniaRussiaRussiaSerbiaSerbiaSingaporeSingaporeSlovak Slovak RepublicRepublicSloveniaSloveniaSouth AfricaSouth AfricaSpainSpainSri LankaSri LankaSwedenSwedenSwitzerlandSwitzerland

10

Identifying Transfer Pricing (TP) RiskIdentifying Transfer Pricing (TP) Risk

Corporate Control ProcessesCorporate Control ProcessesIdentifying material intraIdentifying material intra--group transactionsgroup transactions

Relationship with the business sideRelationship with the business side

Relationship with finance functionRelationship with finance function

Managerial vs. Legal Entity AccountManagerial vs. Legal Entity Account

Understanding the TP environment in countryUnderstanding the TP environment in country

SOX 404SOX 404

11

Quantifying Transfer Pricing (TP) RiskQuantifying Transfer Pricing (TP) Risk

Corporate perspectiveCorporate perspectiveEffective tax rate impact; FIN 48Effective tax rate impact; FIN 48

Tested party resultsTested party results

Price adjustmentsPrice adjustments

Double tax vs. Differential tax ratesDouble tax vs. Differential tax rates

DisclosureDisclosure

ReputationReputation

12

Managing Transfer Pricing (TP) Risk before the ControversyManaging Transfer Pricing (TP) Risk before the Controversy

TP Policies and ModelsTP Policies and ModelsInteraction with business objectives and incentivesInteraction with business objectives and incentives

Locus of risk and intellectual property Locus of risk and intellectual property

Hub and spoke model (trade flow consolidation)Hub and spoke model (trade flow consolidation)

Interaction with other taxes, e.g. VAT, and customsInteraction with other taxes, e.g. VAT, and customs

ImplementationImplementationIntercompany Agreements/ContractsIntercompany Agreements/Contracts

SystemsSystems

Legal entity accountingLegal entity accounting

TrueTrue--upsups

13

Settling Transfer Pricing (TP) ControversiesSettling Transfer Pricing (TP) Controversies

Choice of forum Choice of forum –– single tax reliefsingle tax reliefAuditAudit

Administrative AppealsAdministrative Appeals

LitigationLitigation

Alternative Dispute Resolution MechanismsAlternative Dispute Resolution Mechanisms

Choice of forum Choice of forum –– double tax reliefdouble tax reliefCompetent AuthorityCompetent Authority

APA and rollbacksAPA and rollbacks

ArbitrationArbitration

Factors to consider to choosing the right Factors to consider to choosing the right forumforum

14

Governing Tax RiskGoverning Tax Risk

““ How ToHow To ””The Role of the Audit CommitteeThe Role of the Audit CommitteeThe Role of the Tax DepartmentThe Role of the Tax Department

15

”How To””How To”

Identify Company's Risk Tolerance Identify Company's Risk Tolerance Policy for TaxesPolicy for TaxesAnnounce or Implement the Agreed Announce or Implement the Agreed Upon PolicyUpon PolicyExecute the Agreed Upon PolicyExecute the Agreed Upon PolicyPeriodic Monitoring and RemediationPeriodic Monitoring and RemediationPeriodic Assessment and BenchmarkingPeriodic Assessment and Benchmarking



16

The Role of the Audit CommitteeThe Role of the Audit Committee

The Audit Committee needs to The Audit Committee needs to understandunderstand who who is responsible for key tax functions and how is responsible for key tax functions and how tax risks are:tax risks are:

IdentifiedIdentified

Communicated Communicated

AssessedAssessed

Controlled, managed and monitoredControlled, managed and monitored

Accounted forAccounted for

DisclosedDisclosed

AuditedAudited



17

The Role of the Audit CommitteeThe Role of the Audit Committee

Tax Risk Assessment ProcessTax Risk Assessment ProcessAudit CommitteeAudit Committee’’s oversight process over taxes should s oversight process over taxes should take into consideration key elements of effective take into consideration key elements of effective oversight, including:oversight, including:

The depth and experience of the tax personnel involved (internalThe depth and experience of the tax personnel involved (internal and and external)external)

ManagementManagement’’s processes to assess and evaluate compliance with tax s processes to assess and evaluate compliance with tax laws and regulationslaws and regulations

The strength and completeness of internal controls over tax accoThe strength and completeness of internal controls over tax accounting unting and risk mitigationand risk mitigation

Significant tax judgments and estimates Significant tax judgments and estimates

The adequacy of external and internal audit activities associateThe adequacy of external and internal audit activities associated with tax d with tax issuesissues



18

The Role of the Tax DepartmentThe Role of the Tax Department

Formal reporting on tax risk to Audit Formal reporting on tax risk to Audit Committee, including:Committee, including:

CompanyCompany’’s current overall tax postures current overall tax posture

Significant risks and potential impactSignificant risks and potential impact

How tax risks are strategically aligned with overall How tax risks are strategically aligned with overall corporate risk profile corporate risk profile

Key tax procedures and controls over tax accounting Key tax procedures and controls over tax accounting

Review of companyReview of company’’s financial statement tax footnotes financial statement tax footnote



19

The Role of the Tax DepartmentThe Role of the Tax Department

The Tax Department needs to proactively The Tax Department needs to proactively execute identification, assessment, execute identification, assessment, management of tax risksmanagement of tax risks

Both Both ““ownedowned”” and and ““not ownednot owned”” by Tax Departmentby Tax Department

Take lead in communications and mitigationTake lead in communications and mitigation

““Share the burdenShare the burden”” of tax risks with managementof tax risks with management





Presenter’s contact detailsHarry L. Gutman

KPMG LLP202-533-3044

[email protected]

transfer pricing and corporate governancefitindia.org/downloads/harry_gutman_2008.pdf ·...

Documents