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Presentation Kiev event. Topics 1)Intro Netherlands 2)Practical approach 3)Business Restructuring 4)BEPS 2.

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Presentation on theme: "Presentation Kiev event. Topics 1)Intro Netherlands 2)Practical approach 3)Business Restructuring 4)BEPS 2."— Presentation transcript:

1 Presentation Kiev event

2 Topics 1)Intro Netherlands 2)Practical approach 3)Business Restructuring 4)BEPS 2

3 Introduction Our value proposition  Altus is an independent global alliance specialised in providing the following services:  Transfer Pricing  Business restructuring  Valuation  Dispute resolution  Focus on senior professionals - the Altus Alliance consists of senior professionals with a wide variety of backgrounds, including Big 4, industry, government and academic.  Global network – Altus has a presence in 20 countries worldwide 3

4 Introduction What is transfer pricing and why is it important?  Pricing of all inter-company transactions  Necessary in every multinational  Determines profit allocation within multinational  Regulations required to ensure fair and reasonable for all stakeholders:  Tax authorities – fair share of profit to levy tax  CFO, FD, CEO, Heads of Tax etc – shareholder value  Current shareholders – return on investment  Potential investors – future return on investment, corporate governance, proper valuation of the business  Lending institutions – corporate governance  Employees – performance measurement  Boards of Directors – corporate governance, shareholder value  Competitors – relative shareholder value 4

5 Theoretical Framework Local – The Netherlands  Most EU and non-EU countries have codified the arm’s length principle and local documentation requirements  In the Netherlands, the transfer pricing documentation requirements are codified as from January 1, 2003 in article 8b of the Corporate Income Tax Act (‘CITA’)  Potential reversal of the burden of proof and (general tax) penalties, in case the Dutch tax authorities (‘DTA’) request documentation and it is not submitted in time  No specific transfer pricing penalties. General tax penalties (up to 100 percent) may apply in case of an intentional act (e.g. the taxpayer took a non-defendable standpoint) leading to the underpayment of taxes  Submission deadline is within 30 days of request; this may be extended by the DTA to three months, depending on the complexity of the case 5

6 Advance Pricing Agreements Regulatory framework – The Netherlands  Typical APAs  Limited risk distribution  Procurement / trading roles  Entrepreneurs with global (distribution) activities but with residual profit in the Netherlands  Intermediary finance activities / Intermediary IP activities 6

7 Advance Pricing Agreements Regulatory framework – The Netherlands Dutch version of a pragmatic and consensus based decision model 7

8 Advance Pricing Agreements Regulatory framework – The Netherlands  Dutch version of a pragmatic and consensus based decision model  Some Statistics  APAs  MAPs Statistics APA’s submitted APA’s handled APA’s Average days Chess clock MAPS Australia Austria Belgium Canada Chile0000 Czech Republic13 48 Denmark Finland France Germany Greece4555 Hungary Iceland1100 Ireland46713 Israel-- Italy Japan Korea Luxembourg Mexico Netherlands New Zealand2413 Norway Poland Portugal Slovak Republic1456 Slovenia-- 31 Spain Sweden Switzerland Turkey1124 United Kingdom United States Total2,3522,6693,1683,842 MAPs 2011OECD non- OECD Initiated During Reporting Period331 Completed During Reporting Period266 Ending Inventory on Last Day of Reporting Period866 Closed or Withdrawn with Double Taxation During Reporting Period 00 Average Cycle Time for Cases Completed, Closed or Withdrawn During Reporting Period (in months) Inventory of cases at end of reporting period 8

9 STEPS IN A TRANSFER PRICING STUDY 9

10 Steps in a Transfer Pricing Study Introduction  4-Step Approach  Responsibility profile  Choice of Method  Economic analysis 10

11 Steps in a Transfer Pricing Study 4-Steps Approach 11 Manageable Transfer Pricing System IDENTIFICATION OF BUSINESS CONTEXT IDENTIFICATION OF BUSINESS CONTEXT DESIGN & IMPLEMENTATION DESIGN & IMPLEMENTATION DOCUMENTATION RISK ASSESSMENT/ MANAGEMENT RISK ASSESSMENT/ MANAGEMENT Company’s Business model -Investigate industry and business context -Identify key business objectives of management e.g. market penetration -Analyse key functions/ activities performed -Identify assets and risks associated with activities -Analyse the nature of the current value chain and plans for the future -Identify responsibility centres -Determine appropriate TP methodology -Consider opportunities to minimize overall tax rate -Establish appropriate performance measurement / incentives -Legalise inter-company transactions – agreements -Conduct comparability search to support result -Prepare Masterfile/local documentation -Prepare transfer pricing policy paper -Identify key risk countries – country risk matrix -Introduce maintenance and disclosure manual -Ensure legal agreements in place and consistent -Prepare transfer pricing defence file -Tax risk assessment – e.g. FIN 48 -Investigate possibility of APAs? -Risk ranking/screening for transfer pricing audit -Manage transfer pricing audits effectively -Explore avenues for arbitration -Consider availability of MAP

12 Steps in a Transfer Pricing Study Responsibility profile (1/2)  Responsibility profiling:  Cost centre  Expense centre  Revenue centre  Profit centre  Investment centre  How to indentify? 12

13 Steps in a Transfer Pricing Study Responsibility profile (2/2) 13

14 Steps in a Transfer Pricing Study Choice of Method (1/2)  The OECD Guidelines have identified the following three ‘traditional transaction methods’:  comparable uncontrolled price method (CUP);  resale price method; and  cost-plus method.  and the following ‘transactional profit methods’:  transactional net margin method (TNMM); and  profit split method.  Transfer pricing method should be the “most appropriate method to the circumstances of the case.” (Chapter II – Part 1) 14

15 Steps in a Transfer Pricing Study Choice of Method (2/2)  Responsibility center mapping: 15 OECD labelsManagerial labelsLegal labels CUPExpense/cost/revenue centreServices agreement Resale priceRevenue/profit centreDistribution agreement Cost-plusExpense/cost centreResearch and development agreement TNMMRevenue/profit centreCommission agent agreement Profit splitProfit/investment centreSales and marketing agreement

16 Transfer Pricing Documentation Introduction  Type of Transfer Pricing Documentations  Inter-Company agreements:  Agreements for delivery of intercompany goods or services  Agreements for intercompany loans  Agreements for the use of intangibles  Transfer Pricing country report  Transfer Pricing master file  Transfer Pricing policy papers:  Policy paper on the use of HQ management services  Policy paper on the use of intangibles among group companies  Policy paper on interest rate setting  Cost Sharing Agreements  Valuation report setting out the transfer price of assets, liabilities or equity  Business Restructuring documentation 16

17 Implementation Introduction  Accounting implementation (Price setting / Price checking)  Legal implementation  Changes / restructurings 17

18 Implementation Accounting implementation - Price setting / Price checking (1/4)  Traditional methods of price setting  Comparable Uncontrolled Price method (CUP)  Cost Plus method  Resale Price method  Profit related methods of price checking  Transactional Net Margin method (TNMM)  Profit Split method  Local country rules regarding year-end adjustments can vary considerably. For example, German tax authorities may not allow the corresponding / compensating adjustment if:  it is not operated on the basis of an agreement which is in place at the beginning of the FY concerned, regulating price setting factors and related adjustments, or  the company is not otherwise able to show to tax authorities that the same adjustment would have been made by third parties as well (“Administrative principles - Procedures”, Chapter )  Many tax authorities may view year-end adjustments as an examination trigger.  Some tax authorities may view adjustments as non-deductible voluntary contribution or contribution of capital – double taxation issues. 18

19 Implementation Accounting implementation - Price setting / Price checking (2/4) Price setting 19 Production Cost Cost+ margin Cost+ Bench- marked Margin Total Sales Price TPM margin Bench- marked Margin RPM Price checking EBITA TNMM OPEX COGS Bench- marked Margin EBITA Profit Split Benchmarked Allocation of EBITA CUP benchmarking per transaction

20 Implementation Accounting implementation - Price setting / Price checking  Potential issues:  General  There is no IC agreement  The IC agreement does not specify the IC prices  There is no benchmark available to support the price setting / price checking  The available benchmark is outdated  Price setting  There is no price setting policy and the IC prices are determined on a case by case basis  The price setting policy has no relation with any TP method. For example prices are set based on business practice, historical practice or influenced by management accounting interest (i.e. bonuses)  The entity has turned from a profit making in to a loss making situation with no change to the transfer pricing method  The entity is making a lot of profit because of the Price Setting policy  Price checking  There is no price checking procedure 20

21 Implementation Accounting implementation - Price setting / Price checking EUJTPF Presentation Feb 2013:  Confirmation that currently there is no harmonisation  Many aspects on price setting/checking are currently unclear  As a result uncertainty is introduced for Corporates 21 Wish list EUJPF: price setting/checking should be accepted in all members states A policy statement should be issued Aim should be to minimise uncertainty for Corporates

22 Implementation Legal implementation  Each intercompany transactions is covered by a legal agreement  Templates are used to make sure consistency is guaranteed  Where differences in terms and conditions are introduced they can be supported  All legal agreements are signed by the relevant representatives  All legal agreements are store centrally  Legal agreements are up to date and reflect the accounting and economic reality 22

23 Implementation Changes / Restructurings  Where changes occur, both accounting and legal has to follow, i.e.  Intercompany price has to be adjusted  Intercompany agreements has to be amended  Where the restructuring results in a reallocation of profit between countries, a defense file should be considered  Examples:  Introduction of a new entity in a new country -> new agreement should be introduced  Merger or shift of manufacturing capacity between group entities -> existing agreement should be amended accordingly  Repayment or increase of a loan amount prior to the end of the term -> loan amendment should be introduced  Post merger integration -> transfer pricing policies of both companies should adjusted or a new single TP policy should be introduced for the whole group to reflect the new reality 23

24 BUSINESS RESTRUCTURING 24

25 Business Restructuring Introduction  Types of restructurings  Principal structure vs licensing model  Examples  Regulatory background  OECD Business Restructuring  Valuation aspects  Court Cases 25

26 Business Restructuring Types of restructurings OECD examples of a Business Restructuring  Conversion of full-fledged distributors into limited-risk distributors or commissionaires;  Conversion of full-fledged manufacturers into contract-manufacturers;  Rationalisation and / or specialization of operations;  Transfers of intangible property rights to a central entity (e.g. a so-called “IP company”) within the group. Transactions methods:  Comparable Uncontrolled Price (CUP)  Cost Plus (CP)  Re-sale Price Minus (RPM)  Profit split method  Transactional net margin method 26

27 Business Restructuring Principal structure vs licensing model  IP licensing model under central IP ownership  Varies per Industry  Examples: trademarks, patents, know-how, procurement  Boundaries (CUP, regulatory, rule of thumb)  PRO: Flexibility and planning / CON: Capped  Principal structure (supply chain plus marketing and sales)  Varies per Industry  Boundaries (substance, local versus global, local IP, geographical differences)  PRO: upward profit shift / CON: substance requirements 27

28 Business Restructuring Example 1  Conversion from full fletched manufacturer to contract manufacturer: Facts: Manufacturing costs Spain:10M Sales Price Germany:12M Operating margin:20% Prior Restructuring: Spain is full fletched manufacturer Germany is limited risk distributor EBIT Germany (1.5% distribution margin):150k Residual profit Spain1,850M Post Restructuring: Spain becomes contract manufacturer (“CM”) Germany is full fletched distributor EBIT Spain (3% CM margin):300k Residual profit Germany:1,700M 28

29 Business Restructuring Example 2  Conversion from full fletched manufacturer to contract manufacturer: Facts: Manufacturing costs Spain:10M Sales Price Germany:12M Operating margin:20% Prior Restructuring: Spain is full fletched manufacturer Germany is limited risk distributor EBIT Germany (1.5% distribution margin):150k Residual profit Spain1,850M Post Restructuring: Spain becomes CM on behalf of HQ Germany is limited risk distributor EBIT Spain (3% CM margin):300k EBIT Germany (1.5% distribution margin):150k Residual profit France1,650M HQ 29

30 Business Restructuring Example 3  conversion from a licensing model to a principal model Residual Profit Netherlands (Global Principal) China (LRD) Customers Hong Kong (LRD) Singapore (LRD) Singapore (Reg. principal) Indonesia (Production & Sales) Vietnam (Production & Sales) Customers Malaysia (Production & Sales) Customers Thailand (LRD) Customers Distribution entities Manufacturing & distribution entities China (FFD) Customers Hong Kong (FFD) Singapore (FFD) Netherlands (Global Entrepreneur) Indonesia (Production & Sales) Vietnam (Production & Sales) Customers Malaysia (Production & Sales) Customers Royalty Thailand (FFD) Customers Distribution entities Manufacturing & distribution entities Now In Future Residual Profit 30

31 Business Restructuring Regulatory background  OECD - Report on the transfer pricing aspects of Business Restructurings Chapter IX of the Transfer Pricing Guidelines (published )  Germany - Funktionsverlagerung (as of January 2008)  Other countries - general Transfer Pricing regulations All have in common the Arm’s Length principal of IC transactions. Nevertheless differences exists on the one off compensation of business restructurings. 31

32 Business Restructuring OECD (1/5) Note 1 - Special considerations for risks  Contractual terms between the parties is starting point;  The contractual allocation of risk between associated enterprises is, however, respected only to the extent that it has economic substance;  Parties’ conduct should generally be taken as the best evidence concerning the true allocation of risk;  Where reliable data evidence is available of a similar allocation of risk in contracts between comparably situated independent parties, then the contractual risk allocation is regarded as arm’s length;  Where no comparables exist to support a contractual allocation of risk between related parties, it becomes necessary to determine whether that allocation of risk is one that might be expected to have been agreed between independent parties in similar circumstances;  One factor that can assist in this determination is the examination of which party(ies) has (have) “control” over the risk. 32

33 Business Restructuring OECD (2/5) Note 2 - Arm’s length compensation  profit / loss potential is not an asset in itself, but a potential which is carried by some rights or other assets;  Whether a transfer of profit / loss potential is an arm’s length transaction depends on a number of factors, including the options that would have been realistically available to the transferor and transferee at arm’s length;  where at arm’s length the restructured entity would be entitled to an indemnification there should be no presumption that all contract terminations or substantial renegotiations give rise to a right to indemnification at arm’s length;  Relevant circumstances are whether the arrangement that is terminated, non-renewed or substantially renegotiated is formalised in writing and provides for an indemnification clause; 33

34 Business Restructuring OECD (3/5) Note 2 - Arm’s length compensation – illustration Pre-conversion profitsProfit expectationsPost-conversion profits of the distributor with full risk activityif it had remained full-riskwith low risk activity 1 Y1: (-2%) Y2: +4%[-2%; +6%]+2% per year Y3: +2% Y4: 0%with significantstable guaranteed Y5: +6%uncertaintiesprofit 2 Y1: +5% Y2: +10%[+5%; +10%]+2% per year Y3: +5% Y4: +5%with significantstable guaranteed Y5: +10%uncertaintiesprofit 3 Y1: +5% Y2: +7%[0%; +4%]+2% per year Y3: +10% Y4: +8%with significantstable guaranteed Y5: +6%uncertaintiesprofit 34

35 Business Restructuring OECD (4/5) Note 3 - Remuneration of post-restructuring  arm’s length principle and the TP Guidelines do not and should not apply differently to post- restructuring transactions as opposed to transactions that were structured as such from the beginning;  For this reason, it is essential in business restructuring cases that a comparability (including functional) analysis be performed both for the pre-restructuring and for the post- restructuring arrangements and that the actual changes that took place upon the restructuring be documented;  While such before-and-after comparisons would not suffice to support a transfer pricing adjustment in the face of the requirement posed by Article 9 of the Model Tax Convention for a comparison to be made with uncontrolled transactions, they could play a role in understanding the restructuring itself and could be part of a before-and-after comparability analysis to understand the value drivers and the changes that accounted for the changes in the allocation of profits amongst the parties. 35

36 Business Restructuring OECD (5/5) Note 4 - Recognition of the transactions undertaken  Discusses notions in relation to the exceptional circumstances where a tax administration may consider not recognising a transaction or structure adopted by a taxpayer;  Non recognition applies where there is a dispute about the fundamental nature of the transaction being examined;  Recognition does not restrict a tax administration’s ability to adjust the price or other conditions of a controlled transaction in situations where there is no dispute about the nature of the transaction but where such price or conditions are not arm’s length according to guidance provided in other parts of the TP Guidelines;  Non-recognition of transactions is not the norm but an exception to the general principle. Tax administrations should not ordinarily interfere with the business decisions of a taxpayer as to how to structure its business arrangements. A determination that a controlled transaction is not commercially rational must therefore be made with great caution;  in assessing the commerciality of a transaction that is part of a broader overall arrangement, it is important not to examine the transaction in isolation, but to look at the totality of the arrangements to determine whether the terms make commercial sense for the parties;  it is not sufficient from a transfer pricing perspective that an arrangement make commercial sense for the group as a whole: the transaction must be arm’s length at the level of each individual taxpayer. 36

37 Business Restructuring Valuation aspects What aspects are relevant from a transfer pricing perspective for the business case? 1.Tax saving as a result of decreased corporate income tax rate 2.Exit tax 3.Amortization tax benefit All three aspects should be taken in to account when determining the pros and cons; Other aspects include 1.Availability of past losses 2.Non transfer pricing aspects Examples 37

38 Business Restructuring Court Cases  Company: Roche  Country: Spain  Industry: Pharmaceuticals  Date: March 2012  Date BR: 1999  Details: conversion from full fledged distributor to contract manufacturer and limited risk distributor  Challenge tax authorities: parent had a PE in Spain because of activities performed. Cost+ remuneration not good enough  Outcome: in favor of tax authorities  Company: Eli Lilly  Country: US  Industry: Medical Equipment  Date: 1988  Details: Eli Lilly moved its IP to its subsidiary in Puerto Rico. The entity manufactured drugs and later sold them to Lilly for free  Challenge tax authorities: subsidiary’s ownership of the intangible should be disregarded and the profits generated by the intangibles should be allocated completely to Lilly.  Outcome: profit split method should be used to allocate adequately the income between both  Company: Bauch & Lomb  Country: US  Industry: Contact lenses  Date: 1980  Details: B&L set up an Irish subsidiary to manufacture soft contact lenses and granted rights to the spin cast technology and trademarks  Challenge tax authorities: Ireland should be viewed as a contract manufacturer for B&L  Outcome: split of Ireland’s residual profit and principal 38

39 RISK MANAGEMENT 39

40 Risk Management Introduction  Maintenance  Tax Control Framework  Controversy management 40

41 Risk Management Maintenance (1/4)  Type of maintenance depends on:  Number of entities to check  Number of intercompany transactions  Number of transfer pricing policies  Number of countries involved  Transfer pricing maintenance to check?  What are the transfer pricing regulations in each country?  Are there IC agreements up to date?  Do the transfer pricing reports reflect the current business?  Are benchmarks up to date?  Are the margins within the arm’s length?  How to make your life easy?  Create overviews of IC transactions  Setup dedicated ledgers for IC transactions  Allocate TP responsibilities locally 41

42 Risk Management Maintenance (2/4) Documentation approach:  Lean vs. extensive documentation  Compliance costs  Availability of data and information  How much do you want to tell?  Permanent vs.on demand documents  Guidelines  Availability of data and information  What do local regulations require?  “Masterfile“ vs. local documentation  Centralized masterfile approach vs. Local documentation requirements  Consistency and planning in the Group  How much do you want to tell? 42

43 Risk Management Maintenance (3/4)  Example of a transaction TP maintenance overview 43

44 Risk Management Maintenance (4/4)  Example of a country/entity TP maintenance overview  Local TP regulations can be found on Big4 websites, eg. KPMG - E&Y - PWC

45 Risk Management Transfer Pricing Control Framework (1/6) Business cycle Transactions Business Control Framework Design and Implementation TCF Testing TCF Tax Filings Input  Business cycles lead to intercompany transactions.  Both business cycles and inter company transactions should be described and documented. The MF is the common denominator Smaller or country specific transactions are typically addressed in Country File Control Framework  For TP purposes, a business control framework should be based on relevant responsibility profiles; e.g. cost centre, profit centre, etc.  Responsibility centres should be linked to a TP policy per division with relevant benchmarks of I/C transactions  Testing is key to ensure adherence to the outcome of the benchmarking studies. Policy decisions to be made; e.g. Does a country has to be ‘at arm’s length each year?  Testing to what extent the MNE is ‘in control’ Output  Determination of potential risks, determine to what degree the MNE is ‘in control’ including materiality test  Positions for the tax returns are being taken. In case not ‘in control’ and ‘material’, (local) tax authority is involved with a suggestion how to deal with specific issues Financial Risks TAX CONTROL FRAMEWORK TRANSFER PRICING CONTROL FRAMEWORK 45

46 Risk Management Transfer Pricing Control Framework (2/6) TP Policies & Documentation  Transactions▪ Intangibles  Services▪ Financial Transactions TP Workflow  Responsibility/accountability  Recurring TP task management  Data retrieval and conversion process Monitoring and Managing  Framework to detect inconsistencies  Procedures to evaluate policies Reporting  TP ‘dashboard’ for stakeholders Transfer Pricing Control Framework 46

47 Risk Management Transfer Pricing Control Framework (3/6)  TP Policies are a starting point for a TP Control Framework. First the policies then the Control Framework  TP Policies are required for each intercompany transactions: 1.Goods 2.Services 3.Intangibles 4.Treasury / Financial transactions 5.One-off Restructurings  Besides policies, documentation should be up-to-date. Documentation includes:  TP Master files  TP Country files  Benchmarks  IC agreements  In some countries the lack of documentation is a trigger for penalties 47

48 Risk Management Transfer Pricing Control Framework (4/6)  Once policies are drafted a workflow can be setup  Coordination should be central, responsibility can be local or central depending on the type of inter company transaction  Responsibility of the application of the TP policy should be allocated to dedicated persons (for example business controllers)  Responsible people should acknowledge their responsibility and know what is expected from them  Clear instructions should be issued regularly to inform everyone on policies and deadlines  IT systems should facilitate TP tasks to the greatest extend possible 48

49 Risk Management Transfer Pricing Control Framework (5/6)  To obtain control an overview with transfer pricing details on all entities and all IC transactions is developed (“Master Overview”)  The Master Overview enables the TP manager to manage and maintain control per transaction  The Master Overview includes transactional data extracted centrally (where possible) or collected locally  The Master Overview provides a tool to identify key transfer pricing issues 49

50 Risk Management Transfer Pricing Control Framework (6/6)  TP Control Framework reporting enables Maersk to provide insight in transfer pricing risks to key stakeholders  A dashboard can be setup to highlight countries at risk:  Fully Compliant Entities  Entities or transactions at risk  Entities under audit  A dashboard can be setup to highlight area at risk:  Goods  Services  IP  IC financing transactions  One-off transactions  The Dashboard can be tailor made depending on the company preferences 50

51 Risk Management Controversy Management (1/6) Risk evaluation factors:  Transaction volume (continuous data access)  Audit trends (learning process)  Country-specific facts  Extra-ordinary transactions (business restructuring!) General problem  Loss of knowledge due to time lag of audit procedures (change of personnel, change of operating concepts, etc.); this concerns HQ in particular -> Contemporary documentation is not a legal requirement, but an operating necessity ! HQ can usually provide a lot of answers, but can they be used readily ? Get knowledge from local units who often feature more continuity and can provide more information; but: no complete overview on extra-ordinary transactions! 51

52 Risk Management Controversy Management (2/6) Focus areas: 52

53 Risk Management Controversy Management (3/6) Trigger points High transaction volumes Difficult audits at home or abroad Corporate restructuring or M&A transaction Changes of the TP system Complex supply chain with different owners of IP in the Group 53

54 Risk Management Controversy Management (4/6) Auditors‘ Myths: Tax Department knows anything (in advance) Information is readily available There is a consistent operating business concept for a longer period of time -> Necessity to communicate Audit points of attention Determine key topics -> Definition value at risk Secure available resources and options (TP is bilateral) Strategic approach (offensive or defensive) Watch for consistency Make use of audit dynamic and show flexibility 54

55 Risk Management Controversy Management (5/6) Competent authority or compromise? What amounts are at stake in an adjustment Do you create a precedence? Auditor deviates from TP standards How is your capacity to handle the issue abroad? You will need stamina to get TP issues settled 55

56 Risk Management Controversy Management (6/6) International trends Italy: Shoot at everything that moves Spain: Tick the box Netherlands: Horizontaal toezicht Switzerland: We can negotiate Germany: Funktionsverlagerung China: What about location savings and “market IP”? India: Ways ahead in litigation? Brazil: How to get some planning security for your business? Russia: The undiscovered country… 56

57 Risk Management Final remarks Conflict management is mandatory for globally operating companies Any conflict management process starts with a corresponding planning process for TP documentation Implementation of the right process is important for a successful audit Local and bilateral options should be weighed before concluding an audit Only APAs or MAPs with arbitration let you avoid double taxation for sure 57

58 BEPS On 12 February 2013, the OECD released its widely anticipated initial report on the issue of base erosion and profit shifting (BEPS) by multinationals The report was released in connection with the week’s G20 Finance Ministers meeting in Moscow The Report concludes that there is a need for increased transparency on effective tax rates of MNEs. It identifies the following key pressure areas: -Mismatches in entity and instrument characterization -Application of treaty concepts to profits derived from the delivery of digital goods and services Tax treatment of related-party debt-financing, captive insurance, and other intra-group financing Transfer pricing, in particular in relation to the shifting of risk and intangibles, the artificial splitting of ownership of assets between group legal entities, and group transactions that would rarely take place between independent entities The effectiveness of anti-avoidance measures such as GAARs, CFC regimes, thin capitalization rules, and rules to prevent treaty abuse The availability of harmful preferential regimes The report indicates that the OECD intends to develop an initial comprehensive action plan to be finalized in June

59 BEPS The Report then notes that globalization has made it possible for businesses to locate many productive activities in geographic locations that are distant from the physical locations of their customers Call for further information exchange between tax authorities Apart from double taxation, there are also instances of ‘double non-taxation’ Transfer pricing strategies that involve the shifting of functions, assets and risks (and therefore income) from high-tax to low-tax jurisdictions are also discussed, as are strategies to escape the application of general anti-avoidance rules The report calls for multinational effort to address BEPS concerns, noting that unilateral actions could lead to further mismatches, additional disputes, increased uncertainty, or a “race to the bottom” with respect to corporate income taxes The Report proposes that action be taken to address these problems, first by developing a comprehensive, global action plan aimed at better aligning rights to tax with real economic activity The Report states that such an action plan should be developed in consultation with all stakeholders, including the business community, practitioners, civil society and others 59


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