1. Transfer Pricing in Latin America and the Caribbean by Monique van Herksen E&Y Global Transfer Pricing Controversy Leader Private Sector Perspectives on Transfer Pricing April 26, 2012

2. Private Sector Priorities in Transfer Pricing Reforms The need for clear transfer pricing rules and globally consistent enforcement thereof ► OECD BEPS Report identifies “base erosion and profit shifting as serious risk to tax revenues, tax sovereignty and tax fairness to the respective States” – transfer pricing listed as one of the contributing factors ► And lists that “Multinational companies have become more aggressive raising serious compliance and fairness issues” ► But also: due to the way some tax authorities enforce transfer pricing rules, multinationals may ‘over-report’ taxable income to avoid penalties, to the detriment of other States

3. Private Sector Priorities in Transfer Pricing Reforms Absence of clear rules and regulations Abuse of rules to raise revenue Lack of resources and know-how Conflicting rules and instructions Analysis of observations

4. Hurdles encountered in countries without clear rules and regulations

5. Private Sector Priorities in Transfer Pricing Reforms Absence of transfer pricing rules does not mean absence of audits and challenges ► No challenge of arm’s length pricing per se, but.. ► Scrutiny of pricing to assess withholding tax (also on services) ► Scrutiny as regards invoices and burden of proof challenges ► Assessments that require prepayment (in part) before they can be objected or appealed against ► Uncertainty as to what type of information qualifies as transfer pricing documentation in case of challenges to meet the burden of proof

6. Hurdles encountered in countries with clear rules and regulations

7. Private Sector Priorities in Transfer Pricing Reforms (Mis)use of transfer pricing apparently for raising revenue ► “Anatomy” of a transfer pricing rule: ► Targeted to curb abuse/tax base erosion ► Very fact specific, difficult to capture general rule ► Comparables-based ► Requires substantive documentation/evidence ► Burden of proof on taxpayer ► Operates hand-in-hand with strict penalties for non- compliance

8. Private Sector Priorities in Transfer Pricing Reforms (Mis)use of transfer pricing apparently for raising revenue ► Invoking rules to target rising market prices ► Formalistic triggering of the penalty provisions to levy tax ► Burden of proof never shifts to tax authorities ► No deferral for payment of (part) of the tax assessed ► “Gift tax” assessments in case a deemed benefit is conferred

9. Private Sector Priorities in Transfer Pricing Reforms Lack of resources and know-how to properly apply the rules ► No issuance of guidance by revenue authorities on operation and practice of transfer pricing rules ► Competent authorities blocking mutual agreement procedures on transfer pricing due to procedural/technical reasons rather than substantive ones ► Absence of comparables leading to secret comparables or deemed CUPs, or to worldwide profit benchmarking and pro rata income allocation

10. Private Sector Priorities in Transfer Pricing Reforms Lack of resources and know-how to properly apply the rules ► Distrust as to information received from taxpayers and endless requests for proof and substantiation. (How to prove benefit of using company logo?) ► Tax adjustments and assessments without appropriate substantiation, including or based on deemed intangibles and market premiums ► Intimidating taxpayers when they inquire about the reasons for assessments ► Tax amnesty programs discouraging open discussion of audit and assessment practices ► Narrow interpretations and formalistic approaches

11. Hurdles encountered due to conflicting rules and regulations

12. Private Sector Priorities in Transfer Pricing Reforms Conflicting instructions/political barriers ► Quantitative audit instructions leading to cases being enforced on a more subjective or even discriminatory basis and once being enforced, reduced taxpayer protection/rights ► National or Federal Reserve Bank requirements to have (intercompany) payments be in compliance with exchange control rules and customs valuations ► Distrust as to western or international organizations, polarization based on historical political challenges

13. Preliminary conclusions and observations

14. Private Sector Priorities in Transfer Pricing Reforms Preliminary conclusions and observations To enhance the transfer pricing practice and enforcement, direct needs include: ► Clear and (internationally) consistent transfer pricing legislation ► Predictable and consistent enforcement ► Ongoing investment in capacity building ► More need for treaties and their use ► More training

15. Private Sector Priorities in Transfer Pricing Reforms Preliminary conclusions and observations ► MNEs usually do business in countries to sell their goods or services and earn an income, not to just reduce taxation ► MNEs employ people, pay wage-withholding taxes, make investments in PPE, may develop know-how and intangibles, tend to train their employees, pay VAT/customs duties and pay corporate tax ► MNE supply chain structures are competitively structured and susceptible to market developments

16. Private Sector Priorities in Transfer Pricing Reforms Preliminary conclusions and observations ► MNEs can afford to take a global approach as to how they structure their business ► Governments are forced to consider only what happens between the 4 corners of their geographic border ► There is a (great) level of distrust and misunderstanding as a result of this difference in angle and maneuvering space between these two parties that affects the arena in which transfer pricing fights take place

17. Private Sector Priorities in Transfer Pricing Reforms Preliminary conclusions and observations ► MNEs tend to prefer certainty as to being in compliance above operating at the very lowest tax cost (yet with lots of risk and exposure) ► Accommodating a way to develop a dialogue between MNEs and tax authorities that does not lead to retaliation or corrupt practices may help significantly reduce distrust and bring out the above aspect to the benefit of both parties ► Here international organizations can play a material role (also considering their neutrality and make)?

18. Thank you!