Advanced Dispute Resolution Workshop TP Minds Africa 23 November 2015 Presented by: Dr. DN Erasmus...

Advanced Dispute Resolution WorkshopTP Minds Africa

23 November 2015Presented by: Dr. DN Erasmus & Prof A Venter

2. Technical consideratio

ns

1. Tax Administrati

on

4. Case Study

3. APAs & MAPs

WORKSHOP CONTENT

TAX ADMINISTRATION

TAX ADMINISTRATION

CONSTITUTION

TAX ADMIN FRAMEWORK

AUDIT PROCEDURE

ADMIN

DOMESTIC TP LEGISLATION

DETAILED TP GUIDANCE/

REGULATIONS

CONSTITUTION

All law and conduct must conform

Sets out fundamental rights

Determines administrative justice

International law and interpretation

FOUNDATION OF LAW AND PROCEDURE

TAX ADMIN FRAMEWORK ADMINISTRATIVE JUSTICE

PRINCIPLES DETERMINES FAIR AND VALID

CONDUCT BY ADMINISTRATIVE OFFICIALS

GIVES EFFECT TO FUNDAMENTAL RIGHTS

AUDIT ADMIN PROCEDURES

LAW, REGULATIONS OR REVENUE AUTHORITY SERVICE CHARTER

PROTECTS THE TAXPAYER’S RIGHTS WHAT TO EXPECT DURING AN AUDIT PARAMETERS FOR CONDUCT AND

SERVICE DELIVERY

DOMESTIC TP LEGISLATION

POWER TO ADJUST INCOME

SCOPE OF TP LEGISLATION

ONUS ARM’S LENGTH

REQUIREMENT OR ANTI-AVOIDANCE ADJUSTMENT

SPECIFIC SCOPE AND POWER

DETAILED GUIDANCE OR REGULATIONS

DOMESTIC RULES

OECD GUIDANCE

NO DETAILED GUIDANCE

TECHNICAL CONSIDERATIONS

TECHNICAL CONSIDERATIONS

Intangibles

Management

Fees

Guidance

Case Law

INTANGIBLES – GUIDANCE

BEPS OECD TPG

UN MANUAL

DOMESIC LAW

INTANGIBLES – OECD PAR 6.38 ANALYSIS

CONTEXT: No reimbursementISSUE: Extent of the ability of the marketer to share in benefit from activitiesCRITERIA: Substance of the rights of the parties

EXAMPLE: COMPARABLE RETURN EXAMPLE: ADDITIONAL RETURN

LOW RISK EXAMPLE HIGH RISK EXAMPLE

TERM/LENGTH PROTECTION LEVEL OF EXPENDITURE

• LONG TERM, SOLE RIGHTS• BENEFIT THROUGH SALES AND MARKET SHARE• COMPARABLE: DISTRIBUTOR WITH SIMILAR CIRCUMSTANCES

• EXTRAORDINARY EXPENDITURE• DECREASED PRODUCT PRICE OR• DECREASED ROYALTY RATE• WILL NOT OBTAIN EXPECTED BENEFIT WITHOUT ADDITIONAL COMPENSATION

INTANGIBLES – OECD PAR 6.38 ANALYSISBENCHMARK:Level of marketing investment: 2% of salesPeriod: 10 yearsProtection: sole rightsEXPECTATION: marketing investment of R100 000 will generate sales of R 5 millionThis will be achieved over 10 years if sole distribution rights are obtained.

EXAMPLE: COMPARABLE RETURN EXAMPLE: ADDITIONAL RETURN

LOW RISK EXAMPLEHIGH RISK EXAMPLE

• Contracts of no less than 10 years: sufficientopportunity to gain benefit through sales• Contracts with the at least sole distribution rights:Allowed the necessary market share to be developedto obtain the expected benefit• Contracts with an expectation of marketing Investment of no more than 2% of sales

• Contracts of less than 10 years: at risk of not generating R 5 m in sales due to time constraints• Contracts with non-exclusive rights: insufficient protection to develop the expectedmarket share. • Contracts with an expectation of investmentof more than 2% of sales: risk of lower profit

INTANGIBLES – CASE LAW

DHL CASE

GLAXO CASE

LG ELECTRONICS CASE

SONYERICSSON CASE

BMW CASE

INTANGIBLES – EXAMPLE

STEP 2:BRAND

EARNINGS(Brand

contribution to excess profits)

STEP 1:INTANGIBLE EARNINGS

(EXCESS PROFITS)

STAGE 2: SPLIT THE COMBINED

PROFITS

ROYALTY

Brand Earnings

1. Excess Profits2. Attributable to Brand

STAGE 1:DETERMINE COMBINED

TRANSACTIONAL PROFITS

Total average 3,3% of revenue (page 15 and 39)

FORMULA:Intangible earnings (STEP 1) X Role of Brand (35%)(page 36-40)

FORMULA:Profit after TaxLESS: capital charge (Capital employed x WACC)= Economic Value add (EVA)(page 36)

STEP 2:Intangible earnings x

Role of Brand

STEP 1:INTANGIBLE EARNINGS

STAGE 1:DETERMINE COMBINED

TRANSACTIONAL PROFITS

STAGE 2: SPLIT THE COMBINED

PROFITS

ROYALTY

LICENSEE PROFIT

Excess Profit:Intangibles Earnings

Excess Profit from other Intangibles

(65%)

Excess Profit from Brand specifically

(35%)

Normal Profit

Brand Earnings

TRANSACTIONAL PROFITS

TO BE SPLIT(BRAND EARNINGS)

STEP 2:BRAND

EARNINGS

STEP 1:INTANGIBLE EARNINGS

STAGE 1:DETERMINE COMBINED

TRANSACTIONAL PROFITS

STAGE 2: SPLIT THE COMBINED

PROFITS

STEP 2Brand Strength Index (Position

Brand in royalty range (2% max

rate)(CONTROVERSIAL)

STEP 1Benchmarking

(CUPs)AL royalty

range(0,25% - 1,6%)

ROYALTY

Brand Earnings

Determine the licensor’s portion by using benchmarking:1%(30% of the full 3,3%brand earnings)

SERVICES - GUIDANCE

OECD AND BEPS

DOMESTIC LAW

UN MANUAL

2 1 3

MAPs & APAs

MAPs & APAs

Settlements

APAs

MAPs

SETTLEMENTS

When to consider a settlement?

Key success factors

ADVANCED PRICING ARRANGEMENTS (APA)

Timing Criteria in

regulations Implementation Risks

MUTUAL AGREEMENT PORCEDURES (MAPs)

Double Tax Agreements: Section 25 and Section 9

MAPS and Domestic Remedies Triggers Procedure Arbitration

CASE STUDY

COMPANY ZZ

SUBSIDIARY Z KENYA

SUBSIDIARY Z MALAWI

SUBSIDIARY Z ZIMBABWE

SUBSIDIARY Z BOTSWANA

SUBSIDIARY Z TANZANIA

TRADEMARKMANAGEMENT

FEES

PENALTY