Transfer Pricing, Indirect Tax & Customs Post-BEPS – Value of a Connected Approach

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SESSION #O115

Transfer Pricing, Indirect Tax & Customs Post-BEPS – Value of a Connected ApproachNiren Saldanha, Tax Partner, KPMG LLPGisele Belotto, Tax Senior Manager, KPMG LLPDoreen Liu, Tax Managing Director, KPMG LLP

• Niren Saldanha is a Partner in KPMG’s Indirect Tax Technology practice and leadsKPMG’s Tax Technology efforts for global deployments. Based in New York, Niren hasover 15 years experience advising multinational clients on indirect tax (Sales/Use andVAT) automation and optimization areas. Niren holds an MBA and a CPA and is amember of the AICPA.

• Gisele Belotto is a Senior Manager in KPMG’s Trade and Customs practice and leadsKPMG’s Trade technology alliance with Thomson Reuters. Based in Miami, FL Giselehas over 16 years experience in international trade matters. Gisele holds an MA inEconomic Development and is a member of OWIT, ICPA and AAEI.

• Doreen Liu is a Managing Director in KPMG’s Global Transfer Pricing Services practice and leads KPMG’s Operational Transfer Pricing technology alliance with Thomson Reuters. Based in New Jersey, Doreen has nearly 15 years experience in delivering transfer pricing planning, documentation and controversy services to clients covering a broad range of industries. Doreen holds an MBA and is a co-author of the article “Staying Ahead of the Curve: What Companies Should Consider in Preparing the BEPS Master File”, in Bloomberg BNA’s Transfer Pricing Report, November 13, 2014.

BIOGRAPHIES

• Understand the latest regulatory developments around Base Erosion Profit Shifting (BEPS) and Tax implications

• Connect the dots between Indirect Tax, Customs Duties and Transfer Pricing and their dependencies

• Understand the financial consequences and benefits of developing a collaborative approach

OBJECTIVES

• Global Supply Chain

• Transfer Pricing

• Trade and Customs

• Indirect Tax

• Getting Cross-Border Pricing Right

• Conclusion and Q&ASome or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

AGENDA

• Global company selling hot new electronic gadget

• Sourcing and manufacturing in various regions and countries

• New gadget highly popular with hipsters all over the world

GLOBAL SUPPLY CHAINTransfer Pricing Indirect Tax Trade and

Customs

Amazing new product but have the tax implications of a global supply chain been fully considered?

GLOBAL SUPPLY CHAIN – KEY TAX RULES AND REGULATIONSBrazil China Mexico India United Kingdom

Transfer Pricing (TP)

Brazilian Transfer Pricing calculation rules, specific compliance

Comply with OECD guidance with special limitations on management fees and royalties; BEPS Action 13 Implementation

Comply with OECD guidance with special limitations on cost allocations/sharing; Specific transfer pricing information returns; BEPS Action 13 Implementation

Indian Transfer Pricing Regulations, similarities with OECD guidance; Specific transfer pricing information returns; BEPS Action 13 Draft Proposals

Comply with OECD guidance; no separate transfer pricing information returns; BEPS Action 13 Intention to Implement

Customs Related-party ValueClassificationIncotermsMercosur

Related-party ValueClassificationIncoterms

Related-party ValueClassificationIncotermsNAFTATPP

Related-party ValueClassificationIncoterms

Related-party ValueClassificationIncotermsEU FTAs

Indirect Tax VAT (ICMS, IPI, PIS/COFINS) returns

Golden Tax System, phasing out Business Tax and phasing in VAT return

VAT (IVA) return GST return VAT return, EU Sales List

Corporate income tax compliance

Corporate Tax (IRPJ) Enterprise Income Tax (CIT) Corporate Tax (ISR) Corporate Tax Corporate Tax

Stat Account Compliance

SPED Statutory Audit of Accounts report

Contabilidad Electronica Accounts Production Statutory Accounts (Legal Entity), Annual Return (Consolidated)

Other Electronic tax invoicing (Nfe), Fuel tax (CIDE), Import Tax (II), Foreign Trade (SIScomex)

Property Tax, Excise Tax, Customs Tax

Electronic invoicing (CFDI), Excise Tax (IEPS)

Fringe Benefits Tax, Property Tax, Excise Tax, Customs

Customs, Excise Tax, Payrolltaxes (Real-time reporting), Climate Change Levy, Landfill taxes

Information Reporting

SPED, IRPJ DIOT Instrastat reporting (EU movement of goods)

TRANSFER PRICING

Tax authorities, external auditors, and regulators are increasingly focused on the data, processes, governance, and controls around TP:

TRANSFER PRICING: GLOBAL LANDSCAPE

Pressure from external and internal auditors in relation to TP implementation

Heightened regulatory standards and increased risk of regulatory scrutiny in the financial sector

BEPS and increased scrutiny by tax authorities

OPERATIONAL TRANSFER PRICING CHALLENGES

Increases inefficiencies and waste impacts cash flow, ROI, and EPS Increases risk in tax and financial audits

Impacts compliance and planning

Process Technology DataPeople

• Out of date (lack of) policies and processes

• Lack of standardization

- Data requirements and formats

- Tools and techniques

- Process

- Timing

• No continuous improvement mentality

• Manually intensive processes and calculations consuming significant resources

• Multiple nonintegrated systems leading to data availability and data quality issues

• Existing systems not leveraged to full potential

• Lack of tools to facilitate data gathering

• Lack of automation to monitor, adjust, and report transfer pricing results

• Complex, poorly documented, and uncontrolled spreadsheet models

• Inability to generate segmented data required for analysis, decision making, and reporting

• Manual, resource-intensive process to extract data from source systems and format in a way that enables analysis and reporting

• Increasing regulatory requirements around data quality and transparency, e.g., the ability to trace data from financial reporting back to source systems

• Lack of ownership and accountability

• Poor communication among departments (tax, accounting, finance) and between corporate and operating companies

• Employee turnover

• Lack of training or in-depth experience and knowledge regarding intercompany transactions

• “Hero-dependency” (over-reliance on specific individuals)

• Process focused on how TP policies are implemented within a company’s financial systems

• Potential benefits:

- Enhance tax positions, improve ETR forecasting and increase EPS

- Increase operational efficiencies

- Reduce tax and financial reporting risks

KEY PRINCIPLES: OPERATIONAL TRANSFER PRICING

Defining & Documenting TP Policies

TP DocumentationIdentifying Intercompany Arrangements

Processing Transactions

Monitoring Results & Making Adjustments

Reporting & Close

Defining TP Calculation Mechanics

Executing Intercompany Agreements

Policy Management Policy Implementation Compliance

Technology Enablement

Governance, Process, and Controls

LEADING OPERATIONAL TRANSFER PRICING PRIORITIESProcess Technology DataPeople

• Rationalize/simplify policies and document business requirements necessary to support the TP strategy

• Standardize processes and procedures for each intercompany process area

• Define process controls and key performance indicators as part of the process design

• Define an approach to integrate new acquisitions into the intercompany process design

• Incorporate TP requirements and processes into the ERP system to the extent possible

• Assess other technology tools to address TP requirements (e.g., workflow, knowledge and document management, analytics and reporting, compliance, etc.)

• Develop reporting tools for planning and forecasting intercompany profit distribution across the supply chain and legal entity structure

• Create a tax data warehouse to consolidate, stage, and transform the data required for TP analysis, monitoring, and reporting

• Leverage data collection efforts for other “tax” customers (e.g., indirect tax, customs, tax provision, statutory reporting, etc.)

• Create a cross-functional governance team with clear accountability for implementing an end-to-end process

• Institute an intercompany Center of Excellence to provide sustainable intercompany management and consistency

• Establish formal communication and knowledge management process across organization

• Train resources to support proper execution of TP strategy and processes

TRADE AND CUSTOMS

CUSTOMS VALUE: KEY DRIVERS

Customs Valuation

Import value declarations similar to submission of tax returns

Import value used for duty and VAT calculations

Invoice price/transaction value most common valuation method

Dutiable additions to price are a part of customs value

Transfer Prices = Customs Value Different “Arm’s-Length” tests

Transfer Pricing Adjustments = Adjustments to import value

CUSTOMS: KEY CHALLENGESOperationally

burdensome to process value

adjustment with customs

authorities

No seat at the “transfer

pricing table”

Lack of automated valuation processes

No or late notification of

transfer pricing adjustments

Reactive processing of

transfer pricing adjustments

Lack of understanding

on how transfer prices

will impact customs in

various steps in the supply

chain

No visibility into global import duty

spend

Customs team not consulted

on transfer pricing

decisions

Certain countries do

not allow refunds on retroactive

adjustments

Customs and finance system

not often connected

INDIRECT TAX

INDIRECT TAX: SUMMARY

Transactional: Domestic, Cross-Border, Related and Unrelated Parties

(1) Country and Local Jurisdictions

(2) Value of Transaction

(3) Taxable Base

(4) By Transaction and line item

(5) Product/Service Purchased/Sold

(6) Customer and Vendor Considerations

(7) Legal Entity Responsible for Documentation/Reporting

Indirect Tax – Key Themes

• Indirect tax: Considerations when providing goods, services, and software

• Business-to-business and business-to-consumer considerations

• Place of supply rules:- Goods: Generally destination-based- Services: Remote supply, benefit-received considerations, and user location

INDIRECT TAX: KEY DRIVERS

• RecoverabilityNot all VAT is recoverable; sales and use tax refunds are based upon exemptions.

• Data requirements: Line item level;bundled transactions versus separately stated

Registrations – Customer and Vendor, Incoterms, material/services, usage, etc.

• Invoicing and reporting• Cash flow management• Risks and opportunities

INDIRECT TAX: KEY DRIVERS (CONTINUED)

• Calculating VAT on purchases/sale of goods and services from foreign suppliers

• Complex supply chain and nonstandard purchasing activity

• Calculating VAT on goods where they remain in a foreign country and where the GM acquirer has no presence in that country (no cross-country movement of goods, e.g., tooling)

• Calculating VAT/SUT on movements of goods from one country to another where there is no sale (or from state to state)

• Calculating VAT/SUT on multiple purchasing models

INDIRECT TAX: KEY CHALLENGES

• Identifying usage/beneficiary in countries/states—Brazil, India, Canada, and United States

• Calculating tax in multiple systems

• Data analytics with legacy systems

INDIRECT TAX: KEY CHALLENGES (CONTINUED)

GETTING CROSS-BORDER PRICING RIGHT

The challenge is to predicatively set transactional prices at the time of invoicing that:

• Comply with transfer pricing and customs transactional value arm’s-length requirements

• Result in tax-compliant entity-level profitability in aggregate by source

• Help ensure the company does not pay more duties than legally required

• Coordinate the transfer pricing and customs groups process throughout the year

• …and to do this on a multi-jurisdictional basis as it multiplies the value to the company.

THE CHALLENGE

Policy Execution

ANNUAL CUSTOMER PROCESS FLOW – TRANSFER PRICING, CUSTOMS, AND INDIRECT TAX

Illustrative

StartYear Prep Jan 1 Feb 1 Mar 1 Q1 Apr 1 May 1 June 1 Q2 July 1 Aug 1 Sept 1 Q3

Transfer Pricing

Policy 50 – 100 pg

Forecast – – – True Up

– – – True Up

– – – True Up

Customs Analysis5 – 30 pg

– Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Indirect Tax

RulesWrite Up

– Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real Time Calc

Real TimeCalc

A manufacturing entity (exporter) in Spain sells finished goods to an affiliate limited risk distributor (importer) in Mexico.

EXAMPLE 1

Transfer Pricing

• Resale minus 5% intercompany pricing

• Distributor target of3%–5%

• Aggregate profitability

Customs

• Customs circumstances of sale test used based on all costs plus profit

• Equivalent to seller’soverall profit for sale of similar goods of 10%

• On each transaction

Indirect Tax

• 16% import VAT calculated on intercompany price plus import duty

• VAT trapping concern in Mexico

EXAMPLE 1 – RESULTS

SKU

MFG Fully Loaded Cost Per

UnitTransfer

Price QuantityEU-MX

FTADutyRate

DutiesDue

Seller/Profit

CustomsThreshold

Import VAT16%

End Customer

Sales PriceOperating Expense

A B C E G=0% ifE >40%

H=(B*C)*G I=(B-A)/8 J=(B*C+H)*16%

L K=(L-B)/L

Part 1 $55 $63 30 46% 2.60% 0 13% $302 $66 5.00%

Part 2 $155 $169 10 45% 5.50% 0 8% $271 $178 5.00%

Part 3 $72 $86 20 40% 9.00% 0 17% $276 $91 5.00%

Total $4,630 $5,302 0 $848 $5,581 5.00%

Customs threshold of 10% not met

Based on BEPS regulations, the affiliate in Mexico is no longer considered a limited-risk distributor. New transfer pricing benchmarks are calculated for Mexican affiliates, and intercompany prices are adjusted for future transactions.

EXAMPLE 2

Transfer Pricing




Customs




Indirect Tax



Across the board price decrease

SKU


UnitTransfer

Price QuantityEU-MX

FTADutyRate

DutiesDue

Seller/Profit

CustomsThreshold

Import VAT16%

End Customer


A B C E G=0% ifE >40%

H=(B*C)*G I=(B-A)/8 J=(B*C+H)*16%

L K=(L-B)/L

Part 1 $55 $63 30 45% 2.60% 0 11% $295 $66 7.00%

Part 2 $155 $169 10 44% 5.50% 0 6% $265 $178 7.00%

Part 3 $72 $86 20 39% 9.00% 152 15% $295 $91 7.00%

Total $4,630 $5,302 152 $855 $5,581 7.00%

EXAMPLE 2 – INCREASED RISK AND UNBALANCED DUTY PAYMENTS

Customs threshold of 8% not met152% increase in duty payments 0.8% increase in VAT

Strategic setting of intercompany prices to meet transfer pricing (including new BEPS requirements) and customs requirements. Avoid overpayment of customs duties and increased trapped VAT.

EXAMPLE 3

Transfer Pricing




Customs




Indirect Tax



Strategic Price Setting

EXAMPLE 3 – COMPLIANT AND BALANCED

SKU


UnitTransfer

Price QuantityEU-MX

FTADutyRate

DutiesDue

Seller/Profit

CustomsThreshold

Import VAT16%

End Customer


A B C E G=0% ifE >40%

H=(B*C)*G I=(B-A)/8 J=(B*C+H)*16%

L K=(L-B)/L

Part 1 $55 $60 30 43% 2.60% 0 8% $286 $66 10.00%

Part 2 $155 $169 10 45% 5.50% 0 8% $271 $178 5.00%

Part 3 $72 $86 20 40% 9.00% 0 17% $274 $91 5.67%

Total $4,630 $5,191 0 $830 $5,581 7.00%

Customs threshold of 8% metor exceeded

152% decrease in duty payments 3% decrease in VAT

CONCLUSION

• There are various connections among TP, customs, and indirect tax

• Today, most companies view and handle each area independently:

-Compliance risk and missed opportunities

• Increased coordination and strategic planning can not only mitigate risk but also provide tangible benefits and savings.

• Technology is becoming available to address the three areas more strategically.

IN SUMMARY

THANK YOUSome or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

The information contained herein 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 on such information without appropriate professional advice after a thorough examination of the particular situation.

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