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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