Current Transfer Pricing landscape in light of BEPS - EYFILE/2... · Current Transfer Pricing landscape ... where MNC has operations . ... Expected output is changes to the OECD transfer

Current Transfer Pricing landscape in light of BEPS 7th International Tax Seminar

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Disclaimer

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► This presentation is © 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

7o Seminário Internacional de Impostos / 7th International Tax Seminar

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► Organization for Economic Cooperation and Development (OECD) BEPS project overview ► Latest developments

► Actions related to transfer pricing ► Impact of BEPS on Latam transfer pricing (TP) landscape

► Latam TP current OECD influence ► Latam TP possible effects

► General conclusions – global perspective


Agenda

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OECD BEPS project overview


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OECD BEPS project – Background

► The OECD’s action plan on addressing Base Erosion and Profit Shifting (BEPS) is aimed at government concern about potential for multinational companies (MNCs) to reduce their tax liabilities through shifting of income to no- or low-tax countries

► Driven by MNC tax issues that have been in the headlines around the world

► G20 governments have endorsed OECD’s work on BEPS and have committed to individual country action

► Major non-OECD countries, including China and India, are actively participating in the BEPS project

► Responsive changes over the next several years will differ across countries in specifics and in timing, reflecting each country’s particular circumstances

► Many countries are taking action already, without waiting for OECD recommendations

► The OECD BEPS agenda is ambitious in both scope and timing, the issues are complex, but there is a real sense of political imperative


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OECD BEPS action plan


1) Tax challenges of digital economy – September 2014

2) Hybrid mismatch arrangements – September 2014

3) Controlled foreign corporation (CFC) rules – September 2015

4) Deductibility of interest and other financial payments – September/December 2015

5) Harmful tax practices – September 2014/September 2015/December 2015

6) Treaty abuse – September 2014

7) Artificial avoidance of permanent establishment status – September 2015

8) Transfer pricing for intangibles – September 2014/September 2015

9) Transfer pricing for risks and capital – September 2015

10) Transfer pricing for other high-risk transactions – September 2015

11) Development of data on BEPS and actions addressing it – September 2015

12) Disclosure of aggressive tax planning arrangements – September 2015

13) Transfer pricing documentation – September 2014

14) Effectiveness of treaty dispute resolution mechanisms – September 2015

15) Development of a multilateral instrument for amending bilateral tax treaties – September 2014/December 2015S

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Latest developments


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OECD BEPS action plan – September 2014 developments

► On 16 September 2014, the OECD issued documents with respect to 7 of the 15 BEPS focus areas that had September 2014 target dates:

► Action 1 (Digital economy) ► Action 2 (Hybrid mismatch arrangements) ► Action 5 (Harmful tax practices) ► Action 6 (Treaty abuse) ► Action 8 (Transfer pricing for intangibles) ► Action 13 (Transfer pricing documentation and country-by-country

reporting) ► Action 15 (Multilateral instrument)

► The OECD also indicated that additional work will be done in all these areas in 2015


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Actions related to transfer pricing


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Action 13: Transfer pricing documentation and country-by-country reporting

Master file High-level information about MNC’s

business, transfer pricing policies and agreements with tax authorities in single document available to all tax authorities

where MNC has operations

Local file Detailed information about MNC’s local

business, including related-party payments and receipts for products, services,

royalties, interest, etc.

Country-by-country (CbC) Report

High-level information about jurisdictional allocation of

profits, revenues, employees and assets


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Meanwhile around the world

EY global webcast: Transfer pricing documentation and CbC reporting 1 October

HM Treasury announced that UK is “formally committing‘” to implementing CbC reporting. No comment on timescale 2014

Announced intention to introduce CbC inspired mandatory reporting on related party-transactions

2014

Master file type information now required with respect to 2013 2014

Consultation paper on transfer pricing documentation proposes Master file/Local file approach 2014

Supply chain and profitability information for group members required in tax audits 2013

New transfer pricing guidelines require more detailed information on group companies 2012

UK

France

Singapore

Indonesia

Ghana

Czech Republic


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Action 8: Transfer pricing for intangibles

Transfer pricing for intangibles

Next steps: Guidance on ownership, funding, hard to value intangibles and recharacterization

When: Interim guidance September 2014 Final guidance September 2015

Why: Increased importance of intangibles; perceived portability of intangibles; concerns around residual/synergistic profits; transition to globalized operating models

What: Definition of “intangible” and its component parts, including “marketing intangible;” guidance on location savings and other local market characteristics and assembled work force; comparable and also specific valuation guidance in respect of intangibles; transfer pricing of synergies and “group effects;” ownership of intangibles (moving away from legal to functional); role of – control over – capital, risks and financing in respect of intangibles. Extensive illustrative examples.


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Action 8: Report overview

Chapter I ► Clarification of definition

of intangibles ► Discussion of transfer pricing

treatment of location savings, other local market features, assembled workforce and corporate synergies

Chapter VI ► New guidance on

comparability in transactions involving intangibles

► New guidance on transfer pricing methods and use of valuation techniques

► To be issued in final form in 2015 following consideration of several controversial points:

► Excessive capitalization ► “Cash box” intangible

owners ► Contractual assignment

of risks ► Hard to value intangibles

Main final changes Interim guidance ► Provided on the allocation

of returns derived from intangibles

► Legal ownership and contractual arrangements are starting point in transfer pricing analysis of intangibles

► Financing return to be attributable to entities that finance development / acquisition of intangibles and that have legal ownership

► DEMPE functions – arm’s- length return to entities developing, enhancing, maintaining, protecting and exploiting intangibles

Recommendations


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Meanwhile around the world

Australia

China

India

Mexico

Mexico

Netherlands

Spain

Broader powers to recharacterize transactions

Audit directive to broadly investigate outbound license and services fees, especially if payment to no/low tax jurisdictions

Introduction of safe harbor rules (e.g., minimum expected operating profit margins); application of location savings and “location rent”

Increased transfer pricing audit focus on location savings, local marketing intangibles and Intellectual Property (IP) transactions

Tax reform bill with provisions that seek to increase taxable income from contract manufacturing

Decree with provisions on transfers of IP; valuation of hard-to-value IP and cost sharing

Business restructuring cases. IP and services policies under examination

2014

2014

2013

2013 2014

2014

2013

2013 2014


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Action 10: Transfer pricing for other high-risk transactions

► Action 10 proposes to develop rules to prevent BEPS involving transactions which would not (or would only very rarely) occur between third parties.

► This will involve: ► Adopting rules to clarify the circumstances in which transactions may be recharacterized ► Clarifying the application of transfer pricing methods (profit splits in particular) in the global value

chain context ► Providing protection against common types of base-eroding payments such as management

fees and head office expenses

► Expected output is changes to the OECD transfer pricing guidelines and possibly to the OECD Model Treaty.

► Target date is September 2015.


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Impact of BEPS on Latam TP landscape

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Latam TP current OECD influence

► The OECD TP guidelines have been considered as a source of interpretation in the case of local legal matters or in the case of a lack of regulations in the whole Latam region, except Brazil.

► In some countries, the OECD TP guidelines are used for interpretation or as a complimentary source to local regulations. In addition, the OECD TP guidelines have been used frequently by tax authorities in TP audits and assessments.

► BEPS-like legislation has been/will be enacted in some Latam countries.


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Latam TP possible BEPS effects

► Tax authorities in Mexico, Colombia, Peru and Chile have expressed their interest in keeping alignment with changes proposed by the BEPS initiative.

► Major changes on the TP approach on documentation and audits can be expected: ► Profit split method relevancy ► Functional Analysis: Assuring that transfer pricing outcomes are in line with value creation ► Rules to avoid BEPS by transferring risks among, or allocating excessive capital to, group

members ► Rules to avoid BEPS by engaging in transactions which would not, or would only very rarely,

occur between third parties ► More guidance on the best method rule (sixth method for commodities)


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Latam TP possible BEPS effects

► Brazil TP rules are not expected to be changed in the near future. However, the pressure of BEPS will encourage multinational groups to evaluate alternative methods applicable for Brazilian purposes.

► Brazilian multinational groups will be encouraged to have a more hands-on role in managing, controlling and reporting of their intercompany transaction policies and documentation requirements based on the arm’s length principle.

► CbC information required for Brazilian entities related to their intercompany transactions may create distortions.


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General conclusions – Global Perspective


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Global perspective

► TP landscape is going to be changed to a more uniform and consistent approach

► Control and reporting needs to be aligned with global TP guidelines ► TP audits will become more focused on all sides of the transaction

performed and the reasonable attribution of profits and losses based on value creation, and risks allocation, among the most relevant aspects

► TP will be become a global mechanism to demonstrate economic substance and a source of valuable information on profit shifting


Documents

Current Transfer Pricing landscape in light of BEPS - EYFILE/2... · Current Transfer Pricing landscape ... where MNC has operations . ... Expected output is changes to the OECD transfer