G20/OECD: BEPS, Intangibles, ICE and Transfer Pricing Brazil October 2013

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Disclaimer

►This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

►This presentation is © 2013 EYGM Limited. All Rights Reserved

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Circular 230 disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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

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Agenda

08:30 Welcome coffee 09:00 Opening remarks - Werner Stuffer 09:15 OECD’s Base Erosion and Profit Shifting project overview - Purvez Captain 10:00 Recent developments regarding transfer pricing aspects of intangibles - Jay Camillo 10:30 Operationalizing transfer pricing - Purvez Captain and Jay Camillo 11:00 Q&A panel - Purvez Captain, Jay Camillo and Werner Stuffer 12:00 Coffee-end

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EY’s 2013 Global Transfer Pricing Survey Key Findings

► Increasing focus on risk management as the most important transfer pricing issues faced by multinational enterprises. ► 66% of respondents identified risk management as their top priority,

a 32% increase from survey results in 2010 and 2007. ► Three main factors:

► 1. Controversy on the rise. ► EY’s 2011-2012 Tax Risk and Controversy Survey found 57% of tax

administrators identified transfer pricing as their top risk focus in the next 12 months.

► 40% of companies also identified transfer pricing as their leading risk. ► 2. Emerging Markets – Emerging Risks

► Nearly 30% of parent companies with operations in the BRIC and African countries identified those regions as their No. 1 or No. 2 most important transfer pricing jurisdictions

► 70% of the companies answering the question also reported they experienced double taxation because of an adjustment.

► 3. Reputational Risks

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Transfer Pricing in the News

► “OECD Enables Companies to Avoid $100 Billion in Taxes”

Bloomberg March 18, 2013

► “Yahoo, Dell Swell Netherlands’ $13 Trillion Tax Haven” Bloomberg, January 23 2013

► “Starbucks paid no tax on UK earnings in the past three years.”

The Guardian, October 16, 2012

► “How Apple Sidesteps Billions in Taxes” New York Times, April 23 2012

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OECD/G20 and Brazil

► Brazil is not a member of the OECD, but of the G20. ► Signed declaration in consensus with other G20 countries

to combat tax evasion in the most recent G20 meeting in St. Petersburg, Russia

► On October 8, Brazil’s National Confederation of Industry (CNI) together with the Business and Industry Committee to the OECD (BIAC) held a conference on Brazilian and International Tax Issues in Brasilia. ► Attendees included representatives from the Federal Revenue of Brazil,

the OECD Secretariat, multinational enterprises and Brazilian government agencies

► Agenda addressed interconnections between the Brazilian and international tax system, with a focus on the OECD Action Plan on Base Erosion and Profit Shifting

OECD BEPS project and focus on increased reporting

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Country by Country Reporting

► Country by country will be an essential element of transfer pricing proposals developed by the BEPS project.

► On October 3, 2013, the OECD issued a memorandum on transfer pricing documentation and country by country reporting. ► The most critical items to be reported included the following with

considerations for each. ► Income earned in a country

► Income before tax for each legal entity on the basis of statutory financial statements, taxable income, or a segregation of consolidated financial information based on segment reporting rules?

► Taxes paid by country- cash or accrual? ► Measures of economic activity

► Examples included: revenue by location of customers, tangible and intangible assets by location, employment measures, research and marketing expenditures and the location of senior management.

OECD BEPS project and focus on increased reporting

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What does BEPS Action Item 13 mean for your company? ► OECD BEPS project and focus on increased

reporting

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Background on OECD BEPS project

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OECD BEPS project objectives

► The aim of the OECD project on Base Erosion and Profit Shifting (BEPS) is the development of approaches for addressing government concern about Multinational Corporations (MNCs) reducing their tax liabilities through BEPS activity. ► The G8 and G20 governments have strongly endorsed the OECD’s work on

BEPS. ► There are high-level political concerns about BEPS in key OECD member

countries that are driving the work, including France, Germany, the UK and the US.

► Major developing countries, including China and India, are also actively participating in the BEPS project.

► The BEPS project is focused on the same issues that are the subject of headlines and hearings around the world.

► Some countries are already taking unilateral action with respect to BEPS, such as recent legislative activity in Australia, Mexico and France.

► BEPS is already affecting the tax enforcement and controversy environment in many countries.

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Specific BEPS target areas

► The OECD’s 19 July 2013 report set forth its work plans in 15 target areas: 1) Tax challenges of the digital economy – Sept

2014

2) Hybrid mismatch arrangements – Sept 2014

3) CFC rules – Sept 2015

4) Deductibility of interest and other financial payments – Sept/Dec 2015

5) Harmful tax practices of countries – Sept 2014/Sept 2015/Dec 2015

6) Treaty abuse – Sept 2014

7) Artificial avoidance of permanent establishment status – Sept 2015

8) Transfer pricing for intangibles – Sept 2014/2015

9) Transfer pricing for risks and capital – Sept 2015

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

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

12) Disclosure of aggressive tax planning arrangements – Sept 2015

13) Transfer pricing documentation – Sept 2014

14) Effectiveness of treaty dispute resolution mechanisms – Sept 2015

15) Development of a multilateral instrument for amending bilateral tax treaties – Sept 2014/Dec 2015

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Related OECD projects and relevant themes

OECD Report on the Transfer Pricing Aspects of Business Restructurings (July 2010) ► Focus on conversion analysis and future pricing when

functions, assets and risks are transferred as part of a restructuring

► Importance given to substance and value chain analysis

► Focus on analysis of both sides of transaction

► Re-characterization only in special circumstances

OECD Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles (July 2013) ► Expanded definition of intangibles

► Detailed discussion of method selection

► More stringent criteria for one-sided analyses

► Focus of profit split and bargaining analysis

► Discussion of re-characterization (e.g., override of legal form)

OECD White Paper on Transfer Pricing Documentation (July 2013) ► Purpose is simplification and transparency

► Concept of master file/local file introduced as a means of gathering information for tax authorities to assess audit profile of taxpayer

► Emphasis on value chain and global profits

► Also discussion of a country-by-country reporting template to be developed

OECD Draft Handbook on Transfer Pricing Audit Risk Assessment (April 2013) ► Sets forth detailed steps countries can take to assess

transfer pricing risk

► Intended to be relevant for both developing and developed countries to use in conducting transfer pricing risk assessments

► Draft is available to local country tax auditors now

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► Increased reporting is the highest priority for the OECD and many countries. ► It was explicitly addressed in the G8 leaders communique in June.

► Work on enhanced documentation was already underway prior to Action Plan issuance. ► Work was subsequently incorporated into Action 13. ► Leveraging the previous work, the White Paper on Transfer Pricing

Documentation was released quickly after the Action Plan.

► Increased documentation is intended to provide information for tax authorities to assess audit risk and gain transparency regarding an MNC’s tax profile.

► OECD suggests that harmonizing documentation approaches will reduce compliance burdens and create uniformity in documentation practice.

► The white paper reflects a tiered approach focused on global and local attributes.

► The white paper also includes reference to high-level country-by-country reporting, which is the most immediate focus for the OECD.

OECD White Paper on TP Documentation

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OECD White Paper’s Proposed Approach to TP Documentation

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Country-by-country reporting template

► Country-by-country reporting of high-level information regarding MNC’s activity in each country ► Separate template to be created

► Details still being considered by OECD, but will include some measure of income, taxes, head count and assets

► May also include additional information not yet specified

► Ultimately may be part of the master file but is being developed by OECD as a separate work stream because of political urgency associated with it

► Will be required to be provided to all “relevant” countries ► There are existing country-based public reporting requirements for the

extractive industry, and a new country-based reporting requirement in the EU for banks is coming

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Global information – master file

► Global information is aimed at transparency and providing a clear and accurate understanding of an MNC’s entire operations

► OECD asserts current documentation does not provide a “big picture” that is available for risk assessment purposes

► Particular focus on features that may indicate significant transfer pricing risk ► Significant transactions with a low tax jurisdiction ► Transfers of IP to related parties ► Business restructurings ► Specific types of related party payments ► Year-on-year loss-making ► Poor or nonexistent documentation ► Excessive debt

► Master file likely to be required to be prepared contemporaneously with tax return

► “Simplification” of industry and company information to be based on analyst reports

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Country specific information – local file

► Local file would be specific transaction focused

► Detailed information to determine whether a specific transaction is at

arm’s length

► Robust functional analysis by transaction ► Method selection ► Comparables analysis

► Relevant financial data for local entities also to be supplied locally

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Summary of OECD recommended global file content

Master File ►Overview of Multinational Enterprise Group

(MNE) ► Legal and ownership structure and principal operating

entities

► Management structure and geographical location of key personnel

►Descriptions of MNE’s business(es) ► Value drivers, supply chain for material products, chart with

related party service arrangements, main markets, key competitors, functional analysis for key value drivers, description of business restructuring transactions over last five years

► Internet links to analyst and company data

►MNE’s intangibles ► Strategy for development, ownership and exploitation of IP,

including location of R&D facilities and key personnel

► List of material intangibles and which entities are entitled to returns

► List of related party arrangements related to IP

► Description of group TP policy related to R&D and IP

► A description of material transfers of interests in intangibles during the relevant year (entities, location and compensation)

►MNE’s intercompany financial activities ► Listing of material intercompany loans and other financial

arrangements, including related parties involved, geographic locations and principal amounts involved in the arrangement

► Description of TP policy or the group's transfer pricing system for its financial activities

►MNE’s financial and tax positions ► MNE’s consolidated accounts for prior years

► List and briefly describe MNE group’s applicable APAs

► List and briefly describe other relevant tax rulings related to the allocation of income to particular jurisdictions

► List and briefly describe transfer pricing matters pending under treaty MAP processes or resolved in MAP during the last two years

► Schedule showing for each country in which the MNE does business, including total number of employees in the country

► Company’s consolidated income statement for the most recent year

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Summary of OECD recommended local file content

Local File ►Local entity

► Description of the management structure, to whom local management reports and geographical location of senior executives

► Indication of whether the local entity has been involved or affected by business restructurings or intangible transfers in the present or past year, including explanation of such transactions effect on the local entity

►Controlled transactions For each controlled transaction, provide the following:

► Description of the transaction (manufacture, distribution of goods, etc.) and context in which it takes place (e.g., business activity, financial activities of the MNE group, cost contribution arrangement)

► Aggregate amount of intercompany charges

► Identification of associated parties involved in each controlled transactions, and relationship among them

► Detailed function analysis with respect to each controlled transaction (i.e., functions performed, assets used and risks borne)

► Selection of most appropriate TP method and reasons for selection, as well as selection of the tested party

► Important assumptions made in applying the TP methodology, explanation of performing multi-year analysis (if relevant)

►Controlled transactions (cont’d) ► Description of selected comparable uncontrolled

transactions (internal or external), if any, and information on relevant financial indicators for unrelated parties relied on in the economic analysis, including comparable search methodology

► Description of any comparability adjustments performed

► Description of the reasons for concluding that relevant transactions were conducted on an arm's-length basis based on the application of the selected method

► Summary of financial information used in applying the TP methodology

►Financial information ► Annual local entity financial accounts for the previous years

► Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements

► Summary of schedules of relevant financial data for comparables used in the analysis

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Key content differences between current state and OECD proposed documentation

Proposed OECD master file content

► Global scope ► Industry and business overview dependent on

analyst reports and annual statements ► Coverage of majority of transactions required ► Materiality to be considered ► Transparency provided through global supply

chain chart and profit analysis ► Required to list transactions related to

intangibles, intercompany loans, business restructurings, loss entities and low tax jurisdictions

► Description of transfer pricing policy and financial systems used to implement policy required

► List of all APAs (unilateral or bilateral) ► List of tax rulings

Common documentation content

► Regional or transactional scope ► Industry and business overview tailored to

transaction, including some public and private information

► Does not necessarily cover all or majority of transactions or consider materiality

► Does not require global profit analysis or global supply chain chart not provided

► Transactions related to intercompany loans, intangibles, business restructurings, loss entities and low-tax jurisdictions only covered in relevant country documentation

► Description of company’s financial systems and transfer pricing policy typically not included

► APAs not listed unless relevant to covered transaction in country documentation

► Tax rulings not typically listed or described

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Key questions to consider

► Do you have accurate information on global operations? ► Head count, revenues, profits by country

► Have you identified features listed as potentially indicative of transfer pricing risk? ► Significant transactions with a low tax

jurisdiction ► Transfers of IP to related parties ► Business restructurings ► Specific types of related party payments ► Year-on-year loss making ► Poor or nonexistent documentation ► Excessive debt

► Do you have amounts and supply chain charts for material transfer pricing transactions?

► What is the percentage of transactions that you currently cover in documentation?

► How does your global footprint compare to your global tax footprint? ► Do you have more than 50% of profits

outside jurisdictions where revenue is earned?

► Do you have aligned assets, functions and risks in your principal company?

► Is IP aligned with business substance? ► Do you earn consistent returns on similar

transactions? ► How do the financials you used for a product

or business unit analysis compare to the analyst reports being provided?

► Did you consider the full set of potentially comparable agreements in your analysis?

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Why the TP white paper requires action

► Increased access to information is the primary political imperative of the BEPS project.

► Increased reporting is not directly about dividing taxing jurisdiction, so consensus in OECD and countries is easier to reach.

► Increased reporting seeks to address what many tax authorities see as a highest priority corporate tax issue and key audit focus (transfer pricing and PE risk).

► Adoption and enforcement of increased reporting requirements by countries do not necessarily require changes in legislation or regulation.

► The OECD will issue a template for country-by-country reporting next September, which many countries are expected to implement.

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What you can do now

► Estimate country-by-country template information and assess implications ► Calculate income/head count and income/assets ratios to identify

countries where either of these ratios are outliers or show variances

► Consider potential ways to address outliers and variances ► Potential for further alignment of business functions

► Support for key differences

► Business case for transactions involved (including intercompany debt)

► Prepare audit risk appropriate TP file ► Consider proactive engagement with tax authorities, including bilateral

APAs and other approaches to increased transparency and greater certainty

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Intangibles and transfer Recent developments

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Agenda

► BEPS impact on transfer pricing for intangibles ► OECD Revised Discussion Draft on the Transfer Pricing

Aspects of Intangibles

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BEPS specific actions focused on TP with intangible implications

► BEPS actions on TP combine to have the following implications: ► Heightened focus on substance ► Shift from transactional focus to “acceptable” form mirroring third-

party transactions ► Broadening definition of intangible and moving away from internal

comparables ► Increasing focus on transparency regarding audit risk profile

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Heightened focus on substance

► BEPS project reflects new thinking about arm’s-length standard. ► There is new emphasis on functions in functional analysis, with assets and

risks taking a back seat. ► Action 9 proposes to develop rules to prevent BEPS involving the

transfer of risks among, or allocation of excessive capital to, group members. ► This will involve developing rules to ensure that “inappropriate returns” will

not accrue to an entity solely because it has contractually assumed risks or has provided capital.

► It will also require the alignment of returns with value creation. ► Action 7 proposes to: “Develop changes to the definition of PE to

prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.”

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Heightened focus on substance

► Similar to Actions 7 and 9, Action 8 on intangibles and the July 2013 draft of the intangibles chapter of the TP Guidelines provide the latest thinking on substance. They discuss functional and legal ownership, as well as separation of functions from risks.

► Alignment between functional and legal ownership requires the contractual owner to bear cost and risk; perform and control important functions; control functions outsourced to a related or unrelated parties; and provide all assets necessary to develop, enhance, maintain and protect the intangible.

► Important functions include the following: ► Design and control of research and marketing activities ► Management and control of budgets ► Control of strategic decisions relating to the development of intangibles ► Important decisions relating to the defense and protection of intangibles ► Ongoing quality control over service providers

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Acceptable form and re-characterization

► Action 10 (“Other high-risk transactions”) includes further work on the circumstances in which transactions may be re-characterized because they rarely occur between third parties. It proposes to adopt transfer pricing rules or special measures to: ► Clarify the circumstances in which transactions can be re-characterized ► Clarify the application of transfer pricing methods, in particular, profit

splits, in the context of global value chains ► Provide protection against common types of base eroding payments, such

as management fees and head office expenses ► More subjective standard to assess whether a third party would

transact in a certain way ► Potential for overreach at exam is heightened ► Even less certain standard than status quo ► So difficult to administer that “special measures within or beyond” the

arm’s-length standard will be required

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Acceptable form and re-characterization

► Action 10 (“Other high-risk transactions”) includes further work on the circumstances in which transactions may be re-characterized because they rarely occur between third parties.

► This is somewhat surprising as this issue was looked at closely when a new chapter (IX) on business restructuring was being developed for the Transfer Pricing Guidelines (TPG).

► But TPG Chapter IX already effectively requires that the business case for a restructuring be documented for each entity (i.e., not just for the enterprise as a whole) if a comparable is not available.

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Broadening IP definition and moving toward profits based measures

► Action 8 proposes to develop rules to prevent BEPS involving the movement of intangibles among group members ► Adopting a broad, clear definition of intangibles ► Ensuring that profits associated with the transfer and use of

intangibles are appropriately allocated in line with value creation ► Developing rules for transfers of hard-to-value intangibles ► Updating guidance on cost contribution arrangements

► No longer founded on third-party comparability, but focused on fairness of results ► Increasing focus on other methods (CWI, cap similar to CAMP

Option A, income based approaches)

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Increased focus on transparency

► Action 12 proposes to develop recommendations on the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements or structures ► Will take into consideration the costs for tax administrations and

businesses and draw on experiences of countries that have such rules in place

► The work will use a “modular design” allowing for consistency and for country-specific needs and risks

► Action 13 proposes to develop rules on transfer pricing documentation to enhance transparency for tax administrations ► Will take into consideration the compliance costs for businesses ► May include a requirement that MNCs provide “all relevant governments

with needed information on the global allocation of income, economic activity and taxes paid among countries according to a common template”

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Increased focus on transparency

► TP documentation white paper released on July 30 calls for transparency so authorities can assess risk for the following transactions: ► Significant transactions with a low tax jurisdiction ► Transfers of IP to related parties ► Business restructurings ► Specific types of related party payments ► Year-on-year loss-making ► Poor or nonexistent documentation ► Excessive debt

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OECD revised discussion draft on the Transfer Pricing aspects of intangibles

Date Action 6 June 2012 OECD published the OECD

Intangibles Draft

November 2012 Comments/public consultation process

30 July 2013 OECD published Revised Discussion Draft

1 October 2013 OECD requests comments to be provided

12 –13 November 2013 Public consultation in Paris

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OECD revised discussion draft overview

► Places emphasis on economic substance in determining whether intangibles exist and how the entities involved should share the profit ► Functions performed ► Assets used ► Risks assumed

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OECD revised discussion draft revisions in the July 2013 draft

► New guidance on the transfer pricing treatment of local market features, location savings, assembled workforce and group synergies

► An amendment to the proposed definition of “intangible” for transfer pricing purposes

► Amendments to the proposed guidance on identifying entities entitled to intangible-related returns, while maintaining the approach that intangible related returns should be aligned to the functions, assets and risks associated with intangible development and exploitation

► Guidance on how the funding of intangible development should be remunerated at arm’s length

► New guidance on payments between related parties for the use of the company or group name

► A reorganization of the proposed guidance on the practical application of transfer pricing methods to intangible transactions

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Definition of intangibles

► Legal and accounting definitions of intangibles are rejected in favor of one focusing on what unrelated parties would have agreed. ► Legal enforceability or separate transferability is not the focus. ► Accounting concepts such as goodwill and going concern value

are not relevant for transfer pricing purposes (although they are included in the OECD definition of intangibles).

► Group synergies and market characteristics such as low labor costs should be taken into account when pricing.

► Assembled workforce may provide a benefit and may affect the price.

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Definition of intangibles

► “something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances”

► Bold text was added in July 2013 revised draft ► Clarifies that guidance is designed to determine the

conditions that would apply between parties acting at arm’s length

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Definition of intangibles

► Marketing intangibles ► Used in business operations that are customer facing ► May include the following:

► Trademarks ► Trade names ► Customer lists ► Customer relationships ► Proprietary market and customer data used in marketing and selling goods or

services to customers

► Unique and valuable intangibles ► Are not comparable to intangibles used by or available to parties to

potentially comparable transactions ► Use in business operations (e.g., manufacturing, provision of services,

marketing, sales or administration) is expected to yield greater future economic benefits than would be expected in the absence of the intangible

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Local market features, location savings, assembled workforce, group synergies

► These comparability factors should be taken into account ► They are not by themselves intangible assets ► In certain situations, they can involve intangible assets ► Examples

► Regulatory license required to operate in a specific market may constitute an intangible

► Transfer or secondment of employees may result in the transfer of valuable know-how

► Group synergies ► Focus on how these would be shared at arm’s length ► Group synergy benefits simply from being part of the MNE should not be

shared with other group members (credit enhancement due to parent’s balance sheet)

► Where MNE takes active steps to activate synergy (central purchasing organization), benefits should be shared according to contribution

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Allocation of intangible profit

► Three criteria to take into account in determining which entities should have claims on returns to an intangible ► The terms of the legal agreement ► The alignment of functional contributions and financial investment

with legal rights ► Whether “services rendered in connection with developing,

enhancing, maintaining and protecting intangibles” are compensated on an arm’s-length basis

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Allocation of intangible profit

► Legal ownership of an intangible itself does not confer any right to retain the return from exploiting the intangible

► Return to legal owner depends on contributions it makes to the anticipated value in the intangibles, relative to other group members through functions performed, assets used and risks assumed

► Legal owner must contribute to the development, enhancement, maintenance or protection of the intangible, either ► By performing these functions itself or ► By having such functions performed under its control by

independent or associated enterprises

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Return for funding intangible development

► An entity that provides funding but does not control the risks or perform the functions associated with intangible development would generally, at arm’s length, not receive a return equivalent to the return earned by a similarly situated investor who also controls the risks and/or performs the functions associated with the development of value in the intangibles

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Options realistically available (ORA) analysis

► The perspectives of both parties, including the commercial alternatives they would have if they had been unrelated, should be taken into account in pricing. ► Licensor/transferor of an intangible would not accept a price less

than it could realize by exploiting the intangible itself. ► Licensee/transferee would not pay a price that leaves it less

profitable.

► For DCF valuation, the arm’s-length price will fall between the present value expected to be received by the licensor/transferor and the present value expected to be paid by the licensee/transferee.

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Intercompany use of company name

► Payment for the use of a company name should depend on ► The amount of the financial benefit received from using the name ► The relative contribution made by the owner and user of the name,

as assessed through an analysis of functions, assets and risks

► Follows principles developed elsewhere in the draft

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Other pricing considerations

► Expected future benefits should be taken into account when assessing comparability.

► Intangible valuations for accounting purposes are not relevant. ► Cost based valuations have a limited role (internal software). ► Use of rule of thumb (licensee/licensor split) is discouraged. ► Third-party acquisition price can provide a basis for pricing

intercompany transfer. ► Sensitivity analysis is encouraged. ► Forecasts prepared for non-tax purposes are preferred. ► Discount rate does not automatically need to be WACC. ► Prices must typically be determined on a pretax basis.

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Intercompany effectiveness Improving transfer pricing operations

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Intercompany effectiveness What to consider

Vision Strategy

Processes

Organization

KPIs & Goals

Technology

People

A

B

A

B

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EY intercompany effectiveness (ICE) framework

► ICE is a transaction based and scalable framework for improving intercompany pricing, accounting and reporting processes globally.

► ICE is designed to increase efficiency, drive business value and manage compliance risk.

► ICE uses a multidisciplinary approach to deliver end-to-end results across client stakeholder groups.

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Connecting across the transfer pricing process life cycle

Planning, Budgeting & Forecasting

Intercompany Transaction Processing

Testing & Compliance

Transfer Pricing Monitoring &

Reporting

Transfer Pricing Process Life Cycle

Forecasts are used to set prospective transfer prices and intercompany charges in alignment with transfer pricing policies. Transfer prices are adjusted based on new forecasts to achieve target operating margins by end of year.

Transfer pricing monitoring occurs on a frequent enough basis to ensure operating margin targets are met or identify adjustments to transfer prices. Intercompany profit elimination occurs at a level that adequately supports financial, tax and management reporting.

Intercompany transaction processing is automated and controlled such that transfer prices are easily identifiable within the ERP system to support transfer pricing monitoring, tax analysis and the eliminations for financial reporting purposes.

Documentation of monitoring is maintained to evidence execution of controls for testing. Transfer pricing compliance documentation is finalized annually to meet local country transfer pricing regulations and requirements.

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Set Profit Targets

Forecast P&L Results

(FP&A)

Establish Standard

Costs

Buy, Make & Repair

Sell Third Party

Eliminate ICP

Set Transfer Prices

Sell I/C

Reverse I/C COGS & Rev

Planning, Budgeting & Forecasting Intercompany Transaction Processing

Transfer Pricing Monitoring & Reporting Testing & Compliance

Forecast Demand Plan (SC)

Finalize Forecast

External (Cons.)

Reporting

Target Op. Profit

Margin Monitoring

Product Profitability Reporting

Gross Margin

Reporting

Inventory Reporting

•Physical vs. financial views

•Safety stock •Coverage

•Margin analysis •Actual vs. Standard cost

•Customer profitability

•Management results by entity, segmented, etc.

• Isolation of COGS drivers

•TP target margins compared to actual margins

Reporting Analysis

Finance Core process focus: Tax Supply Chain/Purchasing

ICP Reporting

•Out of balance investigation

• Inventory reconciliation

Connecting across the organization

Update Transfer

Prices

Finance/Tax

Summarize intercompany transactions

Prepare SOX compliance

testing

Prepare globally segmented

financial statements

Prepare locally segmented

financial statements

Finalize transfer pricing

documentation

Local compliance – tax returns,

declarations and documentation

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Business case

► Business value ► ETR ► Indirect tax costs ► Incur higher cost of sales due to misaligned incentive structures and/or lack of

visibility into product costs and profitability

► “Material” compliance ► Ensuring margins are in line with target margins reflected in the TP documentation ► BEPS report

► Efficiency ► Reduce hours spent on execution of transfer pricing