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International Fiscal Association USA Branch
New York Region
International Tax Seminar | Thursday, July 13, 2017
IP Alignment in a Post BEPS World
Tracee Fultz
Principal, Northeast Region Transfer Pricing Leader
EY LLP
Nelly Korsun
Principal, Transfer Pricing
PwC LLP
B. Chase Wink
Partner
Skadden, Arps, Slate, Meagher & Flom LLP
Steve Wrappe
Deputy Head, Transfer Pricing & Dispute Resolution
KPMG LLP
2International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Supply Chain – common profiles
• IP Ownership
– Cost sharing or licensing model with low-tax jurisdiction
– Cost sharing model with multiple participants
– US or non-US ownership of new technology platform or product in
high-tax jurisdiction
– Dispersed ownership with desire to centralize
• Recent developments
– Acquisition of IP in new jurisdictions
– Supply Chain Changes – acquisition integration, distribution
model, IT implementation
– Controversy – transfer pricing, State Aid, permanent
establishment (PE), withholding tax, etc.
– Other Pressure – corporate policies, negative public relations,
consumers, etc.
3International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Current Environment
4International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Current Challenges
• Transfer Pricing for IP
– BEPS Action Items 8-10 (DEMPE Control and Oversight)
– State Aid
• Hybrid Mismatch Rules
– UK early adoption
– Global implementation (e.g., Anti-Tax Avoidance Directive)
• PE / Diverted Profits Tax (DPT) / Royalty Withholding Tax (WHT)
– Direct sale (commission, marketing support) versus local sales (distributor, reseller)
models
– Net tax versus gross tax
– Controversy environment
• More transparency
– Country-by-Country Reporting, Master and Local File (BEPS Action Item 13)
– Exchange of information on rulings
• Operational and Reputational Risk
5International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Global transfer pricing controversy trends
• IRS audit transformation underway
– IRS goal to identify and develop good litigation vehicles continues
• “TPO’s goals continue to be to find good, strategic cases it can win . . . so we can get some victories for
the U.S. government and the IRS in the transfer pricing area.”
• “We’re developing cases so that any particular one could be litigation-ready, all of our cases in theory
should be litigation-ready.” IRS TPO Director, April 2015
– IRS audit “campaign” initiative under development
• Canada Revenue Authority exhibiting an increased appetite for litigation as a resolution
tool
• Revised HM Revenue & Customs guidance curbs transfer pricing discussions outside
APA framework
• China SAT’s insistence on “location savings” position complicates resolution of issues
• European tax authorities increasingly scrutinizing recurring losses
– Presumption that transfer pricing is triggering the losses
– Is the corporate group benefiting from the losses?
• DPT and similar regulations being issued by many companies
• State Aid cases considering past positions
6International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Perceived IRS transfer pricing risks
• Transfers of “value” continue to receive scrutiny
– Recasting related party transactions
– Bootstrapping section 936(h)(3)(B) or Treas. Reg. §1.482.4 (“any
similar item”) onto transfers of “value”
• High-value or non-routine services (e.g., oil and gas
industry)
• Treas. Reg. § 1.385-2(c)(2) indebtedness factors may be
perceived as bright-line rules for documentation
• Contractual de-risking of related parties
– Did the functions and risks borne by the parties also change?
– Are the functions and risks consistent with the agreements?
7International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Timeline: key European developments
Transparency
► Exchange of tax ruling
summaries based on
Action 5 started
State aid
► EC concluded on state
aid cases
► Used own transfer
pricing concept
► Rulings and regimes
Parent subsidiary
directive changed
► Intra-EU anti-hybrid
rule
► GAAR
Old EU IP regimes
► No new entrants
► Phase out /
grandfathering until
July 2021
Transparency
► CbCR introduced in all
EU Member States
► Exchange of tax ruling
summaries based on
EU Directive started
United Kingdom
► UK Anti-Hybrid rules
effective as of 1/1/17
► BREXIT procedure
started
Publication of EU list of
tax havens
Action 15 multilateral
instrument (MLI)
► Signing ceremony in
June
Transparency
► First exchange of CbC
reports
EU Arbitration
Convention
► Dispute resolution
mechanisms
transposed into local
law of EU Member
States and effective
per 1/1/18
Ireland
► New TP framework
(Action 8–10) likely to
be effective in Ireland
ATAD rules effective
1/1/19
► Interest deduction
limitation rules (30%
EBITDA)
► Controlled Foreign
Company rules
► GAAR
United Kingdom
► BREXIT effective
3/29/19 (unless
extended unanimously
by EU Member States)
Action 15 MLI
► MLI will likely be
effective in relation to
first treaties
CCTB
► Common corporate tax
base throughout EU
► Mandatory for groups
with turnover of EUR
750m
ATAD rules effective
1/1/20
► Exit tax rules
► EU Anti-Hybrid rules,
addressing mismatches
within the EU and
with third countries
Ireland
► End of Non-resident
Ireland (NRI) regime
2016 2017 2018 2019 2020 2021
Old EU IP regimes
► Grandfathering of old
IP regimes ends July
2021
CCCTB
► CCTB + Single
calculation of taxable
income and single tax
return for all EU
operations
► Taxable profits shared
between Member
States based on
apportionment formula
(1/3 sales, 1/3 labor,
1/3 assets (excluding
intangible assets))
2022
ATAD rules effective
1/1/22
► Reverse hybrid entity
rules
Red = Reality
Blue = Very high likelihood
Gray = Uncertain
No timing indicated
Public CbCR
Amendments Interest / royalty Directive
8International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Compliance with Actions 5, 8-10 and 13
9International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Legal ownership and DEMPE functions
Entitlement to intangibles return
• Action 8 focus is on Development, Enhancement, Maintenance,
Protection and Exploitation (DEMPE) functions relating to intangible
assets
Development of
intangible asset
Enhancing
value of
intangible
asset
Maintenance
of intangible
asset
(eg: quality
control)
Protection
of intangible
asset against
infringement
Exploitation
• There is no automatic return on account of mere legal ownership of
intangible
• Requirement to directly perform or to control the performance of
DEMPE functions and related risks
• Return retained by an entity in group depends on the contributions it
makes through DEMPE functions to the anticipated value of intangible
relative to contributions made by other group members
10International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Legal ownership and DEMPE functions
Entitlement to intangibles return Cont’d
Routine return for
IP ownership (a)
Risk adjusted rate of
return (b)
Residual
returns
Total system
returns
Legal ownership
Pure Funding
DEMPE functions
Legal ownership +
Funding obligations +
DEMPE functions
Legal ownership +
Funding obligations
(a) + (b)
11International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Legal ownership and DEMPE functions
Changing perceptions of entitlement to profit from intangibles
1980’s 2014 1990’s
Owner
Legal Owner Legal Owner
Economic Owner
Investor
Controller/Functional Contributor
Developer Developer
Routine Developer
Developer/Functional Contributor
User User
Pure User
Value Contributor
Non-routine (residual claimant)
Routine
12International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Country-by-Country Template
CbyC Template – Page 1*
Revenue
Country
Related
Party
Unrelated
Party Total
Profit
(Loss)
Before
Income
Tax
Income
Tax Paid
(on Cash
Basis)
Income Tax
Accrued –
Current
Year
Stated
Capital
Accumulated
Earnings
Number
of
Employe
e
Tangible
Assets Other
than Cash
and Cash
Equivalents
Country A X X X X X X X X X X
Country B X X X X X X X X X X
CbyC Template – Page 2* (Onwards)
Country
Constituent
Entities
Resident in
Country
Country of
Organisation
or
Incorporation
if different
from Country
of Residence Ho
ldin
g o
r
Man
ag
ing
IP
Pu
rch
asin
g &
Pro
cu
rem
en
t
Man
ufa
ctu
rin
g &
Pro
du
cti
on
Sale
s,
Mark
eti
ng
&
Dis
trib
uti
on
Ad
min
istr
ati
ve
,
Man
ag
em
en
t &
Su
pp
ort
Serv
ice
s
Pro
vis
ion
of
serv
ice
s t
o
un
rela
ted
part
ies
Inte
rnal
Gro
up
Fin
an
ce
Reg
ula
ted
Fin
an
cia
l S
erv
ice
s
Insu
ran
ce
Ho
ldin
g s
hare
s o
r
oth
er
eq
uit
y
instr
um
en
ts
Do
rman
t
Oth
er
Country A Entity A Country B √
Entity B √ √ √
*Information obtained from Annex III to Chapter V of OECD/G20 Base Erosion and Profit Shifting
Project: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
13International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Moving Forward
14International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Scale and timing considerationsKey questions to ask yourself?
• What is the group’s current risk profile and where are the pressure
points? How does this compare to others? For example, existing
controversy or unhelpful facts may prompt a more urgent change.
• Is a direct move to a “BEPS-resistant” structure feasible or not due to
e.g., budget-, timing-, logistics- and/or resources restrictions? What
will be the overall impact on the current business model?
• What should you do in the interim period? It turns out that a ‘wait and
see’ approach is often not sufficient.
• Who, outside the tax department, should be part of the change
process and what should you be communicating to your board and/or
shareholders (or other stakeholders)?
15International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Responses
• DEMPE Control and Oversight
– Board of Directors
– IP Management Committees
– Employee substance, including US or other branch operations
• PE / DPT / WHT
– Restructure
• Substance in HQ or Regional HQ Company/Hub
• Distribution model (actual or “synthetic” buy-sell)
• DEMPE Control and Oversight
– Transfer pricing changes
• Return on sales
• Profit split
16International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Responses (2)
• Hybrid mismatch
– Change check-the-box (CTB) elections
– Royalty-free license
– “Temporary” Onshore – e.g., Usufruct
– Onshore
• Lower tax (Barbados, Curacao)
• Other (Ireland, UK, Netherlands, Singapore, etc., etc.)
• Effective Tax Rate Considerations
– IP Transfers
• Foreign taxes
• ARB 51 implications
– Tax incentives
• Amortization
• IP / Innovation / Patent Box – new “modified nexus” regimes in Singapore,
Israel
– US Tax Reform
17International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
IP alignment – onshore vs. offshore
Onshore
• When considering IP alignment in light of the global legislative tax
developments, on-shoring of IP could be considered as a potential solution.
Considerations include:
– Flexibility to unwind – once onshore, the respective location (and value) may be
‘locked in’ and flexibility to unwind may be limited.
– DEMPE – At the onshore location, all relevant people need to be available to
manage the required functions, risks and assets. We are seeing more tax authority
challenge from source countries on this. Is significant substance in IP location
practically feasible?
– Tax accounting implications (as well as regulatory changes, such as repeal of ARB
51) should be carefully considered given Effective Tax Rate (ETR) implications.
• Based on OECD Transfer Pricing (TP) principles, the onshore location should
earn an at arm’s length remuneration in excess of a routine return given its
assets, functions and risks. Depending on the tax regime of the onshore
territory, this may be offset by incentives such as IP boxes, R&D credits,
amortization, and/ interest expenses.
18International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
IP alignment – onshore vs. offshore
Offshore
• Retaining an offshore IP structure with the appropriate substance
provides for the utmost flexibility, including an ultimate on-shoring, but
will likely be met by increasing challenge from source territory tax
authorities.
• Under certain circumstances, the remuneration of both the onshore
HQ company and the offshore IP company can be substantiated by
means of a two-sided TP approach, e.g., profit split methodology.
• Monitor legislative responses to BEPS Action 2 (hybrid mismatch
arrangements) in relation to reverse hybrid IP holding structures.
Furthermore, the EU will publish a blacklist by the end of 2017.
19International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Supplemental Guidance for Determining AL Conditions in Cases Involving Intangibles (Section D)
Hard-to-value intangibles (D.4)
• Examples of HTVI (6.190)
– Intangibles that are only partially developed;
– Intangibles that are not anticipated to be exploited commercially
until several years following the transaction;
– Intangibles that separately are not HTVI but which are integral to
the development or enhancement of other intangibles which fall
within the category of HTVI;
– Intangibles that are expected to be exploited in a manner that is
novel at the time of the transfer
– IP meeting the definition of HTVI has been transferred for a lump
sum payment
– The IP is used in connection with or developed under a CCA
• For these types of intangibles, information asymmetry
may be acute (6.191)
20International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
US Tax Reform
• Worldwide tax system without deferral (Trump campaign
proposal)
• “Territorial”
• Border Adjustment (GOP Blueprint)
• Camp’s 2014 proposal
• Considerations
– Impact on IP Ownership Exploitation, including cost sharing
arrangements
– Impact of Border Adjustment Taxes on supply chain decisions
– Impact on US tax treaty networks
21International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Impact of BEPS C-by-C on TP Risk
• Greater transfer pricing risk in more countries from C-by-
C information
• Exposure to double tax is increased, without substantial
increase in resources to resolve
22International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017
Impact of BEPS C-by-C on Tax Function
• Greater risk may encourage more centralized
management of global transfer pricing by taxpayers
– Consistency
– Efficiency
• In turn, centralized management may encourage
additional in-house staffing and software
– Efficiency
– Control