Prevention of transfer pricing disputes: panel discussion

International Taxation Conference,

Mumbai, 2-4 December 2010

The panel:

Chair: Shyamal Mukherjee

PricewaterhouseCoopers India

Anuradha Bhatia Director of Income Tax, Transfer

Pricing, India

Sean Foley KPMG, United States

Heinz-Klaus Kroppen Deloitte, Germany

Caroline Silberztein Head of the Transfer Pricing Unit,

OECD

Melissa Tatton Deputy Director, Business

International, HMRC, United Kingdom

DISPUTE PREVENTION: PRE-

ADJUSTMENT RESOLUTION?

Pre-adjustment dispute resolution

• Because of time consuming CA process taxpayers are looking for practical alternative

• Encourage tax auditor to informally contact responsible local tax office in other country

• Has worked between Germany-France, Germany-Netherlands, Germany-Belgium

• “Agreement” on adjustment and corresponding adjustment

• Corresponding adjustment is included in amended tax return and is accepted by local tax office 4

ADMINISTRATIVE

ORGANISATION; THE IRS

RESTRUCTURING

IRS LB&I Division

• New IRS Large Business & International Division

• Focus on multinational enterprises & cross border transactions

• Focus on transfer pricing

• Expanded APA/Competent Authority program

• National Transfer Pricing Director

• Lead Economist

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Large Business and International Division Director, Competent Authority and International

Coordination (CA&IC)Draft Structure as of 9/21/2010

Director, Competent Authority & InternationalCoordination (CA&IC)

Director, International Business Compliance

(IBC)

CommissionerLarge Business &

International

Director, Transfer Pricing (TP)

EA

Deputy Commissioner (International)

IRS Commissioner

Mutual Agreement Program

EOI Program

Service-wide Strategy

IRS Deputy Commissioner for

Services & Enforcement

Foreign Posts

JITSICOECD Program

Large Business and International Division Director, International Business Compliance (IBC)

Draft Structure as of 9/21/2010

Territories

Director, International Business Compliance (IBC)

DFO,IBC East

DFO,IBC West

Director, Transfer Pricing (TP)

EA

IRS Commissioner

Foreign PaymentsProgram

Economists East

TerritoriesTerritoriesTerritories4 IETerritories*

TerritoriesTerritoriesTerritories5 IE Territories

Economists West

Lead Economist

Dep. Comm. for Services &

Enforcement

482 TAs

Future TP Terr. Mgr East

Future TP Terr. Mgr West

TP IEs and Economists West

International TAs(non-482)

Technical Coordination & Training

TP IEs and Economists East *Manhattan territory includes

QI and Withholding teams

CommissionerLarge Business &

International

Deputy Commissioner (International)

UNCERTAIN TAX POSITION

Uncertain Tax Position

• New IRS Form

• Taxpayer’s must list the components of their tax provision created for financial accounting

− Special rule for litigation

• Effective for tax returns filed in 2010 and forward

• Each provision is ranked by size, but the actual amount is not disclosed; must include a “concise description”

• Transfer pricing provisions are separately identified

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Structure of Schedule UTP• Part I: Uncertain Tax Positions for the Current Tax Year

• Part II: Uncertain Tax Positions for Prior Tax Years (n/a for 2010)

• Part III: Concise Descriptions of UTPs

(a)

UTP No.

(b)

Primary IRS sections

(e.g., “61”, “108”,

etc.)

(c)

Timing Codes

(check if Permanent,

Temporary, or both)

(d)

Pass-Through

Entity EIN

(e)

Major Tax

Position

(f)

Ranking of Tax

Position

P T

P T

(a)

UTP No.

(b)

Primary IRS

sections

(e.g., “61”, “108”,

etc.)

(c)

Timing Codes

(check if

Permanent,

Temporary, or

both)

(d)

Pass-Through

Entity EIN

(e)

Major Tax

Position

(f)

Ranking of

Tax Position

(g)

Year of

Tax

Position

P T

P T

UTP No. Concise Description of Uncertain Tax Position

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APAS: DO THEY WORK –

AND WHY?

Why APAs Work

• Cooperative process

• Reach agreement on the facts

• Inclusion of future years means the outcome is not known; either the taxpayer or the government could benefit – like arm’s length

• Multiple years help smooth volatile results; generally longer than a typical audit cycle

• Bilateral APAs tend to bring all parties to a middle ground

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US EXPERIENCE: THE CAP

PROGRAM

What is CAP?

• Compliance Assurance Program

• Approach which allows IRS to determine tax return accuracy prior to filing

• Process entails:

− Communication of completed transactions in manner that allows immediate analysis of material items

− Sharing of relevant data and positions

− Early identification of compliance issues

• Results in:

− Determination of return acceptance prior to filing

− Eliminates need for extensive post-filing examination15

Current CAP Status

• Approximately 112 CAP taxpayers (tax year 2010)

• Program is currently a “pilot” but will be made permanent by end of 2010

• New CAP design will include three phases:

− Pre-CAP

− CAP

− CAP Maintenance

• Average CAP cycle time from filing to closures –6.3 months compared to 52 months for CIC case

• High level of participant satisfaction reported16

SPECIFIC ISSUES WITH

MAP

Time frame for CA and arbitration cases

• Germany currently has more than 600 open CA cases/more than 2700 in all OECD countries

• 2 year time proposal as prescribed in OECD-MEMAP in practice hardly ever met

• Double taxation not avoided because frustrated taxpayer withdraws from proceeding

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Triangular Cases

• Typically CA and arbitration are aimed and resolving disputes between two parties

• Often the issue at dispute is involving three parties i. e.:

• Japanese parent manufacturer delivers goods to central distribution company in Belgium which distributes to local distributor in Germany.

• Issue: What is the best process to deal with such cases?

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Taxpayer Initiated Adjustments

• Sometimes companies realize they made a mistake with their transfer pricing

• They often face significant penalties and interest

• Response: file an amended return increasing income, but this creates double tax

• Issue: is competent authority available?

• No government action

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Thank you for your attention.Questions?