Striking the right balancePwC Budget Seminar1 March 2013

www.pwc.com/sg

Transfer pricing plenary

Q1 Which of the following best describes transfer pricing foryou?

Q&A

a) A vague concept only relevant to professional advisors

b) A way to artificially shift profit to low tax locations

c) A management accounting technique

d) The application of arm's length principle to transactions betweencompanies in our group

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e) Never heard of it

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Recent trends

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OECD report on base erosion and profit shifting marks newdiscussion of tax reformInternational Tax Review – 12 February 2013

“A debate at the Centre for the Study of Financial Innovation yesterday concluded thatthe international tax system is at risk of breaking apart under the strain of aggressive taxcompetition and avoidance. The OECD BEPS report is the first step towards fixingthis…”

Global developmentsOECD’s Base Erosion and Profit-shifting (“BEPS”) Report

Purpose and concept of the OECD BEPS report:

• Addressing perception that governments lose substantial corporate revenue because of taxplanning aimed at eroding the taxable base of a company and shifting profits to lower-taxjurisdictionsjurisdictions

• A result of the changing business environment and ease of doing business across borders

• There are six key pressure areas mentioned in the BEPS report, one of which is transfer pricing.

Key pressure area:

Transfer pricing, particularly in relation to the shifting of risks and intangibles, the artificialsplitting of ownership of assets between legal entities within a group, and transactions betweensuch entities that would rarely take place between independents

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“OECD needs to address the perception that transfer pricing is a tool forprofit shifting and base erosion”

- Pascal Saint-Amans, Director of OECD Centre for Tax Policy and Administration

Q2: Which of the following transfer pricing related issues haveyou encountered in your dealings with the tax authorities in

Q&A

you encountered in your dealings with the tax authorities inthe region?

a) Choice of transfer pricing methodology

b) Comparable companies

c) Management fee deductibility

d) Royalty charge

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e) Market premium

f) Others

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Q3: How regularly does your company prepare transferpricing documentation?

Q&A

a) Contemporaneously

b) Every 2 to 3 years

c) As per local country requirements

d) Never

e) When tax authorities come knocking on your door

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f) Others

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Legalagreements

Managing transfer pricing risksVarious types of transfer pricing documentation

• Besides transfer pricing documentation, otherforms of documentation should be kept tosupport transfer pricing arrangements

• Increasingly crucial to document the commercialrationale behind a business transformation

• Important to evidence substance behind thecommercial rationale i.e. evidence which entityhas the control and management of functionsand risks and the ability to service those risks

Legalagreements

Transferpricing

documentation(local)

Transferpricing

documentation(masterfile)

Chapter IXpaper

Commercialrationale paper

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• If a structure fails the substance test, taxauthorities can disregard certain transactions oreven question the entire structure

RACI Matrix/Job

descriptions

Managing transfer pricing risksTransfer pricing as a planning tool

High

Do nothing

A

B

Notacceptable

RiskRegionalDocumentation

CommercialAgreement

CountryDocumentation

E

C

B

DSpecificcompliancerequirements

If no transferpricingdocumentationrequirements Documentation to manage

compliance risks

To actively strategise andmanage tax risk - considerapproaching the taxauthorities

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Low

UnilateralAPA

LowHigh Cost

BilateralAPA

F

Costs / regulatory issuesChange in business modelsor for gaining certainty

What are some of the solutions to manage transfer pricing disputeswhich can result in economic double taxation for a Group?

• Mutual agreement procedures (MAP), a reactive approach

Alternative risk management strategiesMAP vs APA

• Mutual agreement procedures (MAP), a reactive approach

• Advance pricing arrangements (APA), a proactive approach

• There are now more than 130 completed APAs per year from Japan, the US,

Australia, and Korea alone, up from less than 90 in 2003

• APAs growing in popularity in Asia, with long-established regimes in Japan and

Australia; growing regimes in Korea, China and other countries; and unilateral

and bilateral APA programs in India scheduled to start soon

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and bilateral APA programs in India scheduled to start soon

Alternative risk management strategiesPwC Singapore’s tax controversy and dispute resolution experience

First bilateral APA with Korea

PwC Singapore has assisted clients in negotiating and concluding more than 15 bilateral APAs / MAPs and is currentlyassisting with 11 more bilateral cases, out of approximately 50* cases in Singapore. Further, PwC Singapore hasconcluded 4 unilateral APAs with the IRAS and is assisting in two on-going cases.

First bilateral APA and MAP withJapan• Completed – 10• In progress – 4• Total – 14

First bilateral APA with Taiwan

First bilateral APA with China• Completed – 1• In progress – 1• Total – 2

First bilateral APA with UK• Completed – 1• In progress – 1• Total - 2

First bilateral APA with Korea• In progress – 1• Total – 1

First MAP with France• Completed – 1• Total – 1

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First bilateral APA with Taiwan• Completed – 1• In progress – 1• Total - 2

First bilateral APA with Australia• Completed – 1• Total - 1

First bilateral MAP with Indonesia• In progress – 2• Total – 2

Bilateral APA with Thailand• In progress – 1• Total - 1

*This is not an official public figure, but is based on our understanding from the tax authorities

Vision of the future

• Formulary apportionment?

• Disregard for contractual migration of risks – substance over form?

• Significant people functions?

― Top level decision makers? Or

― Second tier operating management team?

• Profit split methodology?

• Adoption of UN TP Manual?

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Thank you

PwC

The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute therendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Services LLP (“PwC”). Before taking any action, pleaseensure that you obtain advice specific to your circumstances.

The materials contained in this presentation were assembled on 28 February 2013 and were based on information available at that time.

© 2013 PricewaterhouseCoopers Services LLP. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity.

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