Transfer Pricing Masterclass

December 2017

KPMG Switzerlandkpmg.ch

Event summary

Matching expectationsKPMG’s approach to detail and knowledge sharing was anything but arm’s length at the firm’s first ever masterclass on transfer pricing. In an introductory session, participants were asked what they expected from the masterclass and which topics they would like to focus on. The intimate size of the group enabled their specific expectations and needs to be addressed in dedicated sessions over the two-day event. Already familiar with many general transfer pricing topics and practices, participants were particularly keen to delve deeper into concrete case studies and problems. Many of them held sole responsibility for transfer pricing at their respective companies so welcomed the chance to share experiences and concerns with others, even if that meant reassuring each other that there’s not always one neat solution.

Start with the status quoThe first practical session was, logically, about the status quo analysis. Asking the right questions early on makes sense in order to identify a group’s risks and opportunities in the area of transfer pricing. The main outcome is a list of action items with priorities, which can serve as a useful roadmap for future dealings with transfer pricing. Tax professionals can use it to convince stakeholders (Board, CFO, etc.) that action needs to be taken, to highlight risks to relevant decision makers, and to work out where to prioritize resources if staffing does not allow all issues to be tackled simultaneously.

In assessing their transfer pricing status quo, groups should address three dimensions:

• The transfer pricing system – are the transfer prices at arm’s length? • Processes – are the right processes in place to get all recurring tasks in the

transfer repricing area right? • Compliance – are contracts and documentation in place where needed?

KPMG’s Transfer Pricing Masterclass was a chance to get to grips with the complex topic of transfer pricing. In their introductory presentations, KPMG experts shone the spotlight on key topics within the transfer pricing landscape, before inviting participants to tackle concrete case studies. With small groups, a mix of industry insights and KPMG expertise on hand, the two-day event generated valuable takeaways that participants could implement in their daily business.

Best practice in transfer pricing? It depends…

Participants

The masterclass was attended by nine representatives of companies operating in industries as diverse as chemicals, food, luxury goods and healthcare. What they all had in common was an interest in transfer pricing and a desire to learn from KPMG’s tax specialists and each other.

Guest speaker

Ronny RosenblattTransfer PricingState Secretariat for International Financial Matters, SIF

KPMG contacts

Markus WyssPartner, Tax Transfer PricingKPMG Switzerland

Gerhard FothDirector, Tax Transfer PricingKPMG Switzerland

Caroline ChuaManager, Tax Transfer PricingKPMG Switzerland

Balazs KarancsiManager, Tax Transfer PricingKPMG Switzerland

Riccardo GiannoneAssistant Manager, Tax Transfer PricingKPMG Switzerland

Johannes UhdeAssistant Manager, Tax Transfer PricingKPMG Switzerland

Transfer Pricing Masterclass – Event Summary 2

“We covered a lot of ground quickly, with the very concrete examples reflecting real challenges we face.”

David Watelet, Head of Finance & Administration, Hoist Group

It was interesting to see that, when working on the case study, the different discussion groups came up with slightly different issues. This highlights the point that a fresh pair of eyes can always spot something that nobody has seen before. Although everybody agreed that this exercise is valuable for any group, most participants felt that they already knew all there is to know with regard to their respective company.

One of the key takeaways was that while it is easy to get an overview on transactions and their transfer pricing handling for most standard transactions, it may be much more difficult to identify transactions that are not reflected in the accounting system (e.g. services for which nothing is charged). Yet with services playing an increasingly important role compared to products in many value chains, this important aspect should not be neglected.

Best practice in goods transactions The goods transactions session covered various topics connected with the intercompany exchange of tangible goods. KPMG’s Johannes Uhde gave an overview of typical constellations at multinationals, and ran through the expectations of tax authorities on profitability of manufacturing and distribution companies. Proactively managing transfer prices for goods transactions is generally deemed “best practice” at low-risk distributors wishing to secure stable target operating margins. This approach is common at multinationals across industries, especially where the IT landscape and inventory levels or structure of sales allows. Retroactive price adjustments at year-end should be approached with caution due to the numerous pitfalls that can arise from an inventory valuation, indirect tax and customs perspective.

During group work, participants agreed that an appropriate transfer pricing system needs to be in place in order to ensure arm’s length profit allocation reflecting the contribution of the MNE’s companies to value creation. A key takeaway from practice was that it is better set prices for inbound transactions “too high” during the year if year-end adjustments are inevitable, thus ensuring that any year-end adjustment increases – rather than decreases – the local tax base.

“The group size gave a sense of intimacy that encouraged knowledge sharing.”

Marc Flückiger, Head of Group Controlling, Bucherer AG

Transfer Pricing Masterclass – Event Summary 3

All about intragroup services Riccardo Giannone’s talk on intragroup services focused on management and technical services and what needs to be considered in relation to each. After all, getting it right means avoiding tax challenges and making the management/technical services recharge structure more robust.

The presentation and subsequent group work was designed to show with a practical example how to determine the right portion of shareholder costs. Participants also learned when it is and isn’t appropriate to charge a mark-up on the identified cost base. The group left the session with a better understanding of what can enable direct cost allocation. Where services are provided out of different locations with different labor rates, it is important to understand what is acceptable from the recipient perspective.

The response from the group was very positive, with highly active and interactive groupwork. Takeaways emerging from discussions included that it’s very important to fully and truly understand the nature of the service, e.g. whether it’s highly routine in nature or more about adding value, etc. It’s important to (be able to) substantiate decisions (such as cost base, allocation keys, mark-up charged). Experience showed the value of drafting service contracts and of making the extra time and effort to ensure consistency.

“The pure-field approach enabled us to cover a lot of ground in a practical, hands-on way.”

Roberto Bollinetti, CFO, AMC International AG

Getting a handle on intangible propertyWhen it comes to intangible property (IP), companies need to learn that the definition of IP is now much wider than it was in the past. This session helped the participants understand how to identify IP within the group. We also looked at how to determine who develops, owns and uses it and which remuneration method to apply. Common pitfalls are not identifying all the relevant IP, looking at IP on a standalone basis, rather than taking a holistic view throughout the overall group and not differentiating between the legal and beneficial/economic owner. The session also reminded the group to specifically look out for the DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) functions in determining how best to remunerate IP.

The participants had a lot of questions regarding the remuneration of intangibles (i.e. the correct rate to set, what constitutes a DEMPE function, and the level of substance within an IP owner needed to obtain a developer’s return). At the same time, they provided some very valuable insights from their own industry experiences. Some helpful examples were provided of cases where something which would not have been classified as a typical intangible asset (e.g. distribution networks) were explicitly remunerated as IP following dealings with tax authorities/courts.

The session was a reminder of how important it is to take a holistic view of the group in terms of IP, and who contributes, rather than just a one-sided approach. Another key takeaway was the observation that many more tax authorities are considering the profit split method for this reason. Where transactions are complex or integrated, this method should therefore be considered. Finally, while we need to identify all sources of IP, not all of them should be remunerated with a separate transaction. For instance, you can bundle a brand within the cost of goods.

Transfer Pricing Masterclass – Event Summary 4

“It’s comforting to know that others have similar challenges and that there isn’t always a straightforward answer.”

Andrew Whitehead, Finance Director (Asia), Jacobi Carbons AG

What’s the story with TP documentation?KPMG’s Balazs Karancsi kicked off the discussion on TP documentation with a look at how multinational companies are facing an increased compliance burden related to their transfer pricing regimes and legal structure. Particularly relevant is the three-layer documentation structure (master file, local file, country by country reporting) required by BEPS Action 13.

KPMG’s best-practice approach to tackling the administrative burden is to set up a modular, lean global transfer pricing documentation process. This needs to be linked to an efficient document repository system (library) where every stakeholder has the access to the documents (s)he may need. The documentation lifecycle starts with creation of templates. The next steps are gathering information, reporting, reviewing reports and embedding these actions into a lean process. It is important to identify the key stakeholders (local team or HQ) and triggering events (new transaction, significant change in business, tax audits).

In the practical session, the group discussed the structure of the modules (files), preferred allocation of responsibilities (local and central teams) and the structure of the documentation process itself. We also discussed the main challenges, which unless managed carefully can result in a slow and costly documentation project, especially if there is insufficient communication between central and local teams or between the tax function and local finance/business.

In terms of benefits, proper documentation shifts the burden of proof to the tax authorities and gives companies better control over the tax audit process. Compliance is something that everyone has to tackle, and the issues are similar regardless of how a business is structured and what industry it operates in. For example, different levels of TP knowledge and awareness in local markets results in different levels of ownership and engagement, increasing compliance requirements and decreasing transparency. A lean and efficient documentation process offers a better overview at local compliance level and helps control the direction of future tax audits.

Insights from the Swiss State Secretariat for International Financial Matters (SIF)Ronny Rosenblatt joined the Transfer Pricing arm of SIF around three years ago after a successful Big Four career. Providing valuable insights from his experience at SIF, he talked the class through the main developments and trends in transfer pricing and dispute resolution.

In terms of overall climate for dispute resolution, MAP works well in Switzerland according to the peer review of Switzerland’s situation performed in light of BEPS Action 14 on More Effective Dispute Resolution. SIF works globally with tax authorities, although certain countries account for a higher proportion of MAP and APA requests than others. As not all countries have the same capacity to deal with (large and complex) requests, the process can take many years. SIF has increased its headcount significantly in recent years in response to growing demand for MAPs and APAs but does not levy a charge for processing applications like some other countries.

What were Ronny Rosenblatt’s best practical tips? He notes that although SIF does not explicitly advise companies on their chances of success, the customary “pre-filing” can be a useful way to test the water before submitting a final application; SIF would not admit a proposal it deemed “indefensible”. He also suggests always filing requests in both countries simultaneously, and points out that this is a requirement for some countries. Companies need to be aware that the requests made, serve as a starting point for negotiation and will rarely be accepted without any amendments. Although there is no obligation to reach an agreement, SIF’s success rate is quite high.

The nature of information requested varies from jurisdiction to jurisdiction. For instance, SIF does not initially ask for highly detailed information, whereas South Korea wants a large volume of information from the start. Before filing, companies should carefully weigh up whether an APA or MAP is a good idea for their business. Key considerations include the volume of relevant transactions and whether the company is prepared to open its business to intense scrutiny of the tax authorities.

Transfer Pricing Masterclass – Event Summary 5

“It was a great idea to have a dedicated KPMG facilitator for each group.”

Christos Assimakopoulos, Director of International Accounting, Covidien AG

“ All of the topics covered were useful for anyone dealing with TP in their daily business.”

Mateusz Pach, Regional Tax – EMEA, Barry Callebaut AG

Finally, what did Ronny Rosenblatt have to say about future trends? There is much discussion around digital economy at the moment. As the users in certain markets make content valuable, the authorities want to tax it there. Intellectual property and substance also remain interesting topics.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The scope of any potential collaboration with audit clients is defined by regulatory requirements governing auditor independence.

© 2017 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

Gerhard FothDirectorTax Transfer Pricing KPMG Switzerland

+41 58 249 34 82gerhardfoth@kpmg.com

Markus WyssPartnerTax Transfer PricingKPMG Switzerland

+41 58 249 41 29mwyss@kpmg.com

Contacts

kpmg.ch

KPMG AGBadenerstrasse 172PO Box8036 Zurich

Transfer Pricing Masterclass – Event Summary 6

It depends…Gerhard Foth wrapped up the session by reflecting on some of the key takeaways. He emphasized the importance of a structured approach when performing a status quo analysis. In services and IP-transactions, the definition of service and IP need to be looked at carefully. Globally consistent charge mechanisms are important, especially as IP becomes more and more important. Documentation affects everyone but nobody wants to read 150 detailed pages. The shift from a project view to a process view is necessary to manage the increasing focus on transfer pricing in an efficient and satisfying way.

And finally, it may be something of a consultant cliché, but the response “it depends” really is the most appropriate one for many questions related to transfer pricing. While some aspects remain something of an art, companies are ultimately looking for certainty and support from the tax authorities. Fortunately, the Swiss competent authority is generally helpful.