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
13
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?