Presentation Kiev event

Topics

1) Intro Netherlands2) Practical approach 3) Business Restructuring 4) BEPS

2

IntroductionOur value proposition

Altus is an independent global alliance specialised in providing the following services:

Transfer Pricing

Business restructuring

Valuation

Dispute resolution

Focus on senior professionals - the Altus Alliance consists of senior professionals with a wide variety of backgrounds, including Big 4, industry, government and academic.

Global network – Altus has a presence in 20 countries worldwide

3

IntroductionWhat is transfer pricing and why is it important?

Pricing of all inter-company transactions

Necessary in every multinational

Determines profit allocation within multinational

Regulations required to ensure fair and reasonable for all stakeholders:

Tax authorities – fair share of profit to levy tax CFO, FD, CEO, Heads of Tax etc – shareholder value Current shareholders – return on investment Potential investors – future return on investment, corporate governance, proper

valuation of the business Lending institutions – corporate governance Employees – performance measurement Boards of Directors – corporate governance, shareholder value Competitors – relative shareholder value

4

Theoretical FrameworkLocal – The Netherlands

Most EU and non-EU countries have codified the arm’s length principle and local documentation requirements

In the Netherlands, the transfer pricing documentation requirements are codified as from January 1, 2003 in article 8b of the Corporate Income Tax Act (‘CITA’)

Potential reversal of the burden of proof and (general tax) penalties, in case the Dutch tax authorities (‘DTA’) request documentation and it is not submitted in time

No specific transfer pricing penalties. General tax penalties (up to 100 percent) may apply in case of an intentional act (e.g. the taxpayer took a non-defendable standpoint) leading to the underpayment of taxes

Submission deadline is within 30 days of request; this may be extended by the DTA to three months, depending on the complexity of the case

5

Advance Pricing Agreements Regulatory framework – The Netherlands

Typical APAs

Limited risk distribution

Procurement / trading roles

Entrepreneurs with global (distribution) activities but with residual profit in the Netherlands

Intermediary finance activities / Intermediary IP activities

6

Advance Pricing Agreements Regulatory framework – The Netherlands

Dutch version of a pragmatic and consensus based decision model

7

Advance Pricing Agreements Regulatory framework – The Netherlands

Dutch version of a pragmatic and consensus based decision model

Some Statistics

APAs

MAPs

Statistics 2008 2009 2010

APA’s submitted 283 227 312

APA’s handled 273 231 272

APA’s 206 191 205

Average days Chess clock 50 53 47

MAPS 2006 2007 2008 2009Australia 16 23 22 23Austria 144 152 105 120Belgium 81 95 152 265Canada 134 153 186 206Chile 0 0 0 0Czech Republic 13 13 4 8Denmark 82 82 79 86Finland 12 22 20 22France 254 233 233 233Germany 476 527 519 543Greece 4 5 5 5Hungary 12 9 10 7Iceland 1 1 0 0Ireland 4 6 7 13Israel -- -- -- --Italy 52 63 56 67Japan 67 85 82 90Korea 28 30 30 47Luxembourg 31 34 35 38Mexico 26 23 14 18Netherlands 120 151 127 118New Zealand 2 4 1 3Norway 25 32 42 51Poland 26 25 399 655Portugal 43 45 47 47Slovak Republic 1 4 5 6Slovenia -- -- 3 1Spain 55 109 66 76Sweden 101 100 125 103Switzerland 33 33 88 143Turkey 1 1 2 4United Kingdom 84 109 126 120United States 430 500 578 724Total 2,352 2,669 3,168 3,842

MAPs 2011 OECD non-OECD

Initiated During Reporting Period 33 1Completed During Reporting Period 26 6Ending Inventory on Last Day of Reporting Period 86 6Closed or Withdrawn with Double Taxation During Reporting Period

0 0

Average Cycle Time for Cases Completed, Closed or Withdrawn During Reporting Period (in months)

22.2 56.2

Inventory of cases at end of reporting period

8

STEPS IN A TRANSFER PRICING STUDY

9

Steps in a Transfer Pricing Study Introduction

4-Step Approach

Responsibility profile

Choice of Method

Economic analysis

10

Steps in a Transfer Pricing Study 4-Steps Approach

11

Manageable Transfer Pricing System

IDENTIFICATIONOF BUSINESS

CONTEXT

DESIGN &IMPLEMENTATION DOCUMENTATION RISK ASSESSMENT/

MANAGEMENT

Company’sBusiness model

- Investigate industry and business context

- Identify key business objectives of management e.g. market penetration

- Analyse key functions/ activities performed

- Identify assets and risks associated with activities

- Analyse the nature of the current value chain and plans for the future

- Identify responsibility centres

- Determine appropriate TP methodology

- Consider opportunities to minimize overall tax rate

- Establish appropriate performance measurement / incentives

- Legalise inter-company transactions – agreements

- Conduct comparability search to support result

- Prepare Masterfile/local documentation

- Prepare transfer pricing policy paper

- Identify key risk countries – country risk matrix

- Introduce maintenance and disclosure manual

- Ensure legal agreements in place and consistent

- Prepare transfer pricing defence file

- Tax risk assessment – e.g. FIN 48

- Investigate possibility of APAs?

- Risk ranking/screening for transfer pricing audit

- Manage transfer pricing audits effectively

- Explore avenues for arbitration

- Consider availability of MAP

Steps in a Transfer Pricing Study Responsibility profile (1/2)

Responsibility profiling:

Cost centre

Expense centre

Revenue centre

Profit centre

Investment centre

How to indentify?

12

Steps in a Transfer Pricing Study Responsibility profile (2/2)

13

Steps in a Transfer Pricing Study Choice of Method (1/2)

The OECD Guidelines have identified the following three ‘traditional transaction methods’:

comparable uncontrolled price method (CUP);

resale price method; and

cost-plus method.

and the following ‘transactional profit methods’:

transactional net margin method (TNMM); and

profit split method.

Transfer pricing method should be the “most appropriate method to the circumstances of the case.” (Chapter II – Part 1)

14

Steps in a Transfer Pricing Study Choice of Method (2/2)

Responsibility center mapping:

15

OECD labels Managerial labels Legal labels

CUP Expense/cost/revenue centre Services agreement

Resale price Revenue/profit centre Distribution agreement

Cost-plus Expense/cost centre Research and development agreement

TNMM Revenue/profit centre Commission agent agreement

Profit split Profit/investment centre Sales and marketing agreement

Transfer Pricing DocumentationIntroduction

Type of Transfer Pricing Documentations Inter-Company agreements:

Agreements for delivery of intercompany goods or services Agreements for intercompany loans Agreements for the use of intangibles

Transfer Pricing country report Transfer Pricing master file Transfer Pricing policy papers:

Policy paper on the use of HQ management services Policy paper on the use of intangibles among group companies Policy paper on interest rate setting

Cost Sharing Agreements Valuation report setting out the transfer price of assets, liabilities or equity Business Restructuring documentation

16

ImplementationIntroduction

Accounting implementation (Price setting / Price checking)

Legal implementation

Changes / restructurings

17

ImplementationAccounting implementation - Price setting / Price checking (1/4)

Traditional methods of price setting Comparable Uncontrolled Price method (CUP)

Cost Plus method

Resale Price method Profit related methods of price checking

Transactional Net Margin method (TNMM)

Profit Split method Local country rules regarding year-end adjustments can vary considerably. For example,

German tax authorities may not allow the corresponding / compensating adjustment if: it is not operated on the basis of an agreement which is in place at the beginning of the FY

concerned, regulating price setting factors and related adjustments, or

the company is not otherwise able to show to tax authorities that the same adjustment would have

been made by third parties as well (“Administrative principles - Procedures”, Chapter 3.4.12.8) Many tax authorities may view year-end adjustments as an examination trigger. Some tax authorities may view adjustments as non-deductible voluntary contribution or

contribution of capital – double taxation issues.

18

ImplementationAccounting implementation - Price setting / Price checking (2/4)

Price setting

19

Pro

duct

ion C

ost

Cost+ margin

Cost+

Bench-markedMargin

Tota

l Sale

s Pri

ce

TPM margin

Bench-markedMargin

RPM

Price checking

EBITA

TNMM

OPEX

COGS

Bench-markedMargin

EBITA

Profit Split

Benchmarked Allocation of EBITA

CUP

benchmarking per

transaction

ImplementationAccounting implementation - Price setting / Price checking

Potential issues: General

There is no IC agreement

The IC agreement does not specify the IC prices

There is no benchmark available to support the price setting / price checking

The available benchmark is outdated Price setting

There is no price setting policy and the IC prices are determined on a case by case basis

The price setting policy has no relation with any TP method. For example prices are set based on

business practice, historical practice or influenced by management accounting interest (i.e. bonuses)

The entity has turned from a profit making in to a loss making situation with no change to the

transfer pricing method

The entity is making a lot of profit because of the Price Setting policy Price checking

There is no price checking procedure

20

ImplementationAccounting implementation - Price setting / Price checking

EUJTPF Presentation Feb 2013: Confirmation that currently there is no

harmonisation

Many aspects on price setting/checking are

currently unclear

As a result uncertainty is introduced for Corporates

21

Wish list EUJPF: price setting/checking should be accepted

in all members states A policy statement should be issued Aim should be to minimise uncertainty for

Corporates

ImplementationLegal implementation

Each intercompany transactions is covered by a legal agreement

Templates are used to make sure consistency is guaranteed

Where differences in terms and conditions are introduced they can be supported

All legal agreements are signed by the relevant representatives

All legal agreements are store centrally

Legal agreements are up to date and reflect the accounting and economic reality

22

ImplementationChanges / Restructurings

Where changes occur, both accounting and legal has to follow, i.e.

Intercompany price has to be adjusted

Intercompany agreements has to be amended

Where the restructuring results in a reallocation of profit between countries, a defense file should be considered

Examples:

Introduction of a new entity in a new country -> new agreement should be introduced

Merger or shift of manufacturing capacity between group entities -> existing agreement should be

amended accordingly

Repayment or increase of a loan amount prior to the end of the term -> loan amendment should be

introduced

Post merger integration -> transfer pricing policies of both companies should adjusted or a new

single TP policy should be introduced for the whole group to reflect the new reality

23

BUSINESS RESTRUCTURING

24

Business RestructuringIntroduction

Types of restructurings

Principal structure vs licensing model

Examples

Regulatory background

OECD Business Restructuring

Valuation aspects

Court Cases

25

Business Restructuring Types of restructurings

OECD examples of a Business Restructuring Conversion of full-fledged distributors into limited-risk distributors or commissionaires; Conversion of full-fledged manufacturers into contract-manufacturers; Rationalisation and / or specialization of operations; Transfers of intangible property rights to a central entity

(e.g. a so-called “IP company”) within the group.

Transactions methods: Comparable Uncontrolled Price (CUP) Cost Plus (CP) Re-sale Price Minus (RPM) Profit split method Transactional net margin method

Return

Profit centre / entrepreneur / Investment Center

Revenue center / Limited risk distributor

Cost Center / Contract Manufacturer / service provider

Risk

26

Business Restructuring Principal structure vs licensing model

IP licensing model under central IP ownership Varies per Industry Examples: trademarks , patents, know-how, procurement Boundaries (CUP, regulatory, rule of thumb) PRO: Flexibility and planning / CON: Capped

Principal structure (supply chain plus marketing and sales) Varies per Industry Boundaries (substance, local versus global, local IP, geographical differences) PRO: upward profit shift / CON: substance requirements

27

Business Restructuring Example 1

Conversion from full fletched manufacturer to contract manufacturer:

Facts:Manufacturing costs Spain: 10MSales Price Germany: 12MOperating margin: 20%

Prior Restructuring:Spain is full fletched manufacturerGermany is limited risk distributorEBIT Germany (1.5% distribution margin): 150kResidual profit Spain 1,850M

Post Restructuring:Spain becomes contract manufacturer (“CM”)Germany is full fletched distributorEBIT Spain (3% CM margin): 300kResidual profit Germany: 1,700M

28

Business Restructuring Example 2

Conversion from full fletched manufacturer to contract manufacturer:

Facts:Manufacturing costs Spain: 10MSales Price Germany: 12MOperating margin: 20%

Prior Restructuring:Spain is full fletched manufacturerGermany is limited risk distributorEBIT Germany (1.5% distribution margin): 150kResidual profit Spain 1,850M

Post Restructuring:Spain becomes CM on behalf of HQGermany is limited risk distributorEBIT Spain (3% CM margin): 300kEBIT Germany (1.5% distribution margin): 150kResidual profit France 1,650M

HQ

29

Business Restructuring Example 3

conversion from a licensing model to a principal model

Residual Profit

Netherlands(Global

Principal)

China(LRD)

Customers

Hong Kong(LRD)

Singapore(LRD)

Singapore(Reg. principal)

Indonesia(Production &

Sales)

Vietnam(Production &

Sales)

Customers Customers

Malaysia(Production &

Sales)

Customers

Customers

Customers

Thailand(LRD)

Customers

Distribution entities

Manufacturing & distribution

entities

China(FFD)

Customers

Hong Kong(FFD)

Singapore(FFD)

Netherlands(Global

Entrepreneur)

Indonesia(Production &

Sales)

Vietnam(Production &

Sales)

Customers Customers

Malaysia(Production &

Sales)

Customers

Customers

Customers

Royalty Thailand(FFD)

Customers

Distribution entities

Manufacturing & distribution

entities

Now In Future

Residual Profit

30

Business Restructuring Regulatory background

OECD - Report on the transfer pricing aspects of Business RestructuringsChapter IX of the Transfer Pricing Guidelines (published 22.07.10 )

Germany - Funktionsverlagerung (as of January 2008) Other countries - general Transfer Pricing regulations

All have in common the Arm’s Length principal of IC transactions. Nevertheless differences exists on the one off compensation of business restructurings.

31

Business Restructuring OECD (1/5)

Note 1 - Special considerations for risks Contractual terms between the parties is starting point; The contractual allocation of risk between associated enterprises is, however, respected only

to the extent that it has economic substance; Parties’ conduct should generally be taken as the best evidence concerning the true

allocation of risk; Where reliable data evidence is available of a similar allocation of risk in contracts between

comparably situated independent parties, then the contractual risk allocation is regarded as arm’s length;

Where no comparables exist to support a contractual allocation of risk between related parties, it becomes necessary to determine whether that allocation of risk is one that might be expected to have been agreed between independent parties in similar circumstances;

One factor that can assist in this determination is the examination of which party(ies) has (have) “control” over the risk.

32

Business Restructuring OECD (2/5)

Note 2 - Arm’s length compensation profit / loss potential is not an asset in itself, but a potential which is carried by some rights or

other assets; Whether a transfer of profit / loss potential is an arm’s length transaction depends on a

number of factors, including the options that would have been realistically available to the transferor and transferee at arm’s length;

where at arm’s length the restructured entity would be entitled to an indemnification there should be no presumption that all contract terminations or substantial renegotiations give rise to a right to indemnification at arm’s length;

Relevant circumstances are whether the arrangement that is terminated, non-renewed or substantially renegotiated is formalised in writing and provides for an indemnification clause;

33

Business Restructuring OECD (3/5)

Note 2 - Arm’s length compensation – illustration

Pre-conversion profits Profit expectations Post-conversion profits

of the distributor of the distributor of the distributor

with full risk activity if it had remained full-risk with low risk activity

1

Y1: (-2%) Y2: +4% [-2%; +6%] +2% per year

Y3: +2% Y4: 0% with significant stable guaranteed

Y5: +6% uncertainties profit

2

Y1: +5% Y2: +10% [+5%; +10%] +2% per year

Y3: +5% Y4: +5% with significant stable guaranteed

Y5: +10% uncertainties profit

3

Y1: +5% Y2: +7% [0%; +4%] +2% per year

Y3: +10% Y4: +8% with significant stable guaranteed

Y5: +6% uncertainties profit

34

Business Restructuring OECD (4/5)

Note 3 - Remuneration of post-restructuring arm’s length principle and the TP Guidelines do not and should not apply differently to post-

restructuring transactions as opposed to transactions that were structured as such from the beginning;

For this reason, it is essential in business restructuring cases that a comparability (including functional) analysis be performed both for the pre-restructuring and for the post-restructuring arrangements and that the actual changes that took place upon the restructuring be documented;

While such before-and-after comparisons would not suffice to support a transfer pricing adjustment in the face of the requirement posed by Article 9 of the Model Tax Convention for a comparison to be made with uncontrolled transactions, they could play a role in understanding the restructuring itself and could be part of a before-and-after comparability analysis to understand the value drivers and the changes that accounted for the changes in the allocation of profits amongst the parties.

35

Business Restructuring OECD (5/5)

Note 4 - Recognition of the transactions undertaken Discusses notions in relation to the exceptional circumstances where a tax administration may consider not recognising a

transaction or structure adopted by a taxpayer;

Non recognition applies where there is a dispute about the fundamental nature of the transaction being examined;

Recognition does not restrict a tax administration’s ability to adjust the price or other conditions of a controlled transaction

in situations where there is no dispute about the nature of the transaction but where such price or conditions are not arm’s

length according to guidance provided in other parts of the TP Guidelines;

Non-recognition of transactions is not the norm but an exception to the general principle. Tax administrations should not

ordinarily interfere with the business decisions of a taxpayer as to how to structure its business arrangements. A

determination that a controlled transaction is not commercially rational must therefore be made with great caution;

in assessing the commerciality of a transaction that is part of a broader overall arrangement, it is important not to examine

the transaction in isolation, but to look at the totality of the arrangements to determine whether the terms make

commercial sense for the parties;

it is not sufficient from a transfer pricing perspective that an arrangement make commercial sense for the group as a whole:

the transaction must be arm’s length at the level of each individual taxpayer.

36

Business Restructuring Valuation aspects

• What aspects are relevant from a transfer pricing perspective for the business case?

1. Tax saving as a result of decreased corporate income tax rate

2. Exit tax

3. Amortization tax benefit

• All three aspects should be taken in to account when determining the pros and cons;• Other aspects include

1. Availability of past losses

2. Non transfer pricing aspects

• Examples

37

Amounts in kxEURScenario 1Country A

Scenario 2Country B

CIT pre-restructuring 3,970 3,970CIT post-restructuring 2,687 3,553CIT saving - 5 year period 1,283 417

Deduct - Exit tax -2,641 -2,636Add - Tax Shield 1,377 1,601

Total benefit/loss over a 5 year period 19 -618

Business Restructuring Court Cases

Company: Roche

Country: Spain

Industry: Pharmaceuticals

Date: March 2012

Date BR: 1999

Details: conversion from full fledged distributor to contract manufacturer and limited risk distributor

Challenge tax authorities: parent had a PE in Spain because of activities performed. Cost+ remuneration not good enough

Outcome: in favor of tax authorities

Company: Eli Lilly

Country: US

Industry: Medical Equipment

Date: 1988

Details: Eli Lilly moved its IP to its subsidiary in Puerto Rico. The entity manufactured drugs and later sold them to Lilly for free

Challenge tax authorities: subsidiary’s ownership of the intangible should be disregarded and the profits generated by the intangibles should be allocated completely to Lilly.

Outcome: profit split method should be used to allocate adequately the income between both

Company: Bauch & Lomb

Country: US

Industry: Contact lenses

Date: 1980

Details: B&L set up an Irish subsidiary to manufacture soft contact lenses and granted rights to the spin cast technology and trademarks

Challenge tax authorities: Ireland should be viewed as a contract manufacturer for B&L

Outcome: 50-50 split of Ireland’s residual profit and principal

38

RISK MANAGEMENT

39

Risk ManagementIntroduction

Maintenance

Tax Control Framework

Controversy management

40

Risk ManagementMaintenance (1/4)

Type of maintenance depends on: Number of entities to check

Number of intercompany transactions

Number of transfer pricing policies

Number of countries involved

Transfer pricing maintenance to check? What are the transfer pricing regulations in each country?

Are there IC agreements up to date?

Do the transfer pricing reports reflect the current business?

Are benchmarks up to date?

Are the margins within the arm’s length?

How to make your life easy? Create overviews of IC transactions

Setup dedicated ledgers for IC transactions

Allocate TP responsibilities locally

41

Risk Management Maintenance (2/4)

Documentation approach: Lean vs. extensive documentation

Compliance costs Availability of data and information How much do you want to tell?

Permanent vs.on demand documents Guidelines Availability of data and information What do local regulations require?

“Masterfile“ vs. local documentation Centralized masterfile approach vs. Local documentation requirements Consistency and planning in the Group How much do you want to tell?

42

Risk Management Maintenance (3/4)

Example of a transaction TP maintenance overview

Rep Company 1 Company 2 Net Sales HFM entity HFM entity Product TP Primary Contact2011 2011 From To remark method

Division A1 ABC Consumer Products International BV ABC Canarias SL 1,018 NLD058Fr ESPCanarias Milk Powder resale price Tony de Wijk2 ABC Nederland Holding BV ABC Hellas SA 148,847 NLD058GrPLH GRCFrHellas Dairy and cream products resale price Arnoud van den Heuvel3 ABC Nederland Holding BV ABC Hellas SA 823 NLD0573Butter GRCFrHellas Milk Powder resale price Arnoud van den Heuvel4 ABC Nederland Holding BV ABC Hellas SA 30,542 NLD056Export GRCFrHellas Sports drinks resale price Tony de Wijk5 ABC Riedo BV DEF België NV 5,790 NLD0318Comm BELBelgium Sports drinks cost plus Tony de Wijk6 ABC Riedo BV DEF België NV 272 NLD0318Comm BELProdBornem EVAP resale price Tony de Wijk7 ABC Consumer Products Europe BV DEF België NV 4,144 NLD058SPL BELProdBornem EVAP cost plus Tieneke Wijdelings8 ABC Consumer Products Europe BV DEF België NV 102 NLD058SPL BELBelgium EVAP resale price Tieneke Wijdelings9 ABC Consumer Products Europe BV DEF België NV 9,462 NLD0318Riedel BELBelgium Flavoured dairy drinks cost plus René van der Zee11 ABC Consumer Products Europe BV ABC UK Ltd 1,975 NLD040Netherl GBR_04408501 Cream resale price René van der Zee12 ABC Consumer Products Europe BV ABC Germany GmbH 1,644 NLD040Netherl DEU713 Spray cream, coffee cream resale price Robbert van Zanten13 ABC Consumer Products Europe BV ABC Professional NV 400 NLD058PackZuid BELMeldert EVAP resale price Robbert van Zanten14 ABC Consumer Products Europe BV ABC Professional NV 481 NLD058SPL BELMeldert Cream resale price Robbert van Zanten15 ABC Consumer Products Europe BV ABC Professional NV 638 NLD0348_SCR BELMeldert Dairy products cost plus Robbert van Zanten16 ABC Consumer Products Europe BV ABC Professional NV 8,510 NLD040Cobic BELMeldert Cream, butter, fillings desserts cost plus René van der Zee17 ABC Consumer Products Europe BV ABC Professional NV 1,930 NLD040Netherl BELMeldert Cream resale price René van der Zee

Division B18 DEF België NV ABC Consumer Products Europe BV 16,197 BELProdBornem NLD0513WDLH Sports drinks and fruit drinks cost plus René van der Zee19 DEF België NV ABC Reido BV 2,525 BELProdBornem NLD0318WDEde Sports drinks and fruit drinks cost plus René van der Zee20 DEF België NV ABC Consumer Products International BV 5,018 Plant Bornem NLD058GrPLH Fruit based drinks cost plus René van der Zee21 DEF Deutschland GmbH ABC Consumer Products Europe BV 8,634 DEUProdDussel NLD0318Riedel Flavoured- and long lilfe dairy cost plus René van der Zanten22 DEF Deutschland GmbH ABC Consumer Products Europe BV 59,471 DEUProdDussel NLD0513WDLH Flavoured- and long lilfe dairy cost plus René van der Zanten23 DEF Deutschland GmbH ABC Consumer Products Europe BV 224 DEUProdDussel NLD058SPL Dairy products cost plus René van der Zanten24 DEF Deutschland GmbH ABC Consumer Products International BV 5,283 DEUProdDussel NLD058FrExport Dairy products cost plus René van der Zanten25 DEF Deutschland GmbH ABC Consumer Products International BV 47,145 DEUProdDussel NLD058GrPLH Dairy drinks – UHT milk resale price René van der Zanten26 DEF Deutschland GmbH ABC Consumer Products International BV 41 DEUProdDussel NLD058FrIntEx Dairy drinks – UHT milk resale price René van der Zanten27 DEF Deutschland GmbH ABC Consumer Products International BV 119 DEUProdDussel NLD058FREXWA Dairy products resale price René van der Zanten28 DEF Deutschland GmbH ABC Professional NV 1,322 DEUProdDussel BELMeldert Semi- finished dairy products cost plus René van der Zanten29 DEF Deutschland GmbH ABC Hungaria zRt 4,066 DEUProdDussel HUNFrHungar Dairy products cost plus René van der Zanten30 DEF Deutschland GmbH ABC Romania SA 1,685 DEUProdDussel ROUFrRom Dairy drinks – UHT milk cost plus René van der Zanten31 ABC Professional NV El Castillo Debic Food Services SL 6,472 BELMeldert El Castillo Cream, ice, shakes, etc. cost plus Liesbeth Buyle 32 ABC Professional NV ABC Consumer Products Europe BV 16,379 BELMeldert NLD040Netherl Cream, ice, shakes, etc. resale price Liesbeth Buyle 33 ABC Professional NV ABC Consumer Products Europe BV 19,181 BELMeldert NLD040Netherl Spray cans supply resale price Liesbeth Buyle 34 ABC Professional NV ABC Consumer Products Europe BV 509 BELMeldert NLD0348_SC Spray cans supply cost plus Liesbeth Buyle

43

Risk Management Maintenance (4/4)

Example of a country/entity TP maintenance overview

Local TP regulations can be found on Big4 websites, eg.

KPMG - http://www.kpmg.com/global/en/issuesandinsights/articlespublications/pages/2012-global-transfer-pricing-review.aspx

E&Y - http://www.ey.com/Publication/vwLUAssets/2012-Transfer-pricing-global-reference-guide/$FILE/Tranfer-Pricing-Reference-2012.pdf

PWC - http://www.pwc.com/en_GX/gx/international-transfer-pricing/assets/itp-2011.pdf

Country

Local Documentation threshold and

criteria

Transfer Pricing

Penalties relation to mandatory

documentation

Deadlines to Prepare

Documentation

Deadlines to submit

Documentation

Documentation in

English Accepted?

Responsible for

Transfer Pricing

Local TP Documentat

ion Available

Budgeted operating

margin

Number of IC

transactions of Goods

Number of other IC

transactions

Quality level of

documentation

Audit History

Overall risk Assessment

Recommended Action Timing

Local TP Environment Entity specific TP information

China transaction with >RMB200M

RMB2,000 - 50,000

31-May 20 days No(Chinese)

Taiwan no threshold no May 1 month No(Chinese)

Singapore not defined no n/a 1 month Yes

Korea not defined no tax return due date

60 days Yes(if allowed)

Hong Kong not defined no n/a n/a Yes

Thailand not defined no Filling date timelymanner

Yes

…

…

Action required

44

Risk Management Transfer Pricing Control Framework (1/6)

Business cycle

Transactions

Business Control Framework

Design and Implementation TCF

Testing TCF

Tax Filings

Input Business cycles lead to intercompany transactions. Both business cycles and inter company transactions should be described

and documented. The MF is the common denominator Smaller or country specific transactions are typically addressed in Country File

Control Framework For TP purposes, a business control framework should be based on

relevant responsibility profiles; e.g. cost centre, profit centre, etc. Responsibility centres should be linked to a TP policy per division with

relevant benchmarks of I/C transactions Testing is key to ensure adherence to the outcome of the benchmarking

studies. Policy decisions to be made; e.g. Does a country has to be ‘at arm’s length each year?

Testing to what extent the MNE is ‘in control’

Output Determination of potential risks, determine to what degree the MNE is ‘in

control’ including materiality test Positions for the tax returns are being taken. In case not ‘in control’ and

‘material’, (local) tax authority is involved with a suggestion how to deal with specific issues

Financial Risks

TAX CONTROL FRAMEWORK TRANSFER PRICING CONTROL FRAMEWORK

45

Risk Management Transfer Pricing Control Framework (2/6)

TP Policies &Documentation

Transactions ▪ Intangibles Services ▪ Financial

Transactions

TP Workflow

Responsibility/accountability Recurring TP task management Data retrieval and conversion

process

Monitoring andManaging

Framework to detect inconsistencies

Procedures to evaluate policies

Reporting

TP ‘dashboard’ for stakeholders

Transfer Pricing Control Framework

46

Risk Management Transfer Pricing Control Framework (3/6)

TP Policies are a starting point for a TP Control Framework. First the policies then the Control Framework

TP Policies are required for each intercompany transactions:1. Goods2. Services3. Intangibles4. Treasury / Financial transactions5. One-off Restructurings

Besides policies, documentation should be up-to-date. Documentation includes: TP Master files TP Country files Benchmarks IC agreements

In some countries the lack of documentation is a trigger for penalties

47

Risk Management Transfer Pricing Control Framework (4/6)

Once policies are drafted a workflow can be setup Coordination should be central, responsibility can be local or central depending on the type

of inter company transaction Responsibility of the application of the TP policy should be allocated to dedicated persons

(for example business controllers) Responsible people should acknowledge their responsibility and know what is expected from

them Clear instructions should be issued regularly to inform everyone on policies and deadlines IT systems should facilitate TP tasks to

the greatest extend possible

48

Risk Management Transfer Pricing Control Framework (5/6)

To obtain control an overview with transfer pricing details on all entities and all IC transactions is developed (“Master Overview”)

The Master Overview enables the TP manager to manage and maintain control per transaction

The Master Overview includes transactional data extracted centrally (where possible) or collected locally

The Master Overview provides a tool to identify key transfer pricing issues

Entity XYZ Nigeria Ltd. XYZ Oil Angola AS

Country Nigeria Angola

Regulatory frameworkLocal country file requirementTransfer Pricing PenaltiesDeadlines to Prepare DocumentationDeadlines to submit DocumentationDocumentation in English Accepted?Audit/claim History

EvaluationLocal TP Documentation available?Local TP Documentation updated?Quality level of documentationNumber of IC transactionsOverall risk AssessmentRecommended Action

ResponsibiliesEnd responsible for transfer pricingResponsible Business Controller

Profile Goods - transaction …Type of transaction?Volume of IC transactionAmount of IC transactionConsistent with company policy?Documentation available?Benchmark available?Person responsible for this transaction

Profile ServicesType of IC servicesGroup policy available?Documentation available?Benchmark available?Person responsible for this transaction

Profile IntangiblesType of intangibleGroup policy available?Documentation available?Benchmark available?Person responsible for this transaction

Profile financial transactionsType of intangibleGroup policy available?Documentation available?Benchmark available?Person responsible for this transaction

49

Risk Management Transfer Pricing Control Framework (6/6)

TP Control Framework reporting enables Maersk to provide insight in transfer pricing risks to key stakeholders

A dashboard can be setup to highlight countries at risk: Fully Compliant Entities Entities or transactions at risk Entities under audit

A dashboard can be setup to highlight area at risk: Goods Services IP IC financing transactions One-off transactions

The Dashboard can be tailor made depending on the company preferences

Policies & Documentation ProjectsGoods Project Name CompletionServices Update of distribution benchmark 80%

Intangibles Update of TP polidcy services 90%

Financial Transactions Quarterly TP evaluation - Q2 2012 40%Comments APA Malaysia 30%

Audit Indonesia 30%Click here for more

Entities under review

Entity Issue Solved Status

1 ABC Vietnam Ltd. - Comparables distirbution benchmark under review May-12

2 ABC Taiwan Ltd. - trademark royalties under review Dec-12

3 ABC Singapore Pte Ltd - Interquartile range under review Sep-12

4 ABC Supply Service A/S - Documentation not update Jul-12

5 ABC Supply Service Canada - Interquartile range under review n/aClick here for more

Operating margin of entities

Entity Operating Martin Range from Range to1 ABC Giant Norge 2.1%2 ABC Giant Norge A/S 2.1%3 Damco Denmark A/S 2.1%4 Damco Finland Oy 2.0%5 ABC Maritime 1.5%

Click here for more

Benmarks under review Country Files to be update

Entity Due date Entity1 Distribution Asia May-12 1 ABC Vietnam Ltd.2 Trademark Royalty Apr-12 2 ABC Taiwan Ltd.3 Treasury Apr-12 3 ABC Singapore Pte Ltd4 HQ Services Apr-12 4 ABC Supply Service A/S5 Distribution Europe Jun-12 5 ABC Supply Service Canada

Click here for more Click here for more

The pol icy for fi nancia l transactions i s being prepared

2008

2005-2009

2006-2008

2009

2006-2008

Years

2.5%3.0%

Mar-12

TRANSFER PRICING DASHBOARD

Status

4.0%-2.4%1.5%

6.0%6.0%6.3%4.2%4.2%

Due dateJan-12May-12Apr-12Apr-12

50

Risk Management Controversy Management (1/6)

Risk evaluation factors: Transaction volume (continuous data access) Audit trends (learning process) Country-specific facts Extra-ordinary transactions (business restructuring!)

General problem Loss of knowledge due to time lag of audit procedures (change of personnel, change

of operating concepts, etc.); this concerns HQ in particular-> Contemporary documentation is not a legal requirement, but an operating necessity !HQ can usually provide a lot of answers, but can they be used readily ? Get knowledge from local units who often feature more continuity and can provide more information; but: no complete overview on extra-ordinary transactions!

51

Risk Management Controversy Management (2/6)

Focus areas:

52

Risk Management Controversy Management (3/6)

Trigger points• High transaction volumes• Difficult audits at home or abroad• Corporate restructuring or M&A transaction• Changes of the TP system• Complex supply chain with different owners of IP in the Group

53

Risk Management Controversy Management (4/6)

Auditors‘ Myths:• Tax Department knows anything (in advance) • Information is readily available• There is a consistent operating business concept for a longer period of time-> Necessity to communicate

Audit points of attention• Determine key topics -> Definition value at risk• Secure available resources and options (TP is bilateral)• Strategic approach (offensive or defensive)• Watch for consistency• Make use of audit dynamic and show flexibility

54

Risk Management Controversy Management (5/6)

Competent authority or compromise?• What amounts are at stake in an adjustment • Do you create a precedence? • Auditor deviates from TP standards• How is your capacity to handle the issue abroad?• You will need stamina to get TP issues settled

55

Risk Management Controversy Management (6/6)

International trends• Italy: Shoot at everything that moves• Spain: Tick the box• Netherlands: Horizontaal toezicht• Switzerland: We can negotiate• Germany: Funktionsverlagerung• China: What about location savings and “market IP”?• India: Ways ahead in litigation?• Brazil: How to get some planning security for your business?• Russia: The undiscovered country…

56

Risk Management Final remarks

• Conflict management is mandatory for globally operating companies• Any conflict management process starts with a corresponding planning process for

TP documentation• Implementation of the right process is important for a successful audit• Local and bilateral options should be weighed before concluding an audit• Only APAs or MAPs with arbitration let you avoid double taxation for sure

57

BEPS • On 12 February 2013, the OECD released its widely anticipated initial report on the issue of

base erosion and profit shifting (BEPS) by multinationals• The report was released in connection with the week’s G20 Finance Ministers meeting in

Moscow• The Report concludes that there is a need for increased transparency on effective tax rates of

MNEs. It identifies the following key pressure areas:- Mismatches in entity and instrument characterization- Application of treaty concepts to profits derived from the delivery of digital goods and services• Tax treatment of related-party debt-financing, captive insurance, and other intra-group

financing • Transfer pricing, in particular in relation to the shifting of risk and intangibles, the artificial

splitting of ownership of assets between group legal entities, and group transactions that would rarely take place between independent entities

• The effectiveness of anti-avoidance measures such as GAARs, CFC regimes, thin capitalization rules, and rules to prevent treaty abuse

• The availability of harmful preferential regimes • The report indicates that the OECD intends to develop an initial comprehensive action plan to

be finalized in June 2013.

58

BEPS • The Report then notes that globalization has made it possible for businesses to locate many

productive activities in geographic locations that are distant from the physical locations of their customers

• Call for further information exchange between tax authorities• Apart from double taxation, there are also instances of ‘double non-taxation’• Transfer pricing strategies that involve the shifting of functions, assets and risks (and therefore

income) from high-tax to low-tax jurisdictions are also discussed, as are strategies to escape the application of general anti-avoidance rules

• The report calls for multinational effort to address BEPS concerns, noting that unilateral actions could lead to further mismatches, additional disputes, increased uncertainty, or a “race to the bottom” with respect to corporate income taxes

• The Report proposes that action be taken to address these problems, first by developing acomprehensive, global action plan aimed at better aligning rights to tax with real economic activity

• The Report states that such an action plan should be developed in consultation with all stakeholders, including the business community, practitioners, civil society and others

59