transfer pricing case studies workshop san jose 31 march - 4 april 2014 3-a. transfer pricing -...
TRANSCRIPT
TRANSFER PRICING CASE STUDIES
WORKSHOP
SAN JOSE
31 MARCH - 4 APRIL 2014
3-a. Transfer Pricing - Introduction
1
OECD freely authorises the use of this material for non-commercial purposes. All requests for commercial uses of this material or for translation rights should be submitted to [email protected] opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the official views of the OECD or of the governments of its member countries.
ManufacturerParent Co.
Wholesale distributor
for Central American
Region
• Is there a transfer pricing issue?•What are the risks to businesses
and governments?
Distributor
for each country
End-Customers
What is Transfer Pricing?
Goods
2
3
What is Transfer Pricing?
4
Relevance of the Subject
• Approximately 60-70% of world trade is carried on within Multinational Groups of Enterprises (MNEs)
• Cross-border dimension of transactions...
...due to globalisation and economies of scale
• Transfer prices ... are prices at which an enterprise transfers goods, services or intangible property to associated enterprises
What is an “associated enterprise”?
• Definition in Article 9 OECD Model Tax Convention:
“Direct or indirect participation in the
– management,
– control or
– capital of an enterprise”
• No minimum level of participation
• Enterprises are associated where:– one enterprises participates in the management control or
capital the other, or
– the same person(s) participate in the management, control or capital of both
Definition of “Associated Enterprises”
5
• Potentially quite wide
• Domestic rules may refine or expand what transactions or arrangements are subject to the transfer pricing rules
– Shareholding (de jure control): sometimes > 50%
– De facto control, e.g. • same directors in both enterprises
• sole customer or supplier
– Association need not be proven
Participation in management, control or capital
6
Company A
Company B
Company C
51%
26%
Are A and C associated enterprises?
Participation in management, capital or control
7
Other share-holders
Company A
Company B
Company C
Transaction
Are B and Dassociated enterprises?
51%
51%
26%
Company D
Control
8
Reliance on the Arm‘s Length Principle (ALP)...
...contained in Article 9 (1) OECD Model Tax Convention
ALP entails the Separate Entity Approach, i.e. associated enterprises are taxed as if they were dealing wholly independently (i.e. at arm‘s length)
“Where...conditions...in [the] commercial or financial relations [between the associated enterprises] which differ from those which would be made between independent enterprises”
“...profits which would...have accrued...may be included in the profits of the enterprise and taxed accordingly”
9
Relevance of the Subject
* Also applicable to the UN Model Double Taxation Convention. ALP may also be mentioned in legislation (enacted in domestic law), regulations, rulings, case law or guidelines.
OECD MTC basis for 3,600 legally binding bilateralIncome & Capital Tax Treaties
Arm’s Length Principle*embodied in Article 9 (1)
OECD MTC
OECD MTC and OECD TPG
OECD TPG interpretative tool for Article 9 of the MTC
10
Consensus definition of the arm’s length principle
Pricing methods and guidance used by countries around the world
11
OECD Transfer Pricing Guidelines
• Chapter I: Guidance for applying the ALP
• Chapter II: Transfer Pricing Methods
• Chapter III: Comparability Analysis
• Chapter IV: Administrative approaches to avoiding &resolving TP disputes (MAP, APAs, etc.)
• Chapter V: Documentation
• Chapter VI: Intangibles
• Chapter VII: Intra-Group Services
• Chapter VIII: Cost Contribution Arrangements
• Chapter IX: Business Restructurings12
OECD Transfer Pricing Guidelines
Transfer pricing and profit shifting
ManufacturerCountry A
Costs = 100
Intra-GroupTransaction Distribution Subsidiary
Country BResale Price = 300
Arm’s LengthTransfer Price
150?200?250?300?350?
Profit A 50 100 150 200 250
Gross Profit B 150 100 50 0 - 50
Group Profit 200 200 200 200 200
13
Transfer Pricing and profit shifting
ManufacturerCountry A
Costs = 100
Intra-GroupTransaction Distribution Subsidiary
Country BResale Price = 300Transfer Price
250
Profit A = 150Tax 10% = 15
Profit B = 50Tax 30% = 15
Total = 200Total = 30
14
Transfer Pricing and profit shifting
ManufacturerCountry A
Costs = 100
Intra-GroupTransaction Distribution Subsidiary
Country BResale Price = 300Transfer Price
300
Profit A = 200Tax 10% = 20
Profit B = 0Tax 30% = 0
Total = 200Total = 20
15
Transfer Pricing Adjustment andEconomic Double Taxation
ManufacturerCountry A
Costs = 100
Intra-GroupTransaction
Distribution SubsidiaryCountry B
Resale Price = 300Transfer Price300
Transfer Pricing Adjustment by B (50)250
Profit A = 200Tax 10% = 20
Profit A reported = 200Tax 10% = 20
16
Profit B = 0Tax 30% = 0
Profit B adj. =+50Tax 30% = 15
Total = 200Total = 20
Total = 250Total = 35
Transfer Pricing Adjustment andEconomic Double Taxation
ManufacturerCountry A
Costs = 100
Intra-GroupTransaction
Transfer Price 300
Distribution SubsidiaryCountry B
Resale Price = 300
Transfer Pricing Adjustment by B (50)250
Profit A = 200Tax 10% = 20
Profit A reported = 200Tax 10% = 20
Profit doubly taxed = 50
17
Profit B = 0Tax 30% = 0
Profit B adj. =+50Tax 30% = 15
Total = 200Total = 20
Total = 250Total = 35
Elimination of Double Taxationby Corresponding Adjustment
ManufacturerCountry A
Costs = 100
Intra-GroupTransaction
Transfer Price 300
Distribution SubsidiaryCountry B
Resale Price = 300
Total = 250 Total = 35
Total = 200
Total = 30
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Profit A reported = 200Tax 10% = 20
Profit A reported = 200Corr. adjustment - 50Profit A adjusted = 150Tax 10% = 15
Corresponding adjustment by A (-50)
Profit B adj. = +50Tax 30% = 15
Profit B adj. = 50
Tax 30% = 15
Questions and/or comments?