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Transfer Pricing

Transfer Pricing . Transfer Pricing Methods. Hugo Vollebregt. Purpose of today’s session After today you will have a better understanding of:. The arm’s length standard Alternatives to the arm’s length standard Transfer pricing methods. Contact details. Hugo Vollebregt

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Transfer Pricing

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  1. Transfer Pricing Transfer Pricing Methods • Hugo Vollebregt

  2. Purpose of today’s sessionAfter today you will have a better understanding of: • The arm’s length standard • Alternatives to the arm’s length standard • Transfer pricing methods

  3. Contact details Hugo Vollebregt Amsterdam, The Netherlands hugo.vollebregt@gmail.com

  4. P r a t Introduction 1

  5. Transfer pricing • Taxable income per group entity • Prices in transactions between related companies • Pricing, not allocating consolidated group profit to affiliates • Hard bargaining among group companies is not an OECD approved transfer pricing method

  6. Related companies Affiliates Subsidiaries Group companies Controlled companies Related transactions Intercompany transactions Controlled transactions Transfer pricing jargon

  7. Which transactions: Supply of products by one group company to another Transfer pricing? Costs Plant Transfer price Sales office Market

  8. Which transactions: Services by one group company to another group company Services by head-offices Services by shared services centers Transfer pricing? Costs Shared services center Transfer price Sales office Market

  9. Which transactions: Making intangibles available to other group companies Brands, technology or know how Royalties Art 12 OECD MTC Transfer pricing? R &D Center Transfer price Plant

  10. Which transactions: Making funds available to other group companies Loan amount Interest rate Guarantee Art 11 OECD MTC Transfer pricing? Treasury Transfer price Plant

  11. OECD Transfer Pricing Guidelines (2010) • Guidance for setting transfer prices for • Products: +++ • Services: ++ • Royalties: + • Loans, interest and guarantee: - / -

  12. P r a t The arm’s length standard and fair share 2

  13. The international standardArticle 9 OECD Model Tax Convention • ASSOCIATED ENTERPRISES • 1. Where …conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

  14. The arm’s-lengthprinciple / separate entity approach • Treatmembers of an MNE as separate entitiesratherthan as inseparableparts of a single business • Members of an MNE are supposed to enter into transactions among themselves as if they were independent companies • Compareconditions of controlledtransactions to those of uncontrolledtransactions

  15. The arm’s-lengthprinciple / separate entity approach • Starting point is a pricefor a controlledtransaction • In theory: transactional approach • Exception: profit split method of the OECD • Compare a controlledtransaction to anuncontrolledtransaction • Goods and services • Functional analysis • Contractual terms • Economic circumstances (markets) • Business strategies

  16. P r a t Alternatives to the arm’s length principle 3

  17. Why do we use the arm’s length principle? • Equaltreatment of controlledtransactions to uncontrolledtransactions • It works! • Acceptancebymanycountries • OECD TPG para 1.8 en 1.9

  18. Challengeswith the arm’slengthprinciple • ALP / “separate entityapproach” and synergy • Which group company should earn synergy advantages? • Can we findcomparableuncontrolledtransactions? • Transactions are unique • Growth of i/c transactionsthuslesscomparability data (70%) • Lack of public (financial) data onuncontrolledtransactions

  19. Formularyapportionment Allocate consolidated profit Formula (allocation keys) Consolidation: Accounting principles of the parent (home state taxation) Common accounting principles (CCCTB) Allocation keys: Local sales Local fixed assets Local people (number or salaries) Formulary apportionment Does not meet the ALP Explanation Profit split method of the OECD Meets the ALP Explanation Alternatives to the arm’s length principle

  20. P r a t Transfer pricing methods 4

  21. Costs Plant Transfer price Sales office Market

  22. OECD: “most appropriate transfer pricing method to the circumstances of the case” US: “best method rule” Costs Plant Transfer price Sales office Market

  23. Traditional transactional methods: Comparable Uncontrolled Price Method (CUP) Resale Price Method (RPM) Cost Plus Method (CP) Transactional profit methods Profit Split (PS) Transactional Net Margin Method (TNMM) Costs Plant Transfer price Sales office Market

  24. Allocateconsolidatedprofitusing relevant allocationkeys: Agreementbetweencountrieson: Allocationkeys Relativeweight of allocationkeys Accounting principles Difference with other OECD methods: Allocate consolidated profit vs transactional approach Synergy advantages shared Example: Income A: [1/3*60/100 + 1/3*90/100 + 1/3*30/100] * group profit Profit MethodsProfit split: Nice and easy

  25. Internal CUP Traditional Transactional MethodsComparable Uncontrolled Price (CUP) External CUP Plant Plant Sales office Client (3) Sales office Client (3) Competitor

  26. Cost Plus MethodP&L of the plant

  27. Resale Price MethodP&L of the sales office

  28. Transactional Net Margin Method (TNMM) US: Comparable profit method • TNMM sets the mark up at the Cost Plus Method and the minus at the Resale Price Method • Economic analysis, comparability analysis or benchmark study • Analysis: • How profitable are comparable independent companies? • Cost plus: what is the mark up earned by comparable, independent plants? • Resale price: what is the margin earned by comparable, independent sales offices?

  29. Whencost plus and whenresaleprice minus? “Least complex” (routine) entity : • No keyvaluedrivers • Routine activities • Routine profit • “Entrepreneur” or “principal”: • Keyvaluedrivers • Management, decisions, authority, etc • Residual profit

  30. Whencost plus and whenresaleprice minus?

  31. Whencost plus and whenresaleprice minus?

  32. Transfer pricingmethodssummary

  33. P r a t GSK revisited 5

  34. GSK US 2006 H R &D Plant Sales office UK US

  35. Specific cases GSK US 2006 • Taxpayer on KVD • R &D and manufacturing • In UK • US Sales office routine reward

  36. Specific cases GSK US 2006 H R &D Plant Sales office UK US

  37. Specific cases GSK US 2006 • IRS on KVD • Marketing and premium market • In US • US Sales office residual profit

  38. Specific cases GSK US 2006 H R &D Plant Sales office UK US

  39. Specific cases GSK US 2006 Taxpayer position IRS position H R &D Plant Sales office UK US

  40. Contact details Hugo Vollebregt Amsterdam, The Netherlands hugo.vollebregt@gmail.com

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