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Presentation Kiev event

Presentation Kiev event. Topics. Intro Netherlands Practical approach Business Restructuring BEPS. 2. Introduction Our value proposition. Altus is an independent global alliance specialised in providing the following services: Transfer Pricing Business restructuring Valuation

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Presentation Kiev event

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  1. Presentation Kiev event

  2. Topics • Intro Netherlands • Practical approach • Business Restructuring • BEPS 2

  3. 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

  4. 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

  5. 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

  6. 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

  7. Advance Pricing Agreements Regulatory framework – The Netherlands Dutch version of a pragmatic and consensus based decision model 7

  8. Advance Pricing Agreements Regulatory framework – The Netherlands • Dutch version of a pragmatic and consensus based decision model • Some Statistics • APAs • MAPs Inventory of cases at end of reporting period 8

  9. Steps in a Transfer Pricing Study 9

  10. Steps in a Transfer Pricing Study Introduction • 4-Step Approach • Responsibility profile • Choice of Method • Economic analysis 10

  11. IDENTIFICATION OF BUSINESS CONTEXT DESIGN & IMPLEMENTATION DOCUMENTATION RISK ASSESSMENT/ MANAGEMENT Steps in a Transfer Pricing Study 4-Steps Approach Company’sBusiness model Manageable Transfer Pricing System • 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 11

  12. 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

  13. Steps in a Transfer Pricing Study Responsibility profile (2/2) 13

  14. 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

  15. Steps in a Transfer Pricing Study Choice of Method (2/2) • Responsibility center mapping: 15

  16. 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

  17. ImplementationIntroduction • Accounting implementation (Price setting / Price checking) • Legal implementation • Changes / restructurings 17

  18. 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

  19. ImplementationAccounting implementation - Price setting / Price checking (2/4) Price checking Price setting TPM margin Total Sales Price Bench-marked Margin COGS Bench-marked Margin Cost+ margin Benchmarked Allocation of EBITA EBITA Production Cost OPEX benchmarking per transaction EBITA Bench-marked Margin CUP Cost+ RPM TNMM Profit Split 19

  20. 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

  21. 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 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 21

  22. 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

  23. 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

  24. Business restructuring 24

  25. Business RestructuringIntroduction • Types of restructurings • Principal structure vs licensing model • Examples • Regulatory background • OECD Business Restructuring • Valuation aspects • Court Cases 25

  26. 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 26

  27. 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

  28. Business Restructuring Example 1 • Conversion from full fletched manufacturer to contract manufacturer: Facts: Manufacturing costs Spain: 10M Sales Price Germany: 12M Operating margin: 20% Prior Restructuring: Spain is full fletched manufacturer Germany is limited risk distributor EBIT Germany (1.5% distribution margin): 150k Residual profit Spain 1,850M Post Restructuring: Spain becomes contract manufacturer (“CM”) Germany is full fletched distributor EBIT Spain (3% CM margin): 300k Residual profit Germany: 1,700M 28

  29. Business Restructuring Example 2 • Conversion from full fletched manufacturer to contract manufacturer: Facts: Manufacturing costs Spain: 10M Sales Price Germany: 12M Operating margin: 20% Prior Restructuring: Spain is full fletched manufacturer Germany is limited risk distributor EBIT Germany (1.5% distribution margin): 150k Residual profit Spain 1,850M Post Restructuring: Spain becomes CM on behalf of HQ Germany is limited risk distributor EBIT Spain (3% CM margin): 300k EBIT Germany (1.5% distribution margin): 150k Residual profit France 1,650M HQ 29

  30. Netherlands(Global Principal) Malaysia(Production & Sales) Vietnam(Production & Sales) Indonesia(Production & Sales) Malaysia(Production & Sales) Vietnam(Production & Sales) Indonesia(Production & Sales) Singapore(Reg. principal) Netherlands(Global Entrepreneur) China(FFD) China(LRD) Customers Customers Customers Customers Customers Customers Customers Customers Customers Customers Customers Customers Customers Customers Hong Kong(FFD) Hong Kong(LRD) Thailand(FFD) Thailand(LRD) Singapore(LRD) Singapore(FFD) Business Restructuring Example 3 • conversion from a licensing model to a principal model Now In Future Distribution entities Distribution entities Residual Profit Royalty Residual Profit Manufacturing & distribution entities Manufacturing & distribution entities 30

  31. 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

  32. 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

  33. 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

  34. Business Restructuring OECD (3/5) Note 2 - Arm’s length compensation – illustration 34

  35. 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

  36. 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

  37. Business Restructuring Valuation aspects • What aspects are relevant from a transfer pricing perspective for the business case? • Tax saving as a result of decreased corporate income tax rate • Exit tax • Amortization tax benefit • All three aspects should be taken in to account when determining the pros and cons; • Other aspects include • Availability of past losses • Non transfer pricing aspects • Examples 37

  38. Business Restructuring Court Cases • 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 • 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 38

  39. RISK MANAGEMENT 39

  40. Risk ManagementIntroduction • Maintenance • Tax Control Framework • Controversy management 40

  41. 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

  42. 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

  43. Risk Management Maintenance (3/4) • Example of a transaction TP maintenance overview 43

  44. 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.aspxE&Y - http://www.ey.com/Publication/vwLUAssets/2012-Transfer-pricing-global-reference-guide/$FILE/Tranfer-Pricing-Reference-2012.pdfPWC - http://www.pwc.com/en_GX/gx/international-transfer-pricing/assets/itp-2011.pdf 44

  45. Risk Management Transfer Pricing Control Framework (1/6) Tax Control Framework Transfer Pricing Control Framework 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 Business cycle Transactions 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’ Business Control Framework Design and Implementation TCF Testing TCF 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 Filings 45

  46. Risk Management Transfer Pricing Control Framework (2/6) Transfer Pricing Control Framework • TP Workflow • Responsibility/accountability • Recurring TP task management • Data retrieval and conversion process • TP Policies & • Documentation • Transactions ▪ Intangibles • Services ▪ Financial Transactions • Monitoring andManaging • Framework to detect inconsistencies • Procedures to evaluate policies • Reporting • TP ‘dashboard’ for stakeholders 46

  47. 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: • Goods • Services • Intangibles • Treasury / Financial transactions • 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

  48. 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 tothe greatest extend possible 48

  49. 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 49

  50. 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 50

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