Peter Steeds

1. Peter Steeds Deputy Director Business International Head of Transfer Pricing

2. Transfer Pricing Landscape • Relationship between HMRC and large business • Dispute resolution • The future of the arm’s length standard • An expanding market

3. Transfer Pricing Group • Initiated in response to the Links with Business report • Dedicated resources • Strong governance • Aim to resolve legacy cases, • Aim to improve selection, working and resolution of new cases

4. Dispute resolution What it should do: • deliver certainty • relieve double taxation • in accordance with treaties • do it quickly • and cost effectively

5. Competent Authority Issues • More APA business • Ways to deliver quicker resolution • Effective Arbitration • Business access to the process

6. OECD Working Party 6 • Intangibles • Simplification • Global Forum • UN Manual for Developing Countries

7. Expanding market • Mostly unchanged – US, France, Germany, Japan • New MAP and APA treaty partners • BRICs countries

8. Contact Details Peter Steeds Deputy Director Business International, Head of Transfer Pricing HMRC 100 Parliament Street London SW1A 2BQ Telephone: 020 7147 3916 E-mail: peter.steeds@hmrc.gsi.gov.uk

9. International Fiscal AssociationTransfer Pricing of IntangiblesWendy NichollsPartner - Head of Transfer Pricing8th November 2012

10. What is the news saying about transfer pricing … Starbucks tax bill stirs transfer pricing spat "Anger over how Starbucks reportedly paid just £8.6m in taxes on £3bn+ UK income since 1998 has re-ignited debate about multinationals’ transfer pricing transactions." Apple paid less than 2% tax on overseas profits - despite £23bn earnings "Apple paid less than 2% tax on its overseas profits, documents revealed today, after the iPad and iPhone giant slashed the amount foreign taxmen receive." Facebook's UK corporation tax bill last year was less than it pays a single average worker "This involved a transfer pricing game, using Ireland as the offshore bolthole. It illustrates among other things that when people talk about Ireland’s headline corporation tax rate of 12.5%, this is easy to misunderstand."

11. Discussion draft on Intangibles (OECD) “Working Party No. 6 delegates are uniformly of the view that transfer pricing outcomes in cases involving intangibles should reflect the functions performed, assets used, and risks assumed by the parties. This suggests that neither legal ownership, nor the bearing of costs related to intangible development, taken separately or together, entitles an entity within an MNE group to retain the benefits or returns with respect to intangibles without more.”

12. Why are intangibles important for transfer pricing? "Recognition that the most difficult business restructuring issues involve intangibles, where guidance is inadequate" Joe Andrus - OECD, Head of Transfer Pricing • Increasing profits of MNEs (multinational enterprises) are being driven by intangibles ('make and sell' gives way to 'technology' and 'brand'). • Groups have 'globalised' and centralised. • The ownership and control of intangibles are mobile: • tax competition • concerns over 'base erosion'.

13. What do we mean by intangibles Proposed definition: 1) Something which is not a physical asset or a financial asset; and 2) Which is capable of being owned or controlled for use in commercial activities. (paragraph 5 Discussion Draft)

14. Recent cases • Recent cases have highlighted the difficulties, especially with 'marketing intangibles' and royalties. • For example: • Maruti-Suzuki - "bright line" test • Glaxo Canada - separate transactions vs. entirety of arrangements/provisions.

15. What is 'out' and what is 'in' … Out: Old distinctions: • hard vs. soft • routine vs. non routine • marketing vs. trade • economic ownership vs. legal ownership. In: New definitions: • 'unique and valuable' • 'entitlement to Intangible Related Returns' • 'IRRs' are 'economic returns after deducting costs and expenses and returns to other business functions assets and risks' • 'important functions' ('SPFs'?).

16. Good news (so far) • Confirmation that group synergies, workforce in place and market specific characteristics are not intangibles per se, but comparability factors. • Explicit acknowledgement that not all intangibles give rise to 'super profits'. • Re-characterisation is allowed in extreme cases only (at least in the text). • Hindsight is discouraged (again at least in the text).

17. Development needs • Loose definitions e.g. 'IRR' and confusing/incorrect examples • Anti abuse tone e.g. re-characterisation examples and 'conduct trumps contract' assumptions • Functions and control over functions promoted above assets and risks • Legal contracts, accounting, meeting costs and purchase price allocations (inter alia) are too swiftly dismissed • 'Options realistically available' need to be analysed - how far? how many options? • Potential default to residual profit split methods.

18. What's next?... • Public consultation in Paris 12th-14th November 2012. • Back to the drafting for Working Party 6 delegates. Final report due by end of 2013. • Meanwhile various countries making up their own rules leading to more potential disputes and more double taxation?

19. Resolving and avoiding disputes Erica Hogg Johnson Controls Ltd