10 Countries. 1 Company.

Transcription

1 10 Countries. 1 Company. Transfer Pricing Risk Management Iris Burgstaller 2 March 2011 Klaus Krammer

2 TPA Horwath Group Locations 10 countries 25 offices around 960 employees page 2

3 Overview 1. Transfer Pricing and Tax Risk Management 2. Documentation State-of-the-Art 3. Transfer Pricing Resume Seite 3

4 Transfer Pricing Starting Point Dealing at arm s length Seite 4

5 Dealing at arm s length Basic principle The commercial and financial relations e.g. supplies, financing, services provided like consultancy, contract manufacturing, research and development, etc. of associated enterprises given a direct or indirect share in capital, management or control, or given a direct or indirect share of the same persons in capital, management or control shall not differ from those, which would have been agreed upon by independent enterprises under comparable conditions (Art 9 OECD-Model Tax Convention). Seite 5

6 One principle Many potential conflicts Dealing at arm s length Austria page 6

7 Transfer Pricing A balancing act Economic/ Commercial Perspective Business Strategy (including tax strategy) Management-Incentives Performance-Measurement, etc. Tax Perspective Local Transfer Pricing Laws protecting local tax base Seite 7

8 Good news (?) Transfer Pricing Rulings from 2011 in Austria Binding Ruling regarding Business Reorganizations, Corporate Group Taxation and Transfer Pricing Written application to competent tax office Explanation of the circumstances of the case Demonstration of the particular interest of the taxpayer Analysis of the judicial problem and formulation of precise legal questions Formulation of a founded legal opinion Amount of administrative expense loading (from EUR 1,500 to EUR 20,000 for large corporate entities; EUR 500 in case of decline of the proposal) Taxpayer may rely on binding ruling Insofar as the circumstances do not change Insofar as the underlying fiscal law does not change Seite 10

9 Service Provision An example Headquarter (A HQ) Entrepreneur ; Central Functions Konzernstrategie (M&A) Accounting / Controlling Law and Tax Department Internal Audit HR Marketing Corporate House-Keeping Strategy / Management Corporate Finance / Treasury Services CZ SK PL HU RO RU BG UA Practical idea: Service Fee set at 0,5% of local turnover Revised idea: Services are charged based on cost-plus 10%, allocation key local turnover Seite 11

10 One Example Multiple Risks Risks in CEE-countries / Romania Non-acceptance of services Non-deductible expense (increase in profit) at the level of the subsidiary: corporate income tax plus penalty interest and fines Presumption of a hidden profit distribution: levy of withholding tax plus penalty interest Lack of documentation: fines (up to 50%) Risks in Austria Taking full costs as base is requested, mark-up of 10% is within accepted range of 5% to 15% Presumption of valuable services (e.g. market development): mark-up might be too low Correlative adjustment in Austria (reduction of profit): long and cost-intensive mutual agreement procedures (according to DTT or EU arbitration convention) or effective double taxation Seite 12

11 Practical hints Provision of services Practical problem: RomanianCo is exposed to risks, does not have full access to information (cooperation necessary) Provision of (modest) narrative that provides sufficient confidence that service has been rendered service provides economic or commercial value and the recipient if it were independent would have paid for the activity or performed the service itself Clear definition of cost base Direct and/or indirect costs (relevant for mark-up considerations) Direct charge of costs, where possible Shareholder costs need to be eliminated from cost base Adequate Mark-up EU-Benchmarking Study: 1,7% to 10,7%, Median 4% (interquartile range approx. 3%-7%) for lowvalue adding services Austrian TP Guidelines: 5% to 15% page 13

12 Practical hints Provision of services Consider cost allocation agreement (where possible) Appropriate Allocation Key For example: IT number of users, HR headcount, Management development headcount, Tax, Accounting turnover or size of balance sheet, Marketing turnover, etc. Clear invoicing system avoid year-end invoices Sanity checks Indicative ratios: Costs incurred for intra-group services compared to overall operating expenses, level that intra-group service provision turnover bears to total turnover Contemporaneous preparation of documentation Written contract (specific requirements) Documentation does not mean automatic deductibility of service fees Documentation should address processes within group (how is service provision triggered? who provides service (qualification/experience of service provider)? how is service provided? who uses service? etc.) page 14

13 Practical hints Documentation requirements Austrian TPG Management Fees: written agreement including Agreement regarding quality and extent of services to be rendered Definition of companies participating Agreement cost basis to be apportioned Agreement regarding allocation key Term of the agreement Agreement on the impact of fundamental changes in services of several participating companies Cost allocation agreements Conclusion in advance and in written form Appropriate documentation (reference to OECD-TPG) Clause regarding entry and exit payments Seite 15

14 Another example Business Restructuring Relocation of production to Romania and Location Savings before after Production & Sales in Austria Sale to third parties for EUR 150 Production in Romania Sales in Austria a) Sale to third parties for EUR 150 Production for EUR 100 per piece (+sales costs EUR 30 per piece) Production for EUR 70 per piece Transferprice? Sales costs of EUR 30 per piece b) Sale to third parties for EUR 90 Are valuable (intangible) assets transferred? Which party is entitled to Location Savings (decrease in production costs by EUR 30)? How shall transfer price be set? How shall losses be allocated? Seite 16

15 Practical hints Business Restructuring Transfer pricing follows business model Romanian entity as fully-fledged manufacturer Romanian entity as contract manufacturer Romanian entity as toll manufacturer Careful contract design Sustainable TP method selection CUP-Method, Resale Minus Method, Cost Plus, TNMM Benchmarking Internal benchmarks might be applicable (fully-fledged manufacturer scenario) Usually external benchmarks necessary (Amadeus Database) Specific documentation requirements Application for binding ruling (?) page 17

16 Practical hints Specific documentation Austrian TPG Business Restructuring Character of Business Restructuring; transferred business units, Feasibility Studies Three-dimensional functional and risk analysis of transferring and receiving company (before and after restructuring process) including acquisition and divestiture of essential assets Considerations with reference to allocation of tangible and intangible assets as well as liabilities (existent appraisal reports) Information, that the receiving company which receives the functions, risks and assets has the necessary substance (adequate capital and personnel endowment) Does the company that transfers functions still exercise essential functions as services for the receiving company? Arm s length gratification of residual functions and risks and the costs of restructuring Foundation of permanent establishments or depending agent branches Impacts on compensation scheme, Management gratification Seite 18

17 Example Financing Loan Austrian LenderCo Romanian BorrowCo Austria: interest rate range: between debit interest rate and credit interest rate; depending on equity volume of Austrian LenderCo reference market interest rate depends on used currency High Romanian country risk may lead to interest rate above Romanian statutory rate Romania Interest deduction statutory limitation (currently 6%) Thin Cap Rules: - Debt: Equity < 3:1 - Excess interest non-deductible - Carry forward of interest expenses Risk of double taxation careful structuring necessary page 19

18 Transfer Pricing can trigger considerable risks depending on transaction depending on the business model and market depending on the countries involved depending on compliance Transfer Pricing requires Tax Risk Management Seite 20

19 Overview 1. Transfer Pricing and Tax Risk Management 2. Documentation State-of-the-Art 3. Transfer Pricing Resume Seite 21

20 TP Documentation State of the art Analysis of Functions/Risks Company characterization Transfer Pricing System Transfer Pricing Method Profit Level Indicator Benchmarking / comparable research Seite 22

21 Database analysis When? Analyses of company databases are necessary, if No comparable transactions with third parties take place No comparable transactions on the market may be observed No comparable transactions are displayed in public price lists or market indices Target Collect comparable data based on annual financial statements of independent enterprises for intra-company transactions Prove comparability with tested party Seite 23

22 Database Amadeus Facts & Figures Standard database at TPA Horwath European-wide company database 42 countries approx. 14 million companies Data sources National commercial registers as well as cooperation with information providers Company profiles 24 accounting ratios 25 P&L-ratios 26 financial ratios Ratings, Reuters press reports Seite 24

23 Database Amadeus Facts & Figures Fiscal authorities with access to Amadeus/Orbis Europe Europe North America Asia Pacific Middle East & Africa AUSTRIA BELGIUM CROATIA CZECH REPUBLIC DENMARK FINLAND FRANCE GERMANY GREECE HUNGARY ICELAND IRELAND ITALY LATVIA LITHUANIA NETHERLANDS NORWAY PORTUGAL UK ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN CANADA USA AUSTRALIA CHINA TAIWAN HONG KONG INDIA INDONESIA JAPAN MALAYSIA NEW ZEALAND SOUTH KOREA SINGAPORE ISRAEL SOUTH AFRICA Seite 25

24 Focus of external audits on Transfer Prices in AT and RO/CEE Elements of a TP Documentation significance Market- und Industry Analysis 1 Analysis of Functions 5 Transfer Pricing Logic 4 Benchmarking (assessment of comparative data) 3 Documentation 3-5 Plausibility of Transfer Prices and Performance Measurement Empirically high significance for external audits 1 Empirically low significance for external audits Seite 26

25 Overview 1. Transfer Pricing and Tax Risk Management 2. Documentation State-of-the-Art 3. Transfer Pricing Resume Seite 28

26 Transfer Pricing Resume In the final analysis, transfer pricing is largely a question of facts and circumstances coupled with a high dose of common sense. Judge Hogan, Tax Court of Canada page 29

27 Key points Transfer Pricing Risk Management Harmonization with Business Model Tax Risk Effectivity of Documentation Compliance Risk Integration in tax planning In case of differences -system always vulnerable and inefficient Double taxation Interest / Fines TP audit/ mutual agreement procedure Internal / external Effectivity of communication influences compliance costs and tax risk Possibility for lower compliance costs / lower tax risk Fines for lack of documentation Costs of last minute repairs Tax authority is entitled to estimation Optimization of the tax rate through business model selection Awareness of TP reg. Business Restructuring Seite 30

28 Thank you for your attention! Iris Burgstaller Klaus Krammer TPA Horwath Austria Head of Transfer Pricing TPA Horwath Romania Head of Austrian & German Desk Tel.: iris.burgstaller@tpa-horwath.com Tel.: klaus.krammer@tpa-horwath.ro Seite 31