Transfer pricing documentation: Addressing the practical challenges The Dbriefs Transfer Pricing series

Transcription

1 Transfer pricing documentation: Addressing the practical challenges The Dbriefs Transfer Pricing series Fiona Craig / David Letos / Rahul Tomar 16 May 2017

2 Agenda Introduction Preparing for Country-by-Country (CbC) Reporting Practical tips for preparing Master File Local File Other issues Contract review Technology Questions and answers 2

3 Polling question 1 How advanced are you in your understanding of your CbC Reporting (CbCR) obligations? We have a detailed plan that sets out everything we need to do (notifications and filings), where, and by when We think we have our main countries covered off and the earliest deadlines under control, but after that it s less clear We are trying hard to keep up with all the requirements but finding it very difficult and don t have a real plan in place yet We are still wondering how this all got so hard 3

4 Preparing for Country-by-Country Reporting 4

5 Preparing for CbC Reporting The importance of planning Why is planning important? Our experience to date Tendency to underestimate level of complexity Tendency to over emphasise requirements in Parent Co s jurisdiction Tendency to over estimate quality and coverage of existing documentation Resourcing challenges First year will require significantly more resources and time to execute properly What can catch taxpayers off guard? Early adopters (especially those with Master File requirements) Notification requirements Potential exemptions (with deadlines) Nuance in local requirements E.g., countries with both Local File and separate local TP documentation requirements Proper planning helps clarify key questions up-front Where in which countries do you have reporting requirements? What what is required versus what is currently available? When by when do you need to prepare / file in each relevant country? Implications what potential penalties apply for not meeting certain requirements? 5

6 Preparing for CbC Reporting Key considerations in planning for CbC Reporting Strategic considerations What approach will you take to addressing the requirements? Big bang approach Complete and comprehensive refresh of your global documentation Addressing requirements in all countries Risk based approach Significance of operations and tax history Implications of non-compliance Likelihood of transfer pricing enquiry Centralized vs. decentralized Operational considerations How will you resource and execute the project Resourcing and responsibilities Project sponsor Central team Local teams Protocols for storing / sharing information Project management protocols Project timelines, stakeholder management Practical steps in developing the plan Develop reporting timeline, reflecting local country compliance requirements and priorities Confirm existing documentation and relevant transaction data Full review of all existing documentation and agreements Identify any gaps / inconsistencies in existing doc and the need for additional analysis Develop detailed project plan for execution (based on approach taken)

7 Polling question 2 Where have you got to in addressing your Master File / Local File obligations? Made good progress on the Master File Have a plan in place and are starting to meet Local File requirements On track to meet all Master File and Local File obligations globally Haven t commenced preparation of either report yet 7

8 Master File 8

9 Master File Recap on BEPS action 13 recommendations Master File includes Key challenges Group organizational structure Description of the business Intangibles Intercompany financial activities Need to centralize Financial and tax positions How much detail to include and how to articulate Use of product line approach First year will be critical Country adoption differences could create further complexity Information is made available to all jurisdictions. Taxpayers are required to create a high level blueprint of a multinational group s business Information is to be provided for the MNE as a whole holistic view Intended transparency on global operations and policies for Intellectual Property (IP) and financing Presentation either on overall group level or at product level Important requirements include Supply chain chart for the five largest products and service offerings plus other products or services amounting to more than 5% of a MNE s consolidated revenues Information on important IP or groups of IP plus information on legal ownership Unilateral income allocation rulings and Advance Pricing Agreements (APAs) 9

10 Master File Frequently Asked Questions what our clients are asking us? Is the Master File the same as the transfer pricing documentation we have previously prepared? Should we prepare comments to explain high profits in certain jurisdictions (particularly those with few people and assets)? Should we include more or less detail? What if the report is inconsistent with some of the comments in our annual report? 10

11 Master File Practical considerations Project launch and management Develop Master File strategy (e.g., minimum requirement vs. comprehensive) Consider level of transparency required to explain value chain and CbCR outputs (exercise judgement to avoid presenting unnecessary information) Drive timelines by the earliest approaching deadlines in the MNC s locations (not the headquarter regulations) Assess role of all stakeholders (including C-suite) early in the process Appoint project champion / team (linked to wider project planning phase) Information gathering process Gather exhaustive information across jurisdictions, especially in decentralized MNCs Leverage from Local File previously prepared and CbCR (if prepared first) Coordinate with local finance, legal, HR, and IT teams Identify TP positions taken across jurisdictions, business divisions, tax audits, and APAs Identify publicly available information on the supply chain, value drivers, intangibles, funding arrangements etc. Annual reports Devote sufficient resources to project management Evaluate technology solutions Establish protocols for updating and sharing of Master File (linked to protect planning phase) Investor presentations Websites Project launch and management Information gathering process Strategic alignment with BEPS Actions Information presentation and report structure 11 11

12 Master File Practical considerations (Cont d) Strategic alignment with BEPS Action Plan (8 10) Re-assess complex tax structures (e.g., IP holding companies, regional hubs, pass-through entities, central financing structures) Align risk / return based on the six step functional analysis approach Prepare a summary of key facts which support the transfer pricing policy (and capture these facts consistently and unambiguously in the Master File) Focus on augmenting substance in jurisdictions where CbCR will show disproportionate profits Information presentation and report structure Maintain proper check-lists to ensure that all elements are prepared (consider OECD and any specific country requirements) Identify information to be provided in main body of report versus appendix Validate global footprint disclosed within Master File with CbCR analysis Obtain sign-offs from respective stakeholders Evaluate translation requirements Define Groups of intangibles and General descriptions Project launch and management Information gathering process Strategic alignment with BEPS Actions Information presentation and report structure 12 12

13 Master File Sample reports 13

14 Master File OECD requirements tracked to the report 14

15 Polling question 3 What are the biggest challenges you are facing with the new CbCR obligations? Inconsistency of messaging in TP reports to date (i.e., historically prepared with focus on local view) Documentation does not always reflect what is actually happening in the business Intercompany agreements don t exist / are inconsistent / are not aligned with reality of business We don t have enough people to assist with the work required All of the above 15

16 Local File 16

17 Local File Coordinated and appropriate attention to each jurisdiction Phase 1: planning Strategic documentation risk assessment and planning for TP documentation Review of existing reports and undertaking documentation risk assessment Is TP Policy change required in the post-beps world? Phase 1A Country-wise assessment of Local File requirement based on Jurisdiction Complexity of transactions Materiality of transactions Transaction value Phase 1B Identification of priority / complex / routine transactions, key jurisdictions Assign levels 1 to 4 to various country Local Files Decide on project management protocol central (HQ), regional, or divisional Extent of outsourcing Build consensus on process and policy among local tax directors / stakeholders Phase 2: report preparation Building the foundation through documentation Leveraging cutting edge tools and technology Getting TP compliant across jurisdictions in which client has operations Existing documentation Functional analysis validation DTi Existing transfer pricing policy Consolidated data Facilitate transfer pricing report preparation Country specific vs. OECD reports Economic analysis Digital DoX Review of Reports prepared by local Deloitte offices / your tax advisors in identified jurisdictions basis of the documentation risk assessment Regional vs. Local comparable / Local language reports on the basis of the documentation risk assessment Statutory accounts 17

18 Local File: phase 1 Documentation risk assessment 18

19 Local File: phase 1 Documentation risk assessment (Cont d) 19

20 Local File: phase 2 Project management and report preparation Identify additional economic analyses required OR Gaps considering BEPS Economic analysis Leverage Consistency Profit split sanity check Feedback from local office / advisor Set up Project Management Tool Track timeliness and follow-up with relevant personnel Phase 1: planning Request for information Review available information and economic analysis Modular approach to minimize duplication of effort Draft Local Files for multiple countries GAP analysis vis-à-vis post- BEPS local requirements Local File elements FAR I/C agreements Industry Analysis? Review, sign-off, and finalization Set up Report Preparation Tool Old TP Reports, Master File information, I/C agreements, financials, and business reports Use Local / Master File report modules / templates Multiple people can modify / add information simultaneously Any gaps noticed OR local office suggestions Prioritize finalization based on specific country documentation deadlines Howto use an advisor and manage cost? Systematic effort (gap analysis, creation of templates and modules) in first year can significantly reduce costs in subsequent years First year, rely strongly on advisor and then employ / train internal team for subsequent years If a strong internal team and low risk structure, then use advisor for economic analysis only Discuss various aspects of technology tools upfront Data confidentiality Access rights to tool and data Future report update costs Extent and life of rights offered to the company Bundling with services Closely follow changing local laws in post-beps world to manage compliance costs and risks Establish an empowered internal team with CXO involvement 20

21 Local File Sample reports 21

22 Other issues Intercompany agreements and technology 22

23 Intercompany agreements What s changed? Inclusion of listing of intercompany agreements in Master Files and copies of intercompany agreements in Local Files Guidance on role of intercompany agreements in determining economic substance Guidance on contractual terms in context of the factors for determining comparability Increasing role of intercompany agreements for local revenue administrations Broadened definition of contractual terms 23

24 Intercompany agreements Gap analysis with respect to identifying, allocating, and addressing economically significant risks Does the actual conduct of the parties support the characterisation? Can the conduct be changed consistent with the company s business model? Can the management and control of risk be changed consistent with the company s business model? Determine changes that can be made to the contract or conduct to support intended characterisation of the entity 24

25 Intercompany agreements Some best practices Timing Consistency Consistency Clarity Pricing Flexibility 25

26 Contract analysis Sample checklist for contract review Elements that impact distributor's P&L Distributor responsible Counterparty responsible Issue not addressed Notes (e.g., elaborate if both parties are responsible) Revenue components 1. Characteristics of product (e.g., design, quality, specifications) 2. Overall business strategy 3. Product sales Cost components 1. Intercompany sale of products 2. Overall distribution process 2a. Logistics and freight (including customs costs) 2b. Inventory holding (e.g., how much to hold, how long to hold) 3. After-sales service 4. Advertising and marketing 5. Warranty 6. Product liability 6a. Other hazards (e.g., product damage, loss, recall) 6b. Regulatory 7. Routine administrative Other factors 1. Capital equipment 2. Term and termination Intangible ownership, maintenance, and protection Intellectual property ownership, maintenance, and protection 26

27 Contract analysis Sample checklist for contract review (Cont d) Elements that impact distributor's P&L Distributor responsible Counterparty responsible Issue not addressed Notes (e.g., elaborate if both parties are responsible) Cost components 4. Advertising and marketing Determine marketing and brand strategy and plans Create global marketing and advertising materials Create local marketing and advertising materials Local customization of global marketing material Execution of global marketing efforts (please specify: e.g., global sponsorship, global campaigns, operate global website) Execution of local marketing efforts (please specify: e.g., attend local tradeshows, place advertising in local outlets) Approval of locally developed marketing material Determine global marketing budget Adjust global marketing budget Determine local marketing budget Adjust local marketing budget 27

28 Technology utilization Technology for cost efficiency, collaboration, and consistency Diagnostic tools Project management tools Report preparation tools CbCdata collation and analysis of key ratios BEPS exposure heat map Profit split analysis vis-à-vis actual profits DEMPE assessor Global docs assessor Timeline management Alerts to relevant stakeholders at different milestones / deadlines Version control and file sharing Roadmap to completion Modular approach for leverage Collaboration across various MNC personnel and advisor Faster economic analysis Automation in generating consistent reports Watch out for artificial intelligence and robotics: A number of companies / advisors investing heavily 28

29 Questions and answers

30 Contact information Fiona Craig Asia Pacific Regional Leader Transfer Pricing Deloitte Sydney, Australia David Letos Tax Director Deloitte Melbourne, Australia Rahul Tomar Tax Partner Deloitte Delhi, India

31 Thanks for joining today s webcast. You may watch the archive on PC or mobile devices via itunes, RSS, YouTube. Eligible viewers may now download CPE certificates. Click the CPE icon at the bottom of your screen.

32 Join us 18 May at 2PM HKT (GMT +8) as our Global Mobility, Talent & Rewards series presents: Global immigration: A new landscape and mindset For more information, visit

33 Dbriefs Bytes This video brings you a weekly summary of the significant international tax developments. It is broadcast every Friday afternoon. Dbriefs Bytes is also available in Chinese and is broadcast every Tuesday. For more information, visit To view archives, visit

34 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

35 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms.