Global Transfer Pricing Conference

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Martin Walton
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1 Global Transfer Pricing Conference Delivery models for permanent establishments October 2016 The new normal full TransParency

2 Today s presenters Introductions Why am I here? Stefaan De Baets Belgium Monika Laskowska Poland Blanca Kovari US Darpan Mehta India Paul Tang China PwC 2

3 In-session polling When requested, select the current session from the Agenda (main menu), tap on Participate and Polling. PwC 3

4 Polling question A. I do not know Are you affected by BEPS Action 7 Report? B. Definitely not C. Maybe D. Likely E. Very likely F. Definitely yes PwC 4

5 Polling question As a result of the BEPS Action 7 Report the number of Permanent Establishments: A. Will remain the same B. Will increase C. Will decrease D. I do not care, I just convert my PE into a sub PwC 5

6 Agenda 1 What s new (BEPS Action 7 ) 3 Case study 2 Authorised OECD Approach 4 Call for action PwC 6

7 BEPS Action 7 report (5 October 2015) Preventing the artificial avoidance of PE status What s new / what has changed? Dependent Agent PE (DAPE) Principal role - conclusion of contracts Preparatory / auxiliary activities Consider cohesive business Anti-fragmentation / splitting contracts Prevent fragmenting into several small operations or splitting-up contracts PwC 7

8 Authorised OECD Approach (4 July 2016) Additional Guidance on profit attribution to PE Attribution of profits to PE Step One: Hypothesise the PE as a distinct and separate enterprise Step Two: Determine the profits of the PE Functional/ factual analysis to determine the activities and conditions of the PE Functions Assets Risks Rights and obligations Capital and funding Dealings Comparability analysis Select and apply transfer pricing methods to attribute profits PwC 8

9 Case Study 1 - Dependent Agent PE U.S. Med Device Co. China/India/Poland Dependent Agent PE (DAPE) Local Marketing Co. (DAE) Contract negotiation, inventory and customer credit management 3 rd Party Customers Question Pre-BEPS Post-BEPS Existence of PE No Yes, DAPE of Med Device Co. in China/India/Poland PE profit attribution No Yes, apply AOA PwC 9

Case Study 1 Attribution of profits to DAPE China India Poland Apply Article 9 before Article 7? No Yes Yes Article 9 Local Marketing Co. remuneration Is a cost plus compensation appropriate?

10 Case Study 1 Attribution of profits to DAPE China India Poland Apply Article 9 before Article 7? No Yes Yes Article 9 Local Marketing Co. remuneration Is a cost plus compensation appropriate? Risk of challenging Med Device Co. assumes the inventory risk and credit risk Article 7 DAPE remuneration Yes, but with uncertainty No No No Yes Yes Is the AOA followed by local tax authorities? No Yes? Yes Should DAPE be attributed the inventory and credit risk and economic ownership of assets Risk of challenging zero operating profit of DAPE depending on Local Marketing Co. remuneration DAPE should only be compensated for economic ownership of assets No Yes Yes Yes Yes Yes No Yes Yes/No PwC 10

11 Case Study 2 - Fixed place of business PE U.S. China/India/Poland Cocoa Warehouse Co. Local Warehouse PE 3 rd Party Chocolate Manufacturers Question Pre-BEPS Post-BEPS Existence of PE No Yes, Fixed place of business warehouse PE PE profit attribution No Yes, apply AOA to determine attributable profits to warehouse PE PwC 11

Case Study 2 Attribution of profits to Warehouse PE China India Poland

and its PE Acceptance of services dealings between Cocoa Warehouse Co.

Yes Acceptance of allocating employment costs to PE No Yes Yes Acceptance

12 Case Study 2 Attribution of profits to Warehouse PE China India Poland Acceptance of intangibles dealings between Cocoa Warehouse Co. and its PE Acceptance of services dealings between Cocoa Warehouse Co. and its PE No Yes? Yes Yes Yes? Yes Acceptance of allocating employment costs to PE No Yes Yes Acceptance of allocating asset depreciation costs to the PE Acceptance of attributing free capital and interest costs to the PE No Yes Yes No No Yes PwC 12

13 Polling question A. Operational impact with potential restructuring of local business model Impact of these PE developments on your business? B. Uncertainty of PE exposure C. Compliance burden for new PEs D. Ambiguity of profit attribution methodology E. Local audit risk F. Risk of double taxation G. Decision to apply for APA/ruling H. Other PwC 13

14 Panel Q&A PwC 14

15 Call for action More exposure to existence of PEs Allocation of profit issues Revisit business models Increased Controversy Economic double taxation Juridical double taxation PwC 15

16 What did you think? Please give us some feedback on the sessions. Please tap Session Survey and provide your rating on any or all survey questions. Tap submit response. PwC 16

17 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. Design services 30335_PRES_09/16

Global Transfer Pricing Conference

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