Transfer pricing Summit

Transcription

1 Transfer pricing Summit 22 November 2016 Okkie Kellerman - tax executive

2 cross-border services (1/2) procurement marketing technical support financial assistance

3 cross-border services (2/2) management & administrative strategic management business development financial accounting IT HR

4 example 1 (1/6) AfriCos are fully self-sufficient retailers FM is a SA company within the group HoldCo is a Zam company holding all the shares in FM and AfriCos

5 example 1 (2/6) division of FM undertakes: market research suppliers identification ordering merchandise identifying promotional opportunities inventory planning arranging of shipping to SA costing of all merchandise payment of suppliers.

6 assets owned example 1 (3/6) potential suppliers relationships with suppliers procurement procedures procurement guidelines

7 risks assumed example 1 (4/6) enter into contracts with supplier - assume the pricing risk & payment risk FM only procures items upon specific instruction from AfriCos these risks are limited FM charges AfriCos interest at 0% per annum on trade accounts FM as contracting party assumes the warranty risk and liaises with supplier re this

8 example 1 (5/6) Transfer pricing method Tested party Nature of business Service provider Recipient Price determination Application Transfer pricing validation method Profit level indicator Allocation key Target range Mark-up to be applied

9 example 1 (6/6) is this the best business model what alternatives

10 example 2 (1/4) AfriCos sell into domestic markets 30% of sales generated from exports AfriCos appointed group company IllCo as exclusive agent to manage and co-ordinate sale & distribution of export products

11 example 2 (2/4) functions performed develop & implement marketing plan and strategy manage marketing, promotion, sale and distribution of products co-ordination of sale, delivery and distribution of products managing credit risk where sales are made to certain blue chip clients on credit; invoicing and collection of purchase price pay AfriCos prior to collecting the payment from customers

12 example 2 (3/4) risks assumed does not take ownership of products credit risk remains with AfriCos recovers all 3 rd party expenses on cost recovery basis

13 example 2 (4/4) Transfer pricing method Tested party Nature of business Service provider Recipient Price determination Application Transfer pricing validation method Profit level indicator Allocation key Target range Mark-up to be applied

14 example 3 (1/2) ROCo acts as regional office for (RO) AfriCos in the group ROCo provides all support services to AfriCos re shipping agencies activities basic accounting and reporting services assets owned all assets required to provide RO services risks assumed actual risk assumed is limited

15 example 3 (2/2) Transfer pricing method Tested party Nature of business Service provider Recipient Price determination Application Transfer pricing validation method Profit level indicator Allocation key Target range Mark-up to be applied

16 example 4 (1/2) AHCo renders to AfriCos functions performed: strategic support services; global corporate reporting and compliance services client networking services

17 example 3 (2/2) Transfer pricing method Tested party Nature of business Service provider Recipient Price determination Application Transfer pricing validation method Profit level indicator Allocation key Target range Mark-up to be applied

18 thank you Okkie Kellerman

19 procurement services (1/4) asset & materials management fee structures: full-time equivalent (FTE) own personnel cost (OPEX) plus a mark-up little or no correlation between activities and savings managed spend fee - commission on total purchases gain share - fee as a percentage of the value generated/cost reduction achieved hybrid fee based on gain share and managed spend fee must earn an arm s-length price for functions performed, the risks assumed & assets used

20 procurement services (2/4) the core issue in disputes mark-up on COG? extent of contribution to the performance & profitability of business measuring of contribution savings generated through cost avoidance / cost reduction use of strategic know-how - commission on total purchases or mark-up on OPEX is a key component of the overall supply chain is responsible for driving strategic and operational decision-making on overall procurement process

21 procurement services (3/4) gross commissions & gain shares scrutinised especially if located in a low-tax-rate jurisdiction in setting transfer pricing policies - focus more on people based substance and important economic activities synergies to be shared by group companies proportion of contribution to create synergy

22 procurement services (4/4) support for pricing policies: contribution to overall value chain and profitability of the business as a whole appropriate substance for strategic and operational decision-making ensure that appropriate risks are assumed and controlled supported by contracts identify benefits and value contributed transfer pricing documentation addressing key aspects

23 marketing marketing intangibles? consider use of cost-sharing arrangements all must benefit consider type of customer retail vs institutional investors pricing recover 3 rd party costs with no mark-up cost plus method TNMM PLI: EBIT/Total Costs allocation key: advertising spent

24 technical know-how vs show-how know-how = accumulated specific knowledge to produce pricing cost plus method TNMM PLI: EBIT/Total Costs allocation key:?

25 financial assistance (1/2) inward loans thin cap part of TP rules both loan amount and interest rate must be arm s length would the company have borrowed would a 3 rd party grant the loan interest cover interest to EBITDA debt cover debt to EBITDA

26 financial assistance (2/2) outward loans relief from the TP Rules SA resident grants financial assistance to a CFC forms part of the same group of companies TP Rules not applied if: CFC has a FBE CFC taxed at 75% or more of SA tax rate loan funding between CFCs recipient CFC exclusion payer FBE exemption subject to interest rate AL

27 management & admin services (1/3) a service rendered if economic or commercial value is provided (value test) 3 rd party would pay for the same service (benefit test) shareholder services no charge no value no intra-group service for duplicate services no value incidental/passive benefits - no benefit on-call services - benefit to group over years not 1 year allocation of costs direct charge = expenses directly attributed indirect charge = direct not possible pricing methods for pricing cost plus method TNMM TCMU

28 management & admin services (2/3) countries generally follow the OECD s recommendations countries believe that benefit test be focused on whether or not a benefit was received USA - does not approve a general benefit test China - apply 6 tests to determine whether intra-group services were rendered India - apply additional tests to the benefits test

29 management & admin services (3/3) the arm s length test is different between the countries USA - very narrow definition on shareholder activities China - management fees not deductible being shareholder activities Canada no mark-up where services are ancillary in nature India requires supporting documents to proof receipt of intragroup services USA - detailed requirements on the use of charging methods Canada, Australia, UK, China, India and SA - follow the OECD guidance in general. USA, UK and Australia - adopted safe harbour rules SA requires exchange control approval

30 low value adding services (1/3) an elective, simplified transfer pricing approach for low value-adding intra-group services standard definition of low value-adding intra-group services supportive in nature not part of MNE s core business not requiring or creating valuable intangibles not involving significant risks a list of services that - generally back-office services simplified approach to determine arm's length charge: a process to determine the costs use general allocation keys simplified benefits test standard 5% mark-up

31 low value adding services (2/3) guidance on documentation and reporting to be prepared use of a threshold to deny use of simplified approach limit WHT to the profit element low value-adding services: HR accounting accounts receivable and payable processing IT monitoring and compilation of health and safety data internal and external communications tax related activities legal services general administrative services

32 low value adding services (3/3) services not qualifying R&D manufacturing sales and marketing extraction exploration processing of natural resources insurance and re-insurance financial transactions the services of corporate senior management purchasing and procurement SARS position still unclear SARS not in favour of safe harbours

33 thank you Okkie Kellerman