Transfer pricing and BEPS developments in Singapore and selected countries

Transcription

1 Transfer pricing and BEPS developments in Singapore and selected countries 29 August September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 1

2 Transfer pricing in a BEPS world: Global TP developments Sean F. Foley Global Head of Transfer Pricing KPMG in the United States

3 BEPS background The changing landscape Transfer pricing is at the heart of the debate. Governments under extreme fiscal pressure as a consequence of the global economic crisis Increased political focus on perceived tax avoidance by multinationals The G20 was concerned that current international tax rules and frameworks were/remain inadequate The OECD response to growing pressure was to release the Base Erosion and Profit Shifting (BEPS) report The G20 was applying political support/pressure to push for change There is a drive to develop a tax system that is fit for purpose for today s multinationals and digital age 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 3

4 BEPS Action Plan Address the tax challenges of the digital economy Neutralise the effects of hybrid 2 mismatch arrangements Strengthen CFC rules Limit base erosion via interest 4 deductions and other financial payments Counter harmful tax practices more effectively, taking into account transparency and substance Prevent treaty abuse 6 Prevent the artificial avoidance of PE status Develop rules to prevent BEPS by moving intangibles among group members. Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members Develop rules to prevent BEPS by engaging in transactions 10 which would not, or would only very rarely, occur between third parties Establish methodologies to collect and analyze data on BEPS and the actions to address it Require taxpayers to disclose their aggressive 12 tax planning arrangements Re-examine transfer pricing documentation Make dispute resolution mechanisms 14 more effective Develop a multilateral instrument 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 4

5 An overview BEPS Action 13

6 BEPS Action 13 guidance Three-tired approach for documentation Master file Objective: Risk Assessment Approach: Provides an overview of the multinational group and business Local file Country-By-Country (CbyC) Report Objective: Appropriate considerations in setting transfer prices Approach: Provides additional detail on the operations and transactions relevant to that jurisdiction Objective: Prioritization of Audit Issues Approach: Provides summary data by jurisdiction including revenue, income, taxes, and indicators of economic activity 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 6

7 What are companies doing to prepare? Short-Term Action Steps Identify potential data sources for required CbyC reported items, and internal resources that can help explain scope, logic, inputs, etc. Perform initial data mapping What items can be pulled electronically? What items must be manipulated manually? What items are subject to significant interpretation or discretion? Assess available master and local country transfer pricing documentation How long would it take to prepare items not currently available? Perform dry run CbyC report and master and local documentation Identify BEPS risks highlighted by your dry run reporting packages What are the risks for proposed adjustments? How can you mitigate those risks? 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 7

8 Why Action 13 matters for subsidiaries Action 13 not only matters for the headquarters of a MNE but also subsidiaries of MNEs Frequently Asked Questions What are my competitors doing? Am I behind the pack? How do I message to management? What will my ETR look like over the next five years? What does this do to our cash taxes? Do I have resources to manage the changes? Are we in the loop with what is happening at headquarters? How do I keep up with changes? Headquarter Conversation Subsidiary Conversation 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 8

9 An overview BEPS Actions 8, 9 & 10

10 More focus on people & functions Transfer Pricing Generally Focuses on: Assets Functions Risks The OECD and Other Key G20 Countries Pushed to: Increase the importance attached to people and local functions Focus on key decision makers and where they are located Limit profits associated with naked contractual rights Historically, MNEs Have: Used contracts to move assets and risks to principal companies Moved the economic responsibility for, and key benefits from, important local functions to principal companies Limited local returns Key Themes in Chapter I of OECD Transfer Pricing Guidelines Contractual arrangements and actual conduct should be considered Need to look at the location of decision-makers and the decisions they have made, especially with respect to risk 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 10

11 Six-step analytical risk framework 1 Identify economically significant risks with specificity 2 Identify contractual assumption of the specific risk 3 4 Functional analysis. Establish conduct and which enterprises perform control functions and risk mitigation functions and have the financial capacity to assume the risk Is the contractual assumption consistent with the conduct? Do the entities follow the contractual terms and does the party assuming risk exercise control and have the financial capacity to assume risk? 5 If the party assuming the risk does not control the risk or does not have the financial capacity to assume the risk, then allocate the risk to the group company having most control and having the financial capacity to assume the risk 6 Price the accurately delineated transaction taking into account the financial and other consequences of risk assumption, as appropriately allocated 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 11

12 What is DEMPE? We Love Acronyms: BEPS, KERTF/SPF, FRA, DEMPE, PSM Understanding DEMPE Functions Existing IP models did not always include an analysis of the parties responsible for: Legal ownership Funding [economic ownership] Important IP functions: Development, Enhancement, Maintenance, Protection and Exploitation [new ownership concept?... shared ownership, like the shared economy] Many IP planning strategies did not clearly define IP. Often it means, anything leading to profits above routine or normal profits. Model was applied for all industries, from high tech to consumer goods, in a similar way A review of DEMPE functions may require changes to the allocation of profits in the value chain New emphasis on control: people with the relevant knowledge to make decisions The importance of each function: Development, Enhancement, Maintenance, Protection and Exploitation will be different for different sectors (e.g., mining, pharma, luxury goods, software) and may change with the life cycle of the business (e.g., start up vs. mature company) Does DEMPE put an emphasis on IP at the beginning of the supply chain or at the end? 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 12

13 An overview BEPS developments in the US

14 CbyC Final Regulations Treas. Reg ( Final Regs ) Effective for tax years that begins on or after June 30, 2016 Additional IRS guidance is anticipated with respect to 2016 gap year filings Designates the U.S. CbyC report as Form 8975 Still under development, with further guidance expected in the form instructions Remember that electronic filing is required, pursuant to the OECD s XML schema OECD Guidance Issued concurrently with the final regulations Non-binding, but instructive in that the Treasury and IRS (and other countries) seek consistency with OECD model template 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 14

15 Comparison with OECD Template Effective Date OECD: MNE s fiscal year beginning on or after January 1, 2016 Final Regs: taxable years beginning on or after June 30, 2016, with anticipated guidance for voluntary gap year filings (see below) First filing deadlines OECD: by 12 months after the end of the reporting period (e.g., December 31, 2017, for calendar year 2016 reports) Final Regs: with the parent s income tax return, including filing extensions* Annual reporting threshold requirement OECD: reporting required for MNE groups with annual consolidated group revenue of at least 750 million Final Regs: reporting required for MNE groups with consolidated group revenue of at least US$850 million * The Final Regs provide that Form 8975 may prescribe an alternative time and manner for filing KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 15

16 Arbitration OECD BEPS Action 14 - Final BEPS Action 14 package includes commitment by 20 countries to provide for mandatory binding MAP arbitration in their bilateral tax treaties: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the UK and the US - Mandatory binding MAP provision to be developed as part of BEPS Action 15 (multilateral instrument) Mandatory Binding Mutual Agreement Procedure (MAP) Arbitration The US has entered into new treaties or protocols with the following countries, each containing mandatory binding MAP arbitration In Force Not In Force Belgium Canada France Japan Spain Switzerland Germany All have last-best-offer (baseball-style) arbitration occurring after 2 years of unsuccessful MAP negotiations Only arbitrations to have occurred to date involved Canada 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 16

17 Canada United States CbCR Final Legislation Mexico BEPS today and more to come! CbCR Draft legislation CbCR / MF / LF Final Legislation Peru Chile Bermuda CbCR / MF/LF Intentions CbCR / MF/LF Intentions Belgium CbCR Intentions Implemented Draft bills/public discussion draft Intention to Implement CbCR / MF /LF Final Legislation United Kingdom Ireland Source: KPMG International member firms CbCR Final Legislation CbCR Final Legislation Luxembourg CbCR Draft legislation France CbCR Final Legislation Denmark Netherlands Jersey Brazil CbCR / MF / LF Final Legislation CbCR / MF / LF Final Legislation CbCR Intentions Portugal CbCR Final Spain CbCR Intentions Nigeria CbCR / MF / LF Final Legislation MF / LF Intention CbCR Intentions Norway CbCR Draft Switzerland Italy South Africa CbCR Draft CbCR Draft MF/LF Intention CbCR / MF / LF Final Legislation CbCR / MF /LF Final Legislation Australia CbCR / MF / LF Final Legislation 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Israel Poland MF / LF Intention MF / LF Intention Sweden Germany CbCR Final Legislation CbCR/LF Draft CbCR/MF Draft CbCR / MF / LF Draft Legislation MF Intention Liechtenstein LF Intention Austria Czech Republic Malaysia Romania CbCR Intention Finland CbCR / MF / LF Draft Legislation CbCR / MF / LF Intentions India CbCR FInal CbCR / MF / LF Intentions CbCR / MF /LF Final Legislation CbCR / MF / LF Draft Legislation MF / LF Draft China MF / LF Final Slovenia CbCR Draft Legislation New Zealand CbCR / MF / LF Intentions Korea Singapore Russia CbCR Draft Japan CbCR Draft CbCR / MF /LF Final Legislation Taiwan CbCR Draft legislation 17 MF Intention MF / LF Final CbCR / MF / LF Intentions Indonesia CbCR / MF / LF Intentions

18 Check for updates kpmg.com/action13updates 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 18

19 Contact Sean F. Foley Global Head of Transfer Pricing KPMG in the United States T: E: kpmg.com/socialmedia kpmg.com/app 2016 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

20 Transfer pricing developments and outlook in Singapore Geoffrey Soh Head of Transfer Pricing KPMG in Singapore

21 Recent developments

22 Meanwhile in Singapore... IRAS is concerned about international developments on TP, and their impact on Singapore. Several concerns drive the current focus on TP: that Singapore be seen as responsible to the global community and international sensitivities on BEPS; that taxpayers may err on the side of caution and allocate more profits to jurisdictions with new/stricter TP rules; that taxpayers have not paid adequate attention to TP even after the guidance in 2006; and to fulfil Singapore s obligations as a BEPS Associate KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 22

23 Transfer Pricing Developments: Timeline Oct 2015 Final Report on BEPS Actions 8 to 10 and 13 Jun 2016 Additional guidance on CbCR Formal inclusion of BEPS changes into OECD Guidelines Jan 2015 Jan 2016 Today 29 th August 2016 OECD A B C IRAS Jan nd Edition IRAS TP Guidelines Jan rd Edition IRAS TP Guidelines Jun 2016 Singapore joins BEPS Inclusive Framework Notes: (1) Timeline is not to scale. (2) Only major events stated, list of events stated here are not exhaustive E-tax guide on CbCR Revised guidance on interest and services 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. Legislation, enforcement and penalties New Form-C and TPG v4.0 23

24 Evolution of TP Guidance in Singapore First edition of TP Guidelines issued in IRAS Circulars in 2008/2009. Section 34D incorporated in SITA in Second edition of TP Guidelines issued January 2015: mandatory contemporaneous documentation requirements for detailed information at the group level and entity level; and negative implications for non-compliance, including penalties under Section 94(2). Third Edition of TP Guidelines issued January 2016: amended guidance on the MAP and APA process; and some (minimal) changes in the application of TP methodologies. Singapore joins the BEPS Inclusive Framework in June KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 24

25 MOF s Announcement on BEPS (June 2016) MOF announced Singapore s participation in the OECD s Inclusive Framework for the implementation of measures against BEPS. The inclusive framework focuses on the four minimum standards: Action 5: Countering harmful tax practices Action 6: Preventing treaty abuse Action 13: TP documentation and Country-by-Country Reporting (CbCR) Action 14: Enhancing tax dispute resolution CbCR will give tax authorities access to detailed information about group operations and substance worldwide, in order to assess TP risks KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 25

26 Why be a BEPS Associate? Singapore will have equal rights as the OECD/G20 members, in developing standards and monitoring implementation on BEPS-related issues. Strengthens Singapore s commitment to the transparency required, to ensure that profits are taxed where economic activities take place and value is created. Should serve to safeguard Singapore s reputation as a responsible member of the international tax community KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 26

27 Transfer pricing compliance

28 Required Contemporaneous TP documentation: prior to or at the time of undertaking the transactions; for ease of compliance, no later than the time of completing and filing the tax return; and date of creation to be stated. What content would meet minimum standards of adequacy? On a group and local entity level (see next slides) 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 28

29 Minimum Standards for Documentation Group-Level Information Entity-Level Information Industry Analysis and Functional Analysis Economic Analysis Worldwide organisational structure Group's business segments Group's business models and strategies Group s supply chain and principal business of each party Consolidated financial statements Entity s management and organisational chart Entity's business segments Entity's business model and strategies Entity s transactions with related parties Entity s financial information Contracts and agreements The Group and entity s industry dynamics and regulatory setting Detailed analysis of the functions performed, assets used and risks assumed in relation to the related-party transactions Transfer pricing method chosen and reason Application of chosen transfer pricing method Typically, screening for comparable companies and transactions Comparability analysis Computation of arm's-length price/margin 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 29

30 Required After TP documentation is prepared: testing of arm s-length nature of transactions should be done annually; and TP documentation to be updated periodically. Taxpayers to submit TP documentation within 30 days of request from IRAS. Non-compliant taxpayers can be penalized under Section 94(2) of the SITA. May be exemptions from documentation if below certain thresholds. For situations when risk of tax leakage is small KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 30

31 TP documentation process and contents Functional analysis GROUP LEVEL Updating the TP documentation ENTITY LEVEL Choice of TP methodology and approach Development of TP documentation Economic analysis / benchmarking 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 31

32 Supporting documents Legal contracts Invoices Business plans Allocation rationale and formulas Minutes and memos Valuation report 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 32

33 Consequences of Non-Compliance

34 Adverse Tax and Other Consequences 1) Record keeping penalties per Section 94(2) of the SITA. 2) Adjustments to income per Section 34(D) of the SITA. 3) No MAP support to resolve double taxation incidences. 4) Denial of APA application. 5) Rejection of year-end and self-initiated retrospective TP adjustments. 6) Negative publicity. 7) Drain on resources to defend against TP audit KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 34

35 Risk Indicators Leading to Audit Selection Related-party transactions are of significant value, and also when compared to other transactions. Losses or erratic/marginal profitability. Business performance at odds with industry/peers. Complex chain of transactions. Its all data analytics! 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 35

36 How Can I Mitigate Exposure? Basic option do the TP documentation and implement it. A step beyond consider a bilateral Advance Pricing Agreement to further mitigate TP risk. A bilateral APA includes an agreement between a transacting party and its tax authority, specifying the TP method to be applied and profitability to be accorded for the controlled transaction(s). In Singapore, a bilateral APA can cover 3 to 5 future years as well as a roll-back period of 2 years An APA will help mitigate the possibility of future disputes and reduces the incidence of double taxation KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 36

37 Red flags Things to Avoid

38 Function Creep Functions Compensation Good ol Days Purchases from related parties, for resale to unrelated customers Accorded a margin of 5% Moving Up the Food Chain As above but including: kitting financing Still same 5% as above? 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 38

39 Focusing on Half the Issue Benchmarking study completed with an identified arm s-length profitability range. However, the TP methodology is total cost plus a mark-up (5%? 10%? 15%?). Cost base compiled correctly? It has the greatest impact: Only direct costs? Indirect costs? Overheads? Is allocation appropriate? Cost base has the greatest impact (100%) KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 39

40 Entity Classification At Odds With Legal Agreements or Fact Pattern Classification Toll Manufacturer Administrative service provider Sales Facilitator Actual Fact Pattern Take possession of raw materials purchased Finances purchases Owns/utilizes warehouses and delivery vehicles 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 40

41 Leaving It Too Long Distributor earns a fixed $5.00 per unit sold as remuneration for its distribution activities. Purchase and sales price are determined based on quoted market prices. In periods of significant fluctuation in market prices, Distributor received the same fixed amount. Resulted in significant fluctuations in gross margin and audited by IRAS KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 41

42 Leaving It Too Long (Cont d) Year 1 ($ per unit) Year 2 ($ per unit) Year 3 ($ per unit) Sales COGS Gross Margin 6% 4% 11% 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 42

43 What s Next? Future Developments

44 MOF s Announcement on CbCR In June 2016, MOF announced Singapore to implement CbCR and to join Inclusive Framework for implementing measures against BEPS. Applies to MNCs, whose ultimate parent entity is in Singapore, and whose group turnover exceeds SGD billion. Requirement to file their CbCR report within 12 months from the last day of the financial year starting on/after 1 January Meaning 31 December 2018 is the first due date KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 44

45 Potential Implications Tedious and mechanical data collection is required, at least for the first time. How will the data be perceived? For example, high revenues and low tax paid in Singapore and losses in another jurisdiction. Pay attention to the content of CbCR to ensure this would not trigger negative reactions from tax authorities KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 45

46 What Some Taxpayers Are Doing Proactive Mock CBCR dry run with previous year s data. Use the mock run to flush out anomalies and clear these up while there is still time by aligning profitability to value creation. Prepare at the minimum TP documentation or enter into an APA for transactions likely subjected to challenge KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 46

47 More To Come? IRAS will continue to closely monitor taxpayer compliance. If this is unsatisfactory, more stringent compliance measures may be introduced. A safe harbor is expected to be introduced for intra-group loans. IRAS to come out with e-tax guide on CbCR. International agreements/treaties for automatic exchange of CbCR information. New Form C. International developments will continue to have impact and Singapore requirements will be adjusted accordingly KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 47

48 How Should We Be Prepared? Review your current transfer pricing policy and the adequacy of your existing documentation. Plan how to prepare documentation in a consistent and systematic way. Remember even if below exemption thresholds, arm s-length principle still needs to be adhered to. Consider proactive measures to manage your transfer pricing, e.g. APAs. BEPS health check on existing related-party transactions/arrangements KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore. 48

49 Contact Geoffrey Soh Head of Transfer Pricing KPMG in Singapore T: E: kpmg.com/socialmedia kpmg.com/app 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

50 BEPS is part of the here and now in Australia but what does it signal for the rest of the region? Jeremy Capes Partner, Global Transfer Pricing KPMG in Australia

51 My message is clear if you do business in Australia, you must pay your fair share of tax on the profits you earn here Chris Jordan, Commissioner of Taxation, 3 March September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 51

52 How is the Australian TP landscape changing? Yesterday Introduction of 815-A Introduction of 815-B and repeal of 815-A and Division 13 ATO s International Structuring and Profit Shifting (ISAPS) program Senate Inquiry into Corporate Tax Avoidance Chevron decision handed down Today Implications of Chevron decision & Senate Inquiry into Corporate Tax Avoidance Country-By-Country (CbC) reporting Multi-National Anti-Avoidance Law (MAAL) Diverted Profits Tax Tomorrow ATO s new Tax Avoidance Taskforce Implementation of the 2015 OECD report into Australian legislation Other transparency measures Increased penalties 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 52

53 Current developments What are the implications of the recent Senate Inquiry into Corporate Tax Avoidance and the Chevron decision?

54 Senate inquiry into corporate tax avoidance signals a subtle shift in TP focus? In signalling the political support for BEPS, the Senate Committee in 2015 focused on a number of themes in the hearings: - Global tax structures and entities in low tax jurisdictions, particularly Singapore, Ireland and Switzerland - A comparison of the profits and relative profitability of Australia versus global profits and profitability - Current and past ATO interactions of taxpayers, including court cases, risk reviews, audits and APAs - The comparative cost of products supplied into other jurisdictions compared to the cost of supply into Australia, and any knowledge by local management of these prices - Local management incentives, Key Performance Indicators and the link to global group performance - Corporate citizenship and current/former legal proceedings outside taxation (such as fraud or negligence) 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 54

55 Senate inquiry into corporate tax avoidance signals a subtle shift in TP focus? (Cont d) In addition to a number of taxpayers, the ATO also appeared before the Senate Review Committee and signalled a new focus in transfer pricing on: - Is the taxpayer truly a low risk entity or is it something more? - Has the Australian taxpayer truly acted in its own best interests or instead in the interests of the multinational group? - Would the cross border arrangement be structured in the same way if agreed at arm s length? Taxpayers should be aware of the evolving landscape in Australia the sands are shifting 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 55

56 Chevron case implications for debt and beyond? The case (Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner of Taxation [2015] FCA 1092) considered the quantum of deductible interest in relation to related party loans in the income years The case was run under both Division 13 of Income Tax Assessment Act 1936 and Subdivision 815-A of Income Tax Assessment Act 1997 (Australia s current 815-B legislation, and its explicit reconstruction provisions was not applicable then) The Court held that the taxpayer failed to prove that the amended assessments were excessive (taxpayer s onus) Chevron s Full Court appeal was set for a 5-day hearing commencing Monday 29 August but has been deferred. Implications: - Onus of proof and evidence - Debt pricing - Arm s length conditions and reconstruction - Comparability and expert evidence - Beyond debt? USA CVX USA 100% Implicit support? CAHPL AUS Taxpayers need to consider the arm s length support for the terms, structure and substance of their loans and other transactions, not just the pricing 100% Chevron- Texaco Funding Corp. US$2.45bn loan Interest (LIBOR %) S128F funding (AUD) (withholding tax exempt) 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 56

57 Current developments How has CbC Reporting been adopted in Australia?

58 CbC Reporting how has it evolved in Australia? CbC exposure draft released CbC legislative bill passed in Parliament Law Companion Guide 2015/3 published ATO releases draft High Level Design for the Local File. Consultation period commences Final ATO High Level Design released with compendium of comments from consultation. ATO confirms it will follow the OECD format for the Master File but will differ for local file Lodgement of first reports for first CbC reporting year for 31 Dec balancers May Aug Oct Dec Dec Dec Jan Jan Mar May Dec Dec 2017 CbC legislation announced in Federal budget OECD BEPS Action 13 Report finalised Legislation given Royal Assent Start of first CbC reporting year for 31 Dec balancers OECD releases standardised electronic format for CbC report (Schema) -Aus will adopt Still to come Electronic approved form for Local File and instructions Exemption process guidance Administrative solutions and mechanics End of first CbC reporting year for 31 Dec balancers ITR, IDS & TP Doc due 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 58

59 CbC Reporting what do I need to know for Australia? Who? Entities who have annual total global income of $1 billion or more and are either: Australian residents (i.e. Australian headquartered MNCs or Australian subsidiaries of MNCs headquartered outside Australia); or Foreign residents with an Australian Permanent Establishment. When? The first period in scope will be the accounting period beginning on or after 1 January Entities required to provide a statement to the Commissioner within 12 months after the close of the income year. Potential for replacement reporting period where parent and local entity year ends differ. The first filings will therefore be 31 December Provide a statement to the Commissioner in the approved form, subject to exemption. Approved form yet to be determined by the Commissioner but likely to include the following: Files to be lodged by Aus entity What? CbyC Master File Local Australian headquartered MNE Australian Sub of overseas MNE 1 File How? That tax authority will automatically share the CbC report with countries in which the group operates providing certain conditions are met (i.e. confidentiality, consistency and appropriate use). ATO designing administrative implementation guidance (e.g. permanent and transitional exemptions). Administrative penalties apply if the statement is not filed in time and/or false and misleading information is provided.* 1 Expected to be obtained via automatic exchange of information * Note 2016 Federal Budget proposed increased penalties up to $450,000 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 59

60 CbC Reporting how does it align to existing TP documentation? Obligation Existing obligation New (additional) obligation Due date Self-assess compliance with Subdivision 815-B/C Prepare contemporaneous Subdivision 284-E transfer pricing documentation (for penalty mitigation purposes) Before lodging the tax return Lodge Country-by-Country Report ( CbCR ), if not available through automatic EOI Lodge Master File Lodge Australian Local File Within 12 months after year end Lodge an International Dealings Schedule ( IDS ) with tax return, if Part A of Australian Local File is not lodged with the return With tax return Where is there overlap? Significant overlap between the Australian Local File and the IDS Some overlap between the 284-E documentation and both the Master File and Australian Local File Centrally prepared materials can be useful but be aware of the local Australian requirements and differences 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 60

61 Current developments Am I affected by MAAL?

62 What is MAAL? Australia has signalled it will adopt the BEPS action item 7 in respect of the artificial avoidance of PEs In the meantime, MAAL is aimed at artificial or contrived arrangements to avoid the attribution of business profits to Australia through a taxable presence in Australia Domestic action to respond to base erosion and profit shifting ( BEPS ). ATO acknowledges MAAL will likely cover transition until OECD BEPS changes on PE occur MAAL is intended to be a part of and supplement Australia s existing general antiavoidance provisions ( GAAP ) in Part IVA Applies from 1 January 2016 (including schemes that were entered into beforehand) Four key limbs : Significant global entity Gateway provisions Principal purpose(s) Tax benefit The Commissioner has the power to cancel any tax benefit on the basis of reasonably alternative postulate 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 62

63 MAAL how has it evolved in Australia? Bill relating to MAAL introduced into parliament MAAL came into effect Deadline for voluntary disclosures ATO target for initial 175 risk ratings 12 May Sep Nov Dec Jan Mar Apr Nov 2016 Government announces in budget and releases exposure draft bill on MAAL ATO issues guidance on when proposed MAAL rules may or may not apply Applies to certain schemes from this date onward. ATO releases alert on transactions that are designed to avoid tax 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 63

64 MAAL what are the key elements? Gateway provisions A foreign entity makes certain supplies to an Australian customer; Activities are undertaken in Australia in connection with the supply; Some or all of those activities are undertaken by an Australian entity (or an Australian PE of an entity) that is an associate of or is commercially dependent on the foreign entity; The foreign entity derives ordinary or statutory income from the supply; and Some or all of that income is not attributable to an Australian PE of the foreign entity. Principal purpose(s) a scheme that was entered into or carried out for a principal purpose of, or for more than one principal purpose that includes a purpose of obtaining a tax benefit (or obtaining both a tax benefit and reducing a foreign tax liability) under the scheme. Tax benefit can be either i) an Australian tax benefit or ii) both to obtain an Australian tax benefit and a foreign tax benefit Require CoT to identify a reasonable alternative postulate to the actual scheme Necessary to hypothesise that steps would have been taken in Australia that would lead to the additional income being attribute to a permanent establishment in Australia Two likely tax benefits: o o Tax benefit Amount not included in assessable income of a taxpayer; and A taxpayer not being liable to withholding tax. Significant global entity Captures entities that are part of a group with more than A$1 billion in revenue. 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 64

65 MAAL how do I know if I am high or low risk? Offshore Contract and product Offshore parent company Low risk scenario Payment and contract Services Payment Cost contribution agreement Offshore parent company Offshore Subsidiary A High risk scenario Royalty / License Offshore Subsidiary B Offshore Australia Australian customer General marketing and post contract support services Australian company Payment and contract Australian customer Sales functions contributing to contracts Payment for services Australian company Australia Key features low risk scenario Low likelihood that MAAL would apply ParentCo owns, develops and maintains IP Formal agreement between ParentCo and AusCo for marketing and support services Sales and marketing strategy developed by ParentCo; any tailoring for local market approved by ParentCo AusCo does not contribute significantly to bringing about customer contracts. No contact between customers and AusCo prior to sales Key features high risk scenario Strong likelihood that MAAL would apply ParentCo owns, develops and maintains IP Sub A is located in a jurisdiction with no income tax, has no employees and makes no contribution to development or maintenance of IP IP sublicensed to Sub B, located in a low tax jurisdiction Sub B sells products and services to channel partners or customers contract directly with Sub B AusCo does not make any sales itself in Australia AusCo undertakes most of the activities necessary to bring about customer contracts (e.g. identifying and meeting with channel partners and conveying key corporate messages) AusCo costs reimbursed by Sub B with a mark-up 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 65

66 Current developments What will the proposed DPT mean for me?

67 What is the DPT proposed for Australia? In 2015, the United Kingdom introduced a Diverted Profits Tax ( DPT ) with two limbs. The first limb was broadly replicated in Australia by the enactment of the MAAL, the second limb of the UK DPT addresses cross-border transactions entered into by UK resident entities which lack economic substance and result in a 'tax mismatch' outcome. The new Australian DPT is based on this second limb. Legislation and administrative guidance on the new DPT are still to be drafted, and will follow a consultation process. It is expected that the DPT will apply to income years beginning on or after 1 July Like the UK tax, the proposed design of the Australian version employs a pay first and argue later approach. The UK DPT is designed to change the behaviour of companies so that they pay more tax on their UK profits rather than risk paying a higher rate of DPT. The Diverted Profits Amount to which a 40 per cent tax rate applies is: where the deduction claimed is considered by the ATO to exceed the arm's length amount (called an 'inflated expenditure case'), 30 per cent of the transaction expense; and otherwise the ATO's best estimate of the diverted taxable profit that can be reasonably made at the time. 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 67

68 What is the DPT proposed for Australia? (Cont d) Similarities & Differences Applicable from July 2017 Applicable from April % Diverted profits tax rate C Applies to businesses with global turn over >$25 million Transactions which create an S effective tax mismatch Transactions with insufficient S economic substance $ Estimated to gain $100 million per year 25% Diverted profits tax rate C Businesses where UK sales < 10 million (Excludes SME s) Transactions which create an S effective tax mismatch Transactions with insufficient S economic substance Estimated to bring in an additional 1.3 billion by September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 68

69 How is the DPT proposed to work? Australian resident or PE Large multinational Are you an Australian resident or an Australia PE of a foreign resident? YES Do you have annual global turnover of $1 billion or more? NO NO Exemption Offshore related parties Effective tax mismatch Insufficient economic substance YES Do you have total Australian turnover of less than $25 million and do not artificially book any income offshore? NO Do you have an arrangement that involves dealings with a related party outside of Australia? YES Is the increased tax liability of your related party as a result of the arrangement less than 80 percent of the corresponding reduction in your Australian tax liability (i.e. 24% tax rate compared to Australia s 30%)? YES Is it reasonable to conclude that the arrangement was designed to secure a tax reduction and that the tax reduction exceeds the quantifiable commercial benefits of the arrangement? YES NO NO NO You are not caught by the DPT YES You are caught by the DPT 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 69

70 Future developments

71 What is the ATO s new Tax Avoidance Taskforce? The ATO will have an additional $678.9m over four years to establish a new Tax Avoidance Taskforce The Taskforce will consist of 1,300 people, including 390 new specialised officers The Taskforce will focus on compliance activities targeting multinationals, large public and private groups and high wealth individuals As part of the Taskforce, the ATO will form a panel of eminent former Judges which will review any proposed settlement arrangements to ensure they are fair and appropriate The Tax Avoidance Taskforce will be led by the ATO Commissioner of Taxation, Chris Jordan. The Commissioner will provide regular progress reports to Government to provide transparency to the Australian community, with the first report to be provided before the end of the year The Taskforce is expected to raise $3.7 billion in tax liabilities over four years ($5.50 returned for each $1 spent) 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 71

72 Will the updated 2016 OECD guidelines be adopted in Australia? The OECD 2010 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ( 2010 OECD Guidelines ) are already required to be considered under Australian TP legislation. As part of the BEPS action items 8 to 10, the OECD has released the 2015 report, which set out recommended amendments to various chapters of the 2010 OECD Guidelines. The amendments address the following areas / chapters of the 2010 OECD Guidelines: Risk and recharacterization (chapter 1) Intra-group commodity transactions (chapter 2) Intangibles including hard to value intangibles (chapter 6) Services including low value-adding intra-group services (chapter 7) Cost contribution arrangements (chapter 8) The Australian Treasury has recently released a consultation paper requesting feedback on issues that may be raised from incorporating the 2015 OECD Report into Australia s transfer pricing rules. 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 72

73 What is Australia s new Voluntary Tax Transparency Code? All businesses with turnover of $100mil or more Disclosures can be made in GPFS, Taxes paid or separate report Part A: Tax reconciliation notes Reconciliation of accounting profit to tax expense and to income tax paid/tax payable Material temporary and non-temporary differences Accounting effective income tax rates for Australia & globally What to consider & action? Apply for 2016 financial statements onwards These are minimum standards Part B: Taxes paid report Tax policy, strategy and governance Total tax contribution to Australia International related party dealings All businesses with turnover of $500 mil or more 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 73

74 A new General Purpose Financial Statements lodgement requirement? New law requires certain entities that previously prepared Special Purpose Financial Statements to lodge GPFS with the ATO A corporate tax entity is affected if: It is a significant global entity : That is, part of a group with global annual income of $1 billion or more It is an Australian resident; or a foreign resident who operates an Australian PE Does not lodge GPFS with ASIC for the year What to consider & action? Commencement: income years commencing on or after 1 July No impact for entities reporting for financial years ending 30 June 2016 ATO consultation paper is due October September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 74

75 How have penalties increased recently? From 1 January 2016, penalties have increased for significant global entities. Type of scheme Base Penalty Amount Voluntary disclosure Tax avoidance scheme (sole or dominant purpose) Profit shifting scheme Previously: 50% Now: 100% (with RAP reduced to 25%) Previously: 25% Now: 50% (with RAP reduced to 10%) Previously 10% Now: 20% (with RAP reduces to 5%) Previously: 5% Now: 10% (with RAP reduces to 2%) Additionally, there are increased administrative penalties for significant global entities. From 1 July 2017, for companies with global revenue of over $1b, penalties relating to the lodgement of tax documents to the ATO will be increased by a factor of 100. This will raise the maximum penalty from $4,500 to $450,000. This is designed to ensure that multinational companies do not opt out of their reporting obligations (such as lodgement of CbC local file). 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 75

76 What are the key takeaways?

77 When do the new measures kick in and who is affected? New measure Date active Size requirements CBC 1 January 2016 MAAL 1 January 2016 Part of a group with global annual income of AUD $1 billion or more Part of a group with global annual income of AUD $1 billion or more DPT (discussion draft) 1 July 2017 Part of a group with global annual income of AUD $1 billion or more (de minimis exempts Australian entities with less than $25m turnover) GPFS 1 July 2016 Part of a group with global annual income of AUD $1 billion or more Voluntary tax code Part A Voluntary tax code Part B 1 January 2016 (recommended) $100m 1 January 2016 (recommended) $500m 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 77

78 How extensive are the ATO s anti-avoidance powers? Measure Part IVA 815-B MAAL DPT (discussion paper) Test Dominant purpose Part IVA applies if it would be concluded that a person who entered into the scheme did so for the dominant purpose of enabling a taxpayer to obtain a tax benefit. Arm s length conditions automatic reconstruction provisions 1. If form is different from substance 2. If independent entities would enter into different transactions 3. If independent entities would not enter into any transactions Principal purpose a scheme that was entered into or carried out for a principal purpose of, or for more than one principal purpose that includes a purpose of obtaining a tax benefit (or obtaining both a tax benefit and reducing a foreign tax liability) under the scheme. Insufficient economic substance (tax arbitrage v commercial benefit) Determination of whether there is insufficient economic substance will be based upon whether it is reasonable to conclude based on the information available at the time to the ATO that the transaction(s) was designed to secure the tax reduction and where a related party transaction is assessed to be artificial or contrived. 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 78

79 Navigating the change what can you do? 1. Contracts what are the terms & conditions? Do you have intra-group contacts? Are they up to date? What are the terms of these contracts do they match the substance and are they arm s length? Does the transaction make commercial sense? 3. Documentation - do you have adequate transfer pricing documentation? Does it reflect recent legislative changes? Does it describe the global value chain and evidence substance and value contributions? Does it adequately consider third party evidence (CUPS and comparables)? Is it prepared contemporaneously to support the disclosures on your IDS? Do have started implementing your plan for Country by Country reporting (noting Australia s differences)? 2. Transfer Pricing Policy - do you have an effective and commercial policy? Does your TP policy reflect the recent local and international developments? Does it consider how third parties might structure arrangements? Do you have the systems and processes in place to implement the policy? Are there likely to be any TP adjustments or true-ups required? Have you documented the commercial rationale for the TP policies? 4. TP Risks have you supported any high risk transactions? Do you have losses or low profits? Do you have significant or highly structured debt (noting recent Thin Cap safe harbour changes)? Have you had any business restructures? Do you have transactions involving IP? Do you have any BEPS type transactions (e.g. Digital, offshore supply or double non taxation)? Do you have unique arrangements for which comparables are hard to find? Have you considered anti-avoidance and reconstruction? 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 79

80 Contact Jeremy Capes Partner, Global Transfer Pricing KPMG in Australia T: E: kpmg.com/socialmedia kpmg.com/app 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

81 Transfer pricing developments in China Cheng Chi Head of Global Transfer Pricing KPMG in China

82 Current State of Play Monitoring and data analysis Rule taker to rule maker Aggressive audit and national coordination KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 82

83 Enforcement Increased Tax Revenue (Billion RMB) Administration Investigation Service Total KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 83

84 Announcement 42 New Contemporaneous documentation regulations in Announcement 42 Annual Reporting Forms on Related Party Transactions provided by Announcement 42 (including Segmented Financials) Abolished Chapters 2, 3, Article 74 and Article 89 of Circular 2 Annual Reporting Forms on Related Party Transactions provided by Circular 114 Applies to fiscal years beginning from January 1, 2016 onwards The first of a series of regulations to localize OECD/G20 BEPS Project recommendations in China Master File and Local File BEPS Announcement 42 Contemporaneous documentation Country-by-country (CBC) report Part of the Annual Reporting Forms on Related Party Transactions (forming part of taxpayer s corporate income tax returns) KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 84

85 Key Components Related-party relationships Related-party transactions PRC annual reporting forms on related-party transactions (2016 version) Contemporaneous documentation Announcement 42 Further clarified the circumstances where relatedparty relationships would be deemed to exist E.g. familial relationships, having common interest in substance Expanded the related-party transaction categories E.g. transfer in equity investments (including equity transfers), transfer in accounts payable Expanded previous Nine Forms to a number of 22 Forms, including both the Chinese and English versions of the country-by-country report Specific Segmented Financial Statements as part of the forms Master File Local File Special documentation KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 85

86 Types of Documentation and Thresholds Who will need to prepare a Master File Who will need to prepare a Local File Who will need to prepare Special Doc? (i) Conducted cross-border related-party transaction(s) during that tax year, and the group to which the enterprise s ultimate holding company (UHC) consolidating the enterprise s financial statements belongs has already prepared the Master File; or (ii) Total annual amount of related-party transactions (RPT) exceeding RMB 1 billion. (i) Transfers of tangible assets exceeding RMB 200 million (processing/toll manufacturing transactions calculated based on declared value of imports and exports during the year); or (ii) Transfers of financial assets exceeding RMB 100 million; or (iii) Transfers of ownership of intangible assets exceeding RMB 100 million; or (iv) The amount of other RPTs totalling RMB 40 million or higher. (i) Entered into or executed any cost sharing arrangement(s); or (ii) Exceeding the thin cap debt-to-equity thresholds (5:1 for financial institutions; 2:1 for non-financial enterprises) (i) Transactions covered by an APA Local File & Special Documentation Exempted (ii) RPTs are domestic only Master File, Local File & Special Documentation Exempt (Circular 2: only applicable to companies whose foreign shareholding is less than 50 percent) KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 86

87 Key Deadlines Master File Local File Special Documentation When Must be prepared within 12 months of the ultimate parent s financial year end Must be completed by June 30 in the following year, i.e., June 30, 2017 for FY 2016 Must be completed by June 30 in the following year, i.e., June 30, 2017 for FY 2016 Submission deadline has changed to 30 days as opposed to 20 days under Circular 2, upon being requested by tax authorities Submission deadline has changed to 30 days upon being requested by tax authorities CBC Report Must be filed by May 31 in the following year, i.e., May 31, 2017 for FY KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 87

88 Master File Announcement 42 vs. BEPS 13 Comparison of Requirements Under BEPS 13 Under Announcement 42 Organizational structure Group s business descriptions, including business restructuring Group s financial position Group s intangibles Group s financing arrangements Chart illustrating the MNE s legal and ownership structure and geographical location of operating entities. (Similar) Functional analysis including contributions to value creation by all entities within the Group and key functions, risks and assets of each; and description of any business or legal restructuring which occurred during the fiscal year. (Additional) Name and location of the legal entity preparing and submitting the CBC report, bilateral APAs (BEPS Action 13 Report requires the disclosure of unilateral APAs only) (Additional) Detailed information of R&D activities (functions, risks, assets, personnel, etc., of the principal R&D company(ies)) (Additional) Detailed information of how the MNE is financed. (Similar) Compared with BEPS Action 13, the Master File contents under Announcement 42, to a certain extent, went beyond the BEPS recommendations; therefore, if an MNE has prepared a Master File based on BEPS recommendations, the contents may not be sufficient under the requirements in China KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 88

89 Main Contents of Local File Local File requires detailed disclosure of information of related-party transactions. 1. Overview of local entity 2. Related-party relationships 3. Related-party transactions (including value chain analysis) 4. Comparability analysis 5. Selection and application of transfer pricing methods Detailed information required in relation to related party equity transfers and service transactions. Elements of value chain analysis: 1. Transaction, goods and funds flows, within each value chain in the MNE group, leading from initial design and development of goods, through production, marketing, delivery and after-sales service 2. Standalone and consolidated financial statements for every entity within the MNE value chain 3. Quantification and attribution of profits arising from location specific advantages 4. An overview of the attribution of MNE global profits to the different countries within the MNE s value chain, both in terms of how profits are allocated across the value chain and also in terms of the actual amounts of profits earned by each value chain participant KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 89

90 Local File Announcement 42 vs. Circular 2 Broadly follows the structure of Circular 2, except for: Value chain analysis that requires the disclosure of an overview of the attribution of MNE global profits; standalone and consolidated financial statements for every entity participating in the MNE value chain; the quantification and attribution of profits arising from location specific advantages (LSAs) LSAs including location savings and market premium and their impact on pricing must be disclosed. Requirements to include information on the taxpayer s contribution to the overall profits or excess profits of a MNE regardless of the choice of transfer pricing method Prescriptive requirements on the level of disclosure required on outbound investment, related-party equity transfers, and relatedparty service transactions Revenue, costs, expenses, and profits by business segment and product to the financial data are required to be included KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 90

91 Special Documentation Broadly consistent with OECD framework. However: Cost Sharing Arrangement Compared with Circular 2, one additional disclosure requirement is the inclusion of expected benefit arising from the CSA. Thin Capitalization Remain largely the same as Circular 2, except the addition to include analysis on whether independent parties would be able and willing to accept the terms of the financial transactions under analysis, and that the debt/equity ratio calculation that is used to determine whether a company needs to be prepare a thin-cap report has changed KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 91

92 Filing Requirements and Deadline Expanded previous Nine Forms to a number of 22 Forms, including both the Chinese and English versions of the CBC Report Requirements Applicable to all taxpayers (except for those who are taxed on a deemed basis) Replaces the old Annual Reporting Forms on Related Party Transactions (9 forms) provided by Circular 114 Exemption N/A Filing Deadline Must be filed by May 31 in the following year, i.e., May 31, 2017 for FY KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 92

93 Overview of Forms Information Circular 114 (Old Forms) Announcement 42 (New Forms) Corporate Information Related Parties Related Party Transactions N/A Form on Relationship between Related Parties (Form I) Related Party Transaction Summary (Form II) Purchases and Sales Form (Form III) Services Form (Form IV) Intangible Asset Transaction Form (Form V) Fixed Asset Transaction Form (Form VI) Financing Form (Form VII) Corporate Information Form (compulsory) (G000000) Related Party Relationship Form (compulsory) (G101000) Overseas Related Party Form (G112000) Annual Summary Form on Related Party Transactions (compulsory) (G100000) Transfers of Ownership in Tangible Assets Form (G102000) Transfers of Ownership in Intangible Assets Form (G103000) Transfers of Rights to Use Tangible Assets Form (G104000) Transfers of Rights to use Intangible Assets Form (G105000) Financial Assets Transaction Form (G106000) Financing Form (G107000) Related Party Services Form (G108000) Equity Investment Form (G109000) KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 93

94 Overview of Forms (Cont d) Information Circular 114 (Old Forms) Announcement 42 (New Forms) Related-Party Investments Cost Sharing Agreements Overseas Investments Form (Form VIII) (Repealed by State Administration of Taxation Announcement [2014] No. 38) N/A N/A (although some information would be covered under G106000) Cost Sharing Agreements Form (G110000) Outbound Payments Overseas Payment Form (Form IX) Overseas Payment Form (G111000) Financial Analysis Form for Relatedparty Transactions N/A (covered by Chapter 3 of Circular 2, requirements on the transfer pricing documentation) Financial Analysis Form for Related-party Transactions (Unconsolidated) (G113010) Financial Analysis Form for Related-party Transactions (Consolidated) (G113020) Country-by-Country Reporting N/A Form on the Global Distribution of Revenue, Tax, and Operating Activities (G114010) Form on the Global Distribution of Revenue, Tax, and Operating Activities (English) (G114011) List of Entities within the Multinational Group (G114020) List of Entities within the Multinational Group (English) (G114021) Additional Information (G114030) Additional Information (English) (G114031) KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 94

95 CBC Report Who needs to submit a CBC Report? (i) The Chinese tax resident is the UHC of a MNE group and the annual consolidated revenue of the group in the previous fiscal year exceeds RMB 5.5 billion; or (ii) The Chinese tax resident has been designated by its MNE group as the reporting entity for CBC Report. When the MNE group s UHC is a Chinese tax resident and its information involves national security issues, part or all of the CBC Report can be exempted in accordance with relevant regulations. (iii) In addition, if the Chinese tax resident (1) under special tax (TP) investigation does not fall into either of the above categories and (2) in accordance with the regulations of other tax jurisdictions its MNE group shall prepare the CBC Report, and when any of the following conditions is met: - The MNE group has not provided the CBC Report to any tax jurisdiction; or - Although the MNE group has provided the CBC Report to another tax jurisdiction, but there is no information exchange mechanism in place for the CBC Report between the recipient country and China; or - Although the MNE group has provided the CBC Report and the information exchange mechanism has been established between the recipient country and China concerning CBC Report, but the CBC Report fails to be successfully exchanged to China in actuality KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 95

96 What s Next Increasing level of transparency (more disclosure requirements, greater emphasis on value chain of MNEs, etc.) Increasing monitoring level of the tax authorities More mature transfer pricing environment Higher expectation on the transfer pricing technical knowledge of taxpayers KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. 96

97 Contact Cheng Chi Head of Global Transfer Pricing KPMG in China T: E: kpmg.com/socialmedia kpmg.com/app 2016 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in China. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

98 Update on transfer pricing in India Rahul Mitra National Head of Transfer Pricing & BEPS KPMG in India

99 Indian TP environment TP Adjustments* 2,500 2,000 1,500 1, Oct 05 Oct 06 Oct 07 Oct 08 Oct 09 Oct 10 Oct 11 Jan 13 Jan 14 Jan 15 Audit Cycle ending on 12,000 10,000 8,000 6,000 4,000 2,000 0 Number of adjustment cases Amount of adjustment - As per CBDT Annual Report (USD in Millions) Amount of adjustment excluding Vodafone & Shell litigation (USD in Millions) *Source : Annual Report and Ministry of Finance 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 99

100 Major Issues in TP in India for Foreign MNCs Marketing Intangibles Revenue paints all licensees of brands with same brush; seeks reimbursement of excess advertisement, marketing & sales promotion (AMP) expenses Procurement/ marketing functions Revenue applies revenue linked remuneration, resulting in exorbitant operating profits on cost/berry Ratio Extraordinarily high profit margins for IT, ITeS & KPO contract service providers Profit attribution to PEs Revenue applies global formulation approach in absence of TP study by taxpayer Royalties/Intra group services Revenue challenges benefit of intangibles/services Regulatory restrictions for classical/ integrated principal structures How to repatriate entrepreneurial/ portable profits to Principal? 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 100

101 Indian Government s bid to rationalise TP 2009 Dispute Resolution Panel (DRP) introduced to mitigate TP litigation (not successful) 2012 APA provisions introduced to provide more certainty on TP in India (good success) 2013 Safe Harbour rules introduced (no takers due to high numbers) APA Rollback rules announced 2015 Final rules for application of range concept & use of multiple year data Frame-work agreement signed with US for MAP under India-US tax treaty 2016 Risk based TP audits announced by Revenue Board (parameters not fully laid out) 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 101

102 APA Programme in India global best practices Unilateral, Bilateral & Multilateral Pre-filing meeting, even on anonymous basis Formal APA application Filing fees Critical assumptions Roll back Withdrawal, cancellation and revision APA renewals Annual compliance report Annual compliance audit 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 102

103 APA as an option APA as an option Why? APA Rollback (For 4 previous fiscal years) APA (For 5 future fiscal years) Renewal of APA (For 5 Future Years) FY FY FY FY FY FY FY FY US had initially distanced itself from bilateral APA negotiation with India Favourable settlement of pending MAP cases with US in 2015 FY US starts accepting bilateral APAs with India effective middle of February, 2016 India s policy of no bilateral APA & MAP in absence of Article 9(2) in tax treaty Singapore impacted 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 103

104 Status of APAs Key Milestones 1 st Year of APA filings (2013) 2 nd Year of APA filings (2014) 3 rd Year of APA filings (2015) 4th Year of APA filings (2016) 146 Applications* 232 Applications* 204 Applications** 130 Applications** 117Unilateral 29 Bilateral 205 Unilateral 27 Bilateral 192 Unilateral 12 Bilateral 118 Unilateral 12 Bilateral Total APAs signed till date# 0 FY FY FY FY TOTAL Total APA Unilateral APA Bilateral APA Source : *Annual Report Ministry of Finance **Article in Business Standard dated 18 April 2016 #CBDT Press release dated 4 August September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 104

105 Master File & CbC reporting Master File Union Budget introduced effective FY High-level blue print of MNE group s global operations Value drivers, supply chain model, etc Prepared centrally; submitted with Tax Authorities of all countries Ideally prepared by ultimate parent for consolidation Local File Local country TP documentation To be prepared by each local entity; and submitted to local Tax Authority In place in India since 2001 CbC Report Union Budget introduced effective FY MNEs having consolidated annual revenue > Euro 750 MN Summary data & economic activity in each country Prepared by ultimate parent for consolidation purposes Submitted with Tax Authority of ultimate parent Shared with other tax authorities through official channel 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 105

106 Contract Service Providers IT, ITeS & KPO Indian Revenue consistently aggressive with mark ups around 25 to 35% for IT & ITeS; and > 40% for KPOs Safe harbour regulations mark ups of 20% (annual turnover < INR 5 billion) & 22% (annual turnover > INR 5 billion) for IT & ITeS; and 25% for all KPOs Safe harbour rates applied as floors in normal TP audits Evaluate safe harbour vs. unilateral APA for companies having low cost base Bilateral APA s for medium & large captive service providers eliminates double taxation Litigation before Tribunal provides most optimal solution Litigation vs. APA value for time, money & certainty 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 106

107 Contract R&D service providers Major area of dispute in India Indian Revenue challenges contract service provider (cost plus) model Indian Revenue asserts economic ownership of intangibles applies profit split Circular/guidelines issued by Indian Revenue Board on R&D services in 2013 : Broadly in line with OECD guidelines on intangibles [Chapter VI] Emphasis on substance at level of foreign principal Tests laid down for contract service provider (cost plus) model vs. profit split Health check of Indian centre in line with circulars Final safe harbour for contract R&D services mark ups of 30% (for IT) & 29% (for generic pharmaceuticals) without turnover threshold Same going forward strategy as for IT, ITeS & KPOs 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 107

108 Marketing/procurement services & related PE risks Marketing/ procurement functions under cost plus model Revenue Officer challenges functional profile; asserts thumb rule commission Resultant exorbitant Berry Ratio (even 600% in some cases) Agency PE Revenue attributes profits under formulatory approach Large scale litigation in India Tribunals & High Courts ruling favourably APA team open to address issues : Proper economic modelling with respect to intensity of functions Commission capped to Berry Ratio of commission agents/limited risk distributors PE profit attribution as per TP methods with respect to significant people functions 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 108

109 Business Models for manufacturing & distribution Is business model in India aligned to global business/tp model? Entrepreneurial profits trapped in 45.92%? Repatriation of profits not properly planned? Facing challenges around TP adjustments re marketing intangibles? Value chain transformation (VCT) projects provide solutions Business conversion vs. corrective measure of business model 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 109

110 Integrated Principal Structure Indian customers Principal Co Currently not possible in India (regulatory restrictions) Principal Co cannot raise invoice on distributor/customer, if goods not physically imported from outside India Supplier Entrepreneurial results trapped in India INDIA India Sub Co 1 Contract Mfg India Sub Co 2 Distributor Indian customer Say, FCMU of 5 to 6% Say, ROS of 3 to 4% Flow of legal title of goods Physical movement of goods FCMU = full cost mark up ROS = return on sales 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 110

111 Conventional model of foreign MNCs in India Principal Co Routine Tech & Brand Royalty Issues : Tendency to treat India Sub Co as tested party Entrepreneurial results of India Sub Co tested against entrepreneurial comparables against cardinal principles of TP Exposure to unnecessary marketing intangible related adjustments Entrepreneurial Profits trapped in India INDIA Supplier India Sub Co (Licensed Mfg) Mfg division Sales division Indian customer Flow of legal title of goods Physical movement of goods 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 111

112 Minimal localisation value added distributor Principal Co Entrepreneurial profits embedded in import price Import of materials INDIA India Sub Co (Value added Distributor) Assembly division Say 15% of VAE [or 6% ROCE] Sales division Say 3 to 4% ROS Indian customer Flow of legal title of goods Physical movement of goods VAE = value added expenses ROCE = return on capital employed ROS = return on sales 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 112

113 Reasonable localisation in India limited risk licensed manufacturing model Performs major significant people functions & assumes major related risks Principal Co Bundled Tech & Brand Royalty; and fees for other non-routine, value added services (Residual Profits) Liability on account of technology Principal Co Principal Co advises on material sourcing, quality controls, vendor selection, production scheduling, etc Residual profits repatriated as bundled royalties / industrial franchise fees same economic result of principal structure Depending upon strategic functions performed in India, full or partial residual profits my be repatriated INDIA Supplier India Sub Co (Licensed Mfg) Mfg division Say FCMU of 5 to 6% Sales division Say 3 to 4% ROS Indian customer Flow of legal title of goods Physical movement of goods Performs less significant people functions & assumes less risks FCMU = full cost mark up ROS = return on sales 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 113

114 Reasonable localisation in India entrepreneurial licensed manufacturing model Principal Co Tech & Brand Royalty Significant localisation in India; also strategic functions for manufacturing performed in India Difficult to segregate manufacturing & distribution functions India Sub Co entrepreneur, albeit licensed manufacturer Not proper to benchmark combined results of India Sub Co against Indian entrepreneur comparables If significant intangibles not embedded in imported components, price to be tested in hands of Principal Co on cost plus basis Royalty to be tested on stand alone basis, as per CUP analysis from global royalty databases; may be corroborated by residual profit split method INDIA India Sub Co (Licensed Mfg) Supplier Mfg division Sales division Indian customer Flow of legal title of goods Physical movement of goods 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 114

115 Contact Rahul Mitra National Head of Transfer Pricing & BEPS KPMG in India T: E: kpmg.com/socialmedia kpmg.com/app 1 September 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

116 Thank you 2016 KPMG Services Pte. Ltd. (Registration No: G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Document Classification: KPMG Confidential