PAPER 3.03 TRANSFER PRICING OPTION

Transcription

1 THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION December 2017 PAPER 3.03 TRANSFER PRICING OPTION ADVANCED INTERNATIONAL TAXATION (THEMATIC) TIME ALLOWED 3¼ HOURS This paper has three parts: Part A, Part B and Part C. You need to answer five questions in total. You must answer: Both questions in Part A (25 marks each) One question from Part B (20 marks) Two questions from Part C (15 marks each) Further instructions All workings should be made to the nearest month and in appropriate monetary currency, unless otherwise stated. As you are using the on-screen method to complete your exam, you must provide appropriate line breaks between each question, and clearly indicate the start of each new question using the formatting tools available. Marks may be allocated for presentation. The time you spend answering questions should correspond broadly to the number of marks available for that question. You should therefore aim to spend approximately half of your time answering Part A, and the other half answering Parts B and C. The first 15 minutes of the exam consists of reading time. You will be allowed to annotate the question paper during this time; however, you will not be permitted to start writing or typing your answer, or use a calculator. The Presiding Officer will inform you when you can start answering the questions. Although references and short quotes from the OECD Transfer Pricing Guidelines can be included in your answer, you will not benefit from any extra marks by copying from the OECD Transfer Pricing Guidelines directly.

2 PART A You are required to answer BOTH questions from this Part. 1. Terrific Baby Products Co (TBP) is a company incorporated and tax resident in Jurisdiction A. It is 80% owned by Baby Co, a company incorporated and tax resident in Jurisdiction B. TBP is engaged in the business of importing baby products, repackaging them, rebranding them where possible, and selling them in the local market. Some of its products are purchased from Baby Co, including rattles and dolls. The rattles are manufactured by Baby Co for a unit cost of 10, and sold in Jurisdiction A by TBP for 16. TBP receives the rattles in boxes of 100. The rattles are then repackaged individually and branded as Rattles are Gr8. The dolls are also manufactured by Baby Co, for a unit cost of 22, and sold in Jurisdiction A by TBP for 56. TBP receives the dolls individually, fully boxed and branded by Baby Co as Daisy the Doll. TBP is contractually obliged to resell with the branding developed by Baby Co. The directors of TBP approach seek your advice on the following questions: 1) What options are available in determining the appropriate pricing method to be used in setting the prices for sale of the rattles and dolls between TBP and Baby Co? Can different pricing methods be used for the rattles and the dolls? (5) 2) In the context of this case, how would you apply each of the methods you have identified? What further information might you require, in order to complete your analysis? (5) 3) What are the relative strengths and weaknesses of each method, as they apply in the circumstances? Which method do you think gives the outcome that is most likely to be acceptable to the relevant revenue authorities? (5) 4) What implications, if any, will arise if a double tax agreement (DTA) exists between Jurisdiction A and Jurisdiction B containing an Associated Enterprises article similar to Article 9 of the OECD Model Treaty? (5) 5) The revenue authority in Jurisdiction A has threatened to impose a unitary tax methodology to determine the appropriate amount to bring to tax there. What does that mean, and how would it work? Should the directors of TBP resist such a determination and, if so, on what basis? (5) Total (25) 2. The concepts of functional analysis and comparability are often used in the context of transfer pricing. In the context of transfer pricing, explain in your own words what is meant by these two concepts, and how they apply in practice. You should consider all acceptable methods that, according to the OECD, can be used to determine arm s length pricing. Explain how, if at all, each of those two concepts applies specifically in relation to each method. Use examples to illustrate your analyses. (25) Page 2 of 6

3 PART B You are required to answer ONE question from this Part. 3. Pills Group is a multinational group of companies operating within the pharmaceutical industry. The group includes the following entities: Parentco, resident in Permania, which holds legal ownership of all intellectual property including trademarks, patents and knowhow; manufactures of all the group s pharmaceutical products (including prescription and over the counter products and medical devices); conducts research and development, including all stages of clinical trials; and is responsible for sales and marketing. Permania levies a 30% corporate tax rate. Subco A, resident in Acrylia, which is responsible for the group s marketing and distribution activities within the Asia Pacific region. The corporate tax rate in Acrylia is 17%. Subco B, resident in Boroland, which is responsible for marketing and distribution within Europe. Boroland has a corporate tax rate of 15%. Pills Group is undertaking a global group business restructure, following advice provided by the group s taxation adviser and noting the commercial rationale to achieve supply chain efficiencies, synergies and cost savings for the group. The group structure and activities after the restructure is to include the following changes: Subco A, in addition to its marketing and distribution activities, will now conduct research and development and contract manufacturing on behalf of Parentco (whose manufacturing plant is to be shut down). Subco A is to be granted a corporate tax rate of 5%, as it will be classified as a regional hub. Parentco A is to sell the legal ownership of all intellectual property to Subco C, resident in Curala. Subco C employs no staff and has a contract with Subco A and B that provides for a royalty withholding tax rate of 10%, which is the applicable withholding tax rate under the relevant double taxation treaty. Curala does not levy any corporate tax. Subco A and Subco B now pay a royalty equal to a percentage of sales to Subco C, for use of the intellectual property. You are required to: 1) Describe the changes to the functions, assets and risks, as well as the characterisation of the entities within Pills Group, as a result of the global business restructure. (10) 2) Discuss the potential transfer pricing issues and risks for Pills Group, including any implications in relation to Actions 8-10 of the OECD BEPS Project. (10) (Total 20) Page 3 of 6

4 4. The Opalize Group is a large, multinational group of companies that is headquartered in Ormondia as Opalize Parentco. The corporate tax rate in Ormondia is 25%. The Opalize Group conducts interior design and installation projects in Joulerra, where it operates through Subco J. Subco J has never declared a permanent establishment in Joulerra, nor residency, given the temporary nature of its project operations and fragmentation of activities between a number of other companies. Joulerra s corporate tax rate is 30%. Opalize Parentco has a financing arrangement with a related party, Subco K, to which it lends significant funds. A contract exists between Opalize Parentco and Subco K, providing for an interest withholding tax rate of 10%, which is the applicable withholding tax rate under the relevant double taxation treaty. Subco K is resident in Kepland, which levies a corporate tax rate of 5%. You are required to: 1) Discuss the potential transfer pricing and permanent establishment issues of the arrangements described, with regard to Article 5 (Permanent Establishments) of the OECD Model, Article 7 (Business Profits) of the OECD Model, and Action 7 of the OECD BEPS Project. (15) 2) Discuss the potential transfer pricing issues associated with the related party financing arrangements within the Opalize Group. (5) Total (20) Page 4 of 6

5 PART C You are required to answer TWO questions from this Part. 5. Tower Surfboards (TS), a company located in the country of Quantavia, purchases raw materials from its wholly owned subsidiary in Rutherland. TS uses the raw materials in the manufacture of surfboards in Rutherland, for sale in Rutherland and in two neighbouring countries, Sagania and Turiland. TS has carried out these activities for six years, but its pricing has previously been based on the simple premise that it would pay to the subsidiary an amount equal to the audited cost, plus an uplift of 5%. TS has never properly tested its methodology for setting the price with the subsidiary. The directors of TS seek your advice on the following issues: 1) Should the company pursue a strategy to secure an Advance Pricing Agreement (APA) with the revenue authorities in either or both of Quantavia and Rutherland? (3) 2) What are the relative advantages and disadvantages of pursuing and obtaining an APA? (3) 3) What are the main subject areas you would expect to find in the APA? (3) 4) Is the OECD BEPS project likely to impede the ability of the company to secure an effective APA? (3) 5) Is it possible to pursue an APA with the tax authority of Quantavia but not with that of Rutherland? What implications would arise if an APA with Quantavia was secured but that with Rutherland was not? (3) Total (15) 6. The partner in charge of the international tax division at your firm has asked you to prepare a report concerning transfer pricing documentation, addressing the following matters: 1) What are the main objectives in documenting transfer pricing arrangements? Broadly, what information needs to be documented? (2) 2) Does the OECD Guidance on Transfer Pricing Documentation require any more enhanced documentation? (3) 3. Explain in your own words what is meant by each of the following terms: The Master file The Local file The Country-by-Country Report Give a practical example of a transfer pricing hypothetical, and explain in the context of that example how the three files would relate to one another. (5) 4) What does the adjective contemporaneous add to the requirement for documentation? (2) 5) In practice, what does contemporaneous documentation look like? Provide a list of possible headings. (3) Total (15) Page 5 of 6

6 7. Discuss the implications and challenges for a multinational group of e-commerce companies, with regard to the OECD BEPS Action Item 1: Addressing the Tax Challenges of the Digital Economy. (15) 8. The Verger group is a multinational group of companies headquartered in Denmark. The group has a global policy in relation to intra-group services that stipulates a cost plus 5% fee for all services to be charged between all entities. Functions performed under the intra-group services policy include: Accounting, finance and reporting; Human resources; Information technology; Research and development; Marketing and sales; and Engineering design. You are required to: 1) Identify potential chargeable and non-chargeable services for the Verger group, and explain the rationale for each charge. (5) 2) Discuss direct and indirect charging in the context of the Verger group, providing examples. (5) 3) Discuss allocation keys that could be applied in the context of the Verger group s intra-group service activities. (5) Total (15) 9. The following cases have been cited as examples of important decisions on the subject of transfer pricing: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017 FCAFC 62]; GE Capital [2010 FCA 344]; DSG [2009 UKFTT 31 (TC)]; and SNF (Australia) Pty Ltd v Commissioner of Taxation [Full Federal Court Decision, 2011 FCAFC 74]. For any two of these cases, you are required to explain: 1) The applicable facts of the case; 2) The issue which was contested; 3) The decision made by highest court deciding the case; and 4) Any broader implications which have arisen from the decision. (15) Page 6 of 6