G20/OECD: BEPS, Intangibles, ICE and Transfer Pricing. Brazil October 2013

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1 G20/OECD: BEPS, Intangibles, ICE and Transfer Pricing Brazil October 2013

2 Disclaimer This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. This presentation is 2013 EYGM Limited. All Rights Reserved EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Page 2

3 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 3

4 Agenda 08:30 Welcome coffee 09:00 Opening remarks - Werner Stuffer 09:15 OECD s Base Erosion and Profit Shifting project overview - Purvez Captain 10:00 Recent developments regarding transfer pricing aspects of intangibles - Jay Camillo 10:30 Operationalizing transfer pricing - Purvez Captain and Jay Camillo 11:00 Q&A panel - Purvez Captain, Jay Camillo and Werner Stuffer 12:00 Coffee-end Page 4

5 EY s 2013 Global Transfer Pricing Survey Key Findings Increasing focus on risk management as the most important transfer pricing issues faced by multinational enterprises. 66% of respondents identified risk management as their top priority, a 32% increase from survey results in 2010 and Three main factors: Page 5 1. Controversy on the rise. EY s Tax Risk and Controversy Survey found 57% of tax administrators identified transfer pricing as their top risk focus in the next 12 months. 40% of companies also identified transfer pricing as their leading risk. 2. Emerging Markets Emerging Risks Nearly 30% of parent companies with operations in the BRIC and African countries identified those regions as their No. 1 or No. 2 most important transfer pricing jurisdictions 70% of the companies answering the question also reported they experienced double taxation because of an adjustment. 3. Reputational Risks

6 Transfer Pricing in the News OECD Enables Companies to Avoid $100 Billion in Taxes Bloomberg March 18, 2013 Yahoo, Dell Swell Netherlands $13 Trillion Tax Haven Bloomberg, January Starbucks paid no tax on UK earnings in the past three years. The Guardian, October 16, 2012 How Apple Sidesteps Billions in Taxes New York Times, April Page 6

7 OECD/G20 and Brazil Brazil is not a member of the OECD, but of the G20. Signed declaration in consensus with other G20 countries to combat tax evasion in the most recent G20 meeting in St. Petersburg, Russia On October 8, Brazil s National Confederation of Industry (CNI) together with the Business and Industry Committee to the OECD (BIAC) held a conference on Brazilian and International Tax Issues in Brasilia. Attendees included representatives from the Federal Revenue of Brazil, the OECD Secretariat, multinational enterprises and Brazilian government agencies Agenda addressed interconnections between the Brazilian and international tax system, with a focus on the OECD Action Plan on Base Erosion and Profit Shifting Page 7 OECD BEPS project and focus on increased reporting

8 Country by Country Reporting Country by country will be an essential element of transfer pricing proposals developed by the BEPS project. On October 3, 2013, the OECD issued a memorandum on transfer pricing documentation and country by country reporting. The most critical items to be reported included the following with considerations for each. Income earned in a country Income before tax for each legal entity on the basis of statutory financial statements, taxable income, or a segregation of consolidated financial information based on segment reporting rules? Taxes paid by country- cash or accrual? Measures of economic activity Examples included: revenue by location of customers, tangible and intangible assets by location, employment measures, research and marketing expenditures and the location of senior management. Page 8 OECD BEPS project and focus on increased reporting

9 What does BEPS Action Item 13 mean for your company? OECD BEPS project and focus on increased reporting Page 9

10 Background on OECD BEPS project Page 10

11 OECD BEPS project objectives The aim of the OECD project on Base Erosion and Profit Shifting (BEPS) is the development of approaches for addressing government concern about Multinational Corporations (MNCs) reducing their tax liabilities through BEPS activity. The G8 and G20 governments have strongly endorsed the OECD s work on BEPS. There are high-level political concerns about BEPS in key OECD member countries that are driving the work, including France, Germany, the UK and the US. Major developing countries, including China and India, are also actively participating in the BEPS project. The BEPS project is focused on the same issues that are the subject of headlines and hearings around the world. Some countries are already taking unilateral action with respect to BEPS, such as recent legislative activity in Australia, Mexico and France. BEPS is already affecting the tax enforcement and controversy environment in many countries. Page 11

12 Specific BEPS target areas The OECD s 19 July 2013 report set forth its work plans in 15 target areas: 1) Tax challenges of the digital economy Sept ) Transfer pricing for risks and capital Sept ) Hybrid mismatch arrangements Sept ) CFC rules Sept ) Deductibility of interest and other financial payments Sept/Dec ) Harmful tax practices of countries Sept 2014/Sept 2015/Dec ) Treaty abuse Sept ) Artificial avoidance of permanent establishment status Sept ) Transfer pricing for intangibles Sept 2014/ ) Transfer pricing for other high-risk transactions Sept ) Development of data on BEPS and actions addressing it Sept ) Disclosure of aggressive tax planning arrangements Sept ) Transfer pricing documentation Sept ) Effectiveness of treaty dispute resolution mechanisms Sept ) Development of a multilateral instrument for amending bilateral tax treaties Sept 2014/Dec 2015 Page 12

13 Related OECD projects and relevant themes OECD Report on the Transfer Pricing Aspects of Business Restructurings (July 2010) Focus on conversion analysis and future pricing when functions, assets and risks are transferred as part of a restructuring Importance given to substance and value chain analysis Focus on analysis of both sides of transaction Re-characterization only in special circumstances OECD Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles (July 2013) Expanded definition of intangibles Detailed discussion of method selection More stringent criteria for one-sided analyses Focus of profit split and bargaining analysis Discussion of re-characterization (e.g., override of legal form) OECD White Paper on Transfer Pricing Documentation (July 2013) Purpose is simplification and transparency Concept of master file/local file introduced as a means of gathering information for tax authorities to assess audit profile of taxpayer Emphasis on value chain and global profits Also discussion of a country-by-country reporting template to be developed OECD Draft Handbook on Transfer Pricing Audit Risk Assessment (April 2013) Sets forth detailed steps countries can take to assess transfer pricing risk Intended to be relevant for both developing and developed countries to use in conducting transfer pricing risk assessments Draft is available to local country tax auditors now Page 13

14 OECD White Paper on TP Documentation Increased reporting is the highest priority for the OECD and many countries. It was explicitly addressed in the G8 leaders communique in June. Work on enhanced documentation was already underway prior to Action Plan issuance. Work was subsequently incorporated into Action 13. Leveraging the previous work, the White Paper on Transfer Pricing Documentation was released quickly after the Action Plan. Increased documentation is intended to provide information for tax authorities to assess audit risk and gain transparency regarding an MNC s tax profile. OECD suggests that harmonizing documentation approaches will reduce compliance burdens and create uniformity in documentation practice. The white paper reflects a tiered approach focused on global and local attributes. The white paper also includes reference to high-level country-by-country reporting, which is the most immediate focus for the OECD. Page 14

15 OECD White Paper s Proposed Approach to TP Documentation Page 15

16 Country-by-country reporting template Country-by-country reporting of high-level information regarding MNC s activity in each country Separate template to be created Details still being considered by OECD, but will include some measure of income, taxes, head count and assets May also include additional information not yet specified Ultimately may be part of the master file but is being developed by OECD as a separate work stream because of political urgency associated with it Will be required to be provided to all relevant countries There are existing country-based public reporting requirements for the extractive industry, and a new country-based reporting requirement in the EU for banks is coming Page 16

17 Global information master file Global information is aimed at transparency and providing a clear and accurate understanding of an MNC s entire operations OECD asserts current documentation does not provide a big picture that is available for risk assessment purposes Particular focus on features that may indicate significant transfer pricing risk Significant transactions with a low tax jurisdiction Transfers of IP to related parties Business restructurings Specific types of related party payments Year-on-year loss-making Poor or nonexistent documentation Excessive debt Master file likely to be required to be prepared contemporaneously with tax return Simplification of industry and company information to be based on analyst reports Page 17

18 Country specific information local file Local file would be specific transaction focused Detailed information to determine whether a specific transaction is at arm s length Robust functional analysis by transaction Method selection Comparables analysis Relevant financial data for local entities also to be supplied locally Page 18

19 Summary of OECD recommended global file content Master File Overview of Multinational Enterprise Group (MNE) Legal and ownership structure and principal operating entities Management structure and geographical location of key personnel Descriptions of MNE s business(es) Value drivers, supply chain for material products, chart with related party service arrangements, main markets, key competitors, functional analysis for key value drivers, description of business restructuring transactions over last five years Internet links to analyst and company data MNE s intangibles Strategy for development, ownership and exploitation of IP, including location of R&D facilities and key personnel List of material intangibles and which entities are entitled to returns List of related party arrangements related to IP Description of group TP policy related to R&D and IP A description of material transfers of interests in intangibles during the relevant year (entities, location and compensation) MNE s intercompany financial activities Listing of material intercompany loans and other financial arrangements, including related parties involved, geographic locations and principal amounts involved in the arrangement Description of TP policy or the group's transfer pricing system for its financial activities MNE s financial and tax positions MNE s consolidated accounts for prior years List and briefly describe MNE group s applicable APAs List and briefly describe other relevant tax rulings related to the allocation of income to particular jurisdictions List and briefly describe transfer pricing matters pending under treaty MAP processes or resolved in MAP during the last two years Schedule showing for each country in which the MNE does business, including total number of employees in the country Company s consolidated income statement for the most recent year Page 19

20 Summary of OECD recommended local file content Local File Local entity Description of the management structure, to whom local management reports and geographical location of senior executives Indication of whether the local entity has been involved or affected by business restructurings or intangible transfers in the present or past year, including explanation of such transactions effect on the local entity Controlled transactions For each controlled transaction, provide the following: Description of the transaction (manufacture, distribution of goods, etc.) and context in which it takes place (e.g., business activity, financial activities of the MNE group, cost contribution arrangement) Aggregate amount of intercompany charges Identification of associated parties involved in each controlled transactions, and relationship among them Detailed function analysis with respect to each controlled transaction (i.e., functions performed, assets used and risks borne) Selection of most appropriate TP method and reasons for selection, as well as selection of the tested party Important assumptions made in applying the TP methodology, explanation of performing multi-year analysis (if relevant) Controlled transactions (cont d) Description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for unrelated parties relied on in the economic analysis, including comparable search methodology Description of any comparability adjustments performed Description of the reasons for concluding that relevant transactions were conducted on an arm's-length basis based on the application of the selected method Summary of financial information used in applying the TP methodology Financial information Annual local entity financial accounts for the previous years Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements Summary of schedules of relevant financial data for comparables used in the analysis Page 20

21 Key content differences between current state and OECD proposed documentation Proposed OECD master file content Common documentation content Global scope Industry and business overview dependent on analyst reports and annual statements Coverage of majority of transactions required Materiality to be considered Transparency provided through global supply chain chart and profit analysis Required to list transactions related to intangibles, intercompany loans, business restructurings, loss entities and low tax jurisdictions Description of transfer pricing policy and financial systems used to implement policy required List of all APAs (unilateral or bilateral) List of tax rulings Regional or transactional scope Industry and business overview tailored to transaction, including some public and private information Does not necessarily cover all or majority of transactions or consider materiality Does not require global profit analysis or global supply chain chart not provided Transactions related to intercompany loans, intangibles, business restructurings, loss entities and low-tax jurisdictions only covered in relevant country documentation Description of company s financial systems and transfer pricing policy typically not included APAs not listed unless relevant to covered transaction in country documentation Tax rulings not typically listed or described Page 21

22 Key questions to consider Do you have accurate information on global operations? How does your global footprint compare to your global tax footprint? Head count, revenues, profits by country Have you identified features listed as potentially indicative of transfer pricing risk? Significant transactions with a low tax jurisdiction Transfers of IP to related parties Business restructurings Specific types of related party payments Year-on-year loss making Poor or nonexistent documentation Excessive debt Do you have amounts and supply chain charts for material transfer pricing transactions? Do you have more than 50% of profits outside jurisdictions where revenue is earned? Do you have aligned assets, functions and risks in your principal company? Is IP aligned with business substance? Do you earn consistent returns on similar transactions? How do the financials you used for a product or business unit analysis compare to the analyst reports being provided? Did you consider the full set of potentially comparable agreements in your analysis? What is the percentage of transactions that you currently cover in documentation? Page 22

23 Why the TP white paper requires action Increased access to information is the primary political imperative of the BEPS project. Increased reporting is not directly about dividing taxing jurisdiction, so consensus in OECD and countries is easier to reach. Increased reporting seeks to address what many tax authorities see as a highest priority corporate tax issue and key audit focus (transfer pricing and PE risk). Adoption and enforcement of increased reporting requirements by countries do not necessarily require changes in legislation or regulation. The OECD will issue a template for country-by-country reporting next September, which many countries are expected to implement. Page 23

24 What you can do now Estimate country-by-country template information and assess implications Calculate income/head count and income/assets ratios to identify countries where either of these ratios are outliers or show variances Consider potential ways to address outliers and variances Potential for further alignment of business functions Support for key differences Business case for transactions involved (including intercompany debt) Prepare audit risk appropriate TP file Consider proactive engagement with tax authorities, including bilateral APAs and other approaches to increased transparency and greater certainty Page 24

25 Intangibles and transfer Recent developments Page 25

26 Agenda BEPS impact on transfer pricing for intangibles OECD Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles Page 26

27 BEPS specific actions focused on TP with intangible implications BEPS actions on TP combine to have the following implications: Heightened focus on substance Shift from transactional focus to acceptable form mirroring thirdparty transactions Broadening definition of intangible and moving away from internal comparables Increasing focus on transparency regarding audit risk profile Page 27

28 Heightened focus on substance BEPS project reflects new thinking about arm s-length standard. There is new emphasis on functions in functional analysis, with assets and risks taking a back seat. Action 9 proposes to develop rules to prevent BEPS involving the transfer of risks among, or allocation of excessive capital to, group members. This will involve developing rules to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. It will also require the alignment of returns with value creation. Action 7 proposes to: Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues. Page 28

29 Heightened focus on substance Similar to Actions 7 and 9, Action 8 on intangibles and the July 2013 draft of the intangibles chapter of the TP Guidelines provide the latest thinking on substance. They discuss functional and legal ownership, as well as separation of functions from risks. Alignment between functional and legal ownership requires the contractual owner to bear cost and risk; perform and control important functions; control functions outsourced to a related or unrelated parties; and provide all assets necessary to develop, enhance, maintain and protect the intangible. Important functions include the following: Design and control of research and marketing activities Management and control of budgets Control of strategic decisions relating to the development of intangibles Important decisions relating to the defense and protection of intangibles Ongoing quality control over service providers Page 29

30 Acceptable form and re-characterization Action 10 ( Other high-risk transactions ) includes further work on the circumstances in which transactions may be re-characterized because they rarely occur between third parties. It proposes to adopt transfer pricing rules or special measures to: Clarify the circumstances in which transactions can be re-characterized Clarify the application of transfer pricing methods, in particular, profit splits, in the context of global value chains Provide protection against common types of base eroding payments, such as management fees and head office expenses More subjective standard to assess whether a third party would transact in a certain way Potential for overreach at exam is heightened Even less certain standard than status quo So difficult to administer that special measures within or beyond the arm s-length standard will be required Page 30

31 Acceptable form and re-characterization Action 10 ( Other high-risk transactions ) includes further work on the circumstances in which transactions may be re-characterized because they rarely occur between third parties. This is somewhat surprising as this issue was looked at closely when a new chapter (IX) on business restructuring was being developed for the Transfer Pricing Guidelines (TPG). But TPG Chapter IX already effectively requires that the business case for a restructuring be documented for each entity (i.e., not just for the enterprise as a whole) if a comparable is not available. Page 31

32 Broadening IP definition and moving toward profits based measures Action 8 proposes to develop rules to prevent BEPS involving the movement of intangibles among group members Adopting a broad, clear definition of intangibles Ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in line with value creation Developing rules for transfers of hard-to-value intangibles Updating guidance on cost contribution arrangements No longer founded on third-party comparability, but focused on fairness of results Increasing focus on other methods (CWI, cap similar to CAMP Option A, income based approaches) Page 32

33 Increased focus on transparency Action 12 proposes to develop recommendations on the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements or structures Will take into consideration the costs for tax administrations and businesses and draw on experiences of countries that have such rules in place The work will use a modular design allowing for consistency and for country-specific needs and risks Action 13 proposes to develop rules on transfer pricing documentation to enhance transparency for tax administrations Will take into consideration the compliance costs for businesses May include a requirement that MNCs provide all relevant governments with needed information on the global allocation of income, economic activity and taxes paid among countries according to a common template Page 33

34 Increased focus on transparency TP documentation white paper released on July 30 calls for transparency so authorities can assess risk for the following transactions: Significant transactions with a low tax jurisdiction Transfers of IP to related parties Business restructurings Specific types of related party payments Year-on-year loss-making Poor or nonexistent documentation Excessive debt Page 34

35 OECD revised discussion draft on the Transfer Pricing aspects of intangibles Date Action 6 June 2012 OECD published the OECD Intangibles Draft November 2012 Comments/public consultation process 30 July 2013 OECD published Revised Discussion Draft 1 October 2013 OECD requests comments to be provided November 2013 Public consultation in Paris Page 35

36 OECD revised discussion draft overview Places emphasis on economic substance in determining whether intangibles exist and how the entities involved should share the profit Functions performed Assets used Risks assumed Page 36

37 OECD revised discussion draft revisions in the July 2013 draft New guidance on the transfer pricing treatment of local market features, location savings, assembled workforce and group synergies An amendment to the proposed definition of intangible for transfer pricing purposes Amendments to the proposed guidance on identifying entities entitled to intangible-related returns, while maintaining the approach that intangible related returns should be aligned to the functions, assets and risks associated with intangible development and exploitation Guidance on how the funding of intangible development should be remunerated at arm s length New guidance on payments between related parties for the use of the company or group name A reorganization of the proposed guidance on the practical application of transfer pricing methods to intangible transactions Page 37

38 Definition of intangibles Legal and accounting definitions of intangibles are rejected in favor of one focusing on what unrelated parties would have agreed. Legal enforceability or separate transferability is not the focus. Accounting concepts such as goodwill and going concern value are not relevant for transfer pricing purposes (although they are included in the OECD definition of intangibles). Group synergies and market characteristics such as low labor costs should be taken into account when pricing. Assembled workforce may provide a benefit and may affect the price. Page 38

39 Definition of intangibles something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances Bold text was added in July 2013 revised draft Clarifies that guidance is designed to determine the conditions that would apply between parties acting at arm s length Page 39

40 Definition of intangibles Marketing intangibles Used in business operations that are customer facing May include the following: Trademarks Trade names Customer lists Customer relationships Proprietary market and customer data used in marketing and selling goods or services to customers Unique and valuable intangibles Are not comparable to intangibles used by or available to parties to potentially comparable transactions Use in business operations (e.g., manufacturing, provision of services, marketing, sales or administration) is expected to yield greater future economic benefits than would be expected in the absence of the intangible Page 40

41 Local market features, location savings, assembled workforce, group synergies These comparability factors should be taken into account They are not by themselves intangible assets In certain situations, they can involve intangible assets Examples Regulatory license required to operate in a specific market may constitute an intangible Transfer or secondment of employees may result in the transfer of valuable know-how Group synergies Focus on how these would be shared at arm s length Group synergy benefits simply from being part of the MNE should not be shared with other group members (credit enhancement due to parent s balance sheet) Where MNE takes active steps to activate synergy (central purchasing organization), benefits should be shared according to contribution Page 41

42 Allocation of intangible profit Three criteria to take into account in determining which entities should have claims on returns to an intangible The terms of the legal agreement The alignment of functional contributions and financial investment with legal rights Whether services rendered in connection with developing, enhancing, maintaining and protecting intangibles are compensated on an arm s-length basis Page 42

43 Allocation of intangible profit Legal ownership of an intangible itself does not confer any right to retain the return from exploiting the intangible Return to legal owner depends on contributions it makes to the anticipated value in the intangibles, relative to other group members through functions performed, assets used and risks assumed Legal owner must contribute to the development, enhancement, maintenance or protection of the intangible, either or By performing these functions itself By having such functions performed under its control by independent or associated enterprises Page 43

44 Return for funding intangible development An entity that provides funding but does not control the risks or perform the functions associated with intangible development would generally, at arm s length, not receive a return equivalent to the return earned by a similarly situated investor who also controls the risks and/or performs the functions associated with the development of value in the intangibles Page 44

45 Options realistically available (ORA) analysis The perspectives of both parties, including the commercial alternatives they would have if they had been unrelated, should be taken into account in pricing. Licensor/transferor of an intangible would not accept a price less than it could realize by exploiting the intangible itself. Licensee/transferee would not pay a price that leaves it less profitable. For DCF valuation, the arm s-length price will fall between the present value expected to be received by the licensor/transferor and the present value expected to be paid by the licensee/transferee. Page 45

46 Intercompany use of company name Payment for the use of a company name should depend on The amount of the financial benefit received from using the name The relative contribution made by the owner and user of the name, as assessed through an analysis of functions, assets and risks Follows principles developed elsewhere in the draft Page 46

47 Other pricing considerations Expected future benefits should be taken into account when assessing comparability. Intangible valuations for accounting purposes are not relevant. Cost based valuations have a limited role (internal software). Use of rule of thumb (licensee/licensor split) is discouraged. Third-party acquisition price can provide a basis for pricing intercompany transfer. Sensitivity analysis is encouraged. Forecasts prepared for non-tax purposes are preferred. Discount rate does not automatically need to be WACC. Prices must typically be determined on a pretax basis. Page 47

48 Intercompany effectiveness Improving transfer pricing operations Page 48

49 Intercompany effectiveness What to consider Vision Strategy B KPIs & Goals People A Processes Organization Technology Page 49

50 EY intercompany effectiveness (ICE) framework ICE is a transaction based and scalable framework for improving intercompany pricing, accounting and reporting processes globally. ICE is designed to increase efficiency, drive business value and manage compliance risk. ICE uses a multidisciplinary approach to deliver end-to-end results across client stakeholder groups. Page 50

51 Connecting across the transfer pricing process life cycle Transfer Pricing Process Life Cycle Planning, Budgeting & Forecasting Intercompany Transaction Processing Transfer Pricing Monitoring & Reporting Testing & Compliance Forecasts are used to set prospective transfer prices and intercompany charges in alignment with transfer pricing policies. Transfer prices are adjusted based on new forecasts to achieve target operating margins by end of year. Intercompany transaction processing is automated and controlled such that transfer prices are easily identifiable within the ERP system to support transfer pricing monitoring, tax analysis and the eliminations for financial reporting purposes. Transfer pricing monitoring occurs on a frequent enough basis to ensure operating margin targets are met or identify adjustments to transfer prices. Intercompany profit elimination occurs at a level that adequately supports financial, tax and management reporting. Documentation of monitoring is maintained to evidence execution of controls for testing. Transfer pricing compliance documentation is finalized annually to meet local country transfer pricing regulations and requirements. Page 51

52 Connecting across the organization Planning, Budgeting & Forecasting Intercompany Transaction Processing Transfer Pricing Monitoring & Reporting Testing & Compliance Forecast P&L Results (FP&A) Set Transfer Prices Set Profit Targets Forecast Demand Plan (SC) Establish Standard Costs Finalize Forecast Update Transfer Prices Buy, Make & Repair Sell I/C Sell Third Party Reverse I/C COGS & Rev Eliminate ICP Reporting Inventory Reporting Product Profitability Reporting ICP Reporting External (Cons.) Reporting Gross Margin Reporting Target Op. Profit Margin Monitoring Analysis Physical vs. financial views Safety stock Coverage Margin analysis Actual vs. Standard cost Customer profitability Out of balance investigation Inventory reconciliation Management results by entity, segmented, etc. Isolation of COGS drivers TP target margins compared to actual margins Summarize intercompany transactions Prepare SOX compliance testing Prepare globally segmented financial statements Prepare locally segmented financial statements Finalize transfer pricing documentation Local compliance tax returns, declarations and documentation Core process focus: Finance Tax Supply Chain/Purchasing Finance/Tax Page 52

53 Business case Business value ETR Indirect tax costs Incur higher cost of sales due to misaligned incentive structures and/or lack of visibility into product costs and profitability Material compliance Ensuring margins are in line with target margins reflected in the TP documentation BEPS report Efficiency Reduce hours spent on execution of transfer pricing Page 53