New transfer pricing requirements and tax supervision landscapes

Transcription

1 18 th Annual Tax and Legal Conference Maximise Shareholder Value New transfer pricing requirements and tax supervision landscapes 18 October 2016

2 Agenda New transfer pricing landscape Global level: BEPS Action 13 three-tiered approach Local level: draft transfer pricing provisions New tax supervision landscape Tax audit procedures Tax audit cases Steps for tax appeals/complaints Survival strategies 2

3 01 New transfer pricing landscape Global level: BEPS Action 13 three-tiered approach 3

4 Base Erosion Profit Shifting (BEPS) Action 13 A three-tiered approach Each member of an MNE will separately report its respective business and tax information to the country where it operates. Local File CbC Report A detailed picture of business results for each country where an MNE operates including number of employees, revenues, pre-tax profits and taxes paid. (for more information see Master File An overview of an MNE s global business, with aggregate data from all of the countries where it operates. Maximise Shareholder Value October

5 Snapshot of OECD guidance on TP documentation and CbCR Who? Initially, MNEs with revenue greater than Euro 750M or equivalent local currency What? CbCR, master file, and local file to be submitted annually Where? CbCR to be filed with the ultimate parent s home tax authority (or surrogate); master file and local file to be filed directly in relevant tax jurisdictions When? First year for reporting will be for the year ended 31 December 2016, to be lodged by 31 December 2017 How? The MNE to file the CbCR with the ultimate parent s home tax authority shared via the treaty network; master file and local file to be filed directly with the local jurisdictions tax authorities Why? Enhanced transparency and risk assessments Maximise Shareholder Value October

6 What information is required? Local entity Management structure Local organisation chart Business restructurings Local reporting lines Key competitors Local file Controlled transactions Description and context Payments / receipts Inter-co agreements TP analysis APAs Master file Organisation structure Description of MNE business(es) MNE intangibles Financial information Financial accounts Reconciliation Comparable data CbCR Eight pieces of critical information to be provided for each tax jurisdiction: Revenue related and unrelated parties Profit (loss) before income tax Income tax paid (on cash basis) Income tax accrued Current year Stated capital accumulated earnings Number of employees Tangible assets (other than cash and cash equivalents) MNE intercompany financial activities MNE financials and tax positions Maximise Shareholder Value October

7 OECD and G20 members Inside-out approach 7

8 OECD and G20 members Outside-in approach 8

9 02 New transfer pricing landscape Local level: draft transfer pricing provisions 9

10 New transfer pricing landscape Local level: draft transfer pricing provisions Thai transfer pricing guidelines Departmental Instruction Paw 113/ 2545 (Paw 113) It s currently not a law, but a guideline for Revenue officers and taxpayers on how to set arm s length transfer pricing (at market price) It also suggests what information should be prepared to prove that a taxpayer s transfer pricing did not deviate from market price 10

11 New transfer pricing landscape Local level: draft transfer pricing provisions Arm s length principle Draft transfer pricing provisions Corresponding adjustment TP disclosure: Declaration form & TP documentation 11

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15 New transfer pricing landscape Local level: draft transfer pricing provisions Transfer pricing declaration form Level of risk Taxpayer provides information regarding its inter-company transactions in the declaration form The RD uses such information to assess the level of risk of each taxpayer. The RD then selects a target for tax audit 15

16 03 New tax supervision landscape Tax audit procedures 16

17 New tax supervision landscape Transfer pricing audit selection criteria Significant related-party transactions Pay royalties/ management fees More than two years of consecutive losses Profit decline after tax holiday/ business restructuring No tax payment for a prolonged period Low profitability compared with competitors Negative gross profit Drastic fluctuation in profits Non-BOI profits lower than BOI profits Varied profitability by product 17

18 New tax supervision landscape Tax audit selection criteria Excess tax credits Loss at gross profit levels or continuing operating losses Low profits compared with others in the same industry Indication of tax evasion from external source Three-month consecutive input tax carried forward Significant decrease in revenue Drastic fluctuation in profits High chance of tax payment default Never had a tax audit by a RD team Reaching end of prescription period 18

19 New tax supervision landscape Tax audit procedures What has the Revenue Department initiated? Business operation visits (BOVs) Specific tax issues (STIs) Summons audit *Most stringent type of tax audit 19

20 New tax supervision landscape Tax audit procedures Comparison of tax investigation procedures BOV STI Summons audit Objective Follow up and advise on tax return filings Examine before a tax refund Cross check with tax invoices Stock inspection Investigate VAT refunds Transfer pricing Investigate on other STIs Exercise tax assessment authority Intensity Preliminary analysis Investigating nearly all issues for tax refunds Detailed analysis on specific issues Detailed analysis on ALL issues 20

21 New tax supervision landscape Tax audit procedures Comparison of tax investigation procedures (continued) BOV STI Summons audit Possibility of negotiation Medium to high Medium Low Tax assessment Voluntary adjustment Set off in the case of tax refund Voluntary adjustment Assessment letter Penalty CIT: N/A VAT : 20% - 50% ** SBT : 20% - 50% ** CIT: N/A VAT: 20% - 50% ** SBT : 20% - 50% ** CIT: 100% - 200%* VAT: 100% - 200%* SBT : 100% - 200% * *50% reduction may be obtained **Reduced rate 21

22 04 Tax audit cases 22

23 Tax audit cases Case 1: Segregation of business activities Company A (AA), a software distributor in Thailand, has these main activities: Distributing the Group s products (i.e. software) to end-users, and Providing related installation and implementation services. In the past, AA s operating profit margin was approximately 20-25% per year. The parent company reviewed the profit allocation and found that AA, as a routine distributor, had too high a operating profit margin. The parent company then set AA s new operating profit margin at 2-3% in accordance with a benchmarking study for a routine software distributor. RD challenges Based on AA s functional profiles, the RD views that AA has two main business models: 1) Routine software distributor 2) High-value service provider The RD accepts the operating results for routine software distribution at 2-3% as AA has limited functions, assets, and risks assumed for this activity. However, the RD views that for the installation and implementation services requires intensive knowledge relating to accounting finance, HR, and other relevant functions of its customers operations in order to customise software to fulfil customers needs. Therefore, the RD views that such services should not have the same profit level as distributor services. Maximise Shareholder Value October

24 Tax audit cases Case 2: Through-down adjustment Company AB : Manufacturer of medical equipment based in Thailand Company X : Parent company of Company AB All finished products manufactured by Company AB were sold to Company X. The Company AB s operating profit for a nine-month period was above the arm s length range. The Company AB then proposed a through-down adjustment (e.g. credit note to Company AB) of Baht 200 million to ensure that its annual operating results will fall with the arm s length range. AB s operating results Lower Quartile Median Upper Quartile RD challenges Arm s length range The RD views the through-down adjustment as a non-deductible expense as it was an expense determined from the year-end profit in accordance Section 65 ter (19) of the Revenue Code. Maximise Shareholder Value October

25 05 Steps for tax appeals/complaints 25

26 Steps for tax appeals/complaints After summons audit RD officers issue an assessment notice after summons audit has been completed. Timeline for filing appeals/complaints Assessment notice Within 30 days Board of Appeals Within 30 days Central Tax Court Within 1 month Special Appeals Court Within 1 month Supreme Court 1-2 years 1 year Unknown 2 years Timeline for receiving results 26

27 06 Survival strategies 27

28 Survival strategies Transfer pricing best practices Select the appropriate TP policy Design/review business model Benchmark to identify appropriate margins Prepare TP documentation 7 Planning & implementation Test results Build TP policy into the budget Regularly monitor actual results 28

29 Survival strategies Tax audit best practices Best to cooperate Respond in writing All responses reviewed by management Meeting preparation Do: Assign one local person who knows the company s business well to liaise with the RD Prepare before meeting Base responses on prepared documents Meeting preparation Don t: Provide raw data Have different staff provide information Provide information without understanding it Provide bits and pieces Make off-the-cuff replies 29

30 Survival strategies support First step Review compliance Build defence strategies Fourth step Represent clients in any civil, tax, criminal, and administrative litigation Second step Assist in audit presentations, negotiations, and settlement discussions Manage and respond to investigations for information requests, large document production, etc. Update investigation status for management s decisions Third step Assist in drafting tax appeal to the Tax Board of Appeals Arrange processes until the result has been obtained 30

31 Contacts Peerapat Poshyanonda Partner Tel. +66 (0) Ornjira Tangwongyodying Partner Tel. +66 (0) Janaiporn Khantasomboon Partner Tel. +66 (0) Niphan Srisukhumbowornchai Partner Tel. +66 (0)

32 Thank you This content is for general information only and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Legal & Tax Consultants Ltd. All rights reserved. refers to the Thailand member firm and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.