Transfer Pricing Tax School. Tax Executives Institute, Houston, TX

Transcription

1 Transfer Pricing Tax School Tax Executives Institute, Houston, TX

2 Preparing for Global TP Controversies Under BEPS When Dealing with the IRS Speakers: John Hughes, Director (Acting) APMA via teleconference Donna McComber, Baker & McKenzie Consulting LLC Gene Tien, Baker & McKenzie Consulting LLC

3 BEPS and Controversy Main fact pattern relates to audits of transactions between treaty partners, here, the U.S. and a treaty partner Main avenues after U.S. Examination.. Appeals Mutual Agreement Procedure (MAP). Best if issue involves the valuation of the issue Simultaneous Appeals and Competent Authority (SAP) Best if Taxpayer disagrees with the legal merits of the adjustment Approach APA as a field of resolution Any differences under Non-U.S. Examination? With BEPS, how do we approach TP controversies? 2017 Baker & McKenzie Consulting LLC 3

4 BEPS Final action items released Changes to the arm s length standard? BRICS countries touting that the BEPS project has just validated the approach they have been using all along Country-by-country reporting in process 2017 Baker & McKenzie Consulting LLC 4

5 Greater Transparency CbC Reports & Notifications Increased numbers of BEPS-inspired audits Law / guidance changes everywhere: UK DPT Australia MAAL / DPT China GAAR, Local File Baker & McKenzie Consulting LLC 5

6 Outline of Disputes

7 LB&I Organization Current Structure LB&I Commissioner Douglas O Donnell LB&I Deputy Commissioner Rosemary Sereti Division Counsel Thomas Kane Director Program and Business Solutions Dennis Figg Assistant Deputy Commissioner Compliance Integration David Horton Assistant Deputy Commissioner International Theodore Setzer Director Technology and Program Solutions Kathryn Greene (a) Director Resource Solutions Keith Walker Director Data Solutions William Holmes Director Compliance Planning and Analytics Christopher Larsen Director Western Compliance PA Kimberly Edwards Director Pass Through Entities PA Cheryl Claybough Director Enterprise Activities Kathy Robbins Director Central Compliance PA Tina Meaux Director Cross Border Activities PA John Hinding Director Eastern Compliance PA Lavena Williams Director Withholding & Int l. Individual Compliance PA Pamela Drenthe Director Treaty & Transfer Pricing Operations PA Sharon Porter Director Northeastern Compliance PA Barbara Harris Director of Field Operations West Donald Sniezek (a) Deputy Director Pass Through Entities Clifford Scherwinski Director Financial Institutions and Products Gloria Sullivan Director of Field Operations North Central Katheryn Houston Director of Field Operations East Orrin Byrd Director of Field Operations Great Lakes Scott Ballint (a) Director of Field Ops. Foreign Payments Practice Johanna McGeady-Murphy Director of Field Operations Transfer Pricing Practice Jennifer Best (a) Director of Field Operations North Atlantic Catherine Jones Director of Field Operations Southwest Paul Curtis Senior Advisor Elizabeth Wagner Director Corporate/Credit Holly Paz Director of Field Operations South Central Margie Maxwell (a) Director of Field Operations West Jolanta Sander Director of Field Operations Southeast John Hinman (a) Director of Field Operations Int l. Individual Compliance Elise Gardner Director Advance Pricing & Mutual Agreement John Hughes (a) Director of Field Operations Mid-Atlantic Delon Harris (a) As of 20 October Baker & McKenzie Consulting LLC Director Treaty Administration Deborah Palacheck 7

8 Taxpayer Audits in Current IRS Structure Issue People & functions continue to shift at the IRS Potential Effects & Tactical Considerations Potential slow down in audit process Question or tension on who s the decision maker and roles Taxpayers caught in the middle Present and package issues and argument with eye/ear toward a decision maker not at the table Exam loses discretion in identifying issues for audit Data drives audit flag Understand potential numbers, ratios, and other indicia that may trigger scrutiny Hot issues are international issues (e.g., transfer pricing, subpart F, other cross-border issues) Preparation for these areas is key 2017 Baker & McKenzie Consulting LLC 8

9 Taxpayer Audits in Current IRS Structure Issue Exam loses discretion in procedural conduct of audit Getting to Appeals & resolving issues requires buyin from the actual decision makers Potential Effects & Tactical Considerations Audit driven by checklists and directives Potential loss of ability to negotiate scope and timelines Scoping and understanding time and resources needed and communication is critical Document, document, document Transparency of exam guidance should help taxpayer prepare documentation and defend position One-size-fits-all approach does not fit, though the organization will try to make it so LB&I and Appeals increasingly defer to/rely upon specialists Consistency in theory of the case, identifying why we win and supporting with specific facts, key Premium on getting to Appeals, and staying there 2017 Baker & McKenzie Consulting LLC 9

10 Taxpayer Audits in Current IRS Structure Issue The CIC continuous audit program may be eliminated or curtailed Potential Effects & Tactical Considerations Designated summons may be relegated to the history books Additional pressure on statute of limitations decisions Loss of ability to make informal claims Loss of ability to make Rev. Proc disclosures Additional pressure on correct return reporting positions Informal claims may still be entertained, but LB&I may be reluctant to devote resources Use of the formal claim process and refund litigation may increase 2017 Baker & McKenzie Consulting LLC 10

11 Campaigns so far? Exam no longer identifies/selects audit issues; the organization decides which issues to work, and how. We re now suggesting that taking the combined intellect of the group -- of the division -- that we can do a better job understanding the risk, identifying it, and responding to it. Douglas O Donnell, LB&I Commissioner Issues selected by a centralized committee and the subject-based practice areas Data and analysis drives approach to identifying issues 13 new campaigns announced 2017/01/31. Related Party Transaction Campaign (transfer of funds). Inbound Distributor Campaign (losses/small profits in U.S. distributors) Baker & McKenzie Consulting LLC 11

12 Global Controversy U.S. vs foreign TP audits. One-off foreign audits? Increased global transparency - key exposure. Existing LC TP positions in questioned by local tax and customs authorities. Overall pressure on principal company. Importance of third-party support for your TP, and the relationship of value creation Baker & McKenzie Consulting LLC 12

13 Impact on LC TP Methods? Risk control financial capacity Intangibles control value contribution Action Items empower tax authorities to make TP adjustments LC TP positions may have to adjust due to new OECD guidance Contract Other Economic & CUT? strong evidence? conduct? comps? Profit split? 2017 Baker & McKenzie Consulting LLC 13

14 Profit Splits and VCAs Actions 8-10 suggest an expected rise in profit splits; July 4 TH Discussion Draft suggests a more measured view VCA may be useful in certain cases, but caution generating a roadmap for tax audits 2017 Baker & McKenzie Consulting LLC 14

15 APA and MAPs

16 Advance Pricing and Mutual Agreement (APMA) Program Director, APMA John Hughes (a) Washington, DC Assistant Director Peter Rock San Francisco Teams 4, 10, 12 APMA 2 Russell Kwiat Washington, DC APMA 3 Judith Cohen Washington, DC APMA 4 Mark Dunshee (a) San Francisco APMA 8 Gregory Spring Washington, DC APMA 9 Patricia Fouts Washington, DC APMA 10 Dennis Bracken Los Angeles, CA Assistant Director Vacant Washington, DC Teams 2, 7, 8 Assistant Director Vacant Washington, DC Teams 3, 5, 9, 11 APMA 5 Burton Mader Washington, DC APMA 11 Charles Larson Chicago, IL APMA 7 Keith Doce (a) Washington, DC APMA 12 Ho Jin Lee Los Angeles, CA 2017 Baker & McKenzie Consulting LLC 16

17 Recent Developments IRS: Rev. Proc MAP Rev. Proc APA CRA New Director Cindy Negus (as of October 2016) Role of and need for pre-filing conferences Resource constraints Focus on efficiency Developments in case selection Efforts to triage cases Post-BEPS MAP peer reviews 2017 Baker & McKenzie Consulting LLC 17

18 APMA (2016) Rev. Proc (MAP) and Rev. Proc (APA) released in 2015 Significant changes to process and approach Internal process changes slow case progress Updates reflect impact of BEPS Action Item 14 IRS hiring freeze creates brain drain, exacerbates case slowdown IRS announces that it will begin accepting bilateral US-India APA applications on February 16, Baker & McKenzie Consulting LLC 18

19 Highlights of Rev Proc Encourages taxpayer Involvement New guidance strongly encourages taxpayer involvement in case, including making joint presentations to the treaty partners and suggesting potential case resolutions Provides guidance re: reasons map can be rejected Theme of such reasons focus on taxpayer actions that could be perceived as compromising APMA s ability to achieve a principled settlement with the treaty partner Emphasizes and clarifies APMA role in U.S. initiated adjustments Makes significant changes to interplay between APMA and Appeals, including removing ability to go to MAP after signing 870-AD and increasing importance of SAP 2017 Baker & McKenzie Consulting LLC 19

20 Simultaneous MAP and Appeals Highlights. What are key junctures or decision points now? Who are the key people to discuss with at APMA or Appeals? How long should taxpayers expect Appeals / MAP to now last? How does this change the MAP process, practically? Appeals? What else should taxpayers consider before entering this process, such as whether to pursue APAs? 2017 Baker & McKenzie Consulting LLC 20

21 Highlights of Rev Proc Reaffirms IRS commitment to APA process Emphasizes the interconnection between APAs and MAP resolutions as a means for taxpayers to manage and address transfer pricing and other cross-border issues, e.g., PEs Provides clear guidance regarding contents of APA submissions Encourages prefile meetings to flag potential difficult issues early in the process Encourages taxpayers to coordinate bilateral submissions to insure that both countries receive the same information at approximately the same time Encourages joint presentations to treaty partners either during case development or during negotiation Limits taxpayer input to position paper Could reduce ability of taxpayer to influence IRS position in advance of submission to treaty partner 2017 Baker & McKenzie Consulting LLC 21

22 MAP vs. APA* When can it be pursued? Years covered Penalties Timing MAP After audit/reassessment Years reassessed ACAP - Additional filed years (accelerated competent authority process) Mitigated if adjustment is reduced or eliminated if adjustment falls below threshold Approximately 2 years from time of filing Any time APA Five or more future years, rollback to open years None for APA and rollback years, even if adjustment exceeds threshold Approximately 4 years from time of filing but working to improve Baker & McKenzie Consulting LLC * We will focus on Canada-U.S. cases for this discussion. 22

23 APA vs. MAP Cash Flow Issues MAP Pay to play for large corporations in Canada and other jurisdictions APA No upfront payments of taxes Taxpayer input Some input/role Greater input/role in process Ongoing compliance No formal precedential value Agreement for multiple years, reduced compliance burden (annual reports instead of transfer pricing studies) Impact on future audits Minimal impact Limits future audits to ensuring compliance with terms of APA 2017 Baker & McKenzie Consulting LLC 23

24 Action 14

25 BEPS Action Item 14 Minimum Standards: Key Points Countries should ensure that treaty obligations related to MAP are fully implemented in good faith and that MAP cases are resolved in a timely manner. Requires resolving cases with an average time of 24 months. Countries should ensure that administrative processes promote the prevention and timely resolution of treaty-related disputes. MAP staff should have the authority to resolve MAP cases under the respective tax treaty without requiring approval of the audit team. Performance of MAP staff should not be measured on the amount of the audit adjustment sustained Countries should ensure that taxpayers that meet the requirements of paragraph 1 of Article 25 can access the mutual agreement procedure. MAP procedures should be well documented and companies should not be turned away from MAP if they follow the MAP procedures Baker & McKenzie Consulting LLC 25

26 BEPS Action Item 14 Best Practices - Examples Bilateral APA Program Permit adding prospective years to MAP years Suspend collection of adjustment Adequate training of staff Appropriate procedures to facilitate recourse to MAP Permit access to MAP for taxpayer initiated adjustments Mandatory binding arbitration Not a minimum standard but twenty countries have committed to adopt and implement mandatory binding arbitration 2017 Baker & McKenzie Consulting LLC 26

27 BEPS Action Item 14 Peer review Starts in 2016 Compliance of the minimum standard will be monitored through a peer review process executed by the Forum on Tax Administrators, MAP Forum So far, 61 countries have signed up for peer review, including Japan Belgium, Canada, the Netherlands, Switzerland, the U.K. and the U.S. are the first group of countries (starting December 2016) Austria, France, Germany, Italy, Liechtenstein, Luxembourg and Switzerland, are in the second group (Starting in April 2017) 2017 Baker & McKenzie Consulting LLC 27

28 Effect of BEPS on APAs and MAP Cases Revisions to Chapter 1 Revisions to Chapter 6 on intangibles BEPS Action Items 8-10 applied to OECD Transfer Pricing Guidelines 2017 Baker & McKenzie Consulting LLC 28

29 What s the Way Forward? Do APAs still offer enough certainty given the changing landscape? How might these expected changes under BEPS (e.g., multilateral instrument, mandatory disclosure, handling of risk) impact an MNE s strategy? Does MAP remain a viable path for resolving transfer pricing disputes? 2017 Baker & McKenzie Consulting LLC 29

30 Final Thoughts

31 Deciding Whether to Pursue an APA Primary considerations in deciding to pursue an APA Risk analysis Tax and financial statement audit Desire for certainty Types of transactions Relevant tax authority considerations APA renewal issues How will BEPS affect the decision to pursue an APA? 2017 Baker & McKenzie Consulting LLC 31

32 Transfer Pricing Strategies in a Post-BEPS World Globally consistent policies Consistent doesn t mean identical results in each country Increased transparency provides opportunity to give context to tax authorities Central management of TP planning, implementation and compliance Strategic access to APAs and MAP to surface, resolve, complex positions, e.g., intangibles, restructuring 2017 Baker & McKenzie Consulting LLC 32

33 Working within the Action Items Arm s Length Standard still rules - most appropriate / best method analysis highly relevant Consider privileged DEMPE / VCA Analysis Bolster existing TP positions in contracts, and with transactional economic evidence Prepare for more management of global tax audit controversies, and strategic APAs 2017 Baker & McKenzie Consulting LLC 33

34 Thank you!

35 Our Presenters John Hughes, Director (Acting) APMA at IRS Advance Pricing and Mutual Agreement Program (APMA) John Hughes presently serves as Acting Director, APMA. John joined the IRS in September Prior to assuming his current assignment, John was Senior International Advisor to the Director, Treaty and Transfer Pricing Operations. John has also been a Senior Manager in APMA. Before joining the IRS, John worked at the Washington offices of Mayer Brown LLP. He received a JD and an MA (Applied Economics) from the University of Michigan in Baker & McKenzie Consulting LLC 35

36 Our Presenters Donna McComber (Washington D.C.) - Director of Economics Baker & McKenzie Consulting LLC donna.mccomber@bakermckenzie.com Ms. McComber focuses her practice on transfer pricing, negotiating and consummating advance pricing agreements for US and foreign-based multinationals. She advises on matters involving examination, appeals, advance pricing agreements and competent authority matters. This work has given her experience with highly complex issues, including intangibles migration, restructuring, and financial product cases. Gene Tien (Palo Alto) - Director of Economics Baker & McKenzie Consulting LLC gene.tien@bakermckenzie.com Dr. Tien specializes in transfer pricing and applied economics with an emphasis on issues relating to intangibles and licensing. His practice is focused on advising firms on how to strategically develop their transfer pricing positions in a changing environment. Dr. Tien advises companies on planning with regard to intangibles, mitigating or resolving foreign and U.S. disputes, and evaluating transfer pricing risk exposures Baker & McKenzie Consulting LLC 36

37 Baker & McKenzie Consulting LLC is a subsidiary of Baker & McKenzie LLP, a member firm of Baker & McKenzie International, a Swiss Verein of member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome Baker & McKenzie Consulting LLC