Transfer Pricing and Business Restructurings

Transcription

1 Transfer Pricing and Business Restructurings Streamlining all the way Edited by Anuschka Bakker IBFD

2 Foreword Acknowledgements Abbreviations and Common References v ix xi Part A Setting the Scene Chapter 1: Introduction 1. Drivers of business restructuring Global business models to maximize synergies and economies of scale Improvement of productivity of the supply chain Other external and internal factors 7 2. Business restructuring from an economic perspective Business perspective Stakeholder's perspective 9 3. Tension between commercial aims and tax environment 9 Chapter 2: Business Models 1. Introduction Business modelling for tax and transfer pricing purposes Manufacturer Toll manufacturer Contract manufacturer Fully fledged manufacturer Distributor Commission agent Commissionaire Classic buy-sell distributor Fully fledged distributor 30 Xlll

3 2.3. Service provider Business restructurings Intangible property transfers Conversion from fully fledged to contract manufacturing model Conversion from fully fledged distributor to stripped distributor model Centralized services and cost allocation agreements 45 Chapter 3: OECD Policy Framework 1. OECD policy framework in the area of international taxation OECD in general OECD tax work Arm's length principle and OECD Guidelines Comparability analysis Transfer pricing methods Recent developments Other relevant guidance in the OECD Guidelines Permanent establishment issues Definition of a permanent establishment Attribution of profits to permanent establishments Prevention and resolution of transfer pricing and other international tax disputes Dispute resolution Dispute prevention OECD project on business restructuring Restructurings that are within the scope of the OECD project Origins of the project Transfer pricing dimension of business restructurings Presentation of the OECD Discussion Draft Relationship with permanent establishment issues Relationship with domestic anti-abuse rules Main tentative conclusions from the OECD Discussion Draft Issues Note 1: Special considerations for risks 65 xiv

4 Issues Note 2: Arm's length compensation for the restructuring itself Issues Note 3: Remuneration of post-restructuring controlled transactions Issues Note 4: Recognition of the actual transactions undertaken Conclusion 83 Chapter 4: EU Policy Framework 1. Developments with EU legislation Impact of existing secondary EC law on business restructuring Parent-Subsidiary Directive Merger Directive Interest and Royalties Directive Arbitration Convention Impact of proposed secondary EC law on business restructuring: Common Consolidated Corporate Tax Base and Home State taxation Common Consolidated Corporate Tax Base Home State taxation Impact of Common Consolidated Corporate Tax Base and Home State taxation Impact of proposals of the EU Joint Transfer Pricing Forum on business restructuring Impact of case law on business restructuring General CLT-UFA S.A. case FCE Bank case Coordination in the field of exit taxes 96 Chapter 5: Art 9 of the OECD Model Convention 1. Introduction Arm's length (comparability) analysis and recognition, or non-recognition of transactions undertaken Introduction 100 xv

5 2.2. Meaning of "conduct of parties" Determining whether terms and conditions between the respective parties are arm's length from a commercial or financial perspective Choice between comparability adjustment or nonrecognition of (part of) a transaction Endeavouring to understand the envisaged tests by means of examples Trade-off between equity and efficiency Valuing the restructuring itself and the post-restructuring transactions Arm's length compensation for intangibles and related risks Introduction Building the commercial business case Comparison of pre- and post-restructuring scenarios Business reasons for and the expected benefits from the restructuring Existence of probable alternative commercial choices; possible indemnities Determining exit values: valuation methods used by appraisers and valuation practitioners Income-based approach: excess earnings approach Income-based approach: incremental margin analysis Market-based methods Methods to establish bargaining power Rule of thumb used in civil court cases as a last resort Intangible transferred at a point in time where it does not have an established value Impact of intangibles and related risks in the postrestructuring valuation The use of one-sided transfer pricing methods More emphasis on two-sided methods, especially profit split methods Role of control in a post-restructuring situation 143 Chapter 6: Permanent Establishment Issues 1. The presence of a permanent establishment 145 xvi

6 2. Allocation of profits to permanent establishments: Art. 7 of the OECD Model 153 Chapter 7: VAT Aspects of Business Restructuring 1. Introduction General Introduction to the VAT system of the European Union Group financing activities Transfer of assets Scope of the non-taxability Definition of "totality of assets" Successor's intention to continue the business Business licence or authorization Right to deduct VAT Transfer of shares General Selling of shares outside the scope of VAT Issue of new shares Outsourcing Changes to the business model as described in Chapter Transfer of intellectual property From fully fledged manufacturer to contract manufacturer From fully fledged distributor to stripped distributor Commissionaires 175 Chapter 8: Customs Duties 1. Introduction Customs law General Agreement on Tariffs and Trade; World Trade Organization General Agreement on Tariffs and Trade 180 xvu

7 The Geneva Conference Fundamental principles World Trade Organization Uruguay Round New order The European Union The European Communities: ECSC, EEC and EAEC/ Euratom EU customs law Basic legal provisions Customs in the United States The Customs Modernization Act Valuation Free trade agreements Association of Southeast Asian Nations ASEAN Free Trade Area Customs rules Valuation Determining the value of goods Transaction value Significance of "relationships" between buyer and seller Alternative measures of value Additions and exclusions to the transaction value Customs value and transfer pricing Two sides of the same coin A new trend: the holistic approach Arm's length principle: a shared principle? Controls of transactions: an operational convergence How to reconcile methods for determining customs values and transfer prices The strength of the double approach before tax audits 204 Chapter 9: Tax Accounting Considerations 1. Introduction 207 xviu

8 2. International accounting framework General Income tax accounting standards Tax law considerations Plant closures Migration of intangibles Conversion into limited-risk entities Specific tax accounting impacts Transfer pricing uncertainties FIN 48: a further overview IAS 12 versus FIN 48: overview and key differences Accounting for transfer pricing tax uncertainties: specific considerations Deferred tax accounting Pre-tax accounting: deferred tax implications Intercompany asset transfers Realizability of deferred tax assets Outside basis differences Comprehensive example Conclusion 244 Chapter 10: China PartB Country Chapters 1. Introduction Corporate income tax framework Corporate income tax system Taxable entities Taxable income Tax losses Tax rates Tax treatment of R&D expenses Taxation of intellectual property Tax consequences of various models 252 xix

9 3.1. Characterization of manufacturing entities Principal manufacturer versus contract or toll manufacturer Characterization of distributing/selling companies Conversion from fully fledged distributor to a limited-risk distributor Service company or commissionaire or agent Contract service providers Transfer pricing details Issues arising upon restructuring Issues arising with regard to intangibles Post-restructuring issues Recognition of transactions Consequences of restructurings not subject to recharacterization Treatment of business restructuring expenses The bargaining theory applied to business restructuring Specific industries Automotive industry Pharmaceutical industry Banking industry Permanent establishment perspective Existence of a permanent establishment Allocation of profits to a permanent establishment General concept Allocation of assets Valuation and depreciation of assets Capital gains Allocation of risks Intra-company dealings Difference with authorized OECD approach Specific industries Anti-avoidance provisions Case law 271 Chapter 11: Germany 1. Corporate income tax framework 273 xx

10 1.1. Corporate income tax system, taxable entities, taxable income Tax losses Tax rates Tax treatment of R&D expenses and taxation of intellectual property Specific rules on business restructurings Hypothetical arm's length test Implications of EU law and income tax treaties Transfer of function Transfer package Tax consequences of various models Characterization of manufacturing entities Assembler or toll manufacturer Contract manufacturer Manufacturer under licence Fully fledged manufacturer Principal manufacturer versus contract or toll manufacturer Physical carve-out and transfer Duplication of activities Termination of inbound licence Conversion to toll or contract manufacturing Characterization of distributing/selling companies Commission agent Commissionaire Limited-risk distributor Fully fledged distributor Conversion from fully fledged distributor to a limited-risk distributor Business restructuring including commissionaires or commission agents Conversion from full-risk distributor to commissionaire or commission agent Termination of distribution activities Contract service providers Transfer pricing details Issues arising upon restructuring Contractual basis of restructuring Documentation 287 xxi

11 3.2. Issues arising with respect to intangibles Post-restructuring issues Adjustment period for uncertainties in valuation Duplication of functions Recognition of transactions as presented by a taxpayer Consequences of restructurings not subject to recharacterization Treatment of business restructuring expenses The bargaining theory applied to business restructuring Specific industries Automotive industry Pharmaceutical industry Financial services industry Permanent establishment Existence of a permanent establishment Allocation of profits to a permanent establishment General concept Allocation of assets Valuation and depreciation of assets Capital gains Allocation of risks Intra-company dealings Difference with authorized OECD approach Specific industries Anti-avoidance provisions Case law 297 Chapter 12: India Corporate income tax framework Corporate income tax system Taxable entities Taxable income Tax losses Tax rates Tax treatment of R&D expenses Taxation of intellectual property Tax consequences of various models 301 xxu

12 2.1. Characterization of manufacturing entities Principal manufacturer versus contract or toll manufacturer Characterization of distributing and selling entities Conversion of fully fledged distributor to a limited-risk distributor Service company or commissionaire or agent Commission agent Characterization of service-based companies Contract service providers: centralization of R&D activities, contract maintenance and contract marketing Transfer pricing details Issues arising upon restructuring in case of stopping activities and post-restructuring issues Issues arising in case of transfer of intangibles Post-restructuring issues Recognition of transactions as presented by the taxpayer Consequences of restructurings not subject to recharacterization The bargaining theory and business restructuring Specific industries Automotive industry Pharmaceutical industry Global trading of financial instruments Permanent establishment Existence of a permanent establishment Fixed place permanent establishment Agency permanent establishment Service permanent establishment Allocation of profits to a permanent establishment General concept Allocation of assets Valuation and depreciation of assets Capital gains Allocation of risks Intra-company dealings Difference with authorized OECD approach Anti-avoidance provisions 328 xxm

13 6. Case law 329 Chapter 13: Switzerland Corporate income tax system Taxable entities Taxable income General corporate income tax regime Federal and cantonal tax privileges Tax losses Tax rates Tax treatment of R&D expenses General provisions R&D incentives Other incentives applicable for R&D activities Taxation of intellectual property Swiss holding company as beneficial owner of intellectual property Cantonal and communal tax privileges and beneficial IP ownership Transfer pricing rules and regulations Tax consequences of various conversion structures General comments Current approach Characterization of manufacturing entities Key features Tax consequences of a conversion Principal manufacturers versus contract/toll manufacturers Characterization of distribution and selling companies Conversion from fully fledged distributor to limited-risk distributor General observations Conversion of an existing Swiss company into a principal company Service company or commissionaire or agent Contract service providers Transfer pricing details Legal framework Transfer pricing and international tax law 350 xxiv

14 Transfer pricing and Swiss internal tax law Issues arising upon restructuring: indemnification for terminating activities Issues arising with regard to intangibles Post-restructuring issues Recognition of transactions as presented by a taxpayer Treatment of business restructuring expenses The bargaining theory applied to business restructuring Specific industries Permanent establishments Definition of "permanent establishment" under Swiss tax law Taxation of a permanent establishment Existence of a permanent establishment in various arrangements Allocation of profits to a permanent establishment General concept Allocation of assets Valuation and depreciation of assets Capital gains Allocation of risks Intra-company dealings Difference with authorized OECD approach Specific industries Anti-avoidance provisions Case law 363 Chapter 14: United Kingdom 1. Corporate income tax framework Corporate income tax system Taxable entities Taxable income Tax losses Tax rates Tax treatment of R&D expenses Taxation of intellectual property Tax consequences of various models 369 xxv

15 2.1. Characterization of manufacturing entities Principal manufacturers versus contract or toll manufacturers Characterization of distributing/selling companies Conversion from full distributor into limited-risk distributor Service company, commissionaire or agent Contract service providers General R&D credits Transfer pricing details Issues arising upon restructuring Issues arising with respect to intangibles Goodwill Other intangible assets Valuation Post-restructuring issues Substance Recognition of transactions as presented Disregarding transactions Recharacterizing transactions Consequences of restructurings not subject to recharacterization Compensation Commercial agents Transfer pricing Treatment of business restructuring expenses The bargaining theory applied to business restructuring Specific industries Automotive industry Pharmaceutical industry Banking industry Global trading Insurance industry Permanent establishments Existence of a permanent establishment Agents Commissionaires Limited-risk distributors Contract or toll manufacturers 390 xxvi

16 4.2. Allocation of profits to a permanent establishment General concept Allocation of assets Valuation and depreciation of assets Capital gains Allocation of risks Intra-company dealings Difference with authorized OECD approach Specific industries Anti-avoidance provisions Case law 396 Chapter 15: United States Corporate income tax framework Corporate income tax system Taxable entities Taxable income Tax losses Tax rates Tax treatment of R&D expenses Taxation of intellectual property Tax consequences of various models Characterization of manufacturing entities Principal manufacturer versus contract/toll manufacturer Characterization of distributing/selling companies Conversion from a fully fledged distributor to a limited-risk distributor Conversion from a fully fledged distributor to a service company or commissionaire Contract service providers: centralization of R&D activities, contract maintenance and contract marketing Transfer pricing details Issues arising upon restructuring, such as indemnification for termination of activities Issues arising with respect to intangibles Post-restructuring issues Recognition of transactions as presented by a taxpayer 422 xxvu

17 Consequences of restructurings not subject to recharacterization Treatment of business restructuring expenses The bargaining theory applied to business restructuring Specific industries Automotive industry Pharmaceutical industry Banking industry Global trading Insurance industry Permanent establishment perspective Existence of a permanent establishment Allocation of profits to a permanent establishment General concept Allocation of assets Valuation and depreciation of assets Capital gains Allocation of risks Intra-company dealings Difference with authorized OECD approach Specific industries Anti-avoidance provisions The Code and Treasury Regulations Inversions Other Common law Summary Case law Johnson Bronze Company case Hospital Corporation of America case United Parcel Service of America, Inc. case E.I. Du Pont de Nemours case Bausch & Lomb. Inc. case XXVUl

18 Chapter 16: Case Study China - Case Study 452 Germany - Case Study 457 India - Case Study 460 Switzerland - Case Study 463 United Kingdom - Case Study 466 United States - Case Study 473 Chapter 17: Conclusion PartC Conclusion 1. Introduction Business perspective and business models Tax consequences of various models Indirect taxes Tax accounting OECD Report Future prospects 493 xxix