Transfer Pricing Update

Transcription

1 Transfer Pricing Update Ray Brown, Principal Economist, DLA Piper - Los Angeles Mike Patton, Partner, DLA Piper - Los Angeles Eric Ryan, Partner, DLA Piper - Silicon Valley *This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

2 Agenda BEPS: Update and challenges BEPS: Proposed changes to TP documentation IRS TP Exam Roadmap March

3 OECD BEPS Project What is Base erosion and profit shifting (BEPS)? Segregation between the location of actual business activities and investments take place and the location where profits are reported for tax purposes International planning to minimize profits in high-tax jurisdictions and maximize profits in low- or zero-tax jurisdictions. For example: Tax planning to minimize income and maximize expenses in high-tax jurisdictions Structuring organization to minimize taxable presence in high-tax jurisdictions Taking arguably inconsistent positions in different jurisdictions on characterization of transactions or entities TEI-SJSU Tax Policy Conference February 28,

4 BEPS timeline to-date June 2012: G20 asks OECD at leaders meeting to report on the need to prevent base erosion and profit shifting 7/19/13: OECD publishes second report Action Plan on Base Erosion and Profit Shifting, listing 15 actions with deadlines 1/20/14: Digital Economy Task Force (led by Pascal Saint- Amans) reports that it is not viable to propose special rules for internet companies 1/30/14: OECD releases discussion draft on country-bycountry reporting (Action 13) 2/10/14: Tax Notes publishes article on leaked hybrids discussion draft dated October 2013 (Action 2) 2/12/13: OECD publishes first report Addressing Base Erosion and Profit Shifting, listing 6 key pressure areas 9/6/13: G20 leaders endorse OECD s work on BEPS at Russian summit 1/23/14: OECD presents webcast on 2014 deliverables 1/31/14: OECD publishes comments receives on the Tax Challenges of the Digital Economy (Action 1) TEI-SJSU Tax Policy Conference February 28,

5 BEPS action plan Action Deadline Action Deadline 1. Tax challenges of the digital economy 2. Hybrid mismatch arrangements Sept TP for risks and capital Sept Sept TP for other high-risk transactions 3. CFC rules Sept Development of data on BEPS and actions addressing it 4. Deductibility of interest and other financial payments Sept. 2015/Dec Disclosure of aggressive tax planning arrangements Sept Sept Sept Harmful tax practices Sept. 2014/Sept. 13. TP documentation Sept /Dec Treaty abuse Sept Treaty dispute resolution mechanisms Sept Artificial avoidance of PE status Sept TP for intangibles Sept. 2014/Sept Multinational instrument for amending bilateral tax treaties Sept. 2014/Dec TEI-SJSU Tax Policy Conference February 28,

6 Country reactions: positive embrace of BEPS initiatives 5/15/12: Spanish lower court holds the Dell s Irish principal had a virtual PE in Spain - even though its servers were outside Spain due to selling computers to Spanish customers via a website managed by employees of its Spanish affiliate Case is currently on appeal January 2013: French government published a commissioned report written by two economists (Collin & Colin), which recommended that the treaty definition of PE be expanded to include users of social media websites Report also proposed a tax on the collection of data 12/23/13: Italian parliament passed the first BEPS legislation, the Google tax, which requires that Italian companies purchase their internet ads from locally registered companies Law likely violates EU principle on non-discrimination Due to controversy, Italy delayed implementation of law until July 2014 Soon: UK Task Force is expected to release a long report (103 pages) which sets out options for a taxation approach that would expand the definition of PE in order to allow market countries to capture profits from digital economy businesses that currently are exempt This is a deviation from the approach that was originally announced, which was not supposed to focus on PE TEI-SJSU Tax Policy Conference February 28,

7 Country reactions: more modest embrace of BEPS 10/22/13: Ireland passed a law eliminating double Irish stateless structures companies incorporated in Ireland but managed and controlled in an EU/treaty partner country (e.g., the US) will be treated as Irish tax resident unless such companies are tax residents in those countries 12/12/13: US Treasury officials generally endorse BEPS, but publicly stated that any measures proposed by the Digital Economy Task Force must not strip income out of the US (implying that the definition of PE should not be expanded) 1/1/14: the Netherlands codified substance requirements for obtaining treaty benefits, requiring declaration on tax return No indication certain special purpose NL entities will be eliminated 2013: Australia strengthened its General Anti- Avoidance Rules, modernized its Transfer Pricing Regime and now requires publication of taxes paid by largest Australian companies TEI-SJSU Tax Policy Conference February 28,

8 Possible action items now 1. Model impacts of US tax reform proposals 2. Educate executives, boards of directors 3. Consider de-risking international structure Align substance with key entities Collapse 2-tier structures into 1 tier? Obtain APAs for principals / distributors / S&M 4. Lobby for your interests Industry trade groups, TEI, SVTDG Discussion: What steps are companies taking to prepare for BEPS? TEI-SJSU Tax Policy Conference February 28,

9 Discussion draft on CbC reporting On 1/30/14, the OECD released a discussion draft on TP documentation and country-by-country (CbC) reporting (Action 13). Will replace Chapter V of the TP Guidelines Two-tiered approach: Master File and Local File Master File needs to include: Detailed description of the overall business (full legal entity chart, flows of goods globally, services, etc.) Detailed description of all intangibles (where are they, who pays for them, etc.) Detailed description of intercompany loans Proposed Master File includes things like: Who are your top 25 employees in terms of remuneration? Where are they? And a requirement to disclose all APAs and ATRs Master File can be in English; Local File in the local language TEI-SJSU Tax Policy Conference February 28,

10 Discussion draft on CbC reporting cont d Master File needs to include the CbC reporting Compliance costs are certainly going to increase, not decrease TEI-SJSU Tax Policy Conference February 28,

11 Effects of CbC reporting OECD expects to hold meetings for taxpayer comments on CbC reporting in late March CbC reporting requires local implementation to be effective. However, the basic concepts seem to have support with many countries The US (IRS TP Director) claims that CbC would add little for IRS because of existing reporting requirements. OECD indicates that two of the main purposes behind the CbC reporting proposals are: to facilitate TP Risk Assessments by tax authorities, as well as to facilitate transfer pricing examinations Discussion: What changes to TP Documentation are companies making because of expected changes to TP documentation rules? March

12 IRS LB&I TP exam roadmap The TP Exam Roadmap was issued February 14, 2014 The Roadmap consists of detailed procedures and timelines for conducting a transfer pricing examination Unlike prior TP Directives (e.g. Cost Sharing CIP) no substantive guidance is provided The Roadmap largely organizes and references existing case processing procedures or emerging procedures (IDR response process) March

13 IRS roadmap stages TRANSFER PRICING AUDIT ROADMAP Quality Examination Process (QEP) QEP Phases Planning Execution Transfer Pricing Audit Stages & Timeline Resolution Cycle Time in Months Non-cycle time 1st to 2nd 3rd 4th 5th 6th 7th to 15th 16th 17th 18th 19th 20th to 23rd 24th Pre-Examination Analysis Opening Conference, Transfer Pricing Orientation Preparation of Initial Risk Analysis, Exam Plan & Key Milestones Fact Finding and Additional IDRs, Functional Analysis Mid Cycle Risk Assessment Issue Development and Preliminary Reports Pre-NOPA Issue Presentation Resolution Discussions Final NOPA and Case Closing 3 March

14 IRS roadmap timeline TRANSFER PRICING AUDIT ROADMAP Transfer Pricing Audit Roadmap Phases Planning Phase (up to a 6 month process) A. Pre-examination Analysis Preliminary assessment of potential 6662(e) Documentation Review Planning Meetings B. Opening Conference (starts the 24 month cycle) C. Taxpayer Orientations D. Preparation of Initial Risk Analysis and Examination Plan Initial Risk Analysis Examination Plan, Timelines and Key Milestones Execution Phase (up to a 14 month process) A. Fact Finding and Information Gathering Additional IDRs Functional Analysis Mid Cycle Risk Assessment B. Issue Development Economic Analysis Preliminary Report and Findings Resolution Phase (up to a 6 month process) A. Issue Presentation B. Issue Resolution C. Case Closing/RAR Timeline Pre-exam analysis occurs before the cycle begins Opening Conference starts the 24 month audit cycle Planning activities occur during months 1 to 6 of the audit cycle Fact finding and issue development occurs during months 3 to 17 of the audit cycle Issue Resolution occurs during months 18 to 24 of 4 March

15 IRS roadmap The Roadmap emphasizes the need to develop and modify a working hypothesis that supports the expected transfer pricing adjustments. Emphasis is on fact finding to support a persuasive case to determine a reasonable result under the facts and circumstances of any given case. Transfer pricing cases are usually won and lost on the facts. The key in transfer pricing cases is to put together a compelling story of what drives the taxpayer s financial success, based on a thorough analysis of functions, assets, and risks, and an accurate understanding of the relevant financial information. Fact development is the bread and butter of our exam teams it s what they are trained for and good at. An effective story explains the taxpayer s value chain, competitive position in its industry, and financial results, in a clear and compelling fashion. If indications are that the tax result claimed by the taxpayer is at odds with common sense and economic reality too good to be true chances are it is a good candidate for further scrutiny. Early identification and aggressive pursuit of cases that have this potential is important. Conversely, if indications are that the taxpayer s financial results are reasonable, and the taxpayer s method fits its fact profile, it may not be worth pursuing the issue. Discussion: 1. Are companies seeing any difference in IRS TP Examination procedures due to issuance of the Roadmap? 2. Are companies expecting to change their approach to TP examinations because of the issuance of the Roadmap? March

16 Ray Brown DLA Piper 2000 Avenue of the Stars Suite 400 North Tower Los Angeles, CA Office Phone: Cell: Michael Patton DLA Piper 2000 Avenue of the Stars Suite 400 North Tower Los Angeles, CA Office Phone: Cell: Eric Ryan DLA Piper 2000 University Avenue East Palo Alto, CA Office Phone: Cell: Circular 230 Notice: In compliance with U.S. Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein. March