Strategies for Transfer Pricing

Transcription

1 Strategies for Transfer Pricing The impact of the OECD s Base Erosion & Profit Shifting Report Ian Kilpatrick - CICA Joel Chansky - Milliman Matt Gravelin - Johnson Lambert

2 What is the OECD? Originally formed in Later joined by USA & Canada. Now 34 market dominated countries. What is its Mission? Mission To promote policies that will improve the economic and social well being of people around the world.

3 Why the emphasis on BEPS Angel Gurria OECD Secretary General Comments made at the launch of Deliverables 16 th September 2014 [Aggressive tax practices] Erode the integrity of our tax systems; Damage the capabilities of our Governments; Diminish the growth potential of our economies; and Corrode the trust of our citizens ;;;

4 Why the emphasis on BEPS (Continued) At G-20 Leaders summit in November 2013 OECD obtained a mandate to tackle BEPS. Instructed to produce BEPS Report which was published in February G-20 and OECD successfully construe tax avoidance as tax evasion and introduce moral obligation philosophy. Report listed 5 other Pressure Areas and included Captives as a vehicle for abuse.

5 Why the emphasis on BEPS (Continued) OECD Report suggests Captives are vehicles of abuse. CICA and ECIROA responded saying in part: 6000 Captives worldwide operating in the same way as traditional insurance companies. Captives are an integral part of ERM. Captives are the only tool available to MNE s to manage otherwise uninsured exposures. Captives allow MNE s to purchase re-insurance. Captives allow their parents/owners to insure risks not available in the traditional market.

6 BEPS ACTION PLAN Identified 15 Actions organized around three main pillars: The coherence of corporate tax at the international level. A realignment of taxation and substance. Transparency, coupled with certainty and predictability.

7 BEPS ACTION PLANS (continued) Address The Tax Challenges Of The Digital Economy (1) Develop A Multinational Instrument (15) COHERENCE Hybrid Mismatch (2) Strengthen CFC Rules (3) Limit Deductions (4) Counter Harmful Tax Practices (5) SUBSTANCE Prevent Treaty Abuse (6) Prevent Permanent Establishment Abuse (7) Transfer Pricing Outcomes To Be In Line With Value Creation (8, 9 & 10) TRANSPARENCY Collect & Analyze Data (11) Require Disclosure (12) Standardize Transfer Pricing Documentation (13) Make Dispute Resolutions More Effective(14)

8 BEPS ACTION PLAN (Continued) Pascal Saint-Amans Director OECD Center for Tax Policy & Administration 16 th September 2014 These problems cannot be solved by individual countries and the worst thing that could happen is for countries to take unilateral action. That is why we need the G-20, OECD approach to BEPS.

9 BEPS ACTION PLAN (continued) Pascal Saint-Amans Director OECD Center for Tax Policy & Administration 16 th September 2014 BEPS is about rewriting the international tax rules to realign the location of the profits with the location of the real activities. Currently tax planning results in locating profits in tax havens where nothing is happening.

10 BEPS SUMMARY 15 0 VS Team Multinational Prevent use of Tax Havens. Introduce Multinational Instrument. Generate greater tax revenues. Cannot be solved by individual countries. Historical, unprecedented co-operation. Significant consultation with business, trade groups and unions.

11 MEETING OECD ACTION PLAN FOR COHERENCE If based Offshore, know the reasons why the particular domicile was chosen: o Attractive regulation and competence of regulators. Know the reasons your Captive was formed: o Developed to meet business needs not addressed by the traditional insurance market: Tailor-made policies. Risks not insured by commercial companies. o Vital role in risk management. o Access to reinsurance market.

12 MEETING OECD ACTION PLAN FOR COHERENCE OECD Action Plan 4 targets excessive interest and other financial payments. Premiums paid to captives fall into this category. Need to show that premiums are determined in accordance with accepted insurance practices. (e.g., Arm s Length Principle or comparable transactions): o Intercompany transactions must conform to the same level of transactions between unrelated parties. o Sufficient premium for coverage; not over or underpaying. o Detailed financial analysis needed for risks that are difficult or impossible to insure.

13 MEETING OECD ACTION PLAN FOR SUBSTANCE OECD Plans address transactions lacking economic purpose: o Entered into only to avoid taxes. o That would rarely take place between Non- Related parties. They apply not only the recognized Two-Tiered Test: o Must impact taxpayer s economic position. o Needs to have a legitimate non-tax business purpose. But a third criterion: o Management and control of transaction. Ensure profits in line with economic substance of activities. Focus on where important people functions are performed. Ensure capital allocated is in line with risk.

14 SUBSTANCE THE CAPTIVE INSURANCE CASE Captives guard against disruptive scenarios: o Protect the continuity of a company s business plan. o Address issues of availability and affordability. Efficient and effective at addressing risk management needs. Risk distribution an accepted prudent business practice: o a legitimate means for shifting insurance risk. Captives must meet regulatory, actuarial, accounting, and capital requirements. Premiums determined by Arm s Length Principle and appropriate for the risk. Involves real economic transfer of risk. Satisfy requirements of economic substance. Managed by qualified personnel (MBAs, CPCUs, CPAs, CRMs,)

15 MEETING OECD ACTION PLAN FOR TRANSPARENCY Demand for Tax Transparency: Society s push for fairness and equality. o 2008 down turn fueled the fire. o Global regulation initiative. o Clear and accurate reporting of corporate tax transactions. Regulatory Controls (How they affect Captives) Time consuming but substantiates Captive s legitimacy: o Anti-Money Laundering and Know Your Client documentation. o Application Process - more information required. Ongoing Regulatory Monitoring.

16 MEETING OECD ACTION PLAN FOR TRANSPARENCY Financial Reporting - Certified audited financial statements generally describe the following: o Organization, ownership & related parties. o Accounting framework and policies. o Types of risk underwritten and loss activity. o Investments. o Surplus and capital transactions. o Tax positions. Actuarial Study sets loss reserves: o Used to determine appropriate premium and profit. o Reviewed during audit testing.

17 MEETING OECD ACTION PLAN FOR TRANSPARENCY Tax Returns: o Usually consolidated with parent. o In USA FATCA & FBAR as well as State Tax Filings. Regulatory Compliance Reporting: o Annual report & audited financial statements. o Feasibility study. o Claims history reports. o Actuarial opinions. o Board minutes. o State/Country audits.

18 OECD BEPS PROJECT SUMMARY [the BEPS Project could end up] Redefining the architecture of international taxation; rules; tax treaties; guiding principles; recommendations and decisions within the OECD. Pascal Saint-Amans Director, OECD Center for Tax Policy & Administration 13 th February 2013