www.pwc.com.sg 2014 Budget Seminar Transfer pricing Overcoming the storm Chai Sui Fun and Falgun Thakkar g PwC Singapore
Agenda 1. Update on global transfer pricing developments 2. Transfer pricing i documentation ti in Singapore 3. Strategies for dispute resolution PwC 2
Q&A Q1 Which of the following best describes transfer pricing for you? a) A vague concept only relevant to professional advisors b) A way to artificially shift profit to low tax locations c) A management accounting technique d) The application of arm's length principle to transactions between companies in our group e) Never heard of it PwC 3
Update on global transfer pricing developments PwC 4
Global transfer pricing developments Headlines in the news Report: MacDonald confirmed tax inspectors visited its French HQ after French media reported that it had transferred 2.2 2 billion euros abroad since 2009 to dodge taxes but firmly denied the accusation PwC 5
Global transfer pricing developments Headlines in the news Developed countries PwC 6
Global transfer pricing developments Expanded d Stakeholders Base Erosion and Profit Shifting (BEPS) Initiative Country by country reporting Chapter IX: Business Restructuring and Intangibles draft UN TP Manual with country modules Exchange of information Policy maker Developing initiatives economies Arbitration Arm s length principle will still prevail Aggressive enforcement Differing definitions of key concepts such as PE, intangibles, ibl etc. Increased complexity overall Scrutiny of tax payers by general public Political representatives questioning NGO / Public perspectives Developed countries Political, media & social pressures Economic pressures Attack on income migration PwC 7
Global transfer pricing developments What this means for Singapore BEPS developments redefine the parameters of tax planning and documentation requirements Tax functions - exchange of information demands between sovereigns will likely be expanded. Dispute resolution will be on the increase. Singapore will need to focus more resources to enforcing and defending its principles of value creation in international forums and competent authority discussions. Singapore taxpayers will need to step up self-help l to demonstrate compliance with arm s length standard with substance and robust documentation Transparency and Reputation ti Management with Diverse Stakeholders PwC 8
Transfer pricing documentation in Singapore PwC 9
Q&A Q2: How regularly does your company prepare transfer pricing documentation? a) Contemporaneously b) Every 2 to 3 years c) As per local country requirements d) Never e) When tax authorities come knocking on your door f) Others PwC 10
Singapore Transfer Pricing Landscape IRAS launched Transfer Pricing Consultation in 2008 Before TPC Early days after TPC... Recent trend What is your recent experience? PwC 11
Some recent examples (facts are simplified) Case 1 Coy B IRAS AUDIT: Enquired on related party transactions referred to in notes to accounts Country A Subcontract Singapore Coy A TRANSFER PRICING ADJUSTMENT: PROFITS ESTIMATED FOR COY A PwC 12
Some recent examples (facts are simplified) Case 2 Coy B IRAS Audit: IRAS not convinced that the two transactions (T1 and T2) are different Sale (T1) Coy A Service (T2) TRANSFER PRICING Coy C ADJUSTMENT TRADING PROFITS Singapore Other countries IMPUTED TO COY A PwC 13
Some recent examples (facts are simplified) Case 3 Use of IP Coy B (Principal) IRAS AUDIT: Related party transactions Coy A (Principal) Sale of Goods (IP embedded) Owns IP Coy C TRANSFER PRICING (Limited risk ADJUSTMENT distributor) ROYALTY IMPUTED Singapore Other countries TO COY A PwC 14
Some recent examples (facts are simplified) Case 4 Coy A Conclusion of contracts DEPENDENT AGENT PE IRAS AUDIT: Challenge COST PLUS transfer pricing methodology HQ (Country C) Singapore Conclude contracts on behalf of Coy A cost plus Coy B Internal COMPARABLES found PROFITS ATTRIBUTED TO COY B PwC 15
Some recent examples (facts are highly simplified) Case 5 Coy B IRAS AUDIT: Enquired on business and transfer pricing model that resulted in payment to Coy B Country D Payment Singapore Coy A DEDUCTION DISALLOWED PwC 16
Singapore Transfer Pricing Landscape Observations from recent adjustment cases IRAS has stepped up enforcement of arm s length standard (and more stringently) CITQs on related party transactions are now very common Expect to be asked questions, rather than not IRAS does not hesitate to make transfer pricing adjustments where one or a combination of the following elements applies: Inability to convince related parties deal with each other at arm s length based on conduct of activities/ iti explanation provided d Robust documentation and analysis to support related party transaction pricing lacking/ inadequate Timeliness of documentation and analysis Communication with IRAS Do not be complacent Always strive to provide clear and comprehensive explanation to eliminate doubts upfront Build trust during engagement (having sound documentation is first step) PwC 17
Singapore Transfer Pricing Landscape Recent Developments Possible changes to transfer pricing regime? Implications from international developments on Transfer Pricing Documentation and Country-by-Country Reporting? IRAS TP Roundtable Discussion prelude to...? PwC 18
Overcoming the Transfer Pricing Storm Take the first steps (if have not already done so): Have sound transfer pricing policies that align with business model Have robust Transfer Pricing Documentation to support the policies Take these additional steps (if have done the above): Review and strengthen existing transfer pricing policies and Transfer Pricing Documentation Explore other transfer pricing risk mitigation approaches (e.g. APAs) PwC 19
Transfer pricing documentation Planning your global l transfer pricing i policy Contractual terms clearly define the allocation of risks Align transfer pricing policy with the group s business model Actual conduct of the related parties is in line with ih the contractual terms OECD Transfer Pricing Guidelines UN Transfer Pricing Developments Country specific transfer pricing requirements Appropriate transfer pricing documentation PwC 20
Importance of transfer pricing documentation in Singapore Taxpayers should exert reasonable efforts to undertake sound transfer pricing analysis to ascertain the arm s length pricing as well as to demonstrate that such analysis has been performed TP guidelines published by IRAS on 23 February 2006 Increase in transfer pricing related queries and supporting details requested issued by IRAS to taxpayers. Examples: Explain the circumstances under which the inter-company transactions arose Provide the name, addresses and the specific amounts paid to related companies which the Company had transactions with Whether the amounts are reflective of the arm s length amount and the reasons for saying so Show the basis of charge for the inter-company payments Explain the rationale of the Company s transfer pricing policy IRAS has increasingly been scrutinising the substance and arm s length nature of inter-company transactions PwC 21
Transfer pricing documentation in Singapore The arm s length principle i IRAS endorses the arm s length principle as the standard to guide transfer pricing. It is also the standard adopted by many Member and non-member countries of the OECD. As the arm s length principle is also adopted by most tax jurisdictions, this reduces the incidence of transfer pricing adjustments and improves the resolution of transfer pricing disputes. A 3-step approach is recommended by the IRAS for the application of the arm s length principle: Step 1 Comparability analysis Step 2 Identify the appropriate TP method and tested party Step 3 Determine the arm s length results PwC 22
Transfer pricing documentation in Singapore Key benefits Reasonable efforts of company to substantiate its position Clear definition of business model and transfer pricing policies Onus of proof Clarity of model In case of audit, to defend the transfer pricing position First line of defence Harmony of business and tax model Documentary proof to show harmony of business model and tax model PwC 23
Transfer pricing documentation Best practice documentation ti Legal agreements Increasingly crucial to document the commercial rationale behind a business model / restructuring and prepare transfer pricing documentation to support it RACI Matrix/ KPIs/ control over risk Behaviour of parties Transfer pricing documentation (local) Important to provide substance to the commercial rationale as it is required to evidence which entity has the control of functions and risks and the ability to service those risks Implementation paper (in accordance with Chapter IX) Transfer pricing documentation (central) If a structure fails the substance test, IRAS can disregard certain transactions or even question the entire structure, leading to transfer pricing ii adjustments Commercial rationale paper Alignment of tax model with business model PwC 24
Strategies for dispute resolution PwC 25
Strategies for dispute resolution Strategic t APA outlook in Asia and Singapore Overall objective To minimise i i transfer pricing i risk for business in Singapore and globally ll in the most cost efficient manner Key considerations: Significance ifi of fbusiness presence in Singapore / local countries Complexity of the transfer pricing model (in case of restructuring of business, then pre and post restructuring Audit history for business in Singapore / local countries Aggressiveness of tax authorities Release of tax provisions Option 1: Reactive approach (i.e. Status Quo) Option 2: Proactive approach (i.e. APAs) Factors to evaluate options: Increased certainty provided by APAs Information flow control to tax authorities Resources requirement in dealing with tax authorities Potential to leverage from tax authorities existing knowledge PwC 26
Strategies for dispute resolution Advance pricing i arrangement in Singapore Advance Pricing Arrangement (APA) Determines in advance an appropriate set of criteria to ascertain the transfer prices of specified related party transactions over a specified period of time. May involve agreement between Singapore and one or more of its tax treaty t partners. Once agreed, binding on the tax authority and taxpayer, subject to qualifications stated in the APA. Advantages: Obtain certainty of tax treatment relating to transfer prices Efficient way to resolve complex transfer pricing disputes Avoid transfer pricing audits Avoid potential double taxation Considerations: i Outcome is not guaranteed Time and resource intensive Expect significant flow of information to tax authorities PwC 27
Transfer pricing practice in Singapore In summary IRAS has adopted some of the best international practices on transfer pricing IRAS has been involved in a number of bilateral APA and MAP cases Staying ahead of the curve when it comes to applying the arm s length principle in a fair and reasonable manner Balancing its image as an investor friendly jurisdiction in the region at the same time IRAS participates in OECD working committee discussions, seeks to follow best practices from OECD IRAS demonstrates its position on safeguarding gits tax base (transfer pricing consultation process) Tax policy changes in Singapore in the future? PwC 28
Questions? PwC 29
Upcoming events March 2014 Management fee recharges and tax deductibility in local countries April 2014 Building blocks Transfer pricing documentation May 2014 Transfer pricing certainty Your dispute resolution strategy PwC 30
Let s Talk! Your Presenters Falgun Thakkar Senior Manager, PwC Singapore +65 6236 7254 Falgun.d.thakkar@sg.pwc.com Chai Sui Fun Partner, PwC Singapore +65 6236 3758 sui.fun.chai@sg.pwc.com if i PwC 31
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