Extractive Industry Taxation UN Financing for Development meeting May 28, 2013 The nexus between transfer prices and extractive industry taxation The relevance of transfer pricing approaches - but also their limits
What? Application of the Arm s Length Principle Transactions between Associated Enterprises need to take place at the same conditions (prices) as those of unrelated parties Legal basis: Article 9 of the UN Model Convention (and Article 9 OECD Model Convention) Domestic law Guidance: OECD Transfer Pricing Guidelines UN Practical Manual on Transfer Pricing for Developing Countries Page 2
Why? Under- or over-reporting of taxable income Base Erosion and Profit Shifting How? Comparability Analysis, Comparables and Transfer Pricing Methods Comparability analysis? Broad based analysis of the taxpayer s facts and circumstances, review of controlled transactions (functions, assets used and risks), choosing comparables and applying most appropriate transfer pricing method Page 3
Comparables? Important comparability factors: - Characteristics of property or services - Functional analysis - Contractual terms - Economic circumstances - Business strategies What does it mean to be comparable? (1) differences do not affect open market price (2) adjustments can be made to eliminate material effect of such differences Page 4
Functional analysis? Goal: description of functions performed, taking into account risks assumed and assets used of the parties involved in the transaction. Why: in dealings between independent parties compensation is a reflection of the functions performed by each of the enterprises Basis of any transfer pricing analysis Transfer Pricing method? CUP, Cost Plus and Resale Price, Transactional Net Margin Method, Profit Split Page 5
Functional analysis? To determine what functions are performed where: - Financing - Technical services incl. Research and Development - Procurement -Exploration/extraction - (Commodity) Marketing - Processing - Logistics/shipping - Administration - Management Page 6
Key questions: What is critical for the success or failure of the business? What are the value drivers for the business? Where in the process is value added? Remuneration Functions/risks Page 7
Transfer Pricing: Extractive Industries Some key challenges for the industry 1. Natural resource extraction is inherently local and cannot be moved to less expensive places to extract; 2. Usually a(n) (almost prohibitively) capital intensive exercise 3. Financing of the business is a major issue; 4. Mined/extracted resource needs to be processed to be valuable and of interest to customers; 5. Marketing activities require an arm s length return; 6. Finding comparables is a major challenge (consider also non publicly traded commodities, iron ore, coal); 7. Guidance needed on how to use CUP method, off-take pricing and LME traded price issues. Page 8
Transfer Pricing: Extractive Industries Thank you. We much value giving input and helping with looking for solutions to the respective challenges presented Monique van Herksen monique.van.herksen@nl.ey.com +31 88 407 1284 Page 9
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