Transfer Pricing in Botswana and Southern Africa Christian Wiesener KPMG Global Transfer Pricing Services 26 June 2014
Agenda Introduction to Transfer Pricing Transfer Pricing Example Africa Transfer Pricing Transfer pricing Regulations Specific types of transactions/industries The importance of transfer pricing compliance Transfer Pricing Documentation Comparables Base Erosion and Profit Shifting Summary 1
Introduction to Transfer Pricing
Overview of Transfer Pricing What is Transfer Pricing? The transfer price is the price at which goods or services (including financial assistance and/or intellectual property) are transferred between related parties of a multinational across international borders. Arm s length Principle The basis on which independent third parties would transact 3
Pricing principles The Hypermarket P8 The convenience store P12 Outside the FIFA WC stadium P20 Inside the FIFA WC stadium P25 4
Transfer Pricing Growth <1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008/2009 Australia Czech Republic France Germany Indonesia Italy Japan Poland Singapore Slovak Republic Sweden United States Australia Czech Republic France Germany Indonesia Italy Japan Latvia OECD Philippines Poland Singapore Slovak Republic South Africa Sweden United States Australia Austria Czech Republic France Germany Indonesia Italy Japan Korea (Republic of) Latvia OECD Philippines Poland Singapore Slovak Republic South Africa Sweden United States Argentina Australia Argentina Austria Brazil Australia Canada Austria Chile Brazil China (People s Australia Austria Brazil Chile Czech Republic France Canada Chile China (People s Republic of) Czech Republic Denmark France Republic of) Czech Republic Denmark France Germany Indonesia Italy Germany Germany Japan Indonesia Indonesia Korea Italy Italy (Republic of) Japan Japan Latvia Korea Korea Mexico (Republic of) (Republic of) New Zealand Latvia Latvia OECD Mexico Mexico Philippines New Zealand New Zealand Poland OECD OECD Russia Philippines Philippines Singapore Poland Poland Slovak Singapore Singapore Republic Slovak Slovak South Africa Republic Republic Sweden South Africa South Africa Ukraine Sweden Sweden United Ukraine Ukraine Kingdom United States United States United States Argentina Australia Austria Argentina Brazil Australia Canada Austria Chile Brazil China (People s Canada Republic of) Chile Czech Republic China (People s Denmark Republic of) Estonia Czech Republic France Denmark Germany Estonia India France Indonesia Germany Italy Indonesia Japan Italy Korea Japan (Republic of) Korea Latvia (Republic of) Mexico Latvia New Zealand Mexico OECD New Zealand Peru OECD Philippines Philippines Poland Poland Russia Russia Serbia Singapore Singapore Slovak Slovak Republic Republic South Africa South Africa Sweden Sweden Ukraine Ukraine United United Kingdom Kingdom United States United States Venezuela Venezuela Angola in 2013 Argentina Australia Austria Belgium Brazil Argentina Canada Australia Chile Austria China (People s Belgium Republic of) Argentina Brazil Colombia Australia Canada Czech Republic Austria Chile Denmark Argentina Belgium China (People s Ecuador Australia Brazil Republic of) Egypt Austria Canada Colombia Estonia Belgium Chile Czech Republic Finland Brazil China (People s Denmark France Canada Republic of) Ecuador Germany Chile Colombia Egypt Greece Argentina China (People s Czech Republic Estonia Hong Kong Australia Republic of) Denmark France Hungary Argentina Austria Colombia Ecuador Germany India Australia Brazil Czech Republic Egypt Hungary Indonesia Austria Canada Denmark Estonia India Ireland Brazil Chile Estonia France Indonesia (Republic of) Canada China (People s France Germany Israel Israel Chile Republic of) Germany Hungary Italy Italy China (People s Czech Republic Hungary India Japan Japan Republic of) Denmark India Indonesia Korea Korea (Republic Czech Republic Estonia Indonesia Italy (Republic of) of) Denmark France Italy Japan Latvia Latvia Estonia Germany Japan Korea Lithuania Lithuania France Hungary Korea (Republic of) Luxembourg Luxembourg Germany India (Republic of) Latvia Malaysia Malaysia India Indonesia Latvia Lithuania Mexico Mexico Indonesia Italy Lithuania Luxembourg Montenegro Montenegro Italy Japan Luxembourg Malaysia Netherlands Netherlands Japan Korea Malaysia Mexico New Zealand New Zealand Korea (Republic of) Mexico Montenegro OECD OECD (Republic of) Latvia Montenegro Netherlands Peru Peru Latvia Luxembourg Netherlands New Zealand Philippines Philippines Luxembourg Malaysia New Zealand OECD Poland Poland Mexico Mexico Portugal Montenegro Montenegro OECD Peru Portugal Romania Netherlands Netherlands Peru Philippines Romania Russia New Zealand New ZealandKenya, Malawi, Philippines Poland Russia Serbia OECD OECD Poland Portugal Portugal Romania Serbia Singapore Singapore Peru Peru Romania Russia Slovak Slovak Republic Philippines Philippines Slovenia Poland Poland Russia Serbia Republic South Africa Portugal Portugal Serbia Singapore Slovenia Spain Russia Russia and Singapore Slovak Zambia Slovak in South Africa Sri Lanka Serbia Serbia Republic Republic Slovenia Spain Sri Lanka Sweden Singapore Singapore South Africa South Africa Sweden Switzerland Slovak Slovak Sweden Taiwan Taiwan Republic Republic Sweden (Republic (Republic South Africa South Africa 2008/09 Taiwan (Republic Taiwan (Republic of China) of China) Sweden Sweden of China) of China) Thailand Thailand Thailand Thailand Thailand Thailand Ukraine Turkey Ukraine Ukraine United Ukraine United United Ukraine Ukraine Kingdom United Kingdom Kingdom Kingdom United United United States United States United States United StatesGhana Kingdom Kingdom and Venezuela Venezuela Venezuela Venezuela United Venezuela United Venezuela States Vietnam Vietnam Nigeria in 2012 Argentina Aruba Australia Austria Belgium Brazil Canada Chile China (People s Republic of) Colombia Croatia Czech Republic Denmark Ecuador Egypt Estonia Finland France Germany Greece Hong Kong Hungary India Indonesia Ireland (Republic of) Israel Italy Japan Kazakhstan Kenya Korea (Republic of) Latvia Lithuania Luxembourg Malawi Malaysia Mexico Montenegro Netherlands New Zealand Norway OECD Peru Philippines Poland Portugal Romania Russia Serbia Singapore Slovak Republic Slovenia South Africa Spain Sri Lanka Sweden Switzerland Taiwan (Republic of China) Thailand Turkey Ukraine United Kingdom United States Venezuela Vietnam Zambia 5
Importance of Transfer Pricing Why is Transfer Pricing Important? Globalisation and growth in trade Economic downturn resulted in governments looking for tax revenue (BEPS) Prices between related parties are typically not set by market forces, so related parties may be overcharging or undercharging for a particular good or service. 6
Transfer Pricing non-compliance can lead to large tax adjustments Kenya Kenya Revenue Authority (KRA) challenged the Unilever Kenya pricing to Unilever Uganda. Unilever won case. KRA formalized transfer pricing regulations. Canada Canada Revenue Agency denies $136 million (CAD) in deductions for guarantee fees paid to U.S. parent Denmark Danish tax authorities increased multinationals taxable income in 2009 by 15.3 billion DKK ($2.8 billion) Japan Japan s top pharmaceutical manufacturer contests $1.1 billion transfer pricing adjustment from its JV with Abbott Laboratories United States Internal Revenue Service (IRS) reaches largest-ever $3.4 billion tax settlement U.S. pharmaceutical company to pay $2.3 billion in IRS dispute United Kingdom U.K. company agrees to pay 505 million ($780 million) to settle 15-year tax battle 7
Transfer Pricing: Example
A Simple Example Botswana Co Sales 100 Cost of Goods (70) Gross Profit 30 Operating Expenses (25) Operating Profit 5 This is the profit and loss statement of a UK distribution company. Does it have any transfer pricing issues? Does it have any transfer pricing risk exposure? In isolation, it is impossible to assess anything. 9
Simple Intra - Group Transaction UK Co Sales 70 Total Costs (60) Operating Profit 10 Product transfer Transfer price = 70 P7 per unit Botswana Co Sales 100 Cost of Goods (70) Gross Profit 30 Operating Expenses (25) Operating Profit 5 Consolidated Operating Profit = 15 10
Effect of Higher Transfer Price UK Co Sales 80 Total Costs (60) Operating Profit 20 Product transfer Transfer price = 80 At P8 per unit Botswana Co Sales 100 Cost of Goods (80) Gross Profit 20 Operating expenses 25 Operating loss -5 Consolidated Operating Profit = 15 11
Africa Transfer Pricing
Global developments impacting on Africa Practical considerations OECD support of Africa Tax Administration Forum, particularly re Transfer Pricing Global focus on transfer pricing compliance Base Erosion and Profit Shifting OECD Draft Handbook on Transfer Pricing Risk Assessment Africa focus (Nigeria, Kenya, Uganda, Angola legislation and rules etc) 13
Transfer Pricing in Africa Country Transfer pricing Act Algeria Yes Yes Country Transfer pricing Act Kenya Yes Yes Country Transfer pricing Act Senegal Yes No Antiavoidance Antiavoidance Antiavoidance Angola Yes No Lesotho Yes Yes South Africa Yes Yes Benin Yes Yes Liberia Limited Yes Sudan No Yes Botswana No Yes Malawi Yes Yes Swaziland No Yes Burkina Faso Yes No Mali Limited Yes Tanzania Yes Yes Cameroon Yes No Mauritius No Yes Togo Yes No Chad Yes Yes Morocco Yes No Tunisia Yes No DRC Yes No Mozambique Yes Yes Uganda Yes Yes Ethiopia Yes No Namibia Yes Yes Zambia Yes Yes Gabon Yes No Nigeria Yes Yes Zimbabwe No Yes Ghana Yes Yes Rwanda Yes No Source: KPMG Global Transfer Pricing Services South Africa 14
Africa Hot Topic Issues Potential skill, information and resource shortage at revenue authorities Aggressive approach and harsh penalties for MNE not complying Very few professional services providers Lack of sufficient/suitable local comparable data Potential need to appropriately adjust foreign comparable data Increased complexity of transfer pricing rules and increased cost of expertise From a foreign investment perspective, uncertainty regarding transfer pricing regulations may have an adverse impact Africa Tax Administration Forum (ATAF) has formed a TP Group (subscribed to by 34 of 56 countries). Provision of support and training to countries 15
Transfer Pricing Regulations
Transfer Pricing Regulations Some countries have enacted regulatory provisions based on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the Organisation for Economic Co- Operation and Development (OECD Guidelines) African countries with standing transfer pricing regulations: Angola, Kenya, Namibia, South Africa, Tanzania, Zambia (Up to 32 African countries have some form of regulation that allows governments to adjust pricing of related-party transactions) Other Global jurisdictions: Many countries enacted their own regulatory provisions based primarily on OECD Guidelines Some countries, such as Brazil, however, have provisions not entirely consistent with OECD Guidelines Transfer pricing involving U.S. firms: Treasury Department regulations issued under 482 of the Internal Revenue Code ( 482 Regulations) Conclusion: Documentation requirements and penalty provisions have been adopted by many countries to determine adherence to transfer pricing regulations 17
OECD Model Tax Convention, Article 9 Article 9 of OECD Model Tax Convention Associated enterprises Where conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly 18
Specific types of transactions/ industries
Specific types of transfer pricing transactions Goods: Transfer in/out Services core business and non-core business: Management fees (eg turnover based vs direct charge) Shareholder type service (no charge) Appropriate basis of allocation direct/indirect costs Technical fees vs licence fee Intellectual property: Royalties, licence fees (value linked to IP?) Financial assistance: Loans, interest free loans, guarantees, cash pooling 20
Specific types of industries Contract manufacturers (performing a service by processing raw materials into semi-finished goods) Distributors (level of risk assumed, large marketing spend, cost of sales figures may be inflated) Pharmaceutical industry (intangibles, high cost of R&D) Financial services (treasury company, financial assistance, guarantee fees, cash pooling, management services) 21
The importance of transfer pricing compliance
Typical Transfer Pricing risks Taxpayer not aware of transfer pricing issue No transfer pricing documentation to demonstrate arm s length pricing Incorrect or outdated transfer pricing documentation No checking that arm s length pricing is correctly implemented No or insufficient transfer pricing agreements Local transfer pricing documentation does not tie up with group documentation Profits achieved by local company differ from Group Consistent losses incurred 23
The potential result of non-compliance Income tax adjustment to reflect arm s length price / return (primary adjustment) DTA relief: Article 9 of OECD Model Tax Convention Secondary adjustment (eg deemed dividend) No DTA relief Penalties Interest Further investigations by revenue authorities Negative publicity 24
Transfer Pricing Documentation
Why transfer pricing documentation? Substantiation what arm s length pricing is (what do comparables charge/pay?) Substantiation that transfer pricing is arm s length (implementation) Transfer pricing planning Advanced Pricing Agreements (APAs) 26
Transfer pricing documentation guidelines: OECD Transfer Pricing Guidelines: Chapter V OECD Discussion Draft on Transfer Pricing Documentation and country by country reporting UN Practical Manual on Transfer Pricing: Chapter 7 OECD Transfer Pricing Guidelines Pacific Association of Tax Administrators (PATA) European Union code of conduct on Transfer Pricing Documentation Local country rules 27
Points to consider regarding transfer pricing documentation Burden of proof Timing of preparation Updating Global/Group documentation Master file/local file 28
Example of contents of transfer pricing documentation: Cross-border connected party transactions should be set out A functional and risk analysis report should be compiled A Group analysis should be performed Industry analysis is required Correct transfer pricing method should be selected Transfer pricing method should be applied Finally the taxpayer should document and demonstrate how the relevant data has been used to determine an arm's length consideration 29
Transfer pricing methods Traditional transaction methods Comparable uncontrolled price method (CUP method) Resale price method Cost plus method Transactional profit methods Transactional net margin method (TNMM) Profit split method 30
Comparables
Finding comparables Comparable uncontrolled prices (CUPs) Lack of comparables in developing countries (OECD discussion draft) The use of foreign databases European comparables Adjustments (country risk, foreign exchange risk) Related party threshold 32
Calculation of the arm s length price CUP, apply the price given Other methods: -Look at financial information from final set -Calculate profitability ratios based on profit level indicators -Weighted average range of comparable prices approach -Several years of comparable data -Tested party should be around the median of the range, unless company profile suggests otherwise, eg limited risk distributor, toll/ contract manufacturer. 33
Base Erosion and Profit Shifting (BEPS)
BEPS: Background - context Context Governments are under extreme fiscal pressure as a consequence of the global economic crisis As a consequence, there is increased political focus on perceived tax avoidance by multinationals The G20 is concerned that current international tax rules and frameworks are inadequate The OECD response to growing pressure was to release the Base Erosion and Profit Shifting report The G20 is applying political support/pressure to push for change There is a drive to develop a tax system that is fit for purpose for today s multinationals and digital age 35
BEPS: The Action Plan - Fifteen Actions Action Deadline Action Deadline Addressing the tax challenges of the digital economy Sept 14 Assure that TP outcomes are in line with value creation: risks/capital Sept 15 Neutralise the effects of hybrid mismatch arrangements Sept 14 Strengthen CFC rules Sept 15 Assure that TP outcomes are in line with value creation: other high-risk transactions Establish methodologies to collect and analyse data on BEPS/actions to address it Sept 15 Sept 15 Limit base erosion via interest deductions/other financial payments Sept/Dec 15 Require taxpayers to disclose their aggressive tax planning arrangements Sept 15 Counter harmful tax practices more effectively taking into account transparency and substance Sept 14 & Sept/Dec 15 Prevent treaty abuse Sept 14 Re-examine TP documentation Sept 14 Make dispute resolution mechanisms more effective Sept 15 Prevent the artificial avoidance of PE status Sept 15 Develop a multilateral instrument Sept 14 & Dec 15 Assure that TP outcomes are in line with value creation: intangibles Sept 14 & Sept 15 36
Summary
Summary Transfer pricing is a focus area in Africa and abroad Revenue authorities: Up skilling and use of technology Non-compliance: Significant financial and reputational risk Tool to check/improve business performance 38
Questions Christian Wiesener Associate Director christian.wiesener@kpmg.co.za +27 (0)82 719 2012
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