PWC Transfer Pricing Beyond Bountries

A series of articles based on our Global Transfer Pricing
Conference in Shanghai, China – October 2015
Transfer Pricing Perspectives:

Beyond boundaries
www.pwc.com/tpperspectives
Transfer Pricing Perspectives: Beyond
Fit for the
boundaries
Future
Foreword
According to good traditions, strict and divergent transfer Shifting (BEPS) Action Plan have
we brought again over 200 PwC pricing environment. resulted in the need for companies
specialists and close to 400 clients to re-evaluate and reconsider their
together for our annual Global The articles in this October transfer pricing strategies in light of
Transfer Pricing Conference. 2015 edition of Transfer Pricing the proposed new guidance.
This year, we were hosted by Perspectives are based on a number
our PwC Shanghai experts. of sessions from our conference Undoubtedly, the tax world will also
The popularity of this event is in Shanghai, and are designed to continue to see a lot of change in
the best proof that navigating help you getting equipped for the the next year – and for years after
operations in an ever-expanding changes we’re sure to see in the that. And as transfer pricing tops
globalised world is creating coming months. more and more media headlines
Isabel Verlinden – and internationally coordinated
Global Leader, Transfer Pricing
significant challenges from an
international tax and transfer There have continued to be efforts to aggressively collect
PwC Belgium
pricing perspective. Indeed, significant changes in the area of taxes escalate even further –
+32 2 710 4422 the stringent, diverse transfer transfer pricing, with several new the number of interested
isabel.verlinden@be.pwc.com pricing requirements companies countries implementing either stakeholders is expanding.
face are daunting. As they align formal or informal transfer pricing This evolving landscape presents
their business supply chains, documentation requirements and an even greater challenge to
tax, and legal operating models significant regulatory changes in company executives who need to
to deliver sustainable financial many other countries over the past keep their finger on the pulse of
benefits, the pressure is on to 12 months. Most significantly, change and constantly adapt their
achieve these goals within a the deliverables released as part of transfer pricing strategies.
the OECD’s Base Erosion & Profit
Fit for the
boundaries
Future
We anticipate that this will be examiners will be a prerequisite to

another eventful year. Companies mitigate the risk of a further surge
will need to disclose more in the number of transfer pricing
information on their intercompany disputes globally.
price setting than ever before.
The public debates on the ethics of I am confident you will enjoy the
tax planning increases the pressure reading of this Perspectives as the
even more and some see the new enthusiasm of the many authors
world as one where disclosure glimmers through. Enjoy the
becomes a corporate reporting reading and please get in touch with
standard. At PwC we welcome your PwC contact as we are keen to
the ongoing efforts to update the engage further in a dialogue on this
international tax system and boost challenging topic.
transparency. This being said,
there is a need for a serene debate
as transfer pricing and “mispricing”
are different things. Tax officers
in the respective countries in
which a group operates may react
differently to what is ultimately
disclosed. Well trained tax
Isabel Verlinden *PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.
Please see www.pwc.com/structure for further details.
Fit for the
boundaries
Future
Contents
Beginning with the end in mind: Navigating the changing transfer pricing
Audit ready preparedness in an evolving landscape for the energy industry........................................................ 40
compliance environment....................................................................... 1
Taking the lead – Reform to Australia’s transfer
Beyond spreadsheets: Emerging trends pricing landscape in a global context................................................... 47
in transfer pricing technology................................................................ 7
Theoretical and practical challenges introduced
Demystifying transfer pricing execution by BEPS Action 4 working draft........................................................... 51
and intercompany accounting.............................................................. 13
US perspectives on key transfer pricing aspects
From startups to stalwarts: of the OECD BEPS project.................................................................... 56
Transfer pricing in the technology sector............................................. 17
Value chain analysis critical in supporting alignment
Global transfer pricing documentation strategies................................. 25 of income and expense under BEPS..................................................... 60
India transfer pricing – Steering in the right direction.......................... 30 Value chain analysis –
Preventive care for radical transparency.............................................. 64
Intercompany allocations of risk –
transfer pricing considerations in a changing landscape ...................... 34
4 PwC – Transfer Pricing Perspectives/October 2014: A series of articles based on our global transfer pricing conference in Switzerland
Transfer Pricing Perspectives: Beyond boundaries
Beginning with
the end in mind:
Audit ready preparedness
in an evolving compliance
environment
1 PwC – A series of articles based on our Global Transfer Pricing Conference in Shanghai, China – October 2015
Beginning with the end in mind:

Audit ready preparedness in an evolving compliance environment
Introduction In the Asian region in particular,
The intensity of transfer pricing disputes the growing scrutiny and increasing
continues to escalate on the back of rapidly sophistication of revenue authorities has
evolving transfer pricing reform, public seen unparalleled growth in audit activity.
scrutiny of multinational enterprises For example, revenue authority collections
(MNEs), and access to greater resources by have grown five-fold in China in the last
revenue authorities globally to enforce what five years.
has become an increasingly political issue.
Key audit risk areas
This article discusses recommended best Arrangements that are likely to attract
practice for the early prevention of disputes, greater revenue authority scrutiny in the
together with perspectives on effective current environment include:
audit management in selected countries
in Asia. • Business restructures (particularly
where valuable intangibles have
The transfer pricing audit been migrated),
landscape globally
• Intra-group financing arrangements,
Effective transfer pricing audit
management is now more relevant than • Loss making entities,
ever in view of increasingly co-ordinated
In the Asian region in particular, the growing scrutiny multilateral approaches to transfer pricing
• Companies with significant related
party dealings,
and increasing sophistication of revenue authorities has compliance and audit management
globally. This is demonstrated through • Companies with a low
seen unparalleled growth in audit activity. For example, the G20 and Organisation for Economic
• effective global tax rate,
revenue authority collections have grown five-fold in Co-operation and Development’s (OECD)
Base Erosion and Profit Shifting (BEPS) • Dealings with tax
China in the last five years. projects. This includes greater collaboration
• haven jurisdictions,
and transparency initiatives (i.e. country by
country reporting) for information sharing • Complex tax structures, and
amongst revenue authorities, which is likely
• Services in low cost jurisdictions
to prompt further increases in audit activity
i.e., where location savings are
as revenue authorities continue to target
arguably derived.
their fair share of MNE profits.

Best practices for prevention In a rapidly changing world, with mobile Practically, if one thinks about a robust i. Written statements
of disputes up-front workforces and fast changing technology, transfer pricing analysis as consisting of
Where possible, written statements
The starting point for a robust transfer retracing steps years after a transaction a functional/ factual analysis, selection
should be obtained from influential
pricing defence position commences with occurs to identify relevant information of the most appropriate transfer pricing
senior executives (e.g. heads
sound analyses, policies and procedures. can prove very difficult, and sometimes method, application of that transfer pricing
of department, CFO and CEO)
even impossible. Hindsight has shown that method (i.e. economic analysis), and
documenting the MNE’s business
However, preparation of transfer pricing while the contemporaneous preparation of ongoing implementation and monitoring
strategy and value drivers.
analysis, documentation and policies a robust ‘audit ready’ analysis may require of the arrangement, the following best
for higher risk transactions should be more focussed effort up front, it results in practice tips and tricks can operate
Involving senior business officials
inherently different from an analysis substantial time and cost savings in the to reduce the likelihood of a revenue
contemporaneously and at the time
of a transaction that is likely to carry long run. authority adjustment.
of a revenue authority dispute can
a lower risk profile in the eyes of a lend additional weight, particularly
revenue authority. 1. Functional/factual analysis where it can be shown that the
Almost all transfer pricing disputes hinge intercompany arrangement is
on a misunderstanding or disagreement driven by commercial rather than
between the parties around the facts tax objectives.
relevant to establishing the arm’s length
price. That is, the facts that are critical to Board documents and approvals
determining the key functions performed, together with public company
assets utilised, and risks borne by the statements can be an excellent source
MNE, and in turn the key value drivers of of contemporaneous documentary
the business. evidence in this regard.
With higher risk transactions, to establish ii. Legal agreements

a robust audit ready defence file a taxpayer
Both related and unrelated third
needs to do more than simply “tell a story”.
party agreements relevant to an
Whilst the story may be factually accurate,
intercompany arrangement should
proving the story in the event of a dispute
be prepared and maintained on file.
requires a more extensive exercise focussed
on establishing the appropriate granularity
It is also important to evidence
of facts through the contemporaneous
that the transaction has been
preparation of documentary evidence,
implemented in accordance with
including:
the legal agreement (e.g. through
Transfer Pricing Perspectives: Beyond boundaries 3


invoices, written correspondence v. Decision making processes • Potential internal comparables. These
between the parties, and should not be disregarded too quickly,
Given an increasing focus on
accounting entries). and examined closely and adjusted for
people functions, particularly
in the context of managing risk, comparability where possible.
Establishing the key terms of a
transaction and intent of the related contemporaneously preparing • Although a transaction might not be
parties becomes increasingly documentation evidencing the sufficiently comparable,it may provide
decision making process for key a ‘line in the sand’ for the arm’s length
difficult in the absence of a written
agreement and leaves a taxpayer functions and risk processes can transfer price e.g. a cap or floor; Third party analyst reports
exposed to a greater risk of revenue be particularly helpful. This might
include process maps, curriculum • Again, playing devil’s advocate can of a company or industry
authority disagreement as to
the legal and economic effect of vitae’s, parameters of authority, be helpful. Consider mounting an can provide an independent
argument for the use of a different
a transaction. and email correspondence. As a
general comment, it is often valuable methodology to identify flaws in and objective perspective.
to play ‘devil’s advocate’ throughout your methodology.
iii. Financial analysis the functional analysis and fact
Financial analysis should be finding stage from the perspective
considered to quantitatively of a revenue authority. In this regard,
support claims made by business it is helpful to cross-check statements
representatives where possible made by personnel with evidence
e.g. quantifying business gathered from varying sources.
improvements of a transformation
initiative, or evidence relevant to the 2. Selection of the appropriate
quantitative significance of a risk transfer pricing method
borne by a party such as insurance,
There is often potential for revenue
warranty and credit claims etc.
authority disagreement regarding the
selection of the most appropriate transfer
iv. Third party analyst reports pricing methodology where the method
Third party analyst reports is not codified or prescribed.
of a company or industry can
provide an independent and It may be useful to consider:
objective perspective. • The use of more than one method as
a cross-check;

3. Application of the Any changes should be communicated • Ensure responses are robust and Perspectives on audit environment
transfer pricing method to the transfer pricing function as soon technically and factually correct and effective audit management in
as possible. and, where possible, supported selected countries in Asia
When applying the selected transfer pricing
method, it can be helpful to take into with evidence;
account the following: Best practices during China
• Consider the use of an internal steering
reviews and audits The China State Administration of Taxation
committee and establishing governance
• Contemplate the validity of all publicly It is important to develop and decide on a (SAT) has significantly increased its focus
around communicating audit
available sources for comparable strategy for communicating and dealing on transfer pricing in recent years.
developments internally.
information (e.g. annual reports), with the revenue authority(ies) and Key areas of focus for the SAT include:
internal business stakeholders early on in
• Evaluate and document the Resolving transfer
the process. • intra-group services and
comparability factors in detail, pricing controversies
intangibles transactions,
A majority of transfer pricing disputes are
• Perform sensitivity and scenario Some useful considerations to managing
ultimately settled as part of commercial • emphasising the importance of location
analysis to sense check the risk of a a revenue authority enquiry, which will
negotiations on a principled basis. specific advantages,
revenue authority disagreeing with be highly dependent on the nature of the
a particular economic variable. dispute and operating jurisdiction, include: • requiring more extensive information
Where settlement discussions are not
to provide a holistic view of the group
fruitful, alternative dispute resolution
4. Implementation and review Engage in dialogue with the revenue value chain and contribution of value
approaches can be helpful in achieving
The above described analysis should authority early to: chain participants, and
an outcome satisfactory to both parties,
be performed periodically to account –– understand the basis for their including mediation or arbitration. • enhancing the verification of the
for any changes in the business and position/their key concerns, authenticity and accuracy of a
economic environment. –– identify key areas of disagreement, The use of independent experts or taxpayers’ related party disclosures
–– resolve any misunderstanding of arbitrators can be helpful in this regard with its financial accounts.
It is particularly important to ensure the facts; e.g. industry or economic experts.
as part of the implementation and The SAT has strengthened its anti-tax
review process that the MNE adopts the Understand the relevance of the line of In some jurisdictions advance pricing avoidance monitoring system with
transaction as originally intended and questioning and keep the enquiry on track; arrangements (APAs) and mutual emphasis on reviews of transfer pricing
contractually agreed. agreement procedures (MAP) can provide documentation and related-party
• Understand your rights and an alternative means of pre-emptively transaction disclosures, single entity or
Any variations or amendments to the responsibilities e.g. when responding preventing or resolving a dispute. group-wide multi-entity joint audits,
arrangement should be documented to information requests; MAP can provide a balanced perspective follow-up administration after transfer
contemporaneously. with input from a counterparty jurisdiction pricing investigations, and management
that can give rise to satisfactory outcomes of self-adjustment by taxpayers.
on a multilateral basis.


Transfer pricing audits in China almost Presenting thorough transfer pricing enterprises in certain notified non-
always end with a negotiated settlement, documentation at the beginning of the audit cooperative jurisdictions which lack Authors
as administrative appeals are not effective is the key to preventing the tax authorities effective exchange of information.
and litigations are rare. Robust analysis from conducting a prolonged transfer Qisheng Yu
and effective communication are keys pricing audit. Disputes can be resolved via a Dispute PwC China
to successful audit management. MAP is Resolution Panel (DRP), which is a unique
frequently initiated as a remedy to avoid APAs are very common in Japan and an mechanism to pre-empt disputes. Further, +86 10 6533 3117
double taxation and APAs are commonly effective means of cooperative compliance APAs are commonly used by taxpayers to qisheng.yu@cn.pwc.com
used to prevent disputes. and dispute prevention. Over one hundred prevent disputes.
APA applications (a majority of them
Dritton Xhemajlaj
Recent trends indicate that taxpayers bilateral) are filed every year. Key takeaways
small and large are increasingly facing MNEs should be aware of key audit areas PwC Australia
pressures to perform self-adjustments India
across their operating jurisdictions and +617 3257 5646
as an alternative to be under a formal The Indian Revenue Service (IRS) is yet to pre-emptively develop robust transfer
investigation. However, resolving the establish risk based compliance processes dritton.xhemajlaj@au.pwc.com
pricing policies and procedures.
dispute via a self-adjustment vis-à- and as a result audits all cross-border
vis a formal investigation should be dealings in excess of INR 150 million Specifically, taxpayer’s should begin with
considered having regards to the relative (US$ 2.5 million). the end in mind by anticipating revenue
merits of either approach based on the authority challenges, and developing robust
particular case. The following IRS trends and practices documentary evidence to establish the fact
have been observed: profile and economics required to robustly
Japan defence its cross-border dealings.
Transfer pricing audits can be conducted • Exchange of information between
either as a part of a corporate tax audit or as Income Tax and Customs Department; Such analysis may prove more onerous
a separate transfer pricing examination by • Use of social networking information initially, but will save significant time
the National Tax Agency (NTA). (e.g. Linkedin profiles) to audit and resources in the long run.
functional characterisation;
During the audit, the tax authorities
will conduct various interviews, • Exercise of power to record statements
on oath, inspect office premises, obtain
Taxpayer’s should begin
look into detailed financial data, and
request overseas information including information from third parties, etc.; with the end in mind by
segmented profit & loss data for cross- • Exercise of power to apply the anticipating revenue
border transactions. transfer pricing provisions in respect
of transactions with non associated
authority challenges.
Beyond spreadsheets:
Emerging trends
in transfer pricing
technology
Emerging trends in transfer pricing technology
Often, a handful of key

individuals, none of whose job
descriptions include a full-time
concentration on transfer
pricing, spend thousands of
processing hours gathering data,
calculating results, and booking
and documenting intercompany
transactions. There’s a better way.
Background parties impacting legal entity accounts, data, calculating results, and booking and coupled with real-time reporting and
Intercompany execution always has been may largely be an afterthought for all documenting intercompany transactions. reconciliation capabilities.
a complex undertaking. The growth of except corporate tax and legal leadership.
international trade and the increasingly Compounding existing challenges, the To meet these additional data and
complex operating structures of As a result, enterprise resource planning new reporting environment under the transparency challenges, companies
multinational enterprises (MNEs) are (ERP) systems may not be optimised Organisation for Economic Co-operation increasingly are looking to the capabilities
straining legacy systems and already for intercompany and transfer pricing and Development’s (OECD) Action Plan on of their information technology (IT)
limited personnel resources. execution, making day-to-day transactions Base Erosion and Profit Shifting (BEPS) is systems to make the process of collecting,
heavily dependent on manual intervention, focused on granular visibility with respect calculating, analysing, and reporting
Typically, organisations internally measure so-called ‘human middleware.’ Often, to the impact of transfer pricing flows transfer pricing data more efficient
operational performance using pre-tax a handful of key individuals, none of on a corporation’s effective tax rate and and productive. Although historically
management accounting. In this context, whose job descriptions include a full-time the financial results of specific entities. considered the domain of finance,
intercompany transactions, allocating concentration on transfer pricing, spend As a result, MNEs need to provide timely controllership, and IT functions, corporate
income and expense between related thousands of processing hours gathering and accurate financial data management tax practitioners are best advised to
embrace proactively the potential for MNEs tend to rely on spreadsheets for a discrete implementation, with a common Tactical technology solutions
technology to improve transfer pricing variety of reasons. For instance, when chart of accounts, functional areas, Tactical transfer pricing technology
effectiveness and support increased global there are multiple legacy financial systems, business units, and geographies. However, aims to address these issues through
documentation and reporting requirements. often the result of previous acquisitions unless tax and transfer pricing issues were targeted automation, typically using a
that were not integrated or organic explicitly considered during the design and middleware database application that is
Manual intervention in growth outpacing the expansion of the implementation of ERP, the company may more rigorous and sophisticated than a
transfer pricing execution systems function, building an integrated find it too expensive to retrofit transfer collection of spreadsheets, but may be less
Frequently, intercompany execution is intercompany solution is challenging. pricing logic, relying instead on the costly than business intelligence software
managed through an array of unwieldy Also, personnel performance metrics often corporate tax department to bridge the or ERP modification projects. Tactical
spreadsheets by a handful of key are based on management reporting, rather gap with spreadsheets. technology solutions tend to address
individuals. These spreadsheets may be than legal entity financial results, reducing specific calculation and reporting issues,
used to determine intercompany charges for the motivation to address transfer pricing Bringing technology to bear such as management fee allocation, profit-
a range of transactions, including overhead execution at the enterprise level. Similarly, Recent advances in transfer pricing in-inventory elimination, and legal entity
and headquarters services, cost-sharing the organisation may take the view that technology solutions offer a range of profit monitoring.
allocations, financing, and intellectual transfer pricing is solely an issue for the options for companies – from tactical to
property licensing. For tangible goods tax return and requires only an annual broad spectrum.
businesses, intercompany price setting offline calculation.
may be handled through spreadsheets.
MNEs that employ robust ERP systems
These spreadsheet models generally are still may find it difficult to incorporate
designed ad hoc often reflecting the quirks transfer pricing into their financial
of their creators. Over time, they can reporting processes and procedures.
degrade as a result of internal structuring For example, a company may have a single
changes, such as the addition of new cost global ‘instance’ of an ERP, defined as a
centres and legal entities, and external
factors, such as changing local tax rules.
Due to the lack of governance around MNEs that employ robust ERP
them, spreadsheets also are prone to
hardcoded, one-off adjustments, often systems still may find it difficult to
left undocumented resulting in potential incorporate transfer pricing into
confusion and risk when the results must
be explained and defended. Much is at their financial reporting processes
stake, as usually the gross intercompany and procedures.
transaction values are significant.

data availability, meet tax and financial Typically web-based, these platforms
reporting requirements in a more timely generally encompass enterprise content
and efficient manner, mitigate risks, and data management providing the
increase the transparency of the charge out ability to store, track, and manage
process, and reduce audit risks and improve electronic documents and assets as well
audit defence support. as social networking, task scheduling,
and collaboration elements. The user
Workflow and collaboration interface for these types of technology
Despite the speed of change within most solutions is highly customisable and can be
MNEs, many organisations’ systems do not configured to match the corporate Intranet
keep pace with the evolving needs of the tax site, or other company-wide internal portal,
function to compile information, analyse and can be linked to existing systems.
data, provide progress outputs, and produce
tailored reporting to comply with complex Embedded system solutions
regulatory requirements and deliver The ideal approach to transfer pricing
insight to the business. Instead, corporate execution is holistic – considering the
tax personnel today may have to spend a end-to-end process and drawing together
MNEs rely on their internal Generally, these tactical solutions are
built as custom applications on common considerable portion of their time on data the wider value chain into a well-defined
systems to accurately price, database platforms, starting with a flat- collection, rather than on true tax analytic set of procedures, from strategy to financial
and risk management activities. and operational systems, financial
record, and report transfers file data extract from financial or data
warehouse systems. Able to handle large reporting, and tax compliance.
of tangible goods, licenses data volumes, providing traceable data Workflow and collaboration platforms
can drive process improvement and As a threshold matter, designing an ERP
or sales of intellectual mapping, including replicable business
logic, and storing results for multiple transparency and significantly transform system that strategically enables efficient
property, and the provision periods, these bespoke database solutions a tax department’s productivity. By end-to-end transfer pricing execution
leveraging these tools to automate the requires an understanding of intercompany
of services and financing often can be implemented in under six
months. They are owned and maintained by organisation of transfer pricing information functions and processes For example,
between related parties. the tax function, without requiring a heavy and processes, companies can realise more the logic must be in place to set legal
touch from the IT department or finance. efficient use of staff and improved internal entity profit levels during the budgeting
controls, greater efficacy in meeting process, calculate target transfer prices
By implementing a more automated system quarter and annual close requirements, or mark-ups, allocate intragroup services
for administering routine intercompany and improved audit defence readiness and charges, monitor interim results, prepare
charges, MNEs can increase operational audit trail. adjustment entries, forecast pricing
efficiencies, improve data quality and changes, simulate alternative scenarios,
and maintain supporting documentation
and audit defence files. Each of these Given that transfer pricing policy targets profit impact of strategic changes
tasks requires detailed analysis. Adding often are set using a bottom-line measure among resources and cost.
The ideal approach to significant complexity is the fact that these of profitability (e.g., operating margin),
transfer pricing execution activities must take place with reference indirect and overhead costs must be The read across to transfer pricing seems
to legal entity results and factor in local apportioned at the product or even SKU compelling. By designing, implementing,
is holistic – considering Generally Accepted Accounting Principles level. Taking into account the additional and integrating EPM within existing
the end-to-endprocess and and timing adjustments. mandate to forecast transfer pricing financial systems, MNEs can take a holistic
results, rather than just to monitor approach to automating intercompany
drawing together the wider For instance, if an intercompany transfer actual results, effectual transfer pricing transactions, setting and calculating
value chain into a well- price must be updated for a specific product execution depends on an analytical intercompany prices at a cost-plus or resale-
line or stock-keeping unit (SKU) based on technology framework rather than minus level. At the same time, they can
defined set of procedures, a review of the latest quarterly financial apurely transactional system. review profitability to segment results by
from strategy to financial results, the required analysis would entail legal entity, or by product or service within
determining the cost and selling price of An emerging technology for approaching a legal entity, in order to test accordance
and operational systems, a given product at a global level as well the broader end-to-end process is enterprise to transfer pricing policy. New avenues
financial reporting, and as the entity level to ensure that both the performance management (EPM), for planning also are created whereby
local and global margins of the product also known as corporate performance MNEs can model the impact of changes to
tax compliance. remain within policy guidelines. management (CPM). EPM is not a new resources, cost, or other factors on their
concept in the world of financial systems; intercompany pricing strategies.
however, its application to transfer pricing
is a recent phenomenon. Although EPM solutions may offer
significant promise, implementation is not
Primarily, EPM is concerned with possible unless the MNE first undertakes
transforming organisational planning a thorough, enterprise-level review of its
across strategy formulation, business end-to-end transfer pricing processes and
planning and forecasting, financial systems landscape.
management, and supply chain
effectiveness. Many MNEs employ EPM As part of building consensus among key
to conduct profitability modelling and stakeholders and senior management
optimization across their value chains. for this kind of large-scale technology
Because EPM can identify and apportion transformation, corporate tax leadership
granular cost data, it helps companies also must ensure cross-functional
effectively segment profitability across collaboration with management
business lines, products, services, and information systems, information
customers and allows for modelling the technology, human resources, and

accounting and financial reporting leaders
to assess user requirements and drive Authors
budget priorities.
David Nickson
The road ahead PwC US
With the OECD’s BEPS Action Plan calling
for greater transparency and compliance +1 646 471 6814
requirements worldwide, the need for david.a.nickson@us.pwc.com
accurate and timely calculation, analysis,
and reporting of operational and financial Liz Sweigart
data has never been more critical. MNEs
PwC US
rely on their internal systems to accurately
price, record, and report transfers of +1 713 356 4344
tangible goods, licenses or sales of
elizabeth.a.sweigart@us.pwc.com
intellectual property, and the provision
of services and financing between related
Andrew Hwang
parties. Not maximising transfer pricing
execution can translate to increased risk PwC US
and a possible impact to the bottom line. +1 646 471 5250
Recent technological innovations, both andrew.hwang@us.pwc.com
tactical and holistic, have emerged to
support corporate tax leaders in complying Simon Wood
with the new protocols established by the PwC UK
jurisdictions in which they operate as a
result of the OECD’s BEPS project. +44 207 212 3861
simon.wood@uk.pwc.com
To leverage these emerging technologies,
corporate tax executives need to work
cross-functionally bridging operational,
financial, and information management
systems to assess their tax and transfer
pricing user requirements and develop
end-to-end solutions to intercompany A version of this article appeared in Tax Notes Int’l,
transaction execution. September 21, 2015, p. 1033.
Demystifying transfer
pricing execution and
intercompany accounting
Demystifying transfer pricing execution and intercompany accounting
For large multinational companies that

must comply with myriad tax policies and
regulatory agencies all over the world, A case in point is the recent
transfer pricing has always been a complex commitment by 44 countries,
undertaking. With more organisations
expanding into international markets, and made at the G20 Summit in
with new regulations shining a spotlight on Cairns, Australia, in September
the source of profits and where those profits
are being reported, transfer pricing has 2014, to accept the Organisation
never been more important than it is today. for Economic Co-operation and
A case in point is the recent commitment Development (OECD) country by
by 44 countries, made at the G20 Summit
in Cairns, Australia, in September 2014,
country reporting template by the
to accept the Organisation for Economic end of 2016.
Co-operation and Development (OECD)
country by country reporting template
by the end of 2016. This commitment –
to disclose to local tax jurisdictions (once
they adopt matters into local law) where
profits are made and how they are allocated
The leading practice is for corporate intelligence designs. Our experience with did not factor in this granular level of
across jurisdictions, was a big step for
executives to work cross-functionally, clients confirms that thousands of hours and transactional oversight or the processes to
organisations that are multinational.
bridging operational, financial, and millions of dollars are frequently spent on support a global transfer pricing solution.
As companies frequently do not have information management systems, aligning highly manual processes, fraught with risk, Just as segmented financial reporting
pricing aligned for how they record transfer pricing with the pricing and to work around this identified gap. created challenges for aging systems, so too
and report transfers of tangible goods, execution approach within their Enterprise does increased transfer pricing scrutiny.
resource planning (ERP) and reporting Having an IT infrastructure that supports
licenses, sales of intellectual property or
systems. However, in a February 2014 complete transfer pricing transparency, Strategy starts with design
the provision of services and financing
survey conducted by PwC that asked senior is of paramount importance for any From a strategy standpoint, the key
between related parties, country by country
tax executives about the technology gaps multinational. System design must support s: How does an organisation ensure that
reporting will bring greater transparency
with tax functions, the majority of the a full integration of ERP transactions the right information is being captured at
to how multinational value chains are
respondents felt that intercompany transfer with tax reporting. A challenge for many the transaction level? Greater transparency
distributed globally.
pricing execution and compliance have organisations that run SAP software, is required not only to drive compliance,
been neglected in their ERP and business however, is that their initial system designs but also to enable a pricing forecasting
model so that an organisation can defend its Moreover, ERP system upgrades do not unit (SKU) based on a review of the latest A monitoring framework
pricing adjustments in the event of an audit. always keep pace with growing geographic quarterly financial results. This would, Today, there is an increasing need to
An analytics tool is also required to analyse footprints or operational expansion, in turn, require analysing the cost and monitor and evaluate changing conditions
and monitor changes in price adjustments particularly in newer companies. Often the selling price of a given product at a global at different levels within the organisation.
necessary to conform with the company’s cost-conscious and entrepreneurial mindset level as well as the entity level to ensure As a result, many ERP systems do not have
transfer pricing policies. of an emerging multinational enterprise both the local and global margins of the the capability to monitor or evaluate changes
translates into systems that lag behind product remain within policy guidelines. on a real-time basis. To fill this gap, enterprise
The reason initial system designs did the needs of the business over time. As a Furthermore, transfer pricing policy targets performance management (EPM) solutions
not factor in the level of transactional result, companies often have to deal with are typically set at an operating margin extend the capabilities of ERP systems by
oversight required to satisfy transfer disparate transactional systems, redundant level, meaning indirect and overhead costs offering real-time modelling. SAP’s solutions
pricing considerations is that ERP systems and decentralised data, and massive also need to be assigned or allocated at the for EPM provide a platform to build a fully
traditionally have been designed to support data volumes. product or even SKU level. integrated tax reporting solution for an ERP
only the core business operations, and system (an SAP or non-SAP transactional
not tax or legal reporting requirements. Designing an ERP system to support When combined with the need to forecast system). SAP provides two applications –
Current leading practices call for tax transfer pricing requires an understanding transfer pricing results – and not just SAP Business Planning and Consolidation
and transfer pricing requirements to be of transfer pricing functions and processes. monitor actual results – transfer pricing and SAP Profitability and Cost Management –
incorporated in the blueprint of the ERP Tasks include setting legal entity profit levels execution requires much more of an either of which companies can deploy as a key
design, with IT professionals working closely during budgeting, calculating target transfer analytical technology framework than just component of an extensive platform for tax
with tax colleagues to achieve appropriate prices or markups, allocating intercompany the transactional system. users to monitor and provide audit defence,
integration. Many companies have rejected services costs, monitoring the interim as well as to enable the needed transparency
this approach because the upfront setup results, preparing adjustment entries, For companies that are setting up operations
into intercompany pricing policies and
costs can be high. However, when compared forecasting pricing changes, simulating overseas for the first time, transitioning
fluctuations. EPM applications such as SAP
to the cost of remediating these differences possibilities, and maintaining supporting from a traditional transaction-based ERP
Business Planning and Consolidation and SAP
on an annual basis, the initial expense is documentation and audit defence, to name system to an analytical and predictive
Profitability and Cost Management can help
often significantly less in the long term. a few, all of which entail detailed analysis. model to support transfer pricing is nothing
solve the challenges inherent in any financial
The need for all these activities to take short of a financial transformation. Helping
transformation to support transfer pricing
place with reference to legal entity clients understand the magnitude of this
policies by providing a multi-user, multi-
Designing an ERP system to results (factoring in local Generally transformation is where we at PwC start on
language, and multi-currency environment
support transfer pricing Accepted Accounting Principles and
timing adjustments) creates significant
a transfer pricing roadmap. Once a company
grasps the concept from a global perspective,
where users can easily analyse and monitor
data. SAP Profitability and Cost Management
requires an understanding additional complexity. we can then help strategise at a local level to
provides the business with a flexible and
of transfer pricing functions For example, consider an intercompany
improve transfer pricing for each legal entity
based on its tax requirements, products,
interactive experience in developing
multiple financial models by centralising
and processes. transfer price that needs to be updated for and geography.
financial data. For example, the powerful
a specific product line or stock-keeping

An opportune time address complex tax and transfer pricing

Financial planning and analysis teams reporting requirements, and they provide
are looking for customer, channel, and an organisation with the confidence that
product profitability, and cost to serve to it is engaging in international trade in a
all be fully loaded. So the opportune time compliant and defensible manner.
is aligned not only to comments on US
Security and Exchange Commission (SEC) The failure to comply with transfer pricing
reporting but also to other needs in the regulations can incur steep financial
finance organisation. In many ways, transfer penalties. As such, IT professionals must
pricing is following the segmented financials work together within their companies,
reporting requirements in terms of how an especially with tax, treasury, and finance, to
organisation responds to increased external guide the development and implementation
pressure, both from technological and of the integrated ERP and EPM solutions.
strategic points of view. An ERP installation The cost of non-compliance is too great to
of a decade ago, for example, was ill-equipped leave transfer pricing to chance.
Today, there is an increasing need to monitor and for the automated segmentation of financial
data that was needed to comply with SEC Authors
evaluate changing conditions at different levels regulations, and manual workarounds were
within the organisation. common until the release of the SAP New Andrew Hwang
General Ledger Financial Planning rapid
deployment solution with SAP ERP 6.0. PwC US
calculation engine of SAP Profitability and which solution to use to monitor transfer
Cost Management enables the analytical pricing rests on a company’s overall Similarly, with transfer pricing scrutiny on +1 646 471 5250
modelling of the information from SAP ERP enterprise architecture, system landscape, the rise, it is critical that an organisation andrew.hwang@us.pwc.com
to help support transfer pricing auditability. and other business processes in scope. design its ERP system so that it is the key
Both applications can serve as transfer data source for all information relevant for Sharabh Ivaturi
SAP Business Planning and Consolidation pricing engines, leveraging information full transfer pricing transparency. Finance IT
and SAP Profitability and Cost Management flowing from ERP systems to support PwC US
professionals need to involve tax department
are compatible with ERP transactional intercompany price-setting strategies that colleagues to understand any additional +1 216 875-3056
systems and data warehouses. In addition, satisfy local tax jurisdiction regulations. necessary reporting or data capture as the
both applications can accept data from sharabh.r.ivaturi@us.pwc.com
Also, both solutions are highly integrated business evolves, enters new markets,
non-SAP systems, which is usually a with Microsoft Office since many companies or encounters tax law changes such as
critical requirement for most multinational extract information from their enterprise country by country reporting. Business
This article appeared in the JAN FEB MAR 2015 issue
companies given their diverse system systems into Microsoft Office tools. planning and profitability applications of insiderPROFILES (insiderPROFILESonline.com) and
application landscapes. The decision of now offer integrated solutions that can appears here with permission from WIS PUBLISHING.
From startups
to stalwarts:
Transfer pricing in
the technology sector
From startups to stalwarts:

Transfer pricing in the technology sector
With each passing moment,

the integration of the digital
economy into the global
economy is accelerating.
Something interesting is happening…

We are experiencing extraordinary times
– revolutionary leaps in technology, new
business models, and completely new ways
of experiencing the internet. One the world’s
largest “taxi” companies, Uber, owns no
vehicles. Facebook, the world’s most popular
media owner, creates no content. Alibaba,
one of the world’s most valuable retailers,
has no inventory. And Airbnb, one of world’s
As a result of these societal and economic Aside from the thriving IPO environment “It’s pretty straightforward. I’ve been
largest accommodation providers, owns no
shifts, both private and public technology for global technology companies, courting in this industry for 20 years. This is the
real estate.1
companies are cashing in. Technology investment in the private venture capital best time to raise money ever. It might
companies had a promising start to 2015 in (VC) market has never been better. For be the best time for any kind of business
With each passing moment, the integration
the global financial markets, with 23 initial private companies and startups pitching the in any industry to raise money for all of
of the digital economy into the global
public offerings (IPOs) raising US$6.1 billion promise of disruptive innovation, VC firms history, like since the time of the ancient
economy is accelerating. Technology has
during the first quarter.2 The second quarter and other investors are lining up around Egyptians.”4
moved well beyond a niche for geeks and
of 2015 ushered in even stronger results, the block to get a piece of the action.
gamers – it has now become the driving force
with 36 technology IPOs across 11 countries, No one wants to miss out on the next 1
Source: Tom Goodwin, Senior Vice President of
propelling our society from the Industrial Strategy and Innovation at Havas Media;
with US$6.2 billion raised.3 In particular, Facebook. In an interview with the
Age in to the Information Age. Major http://techcrunch.com/2015/03/03/in-the-age-of-
domestic exchanges in China saw a large New York Times, Stewart Butterfield, disintermediation-the-battle-is-all-for-the-customer-
facets of our human existence – business,
number of IPOs during the first half of 2015. co-founder of Slack, mused, interface/#.p50if3:g9l7.
education, government, healthcare, and 2
Source: http://www.pwc.com/globaltechipo
human interaction – are being dramatically 3
Id.
4
Source: http://bits.blogs.nytimes.com/2015/04/16/
reshaped by technology. is-slack-really-worth-2-8-billion-a-conversation-with-
stewart-butterfield/?_r=0

Being the first company in an industry to of the dotcom bubble burst of early 2000, As Marc Andreesen, cofounder of prominent
go IPO used to be an advantage, but today’s which wiped out an estimated $4 trillion to Silicon Valley VC-firm Andreessen Horowitz,
market fuelled by strong investor interest $6 trillion of shareholder wealth,9 and the famously put it, “software is eating the world.”
and rising private valuation is causing some 2008 global financial crisis, still haunt the
companies to stay private longer. As an collective consciousness of investors and
example, in 2015 there was a significant economists alike. Yet despite the calamities Being the first company in an industry to go IPO used to
drop-off in US technology IPO listings; of the not-so-distant past, investments
this trend was driven by the abundance of into Internet-specific companies are at the be an advantage, but today’s market fuelled by strong
late stage funding available to companies highest level since the first quarter of 2001.10 investor interest and rising private valuation is causing
at ‘unicorn’ valuations and the delay of
several IPOs by a number of venture backed Indeed, just as there are many similarities some companies to stay private longer.
technology companies.5 between the technology industry of
today and that of the early 2000’s (i.e.,
Unicorns and decacorns skyrocketing valuations, unprofitable
Consider the unicorn. A majestic creature companies going IPO), there are also
shrouded in myth and mystery, found fundamental differences. Some of
in fables and folklore, characterised as these fundamental differences include
impossible to capture alive and extremely companies: staying private for longer
rare. In a similar vein, cultivating a (the median technology company was 11
billion-dollar technology startup was once years old at its IPO in 2014, up from five
considered as rare and unlikely as spotting a years old in 2000);11 amassing significant
unicorn.6 But times have changed. There are stockpiles of cash on their balance sheets;
now 111 private billion-dollar startups across and having a focus on “lean” business
the globe, compared to only 25 in 2013.7,8 models. Most importantly though, the
According to a list compiled by Forbes in ubiquity of the Internet and smartphone
May 2015, there are nine companies with use has transformed the landscape of the
valuations of more than ten billion dollars, global economy.
and as a result, a new buzzword was born –
Widespread technological innovation and
the “decacorn”. Alan Jones, Deals Partner at PwC
adoption has laid the foundation upon which
5
6
In fact, startups that manage to achieve valuations greater than one billion dollars are commonly
It would be easy to dismiss this global digital products and services are now built. referred to as “unicorns”.
explosion of companies with colossal 10 and Technology is no longer a vertical industry, 7
Source: http://knowledge.wharton.upenn.edu/article/is-a-tech-start-up-bubble-forming/
and technology companies are dead-set
8
It should be noted that this figure includes companies across a number of industries, not just technology.
11 digit valuations as symptoms of a tech 9
Source: http://www.pbs.org/wgbh/pages/frontline/shows/dotcon/thinking/stats.html
bubble poised to burst. After all, memories on disrupting almost every facet of society 10
Source: http://www.pwcmoneytree.com/Reports/FullArchive/Technology_2014-3.pdf
– from healthcare to transportation. 11
Source: http://www.wsj.com/articles/more-startups-aim-to-keep-it-private-1420159193


According to Steve Blank, a Silicon Valley Made in Silicon Valley
serial-entrepreneur and consulting associate Somewhat ironically, the epicentre of the
professor of entrepreneurship at Stanford, economy’s major tectonic shift from the
a startup is “an organization formed to Industrial Age to the Information Age runs
search for a repeatable and scalable in close proximity to the San Andreas Fault.
business model.”12 Spanning from San Francisco’s South of
Paul Graham, head of celebrated Silicon Market (SoMa) neighbourhood – a new
Valley startup accelerator Y Combinator, bastion for software startups – to Stanford’s
comments, “a startup is a company designed hallowed halls of academia in Palo Alto,
to grow fast.”13 Graham maintains that streaking through communities such as
it is not necessary for a company to work Mountain View, Sunnyvale, and Cupertino,
on technology or receive venture funding all the way to semiconductor stalwarts
to be considered a startup, but rather he stationed in sunny San Jose, this is where the
argues that a relentless commitment to action is; this is Silicon Valley. When it comes
growth is the single defining characteristic to the technology industry, the startup
of a startup. He continues, “growth is why ecosystem in Silicon Valley is second to none.
A number of factors Start-ups “move fast startups usually work on technology – A number of factors contribute to the success
and break things” because ideas for fast growing companies and effectiveness of startup ecosystems.
contribute to the success What is a startup in today’s world? By now are so rare that the best way to find new ones First, the accessibility of talent, often
and effectiveness of we are all familiar with the fairy tale of the is to discover those recently made viable by driven by the proximity of higher-education
technology startup –They all seem to start change, and technology is the best source of institutions, allows startups to assemble
startup ecosystems. the same way… “Once upon a time in a rapid change.”14 skilled workforces. With respect to Silicon
garage in Palo Alto.” Many would argue that startups are more Valley, universities such as Stanford,
mentality and methodology, attributes that Berkeley, Santa Clara, and San Jose State
Major motion pictures such as “Jobs” and provide startups a constant stream of young
can’t be captured by any single measure
“The Social Network”, and TV shows such as and ambitious skilled workers. However,
or metric. “Move fast and break things,”
HBO’s “Silicon Valley”, have helped launch startups can’t survive on talent alone,
a motto immortalised and adopted by
the term “startup”, and the associated especially with new college graduates,
Facebook, but also echoed in numerous
culture, in to the vernacular of the pop- as these fresh faces need guidance and
iterations by the majority of Silicon Valley
culture mainstream. But despite the ubiquity experience to navigate the challenges and
technology startups.
of the term “startup”, a precise definition risks that go along with starting a business.
proves difficult to nail down. The answer
likely depends on who you ask.
12
Source: http://steveblank.com/2010/01/25/whats-a-startup-first-principles/
13
Source: http://www.paulgraham.com/growth.html
14
Id.

Research from Shikhar Ghosh at the China on the rise In addition to Silicon Valley and China, The G20 and the Organisation for Economic
Harvard Business School indicates that Beijing, Shenzhen and Shanghai have successful startup ecosystems are flourishing Cooperation and Development (OECD) have
75% of all startups fail,15 thus reinforcing become Chinese hubs for innovation during in cities across the globe. New York, Los explicitly sought to address the challenges
the importance of experience within the past few years. Tens of thousands of Angeles, Boston, Tel Aviv, London, Chicago, of the digital economy as part of its Base
startup ecosystems. Over the past decade, budding tech-savvy entrepreneurs have Seattle, Berlin, and Singapore all landed in Erosion and Profit Shifting (BEPS) project.
experience within startup ecosystems has poured into the big three cities with dreams the top 10 of the global startup ecosystem In its deliverable relating to Action 1 of the
manifested itself not only in the form of of changing China’s economic future. ranking.18 BEPS project, the OECD recognised that ‘the
seasoned founders and serial entrepreneurs, digital economy is increasingly becoming the
but also in the form of “angels” and “Beijing, Shanghai and Shenzhen are Innovation and IP economy itself’, and therefore has not sought
“accelerators”. Angels, or angel investors, the most economically dynamic regions intellectual property (IP) to ring fence the digital economy from the
are private investors that provide early stage in China,” Zhao Guodong, secretary of Technology startups, regardless of company rest of the economy for tax purposes.20
startups with seed funding in exchange for Zhongguancun Cloud Computing Industry ethos or ecosystem of origin, all must Rather, the OECD has sought to identify key
equity, often filling the gap between the Alliance, said. “They edge other places maintain a constant focus on innovation features of the business models in the digital
“friends and family” round and the more in attracting the most ambitious and in order to compete. Innovation comes in economy which are potentially relevant from
formal Series A venture funding round. forward-looking entrepreneurs.” many forms. Some companies innovate a tax perspective.
Accelerators are typically three to four by designing radically new solutions
month programs offering small capital Of these three energetic cities, Beijing and developing new technologies. Other
injections, mentorship and training takes a lead by creating more than 120,000 companies reconfigure or combine
designed to help entrepreneurs secure startups every six months. Zhongguancun current technologies and create new
their first round of formal investment. Science Park, commonly referred to as markets through innovative applications
China’s Silicon Valley, is home to nearly of existing technology in a process called
Ecosystems that provide access to talent 20,000 tech companies, including internet “combinatorial innovation”.19 For startups
and entrepreneurial support will facilitate giants such as Baidu Inc, JD.com and and even multinational corporations (MNCs)
the sprouting of startup success, but just as Xiaomi Corp. in the technology sector, just as the term
seeds need water in order to grow, startups “innovation” suggests transformation and
need capital. The availability of capital and
15
Source: https://hbr.org/2013/05/why-the-lean-start-
Although Beijing already has a head start rapid change, the processes of defining IP, up-changes-everything
various forms of financing is fundamental to on other major cities such as Shanghai and setting up an appropriate business model or
16
Source: “The Global Startup Ecosystem Ranking 2015”
the success of the startup ecosystem – and it Shenzhen, this could change in the future. establishing a sustainable value chain are far
Startup Compass Inc. with the support of Crunchbase.
17
Source: http://www.chinadaily.com.cn/business/
is a large part of what makes Silicon Valley “As other entrepreneurial centres continue from static. This fluidity, and the resulting tech/2015-08/31/content_21754487.htm
the most dominant and successful startup to emerge in China, Beijing’s advantage in uncertainty, presents challenges not only to
18
Source: “The Global Startup Ecosystem Ranking 2015”
ecosystem in the world. Even though startup Startup Compass Inc. with the support of Crunchbase.
the high concentration of venture capital company management and investors, but 19
Source: http://www.economist.com/news/special-
ecosystems have expanded globally, Silicon will erode,” noted Frank Hawke, China also to tax authorities, governments and report/21593580-cheap-and-ubiquitous-building-
Valley still has about as much capital director for the Stanford Graduate School of policy makers worldwide that are concerned
blocks-digital-products-and-services-have-caused
20
Source: OECD (2014), Addressing the Tax Challenges
and exit volume as the rest of the top Business, which runs the Stanford Ignite- about getting their fair share of the profits. of the Digital Economy, OECD/G20 Base Erosion and
20 ecosystems combined.16 Beijing Program for young entrepreneurs.17 Profit Shifting Project, OECD Publishing.


One key feature of business models in the While value attribution may not always be available, ease to innovate around, market the “important functions” associated with
digital economy is the disproportionately straightforward, it is certain that ownership conditions, and business models, among the legal and economic ownership of the
high importance placed on intangible of IP in general is a critical path to the other factors. On the other hand, startups intangible. These “important functions”
assets in the global value chain, and success of many technology companies. that create emerging and radically disruptive include the development, enhancement,
the role of intangibles in increasingly With ever evolving business models, the IP technologies may still be in a random phase maintenance, protection and exploitation of
integrated business models. The OECD for technology companies is constantly being of discovery where creation of technology the intangibles.23 The OECD view appears
views the investment in and development updated. For many established technology often takes erratic paths. to suggest that investments in IP creation,
of intangibles as a core contributor to companies, evolutionary and incremental absent the important people functions that
value creation and economic growth for innovation on existing proven IP displaces Such facts impact inputs into the transfer affect the IP, may not be of much value.
companies in the digital economy.21 It is older technologies and brings to market pricing analysis, including choice of
believed that up to 75% of the value of US newer technologies. The displacement economic useful life, growth parameters and Technology companies seeking to support
public companies is now based on their IP rate may be faster or slower, depending discount rates. Understanding the unique the substance behind models where
(up from 40% in 1980).22 on various factors, including IP protection innovation process of each company is key significant economic value is attributed
to the design of a robust IP transfer pricing to a centralised legal owner of intangibles
policy. Like with everything else in transfer will need to specifically consider the above
pricing, it is all about the facts. guidance in relation to its fact pattern.
In particular, these MNCs should ensure
“Important functions” they have sufficient personnel with the
The approaches of tax authorities to requisite expertise, capability and authority
identifying and taxing value drivers in to perform the above “important functions”,
these evolving business models is likely as well as considering the entity’s financial
to be significantly influenced by the capacity to perform the ‘important
recommendations in relation to Action 8 functions’. Further, beyond the contractual
of the BEPS project which broadens the arrangements, MNCs will need to ensure
focus in relation to intangibles from legal business processes and operating procedures
ownership to understanding the substance are aligned to support the business model
of the arrangements and which entities implemented, with appropriate substance
within the MNC group are performing and documentary evidence.
It is believed that up to 75% of the value of

US public companies is now based on their IP 21
Source: OECD (2014), Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion
and Profit Shifting Project, OECD Publishing.
(up from 40% in 1980).22 22
23
Source: http://www.economist.com/node/5014990
Source: OECD (2014), Guidance on Transfer Pricing Aspects of Intangibles, OECD/G20 Base Erosion
and Profit Shifting Project, OECD Publishing.

Got CUTs/CUPs? understand any arrangements it may have typically adopted in the digital economy are these measures to typical digital business
The selection of a transfer pricing method with third parties involving the same IP summarised below: models will need to be considered carefully
always aims at finding the most appropriate rights that the MNC may also transfer as the requirements for application of
to a related party. At a minimum, these • United Kingdom (UK) Diverted Profits the provisions have been criticised as
method for a particular case.24 In the past,
arrangements provide insights into how the tax (DPT) – Draft legislation has complex and subjective to apply, and
we have seen technology companies employ
MNC transacts, negotiates and prices certain been released in the UK in relation the consequences of application of these
one-sided profit models where routine
arrangements with third parties. to a proposed DPT, which will tax at unilateral measures could include double
profits are benchmarked and the remainder
25% profits that are considered to taxation and imposition of considerable
is deemed attributable to IP. In the context
be artificially diverted from the UK. penalties for MNCs.
of new and non-traditional business Unilateral measures
Whilst the measures are complex,
models that have emerged in the digital Technology companies in the digital
in essence the DPT seeks to tax Therefore, while companies operating in the
economy, this approach is being increasingly economy have been able to break down
arrangements where income ends up in digital economy will need to closely monitor
challenged by tax authorities. many of the traditional barriers to
a related company with a low tax rate/ and adapt their global business structures
integration, operating as global firms with
concessionary tax treatment. These and transfer pricing policies in light of the
The revised guidance from BEPS Action Plan integrated global value chains. Business
measures are proposed to apply to BEPS recommendations, they will also need
No. 8 also brings forward a renewed interest models for MNCs in the digital economy
profits arising after 1 April 2015. to be aware of the potential introduction of
by the OECD in actual observed behaviour of have generally involved the centralisation of
third parties when dealing with each other key functions, assets and risks at a regional • Australia’s general anti avoidance unilateral measures as public and political
in matters involving IP. If such be behaviour or global level, along with the intangibles rules (GAAR) – A Bill has been scrutiny continues to escalate.
can observed and reliably measured, it considered to drive value in the global introduced to Australian Parliament
makes the comparable uncontrolled price value chain. This practice of centralising on 16 September 2015 with proposed
(CUP) method likely to prove most useful ownership of intangibles and attributing targeted amendments to the GAAR
in matters involving intangibles. significant economic value to these rules aimed at structures designed
intangibles in tax-favourable jurisdictions, to artificially avoid PE status. The
In practice, however, the difficulties of along with significant in-country sales made measures are proposed to apply
finding suitable comparable transactions by foreign entities, has resulted in more to income years commencing 1
where unrelated parties transfer rights to IP intense scrutiny of digital business models January 2016.
makes the CUP method extremely difficult across the globe.
to apply. Furthermore, once we move away Whilst the UK DPT arguably is broader in
from the one-sided profit model, the lack of Rather than wait for a global OECD-led application, both measures address business
observable standards of measurement opens solution, a number of countries have models where goods and services are sold
the door for tax authorities to implement started to introduce unilateral actions. to local customers by an entity outside
solutions that would be difficult to support Two announced unilateral measures which the local jurisdiction. The implications of
or to refute. Nevertheless, on a periodic focus on addressing perceived challenges
basis, MNCs should carefully review and or mischiefs resulting from structures
24
Source: http://www.oecd.org/ctp/transfer-pricing/45765701.pdf


Authors
Cecilia Lee Hiral Mistry
PwC Honkg Kong PwC Australia
+852 2289 5690 +612 8266 0683
cecilia.sk.lee@hk.pwc.com hiral.mistry@au.pwc.com
Lyndon James Daniela Ielceanu

PwC Australia PwC US
+612 8266 3278 +1 408 817 5939
lyndon.james@au.pwc.com daniela.ielceanu@us.pwc.com
Marios Karayannis Scott Singerman

PwC US PwC US
+1 408 817 7456 +1 408 808 2935
marios.karayannis@us.pwc.com scott.a.singerman@us.pwc.com
Global transfer pricing

documentation strategies
Global transfer pricing documentation strategies
Where are we today? We are now beginning to see tax

The new Chapter V of the OECD Transfer administrations taking steps in this
The finalised Chapter V fundamentally changes the Pricing Guidelines provides for three tiers direction, for example, in the past
nature, scope and arguably purpose of transfer pricing of transfer pricing documentation (TPD): six months:
a master file (MF), a local file (LF), and a
documentation. Companies need to assess these changes country by country report (CbCR).
• The UK became the first country to
announce its intention to implement
and plan for the future. The time for deliberation is over, CbCR and has subsequently issued draft
In the last 12 months, we have seen
the time for action is now. the new Chapter V move closer to
regulations to require CbCR.
being implemented. • Spain became the first country to
formally incorporate the requirements
–– In February 2015, implementation in full into local legislation.
guidance was issued which clarified
• Australia, Mexico and Poland have
a number of the filing requirements
published draft legislation for CbCR,
for CbCR whilst also recommending
MF and LF to be filed locally, with a new
that the MF/LF be filed with
criminal offence for non-compliance
the relevant tax authorities in
(in Australia).
each territory.
–– That was followed in June by an • China has released a discussion draft of
implementation package for CbCR proposed measures to include three-
containing model legislation for local tier documentation (including specific
tax administrations to give effect to documentation for services, cost sharing
CbCR and the related exchange of arrangements, and thin capitalisation)
information provisions. plus related party transaction reporting
(including potentially CbCR).
The Final Report on Chapter V has now been
• Singapore has released revised
published, with limited changes to previous
guidelines including a two tiered
publications. To effect these fundamental
approach equivalent to the MF and LF.
changes most countries will still be required
to amend their domestic legislation.
Accordingly, multinational enterprises • where the transfer pricing risk

(MNEs) and tax authorities alike are facing associated with a particular affiliate
the dawning realisation that TPD will be is considered to be high.
fundamentally different as a consequence
of the OECD’s Base Erosion and Profit The new Chapter V will profoundly affect
Shifting (BEPS) project. The changes are the way MNEs approach the preparation
coming extremely fast and MNEs need to of their TPD.
be ready for a post BEPS world.
In the post BEPS world, a MNE will be
Why do we need a global required to disclose more quantitative
documentation strategy? and qualitative information (in the CbCR,
In the past, as a result of the ad hoc MF and LF) to the tax authorities in,
development of TPD requirements around potentially, all the jurisdictions in which it
the globe, MNEs have often been faced with has affiliates. In some countries, there will
a myriad of different regulations, formats, also be local transfer pricing information
and levels of prescription. The traditional returns to be filed.
approach adopted by many MNEs in
preparing their TPD has been designed to: Under the ‘secondary mechanism’ As a result, the traditional approach will,
recommended by the OECD, MNEs we believe, shortly become a thing of the
past. The preparation of TPD will shift from
In the past, as a result
• ensure compliance with local parented in jurisdictions that have not,
documentation requirements; or will not, implement the new Chapter being purely a compliance exercise to being of the ad hoc development
• provide penalty protection,
V are not necessarily immune from the an inherent part of the MNE’s strategic tax
risk management.
of TPD requirements
new requirements.
but at the same time; around the globe, MNEs
• minimise the effort required. For example, Spain has essentially adopted In this environment, MNEs will need a
global strategy, and effective underlying
have often been faced
Chapter V. Therefore MNEs with a Spanish
This has often resulted in groups only entity (irrespective of whether the parent processes, to deliver TPD which: with a myriad of different
preparing documentation for: jurisdiction has implemented Chapter V) regulations, formats,
will need a CbCR (including data for the • ensures consistency between CbCR
• those countries where there are whole group) and a MF by the end of 2017. disclosures and the MF, LF and
and levels of prescription.
prescriptive local requirements; Now that the final papers have been issued, potentially local transfer pricing
we expect more and more countries to information returns (or at least
• the tax authority is known to adopt these requirements with Chapter V enables the data in each document
aggressively pursue transfer becoming the global standard incorporated to be reconciled);
pricing audits; or within every MNE’s documentation strategy.

• includes a clearly articulated value documentation requirements under the To be able to plan for the future and develop
chain analysis; and new Chapter V, we expect to see most MNEs a documentation strategy, MNEs have been
move to a centralised approach to their assessing their current position by:
• demonstrates that the group’s policy TPD, whether that work is undertaken
has been followed, in practice, in internally or outsourced. For MNEs which • reviewing their existing documentation
the pricing of the inter-company have traditionally adopted a decentralised – assessing what (more) will be needed
transactions recorded in each group approach, this may represent a significant going forward;
company’s books. change in culture. • modelling what the picture would
look like now if the new rules applied
With the increased amount of information As more and more countries adopt the new – performing dry runs and addressing
that will be available to the tax authorities, requirements, MNEs (irrespective of where risks that have been highlighted;
we expect more coordinated multi-territory they are parented) need to monitor the
transfer pricing audits which could put a legislative and tax authority developments in • evaluating whether to take a “top down”
considerable strain on a MNE’s resources. all the jurisdictions in which they operate to or “bottom up” approach to CbCR (with
In these circumstances, TPD will be the first confirm if, and when, CbCR and/or MF filing the associated reconciliation issues
line of defence and will set the agenda for obligations arise. that may arise with the local statutory
these discussions. It is therefore imperative accounts and information returns); and
With the increased amount that MNEs consider how their TPD presents Many MNEs are already planning a smooth
• establishing what is possible – IT and
their global business to the outside world.
of information that will transition to the new world of the MF, LF and
CbCR template. Indeed, a number of groups
internal resource capabilities.
be available to the tax What does that mean for me? are now considering whether to disclose Indeed we have anecdotal evidence of
authorities, we expect In short, a transition from the old world
to a new world involving a higher risk of
more information in documentation that
they are preparing for accounting periods
MNEs fundamentally changing their
documentation approach and adding
more coordinated multi- audit, more demands on a MNE’s resources, preceding the implementation of the new significant resource to their TP function.
territory transfer pricing and, in many cases, a significant shift in
internal culture.
Chapter V.
When it comes to determining an
audits which could put a The MNE’s strategy should include an appropriate strategy, we do not believe that
In the past, MNEs have taken a range of
considerable strain on a different approaches to the preparation
implementation plan. Whilst many countries
have yet to go public on when they will
there is a one-size-fits-all solution. MNEs
have some flexibility in how they structure
MNE’s resources. of their TPD reflecting, amongst other introduce the new requirements, it would, their TPD whilst still complying with the
things, their size and geographic coverage, in our view, be prudent for most large new requirements and it is for this reason
their level of in-house transfer pricing multinationals to plan on the basis that they that each MNE has to decide for itself what
resource, and whether they have a will be required to comply with the CbCR, its documentation strategy should be.
centralised or decentralised culture. MF and LF requirements for accounting
With the harmonisation of the periods beginning on or after 1 January 2016.
It’s time to take action To this end, MNEs should also be reviewing
other areas subject to the BEPS spotlight
We know from MNEs and tax authorities
including (but not limited to):
In this post BEPS
that transfer pricing reporting in the
post BEPS world will require more environment, MNEs will
–– The MNE’s value chain analysis;
documentation, more disclosure, and more
–– The substance underlying need a global documentation
people/IT resources. Governments around
the world are already starting to bring the
–– the MNE’s transfer pricing strategy, along with
model; and
OECD guidance into local law and now we
–– The creation of underlying systems and
have the final report it won’t be long before
the new framework becomes the global
permanent establishments. processes, to enable them
standard. There may be local variations
Your TPD and in particular, your MF gives to deliver consistent and
and nuances but the direction of travel
has been set. With the full involvement
you the opportunity to disclose these matters robust TPD across all their
in a way that minimises the risk of tax
and commitment of the G20, along with
authority challenge. affiliates and in line with
countries such as China, India and South
Africa, to this process, MNEs are coming to statutory deadlines.
Clearly there is a great deal to do in a
terms with the truly global implications of
relatively short period of time and for many
these new requirements.
MNEs, it will be essential to prioritise –
to this end, the first step for MNEs has been
In this post BEPS environment, MNEs
to prepare a roadmap to take them from Authors
will need a global documentation
where they are today to where they want to
strategy, along with underlying systems
be when the new requirements take effect. Matias Pedevilla Kevin Jenkinson
and processes, to enable them to deliver
consistent and robust TPD across all PwC US PwC UK
The time for deliberation is over, the time
their affiliates and in line with statutory
for action is now. +1 305 347 3544 +44 1223 552225
deadlines. On its own however, this is
unlikely to be sufficient to allow a group matias.l.pedevilla@us.pwc.com kevin.j.jenkinson@uk.pwc.com
to mitigate its audit risk – this requires
strategic thinking to decide an appropriate Michael Walter Martin Kennedy
level of qualitative analysis and how
PwC Spain PwC UK
best to present sensitive information in
your documentation. +34 915 684 464 +44 1293 594646
michael.w.walter@es.pwc.com martin.s.kennedy@uk.pwc.com

India transfer pricing –

Steering in the
right direction
India transfer pricing – Steering in the right direction
For multinational enterprises (MNEs) The first bilateral APA was entered into Services (ITES) space. Resolution of these
with business operations in India, transfer with Japan in December 2014. This is a should pave the way for bilateral APAs
pricing has been a significant issue in recent major step towards improving the country’s between the United States and India.
years. India has been perceived to have an challenging investment climate. The Indian The MAP programs with Japan and UK
aggressive and uncertain tax environment, tax authorities are at the advanced stage of are also progressing well with regular The Indian tax authorities
with the Indian tax authorities having negotiations with Japan, United Kingdom meetings and resolution of past disputes.
proposed billions of dollars in tax and other European countries, with more The resolution of MAP cases may also open
are at the advanced stage
adjustments. Lately, however, India is bi-lateral agreements likely to be signed the door for some unilateral APAs which of negotiations with Japan,
moving towards a more taxpayer-friendly, before 2015 ends. would be on similar issues.
non-adversarial tax regime, striving to
United Kingdom and
become a mature tax jurisdiction. This is To make the APA program more attractive With the APA count already in double other European countries,
evident from various actions taken by the for MNEs, the authorities have also figures and many others on the verge of
Indian government, which are not only introduced roll back option for the past four finalisation, and MAP cases heading in
with more bi-lateral
likely to mitigate litigation but also improve years. With this, the MNEs can now plan for the direction of resolution, the Indian agreements likely to be
the ease of doing business in India. Some of a nine year horizon (five forward and four government has demonstrated its intent of
the prominent actions taken in the recent backward) for their key transfer pricing providing tax certainty. The transparency
signed before 2015 ends.
past are briefly described below. issues. Recently, one of the unilateral APA and proficiency with which such processes
that was signed included roll back also. are being conducted is also reassuring.
Bilateral/Unilateral agreements
The Advance Pricing Agreement (APA) Interestingly, after the roll back scheme Setting precedents and limiting
program was introduced to bring certainty was introduced, the Indian government unproductive litigation
and uniformity to transfer pricing matters sought feedback from the stakeholders and In November 2014, India’s Central Board
and reduce protracted litigation. More than issued frequently asked questions (FAQs) of Direct Taxes (CBDT) instructed income
550 applications have been filed in three thereafter, which reflects that the Indian tax officers to more actively monitor
rounds of filing with the APA authorities. government is empathetic and reactive to and guide assessments and ensure more
With 15 unilateral and 1 bilateral APA and the concerns of the stakeholders. reasonable assessments with proper basis.
many more waiting for the final negotiation The tax authorities were advised to utilise
push, the program is certainly gaining The other mode which helps litigation on lengthy questionnaires or summons only
momentum. The 16 signed APAs have sovereign front, i.e. Mutual Agreement after thoughtful consideration and not
been across industries and across issues. Procedure (MAP), has also seen positive as a matter of routine. Taxpayers should
This would help get certainty on the developments. In early 2015, India and the also welcome the instruction that tax
litigation prone tax issues and avoid United States agreed to work on and resolve officers should not routinely litigate all
protracted litigation for these companies. the huge inventory of pending MAP cases in matters and file appeals. Hopefully this
Information Technology (IT)/ IT Enabled will encourage issue resolution without
judicial involvement.

Further, the Indian government’s decision corroborative approach to dealing with key to litigate issues for which a High Court/
not to appeal the favourable (for the regulatory changes. Supreme Court ruling already favours
taxpayer) High Court transfer pricing ruling taxpayers. The clarification on indirect
in the case of Vodafone India pertaining These reforms could significantly reduce transfer taxation also provides some
to the controversy around issue of shares, the avoidable litigation burden in India for certainty on the controversial issue.
was a step towards limiting unproductive authorities and taxpayers. The alignment
litigant and alleviating investor’s concerns of Indian transfer pricing regulations In the past, the Indian government
around prolonged tax disputes. Then the with global best practices is an attempt introduced legislative reforms to expedite
decision not to appeal the Shell India’s to put India on a par with mature tax dispute resolution.
case was reassurance of fact to sidestep administrations. This is a paradigm shift
unproductive litigation. from the position and perception of the Such reforms included introduction of an
Indian tax regime, which would build trust alternate dispute resolution mechanism.
Speaking of precedents, the Indian High and enhance taxpayer’s confidence. However, this mechanism faced certain
Court earlier in the year pronounced challenges and as a result, the desired
a landmark judgment on a marketing Other balancing acts outcome was not achieved. With a resolve
intangible issue for distribution subsidiaries The threshold for applicability of Domestic to making the mechanism effective, the
in India. The case of manufacturing entities transfer pricing has been increased from CBDT revamped the entire mechanism.
is also under litigation in the High Court INR 50 million to INR 200 million. This Earlier this year, the CBDT restructured the
and we can expect another development in should reduce the compliance burden for composition, jurisdiction, and control of the
the near future. small and medium domestic enterprises Dispute Resolution Panel (DRP) across the
in India. country. The revised structure includes five
Fundamental reforms panels – two in Delhi, two in Mumbai, and
in transfer pricing Further, the government’s decision to defer one in Bengaluru. The restructured DRPs
A key reform in India’s transfer pricing general anti-tax avoidance rules (GAAR) by are comprised of dedicated commissioners
regulations has been the recent proposition two years while indicating that such rules to address conflicts of interest and ensure
of permitting the use of arm’s length should be aligned with the Organisation for regular meetings and timely resolution
range and multiple year data, as against Economic Co-operation and Development of cases.
the stringent arithmetic mean and use of (OECD)’s Base Erosion and Profit Shifting
only single year data. These changes were (BEPS) recommendations is favourable. These actions once again reflect the
introduced by means of a draft scheme, The Finance Minister also announced Government’s intent to boost economic
to which the Indian government invited that it will avoid any retroactive tax growth, avoid aggressive taxation, and
comments and suggestions of stakeholders provisions; welcome news for taxpayers. curb litigation.
and general public. This has clearly Also, the recent amendments can help avoid
been perceived as being an inclusive and repetitive appeals as tax officers can opt not
The unfinished agenda The Government, being part of G20, is also

Although the APA (with roll back) keen to introduce the country by country Authors
mechanism will stimulate the reforms, reporting (CbCR) rules effective April 2016.
it needs additional modifications in order This should also refine certain transfer Sanjay Tolia
to be more effective. Such modifications pricing policies in and relating to India. PwC India
could include a more dynamic system
whereby taxpayer feedback and global best On a separate note, other reforms like +91 22 6689 1322
practices are considered and implemented. the unified Goods and Service Tax (GST) sanjay.tolia@in.pwc.com
The process, modalities and momentum and new accounting standards, along the
of APAs are of utmost importance. lines of International Financial Reporting Kuntal Sen
Furthermore, India could expand the list Standards (IFRS), will be introduced
PwC India
of countries with which India could enter soon. Since these would have an impact on
into bilateral APAs and MAPs to include reporting mechanisms and may warrant +91 22 66891366
Singapore, Germany, France, etc. Quickly some changes in the business models,
closing APAs would also encourage more the implications of these reforms on kuntal.sen@in.pwc.com
taxpayers to consider this option. transfer pricing policies would also
need to be evaluated. Nitin Narang
Finally, the existing safe harbour regime PwC India
has not received a positive response from Conclusion Maybe the invitation of +91 124 330 6525
taxpayers. CBDT should relook at them and The common concern amongst MNEs has
rationalize the safe harbour rules. Maybe been that though there are many strategies,
comments and suggestions nitin.narang@in.pwc.com
the invitation of comments and suggestions policies and tools formulated and various of stakeholders and
of stakeholders and general public, could amendments made to the existing legal Ruhi Mehta
help align these rules with the expectations framework to address the uncertain and
general public, could help
PwC India
of the taxpayers and gain acceptance. adversarial tax environment, proper align safe-harbour rules
implementation has been lacking. Thus, +91 22 66891311
The proposed scheme on the use of arm’s taxpayers eagerly await whether, and how,
with the expectations of
ruhi.mehta@in.pwc.com
length range and multiple year data is the Government’s initiatives would alleviate the taxpayers and gain
likely to create practical documentation their concerns on ground. Taxpayer’s are
complications for the taxpayers and audit hopeful that the Indian government would
acceptance.
challenges for both revenue and taxpayers. continue the current momentum and build
Though it is a positive move, but the final upon all the positive steps taken so far,
outcome should be in line with the global to address the litigious tax environment
best practices. and improve the business community’s
perception of doing business in India.

Intercompany allocations
of risk – transfer pricing
considerations in a
changing landscape

transfer pricing considerations in a changing landscape
Introduction the Organisation of Economic Cooperation In this article we discuss how the OECD’s
A common planning feature of many and Development (OECD) has continued position on intercompany allocations of risk,
multinational enterprise (MNE) transfer down the path previously outlined in as set forth in the Risk Section of the Report
pricing structures is the reliance on a other documents released as part of the and other related documents, will increase
principal-service provider relationship.1 ongoing project on base erosion and profit the challenge for taxpayers with regard
Such relationships greatly reduce the shifting (BEPS). A common theme in these to the first point. We then highlight an
complexity of intercompany pricing documents is the OECD’s emphasis on the economic approach that is solidly grounded
by enabling one party in a controlled performance of functions when looking in economic theory and backed by empirical
transaction to bear risk associated with to the allocation of risks and the returns support which can help delineate the
variability in profits (or losses). Limited attributable to such risk. specific elements of risk that are transferred Given the transfer of risk
risk arrangements of this type effectuate a between parties via intercompany
transfer of (some element of) risk from one In light of the OECD’s revised guidance on arrangements. By identifying the nature to the principal, the other
related party – i.e., the service provider – the issue, and the additional scrutiny this is of risks that are transferred between party(s) to the transaction
to the principal. Given the transfer of risk likely to bring, successful defence of these entities the economic framework helps
to the principal, the other party(s) to the structures will turn on two key points: inform the substance requirement/test. are entitled to a risk-
transaction are entitled to a risk-adjusted adjusted return under
return under the arm’s length principle. 1. The ability to demonstrate proper Lastly, the approach can be directly applied
When the principal in such an arrangement substance with the principal by taxpayers to quantify and “price” the risk the arm’s length principle.
also owns the non-routine intangibles that i.e., control over the factors transferred away from the service provider.
represent the key value drivers within the that influence the ability of the
organisation, the transfer pricing analysis organisation to successfully
distils down to a simple one-sided test in generate value and to mitigate risk
which the service provider is typically through effective risk management
benchmarked using the Transactional Net in a manner consistent with the
Margin Method (TNMM). contractual allocation of risk among
the controlled parties; and,
With the release of its final report on 2. The ability of the taxpayer to reliably
actions 8, 9 and 10 as part of the project identify, quantify and “price” the
on base erosion and profit shifting (BEPS) risk that is being stripped away from
titled Aligning Transfer Pricing Outcomes the service provider and assumed by
with Value Creation Actions 8-10 2015 Final the principal.
Reports (the Report) and the sections on
risk (the Risk Section) and intangibles (the 1
The term “service provider” in this article is used generally to denote any entity that performs a well-defined set of
Intangibles Section) within the Report, functions that allows for a precise functional characterization of the entity (e.g., distributor, contract manufacturer,
contract service provider, etc.).


Emphasis on functional control Table 1: Summary of OECD guidance on substance/control
What constitutes an acceptable level of
substance/control is a vast and uncertain
continuum. The answer almost certainly Business Restructuring Paper Intangibles Section Risk Section
turns on a case-by-case analysis that Control of risk requires: To claim intangible related returns: Management of risk requires:
places great pressure on the ability of
the taxpayer to systematically identify Perform and control important The capability to make decisions to
the value drivers and risks within the The capacity to make decisions to intangible-related functions and take on our decline a risk-bearing
organisation. The table present on the right take on risk decisions to put the control other intangible-related opportunity, together with the
capital at risk functions performed by related actual performance of the decision-
of this page summarises the emphasis on
and unrelated parties making function
functional control over key risk mitigation
or value creation activities as set out in the The capability to make decisions on
OECD’s paper on business restructuring as The capacity to make decisions on Bear and control risks and costs whether and how to respond to the
well as the Risk Section and the Intangibles whether and how to manage the risk, related to developing and enhancing risks associated with the opportunity,
Section within the Report.2 internally or using an external provider the intangible together with the actual performance
of the decision-making function
An overarching theme in the Risk Section The capability to mitigate risk, that
This will require the company Bear and control risks and costs
of the Report is the emphasis on “control” is the capability to measure that
to have employees or directors – associated with maintaining and
over risk for purposes of identifying the affect risk outcomes, together
who have authority to and effectively protecting its entitlement to intangible
entity that assumes risk in the context of with the actual performance of
do, perform these control functions related returns
an intercompany transaction and, is thus, such risk mitigation
entitled to the return attributable to such If outsourced, in order to control risk
risk. Furthermore, the OECD’s guidance one has to be able to assess the
in this section ties the notion of control to outcome of the day-to-day monitoring
the essential attributes of “capability” and and administration functions by the
“functional performance” within an entity. service provider.
Finally, the threshold question that

must be answered in the affirmative for
a transaction to be respected (e.g. not
disregarded or recharacterised) per the
Risk Section is whether the transaction
exhibits the “commercial rationality 2
Report on the Transfer Pricing Aspects of Business Restructurings, Chapter IX of the Transfer Pricing Guidelines, 22 July 2010, OECD. The Risk Section and the Intangibles
of arrangements that would be agreed Section within Aligning Transfer Pricing Outcomes with Value Creation Actions 8-10: 2015 Final Reports, 5 October, 2015, OECD. These documents/sections are referred to as
the Business Restructuring Paper, the Intangibles Section and the Risk Section, respectively.

between unrelated parties.” All of this relative import of each member’s value profitability, expressed in terms of a fixed
makes for an environment where taxing contribution also means that taxpayers multiple of some economic variable (e.g., The risk quantification
authorities are not only more likely to will need to refine their approach to the sales, operating expense, etc.), to the service
recharacterise (i.e., disregard) transactions actual measurement of risk for purposes of provider, the intercompany arrangement has framework based on
as originally structured by taxpayers determining proper arm’s length pricing. the effect of altering (lowering) the entity’s operating leverage addresses
but authorities on opposite sides of the operating leverage and its risk exposure that
same transaction can, by reference to An approach for quantifying intercompany stems from such leverage. key challenges that
the same guidance, take fundamentally transfers of risk developed by the authors taxpayers can expect to face
opposed positions with regard to can help taxpayers support limited risk The risk quantification framework based
such characterisation. intercompany arrangements across both on operating leverage addresses three when defending their limited
dimensions of scrutiny.3 The approach is key challenges that taxpayers can expect risk arrangements in the
Risk and measurement grounded in a substantive body of work in to face when defending their limited risk
The guidance in the Risk Section of the finance that analyses the determinants of a arrangements in the face of the OECD’s face of the OECD’s evolving
Report appears to reflect the OECD’s view company’s systematic risk. This literature is evolving guidance on the issue: guidance on the issue.
that taxpayers may have been too quick in used to derive a framework to identify the
attributing risk, and the return associated specific type of operational risk that can be 1. By clearly and objectively
with such risk, to specific members of transferred between parties by means of delineating the “transferable
the MNE group (i.e., the principal). For an intercompany contractual arrangement risk” faced by a functional entity
instance, in its draft paper titled BEPS and also distinguish such “transferable from its overall operational risk,
Actions 8, 9, and 10: Discussion Draft risk” from other elements of operating the approach directly addresses
on Revisions to Chapter I of the Transfer risk. In particular, the framework allows the OECD’s critique of taxpayers’
Pricing Guidelines (including Risk, for the decomposition of the risk faced by a positions with regard to “blanket
Recharacterisation and Special Measures - service provider into two factors. Of these, statements” on entities being ’
a precursor to the Risk Section - the OECD the risk associated with the firm’s revenue “insulated from all commercial
had stated that, “[b]lanket statements generating process is an intrinsic business risk” under principal-service
that one or another party performing risk that cannot be transferred away by provider arrangements.
commercial activities is insulated from all means of an intercompany arrangement. In
2. By identifying the true economic
commercial risk and that pricing should contrast, the “transferable risk” is identified
nature of this “transferable risk” and
be based on the determination of risk-free as the risk that stems from operating
its underlying cause i.e., operating
returns should be carefully scrutinised leverage, a characteristic that derives from
leverage, the approach can help
(pp 49).” Hence, the evolving landscape the firm’s operating cost structure in which
better guide taxpayers’ efforts
requiring taxpayers to carefully parse the presence of fixed costs play the role of
toward ensuring that the principal 3
See Singh, K and W. J. Murphy, “An Approach to
which members of the group manage magnifying the intrinsic business risk faced Quantifying Intercompany Transfers of Risk,” Tax
has the requisite substance/control
risk (via substance) in order to assess the by the firm. By providing a fixed level of Management Transfer Pricing Report, October 29, 2014,
with regard to such risk. Volume 23, Number 13.


3. The framework provides a robust
and defensible quantitative methods Figure 1: Impact of transferable risk on the operating margin results of US distributors (1999-2014)
for purposes of “pricing” the
45.0%
“transferable risk” in terms of a “risk
adjustment” that can be applied
to benchmark returns observed
40.0%
among independent companies that
are functionally comparable to the
related party service provider but 35.0%
which differ in their risk profile.
Taking this framework one step further, we 30.0%
have used its conceptual underpinnings to

empirically quantify the risk-reward trade-
off observed for independent companies. 25.0%
Using data for a sample of independent

distributors in the United States over a
16-year horizon we have estimated what
20.0% 39.7%
percentage of these companies’ observed

operating margins (OM) is attributable to 15.0%
“transferable risk” (in the meaning of the
framework described above). The empirical
strategy applies an econometric approach 10.0% 20.7%
that “controls” for observed as well as
latent firm-specific attributes as factors that
have a bearing on the firms’ OM results. 5.0%
The strategy thus allows us to “isolate” the

specific relationship between “transferable 1.8%
0.0%
risk” and firm profitability(as measured
by its OM). The figure present on the right Impact of transferable risk (lower bound) Impact of transferable risk (average) Impact of transferable risk (upper bound)
of this page summarises some of the key

results from the analysis.

The empirical results show that, on contractually bears and a methodology This article outlines a methodological
average, approximately twenty percent of that can quantify such risk under a reliable approach whose conceptual underpinnings
the observed OM results of US distributors and defensible application of the arm’s and empirical application can help taxpayers
can be attributed to the type of risk that is length principle. in both these objectives.
typically stripped away under a limited risk
intercompany arrangement. Authors
Joe Murphy
The analysis suggests that the target
OM for a “limited risk distributor” should PwC US
be lower than the OM observed for a
+1 617 530 4289
functionally comparable independent
distributor by a factor of 20 percent, on w.joe.murphy@us.pwc.com
average. The empirical analysis, which
applies the concepts of the risk quantification Kartikeya Singh
framework described on the previous page,
PwC US
can be extended to other industries (e.g.,
manufacturers, service providers, etc.) and +1 703 918 3290
provides compelling economic support for kartikeya.singh@us.pwc.com
the risk-reward trade-off that is directly
relevant for taxpayers in the defence of
limited risk intercompany arrangements.
Conclusion The evolving regulatory

The evolving regulatory landscape shaped by landscape shaped by
the OECD’s BEPS project will put significant
additional pressure on a widely used class the OECD’s BEPS project
of intercompany arrangements. will put significant
In particular, taxpayers’ successful defence
of “principal-service provider” arrangements additional pressure
where the service providers earn stable and on a widely used
(relatively) low returns will depend crucially
on two factors, the ability to demonstrate class of intercompany
that the principal possess the requisite arrangements.
control/substance over the specific risk it

Navigating the
changing transfer
pricing landscape for
the energy industry
Navigating the changing transfer pricing landscape for the energy industry
Introduction Figure 1: Historic and forecast price for crude oil imported into the US – 1973 to 2016
Until recently the energy industry received
relatively little attention from many tax Figure 1: Annual imported crude oil price
authorities, at least outside a handful of $US per barrel
significant energy producing countries such Forecast
as Australia, Canada, Norway and the UK. 120
Scrutiny of transfer pricing issues in many

110
developed countries increased rapidly
through the 1990s and early 2000s, although
100
much of that attention focused on industries
other than energy such as consumer 90
and industrial products, technology and
financial services. 80
However, energy transfer pricing 70
is now increasingly in the spotlight,

60
evidenced by an increase in industry-specific
legislation (e.g. Brazil’s transfer pricing
50
rules on exports of commodities)1 and
guidelines and tax authority enquiries. This 40
is hardly surprising given the combination
of recent high commodity prices, which 30
generated record profits for the industry, and Nominal

widespread government fiscal deficits. 20 Real
10
The diagram below illustrates
the timing and extent of the recent oil price 0
boom – notably a number of the highest oil
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
price years (2010-14) occurred after the
global financial crisis when governments Source: EIA, Short Term Energy Outlook, (http://www.eia.gov/forecasts/steo/realprices/)
were most fiscally constrained.
1
Quotation Price on Exports method (PCEX)
introduced by Law 12715/12

Other factors have contributed to the As part of the BEPS Action Plan, the OECD
recent surge in interest in energy transfer has also published a commodity specific
pricing, including: paper for the first time.4 Further, a task
force from the OECD and the World Bank
• the technology-driven surge of Group is performing commodity-specific
unconventional oil and gas production; supply chain reviews as a part of the Tax
and Development Programme.
• a rapid growth in liquefied natural gas
(LNG) projects;
Transfer pricing changes across
• the emergence of new markets and new the energy value chain
producing countries (e.g. in Africa); and The previously mentioned developments
constitute a challenging transformation
• the increasing attention paid to
for the industry from a transfer pricing
transfer pricing by the governments
perspective. The remainder of this article
and tax authorities of developing
discusses components of the energy
countries, a number of which are major
industry value chain which are particularly
energy producers.
affected by recent developments, i.e.
financing arrangements; cross border
The above developments sit against a
leasing of mobile assets; and the marketing
backdrop of the Organisation for Economic
and trading of energy products.
Co-operation and Development (OECD)
Base Erosion and Profit Shifting (BEPS)
The BEPS Action Plan addresses several areas of Action Plan.2 The BEPS Action Plan
Intercompany funding
To fund exploration and development
significance to energy companies (in particular, the addresses several areas of significance
activities, energy producers need
to energy companies (in particular, the
relative contributions of risks, capital, and personnel relative contributions of risks, capital,
substantial amounts of funding. Commonly
this is at least partly in the form of debt
to the value chain) and raises questions as to whether and personnel to the value chain)3 and
from related parties. For large energy
raises questions as to whether established
established structures within the industry will continue structures within the industry will continue
projects, e.g. new LNG developments,
the funds required can run to many billions
to be respected from a tax perspective. to be respected from a tax perspective.
(or even tens of billions) of dollars.
2
OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. (http://dx.doi.org/10.1787/9789264202719-en)
3
OECD BEPS Actions 8, 9 and 10, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10: 2015: Final Reports.
4
OECD BEPS Actions 8, 9 and 10, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10: 2015: Final Reports
Tax authorities in many countries are BEPS Action 4, which seeks to limit base Mobile assets
increasingly paying close attention to erosion via interest deductions and other The developments discussed earlier have Companies which own and
the transfer pricing aspects of funding financial payments, threatens to change affected not only energy exploration and
arrangements for energy projects, including the game even more radically with a new production companies, but also service use mobile assets to provide
interest rates on debt from related parties, a one-size-fits-all approach. The OECD has providers to the industry such as drilling services, e.g. mobile offshore
parent guarantee fees on debt from third suggested two types of tests (fixed ratio rule services companies.
parties, and the amount of debt (in those as the primary test, and group ratio rule as drilling units, platforms
countries where the arm’s length principle optional test) to limit interest deductions, Companies which own and use mobile and floating production
governs the allowable amount of debt). which move away altogether from the arm’s assets to provide services, e.g. mobile
Putting aside the industry-specific issue length principle in its current form.5 offshore drilling units, platforms and vessels, have long used
of interest-free funding of exploration floating production vessels, have long used separate legal entities to
activities (quasi-equity), which has long The proposed primary fixed ratio rule has separate legal entities to own and lease the
attracted interest from tax authorities been confirmed with a range of acceptable assets to the entities that crew and operate own and lease the assets to
in territories providing funding, the EBITDA thresholds for countries to adopt them. The asset owning entities commonly the entities that crew and
‘new normal’ also affects funding of between 10% and 30%. The OECD also lease the assets to the operating companies.
production activities which can afford identifies various factors which it hopes Such operating structures can assist with operate them.
interest payments. will help countries set the appropriate asset protection and facilitate the frequent
ratio. On the other hand, a group ratio movement of mobile assets between
On multi-billion dollar loans rule, which could be adopted alongside countries with minimal commercial,
such as those common in the energy the fixed ratio rule, would allow for net legal and regulatory impediments.
industry, the interest and guarantee fee interest expense above a country’s fixed
amounts at stake can be very substantial. ratio to be deductible up to the level Historically, the transfer pricing
In countries such as Australia and Canada of the net interest/EBITDA ratio of its methodologies used in the industry have
this has led to increasingly technical worldwide group. recognised the substantial value contributed
debates on how to establish an arm’s length by these specialised, high value assets, and
‘price’ for funding and parental guarantees, In light of this OECD recommendation, the significant market and utilisation risks
including how to determine the credit it will be important for energy companies commonly attached to asset ownership.
quality of the borrower and the extent to to closely monitor further developments Under conventional transfer pricing
which ‘parental affiliation’ (i.e. the credit (both at global and local country levels) principles, these contributions are reflected
rating of the group parent company) should and be prepared to respond to changes in in the asset owner’s share of profits.
be taken into account, if at all. rules or practices which may impact their
existing funding arrangements.
5
OECD/G20 Base Erosion and Profit Shifting Project,
Limiting Base Erosion Involving Interest Deductions and
Other Financial Payments, Action 4: 2015 Final Report

Although BEPS Actions 9 contains extensive Centralised allocation of risk where it is at odds Disclosure developments
discussion and guidance on analysis of risks marketing/trading with the substance of the arrangement) relevant to the energy industry
(and the resulting allocation of profits to Although it is common for energy and non-recognition of transactions. As The energy industry is facing a rapid increase
those risk), OECD suggests that it should not companies to centralise their marketing/ demonstrated by the Australian experience, in tax and transfer pricing disclosure
be interpreted as indicating that risks are trading activities in one or a few locations, these OECD developments may cause tax requirements. For example the ‘transparency’
more important than functions or assets.6 many tax authorities (of both developing authorities to overlook the contractual pillar of the OECD’s BEPS Action Plan has
Instead, the expanded guidance on risks and developed countries) are looking allocation of risk to marketing/trading recommended a new ‘three-tier’ framework
and examples around the transfer pricing of at these with increasing scepticism. For operations if those operations do not also for transfer pricing documentation for
mobile assets reflect the practical difficulties example, the tax authorities in Australia manage the risk and have the capability to multinationals, comprising a country-by-
presented by risks: risks in a transaction have closely examined not only the pricing influence the risk. country report (CbCR), a master file and local
can be harder to identify than functions or of product sales to offshore ‘marketing hubs’ files.12 A number of countries have already
assets, and determining which associated and the amount of profit residing in the In the United Kingdom (UK), the diverted confirmed they will implement the new
enterprise assumes a particular risk in a hub, but also the commercial justification profits tax (DPT) regime also has the measures, including the UK,13 Spain14
transaction will require careful analysis. for the arrangements. potential to affect energy companies with and Australia.15
This is an important consideration, offshore marketing hubs. The DPT is a 25%
especially for companies operating in Similarly, the BEPS Action Plan tax on profits that are considered to be 6
this industry, given the historical transfer has targeted situations where transfer artificially diverted from the UK.9 The focus of Aligning Transfer Pricing Outcomes with Value Creation,
Actions 8-10: 2015: Final Reports
pricing method used have recognised pricing outcomes are not aligned with the DPT is on issues of substance and permanent 7
the substantial value of the assets and value creating functions.7 The OECD has establishment (PE), which can be challenging Aligning Transfer Pricing Outcomes with Value Creation,
Actions 8-10: 2015: Final Reports
the significant risks associated with asset also introduced revisions to its Transfer to address in the energy markets because of 8
Ibid, para. 1.60
ownership (e.g. utilisation). Pricing Guidelines, with particular complex global supply chains, unique trading 9
PwC, Tax Insights, UK Diverted Profits Tax to be
emphasis on delineating the transactions activities and highly mobile traders.10 The UK introduced, 12 December 2014
10
HM Revenue & Customs, Diverted profits Tax:
To effectively manage transfer pricing in line with the actual behaviour of the tax authorities have also scrutinised more Interim Guidance, March 2015 (https://www.gov.uk/
risk in value chains where mobile assets parties, pricing of commodities related complex arrangements seen in the industry government/uploads/system/uploads/attachment_data/
file/422184/Diverted_Profits_Tax.pdf)
and associated risks are key value drivers, transactions and the allocation of risk, (i.e. such as fixed-for-floating/total return swaps 11
HM Revenue & Customers, Guidance on avoidance
companies will increasingly need to take a to assume a risk, an entity needs to control – they have reviewed a number of these and schemes involving the transfer of corporate profits,
whole-of-value chain approach to evaluating the risk and have the financial capacity to concluded that some might be regarded as guidance on legislation published on 19 March 2014.
12
and documenting those arrangements. assume the risk), by including multi-step profit transfer arrangements.11 Transfer Pricing Documentation and Country-by-
This will require careful evaluation of the approach to dealing with risk for transfer Country Reporting, Action 13: 2015: Final Report
13
PwC, Tax Insights, UK to introduce legislation to
functions performed throughout the value pricing purposes.8 In light of the above developments, it is implement country-by-country reporting, 15 January 2015
chain including the functions associated critical that energy companies be prepared 14
PwC, Tax Insights, Spain: Government announces
with the ownership of the assets, and The BEPS Action Plan has also increased to defend against substance-based intent to adopt country-by-country reporting
requirements, 27 January 2015
careful and thorough assessment of where the threat of reconstruction of transactions challenges to the amount of profit returned 15
PwC, Tax Insights, Draft law released for Australian
key risks lie within the value chain. (e.g. by disregarding the contractual by their marketing/trading operations. Country-by-Country and Master/Local File Reporting, 7
August 2015
The OECD three-tier reporting framework

will apply to all industries while other
compliance regimes like the Extractive
Transparency
OECD CbCR
Framework
Industries Transparency Initiative (EITI)
Directive
standard, which was rolled out in May 2013
(and revised in January 2015),16
EITI
EU
are more specific to the energy industry.
The EITI is a voluntary mechanism Names of establishments, nature of activities and geographical location x x 
promoting governance in resource-
rich countries through the publication Production entitlement   x
and verification of company payments Profit taxes e.g. corporate income tax   
and government revenues from oil, gas
Payments to government Other taxes on income, profit or production   x
and mining.17 To complement the EITI,
the European Union (EU) introduced Royalties   x
mandatory disclosure requirements for
extractive and logging industries by Dividends   x
requiring companies registered or listed in Production, signatory, discovery and other bonuses   x
the EU to disclose payments to governments
along the same lines as the EITI.18 Licence fees, rental fees, entry fees   x
Those hoping for interchangeability of Infrastructure payments   x
the information in these three regimes
might be surprised by a simple summary Social expenditure  x x
presented on the previous page. Public subsidies received x x x
Production volumes  x x
16
Extractive Industries Transparency Initiative, The EITI Revenues x x 
Standard, EITI International Secretariat – 1 January 2015
(https://eiti.org/files/English_EITI_STANDARD.pdf) Number of employees (Full Time Equivalent) x x 
17
The Australian Extractive Industries Transparency
Initiative Pilot Multistakeholder Group report Profit or loss before tax x x 
(http://www.industry.gov.au/resource/Programs/
ExtractiveIndustriesTransparencyInitiative/Pages/ Stated capital x x 
default.aspx)
18
New disclosure requirements for the extractive Accumulated earnings x x 
industry and loggers of primary forests in the
Accounting (and Transparency) Directives (Country by Tangible assets x x
Country Reporting) – frequently asked questions. (http://

europa.eu/rapid/press-release_MEMO-13-541_en.htm)

Key takeaways and

outlook for the future Authors
The energy industry is experiencing an
unprecedented array of changes to the Hamish McElwee
transfer pricing landscape. While some PwC Australia
of the challenges faced are common to all
industries, arguably the energy industry +61 8 9238 3571
is facing even greater change than many. hamish.j.mcelwee@au.pwc.com
Companies in the industry are facing
increased scrutiny of the ‘substance’ of Szymon Wlazlowski
arrangements and of the pricing of ‘mobile’
PwC UK
value contributions such as financing and
asset leasing. The emerging OECD doctrine +44 207 212 1889
of ‘functions first’ creates challenges in
applying transfer pricing principles in szymon.wlazlowski@uk.pwc.com
an industry dominated by large capital
investments and substantial risk. Dale Bond
PwC US
Successfully navigating these changes
+1 713 356 4156
will require stock-taking of transactions
to identify those most likely to attract dale.bond@us.pwc.com
attention (such as the examples provided
in this article). In some cases, the substance Ivan Williams
and pricing of existing arrangements may
PwC Canada
need to be re-evaluated, to stress test if
they continue to be sufficiently robust to +1 403 509 7554
sustain challenge. ivan.p.williams@ca.pwc.com
Taking the lead –

Reform to Australia’s
transfer pricing
landscape in a
global context
Taking the lead –

Reform to Australia’s transfer pricing landscape in a global context
Introduction Legislative reform • Transfer pricing documentation must • Reconstruction provisions
As the G20 and Organisation for MNEs operating in Australia are subject be prepared prior to lodgement of have been introduced, which allow
Economic Co-operation and Development to new transfer pricing legislation,1 which the tax return if a taxpayer wants to actual transactions to be disregarded
(OECD) drive the reform agenda for the applies to income years beginning on or be eligible to establish a reasonably and hypothetical arm’s length
international tax and transfer pricing after 1 July 2013. The legislative reforms, arguable position (RAP) for penalty transactions to be substituted in certain
landscape through the Base Erosion and which follow the decision in a landmark protection purposes. The heightened circumstances. This has resulted in
Profit Shifting (BEPS) project, Australian transfer pricing case in Australia,2 are exposure to penalties under the new analysis that goes beyond pricing, to
Treasury and the Australian Taxation intended to ‘modernise’ Australia’s transfer documentation requirements has substantiate the substance and overall
Office (ATO) have continued to play a key pricing rules and align them with the OECD resulted in MNEs undertaking a broader commercial rationale of transfer
role in influencing the global debate and model tax treaties and transfer pricing assessment, ‘health check’ and update pricing arrangements, to mitigate the
leading the charge in implementation of guidelines, with some notable exceptions. of their existing transfer pricing policies risk of reconstruction. Notably, the
proposed reforms. The level of political and and documentation (or preparation legislative provisions have a lower
public scrutiny of tax paid by multinational From a practical perspective, the new rules of additional documentation threshold than the OECD guidelines
enterprises (MNEs) in Australia has also have resulted in a heightened focus on where insufficient documentation which permit reconstruction in only
continued to increase, exemplified by the transfer pricing by corporate executives, existed previously). ‘exceptional circumstances’.
Senate Inquiry into corporate tax avoidance boards, and tax managers alike. Key
• Specific requirements in relation
which is due to release its report in relation changes under the new rules, together with
to the nature of transfer pricing
to transfer pricing in November 2015. the practical implications and best practice
documentation (together with self-
compliance measures being adopted by
assessment) have been legislated in Legislative Transparency
In this context, MNEs operating in Australia Australian taxpayers include: reform measures
Australia which diverges from existing
have experienced a complete re-write of
OECD guidance. This has seen MNEs
the transfer pricing law, coupled with • The new rules operate on a self-
seeking to rely on global core/ master
an increasing focus from the ATO in assessment basis, which has resulted in Australian
file style documentation preparing transfer
monitoring compliance and enforcing a requirement for taxpayers (or more pricing
additional analysis to bridge the gap Public,
the law. specifically the Public Officer) to make political & reform Increased
from OECD compliant transfer pricing ATO scrutiny penalties
an informed self-assessment of the
documentation to achieve compliance
This article provides a summary of the key company’s transfer pricing compliance,
with Australia’s laws.
recent legislative, ATO, and other political together with disclosure in its income New anti
avoidance rules &
developments relevant to MNEs operating tax return regarding the extent of goods services tax
in Australia (summarised diagrammatically transfer pricing documentation (GST) reform
below), and our recommendations for maintained to support the arm’s length
taxpayers wanting to mitigate their risk of nature of related party dealings.
an ATO transfer pricing review/audit and 1
Subdivisions 815-B, C and D of the Income Tax
associated penalties. Assessment Act 1997.
2
SNF (Australia) Pty Ltd v Commissioner of Taxation.
Taking the lead –

Reform agenda • Australian headquartered multinational The impending implementation of the OECD These provisions operate as an override
As the Australian Government leads the enterprises – will be required to lodge a transfer pricing documentation and CbC to any conflicting provisions in Australia’s
charge on implementation of tax and CbC report in addition to both a Master reporting standards in Australia should double taxation agreements and domestic
transfer pricing reform, a Bill has been File and Local File with the ATO. also act as a catalyst for MNEs to consider source provisions to effectively deem
introduced to Australian Parliament on both the mechanics of collating relevant an Australian permanent establishment
• Australian subsidiaries of foreign
16 September 2015 containing a suite information to meet these requirements, (PE) in circumstances where there is
headquartered multinational
of proposed measures impacting MNEs as well as the strategy for the organisation a presence in Australia, and goods or
enterprises – will be required to lodge
operating in Australia. managing its tax ‘profile’ globally amongst its services are sold by a related entity outside
both a masterfile and local file with the
internal and external stakeholders in light of Australia to Australian customers. The
ATO, unless granted an exemption by
1. OECD transparency measures increased transparency. rules are complex, subjective and contain a
the ATO. No CbCR will be required in
number of requirements which must all be
The Bill contains provisions incorporating Australia if the ATO is able to obtain the
2. Increased penalties collectively satisfied before the rules apply.
the new OECD standards on transfer pricing CbCR from the tax authority in the local
documentation (master file and local file) entity’s parent entity jurisdiction. The Bill contains measures to double the
In addition to the measures in the Bill,
and country by country reporting (CbCR). maximum administrative penalties for
another reform measure of relevance
The proposed legislation will apply from Information disclosed to the ATO will be companies with global group revenues
to MNEs which was announced by the
1 January 2016 to taxpayers with annual made available to other revenue authorities exceeding A$1 billion. This will apply
Australian Government as part of its
global group revenue exceeding A$1 billion. through mutual exchange procedures. where the taxpayer does not have a RAP
2015/16 Federal Budget are amendments
Given the ATO is likely to be one of the and the ATO assessment relates to tax
to apply the Australian goods and services
It is expected that the disclosure first revenue authorities to obtain this avoidance or transfer pricing. As noted
tax (GST) to digital products and services
requirements (not yet disclosed by the ATO information, it will be important that above, taxpayers must have transfer pricing
imported by Australian consumers.
at the time of writing) will closely follow MNEs are prepared with robust, consistent documentation on file at the time of lodging
the Action 13 guidance issued by the OECD. and sufficiently detailed documentation the income tax return to establish a RAP for
Whilst the above two reform measures were
The practical implications of the draft covering their global arrangements. transfer pricing matters, emphasising the
introduced with the primary intention of
law are: importance of MNEs undertaking annual
targeting companies operating in the digital
analysis and documentation of transfer
space, as currently drafted the proposed
pricing arrangements.
reforms have the potential to inadvertently
Given the ATO is likely to be one of the first revenue impact a range of MNEs providing products
3. New General Anti Avoidance Rules
authorities to obtain this information, it will be important and Goods and services tax reform
or services into Australia where there is no
Australian physical presence. Accordingly,
that MNEs are prepared with robust, consistent and Targeted changes to the general anti affected MNEs should consider how
sufficiently detailed documentation covering their global avoidance rules (GAAR) were also included the proposed reforms may impact their
in the Bill, often referred to as Australia’s Australian operations.
arrangements. version of the Diverted Profits Tax.

Taking the lead –

Public, political PS LA 2015/4. This guidance effectively Key takeaways
& ATO scrutiny formalises changes the ATO started MNEs should consider the implications Authors
The environment of public and political to introduce over the last 12 months, of the current Australian transfer pricing
scrutiny of the taxes paid by MNEs in including: landscape to their specific circumstances, Jenny Elliott
Australia has continued to increase. This including: PwC Australia
has been highlighted by the recent Senate • A front ended early engagement phase
Inquiry into corporate tax avoidance in prior to taxpayers being accepted • Determining whether sufficient analysis +61 3 8603 3753
which a number of key stakeholders were into the APA program, with a greater and documentation has been prepared jenny.elliott@au.pwc.com
called for questioning, including companies focus on identifying and appropriately in compliance with the new legislative
operating in the mining, technology and considering collateral tax issues related regime to enable penalty protection. Dritton Xhemajlaj
pharmaceutical industries. Practically, to the matter covered by the APA (i.e.
• From a practical perspective, the new PwC Australia
consistent with similar inquiries in the UK beyond transfer pricing).
rules, together with the current political
and US, these public inquiries illustrate the +61 7 3257 5646
• The requirement for greater internal landscape in Australia have resulted in
importance of MNEs proactively developing
ATO stakeholder involvement and a heightened focus on transfer pricing dritton.xhemajlaj@au.pwc.com
stakeholder communication strategies in
approval from early engagement and at by corporate executives, boards, and tax
anticipation of increased public scrutiny of
defined points throughout the process, managers alike. Hiral Mistry
MNE tax affairs.
(including internal workshops and
• The Australian Senate inquiry PwC Australia
assignment of a Competent Authority
With this backdrop additional funding illustrates the importance of Australian
to each case). +61 2 8266 0683
has been provided to the ATO to monitor taxpayers proactively developing
taxpayer compliance. Whilst MNEs can The new guidance reinforces the ATO’s stakeholder communication strategies in hiral.mistry@au.pwc.com
expect the ATO to continue to focus its commitment to the APA program and anticipation of increased public scrutiny
transfer pricing review and audit activities enables taxpayers to better understand of MNE tax affairs.
on traditional risk areas (e.g. business the expectations of the ATO to assess
• It is an opportune time for taxpayers to
restructures, intercompany financing, loss the likelihood of their particular facts
assess their individual risk profile, in
making companies) this funding will see a and circumstances being suited to the
light of continued ATO review and audit
continued expansion of compliance activity APA product.
activity, and to understand the potential
and interest in perceived BEPS mischief
benefits of seeking greater certainty
(e.g. digital economy, intangibles, PEs). This represents an opportune time for
through an APA.
taxpayers to assess their individual risk
In view of this increasing uncertainty, the profile, in light of continued ATO review
ATO has reinvented its advance pricing and audit activity, and to understand
arrangement (APA) program through the potential benefits of seeking greater
the release of a new practice statement, certainty through an APA.
Theoretical and practical

challenges introduced by
BEPS Action 4
Theoretical and practical challenges introduced by BEPS Action 4
The thin capitalisation and/or 1. Fixed ratio test Issues

The aim of Action 4 of the anti-avoidance tax rules enacted in an
A fixed ratio test would restrict net interest A fixed ratio test has the advantage of being
individual country’s tax legislation, along
Organisation for Economic with proposed hybrid mismatch rules,
expense to a specified proportion of EBITDA relatively simple to apply and administer.
(earning before interest, tax, depreciation In practice, fixed ratio tests appear to
Co-operation and generally provide an appropriate balance
and amortisation), assets or equity of a work well when countries are allowed to
between preventing tax base erosion
Development’s (OECD) through interest deductions and allowing
company. This type of approach is already independently determine the nature and
widely used by a number of countries, level of the ratio, as either a frontline test or
BEPS Action Plan is to the country to remain economically
for example the restriction of interest anti-avoidance measure.
competitive. The aim of Action 4 of the
produce coordinated and Organisation for Economic Co-operation
deductions based in Germany on the level
of taxable EBITDA in Germany or based in Countries may tailor fixed ratio tests
transparent rules to address and Development’s (OECD) BEPS Action
the United States on the ‘adjusted taxable according to industry; if a “one size fits all”
Plan is to produce coordinated and
base erosion and profit transparent rules to address base erosion
income’. The Paper acknowledges, however, fixed ratio test is applied, it would fail to
the difficulty in setting an appropriate account for differences in industries. For
shifting through the use and profit shifting through the use of
benchmark ratio that is low enough to example, an artificially low fixed ratio would
interest expense. The OECD’s final paper
of interest expense. on Action 4: Interest Deductions and Other
address BEPS concerns without giving rise unfairly penalise capital-intensive industries
to significant double taxation risk. such as infrastructure, which generally have
Financial Payments (the “Paper”), issued on
higher debt ratios for non-tax reasons.
5 October 2015, sets out various options for
The fixed ratio test will be the primary
addressing this issue.
interest limitation rule, based on a Public-Private Joint-ventures (PPS) funding
“net interest/EBITDA” cap. The OECD would be out of scope. Banks and insurance
Recommended approaches
recommends a threshold between 10% and companies would not fall under the rules,
The paper recommends limiting interest
30%, indicating that countries will have but may be subject to specific rules. In-house
deductions primarily using an interest
some flexibility when adopting Action 4 in banks falling under Basel III rules would
cover ratio, supplemented with a group
their local legislation. To manage volatility, be considered as banks for the Action 4
wide ratio. These are explored in more
disallowed interest or unused interest rules. However, there is no exclusion for
detail below. A series of theoretical
capacity could also be carried forward treasury companies.
and practical questions will need to be
(or back). Countries may also choose to
addressed by governments and taxpayers
apply a fixed ratio on an average over a Regarding hedge fund/private equity
alike in their compliance with the
number of periods. There may also be a de structures, there still seems to be two
new recommendations.
minimis rule (e.g. interest remains fully conflicting positions: according to some such
deductible up to EUR 3 mil). structures specific rules should be developed
next year under the bank and
insurance specific rules, while others argue

they should fall under the general interest An artificially low fixed
limitation rules.
ratio would unfairly
These industry specific rules and penalise capital-intensive
considerations will be further developed
in the course of 2016, however the industries such as
likelihood is that certain industries may infrastructure, which
be significantly impacted if carve outs are
not included within the fixed ratio test generally have higher debt
that allow for the nuances of the capital ratios for non-tax reasons.
structures typically used in that sector.
2. Group-wide test
The group-wide test will be the secondary on more external debt than may be industries such as banking and insurance,
The recommended group-wide test outlined interest limitation rule (available as an financially prudent. a group-wide test would presumably also
by the OECD in the paper is to allow interest option to the taxpayer if they do not pass need special rules for groups who are not
deduction allowed up to the group’s net the fixed ratio test). In an attempt to reduce The introduction of a group-wide test may debt funded such as private equity funds
interest/EBITDA ratio where this is higher the risk of a group-wide ratio rule not also lead to MNE’s taking a short-term view or pension funds.
than the fixed ratio. allowing a deduction for third party interest to broader business planning, as the ETR is
expense, territories are invited to allow this likely to fluctuate more on an annual basis Not allowing these companies to deduct
Consensus is required under this approach. rule to give up to a 10% uplift on the group’s as interest deductions in each country will interest expense may make these
If not, double taxation or non-deductibility net finance expense. be unknown and difficult or impossible companies less competitive at a time when
may result on actual net third party to forecast (as they will be a function their investment can be significant in some
interest expense. For example, Company Further work will be carried out in of the economic activity of other group countries. In addition, MNEs are often a
A acquires debt and allocates its interest 2016 by the OECD in relation the the companies). This may impact economic portfolio of entities performing different
expense across the group. Countries B, C implementation of the group-wide test. factors such as medium and/or long term functions, holding different assets, and
and D have all adopted the group-wide investment in labour and capital. bearing different risks. To apply the same
test; however, Country B’s tax laws do Issues framework and ratio to entities with these
not allow for interest on the debt to be In addition, the proposed group-wide tests functional and risk-profile differences
MNE’s raise capital in the most cost
deducted as allocated. There would be require a significant number of ‘carve-outs’ could result in different economic and tax
efficient manner available. The
a disproportionate allocation of interest indicating that such a test would not be outcomes on a legal entity basis.
introduction of a group-wide test has the
expense for which a portion may not easier to apply and would not create an
potential to influence bona fide business
be deductible. equitable result. For example, in addition
decisions incentivising groups to take
to the requirement to have specific rules for

Given the apparent complexity of the might deal with scenarios where groups are Definition of interest and other Practical examples
group-wide tests, their implementation introducing debt into territories to allocate financial payments economically
Taking the above theoretical issues one step
will require taxpayers to allocate more their finance expense in accordance with a equivalent to interest
further, there are practical issues associated
resources (internal and external) than they group ratio rule, however local “motive” or
Difficulties arise in relation to the inclusion with the use of fixed ratio or group- wide
currently allocate in order to apply the arm’s “purpose” based tests apply.
of foreign exchange amounts of entities in a tests in replacement of an
length principle and local country thin cap
group of territories which only tax foreign arm’s length assessment.
legislation. MNE’s will be required to apply Further challenges
exchange on a realised basis, or where
the group-wide test annually, which at the Consistency across jurisdictions
specific tax hedging rules apply which Examples of these practical
very least will involve gathering significant
Attempts at achieving consistency across could create mismatches between amounts issues are provided below:
amounts of financial data centrally and
jurisdictions will be very difficult since included in accounts and tax.
consolidating entities in countries where
there are fundamentally different tax Example 1 – Fixed ratio test
consolidated financial statements were not
and accounting rules in each territory Similar issues could arise in relation to
previously required. Let’s take the example of a limited risk
in terms of interest deductibility, and, the inclusion of the finance cost element
distributor operating within a multinational
as acknowledged in the Paper, there of finance lease payments where lease
Optional rules group. The limited risk distributor may be
will continue to be specific additional classification varies depending on the
A country may decide to apply other receiving an operating margin of say 2-3%
interest limitations which will not be generally accepted accounting principles
general interest limitation rules, such as per annum, but on a potentially large sales
applied consistently. (GAAP). If an entity is in a territory that
the arm’s length principle. It is suggested base. Assume that, after applying the fixed
classifies a lease as an operating lease
that in most cases that these rules should be ratio test the chosen ratio was EBITDA/
In addition, there will undoubtedly under local accounting and therefore tax
applied before disallowing any additional interest, the limited risk distributor would
be territories which do not adopt the rules, this could give a different answer to a
amounts through the fixed ratio and group have reasonable capacity to accommodate
proposals. One of the other uncertainties situation where the group accounts classify
ratio rules. interest costs based on its fairly stable
is the extent to which individual territories the lease as a finance lease.
EBITDA profile. In contrast, a principal
would replace existing interest restriction
The earnings-based worldwide group ratio company that sells via the limited risk
rules with these proposals. If countries As a general matter, the broader the
rule can also be replaced by different group distributor may only have capacity for
decide to implement these rules, they are category of financial payments that are
ratio rules, such as the “equity escape” limited interest costs as its initial EBITDA is
expected to give a reasonable transitional included within the cap, the greater the
rule (which compares an entity’s level of lower, even though it has numerous assets
period or apply transitional rules with number of variations that are likely to arise
equity and assets to those held by its group) and intellectual property, and is expected
excludes interest on certain existing loans both between GAAP and tax, and across
currently in place in some countries. to grow over a 5-year period based on
from the scope of the rules. different jurisdictions.
its functions and assets (all of which
In looking at the role of targeted rules, the would have been taken into account in an
paper identifies a number of scenarios that arm’s length analysis as they would form
territories might choose to target, although aspects that a third party lender would
it does not seem to address how these have considered).
Example 2 – Group-wide test and other financial payments

in inappropriate circumstances. Authors
If we consider an alternative example
whereby a group company is looking to Krishnan Chandrasekhar Daniel Pybus
The recommendations in Action 4
make a significant investment in some new
will be supplemented over 2016 with PwC US PwC UK
intellectual property or investment asset.
guidance on the detailed operation of the
The group company would be limited in +1 312 298 2567 +44 20 7213 1359
worldwide group ratio rule and specific
its ability to debt fund that transaction
rules to address risks posed by banking krishnan.chandrasekhar@us.pwc.com daniel.j.pybus@uk.pwc.com
by the specified group-wide debt ratio,
and insurance groups. Further work on
even though this does not reflect one of
the transfer pricing aspects of financial Jeff Rogers Susan Vincent
the key elements that a third party lender
transactions will be completed over
would take into account (e.g. the asset PwC Canada PwC UK
2016 and 2017.
value). In addition, the group-wide test is
+1 416 815 5271 + 44 20 7212 5220
an annual test, so any debt used to fund
the transaction may need to be repaid/ jeff.rogers@ca.pwc.com susan.vincent@uk.pwc.com
capitalised if the group-wide ratios change
annually. This leads to additional questions
as to how to create debt instruments which
have a varying debt quantum each year,
and how such instruments should be priced.
Conclusion
The recommendations proposed as a result
of BEPS Action 4 will have a fundamental
impact on internal capital structures, Taking the above theoretical
compliance, investment decisions and
overseas expansion for multinational
issues one step further,
groups. A further consideration to the there are practical issues
points outlined above is that these
propositions need to be reviewed in light
associated with the use of
of other BEPS Actions, such as the actions fixed ratio or group-wide
addressing hybrid mismatches, treaty anti-
abuse, and controlled foreign companies,
tests in replacement of an
as they will play a part in preventing base arm’s length assessment.
erosion through the deduction of interest

US perspectives on
key transfer pricing
aspects of the OECD
BEPS project
US perspectives on key transfer

pricing aspects of the OECD BEPS project
We will explore these

potential conflicts and
their implications for both
inbound and outbound
US clients.
As the initial stage of the Organisation for potential conflicts and their implications for While some of these changes narrow Risk and recharacterisation
Economic Co-operation and Development both inbound and outbound US clients. what originally was a significant gulf In line with announcements during the
(OECD) Base erosion and profit shifting between OECD guidance and domestic OECD’s 6 – 7 July 2015 public consultation
(BEPS) project draws to a close, the The earlier Actions 8, 9 and 10 discussion transfer pricing rules in many jurisdictions, on BEPS Actions 8 through 10, the final
OECD has generated a greater volume of drafts featured elements that gave rise several areas remain where companies guidance scales back from the provisions
discussion and guidance in the project’s to significant concerns among taxpayers will face the challenge of coping with around risk and recharacterisation of
time frame than many had thought and practitioners, particularly in the differences between local authority and transactions that were contained in
possible. Focusing on three of the BEPS areas of hard-to-value intangibles and OECD guidance. In particular, companies the December 2014 discussion draft on
Actions with broad implications in the risk and recharacterisation. The final operating in the US appear likely to face Chapter I of the OECD Guidelines. Those
transfer pricing sphere, Actions 8, 9, and deliverable of Working Party 6 reflects these challenges in the areas of potential original drafts indicated a movement
10 and the final deliverables as well as a view that in many ways addresses the recharacterisation of transactions, returns away from the arm’s length principle and
the discussion drafts and commentary commentary received on prior drafts and to risk and capital, and attempting to presented an easier path to tax authorities’
generated by OECD Working Party 6, we aligns with the goal of adhering to the reconcile US Cost Sharing Arrangements recharacterisation of a company’s
examine how the resulting changes to arm’s length principle under the Transfer with Cost Contribution Arrangements. arrangements, giving rise to extensive
Chapters I, II, VI and VIII of the Transfer Pricing Guidelines. commentary. Key changes in the final
Pricing Guidelines present potential conflict guidance include the narrowing of the
with US tax law, including the transfer circumstances in which a transaction
pricing regulations. We will explore these might be recharacterised, the moving away


from the concept of “moral hazard”, and between unrelated parties’ and does not additional conflict. A CSA requires upfront that is squarely at odds with the stated
the establishment of a six-step analytical turn on whether a transaction is actually contributions to be compensated at an arm’s objectives of the BEPS project overall.
framework for the treatment of risk. observed between unrelated parties. length price, but ongoing contributions of CSAs and CCAs are thus expected to be an
cash or intangible development activities additional area of pressure in the dispute
The December 2014 draft’s discussion US tax law does not permit are measured and aligned with expected resolution setting as tax authorities begin to
around recharacterisation (also termed recharacterisation unless the economic benefits at cost. It is this alignment of risks apply these principles in practice.
non-recognition) of a transaction or substance of a transaction differs from its borne with anticipated benefit that places
allocation of risk focused on transactions structure, largely similar to the updated participants on equal footing from a risk and Returns to capital
that take place between related parties OECD guidance. Determinations of reward standpoint, and consequently no Another area of disparate treatment under
and whether their ‘fundamental economic which party bears a particular risk under royalties or other payments are required for OECD and US guidance is the treatment of
attributes’ are the same as those between US tax law, which is broadly similar intangibles created within the CSA. Under cash-rich entities with no or only nominal
unrelated parties. The final guidance to that contained in the final guidance the CCA guidance contributions to a CCA people functions, i.e., ‘cash boxes’.
focuses instead on the ‘recognition of on Actions 8, 9 and 10, is often highly are to be tied to value when determining
the accurately delineated transaction’. contentious on audit. To what degree the respective contributions of the parties US tax law has no restrictions on cash box
This takes into account contractual different tax authorities’ views of the throughout the life of the arrangement. entities enjoying certain benefits allowed by
arrangements as the foundational basis ‘accurately delineated transaction’ will This includes consideration of opportunity the US code and regulations. For example,
for analysis. From this base, the approach align, and whether companies will find cost for contributions and only allows for in an outbound intellectual property (IP)
turns to functional analysis and confirming themselves facing competing positions measurement of current contributions based transfer subject to US IRC §367(d), there
the actual behaviour of the parties, then from multiple jurisdictions with each on cost in limited circumstances where are no functional requirements placed
pricing in line with assumption of risks concluding a different ‘reality’ remains costs generate proportionate value across on the recipient of the IP. Similarly, the
and functions performed. Much focus to be seen. However, given the current all contribution types and some return to operation of the US cost sharing regulations
is placed on identification of the party environment these provisions seem poised capital to an entity contributing pure funding place no requirements on the functionality
bearing a particular risk, and the guidance to engender controversy in the MAP to the arrangement. Further, the guidance of cost sharing participants, so long as
looks both to financial capacity to assume environment and increase pressure on the specifies that identification of participants an arm’s length price is paid for platform
a risk and functional exercise of control, output of Action 14, including mandatory in a CCA includes a requirement that a contributions and cost sharing payments
acknowledging that more than one party binding arbitration. participant exercise control over and have are made in line with expected benefits.
may participate in controlling a risk and financial capacity to bear the risks assumed
respecting contractual allocations of risk Cost sharing and cost under the CCA, again leading to a focus on As expected based on the OECD’s July
if the party with contractual allocation contribution arrangements functions performed. 2015 public consultation, the OECD
functionally participates in control of Cost sharing arrangements (CSAs) under the rules are designed to entitle a cash
that risk. Recharacterisation is reserved US transfer pricing regulations and OECD These differing approaches to sharing box entity to no more than a risk-free
for limited circumstances where the cost contribution arrangements (CCAs) risks and benefits of development return for its contributions of capital in
transaction does not reflect the ‘commercial have always been very different concepts, activity present significant potential for intercompany arrangements.
rationality of that which would be agreed but the final guidance on CCAs illustrates inconsistency across jurisdictions, a result

Overall, the treatment of cash boxes Planning for uncertainty Accordingly, regardless of the degree of
under the BEPS project looks for a higher In advance of the October 2015 G20 consistency or inconsistency between
level of substance and functionality and Finance Ministers meeting, the BEPS US tax law and OECD guidance, as a
the guidance is largely geared towards project has reached its initial stage of defensive measure, clients should be
ensuring that cash box entities no longer completion. The specific impact on the prepared to view related party transactions
are entitled to residual or premium returns. OECD Transfer Pricing Guidelines and tax from multiple perspectives and consider
As these entities are a primary focus of the enforcement globally is foreseeable with the resulting outcomes.
BEPS project and of many tax authorities, more specificity, but the true impact on
the scrutiny placed on them will be clients is only beginning. Implementation
intense and enhanced by the rhetoric of OECD guidance at the local jurisdiction
that is a recurring feature of the current level, or implementation of unilateral Authors
international tax landscape. measures (whether aligned or in conflict
with that guidance) will set the stage for Adam Katz
Finally, it was recognized by the OECD that tax planning, compliance, and controversy PwC US
the financial services industry is unique to come.
in terms of the role played by risk and +1 646 471 3215
capital, and as the guidance on Actions 8, For companies operating in the US, with adam.katz@us.pwc.com
9, and 10 is not specific to one industry it measures now adopted by OECD which Accordingly, regardless of
allows for consideration of prior industry are in conflict with certain elements of Natalie Hodapp
specific guidance. As financial services US tax law, we anticipate that clients the degree of consistency
PwC US
regulators move towards an expectation of will face significant increased potential or inconsistency between
people functions in their jurisdiction, these double taxation with no clear path to +1 646 471 1835
distinctions may harmonise somewhat, conceptual resolution. US tax law and OECD
natalie.v.hodapp@us.pwc.com
but the question of what type of activity guidance, as a defensive
and authority is necessary to enjoy certain Additionally, if the US tax auditors perceive
returns will almost certainly remain. Said that non-US audits will heavily impact
Kathryn Horton O’Brien measure, clients should be
another way, the reward for capital at risk CFCs’ profits available for repatriation, PwC US prepared to view related
may be recognised in a more traditional they may take increasingly aggressive US
manner without financial services positions on audit, including increased
+1 202 414 4402 party transactions from
companies being burdened by the broader refusal to accept additional tax assessments kathryn.horton.obrien@us.pwc.com multiple perspectives and
risk and recharacterisation principles as creditable taxes in the US.
relevant in other sections of the Transfer consider the resulting
Pricing Guidelines. outcomes.

Value chain analysis

critical in supporting
alignment of income
and expense under BEPS
Value chain analysis critical in supporting

alignment of income and expense under BEPS
of income and expense among various
jurisdictions arising out of differences in
international tax laws between countries
that result in double non-taxation (i.e.,
income that is not taxed in any country)
as well as instances where profits are
perceived as geographically divorced from
the activities that gave rise to that income.
Transfer pricing – the discipline of pricing
intercompany transactions – is at the core
of many of the areas the BEPS initiative
aims to address.
In total, 44 countries – including the

OECD’s member states, the members of
the G20, Latvia and Colombia – have been
Increasingly, multinational enterprises To successfully develop, implement, and involved in the negotiation and drafting of
To successfully develop, (MNEs) rely on complex, integrated global defend intercompany pricing policies and the BEPS deliverables. Although perceived
supply chains to deliver products, services, results in the post-BEPS environment, MNEs by many in the tax community to be an
implement, and defend and solutions to their customers worldwide. should consider an holistic approach to aggressive timeline, the OECD has largely
intercompany pricing As a result, MNEs must appropriately transfer pricing analysis that focusses on the met the initial time frame – which included
allocate income and expense across their fundamental contributors of value – in terms a goal of having all work streams complete
policies and results in the organisations to reflect the contributions of of functions performed, assets employed, by December 2015 – for its deliverables.
post-BEPS environment, value made by local operations in line with and risks borne – along the integrated supply
relevant transfer pricing rules. Numerous chain and that evaluates the value created at Fundamentally, BEPS is focused on
MNEs should consider an factors complicate this exercise for MNEs, both micro and macro levels. Robust value transparency and the alignment of profit and
holistic approach to transfer including the continuous evolution of local chain analysis (VCA) is a must for MNEs with expense – and, therefore, income tax paid –
country operations, limitations in established highly integrated supply chains in the current with value-creating activity. Although visible
pricing analysis... transfer pricing methodologies for analysing global tax policy climate. across the range of work streams, these
multifaceted cross-border relationships, and themes are particularly apparent in Action
the increasing demand for transparency and BEPS and the value chain 8 (Transfer Pricing Aspects of Intangibles),
detailed reporting of intra-group transactions Introduced in July 2013, the BEPS Action Action 9 (Risks and Capital), and Action
announced under the OECD’s Base Erosion Plan represents an attempt by the OECD 13 (Transfer Pricing Documentation and
and Profit Shifting (BEPS) initiative. to tackle the perceived misallocation Country-by-Country Reporting).


BEPS Action 8 focuses on the alignment of array of activities, but which do not bear description of its global business including A new methodology for
transfer pricing outcomes with respect to ‘real economic risk’ in the performance the important drivers of business profit; ascribing value creation
intangibles with value-creation activities. of functions. The OECD’s approach under a description of the supply chain for the VCA provides a unique approach for
For MNEs, the question of how intangibles BEPS appears to start from the assumption MNE’s five largest product or service leveraging data and analytics to evaluate an
contribute to value creation in a highly that if risk is shared among members of offerings (or both), as well as any other MNE’s overall value chain and profit profile,
integrated supply chain is critical. More an MNE, at least in the first instance, the offerings that constitute more than 5% rather than a simpler method of evaluating
and more, MNEs rely upon non-legally starting proposition should always be the of global turnover and a written analysis whether or not specific transactions adhere
protectable intangibles – such as systems, established relevant legal agreements. describing the principal contributions to the historically applied arm’s length
processes, procedures, checklists, and to value creation by individual entities standard. To undertake this analysis, VCA
other valuable know-how. Consequently, Although held out as a tool, albeit one within the MNE interpreted to mean the draws on significant amounts of detailed,
traditional methods of valuation and that must be employed cautiously, functions performed, assets (both tangible publicly available data which typically has
income attribution to intangibles may not recharacterisation of the functional profiles and intangible employed), and risks been excluded from traditional transfer
yield the most accurate results. To manage of MNE members by tax authorities will borne by each party. Action 13 heightens pricing analyses.
potential challenges from tax authorities, likely prove to be problematic in practice the need for innovative and deeper
MNEs must clearly articulate and document as government examiners grapple with types of value creation analysis to meet Specifically, VCA has the unique ability
their analysis of the traditional and non- the interrelated and interdependent these documentation requirements and to synthesise and simultaneously consider
traditional intangibles employed in their activities within MNEs that create value in thereby uses the master file as a proactive an MNE’s own corporate data and the way
supply chains and demonstrate the value the market. Accordingly, the best defence recharacterisation risk-mitigation tool. in which similarly situated enterprises
added and the parties responsible for the against recharacterisation is expected
creation of that value. to be a clear expression of value creation
grounded in intuitive analysis using market
Action 9 is designed to develop rules to based data. The best defense against
prevent base erosion and profit shifting
through the transfer of risks among – or the The BEPS Action 13 deliverable, recharacterisation is
allocation of excessive capital to – members introduced by the OECD on 16 September expected to be a clear
of an MNE. Essentially, the issue is one of 2014, has a three-tiered approach to
determining the appropriate reward for transfer pricing documentation. As part expression of value
the parties assuming risk and contributing of the recommended transfer pricing creation grounded in
capital which may be dissociated from the documentation package, the guidance
parties with the human capital performing directs an MNE to develop a master file intuitive analysis using
day-to-day operational activities. For – providing an all-inclusive view of its market based data.
organisations with highly integrated global business dealings and operations.
supply chains, there may be dozens of In particular, the master file calls for
local, routine operators executing an the MNE to provide a general written

describe the risks or value drivers in their will usually permit relatively objective techniques. In particular, VCA aligns with
businesses. Bringing these information sets observations as to which competencies are key BEPS themes around transparency Authors
together allows an MNE to form an overall value enhancing, value eroding, or simply and reporting of value creation within
conclusion by reference not only to its own absent – as well as the relative contributions global organisations while also allowing Ian Dykes
activities and structure, but also in the of each. Contrasting the competencies companies to consider and present the PwC UK
context of its competitors and the broader exhibited by companies generating impact of intangibles – both legally
industry and macroeconomic environment normal profits against those whose profits protected and not – and risk on value +44 121 265 5968
in which it operates. significantly deviate from the predominant creation within the overall business rather ian.dykes@uk.pwc.com
rate may help MNEs to focus on competitive than as a static reference fixed to the
Although most transfer pricing analysis advantages and key differentiating value existing legal entity framework. Tim Holmes
is performed at the local level, VCA takes drivers, such as intangibles and assumption
PwC Denmark
the group level as its starting point. of risk. As every MNE has its own unique
Thus, the data used in VCA generally allows characteristics and culture – and the +45 3945 3830
for the evaluation of the value associated Applying VCA has the added benefit of available information in the public domain
with specific types and categories of eliminating subjective weightings of the applicable to each industry differs – VCA timothy.holmes@dk.pwc.com
activity, referred to as ‘competencies.’ VCA contribution of individuals or decisions, is dynamic, providing a disciplined and
first focuses on values or relative values that an approach for which there remains systematic approach while remaining Liz Sweigart
can be identified and then maps them into a substantial lack of consensus among flexible, adaptable, and evolutionary. PwC US
the value chain. tax authorities and practitioners. At the Although BEPS has spurred significant
+1 713 356 4344
same time, it is important that VCA is not change in the global tax policy and
In terms of employing this distinctive conflated with a profit split approach. It is administrative landscape, MNEs can take elizabeth.a.sweigart@us.pwc.com
methodology, an MNE typically would likely that VCA may support a viewpoint advantage of opportunities to mitigate
leverage VCA to identify a ‘normal’ that the activities in a given territory are enterprise risk proactively, and drive
profitability level for its industry. In this appropriately remunerated under the greater value for their stakeholders, by
context, it is important not to confuse OECD’s established transactional net embracing VCA to evaluate, analyse, and
this prevailing rate of profit with the margin method. articulate the way in which value is created
conventional transfer pricing notion of a – and rewarded – across their complex,
‘routine return,’ as the companies being Looking to the future integrated supply chains.
analysed in this step will likely have Elementally, VCA provides a sophisticated
non-routine levels of profit, intangibles, synthesis of an MNE’s global value chain
and risk. Next, the MNE would analyse in a manner more akin to the approach
other enterprises – often competitors – business leaders and senior executives
whose profit levels are above or below the take toward strategy development and
identified expected rate. This approach execution than historical tax-based
A version of this article originally appeared in Tax Notes Int’l, September 28, 2015, p. 1121.

Value Chain Analysis –

Preventive care for
radical transparency

Preventive care for radical transparency
The OECD Base Erosion and Profit A new world of
Shifting (BEPS) project is dramatically transparency and disclosure
changing the transfer pricing landscape Transparency is at the forefront
for pharmaceuticals and life sciences of today’s transfer pricing reality. The new
(PLS) multinationals. It would come as a set of disclosure requirements introduced
surprise if you did not already have strategic by the OECD is inarguably changing the
discussions on how to address the new landscape of transparency. It is now more
challenges triggered by the additional critical than ever to review your company’s
disclosure requirements and the enhanced value drivers and profit allocations across
transparency of your global value chain the value chain, as well as your overall
and system profitability, as required by transfer pricing positions. PLS companies
the new country by country requirements. should be particularly planning for this
It is also safe to assume these developments new world of transparency given the
are high on your agenda given the complex complexity of industry supply chains and
supply chains, intense M&A activity, and the intellectual property arrangements, as well
dynamic intellectual property arrangements as the commercially sensitive information
that are so prevalent in this industry. steaming from their business model. Given
Today, the “wait and see” strategy of how to the high profile of the industry, it is also allocation of global profits to the various Today, the “wait and see”
deal with imminent transparency of your noteworthy to mention that increased supply chain participants reflects value
transfer pricing positions is no longer an transparency has been called for by several creation. Experience shows that this is a strategy of how to deal with
option and having a well-crystalised action stakeholders other than the tax authorities: fairly strategic task that requires not only imminent transparency
plan is by now well overdue. the public, health regulators, the media, deep insights into the company’s business
politicians and non-governmental model, core competences and competitive of your transfer pricing
Have you already defined your value drivers organisations. A recent example are the advantages, but also the monitoring of positions is no longer an
and how various supply chain participants Senate hearings in Australia where nine PLS industry developments that often impact
contribute to value creation? If not yet multinationals have been asked to become the thinking around value drivers and option and having a well-
comfortable with a final conclusion, you more transparent with respect to their value creation across geographies. In this crystalised action plan is
might want to consider a new practical tax planning strategies and the share of view, one cannot omit to consider aspects
approach to value chain analysis (VCA). Australian profit in global profits. such as patent expirations and how they by now well overdue.
can reshape value drivers for a drug or
In light of the new master file, local file other aspects such as effective supply
and country by country requirements, PLS chain management or successful post-deal
companies have to be prepared to fully integration. As a result of M&A activity,
disclose their value chain and how the many PLS companies rush to harmonise


their transfer pricing policies, and often fail Needless to say that the country by country Traditional TP documentation often and more difficult to challenge in an audit?
to properly review and reconcile website reporting template must tell a story that presented the industry analysis and the Step outside the boundaries of internal
information and other public information is closely aligned with the discussion of supply chain as narrative descriptions that value chain analysis and broaden your
sources that may preserve evidence of value drivers and global profit allocation did little more than add context to the TP perspective with a deeper understanding of
divergent transfer pricing positions. presented in the master file. It therefore analysis. The more holistic questions that business competencies specific to the PLS
becomes imperative to clarify and articulate arise now are what other data is out there industry and how they map to value creation
Nowadays, any discussion on transfer your transfer pricing strategy and tell a and how it can be best used. and allocation of profits to various supply
pricing transparency inevitably brings consistent story that is supported both chain participants.
into the spotlight the country by country by facts, financials and other empirical Value chain analysis –
reporting requirements. More and more evidence. In terms of consistency under stepping outside Welcome our new suggested
countries are swiftly adopting the OECD the new disclosure rules, one can traditional boundaries approach to value chain
guidance on these new compliance expect that tax authorities will also be Fast paced changes most often require analysis (VCA).
requirements into their domestic law. looking for any indication of inconsistent taking a step back to rethink traditional In brief, VCA is an innovative and practical
Spain is one of the latest examples treatment of similar transactions either approaches and explore new avenues to approach that can help PLS multinationals
where country by country reporting geographically or across lines of business. meet the new disclosure requirements. respond to the new transparency
requirements will apply for tax periods If any harmonization of TP policies or What if you did not only rely on your requirements while using publicly available
starting 1 January 2016. In addition to housekeeping is required to help manage company’s functional analysis and your data. It is a holistic process that looks at the
the costs and complexity associated with disclosure risks, it is recommended to carry own internal assessment of value drivers? whole value chain rather than individual
country by country reporting compliance, out this exercise before the new disclosure What if your analysis also relied on external entities and therefore, addresses all of the
PLS companies also have to consider the rules start to apply. public information that is less subjective evolving concerns presented above.
challenges associated with disclosing
information that may be commercially Compliance in the BEPS world no longer
sensitive. While the country by country means simply complying with minimal
Global transparency Pressure on single
reporting information is meant to stay documentation requirements. BEPS
on system profit sided tests
confidential and only shared for the tax compliance now means anticipating and 1 2
authorities’ review, a key implementation addressing the following six imminent risks
threat is the potential accidental disclosure and threats:
Tax authority assertions Bias against role of capital
of such information to the public or business Short term
regarding the existence 6 threats and 3 and risk in favour of
competitors. For the PLS industry, any leak These new compliance attributes are challenges
of local IP people functions
of information may be particularly costly particularly relevant for PLS multinationals
as it has the potential to reveal key aspects that have traditionally been the most
underpinning the company’s business targeted companies when it comes to 5 4 Increased risk of
Bias in favour of
strategy and focus areas. transfer pricing challenges. recharacterisation and PE
Profit Split Methods
(attribution of profits)

By engaging in a business competency
based analysis, one also embraces a Peer Group Analysis – Pharma Industry
broader perspective than only looking
at people based functions. This attribute Mainly Generics Products Patented Products – Group1 Patented Products – Group2 Patented Products – Group3
40%
of the VCA helps manage the latest
strong bias towards disregarding the role
of capital and risk in favour of people
35%
functions. It is also an analysis that may
address some preconceptions or questions
such as: are local distributors creating 30%
marketing intangibles if all market 2012-2014 Weighted Average Operating Margin
players incur similar levels of advertising
& promotional spend? Or is this a cost of 25%
doing business in the industry rather than

a spend that secures PLS companies a
20%
competitive advantage or a monopolistic 38%
market situation?
33%
15% 30% 31%
The ultimate objective of VCA is to stress
26%
test your transfer pricing positions and
allocation of global system profit, to confirm 10% 20% 20%
that the outcomes of your transfer pricing 17%
policy reflect value creation by each value 13%
chain participant and to identify any 5%
11%
exposure areas that may represent the 7%
scope of controversy in audits. The VCA will

result in a mapping of the profits associated 0%
with various business competencies against Hospira Valeant Teva Sanofi Eli Lilly Merck Abbvie Pfizer Roche Amgen Biogen
the PLS company’s unique operating

Source: As reported Bureau Van Dijk Database, July 2015.
model by looking at the relevant activities
and applying empirical data to associate
contributions with profit. This has proved to
be a very powerful tool for documentation,
risk mitigation and audit defence purposes 1
Comprehensive new intelligence, perspectives, and analysis on trends affecting all health-related industries can be found on the web page of the PwC Health Research Institute
(http://www.pwc.com/us/en/health-industries/health-research-institute/index.jhtml)

Value Chain Analysis –v

that is based on objective and irrefutable industry and its dynamics,1 as well as an value drivers and how various supply chain possible and prior to an audit. Performing
external data that complements and appreciation of what business competencies participants contribute to value creation. the VCA in the early stage of defining your
supports existing internal analysis and also represent value drivers and are therefore It may also be the VCA needs to be refined BEPS action plan has multiple benefits
provides a strong platform for presenting indicative of value creation. This is or it may be necessary to look at other risk ranging from introducing new procedures
the results of the TP analysis under the new definitely not a standard analysis and will areas such as permanent establishment or to manage risk to better managing the
disclosure rules. be unique to the specifics of every business. substance. Either way, it is definitely better enhanced disclosure requirements.
It is a thoughtful and strategic exercise that to identify these divergence areas as soon as
VCA in the PLS industry – will help measure value creation and link
let’s get started it to various competencies that are later
The first step of VCA is to carry out a peer mapped to functions, risks and assets of the
group analysis. The key objective of this supply chain participants. One particular
Five signs you should consider the VCA analysis as part of your BEPS readiness assessment:
analysis is to identify a set of relevant characteristic of the VCA is that it can be
PLS peers for your company, review their iterative as it is performed in stages and
You have not yet finalized your master file approach to presenting your
financials and pinpoint differences between therefore refined as it progresses.
peers in an attempt to spot attributes or 1 value chain, value drivers and value creating activities undertaken by the various
supply chain participants
business competencies that translate into Once the results of the VCA analysis are
value drivers and increased profitability. available, the puzzle may fit neatly into
place and you have a robust analysis based Your draft country by country reporting template reflects some divergence
The set of peers may vary depending on on proven external data to support your 2 between the allocation of global system profit and the location of value
the nature of the business and the product transfer pricing positions and allocation of creating functions
portfolio, but often the differences between profits within the value chain.
sets of peers provide the most useful
You are still working to articulate what are the value drivers of your business and
evidence of which attributes are adding One immediate question is: what to do if
value. For example, peers may be grouped some results are divergent with your current 3 what business attributes do not generate a competitive advantage,
nor have the potential to create intangible assets
based on generics versus innovative transfer pricing policies? This could be an
products, focus on Human Health vs Animal indication that there are some aspects of
Health vs Consumer Healthcare products your transfer pricing strategy that have to Your assessment of the company’s value drivers is mainly based on internal data
and other aspects that define similarity with be revisited to proactively manage audit 4 without closely considering PLS industry developments and how other
other PLS market players. exposure and time consuming discussions PLS market players define their success
with respect to your country by country
The next step is defining the attributes or reporting template. It may also merely be an
You have concerns about managing transfer pricing audits in the BEPS
business competencies that are observed to indication that there is a notable difference environment and how you can defend your company against challenges
give rise to differences in profitability. This between your business model and that of 5 related to industry hot topics such as local marketing intangibles or harmonization
requires an in-depth understanding of the your peers that leads to some divergence in of transfer pricing positions subsequent to M&A activity

Conclusion
If you are still getting ready to portray Authors
your value chain X-ray in the new world of
transparency, the VCA analysis can have Horacio Peña
a significant value add in clarifying and PwC US
crystallising your strategy to manage the
new disclosure requirements. Companies +1 646 471 1957
who have embraced this new approach, horacio.pena@us.pwc.com
going beyond the boundaries of traditional
transfer pricing analysis, are able to feel Brian Burt
confident about having a robust defence
PwC US
to sustain their transfer pricing positions
or are able to identify any exposure areas +1 646 471 8386
that need to be promptly addressed before
they become visible in their master file and brian.t.burt@us.pwc.com
country by country reporting.
Blanca Kovari
PwC US
+1 646 471 6817
blanca.v.kovari@us.pwc.com
Companies who have embraced this new approach, going beyond the boundaries of
traditional transfer pricing analysis, are able to feel confident about having a robust
defence to sustain their transfer pricing positions or are able to identify any exposure
areas that need to be promptly addressed before they become visible in their master file
and country by country reporting.

Fit for the
boundaries
Future
A truly global Transfer Pricing network

With over 3,105 dedicated professionals in over 90 countries, PwC’s leading transfer pricing network is well positioned to advise you on a strategy that can help advance your goals
within the ever-shifting compliance landscape.
Global Leader Isabel Verlinden +32 2 710 4422 isabel.verlinden@be.pwc.com

Argentina Juan Carlos Ferreir +54 11 4850 6712 juan.carlos.ferreiro@ar.pwc.com
Australia Pete Calleja +61 2 8266 8837 pete.calleja@au.pwc.com
Austria Herbert Greinecker +43 1 501 883 300 herbert.greinecker@at.pwc.com
Azerbaijan Movlan Pashayev +994 12 497 2515 movlan.pashayev@az.pwc.com
Bahrain Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Belgium Patrick Boone +32 2 710 4366 patrick.boone@be.pwc.com
Brazil Cristina Medeiros +55 11 3674 3818 cristina.medeiros@br.pwc.com
Bulgaria Irina Tsvetkova +359 2 935 5126 irina.tsvetkova@bg.pwc.com
Cameroon, Republic of Nadine Tinen +237 3 343 2443 nadine.tinen@cm.pwc.com
Canada Gordon R. Jans +1 416 815 5198 gordon.r.jans@ca.pwc.com
Chile Roberto Carlos Rivas +56 2 940 0000 roberto.rivas@cl.pwc.com
China Jeff Yuan +86 21 2323 3495 jeff.yuan@cn.pwc.com
Colombia Carlos Mario Lafaurie +57 1 634 0555 (ext 404/327) carlos_mario.lafaurie@co.pwc.com
Congo, Dem Republic of Léon Nzimbi +243 81 037 2645 leon.nzimbi@cd.pwc.com
Congo, Republic of Emmanuel Le Bras +242 06 658 3636 emmanuel.lebras@cg.pwc.com
Costa Rica Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Croatia Lana Brlek +3861 583 6058 lana.brlek@hr.pwc.com
Czech Republic David Borkovec +420 2 5115 2561 david.borkovec@cz.pwc.com
Denmark Thomas Bjerre +45 3 945 3824 tab@pwc.dk
Dominican Republic Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Ecuador Pablo Aguirre +593 2 382 9350 (ext 361) pablo.aguirre@ec.pwc.com
Egypt Abdallah Eladly +20 2 2759 7700 (ext 7887) abdallah.eladly@eg.pwc.com
El Salvador Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Equatorial Guinea Sébastien Lechên +240 33 309 1434 sebastien.lechene@ga.pwc.com
Estonia Hannes Lentsius +372 614 1800 hannes.lentsius@ee.pwc.comt
Finland Sari Takalo +358 9 2280 1262 sari.takalo@fi.pwc.com
France Pierre Escaut +33 1 5657 4295 pierre.escaut@fr.landwellglobal.com
Georgia Robin McCone +995 32 250 8050 robin.mccone@ge.pwc.com
Germany Lorenz Bernhardt +49 30 2636 5204 lorenz.bernhardt@de.pwc.com
Greece Agis Moschovakos +30 210 687 4544 agis.moschovakos@gr.pwc.com
Fit for the
boundaries
Future
Guatemala Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com

Hong Kong Cecilia SK Lee +852 2289 5690 cecilia.sk.lee@hk.pwc.com
Hungary Anita Mekler +36 1 461 9372 anita.mekler@hu.pwc.com
Iceland Jon I. Ingibergsson +354 550 5342 jon.i.ingibergsson@is.pwc.com
India Sanjay Tolia +91 22 6689 1322 sanjay.tolia@in.pwc.com
Indonesia Ay Tjhing Phan +62 21 5289 0658 ay.tjhing.phan@id.pwc.com
Iraq Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Ireland Gavan Ryle +353 1 792 8704 gavan.ryle@ie.pwc.com
Israel Vered Kirshner +972 3 795 4849 vered.kirshner@il.pwc.com
Italy Gianni Colucci +39 02 9160 5500 gianni.colucci@it.pwc.com
Japan Daisuke Miyajima +81 3 5251 2552 daisuke.miyajima@jp.pwc.com
Jordan Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Kazakhstan, Republic of Richard Bregonje +7 727 330 3200 richard.bregonje@kz.pwc.com
Kenya Titus Mukora +254 20 285 5395 titus.mukora@ke.pwc.com
Korea, Republic of Henry An +82 2 3781 2594 henry.an@kr.pwc.com
Kuwait Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Latvia Pavel Sarghi +40 21 225 3250 pavel.x.sarghi@lv.pwc.com
Lebanon Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Libya Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Lithuania Nerijus Nedzinskas +370 5 239 2350 nerijus.nedzinskas@lt.pwc.com
Luxembourg Loek de Preter +352 494 848 2023 loek.de.preter@lu.pwc.com
Malaysia Jagdev Singh +60 3 2173 1469 jagdev.singh@my.pwc.com
Mexico Fred Barrett +52 55 5263 6069 fred.barrett@mx.pwc.com
Moldova Ionut Simion +40 21 225 3702 ionut.simion@ro.pwc.com
Mongolia Tsendmaa Choijamts +976 70 009 089 tsendmaa.choijamts@mn.pwc.com
The Netherlands Gaby Bes +31 88 792 4144 gaby.bes@nl.pwc.com
New Zealand Erin Venter +64 9 355 8862 erin.l.venter@nz.pwc.com
Nigeria Seun Adu +234 9 291 9302 seun.y.adu@ng.pwc.com
Norway Morten Beck +47 9 526 0650 morten.beck@no.pwc.com
Oman, The Sultanate of Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Palestinian Territories Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com

Fit for the
boundaries
Future
Perú Miguel Puga +51 1 211 6500 (ext 8006) miguel.puga@pe.pwc.com

Philippines Carlos T. Carado +63 2 459 2020 carlos.t.carado@ph.pwc.com
Poland Piotr Wiewiorka +48 22 523 4645 piotr.wiewiorka@pl.pwc.com
Portugal Jaime Esteves +351 21 359 9212 jaime.esteves@pt.pwc.com
Qatar Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Romania Ionut Simion +40 21 225 3702 ionut.simion@ro.pwc.com
Russian Federation Andrey Kolchin +7 495 967 6197 andrey.kolchin@ru.pwc.com
Kingdom of Saudi Arabia Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Singapore Nicole Fung +65 6236 3618 nicole.fung@sg.pwc.com
Slovak Republic Christiana Serugová +421 2 5935 0614 christiana.serugova@sk.pwc.com
Slovenia Lana Brlek +38 61 583 6058 lana.brlek@hr.pwc.com
South Africa David Lermer +27 21 529 2364 david.lermer@za.pwc.com
Spain Javier González Carcedo +34 91 568 4542 javier.gonzalez.carcedo@es.landwellglobal.com
Sri Lanka Hiranthi C Ratnayake +94 11 471 9838 hiranthi.c.ratnayake@lk.pwc.com
Sweden Pär Magnus Wiséen +46 10 213 3295 paer.magnus.wiseen@se.pwc.com
Switzerland Benjamin Koch +41 58 792 4334 benjamin.koch@ch.pwc.com
Taiwan Lily Hsu +886 2 2729 6207 lily.hsu@tw.pwc.com
Tanzania David Tarimo +255 22 219 2600 david.tarimo@tz.pwc.com
Thailand Peerapat Poshyanonda +66 2 344 1220 peerapat.poshyanonda@th.pwc.com
Turkey Ozlem Guc Alioglu +90 212 326 6462 ozlem.guc@tr.pwc.com
Uganda Francis Kamulegeya +256 41 423 6018 francis.kamulegeya@ug.pwc.com
Ukraine Olga Trifonova +380 444 906 777 olga.trifonova@ua.pwc.com
United Arab Emirates Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
United Kingdom Annie Devoy +44 20 7212 5572 annie.e.devoy@uk.pwc.com
United States Horacio Pena +1 646 471 1957 horacio.pena@us.pwc.com
Uruguay Daniel Garcia +598 2 916 0463 garcia.daniel@uy.pwc.com
Republic of Uzbekistan Jamshid Juraev +998 71 120 6101 jamshid.juraev@uz.pwc.com
Venezuela Elys Aray +58 212 700 6627 elys.aray@ve.pwc.com
Vietnam Van Dinh Thi Quynh +84 4 3946 2246 (ext 1500) dinh.quynh.van@vn.pwc.com
Zambia George Chitwa +260 21 1256471 george.chitwa@zm.pwc.com
Want to keep up to date with the latest developments?
Click here for our transfer pricing newsalerts
Download TP to Go from your app store
Visit our dedicated BEPS website
www.pwc.com/transferpricing
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to
delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
© 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/
structure for further details.
Design Services 29257 (10/15).

PWC Transfer Pricing Beyond Bountries

Uploaded by

Document Information

Original Title

Copyright

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

PWC Transfer Pricing Beyond Bountries

Uploaded by

Copyright:

A series of articles based on our Global Transfer Pricing

Conference in Shanghai, China – October 2015

Transfer Pricing Perspectives:

We anticipate that this will be examiners will be a prerequisite to

Beginning with the end in mind:

Beginning with the end in mind:

With higher risk transactions, to establish ii. Legal agreements

Transfer Pricing Perspectives: Beyond boundaries 3

Beginning with the end in mind:

Beginning with the end in mind:

Transfer Pricing Perspectives: Beyond boundaries 5

Beginning with the end in mind:

Often, a handful of key

Transfer Pricing Perspectives: Beyond boundaries 9

Transfer Pricing Perspectives: Beyond boundaries 11

Demystifying transfer pricing execution and intercompany accounting

For large multinational companies that

Demystifying transfer pricing execution and intercompany accounting

Transfer Pricing Perspectives: Beyond boundaries 15

Demystifying transfer pricing execution and intercompany accounting

An opportune time address complex tax and transfer pricing

From startups to stalwarts:

With each passing moment,

Something interesting is happening…

From startups to stalwarts:

Transfer Pricing Perspectives: Beyond boundaries 19

From startups to stalwarts:

From startups to stalwarts:

Transfer Pricing Perspectives: Beyond boundaries 21

From startups to stalwarts:

It is believed that up to 75% of the value of

From startups to stalwarts:

Transfer Pricing Perspectives: Beyond boundaries 23

From startups to stalwarts:

Lyndon James Daniela Ielceanu

Marios Karayannis Scott Singerman

Global transfer pricing

Global transfer pricing documentation strategies

Where are we today? We are now beginning to see tax

Global transfer pricing documentation strategies

Accordingly, multinational enterprises • where the transfer pricing risk

Transfer Pricing Perspectives: Beyond boundaries 27

Global transfer pricing documentation strategies

Global transfer pricing documentation strategies

Transfer Pricing Perspectives: Beyond boundaries 29

India transfer pricing –

India transfer pricing – Steering in the right direction

Transfer Pricing Perspectives: Beyond boundaries 31

India transfer pricing – Steering in the right direction

India transfer pricing – Steering in the right direction

The unfinished agenda The Government, being part of G20, is also

Transfer Pricing Perspectives: Beyond boundaries 33

Intercompany allocations of risk –

Transfer Pricing Perspectives: Beyond boundaries 35

Intercompany allocations of risk –

Finally, the threshold question that

Intercompany allocations of risk –

Transfer Pricing Perspectives: Beyond boundaries 37

Intercompany allocations of risk –

Taking this framework one step further, we 30.0%

have used its conceptual underpinnings to

Using data for a sample of independent

percentage of these companies’ observed

The strategy thus allows us to “isolate” the

of this page summarises some of the key

Intercompany allocations of risk –