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Transfer Pricing – Industry Perspective

Transfer Pricing – Industry Perspective. Residential Refresher Course IFA-India (WRC) Presentation by : Kaushal Kapadia. Introduction.

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Transfer Pricing – Industry Perspective

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  1. Transfer Pricing – Industry Perspective Residential Refresher Course IFA-India (WRC) Presentation by : Kaushal Kapadia

  2. Introduction "This incident, in which I almost lost my life, involved an encounter with a primitive ruthless creature who stalks the ocean depth...A Great White Shark."

  3. Agenda • Setting the context • Environment – external & internal • Managing your risk • Top audit triggers • Setting TP policies • TP documentation • Practical difficulties • Some common issues

  4. Example – Bitt & Co • Large MNC with operations in 120 countries • Listed in the US & Luxembourg Stock Exchange • 6 main segments, 54 profit centers, 145,000 SKUs, 12 brands • Functional management style • Group has centralised Treasury, Financing & Trading ops in NY • 1200 legal entities in the group • 40% of trade/services & all financing is inter-co • Profits $6bn, Sales $50bn, Assets $20bn • Bitt & Co has acquired 3 large MNEs in the last 10 years • Systems have not yet been integrated with the last 2 acquisitions • TAX department of 300+ people in 40 countries • YOU – are the head of transfer pricing within TAX

  5. Setting the context Centralised recharges Forward trading Product flows Captive insurance Brand IP R&D Asset optimisation Share options De-centralised recharges Intra-group financing Supply Chain Need to price at “Arm’s Length” terms & maintain a defence file Benefits Risks • Costs of defending • Penalties • Costs of arbitration &/or competent authority • Double taxation • Financial reporting mis-statement • Reputation risk • Maximise utilisation of group tax attributes • Losses • Foreign tax credits • Low tax jurisdictions • Cash tax savings • Manage tax charge in financial reports

  6. TP’s a fine balancing act… Country A Country B Income tax Customs duty Fiscal requirements Business constraints Risk Opportunity

  7. Environment - external • WTO estimates 50% of global trade in Inter-co transactions • 25% of M&A estimated to be cross-border • New investment is going mainly to emerging economies of the world – they are looking for more revenues • Corporate sector continues to remain key tax target around the world • Attention of the regulators • More effort into TP laws & audits • Growing need for transparency in multi-nationals • SOX compliance on controls & financial reporting

  8. Environment - internal • Business models/pricing change constantly • Cost pressure • CFO & CEO are looking for more assurances – no “surprises” ! • Mistakes are costly & distracting • TP remains a key tax issue for most tax managers

  9. Managing your risk • Knowing what you don’t know.. • Portfolio effect in a large business • Materiality is key • Tax exposure - reporting process • How much to provide for tax exposures ? • Looking at risk - local v/s central perspective • Fallout of Country A audit on Country B • Be aware that what you document is discoverable

  10. Top audit triggers • Increase in the enforcement & audit targets • Changes in transfer pricing • Monetary volume of transactions • Changes in taxable income of the company • Past history of issues • New legislation in a country • Restructuring of business/operations • Complexity of transactions

  11. Setting TP policies • Written policy statement • Who is responsible for setting policy ? • Periodic review of policies • Managing changes to TP policies • When ? Why ? How ? Effect ? • Policy implementation ?? • Spreading & sharing the knowledge

  12. TP documentation • Minimum documentation standards • Local v/s central approach • Who’s responsible for what ? • Your “Defense file” • How & where do you store it ? • “Fit for purpose’’ in the transaction context • Avoid duplication of efforts • In house or external effort ?

  13. Practical difficulties • TP is subjective – there is no right answer ! • Getting quality comparable data • Unique business models • Making “the right choices”… • Differences in laws/approach of tax authorities • Impact on MI & Performance Metrics • Eg, Royalty or Product trading • JV operations • Eg, Management services from HO • Resources - managing multiple priorities • Leakage of important pricing data to competition • Genuine losses

  14. Common Issues - Intangibles • Definition of what is the intangible ? • Who owns it ? • How much is it worth ? • Approaches to benchmarking value • Accretions to the cost/value of the intangible • Barriers to moving ownership to a tax favorable location – practical ? Parent IPCo Sub

  15. Common Issues – InterCo service • Is it really a service ? • Benefit analysis from a local lens • Mark-up or cost • Mark-up on what ? • Allocation Keys • Cost to provider or recipient ? • Problems of using CCAs • Contemporaneous arrangement ? • IP & Shareholder costs • Consistency in approach Parent Sub1 Sub1

  16. Questions ?

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