Transfer Pricing - Canadian Tax Foundation

Transcription

Transfer Pricing–
H tT
Hot
Topics
i
Glen Haslhofer, CA
Principal
Grant Thornton LLP
403 260 2547
403-260-2547
[email protected]
Calgary Young Practitioners Group
Transfer Pricing–Hot Topics
Transfer Pricing - Recap
> Method of pricing related party transactions between a
Canadian resident and a non-resident
-
tangible property (goods, tangible assets)
intangible property (i.e. rights, know-how)
services (technical, administrative)
financial transactions (loans, guarantees)
> A high-priority, controversial international tax issue for
multinational companies
2
Glen Haslhofer
Current Environment
> Businesses continue to expand globally
- establishing new markets for products
- searching for new sources of supply/labour
- increase in activities across borders incl. acquisitions
> Governments everywhere are in deficit positions
- searching for new sources of revenue
> New TP legislation and increased enforcement globally
- increased scrutiny of multinationals, US talks tough on TP
> TP is in the news!
3
Glen Haslhofer
1994
or earlier
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Global Transfer Pricing Rules and
Enforcement
Australia
Czech Republic
France
Germany
Indonesia
Italy
Japan
Poland
Singapore
Slovak Republic
Sweden
United States
4
Australia
Czech Republic
France
Germany
Indonesia
Italy
Japan
Latvia
OECD
Philippines
Poland
Singapore
Slovak Republic
South Africa
Sweden
United States
Australia
Austria
Czech Republic
France
Germany
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
OECD
Philippines
Poland
Singapore
Slovak Republic
South Africa
Sweden
United States
Argentina
Australia
Austria
Brazil
Canada
Australia
Chile
Austria
China (People’s
Brazil
Republic of)
Chile
Czech Republic
Czech Republic Denmark
France
France
Germany
Germany
Indonesia
Indonesia
Italy
Italy
Japan
Japan
Korea (Republic of)Korea (Republic of)
Latvia
Latvia
Mexico
Mexico
New Zealand
New Zealand
OECD
OECD
Philippines
Philippines
Poland
Poland
Singapore
Singapore
Slovak Republic Slovak Republic
South Africa
South Africa
Sweden
Sweden
Ukraine
Ukraine
United States
United States
Argentina
Australia
Austria
Brazil
Canada
Chile
China (People’s
Republic of)
Czech Republic
Denmark
France
Germany
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Mexico
New Zealand
OECD
Philippines
Poland
Russia
Singapore
Slovak Republic
South Africa
Sweden
Ukraine
United Kingdom
United States
Argentina
Australia
Austria
Brazil
Canada
Chile
China (People’s
Republic of)
Czech Republic
Denmark
Estonia
France
Germany
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Mexico
New Zealand
OECD
Philippines
Poland
Russia
Singapore
Slovak Republic
South Africa
Sweden
Ukraine
United Kingdom
United States
Venezuela
Argentina
Australia
Austria
Brazil
Canada
Chile
China (People’s
Republic of)
Czech Republic
Denmark
Estonia
France
Germany
India
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Mexico
New Zealand
OECD
Peru
Philippines
Poland
Russia
Serbia
Singapore
Slovak Republic
South Africa
Sweden
Ukraine
United Kingdom
United States
Venezuela
Argentina
Australia
Austria
Brazil
Canada
Chile
China (People’s
Republic of)
Czech Republic
Denmark
Estonia
France
Germany
India
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Luxembourg
Mexico
Montenegro
Netherlands
New Zealand
OECD
Peru
Philippines
Poland
Portugal
Russia
Serbia
Singapore
Slovak Republic
South Africa
Sweden
Thailand
Ukraine
United Kingdom
United States
Venezuela
Argentina
Australia
Austria
Brazil
Canada
Chile
China (People’s
Republic of)
Czech Republic
Denmark
Estonia
France
Germany
Hungary
India
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Luxembourg
Malaysia
Mexico
Montenegro
Netherlands
New Zealand
OECD
Peru
Philippines
Poland
Portugal
Russia
Serbia
Singapore
Slovak Republic
South Africa
Sweden
Thailand
Ukraine
United Kingdom
United States
Venezuela
Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China (People’s
Republic of)
Colombia
Czech Republic
Denmark
Estonia
France
Germany
Hungary
India
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Lithuania
Luxembourg
Malaysia
Mexico
Montenegro
Netherlands
New Zealand
OECD
Peru
Philippines
Poland
Portugal
Romania
Russia
Serbia
Singapore
Slovak Republic
South Africa
Sweden
Taiwan (Republic
of China)
Thailand
Ukraine
United Kingdom
United States
Venezuela
2005
2006
Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China (People’s
Republic of)
Colombia
Czech Republic
Denmark
Ecuador
Egypt
Estonia
France
Germany
Hungary
India
Indonesia
Italy
Japan
Korea (Republic of)
Latvia
Lithuania
Luxembourg
Malaysia
Mexico
Montenegro
Netherlands
New Zealand
OECD
Peru
Philippines
Poland
Portugal
Romania
Russia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Sweden
Taiwan (Republic
of China)
Thailand
Ukraine
United Kingdom
United States
Venezuela
Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China (People’s
Republic of)
Colombia
Czech Republic
Denmark
Ecuador
Egypt
Estonia
France
Germany
Hungary
India
Indonesia
Israel
Italy
Japan
Korea (Republic of)
Latvia
Lithuania
Luxembourg
Malaysia
Mexico
Montenegro
Netherlands
New Zealand
OECD
Peru
Philippines
Poland
Portugal
Romania
Russia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Taiwan (Republic
of China)
Thailand
Ukraine
United Kingdom
United States
Venezuela
Vietnam
2007
Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China (People’s
Republic of)
Colombia
C h Republic
Czech
R bli
Denmark
Ecuador
Egypt
Estonia
Finland
France
Germany
Greece
Hong Kong
Hungary
India
Indonesia
Ireland (Republic of)
Israel
Italy
Japan
Korea (Republic of)
Latvia
Lithuania
Luxembourg
Malaysia
Mexico
Montenegro
Netherlands
New Zealand
OECD
Peru
Philippines
Poland
Portugal
Romania
Russia
Serbia
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Taiwan (Republic
of China)
Thailand
Turkey
Ukraine
United Kingdom
United States
Venezuela
Vietnam
Glen Haslhofer
Principles/
Legislation
Principles
> Arm's Length Principle
-
-
6
International transfer pricing standard that OECD member countries
have agreed should be used by MNE groups and tax
administrations
[when] conditions are made or imposed between two associated
enterprises in their commercial and financial relations which differ
than those which would have been made between independent
enterprises, then any profits which would but for those conditions,
have accrued to one of those enterprises, but, by reason of those
conditions, have not so accrued, may be included in the profits of
that enterprise and taxed accordingly.
Glen Haslhofer
Principles – Cont.
OECD Guidelines
- Affirm arm's length principle as TP standard
- Summarizes applicable methods to be used to determine and
evaluate arm's length transfer prices (comparability)
- Forms basis of bilateral tax treaties involving OECD members
Canadian Transfer Pricing Legislation
- Included in Section 247 of the Income Tax Act
- Information Circular 87-2R, International Transfer Pricing –
summarizes the CRA's administrative practices re s. 247
Other Countries - have own Legislation/Regulations
7
Glen Haslhofer
Assessing Arm's Length Prices
> Comparison to similar transactions under similar terms
and conditions between arm's length entities (between
taxpayer and third party or two third parties)
> Traditional Transactional Methods
- CUP - compares product prices or royalty commissions rates
- Resale Price/Cost Plus - gross margin level comparison
> Transactional Profit Methods
- Profit split - compares resultant split of profit between entities
- TNMM - operating income level comparison
8
Glen Haslhofer
Comparability
> Focus on functions/activities performed, assets used,
risk assumed (key value drivers)
> Other Considerations
- Economic Circumstances
(e.g. geographic markets, competitive positions, availability of
substitute goods, government regulation)
- Business Strategies
(e.g. market penetration)
> Material differences in comparability should be taken
into account
9
Glen Haslhofer
Canadian Legislation
>
>
>
>
>
Section 247
Transfer pricing adjustment (247(2))
Penalty provision (247(3))
Documentation (247(4))
Downward adjustment (247(10))
- special
i l procedures
d
ffor acceptance
t
10
Glen Haslhofer
247(2) Income and Capital Adjustments
Where a taxpayer or a partnership and a non-resident person with
whom the taxpayer or the partnership, or a member of the
partnership, does not deal at arm's length (or a partnership of which
the non-resident person is a member) are participants in a
transaction or a series of transactions and
a) the terms or conditions made or imposed, in respect of the
transaction or series, between any of the participants in the
transaction or series differ from those that would have been made
between persons dealing at arm's length, or
11
Glen Haslhofer
247(2)(b) - Recharacterization
(b) the transaction or series
(i) would not have been entered into between persons dealing at
arm's length, and
(ii) can reasonably be considered not to have been entered into
primarily for bona fide purposes other than to obtain a tax
benefit
12
Glen Haslhofer
TP Penalties
> Transfer Pricing Penalties
-
10% of TP income or capital adjustment (not tax adjustment)
Caution Threshold: < of 10% of revenue or $5 million
Intended to be a compliance penalty
Focuses on efforts that a taxpayer makes to determine and
use arm's length prices
> Transfer
T
f Pricing
P i i Memorandum
M
d
– TPM-09
TPM 09
- Provides guidance as to what constitutes reasonable efforts
- "What reasonable business person in taxpayers circumstances
would do considering complexity and importance of TP issue"
13
Glen Haslhofer
TP Penalties – Cont.
> Transfer Pricing Review Committee (TPRC)
- responsible for reviewing all cases where TP penalty may be
assessed
> Examples provided in TPM-09
- failure to prepare contemporaneous documentation or submit
within 3 month stat time limit
- limited or inadequate documentation (no analysis of FAR, market
conditions or business strategies)
- comparability analysis insufficient
14
Glen Haslhofer
Current
Issues
Tax Authority - Current Focus
> Business Restructurings (Conversions/IP Migration)
- OECD Restructuring Guidance – July 2010
> Intangibles vs Services
> Permanent Establishments
- Canada/US Treaty updates
> Financial Transactions
> Aggressive Tax Planning
16
Glen Haslhofer
Business Restructurings
> Business Restructurings
- purchasing/integrating companies, assets/IP
- moving functions, assets, risks (conversions: i.e. contract mfg/RD)
- closing plants and migrating operations
> OECD Guidance
-
17
focus on allocation of risk among related parties
whether/when BR requires arm's length comp./indemnification
how TP rules should be applied
whether/when governments can consider disregarding BR
Glen Haslhofer
Conversions/IP Migration
> Taxpayer Challenges
- establishing business case
- valuing and obtaining third party comparable information
> Tax Authority Challenges
- tax motivated (no business rationale) – see 247(2)(b)
- profit shift not commensurate with functions and risks
- exit charges, valuations, substance, contractual agreements
18
Glen Haslhofer
Intangibles and Services
> Are intangibles embedded in services transactions
> Any double counting between services and intangible
charges
> Are royalties charged (technology/know-how, TM/brand)
> Is royalty charge (or royalty rate) appropriate
- Benefit must be demonstrated
- Can be substantial difference in income between cost allocation
and royalty based on sales
19
Glen Haslhofer
Permanent Establishments
> U.S/Canada Treaty updates
- Contract workers – prevalent in Oil Sands projects
- Focus on use of OECD guidelines for purposes of determining
profits attributable to PE (functions, assets, risks)
> Increased Audit Activity
> Increase in Voluntary Disclosures
> Emerging Issues
- on-line transactions/servers
20
Glen Haslhofer
TP Controversy
Transfer Pricing Controversy
> Stages of TP Audit
-
request for TP documentation (3 month letter)
field audit - response to queries, possible settlement
audit proposal – referral to TPRC if applicable
response to proposal
issuance of reassessments
> Upfront Costs
- 50% of tax & interest to be paid up front for large corps
- May be long process to recoup
22
Glen Haslhofer
CRA Audit Trends
> CRA has risk based audit program – specific screening
criteria
> Requests for TP documentation at commencement of
audits
> Greater involvement of transfer pricing specialists and
economists
- TSO request/use of HQ economic/advisory reports
- CRA establishing industry specialists (e.g. financial, O&G)
> Increase use of 231.2 and 231.6 information requests
23
Glen Haslhofer
Penalties/Recharacterizations
> TP Penalties applied in approx. 53% of cases referred
to the TPRC, since inception March 2003
> $339 million in penalties assessed in 2009 on approx.
1,100 files audited by CRA
> Recharacterizations – 42 cases, 10 assessed, 15
ongoing
24
Glen Haslhofer
Remedies
> Appeals
- back log, limited resources
> Competent Authority
- article 25 of Model treaty establishes MAP
- government to government negotiation
- "endeavour" to prevent double tax
- U.S. / Canada arbitration effective December 2010 (2 yrs, no
decision)
> Tax Court
> Other ?
25
Glen Haslhofer
APAs
> Advance Pricing Agreement (APA)
- negotiate with CRA to set price for 5 years (may be roll-back)
- can also be bilateral or multilateral
- can avoid costly drawn out audits
> Interest in program continues to be strong
- CRA concluded 16 APAs in 2009-2010 – up from 10 in 2008-2009
- 31 pre-file meetings in 2009/2010 – historical average of 15
meetings
- Cases accepted – 29 in 2009/2010
- 49% transfer of tangibles, 29% intangible, 21% Services
26
Glen Haslhofer
Tax Provision Impact
> Consider statute of limitations 7 years for international
transactions (may differ for other country)
> Canadian tax positions with transfer pricing exposure –
all significant intercompany transactions
> MLTN - Is TP a "wash"?:
- different tax rates
- penalties and interest, Part XIII tax
- lack of double tax relief (losses in one jurisdiction)
- foreign tax credit effect
27
Glen Haslhofer
TP Cases
C
Before the
Courts
Glaxo - Overview
> CRA asserted that Canco overpaid related Swiss
supplier for Ranitidine
- active ingredient in Zantac sold by Glaxo Canada
> CRA "Reasonable Price" - price paid by Generic mfgs
- price differential $1,500-$1,600/kg vs $200-$300/kg
> Original assessment - C$55.0 million – upheld by TCC
(1990-1993 taxation years)
> FCA rejected TCC decision (July 2010)
29
Glen Haslhofer
Glaxo – Cont.
> FCA – key determination regarding license agreement
between UK parent and Glaxo
- TCC erred in concluding that the license agmt was irrelevant
- gave Glaxo access to UK parent's IP – including right to use IP
related to Zantac, right to other products
- should be considered in establishing reasonable price for drug
> B
Backk to
t trial
t i l judge
j d tto reevaluate
l t reasonable
bl price
i
> Supreme Court granted leave to appeal/cross appeal
(March 2011)
30
Glen Haslhofer
Glaxo – Cont.
> Guidance ?
- comparability - business circumstances are relevant in
determining arm's length pricing
- what would "reasonable person" in taxpayers business do, what
factors would they consider
- can't look at transaction in isolation and ignore business realities
31
Glen Haslhofer
GE Capital
> 1% guarantee provided to Canadian parent for issuance
of commercial paper
> Guarantee arrangement dates to 1988 – fee not put in
place until 1995
> CRA - Audit of years 1996-2000
- determined that 1% fee not reasonable ((disallowed expense)
p
)
- concept of implicit support introduced (relationship benefit)
- could have achieved result (lower interest rate) w/o guarantee
- issued 5 years of reassessments totaling $136 million
32
Glen Haslhofer
GE Capital – Cont.
> Dec 2009 – Tax Court of Canada issued judgment
> All adjustments vacated
- guarantee was necessary – could not have raised funds at low
interest amount without it
- determined 1% less than an arm's length rate
- yield approach used – included concept of implicit support
- implicit support – notched up credit rating but < than GE US
> Appeal filed by CRA (Jan 2010)
> FCA dismissed appeal (Dec 2010)
- 1% satisfied arm's length test, implicit support concept upheld
33
Glen Haslhofer
GE Capital – Cont.
> Decision
- Guidance Provided ?
- "Implicit Support" (contrary to or supportive of arm's length
principle)
- contrary to independent entity view – what a standalone entity
could have obtained in the market
- supportive – arm's length pricing takes into account all
circumstances which have a bearing on the transaction price
- may affect other transactions where "implicit support" may be
applied
34
Glen Haslhofer
TP Litigation
>
>
>
>
>
Next Frontier ?
Aggressive adjustments and more anticipated
Taxpayer wins – but at what cost
Cost/benefit decisions
Precedent setting?
• US Taxpayer wins: Veritas and Xilinx
35
Glen Haslhofer
Current US
Issues
What's New South of the 49th
> Current U.S. environment: A new world
> Enforcement
> New tools for the IRS
> Uncertain Tax Positions (UTP)
> Making the board of directors accountable
> Proposed legislation
37
Glen Haslhofer
Enforcement
The IRS will hire nearly 800 new employees devoted
specifically to international enforcement. The funding
would allow the IRS to hire new agents, economists,
lawyers and specialists, increasing the IRS’ ability to crack
down on offshore tax avoidance and evasion, including
through transfer pricing….
> The White House Office of the Press Secretary, May 4, 2009
38
Glen Haslhofer
New Tools for the IRS
The IRS 2009 – 2013 Strategic Plan includes:
> Expand employee knowledge and awareness of
international tax issues
> Develop deep expertise and capabilities in key
international areas
> Enhance coordination with treaty partners and
international organizations
> Aggressively target areas of significant risk
39
Glen Haslhofer
New Tools - Expertise
> LB&I creates a transfer pricing practice
> This group includes some of IRS’ best international
examiners, economists, and product specialists to consult
with the field on difficult cases
> Purpose:
> Strategically and systematically administer transfer pricing
issues
> Identify emerging issues and trends
> Provide consistency in outcomes in transfer pricing cases
> Available to “parachute” into a difficult case and take over the
case completely
40
Glen Haslhofer
Increasing Transparency
The Service has developed Schedule UTP that requires
certain filers to provide information about their uncertain
tax positions that affect their U.S. federal income tax
liability. The schedule requires concise descriptions of
each uncertain tax position in sufficient detail so that the
Service can determine the nature of the issue.
> Internal Revenue Service – 2010
Schedule UTP
41
Glen Haslhofer
Disclosure of UTP
> Mandatory filing for:
> Those filing financial statements using FIN 48 (ASC 740); and
Assets exceeding $100 million
> Disclosure:
> Brief description of the issue
> Why it is an uncertain tax position
> Purpose is to cut down:
> IRS time to find issues;
> Time to select taxpayers for audit; and
> Maximize time spent discussing the law as it applies to TP's
facts
42
Glen Haslhofer
Making Corporate Boards Accountable
Corporate directors should have a mechanism to oversee
tax risk as part of the governance process and should
consider specifically addressing transfer pricing and the
relative profit allocated to low-tax jurisdictions, and make
sure they reflect real economic contributions made in those
jurisdictions.
> IRS Commissioner Shulman – addressing the National
Association of Corporate Directors Governance Conference,
October 19, 2009
43
Glen Haslhofer
2012 Budget and TP
New provisions are included in the administration’s fiscal
year 2012 budget including intangible provisions which
would “backstop our transfer pricing rules.”
Our goal in these proposals is to limit the role taxes play in
business investment decisions byy reducing
g implicit
p
tax
incentives to move investment and jobs overseas.
> Treasury Secretary Timothy Geithner addressing the House
Ways and Means Committee, February 3, 2010
44
Glen Haslhofer

Transfer Pricing - Canadian Tax Foundation

Transcription

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