TAX Pub Global Transfer Pricing Survey Report 2009

2009 Global transfer pricing survey

Tax authority insights:perspectives, interpretations and

regulatory changes

September 2009

Foreword

Glossary of terms

Transfer pricing authorities respond to a changing world: Key findings and insights

Americas

Argentina

Brazil

Canada

Colombia

Ecuador

Mexico

Peru

United States

Venezuela

Asia Pacific

Australia

China

Indonesia

Japan

Korea

Malaysia

New Zealand

Singapore

Taiwan

Thailand

Vietnam

Europe, Middle East, India, Africa (EMEIA)

Austria

Belgium

Czech Republic

Denmark

Egypt

Estonia

Finland

France

Germany

Hungary

India

Israel

Italy

Kazakhstan

Kenya

Lithuania

Norway

Poland

Portugal

Romania

Russia

Slovak Republic

Slovenia

Spain

Sweden

Switzerland

The Netherlands

Turkey

United Kingdom

Ernst & Young‘s Global transfer pricing and tax effective supply chain management practice country contacts

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2009 Global transfer pricing survey1

Since 1995 Ernst & Young has surveyed multinational enterprises (MNEs) on a range of international tax matters, with special emphasis on what continues to be the number one international tax issue of interest to them — transfer pricing.

Foreword


The increased scope of our biennial transfer pricing research reflects the intensely challenging economic climate. This trend is shown by the growing number of countries1 that are devoting attention to transfer pricing activities, the increase in the jurisdictions that are introducing documentation requirements and penalty rules, and the ever-increasing diversity of transfer pricing issues facing MNEs.

Amid the challenges of a global economic downturn, many governments are sharpening their focus on compliance, enforcement and legislative approaches. We trust that you will continue to find our 2009 Global transfer pricing survey, Tax authority insights: perspectives, interpretations and regulatory changes a useful tool in navigating this increasingly complex and challenging environment.

Countries that appear in this edition

Thomas Borstell

Global Director Transfer Pricing

John Hobster

Head of Global Accounts Transfer Pricing

Foreword

ArgentinaAustraliaAustriaBelgiumBrazilCanadaChinaColombiaCzech Republic

DenmarkEcuadorEgyptEstoniaFinlandFranceGermanyHungaryIndia

IndonesiaIsraelItalyJapanKazakhstanKenyaKoreaLithuaniaMalaysia

MexicoNew ZealandNorwayPeruPolandPortugalRomaniaRussiaSingapore

Slovak RepublicSloveniaSpainSwedenSwitzerlandTaiwanThailandThe NetherlandsTurkey

United KingdomUnited StatesVenezuelaVietnam

1 In this report, the term “countries” is used to refer to tax jurisdictions.


Glossary of terms

APA (Advance Pricing Agreement) An agreement between a tax authority and an MNE about the determination of the appropriate transfer pricing method to be used for pricing intercompany transactions. APAs may be unilateral, bilateral (two governments) or multilateral (three or more governments).

Arm’s Length PrincipleThe standard adopted by the OECD that transactions between members of an MNE should reflect conditions that would be made between independent enterprises.

CFC (Controlled Foreign Corporation)A subsidiary and member of an MNE group.

CPM (Comparable Profits Method)Under the Comparable Profits Method of Income Tax Regulations Section 1.482-5, an arm’s length result is determined by comparing the operating profit of the “tested” party with the operating profit of an uncontrolled party involved in comparable transactions. Thus, the CPM looks at profits rather than transactions. Generally, the tested party’s profit is measured in terms of PLIs such as rate of return on capital employed or the ratio of gross profit to operating expenses. The regulations state that the tested party should normally be the “least complex” of the controlled entities. Income Tax Regs. § 1.482-5(b)(2).

CSA (Cost Sharing Arrangements)

CUP (Comparable Uncontrolled Price)A transfer pricing method that compares the price for property or services in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.


ETR (Effective Tax Rate)

EU (European Union)The European Union, currently consisting of 27 member states.

EUJTPF (EU Joint Transfer Pricing Forum)The EU Joint Transfer Pricing Forum, consisting of representatives of governments and the private sector who advise and consult on transfer pricing issues.

FTE (Full Time Equivalent)Used in this survey to indicate the number of resources employed by tax authorities to undertake transfer pricing reviews in their jurisdiction.

GAAP (Generally Accepted AccountingPrinciples)

MNE (Multinational Enterprise)A member of a related group that carries on business directly or indirectly in two or more countries.

MAP (Mutual Agreement Procedure)A dispute resolution process found in Article 25 of the OECD Model Tax Convention. MAP is a government-to-government process of negotiation to resolve matters of taxation not in accordance with the particular tax treaty and to attempt to avoid double taxation.

OECD (Organisation for Economic Co-operation and Development)An intergovernmental organization, based in Paris, formed to foster international trade and economic development. The OECD has 30 member states. Among its many concerns is the removal of tax barriers to the free flow of

goods and services and the avoidance of double taxation of income or profits. The OECD has developed guidelines and a model tax convention, see below.

OECD GuidelinesTransfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published by the OECD between 1995 and 1998. The OECD Guidelines endorse the arm’s length principle and consist of a statement of principle rather than a set of specific rules to be applied.

OECD Model Tax Convention Model Tax Convention on Income and Capital, last published by the OECD in July 2005. The Model Tax Convention is to be used by member states in negotiations of bilateral double tax treaties. The OECD also provides commentary on the interpretation of the Model Tax Convention and states that member countries should follow this commentary, subject to their expressed reservations thereon, when applying and interpreting their double tax treaties.

MoU (Memorandum of Understanding)

PLI (Profit Level Indicators)Ratios that measure the relationship between an entity’s profit and the resources invested or costs incurred to achieve those profits. Refer above to CPM for further discussion of their application.

PATA (Pacific Association of Tax Administrators)An association of the tax administrations of Australia, Canada, Japan and the United States formed to foster

cooperation between and the exchange of information among them. PATA has published guidance on APAs, MAPs and documentation requirements.

QCSA (Qualified Cost Sharing Arrangements)

TNMM (Transactional Net Margin Method)The transactional net margin method is a profits-based method that compares the profitability of an MNE member to the profits of comparable entities undertaking similar transactions. The CPM in the United States is similar to TNMM.


We are delighted to introduce the latest issue of our Transfer Pricing Survey, 2009 Global transfer pricing survey, Tax authority insights: perspectives, interpretations and regulatory changes, which examines the approaches and attitudes of tax authorities in 49 countries.1

Since we last issued this survey in September 2006, the worldwide transfer pricing environment has moved on rapidly. More than ten additional countries have introduced requirements for taxpayers to create and maintain contemporaneous documentation demonstrating the arm’s length nature of their transfer pricing arrangements (with China, the Slovak Republic and Greece being three of the most recent). Many countries have introduced increasingly hard-hitting penalties in the event of a transfer pricing adjustment, or for failure to have documentation.

Transfer pricing authorities respond to a changing worldKey findings and insights

The information presented in this survey was gathered by Ernst & Young transfer pricing professionals around the world. Where tax authorities were prepared formally to discuss their approaches with us, we conducted interviews with them; those interviews were supplemented by the insights of our transfer pricing leaders in the relevant countries. In other countries, our transfer pricing professionals provided insights garnered from their experience of dealing with (and/or recently working within) their local tax administrations.

1 In this report, the term “countries” is used to refer to tax jurisdictions.


Moreover, the world has changed. The credit crunch, a worldwide recession and turmoil in the financial markets have brought serious, and often unforeseen, challenges to multinational enterprises (MNEs) in managing their transfer pricing. Some have had to deal with substantial losses, others with margin compression with or without volatile results — all factors that render traditional approaches to transfer pricing at best difficult, and at worst impossible, to apply.

The same economic factors have an effect on governments and their fiscal approaches. Budget deficits, stimulus packages and bailouts all have significant costs. Raising revenues to cover these costs is front of mind. Raising additional revenue through taxing MNEs’ profits rather than letting someone else tax them must be an attractive thought in such times.

At the same time, MNEs need to meet their tax obligations, often with reduced budgets and fewer resources, while coming under greater scrutiny. Tax administrations are adapting their audit strategies and policies and developing better tools, processes and capabilities. They are also sharing more information and adopting leading practices, sharpening their enforcement focus and carrying out more sophisticated audits. In no area of taxation is this trend more prevalent than in transfer pricing.

In this environment, effective management of transfer pricing issues around the world is more important — but more challenging — than ever before. This survey is intended to help you as a tax or transfer pricing professional assess your organization’s current transfer pricing

landscape, prioritize areas of focus to achieve and maintain leading standards of transfer pricing practice, and, as far as is possible in an uncertain world, predict the near-term challenges you will face.

Key trends ► Tax authorities are increasing their dedicated transfer pricing resources and improving their specialist capabilities.

► Countries seem to be gearing up not simply for more audits but also for more transfer pricing penalties and for more disputes.

► Many companies have suffered a reduction in profits or undergone business restructuring as a result of the recession, both of which are cited as the two most common audit triggers. In addition, the industries that have been most affected by the downturn are the ones most actively targeted by many countries for transfer pricing audit.

► Transactions with tax haven countries and/or major investor countries are increasingly likely to be scrutinized, and formal “watch lists” are becoming more common.

► Substantial differences remain in the practical application and enforcement of what is supposed to be the governing and commonly accepted mantra — the arm’s length principle.

Tax authorities are increasing transfer pricing resources

In general, transfer pricing resources have increased or are increasing in most countries.

Countries that are relative newcomers to transfer pricing enforcement are tending to gear up their capabilities quickly. Finland — with a team of approximately 45 experts involved in transfer pricing with regulations in place for only two years — is an example of this trend. A number of countries are moving towards setting up specialist transfer pricing examination teams (e.g., Austria, Indonesia and Slovenia), with the aim of focusing their efforts and resources. But many more countries are broadening capabilities, increasing full-time equivalents (FTEs), using external agencies to train and advise their people (e.g., Colombia), and increasing yields. This focus is not surprising, given the pressure to raise revenues in these turbulent times.

The likely outcome of this deployment of more specialists is that companies will experience more audit activity and more cross-border disputes. Tax authorities foresee that this will create further demand for transfer pricing resources to handle the higher volumes of dispute resolution requirements. The authorities also foresee that they will need greater capability in the field of mutual agreement procedures (MAPs), as well as opening or extending their programs for advance pricing agreements (APAs).

Industry focus continues, but to what end?

Of the 49 countries covered in this survey, 16 state that they target specific industries, and 8 more are believed to do so. The main targeted industries are automotive, consumer products, financial services, oil and gas, and pharmaceuticals.


Japan also continues to pursue the medical devices and technology-related industries, and the more experienced and largest authorities are active in transfer pricing audits of financial institutions.

This list is not particularly surprising — Ernst & Young has observed through its history of transfer pricing surveys that these industries have long been in the spotlight. But at the time of writing, the automotive industry is in major decline, the banks and insurance companies have been announcing record losses, and consumer spending in many markets has declined heavily. Will tax authorities really be able to increase their yield from these sectors? It will be fascinating in the next couple of years to observe how — and whether — tax authorities change their approach and bring other, possibly newer, industries under transfer pricing scrutiny.

More countries formally listing havens

A clear focus emerged on transactions with perceived tax havens and “blacklisted” countries, as well as an emphasis on high-volume transactions with key trading partners.

The number of countries that formally identify “blacklisted” countries in their tax legislation or administrative practices continues to increase. Responses to the survey indicated that Brazil, Ecuador, Peru, Poland, Slovenia and Indonesia all have formal listings of countries that drive the selection and focus of

taxpayers for transfer pricing scrutiny. Developments in this area in the United States based on recent White House announcements are also being watched by many with interest.

In practice, whether countries have enacted formal lists or not, transactions with perceived low-tax territories are a key focus of tax authorities in a majority of countries. Of those tax authorities that provided direct responses to the survey, well over half flagged transactions with these “havens” as a trigger for greater focus on taxpayers’ activities. However, the mere fact of being headquartered in a specific location did not seem to be a factor in attracting audit attention.

In addition, trading blocs and major trading partners are a focus for tax authorities from a transfer pricing perspective. Not surprisingly, the United States, the United Kingdom, Japan and Germany, as countries which represent significant markets for in-bound investors, feature prominently in the “top five” countries that come under scrutiny. Interestingly, despite its growing importance as a destination for foreign investment, China has yet to appear on these lists.

All types of transactions are under scrutiny

There is a clear divide between the authorities surveyed in respect of the types of transactions that they choose to scrutinize. Countries that have repositories of natural assets (oil, gas and minerals), such as Australia,

Argentina, Kazakhstan and Russia, tend to keep a close eye on transactions in tangible goods. By contrast, in countries outside this group, the trend is firmly towards placing more emphasis on service transactions and intangibles. Indeed, intracompany services were the transactions most frequently cited by tax authorities as being a focus of their transfer pricing reviews. More than three-quarters of responding authorities noted a focus on these service transactions.

This trend is fully consistent with (and perhaps even driven by) regulatory changes in the United States2 and elsewhere that are highlighting the complexity of services with embedded intangibles and/or services of extremely high intellectual value. Some countries also confirmed that they look with suspicion at so-called reimportation transactions (e.g., items manufactured in a country being sold overseas and bought back into the country of manufacture at a later stage).

Financial transactions were already a focus for almost two-thirds of tax authorities providing direct responses to the survey, but, in the current economic climate, financial transactions could be expected to feature even more frequently as a priority in transfer pricing reviews.

Transfer pricing penalties are set to rise

Not only is it anticipated that transfer pricing audits will increase, it also seems likely that transfer pricing penalties will increase. The overwhelming majority of

2 New final, temporary and proposed regulations related to services were issued on 31 July 2006. The new rules came into effect on 1 January 2007 and apply to tax years beginning after 31 December 2006. In conjunction with the new regulations, the Internal Revenue Service (IRS) also issued Announcement 2006-50, which contained a proposed list of “specified covered services” that relate to a specific cost-based method. The new services regulations require stock-based compensation to be considered in total costs. On 20 December 2006, the IRS released Notice 2007-5 and Revenue Procedure 2007-13, which extended the effective date of the Services Cost Method until 1 January 2008 and added to the list of “covered services.”


3 “Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment,” Organisation for Economic Co-operation and Development (OECD), published 19 September 2008.

countries that have transfer pricing-specific penalties anticipate that this will be the case.

This trend is consistent with the need for increased revenues. However, Italy, which starts from a very high level of penalty imposition, is thought to be considering reducing its current punitive levels to encourage taxpayers to settle ongoing disputes. Up until now, most countries that do have penalty regimes do not impose them on all adjustments nor do they always impose them to the maximum extent. Where specific details of penalties were provided by tax authorities directly, approximately half of the respondents indicated that penalties were imposed in less than 50% of cases. However, it seems likely that this level will increase in the future. Some countries apply penalties more routinely than others; for example, Belgium, Hungary. Portugal and Kazakhstan say that they apply penalties in 50% to 100% of the cases where an adjustment is enforced.

Audit triggers reflect economic uncertainty

More countries than ever have moved to a risk assessment-based case selection methodology, and some have adopted quite sophisticated scoring tools to enable the structured selection of high-risk cases. The United Kingdom and Australia have been joined by a few other countries in taking this approach.

We explored the most common reasons why tax authorities take up cases for audit. The most frequently cited trigger was “a sudden reduction in taxable

profits,” with approximately three-quarters of tax authorities directly responding to the survey acknowledging their focus on taxpayers’ profitability. We hope that this does not lead to wasted effort through the inappropriate selection of cases where a profit reduction is caused predominantly by the current economic situation. Otherwise, it seems inevitable that many more companies will be audited than in recent years.

Around half of our respondents cited business restructuring as an audit trigger. This comes at a time when the Organisation for Economic Co-operation and Development (OECD) has issued a discussion draft on the transfer pricing implications of business restructurings.2

We confidently expect this factor to remain a front-of-mind selection trigger.

Indirect tax challenges were also a factor for respondents, though more prevalent in the Americas and Europe than in Asia. Responses by authorities to questions on indirect taxes and transfer pricing highlight the challenges that these two distinct, yet related, areas of taxation pose for MNEs. Approximately half of all authorities identified coordination and information exchange between the organizations responsible for administering indirect and direct taxes in their countries. But fewer than 20% of countries have a firm requirement for consistent pricing for both corporate tax and indirect tax purposes. In the remaining countries, therefore, MNEs may face the potentially conflicting obligations of corporate and indirect taxes in the area of transaction

valuation, with many companies also facing active coordination and communication between the authorities managing these two areas of taxation.

Comparable data still a country issue

A significant issue for debate in transfer pricing is whether data used to benchmark the performance of a company, and therefore the arm’s length nature of its transfer pricing, should be specific to the country of the benchmarked party. The implications of such an approach are clear — huge resource and expense commitments for taxpayers. We tested the appetite of tax administrations to accept less narrow benchmarking, for example, in the form of regional comparables. We obtained a wide range of outcomes on this issue. Russia and India insist on country-specific data. Some countries (e.g., Portugal) are prepared to accept subregional data (Iberia); others will accept regional data (mainly Europe); and, at the extremes, Kenya will accept a global data set, presumably due to insufficient local data. Global transfer pricing compliance, therefore, requires flexible and tailored solutions to this long-standing dilemma.

Transfer pricing methods

The divergent approaches taken by different countries to establishing an arm’s length price is one of the most difficult issues facing MNEs in seeking to avoid transfer pricing disputes. However, this issue does not seem likely to be resolved in the near future.


At the time of this survey, the environment relating to transfer pricing methods is one where we might expect to see more use of methods that, up until now, have been methods of last resort — that is, the transactional net margin method (TNMM) and profit split. Several initiatives at the OECD point in this direction. The exercise on comparability,4 for example, seems to be lifting the bar on the need for very high-quality benchmarks that in many cases will not exist. The exercise on methods5 also seems to be moving the methods of last resort up to a similar status as the traditional transactional methods. The recent OECD Business Restructuring draft paper6 advocates a two-sided analysis (not just the simple testing of one party’s activities) and evaluation of the contributions of all parties. We might therefore expect to see tax authorities leaning more towards the use of profit split methods. However, if so, this inclination is slower and less pervasive than we might expect, and several countries indicate no appetite at all for profit split methodologies.

More commitment to APAs

With APAs seen as a useful tool in dispute management, approximately half of tax authorities responding directly to the survey indicated that a formal APA program was in place in their jurisdiction. The survey also indicates that more countries are committing to the introduction of APA programs, which

is to be welcomed in these uncertain times. India indicated that it is currently investigating such programs, while formal APA processes are expected to be introduced in Sweden shortly.

Countries with established APA programs are finding them resource-intensive, and several countries, including the Republic of Korea, intend to increase their resources in this field. The resource issue is also indicated by several countries observing that it takes longer to conclude an APA than in the past, which may dissuade some potential applicants.

Some authorities are also gearing up their competent authority capabilities to deal with the expected increase in cross-border transfer pricing disputes occasioned by their own investigation capabilities and/or challenges from other authorities. It seems that many countries expect to devote a great deal of time to MAPs and/or Arbitration processes in the near future. MNEs should also expect to do the same.

We also observe examples in the survey of the use of nonbinding agreements or opinions in transfer pricing matters (e.g., Austria, Russia and the Slovak Republic). This may be an effort to give taxpayer certainty at some level, but it is difficult to see the value of nonbinding agreements until, and unless, there is a history of the relevant authorities honoring these agreements.

4 See the release by the OECD of a proposed revision to Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations on 9 September 2009. This revision follows from the activities of Working Party No. 6 of the OECD Committee on Fiscal Affairs; see “Comparability: Public Invitation to Comment on a Series of Draft Issues Notes,” initially issued 10 May 2006.

5 See the release by the OECD of a proposed revision to Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations on 9 September 2009. This revision follows from the activities of Working Party No. 6 of the OECD Committee on Fiscal Affairs; see “Invitation to Comment on Transactional Profit Methods,” initially issued 25 January 2008.

6 “Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment,” OECD, published 19 September 2008.

Managing the trend: next steps for corporate transfer pricing functions

For many MNEs, the focus is — and may very well remain — minimizing potential challenges to their transfer pricing policies from tax authorities and mitigating penalties when these challenges arise. Given tax authorities’ likely intentions to increase reviews and increase the use of penalties, this means a good deal of work for most transfer pricing functions. It may also mean a more fundamental challenge to help sustain businesses in times of depressed markets and diminished margins.

In this environment, you cannot expect to avoid tax controversy. Rather, you should assume controversy will happen and plan for it.

These trends make it even more important for your transfer pricing function to engage with — and potentially help shape — your organizational and operational structure.7 The corporate transfer pricing function will often have to engage more frequently with the rest of the business to keep pace with change, identify and preempt tax authority challenges and, most of all, convert risk into opportunity. A proactive transfer pricing function will have a real opportunity right now to position itself as a strategic partner to the business.

7 “Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment,” OECD, published 19 September 2008.

What should transfer pricing function leaders be doing now?

► Map out the transfer pricing landscape for your organization based on your local operations and your global strategy

► Review your organization’s current business to better understand its value drivers and the impact of the current economic climate on those value drivers

► Identify likely transfer pricing hot spots, based on your organization’s geographic profile, operations and transactions

► Align your transfer pricing policies to keep pace with your business change

► Actively monitor transfer pricing developments so you are ready to face the inevitable challenges in a greater number of countries with disparate approaches and areas of focus

► Consider all available channels of controversy management, from robust documentation through channels of appeal, and APAs

► Take a risk management approach to transfer pricing processes, covering the most valuable transactions and the most challenging countries first


Surveyed countries

Americas


* Country chapter completed based on the insights of Ernst & Young professionals and publicly available information only.

Resources the taxing authority is devoting to transfer pricing The Administración Federal de Ingresos Públicos — Dirección General Impositiva (the AFIP) administers taxes in Argentina.

Within the AFIP, transfer pricing reviews are carried out by the External Examination Division (División de Fiscalización Externa) by dedicated transfer pricing auditors. There are resources fully involved in transfer pricing examinations.

Industry focusFactors taken into account in identifying specific industries for scrutiny include whether the activities of the industry are significant within the country and the profitability of the industry. The industries currently under focus by the AFIP are automotive, consumer products, mining and metals, oil and gas, and pharmaceuticals, as well as commodity exporters.

Geographic focusThe jurisdiction of the counterparty of the transaction might be a determining factor for targeting an audit. However, it is not perceived as the main one. Typically, transactions with low-tax jurisdictions (especially transactions by commodity exporters) are reviewed during audits.

Types of transactions under scrutinyThe AFIP has specifically identified the following transactions currently as the focus of transfer pricing reviews:

• Tangible goods — export of commodities

• Tangible goods — imports in targeted industries

• Intra-group services

• Financial transactions (e.g., loans, other debt instruments), especially those involving cash deposits abroad

• Intellectual property (IP) (e.g., royalties, licensing) in certain cases

Transfer pricing penaltiesThe AFIP has the power to impose transfer pricing penalties. Argentina has enacted legislation to ensure the consistent application of its transfer pricing penalty provisions.

For unpaid taxes related to international transactions, the taxpayer is fined 100% to 400% of the unpaid tax. Late filing of transfer pricing returns; noncompliance with the formal duties of furnishing information requested by the AFIP; and failure to keep vouchers and evidence of prices on available files and failure to file tax returns upon request are subject to increased penalties. Other general tax penalties are applicable (like penalties for fraud and criminal tax law).

Argentina*


However, the imposition of penalties in Argentina is subject to the general tax penalty reduction regime, as provided in the relevant legislation.

According to the provisions of the Moratorium regime established by Law 26,476, penalties (including transfer pricing ones) applicable to formal or material obligations related to fiscal years ended not later than December 2007 are forgiven, as long as the obligations are complied with no later than 31 August 2009.

It is anticipated that the assessment of penalties will increase due to the augmentation of transfer pricing audits in the next two years.

Audit triggersThe selection of the taxpayer and the scope of the audit are typically driven by factors such as:

• The profitability of the taxpayer

• Revenues of the taxpayer

• Issues arising in previous tax audits of the taxpayer

• The nature and volume of the taxpayer’s related-party transactions

Indirect and customs taxThe AFIP is an integrated Tax and Customs administration. As such, it is more than likely that both Tax and Customs Directions share relevant information regarding transactions

between related parties. There is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataSince there is only a limited amount of local company information available, in practice, regional or global (preferably North American or European) comparables may be used.

Generally, financial data for three years needs to be used in preparing and presenting comparable data. The inter-quartile range (with a particular calculation) is the mandatory method for calculating the allowable arm’s length range. There is a general preference for the use of operating margin, mark-up on total costs and return on assets as the profit-level indicator.

No formal guidance is provided about adjustments to comparable data, although comparability differences need to be adjusted. It is worth mentioning that transfer pricing documentation, including comparable search process among other relevant information like chosen transfer pricing method, must be submitted with the Argentine tax authorities annually.

Transfer pricing methodsArgentina does not set out any hierarchy of methods to be used in determining arm’s length remuneration for controlled transactions. However,


Carlos [email protected]+54 11 4318 1619

Ernst & Young contact

the “best method” rule is followed. The Argentinean transfer pricing rules recognize the following methods: comparable uncontrolled price, cost plus, resale price, profit split and transactional net margin method. In the case of exports to related entities involving goods with publicly known quotations on transparent markets, in which an international intermediary other than the intended recipient of the goods is involved, the best method would be the use of the quotation price for the goods on the transparent market on the last day the merchandise is loaded, unless the agreed-upon price is higher, in which case the latter should be considered. This method is not applicable when the intermediary complies with the requirements listed in Income Tax Law Section 15, paragraph 8. Argentinean law permits the Executive Power to define any other transfer pricing method in addition to those specifically mentioned in the local rules. However, no other methods have been defined.

Yield/performance of transfer pricing reviews

The effectiveness of transfer pricing review activities is measured in several ways, including an increase in tax yield and the percentage of review cases involving an adjustment to the taxable income of taxpayers.

Likely trends in transfer pricing activityIt is believed that the AFIP expects compliance measures and yield targets (i.e., an increase in tax take based on audit activity) to be areas of increased focus over the next two years.


Brazil

Resources the taxing authority is devoting to transfer pricingThe Secretaria da Receita Federal do Brasil (RFB) administers taxes in Brazil. The RFB has a specialized department called DEAIN (the Federal Tax Authority’s Department of International Matters), which includes a centralized team of specialists responsible for undertaking transfer pricing reviews. The DEAIN has national jurisdiction to act on transfer pricing issues, worldwide income issues, customs valuation issues and other issues involving international operations.

There are approximately 12 full-time equivalent (FTE) resources involved in transfer pricing reviews centrally located at the DEAIN. This level of resourcing is expected to increase two-fold in the next two years, although there has been a slight decrease (from 15 to 12) in the last couple of years.

In terms of background, the resources involved in transfer pricing reviews consist of lawyers, engineers, economists and registered accountants. All the transfer pricing auditors within the DEAIN are transfer pricing specialists, with a strong technical background in transfer pricing issues.

Industry focusFactors such as whether the activities of the industry are significant within Brazil and the profitability of the

industry are taken into account in identifying specific industries for scrutiny. The DEAIN is currently focusing on the following industries: automotive, banking and capital markets, biotechnology, consumer products, oil and gas, pharmaceutical, technology and telecommunication.

The selection of taxpayers to be examined is dictated by the DEAIN’s Service of Programming, Evaluation and Fiscal Activity Controlling (SEPAC) and is held confidential.

Geographic focusLegislative direction (such as a formal blacklist of certain jurisdictions) drives the jurisdictions chosen for review. Typically, transactions with low-tax jurisdictions are reviewed during audits.

Types of transactions under scrutinyTransactions involving tangible goods currently represent approximately 80% of the DEAIN’s transfer pricing caseload, with financial transactions representing the remaining 20%.

Transfer pricing penaltiesBrazilian law does not provide for the imposition of specific transfer pricing penalties. The general penalties that apply to infringements of the tax laws also apply to transfer pricing cases. It should be noted that the DEAIN


is empowered to impose additional administrative and criminal penalties in cases of flagrant fraud.

Over the last two years, penalties have been applied in over 75% of cases involving transfer pricing adjustments. Where penalties are imposed, they generally exceed 75%, and sometimes even 100%, of the additional tax. Generally, all cases of transfer pricing adjustments are considered to be tax infringements and, as such, they are subject to an administrative penalty of 75%. In cases that involve flagrant fraud, the level of penalty is 150% of the additional tax payable. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersTransfer pricing audits are instigated by the SEPAC, which is an autonomous body. A variety of considerations are taken into account in determining which taxpayers should be the focus of audit resources, in the context of Brazil’s standard tax audit program. Factors include:

• The profitability of the local taxpayer

• Whether there is evidence of business restructurings

• The volume of related-party transactions

• Issues identified during previous tax audits of the taxpayer

Indirect and customs taxTransfer pricing and customs matters are handled by separate divisions within the DEAIN. As such, the work of transfer pricing enforcement resources is not integrated (e.g., in terms of sharing of information) with that of indirect tax or customs specialists. There is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataUnder Brazilian law, statutory margins are predetermined. Therefore, the selection and presentation of comparable information does not apply in the context of Brazilian transfer pricing law.

Transfer pricing methodsBrazil does not specify any hierarchy of methods to be used in determining the arm’s length remuneration for controlled transactions. However, the “best method“ rule is followed. The Brazilian tax authorities consider the profit split method (full profit split as well as residual profit split), transactional net margin method (TNMM) and the comparable profit method (CPM) to be inappropriate methods.

The Brazilian legislation requires the consistent application of any transaction-based method by the taxpayer in its annual income tax return. As such, since statutory profit margins are set by law



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+55 11 2112 5723

for transaction-based methods, the profit-based methods are effectively redundant in the Brazilian context.

Advance Pricing Agreements (APAs)Brazil does not have a formal APA program. The authorities consider that the implementation of the statutory margin system has helped minimize subjective judgments in the auditing phase and avoids the need for a complex and expensive APA structure.


The effectiveness of transfer pricing review activities is measured based on considerations such as the increase in tax yield and the percentage of review cases involving an adjustment to the taxable income of taxpayers.

Likely trends in transfer pricing activityOver the next two years, the DEAIN expects to place greater emphasis on compliance measures and yield targets (i.e., an increase in tax take based on audit activity) from a transfer pricing perspective.


Canada

Resources the taxing authority is devoting to transfer pricingThe Canada Revenue Agency (CRA) administers taxes in Canada. Most of the CRA’s specialized transfer pricing resources are centrally located in the International Tax Division (ITD) of the International and Large Business Directorate in Ottawa. The CRA also has specific transfer pricing resources dedicated to the resolution of double taxation through Competent Authority Assistance and APAs within the Competent Authority Services Division (CASD), which is also centrally located in Ottawa.

There are over 450 FTE resources dedicated to transfer pricing reviews, with 47 based centrally in Ottawa who provide advisory and economic services to the field audit teams and with the remainder located in regional offices. A majority of the resources are located in economic centers such as Toronto, Montreal, Calgary and Vancouver. The number of FTE resources has marginally increased (by approximately 3%) over the last two years. A majority of the resources are specialists in international issues. However, some of the new hires or junior resources may require specialized transfer pricing training or on-the-job experience. Additionally, there are over 20 FTE resources within the CASD.

In terms of background, almost 95% of the resources are qualified accountants, while the remainder are economists. Since the late 1990s, economists have

had a direct role in most high-profile or complex cases, and this trend continues as more field auditors seek assistance from ITD on their transfer pricing audits. The most recent trend is the specialization of resources in specific industry sectors such as financial products and services and oil and gas.

Industry focusThe CRA has Industry Coordinating Offices focusing on the pharmaceutical, oil and gas, automotive and insurance industries. The role of these offices is to ensure consistency in audits of corporations within these industries and will provide CRA auditors with industry awareness.

While the CRA does not target specific industries as such, factors including whether the activities of the industry are significant within Canada (or within certain parts of the country) and the profitability of the industry are nevertheless important. The industries largely under transfer pricing audit by the CRA are the automotive, banking and capital markets, consumer products, insurance, oil and gas, pharmaceuticals, technology, and power and utilities. Although the CRA does not officially communicate a list of priority industries to taxpayers, it does conduct outreach programs through which general comments on planning and resources is provided to the international tax community.


Geographic focusGeographic considerations are not drivers for the selection of taxpayers for review. However, the CRA’s risk assessment model typically involves review of various factors, including the involvement of low-tax jurisdictions as counterparties to the taxpayer’s related-party transactions.

In the current caseload of transfer pricing reviews, the top five most prevalent jurisdictions of the relevant counterparties are:

• The United States

• The United Kingdom

• Japan

• Barbados

• France

Types of transactions under scrutinyKey transactions forming the current caseload of transfer pricing reviews in Canada are:

• Tangible goods

• IP (e.g., royalties, licensing)


• Financial transactions (e.g., loans, other debt instruments)

• Cost sharing or cost pooling arrangements

Transfer pricing penaltiesThe CRA has the power to impose transfer pricing documentation penalties. The CRA has set up an internal Transfer Pricing Review Committee (TPRC) to ensure the consistent application of transfer pricing documentation penalties. The TPRC makes a decision to apply penalties or not based upon whether a taxpayer has made reasonable efforts to determine and use arm’s length prices or allocations, as described under S. 247(4)(a) of the Income Tax Act.

Since the introduction of the transfer pricing penalties, penalties have been applied in more than 50% of cases where the transfer pricing adjustments breached a de minimus threshold of CDN$5 million or 10% of the taxpayer’s gross revenue. Where penalties are imposed, they are applied at a rate of 10% of the transfer pricing income adjustment. It is anticipated that the number of transfer pricing penalties will reduce over the next two years, as the CRA expects a decrease in the rate of noncompliance with Canadian documentation rules, owing to an increase in compliance efforts.

Audit triggersSelection of cases for transfer pricing review is done by experienced Tax Services Office (TSO) personnel, who follow guidelines developed by ITD.


Taxpayers are chosen for review, typically, based on a risk-based assessment involving factors such as:

• The level of profitability of the taxpayer



• Previous tax audits of the taxpayer

• The outcomes of VAT, employment, customs or other indirect tax reviews

Comparable dataTypically local comparables are preferred; however, where local comparables are not available, regional comparables (i.e., comparables located on the same continent as the taxpayer) may be used.

In preparing and presenting comparable data, financial data needs to be provided on a single-year basis, without the use of multiple-year data. The CRA has a general preference for weighted averages, medians, and specific points within a range, depending on each individual case. The TNMM is used in many cases, with the operating margin or the total cost plus being the most commonly used profit level indicators (PLIs). There are no specific requirements or preferences with regards to pooling or averaging of financial data. As such, either method may be used, depending on the number of available comparables.

There is no formal or mandatory guidance provided regarding adjustments to comparable data. Such adjustments are optional and are likely to be accepted by the CRA where they enhance the comparability of the information with relation to the tested party.

Transfer pricing methodsCanadian transfer pricing methods are aligned with the OECD Transfer Pricing Guidelines. The traditional methods (comparable uncontrolled price (CUP), cost plus and resale) are to be applied in preference to the transactional profit methods (residual profit split, profit split and TNMM). This information is included in Canadian Information Circular IC-87-2R, along with guidance on usage of other methods (where the specifically identified methods are not applicable, such as qualifying cost contribution arrangements). The CRA is of the view that, in many cases, the practical application of the CPM does not meet the degree of comparability required by the OECD Guidelines for the application of the TNMM.

Advance Pricing Agreements (APAs)Canada has a formal APA program. Most taxpayers with cross-border transactions are permitted to apply to the program, however, taxpayers must be accepted into the program by the CASD. Following an APA pre-file meeting with the CASD, taxpayers may make an application for


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an APA; taxpayers are only accepted into the APA program following a review of their submission.

There were 39 pre-filing meetings with the CASD during the year 2007-2008, and 22 applicants were accepted into the APA program having initiated a pre-filing meeting in prior years. Of the APA requests received during the year 2007-2008, 80% were bilateral APA requests, 18% were unilateral APA requests and 2% were multilateral APA requests. The average duration of the APA process is over two and a half years for bilateral APAs and up to one year for unilateral APAs. Top treaty partners that have concluded bilateral APAs with Canada are the United States, Japan and the United Kingdom.

Additionally, during the year 2007-2008, 71 cases of double taxation were accepted into the mutual agreement procedure (MAP) program and 49 cases were resolved under MAP. The average duration of such proceedings is up to 21 months for requests related to CRA-initiated adjustments and 38 months for requests where foreign jurisdictions initiated the adjustment. Approximately 8% of cases in the past year had unresolved double taxation.

Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is measured based on taxpayer compliance with the Income Tax Act and Canadian tax conventions, which is the overall goal of the CRA.

Transfer pricing disputes

In the context of disputes, there are approximately 129 ongoing cases in MAP. Taxpayers seeking resolution in these cases are mainly in sectors such as automotive, transportation, computer and electronics and natural resources. For the year 2007-2008, the treaty partners involved in a majority of these cases are the United States, Australia, Japan and the United Kingdom.

There has also been a small number of transfer pricing cases before the courts in the past years; however, the majority of disputes are resolved at the CRA’s audit, administrative appeals, or Competent Authority levels.

Current influences on transfer pricing

While some policy changes may be witnessed in the coming years, these changes are expected to be largely consistent with OECD guidance.

Likely trends in transfer pricing activityThe CRA expects to place greater emphasis on transfer pricing compliance measures and dispute resolution over the next two years.


Colombia

Resources the taxing authority is devoting to transfer pricingThe Dirección de Impuestos y Aduanas Nacionales (DIAN) administers taxes in Colombia. Within the DIAN, transfer pricing reviews are carried out by a centralized unit that consists of 16 FTE resources currently involved in transfer pricing examinations. There has been an increase in the number of resources involved in transfer pricing examinations, from approximately 4 to 16 over the last two years.

In terms of background, the resources involved in transfer pricing reviews consist of (in order of prevalence) economists, lawyers and accountants, while the other resources are business administrators by background. All of these resources are specialized in transfer pricing.

The DIAN is working together with two external advisors in order to decentralize the audit process by next year. A consultant from the United States Internal Revenue Service (IRS) is also working with the DIAN, giving technical support to local tax administrations. This arrangement is anticipated to last for the next two years.

Industry focusTransfer pricing audits in Columbia currently focus on taxpayers from the mining and metals, oil and gas, and pharmaceuticals industries, as well as those trading in other basic products.

The profitability of local taxpayers is the main factor driving the selection of industries for particular focus.

The selection of industries under specific transfer pricing focus is not widely communicated to taxpayers.

Transactions involving taxpayers in the mining industry currently represent about 50% of the caseload of transfer pricing reviews.

Geographic focusThe DIAN does target companies in certain jurisdictions for transfer pricing reviews. Typically, perceived low-tax jurisdictions are reviewed in the scope of audit.

Practical considerations are the key drivers for certain jurisdictions being selected by the DIAN. In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties are:

• Panama

• Cayman Islands

• Anguilla

• Switzerland


Types of transactions under scrutinyThe following transactions are currently the focus of DIAN for transfer pricing review: intra-group services, financial transactions (loans and financial


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services from Colombia to related parties abroad), pharmaceuticals distribution, flower exports, coal exports and software licensing.

Transfer pricing penaltiesColombia has a very strict transfer pricing penalty regime, which includes high penalties for noncompliance with formal requirements. There are processes in place to ensure consistent application of transfer pricing penalties in the jurisdiction. Over the last two years, penalties were applied.


Ecuador

Resources the taxing authority is devoting to transfer pricingThe Servicio de Rentas Internas (SRI) administers taxes in Ecuador. Within the SRI, transfer pricing reviews are carried out by decentralized regional resources under the direction of a national coordination team. There has been an increase in the number of FTE resources involved in transfer pricing examinations, from approximately 9 to 22 over the last two years. Four transfer pricing resources are based in the central unit. The number of transfer pricing resources is expected to increase to 27 over the next two years.

In terms of background, the resources involved in transfer pricing reviews consist of (in order of prevalence) accountants (locally referred to as “commerce engineers”), economists and lawyers. Four out of the 22 resources currently involved in transfer pricing examinations are transfer pricing specialists. The background of resources currently involved in transfer pricing reviews has changed in the recent years, due to an increase in those with an economics background.

Industry focusTransfer pricing audits in Ecuador currently focus on the pharmaceutical, primary agricultural products, fishing and cardboard production industries. The factors driving the selection of industries for focus are significant business activity in Ecuador and repeated losses for several years.

The selection of industries under specific transfer pricing focus is widely communicated to taxpayers. This list of industries is reviewed annually.

Geographic focusThe SRI specifically targets companies located in certain jurisdictions. Typically, perceived low-tax jurisdictions are reviewed in the scope of the audit.Legislative direction (i.e., a formal blacklist of specific jurisdictions) is the key driver for certain jurisdictions being selected by the SRI.

Types of transactions under scrutinyThe sale of tangible goods (representing 80% of the current caseload) and intra-group services (approximately 20% of the current caseload) are currently the focus of the Directorate of Taxes for transfer pricing review.

Transfer pricing penaltiesEcuador has a specific transfer pricing penalty regime. There are processes in place to ensure the consistent application of transfer pricing penalties in the jurisdiction. Over the last two years, penalties were applied in up to 25% of cases where transfer pricing adjustments were issued.

The transfer pricing penalty regime establishes a fixed penalty amount for companies failing to comply with documentation and reporting


requirements (e.g., not filing information, not meeting deadlines or filing inaccurate information). This penalty may be up to US $15,000.

It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersA transfer pricing audit is instigated by a central decision-making body. Various considerations are taken into account in determining which taxpayers to audit, including (ranked in order of importance):

• The outcome of a risk assessment by the SRI

• The nature of related-party transactions undertaken by the taxpayer

• The outcome of customs



Indirect and customs taxThe transfer pricing enforcement resources work in an integrated way with indirect tax specialists as an integral risk concept is applied. However, there is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe SRI prefers local comparables but will accept regional comparables if they are available and if the taxpayer is able to demonstrate that it represents a high degree of comparability with the tested party.

In preparing and presenting comparable data, there are no specific requirements in relation to the number of years of financial information, the use of simple versus weighted averages, pooling or averaging of financial data, or the method for determining the appropriate profit-level indicator. However, there are strict requirements for the method for calculating the allowable arm’s length range (in accordance with the local legislation).

Optional guidance is provided by the SRI in relation to financial adjustments made to the comparable data.

Transfer pricing methodsEcuador follows a hierarchy of transfer pricing methods. Local regulations establish that only the six methods established in the OECD Guidelines are applicable. The CPM and full profit split method are considered to be inappropriate methods by the SRI.

Advance Pricing Agreements (APAs)Ecuador has no formal APA program. The local law outlines the possibility of APA procedures and prescribes



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that regulations will be issued by the tax administration on the application process of APA. However, the relevant regulations have not been issued. Therefore, no taxpayers have started consultation for an APA. Generally, the procedures require taxpayers to satisfy inquiries relating to the previous two taxable years from the tax administration, after which taxpayers may propose, through consultation with the tax administration, applicable prices for the APA Term. The APA Term includes the year preceding the APA application, the year of the APA application and the two tax years following the application.


The SRI measures the effectiveness of the transfer pricing review activities it undertakes by measuring the percentage of review cases where an adjustment is sustained on appeal.


In the context of disputes, there is one ongoing case in litigation and three pending cases undergoing domestic appeals (preceding court action). Tax havens are frequently involved in disputes. Taxpayers from the pharmaceutical, agricultural products and oilfield services industries are facing disputes with the SRI.

Current influences on transfer pricing The transfer pricing environment in Ecuador is responsive to OECD initiatives.The SRI expects best practices to be applied.

The SRI expects the global economic slowdown to have a deep impact on the inter-quartile ranges of several industries; thus, the slowdown renders most operations incomparable if comparison is based on previous (not same) year data (based on dates where filing is required). The administration may be open to proposals from taxpayers to adjust methodologies.

Likely trends in transfer pricing activityThe SRI expects yield targets (i.e., an increase in tax take based on audit activity), compliance measures and dispute resolution (ranked in order of prevalence) to be areas of increased focus over the next two years.


Resources the taxing authority is devoting to transfer pricing The Ministry of Finance, the Tax Administration Service (SAT), the Large Taxpayers Administration and the Transfer Pricing Central Administration are responsible for administering taxes in Mexico. Transfer pricing reviews are carried by the Transfer Pricing Central Administration (TPCA), a unit within the SAT. The TPCA has autonomy to lead transfer pricing audit efforts. The TPCA is also responsible for APAs and MAPs.

There has been a significant increase in the number of FTE resources involved in transfer pricing audits since 2008. In terms of background, the resources involved in transfer pricing reviews consist of economists, lawyers and accountants, and they all specialize in transfer pricing. The Mexican tax authority anticipates an increase in the specialization and number of resources over the next few years.

Industry focusAlthough the SAT has specific programs to audit the chemical and pharmaceutical industry and the automobile industry, the sectors that are currently experiencing the greatest number of transfer pricing audits are the hospitality, distribution, financial services, manufacturing (maquiladora) and electronic products industries. The amount of headquarter charges, profitability of the local taxpayer and business restructuring activity are some of the factors driving the selection of companies for review.

Geographic focusAlthough all transactions with entities resident in low-tax jurisdictions are presumed to be with related parties and thus subject to particular transfer pricing scrutiny, the Mexican tax authorities do not focus on specific jurisdictions for transfer pricing audits.

Types of transactions under scrutinyTranfer pricing reviews by the TPCA currently focus on business structuring transactions, IP transactions, headquarter (prorated) charges, financial transactions and cost sharing/cost pooling arrangements.

Transfer pricing penaltiesMexico does not have a specific transfer pricing penalty regime. The general penalty regime for income misstatements is applied. However, the penalties may be reduced if the taxpayer complies with the transfer pricing documentation obligations. Legislative and administrative requirements, as well as the Courts of Appeal, ensure the consistent application of transfer pricing penalties in Mexico.

Audit triggersTransfer pricing audit targets are selected by the Large Taxpayers General Administration at the SAT. A variety of factors are taken into account in


Mexico*


determining which taxpayers to audit, including:

• The outcome of a risk-based assessment by the Large Taxpayers General Administration


• Whether there is evidence of business restructurings, prorated charges or IP migration

• The volume of related-party transactions undertaken by the taxpayer


• The outcome of value-added tax (VAT), employment, customs or other indirect tax reviews

Indirect and customs taxTransfer pricing enforcement resources in Mexico collaborate with the indirect tax specialists and there is a formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe Mexican Income Tax Law (MITL) specifically states that transactional comparables and traditional transactional transfer pricing methods should be considered before any other method. If transactional comparables are not in existence, the Mexican tax authorities would accept comparable

company data, with a marked preference for local comparables. Since the markets in Canada, the United States and Mexico are considered similar, comparables from these jurisdictions are preferred where local comparables are not available. In practice, US comparables are widely accepted.

The TPCA generally expects only one year of financial data for the tested party. However, multiple years of financial data consistent with the business cycle can be used for comparable transactions or companies if a business cycle exists and can be documented. The inter-quartile range is used for calculating the arm’s length range. The TPCA generally accepts the use of both simple averages and weighted averages when analyzing the financial data.

The TPCA typically accepts working capital adjustments to comparable data and would consider the applicability of other financial adjustments if proper explanation on how such adjustments improve comparability is provided and documented.

Transfer pricing methodsThe MITL establishes that in the analysis of related-party transactions, the transfer pricing methods should be applied in the order mentioned in Article 216 as follows:

• CUP

• Cost plus


• Resale price

• Profit split

• Residual profit split

• TNMM

The CUP method described in Section I of Article 216 shall be applied firstly, and only when said method is not appropriate to determine whether the operations were performed at arm’s length as indicated in the Transfer Pricing Guidelines for multinational enterprises (MNEs) and Tax Administrations referred to in the final paragraph of Article 2151 shall the other methods described above be used.

The MITL specifically states that OECD Guidelines could be used to interpret the transfer pricing provisions whenever the guidelines do not contravene with what is explicitly stated by the local law or in the tax treaties signed by Mexico. As such, other transfer pricing methodologies can be used if they are adequately supported by the OECD Guidelines.

Advance Pricing Agreements (APAs)Mexico has a formal APA program. The APA is an option applied to the taxpayer in the Federal Tax Code (Código Fiscal de la Federación, article 34(a)). A unilateral APA applies for a maximum period of five years, which includes one year before the submission of the APA and a further three additional years after the submission of the APA.

This period may be longer under an International tax treaty (the period is ten years in cases involving the United States). APA applications are submitted to the same tax authority that reviews taxpayer compliance with transfer pricing legislation. APA applications should be concluded in a maximum number of eight months. The decision of the tax authority can be reviewed once by a superior tax authority before a Court of Appeal action is launched.

There are approximately 30 APA applications in process currently. Most of them are bilateral with the United States. The average length of time required to complete an APA process is eight months. However, in practice, it might take up to two years.

Yield/performance of transfer pricing reviews The Mexican tax authorities measure the effectiveness of transfer pricing review activities by the increased tax yield, the percentage of review cases where an adjustment is made to taxpayer income, the percentage of review cases where an adjustment is sustained on appeal, the percentage of taxpayers assessed as high risk and the percentage of taxpayers in compliance with documentation requirements.


Current disputes involve taxpayers in the following industries: automotive, pharmaceuticals, consumer products and electronics.

1 Transfer Pricing Guidelines for Multinational Companies and Tax Administrations approved by the Board of the Organization for Economic Cooperation and Development in 1995, or those substituting for said Guides (to the extent that they are congruent with the provisions hereof and with treaties entered into by Mexico) shall be applicable for interpretation of the provisions of this Chapter.


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Current influences on transfer pricing The transfer pricing environment in Mexico is responsive to OECD initiatives and the implementation of centralized business and tax models. The Mexican tax authorities continuously exchange information with the OECD authorities to drive efforts in line with the best international practices.

Likely trends in transfer pricing activityIt is believed that the Mexican tax authorities expect compliance measures and yield targets (i.e., an increase in tax take based on audit activity) to be areas of increased focus over the next two years.


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Resources the taxing authority is devoting to transfer pricing The National Superintendence of Tax Administration (SUNAT) administers taxes in Peru. Within the SUNAT, transfer pricing reviews are carried out by two teams devoted to transfer pricing. One team is located in the Main Taxpayers National Office, while the other belongs to the Lima Regional Office. In terms of background, the transfer pricing resources are mainly accountants.

Industry focusSUNAT currently focuses on the banking and capital markets, mining and metals, oil and gas, and telecommunication industries for transfer pricing audits. Significant business activity in Peru appears to be a key factor driving the selection of an industry for particular focus. The selection of industries under specific focus from a transfer pricing perspective is not communicated to taxpayers.

Transfer pricing penaltiesPeru does not have a specific transfer pricing penalty regime, but penalties can be imposed on transfer pricing based on the existing general penalty regime contained in the Tax Code. Peru’s penalty regime is based on objective criteria and is defined in local regulations, which ensures that its application is consistent throughout the country.

Audit triggersA transfer pricing audit is determined by certain risk variables; however, selection for audit is part of the SUNAT’s broader strategy to focus on assessing the top 10,000 taxpayers.

Comparable dataThe SUNAT does not impose legal limitations on the use of local, regional or global comparables. No guidance is available regarding the application of financial adjustments to the comparable data.

Transfer pricing methodsThere is no formal hierarchy between transfer pricing methods; rather, the local regulation supports the use of the “best method” rule. The law supports the following methods: CUP, resale price, cost plus, profit split, TNMM and residual profit split. No guidance on the acceptability of other methods is provided.

Likely trends in transfer pricing activityIt is anticipated that compliance measures will be of increased focus for the SUNAT over the next two years.

Peru*


United States

Resources the taxing authority is devoting to transfer pricing The IRS administers taxes in the United States. Generally, while some administrative and coordination functions are centralized, IRS transfer pricing resources are largely decentralized. All international taxation matters, including transfer pricing, are primarily handled by International Examiners (IEs), supported by economists at the audit and examination level. All IEs work for one of the five Industry Directors. Industry Directors are responsible for the direction and assignment of the work done by IEs.

The IRS has established a Transfer Pricing Council to collect information, drive consistency and recommend changes in transfer pricing regulations or legislation, as necessary. The Transfer Pricing Council is composed of 10 representatives from the Large and Mid-Size Business (LMSB) Division and two members from Associate Chief Counsel (International). This group is composed of IRS subject matter experts and key IRS decision-makers to establish a coordinated approach to transfer pricing enforcement strategies and policies. The group evaluates the strategic decisions that the IRS has to make in transfer pricing cases, what resources are available to the IEs and how those resources can be aligned with the IRS’s needs.

As of March 2009, the IRS had approximately 475 IEs (mostly accountants), supported by approximately 120 economists and

10 attorneys. The economists and attorneys are transfer pricing specialists. The attorneys belong to the office of the Associate Chief Counsel (International) and additionally engage in providing advice to taxpayers and drafting administrative guidance. Approximately 33 specialist transfer pricing FTEs are dedicated to the APA program, working almost exclusively on resolving transfer pricing issues, though generally not examinations.

While the number of IEs has remained largely consistent, the number of economists has increased by 50% over the last two years. The existing level of resourcing is expected to grow in the next two years, subject to attrition due to retirement and the IRS’s ability to replace such individuals. The APA program is also expected to hire additional attorneys, program analysts and economists. The IRS places emphasis on timely training so current and incoming transfer pricing resources have a strong background in all international issues, including transfer pricing.

Industry focusThere is no formal program prioritizing the review of taxpayers in a particular industry or industries. Although the IRS does not scrutinize by industry, the IRS organizes its resources by reference to industry groupings. The IRS is organized under five broad industry groups.

Recently, most transfer pricing audits arise within the following two of these


five groups: the communications, technology and media industry group and the retailers, food, pharmaceutical and healthcare industry group. The IRS has also made efforts that resources, such as IEs, focus on a particular industry so individuals may attain greater expertise relevant to that industry. However, the IRS does widely communicate specific issues that the IRS has identified through risk analyses, and the importance of IP in the industry is a risk factor. Furthermore, the LMSB Division adopted an “Issue Tiering” strategy in 2006 to ensure that high-risk compliance issues are properly addressed and treated consistently across the division for all LMSB taxpayers involved in the issue.

Geographic focusGeographic considerations are not drivers for the selection of taxpayers for review. The top five jurisdictions (in order of prevalence) of counterparties in MAP cases pending before the US competent authority are:

1) Canada2) Japan 3) Germany4) The United Kingdom 5) India

Types of transactions under scrutinyIssue Tiering provides the LMSB Division a consistent framework for identifying, prioritizing and addressing significant compliance risks in a nationally

coordinated manner. The “tier issues” are considered higher-risk transactions and issues that represent the LMSB Division’s highest compliance priorities and expected focus of examinations. The Tier I and II issues include the transfer of intangibles, cost sharing arrangements, mixed service costs and post-IRC § 936 structures and transactions. IRC § 936 relates to the Puerto Rico and possession tax credit that was phased out in 2005, resulting in numerous intangibles transactions as taxpayers undertake restructuring. Additionally, financial transactions and the inclusion of stock-based compensation as part of costs are areas of interest for the IRS.

Transfer pricing penaltiesUS law provides for the imposition of specific transfer pricing penalties. IRC § 6662(e) and (h) provide for a 20% addition-to-tax penalty for substantial valuation misstatements and a 40% addition-to-tax penalty for gross valuation misstatements, based on certain objective criteria as defined in the statute. The IRS has a Transfer Pricing Penalty Oversight Committee, which is an initiative across functional groups, to assure consistent application of the transfer pricing penalty provisions. There are also standard procedures in place, as documented in the Internal Revenue Manual, so proposed penalties go through a review process before being considered by the Transfer Pricing Penalty Oversight Committee.


Over the last two years, penalties have been applied in approximately 20% to 40% of cases where transfer pricing adjustments were issued. Where penalties are imposed, the US law imposes a penalty of 20% or 40% of the underpayment of tax depending on the magnitude of the transfer pricing adjustment. The IRS expects the incidence of penalties to increase in the next two years as a result of it expanding the number of taxpayers being reviewed and conducting examinations where taxpayers may not have the same level of experience or familiarity with the administrative guidance relevant to cross-border transactions. The IRS expects to be able to conduct more examinations as a result of electronically filed income tax forms, which will also allow for better risk assessments.

Audit triggersLocal field offices and trained IEs select taxpayers for international examinations based on risk assessments. The IRS typically reviews the corporate income tax return, or other returns filed by taxpayers pertaining to transactions with foreign corporations, for relevant information that may trigger transfer pricing audits. The IRS has a compliance initiative project to monitor certain taxpayers continuously. The selection of taxpayers is based on various considerations such as:

• ►The profitability or persistent losses of the taxpayer


• The outcome of the IRS’ risk-based assessment

• ►The nature and volume of the taxpayer’s related-party transactions

• ►A standard audit cycle or program


Indirect and customs taxThe work of IRS transfer pricing enforcement resources is not integrated with that of indirect tax specialists. As such, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes (except in the case of a taxpayer’s basis or inventory cost for property imported from related persons).

Comparable dataIn applying the “best method” rule, comparability and reliability are critical factors that must be taken into account when determining comparable data. Typically, local country comparables are preferred. However, if good local comparables are not available, regional comparables could also be used if they provide reliable results. The IRS regulations provide guidance on various aspects relevant to preparation and presentation of comparable data, such as the number of years of financial data to be used, the method for calculating the arm’s length range and the method for determining the appropriate profit level indicator.


Advance Pricing Agreements (APAs)The United States has a formal APA program, accessible to all taxpayers, subject to the taxing authority’s discretion.

The APA team received approximately 108 APA applications from taxpayers annually in the past few years, and at the end of the year 2008, there were 272 cases in the inventory, of which 161 were in the active inventory at the following stages:1

APA applicationsBilateral APAs at stage of mutual agreement

111

Bilateral APAs at due diligence phase

117

Unilateral applications in process

44

The average duration of the APA process during the year 2008 was 21.5 months for unilateral APAs and 38.1 months for bilateral APAs. On average, in the past three years, approximately 47 bilateral APAs were concluded annually. Top treaty partners that have concluded bilateral APAs with the US are Canada, Japan and Germany.

Additionally, in the past three years, approximately 217 cases of double taxation have been resolved annually under the competent authority procedure. The average duration of such proceedings (including bilateral APAs) was up to 731 days during the year 2008.2

The number of years of financial data to be used in preparing and presenting comparable data varies depending on the method adopted for determination of the arm’s length range. For instance, in the case of transactional methods, the default period is one year. For profit-based methods, such as the CPM, the default requirement is a multiyear analysis, but the number of years depends on each case.

In the context of pooling versus averaging of financial data, it is appropriate to note that, in recent years, the APA program issued training materials that suggest that the pooling of financial data is appropriate in only limited circumstances. However, these training materials are not official policy or binding on the IRS or taxpayers. Financial adjustments are not mandatory. The regulations allow such adjustments, provided they enhance the comparability and the reliability of the arm’s length analysis, of which working capital adjustments are the most common.

Transfer pricing methodsUS transfer pricing regulations follow the “best method” rule, which requires taxpayers to adopt the transfer pricing method that provides the most reliable arm’s length remuneration for controlled transactions. The regulations do not recognize any hierarchy of methods. If the specified methods do not yield reliable results, the taxpayer is allowed to use an unspecified method to determine an arm’s length remuneration.

1 See Announcement 2009-28 (29 March 2009), “Announcement and Report Concerning Advance Pricing Agreements.”

2 U.S. Competent Authority statistics for 2004-08 (released 10 December 2008 by the Internal Revenue Service). 17 Tax Mgmt. Trans. Pricing Rep. 640 (18 December 2008).



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Approximately 578 applications were in progress as at the end of the year 2008.3 The case processing time was higher during the year 2008 primarily due to shortage of resources.

During the five years 2004 to 2008, taxpayers received full relief in 90.26% of instances and partial relief in an additional 4.45% of instances.4 During that same period, from the perspective of whether competent authority relief was granted, only 5.36% of taxpayers received no relief and their cases were unresolved by competent authority.5

Yield/performance of transfer pricing reviewsThe IRS does not have data on the yield or performance of transfer pricing reviews. However, the IRS has observed that taxpayers make good efforts to have adequate transfer pricing documentation.


In the context of disputes, there were approximately 10 transfer pricing related cases pending6 in litigation and 256 allocation cases and 183 APA cases pending in MAP during the end of the year 2008. The treaty partners in most of these cases were Canada, Japan and Germany. The United States recently entered into treaties with provisions for arbitration with Belgium, Canada and Germany. The process for arbitration is finalized for Germany and is being finalized for the other countries, but there are no cases pending yet.

Current influences on transfer pricing There have not been any changes yet in terms of policies or practices as a result of the economic downturn, particularly because the affected years are not yet under examination. The IRS is considering whether additional guidance is necessary relating to the impact of the downturn. The IRS APA program has an informal committee that considers methods that may be used consistently across taxpayers in similar factual circumstances and may be reliably applied for current and prospective APA-covered tax years.

The Treasury and the IRS are very active in the OECD working party on transfer pricing. The Treasury regulations are also aligned with the OECD Transfer Pricing Guidelines.

Likely trends in transfer pricing activityOver the next two years, the IRS expects to place greater emphasis on transfer pricing compliance measures, with the objective of developing automated risk assessment tools, and transfer pricing dispute resolution via the competent authority assistance route.

3 U.S. Competent Authority statistics for 2004-08, Section 1 (released 10 December 2008 by the Internal Revenue Service).

4 U.S. Competent Authority statistics for 2004-08, Section 3 (released 10 December 2008 by the Internal Revenue Service).

5 Ibid.6 “Transfer Pricing Cases

Pending in the US,” 17 Tax Mgmt. Trans. Pricing Rep. 285 (31 July 2008).



Resources the taxing authority is devoting to transfer pricing The Servicio Nacional Integrado de Administración Tributaria y Aduanera (SENIAT) administers taxes in Venezuela. Within the SENIAT, transfer pricing reviews are carried out by a transfer pricing special unit which is part of the National Income Tax Direction. This unit analyzes transfer pricing as part of income tax audits and develops the transfer pricing strategy to be followed in the audits.

There has been an increase in the number of full time equivalent (FTE) resources involved in transfer pricing examinations, from approximately 5 to 15 over the last few years. All of the transfer pricing resources are located at the central transfer pricing unit. The number of transfer pricing resources is expected to increase to 50 over the next five years.

In terms of background, all 15 transfer pricing resources have a strong technical knowledge of transfer pricing as they have received training in other countries and from various international organizations. The SENIAT expects to build more transfer pricing audit experience in specific industries.

Industry focusVenezuelan transfer pricing audits currently focus on the automotive, mining and metals, oil and gas, and pharmaceuticals industries. Significant business activity in Venezuela and

profitability are the factors driving the selection of industries for particular focus. The selection of industries under specific focus from a transfer pricing perspective is widely communicated to taxpayers and has been part of the “Zero Evasion Plan.”

Types of transactions under scrutinyKey transactions forming the current caseload of transfer pricing reviews (ranked in order of prevalence) are:



• Tangible goods

Transfer pricing penaltiesVenezuela does not have a specific transfer pricing penalty regime. The general tax penalty regime is applied. The transfer pricing penalty system is not complex, and compliance is monitored by the SENIAT. The average penalty rate depends on the development of the transfer pricing assessment. The penalty is 10%, if the taxpayer accepts the assessment at the time it is notified. However, the penalty level rises from 25% to 200% plus late payment interest, if the taxpayer decides to contest this assessment and is unsuccessful. The approximate median of penalties applied by the SENIAT is 112.5%. It is anticipated that the assessment of penalties will increase due to the augmentation of transfer pricing audits in the next two years.

Venezuela*


Audit triggersInstigation of a transfer pricing audit is undertaken by a central decision-making body. A variety of considerations are taken into account in determining which taxpayers to audit, including (ranked in order of importance):

• The outcome of a risk-based assessment by the SENIAT

• Sudden changes on the profitability of the local taxpayer from one fiscal year to another fiscal year



• Customs or other indirect tax reviews

Indirect and customs taxThe SENIAT is an integrated tax and customs administration. As such, it is more than likely that both Income Tax Direction and Customs Direction share relevant information regarding transactions between related parties. In fact, the SENIAT announced joint transfer pricing and Customs Value reviews this year. According to the Venezuelan Customs Value and VAT rules, the transfer price has to be an arm’s length price. As such, the same transfer price needs to be used for corporate (direct) tax and indirect tax purposes.

Comparable dataVenezuelan transfer pricing rules allow the use of local or regional comparable information, although the SENIAT prefers regional comparables rather than local comparables due to the lack of publicly available, local comparable data. The main condition for using either local or regional data is that the information is reliable and publicly available at the time of the transaction.

In preparing and presenting comparable data, there are no specific requirements in relation to the number of years of financial information required, the use of simple versus weighted averages, pooling or averaging of financial data, the method for determining the appropriate profit level indicator or the method for calculating the allowable arm’s length range. The SENIAT and taxpayers use the OECD Transfer Pricing Guidelines in case of discrepancies on these issues.

No guidance is provided by the SENIAT in relation to financial adjustments to be made to the comparable data. Taxpayers may apply financial adjustments to comparable data that improve comparability. It is also mandatory to explain comparability in the transfer pricing report.

Transfer pricing methodsVenezuelan law sets out a hierarchy of transfer pricing methods. The CUP method is the preferred method and is mandatory if it can be applied. The


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other methods can be applied if it is not possible to apply the CUP method. The Venezuelan transfer pricing rules indicate that the only acceptable methods are the CUP method, the resale price method (RPM), the cost plus method, the TNMM, the profit split method and residual profit split method.

Advance Pricing Agreements (APAs)Venezuela has a formal APA program, which was included in the Organic Tax Code in 2000. Taxpayers have right of access to APAs in Venezuela. However, the SENIAT has not yet received any APA applications. According to the Venezuelan APA rules, the average length of time required to complete an APA process (both for bilateral and unilateral APAs) is one year.

Current influences on transfer pricing The transfer pricing environment in Venezuela is responsive to OECD initiatives. Transfer pricing policy changes will be made in accordance with changes to the OECD Transfer Pricing Guidelines as they arise. A provision in Venezuela’s transfer pricing rules indicates that if the OECD changes its guidelines, the Venezuelan rules will apply the new OECD rules. The SENIAT does not anticipate a change in policy or practice based on any of the stimulus packages recently announced in an attempt to combat the global financial crisis.

Likely trends in transfer pricing activityThe SENIAT expects an increase in tax revenue based on transfer pricing audit activities and the increase of joint audit processes between customs and transfer pricing (income tax) to be areas of increased focus over the next two years.


Surveyed countries Asia Pacific


Australia

Resources the taxing authority is devoting to transfer pricing Within the Australian Taxation Office (ATO), coordination of the transfer pricing program is the responsibility of the Transfer Pricing Practice (TPP). There are approximately 12-15 FTEs in the TPP. The TPP takes the lead role in negotiating MAPs and bilateral APAs, in representing Australia at Working Party 6 (Taxation of Multilateral Enterprises) at the OECD, in developing the ATO’s view in respect of significant transfer pricing and profit reallocation issues and in providing specialist input in and strategic oversight of transfer pricing litigation, audits, APAs and risk reviews.

There are approximately 70 to 75 full time equivalents (FTE) resources supporting the TPP. These include approximately 25 economists and 50 field officers; finally, the TPP is also supported by a growing number of field auditors that are receiving specialised training. Some expansion is likely over the next two years.

In terms of background, approximately 40% of the ATO’s transfer pricing resources are registered accountants, 30% are economists and 20% are lawyers. Approximately 40% of the resources are transfer pricing specialists with a strong technical background in transfer pricing issues. The field staff involved in transfer pricing have been committed to a two-year training program, and they are spending an increasing proportion of their time

on transfer pricing work to build their expertise in this area.

Industry focusThere is no formal program for prioritizing any particular industry or industries for review, but in practice, factors pertaining to the industry such as whether the activities of the industry are significant within the country, the profitability of the industry, and low-tax paying industries, are taken into account in identifying taxpayers for scrutiny. The industries the ATO is currently focusing on include the automotive, banking and capital markets, consumer products, mining and metals, and pharmaceuticals industries.

Geographic focusGeographic considerations are not generally drivers for the selection of taxpayers for review. Transactions between Australia and its major trading partners (such as Japan, the United States, the United Kingdom, New Zealand and Korea) represent the majority of the current caseload of transfer pricing reviews. However, where transactions are with companies in low-tax jurisdictions, this can be a factor in whether the ATO reviews these arrangements.

Types of transactions under scrutinyThe ATO has specifically identified the following transactions that are currently


the focus of transfer pricing reviews (in order of prevalence as per the current caseload of transfer pricing reviews):

• Tangible goods

• IP-related transactions (e.g., royalties, licensing)


• Supply chain restructurings

• Financial transactions

The ATO has additionally identified stock-based compensation as an area of interest.

Transfer pricing penaltiesThe ATO has the power to impose transfer pricing penalties. The ATO has put in place administrative requirements and published rulings to ensure consistent application of the transfer pricing penalty provisions. The penalty provisions do not apply in cases where losses are reduced or eliminated and the assessment remains nontaxable. Taxpayers have objection and review rights in relation to penalties.

Over the last two years, penalties have been applied in 25% to 50% of cases where transfer pricing adjustments were assessed. Where penalties are imposed, they generally range up to 25% of the additional tax, in addition to a general interest charge of 12% to 14%. This approach to penalties is not expected to change in the next two years.

Audit triggersTransfer pricing audits are generally instigated centrally and may initially involve either a Comprehensive Risk Review (CRR) or a Transfer Pricing Record Review (TPRR). That is, a transfer pricing audit generally involves a process. However, the selection of the taxpayer to embark on such a process and the scope of the transfer pricing audit that may result from this process are typically driven by various considerations such as:


• Whether there is evidence of business restructuring

• The outcome of a risk-based assessment by the ATO


The ATO relies on related-party disclosures made by taxpayers, along with the income tax return (Schedule 25A) supplemented by third-party data, to identify particular transfer pricing risks in the taxpayer population.

Indirect and customs taxThe work of Australian transfer pricing enforcement resources is not integrated with that of indirect tax specialists. As such, there is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes. Further, where the ATO makes a transfer pricing adjustment to


reduce the cost of goods sold, there will not necessarily be an adjustment to the amount of customs duty paid.

Comparable dataTypically, local country comparables are preferred. Foreign comparables can be accepted only if they are from a comparable economy and reliable financial data is available.

In preparing and presenting comparable data, generally, financial data for four years needs to be used. The use of the inter-quartile range is dependent upon reliability of data. Weighted average is preferred to simple average. Operating margin is the generally PLI. The pooling method is acceptable in cases where there is limited data or data is missing for some of the years.

There is no formal or mandatory guidance provided as to adjustments to comparable data. Such adjustments are optional and will likely be supported by the ATO where they enhance the comparability of the information with the tested party.

Transfer pricing methodsAustralia does not identify any specific hierarchy of transfer pricing methods. In addition to the methods outlined in the OECD Transfer Pricing Guidelines, the ATO also recognizes cost contribution arrangements and a 7.5% safe harbor return for non-core services.

Advance Pricing Agreements (APAs)Australia has a formal APA program, which is accessible to taxpayers subject to the ATO’s discretion.

The APA team receives approximately 20 to 30 APA requests from taxpayers per year, and approximately 65 applications were in process as at 30 June 2008. Bilateral or multilateral APAs represent 35% of the current caseload. The average duration of the APA process is approximately 8 months in the case of unilateral APAs and 16 months in the case of bilateral APAs. Top treaty partners that have concluded bilateral APAs with Australia are Japan, the United States, the United Kingdom and New Zealand.

Additionally, approximately six to eight cases of double taxation are resolved annually under the competent authority procedure. The average duration of such proceedings could range up to two years.

During 2007, the ATO commissioned an independent third party to review and evaluate the ATO’s APA program and provide recommendations to improve the effectiveness and efficiency of the program. The review involved seeking feedback from a variety of stakeholders, including tax office personnel, taxpayers, advisors and industry groups, through surveys, group forums, interviews and written submissions. The findings of the review and recommendations received are currently being evaluated by the ATO,



Paul [email protected]+612 9248 4952

David [email protected]+612 9248 4885

and a process for co-design of the APA program with industry is underway.


Taxpayers who have international related-party transactions are required to report them in a Schedule 25A, together with their income tax returns. The ATO has tracked the effective tax rate of Schedule 25A lodgers to the remaining population of taxpayers, and the results suggest that the two populations are starting to converge. The ATO is exploring the possibility of co-designing a balanced scorecard reporting process to monitor the performance of the APA program, as recommended in the APA Review.


Two cases are in litigation.

Current influences on transfer pricing The current global financial crisis and the implementation of centralized business and tax models have impacted the Australian transfer pricing environment. In particular, given the significant inbound investment and corporate income tax that is derived from foreign-based multinationals, the ATO will be alert to transactions and arrangements that have the potential to erode this tax base.


* Country chapter completed based on the insights of Ernst & Young professionals and publicly available information only, including the BNA Interview: “Chinese Official Discusses New Transfer Pricing Regulations," BNA Tax Management Transfer Pricing Report (Vol 17, No. 20), pages 771-775.

Resources the taxing authority is devoting to transfer pricing The Anti-Avoidance Division of the International Tax Department at the State Administration of Taxation (SAT) is responsible for the administration of transfer pricing issues in China. The anti-avoidance work, including the administration of contemporaneous documentation, is mostly carried out by all of the local tax bureaus.

The tax bureaus are increasing training for anti-avoidance tax professionals, including short-term training, medium-to long-term training, and domestic and overseas training. In addition, the tax bureaus will recruit university graduates with relevant degrees to join the anti-avoidance workforce. We understand that in the next three years, the SAT plans to establish an anti-avoidance team with several hundred professionals across China.

Further, the tax bureaus are strengthening information technology tools and databases to support anti-avoidance work.

Industry focus The tax bureaus continue to focus on the apparel, electronics and telecommunications, food and beverage, retail, industrial, automotive, pharmaceuticals, and service industries, as well as on financing issues relating to infrastructure construction and on companies with outbound investments.

Geographic focus The Administrative Measures of Special Tax Adjustments (Guoshuifa (2009) No. 2) provide for a focus on entities that have transactions with low-tax jurisdictions or tax havens.

Also, tax bureaus in the coastal provinces of China and the cities of Beijing and Shanghai have been active in conducting transfer pricing audits.

Types of transactions under scrutiny We understand that royalties and fees for labor services are key transactions under review from the transfer pricing perspective in China.

In addition, the SAT objects to taxpayers who rely on the lower quartile of comparable ranges, especially those who rely on the lower quartile over a long period. The SAT used to accept the inter-quartile range assuming that companies’ profits should be evenly distributed — considering that some should achieve the upper quartile while some should achieve the lower quartile or that an enterprise should have some years resulting near the upper quartile and years resulting near the lower quartile.

It has been observed by the SAT that the vast majority of companies have kept their profitability around the lower quartile year after year; thus, the SAT has found it necessary to focus on the median when evaluating a company’s profit levels over time. The objective is to

China*


promote a better balanced distribution of profits achieved by companies in China.

Transfer pricing penalties There are two main aspects of transfer pricing penalties for noncompliance:

• Penalties under the Tax Collection and Administration Law (TCAL) and its detailed implementation regulations (TCALIR) apply to noncompliance with the transfer pricing provisions.

• Interest on additional taxes owed on account of a transfer pricing adjustments also applies, comprising two components:

• A base rate of interest equivalent to the Yuan Renminbi (RMB) lending rate of the People’s Bank of China on 31 December of the year that the tax was due, applicable to the whole period for which the tax was not paid

• An additional 5% penalty interest (although this penalty may be waived if the taxpayer can provide the contemporaneous documentation due, or, if the taxpayer is exempted from preparing contemporaneous documentation in accordance with Article 15 of Guoshuifa (2009) No. 2, it provides other relevant materials requested by the tax authorities)

In addition, the unfavorable consequences of noncompliance may include the following:

• The taxpayer may be treated as a key target for a transfer pricing inspection.

• The tax bureaus can exercise the right to deem an amount of taxable income for the taxpayer and compute the tax due in accordance with Article 44 of the Corporate Income Tax Law (CITL).

• Generally, any APA application made by the taxpayer is not accepted.

Audit triggersArticle 29 of Guoshuifa (2009) No. 2 outlines seven criteria used to determine targets for transfer pricing investigation. The three major audit triggers are:

• A failure by the taxpayer to meet disclosure and documentation requirements.

• The taxpayer has low profits or has losses.

• The taxpayer has a large volume or large value of transactions with companies located in tax havens.

In particular, the SAT concentrates on companies that, in addition to having low profits or losses, pay large amounts in royalties to overseas related parties or have a large percentage of their main business activities involving related-party transactions.

Indirect and customs taxThere is no formal interaction of transfer pricing with indirect taxes. However, Chapter 3 Article 15 of the Guoshuifa (2009) No. 2 evaluates the


documentation threshold limit for toll manufacturers based on export and import values declared in their customs records.

Comparable dataThe tax authority uses public information to the greatest extent possible, considering the company and subsequent negotiation procedures. Only in the absence of public information, or if the public information cannot provide a sound assessment of the related-party transactions, is nonpublic information be used. Nevertheless, the SAT will not commit to limiting comparisons to public information only.

According to Article 41 of Guoshuifa (2009) No. 2, if the profitability of an enterprise falls below the median of the inter-quartile range, the profits should, in principle, be adjusted to the median. However, the tax authority takes historic conditions into consideration. If, for example, the profits of an enterprise are higher than the median in one year but lower in another year, provided the profits are distributed normally, the SAT would accept a single year’s results being lower than the median. The SAT encourages companies to achieve a normal distribution of profit levels.

Article 38 of the Guoshuifa (2009) No. 2 requires specific approval from the SAT for performance of any working capital adjustment to comparables.

Transfer pricing methods According to Article 111 of the CITLIR, the transfer pricing methods available to taxpayers include the CUP method, the RPM, the cost plus method, the TNMM, profit split methods and other appropriate methods that comply with the arm’s length principle.

The China transfer pricing regulatory framework does not state a preference for the selection of a specific transfer pricing method.

Advance Pricing Agreements (APAs)Article 48 of Guoshuifa (2009) No. 2 states that APAs are generally available for companies that meet three criteria:

1) Their annual related-party transactions exceed RMB 40 million (inclusive).

2) They fulfil their obligation to report related-party transactions.

3) They prepare, maintain and provide contemporaneous documentation in accordance with the rules.

The threshold of RMB 40 million is not a strict rule, as a lower level of transactions, for example, RMB 30 million, may also qualify, depending on the circumstances. However, applications from companies that are not compliant with the documentation and annual reporting requirements are not accepted.


An APA covers the period of three to five years following the year of application. At the company’s discretion, the methodology agreed in the APA can be rolled back to prior years. Any additional tax payment as a result of the roll-back may not be viewed as special tax adjustment, and therefore, arguably, interest penalty may be avoided.

We understand that, in 2008, the SAT concluded a total of 2 bilateral APAs (there have been 3 in total since introduction of the APA program in China) and 5 unilateral APAs. At present, 15 bilateral APAs and 2 unilateral APAs are in the negotiation or review process.

Three APAs have been concluded with the United States, Japan and Korea.

Yield/performance of transfer pricing reviews Although the method of performance measurement of transfer pricing reviews by the SAT is not clear, we understand that, over the years, the number of audit cases has been significantly reduced, while the amount of transfer pricing adjustments has increased materially. The SAT thus appears to have been focusing on the comprehensiveness and depth of audits rather than on the number of audit cases.

Transfer pricing disputes We understand that, in 2008, the SAT concluded four bilateral agreements on corresponding adjustments through the

MAP. At present, three corresponding transfer pricing adjustments are in the negotiation or review process.

In 2009, The SAT will continue its corresponding adjustment and/or bilateral APA negotiation efforts with competent tax authorities using the MAP provided in the relevant tax treaties. The SAT proposes to negotiate 32 different cases, including MAPs and APAs with competent tax authorities in Japan, Korea, the United States, Singapore and Denmark.

Current influences on transfer pricing One of the SAT’s major tasks is to ensure national consistency in implementing Guoshuifa (2009) No. 2. The SAT monitors and manages anti-avoidance investigations throughout the country. Through monitoring and management systems, the SAT can promote strict enforcement of transfer pricing investigations and, in turn, promote consistent standards in conducting anti-avoidance investigations.

Likely trends in transfer pricing activityIt is understood that the SAT’s work priorities for 2009 will continue to focus on key industries such as the apparel, electronics and telecommunications, food and beverage, retail, industrial, automotive, pharmaceuticals, and service industries and on companies with outbound investments.



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Intercompany transactions involving royalty payments and labor services continue to be areas of focus. Further, it is expected that greater emphasis will be placed on companies that constantly rely on the lower quartile of the arm’s length range to support their transfer pricing.

We also understand that, in 2009, the SAT plans to further strengthen its internal processes and teams in the areas of audits and anti-avoidance in general. Further expansion of detailed anti-avoidance investigations and of related knowledge management resources seems likely, together with augmentation of information collection and administration processes.


Indonesia

Resources the taxing authority is devoting to transfer pricing The Directorate General of Taxes (DGOT), Ministry of Finance of the Republic of Indonesia administers corporate taxes in Indonesia. Within the DGOT, a special transfer pricing unit has been set up as a transfer pricing coordination center. The unit works to prevent transfer pricing abuse in Indonesia through a comprehensive development package, including tax law, tax office resource, taxpayer and tax return, and tax society. Additionally, decentralized transfer pricing working groups and transfer pricing handling teams have been set up in regional and district tax offices.

There are approximately 45 FTE resources at the Indonesian tax authority, of which approximately 10% are located in the coordination center, with 90% in local tax offices. This level of resourcing has been achieved over the last two years. Over the next two years, the DGOT expects to designate one specific group of transfer pricing auditors (consisting of five to seven auditors) for each district tax office, such as the Large Taxpayer Office (LTO), the Medium Taxpayer Office (MTO) and the Foreign Investment Tax Office.

In terms of background, 90% of the transfer pricing resources are registered accountants, and the rest are economists. The existing level of

resourcing is expected to increase over the next two years, with an increase in economists and lawyers. Approximately one-third of the existing resources are transfer pricing specialists, with a strong technical background in transfer pricing issues. There has been a growing emphasis on transfer pricing training to increase the transfer pricing competency of the resources.

Industry focus Industries currently under focus by the DGOT include (in order of importance) mining and metals, consumer products, automotive, oil and gas, and real estate. Factors relevant in driving an industry to be selected for particular focus include (in order of importance) significant activity in the country and unrealistic profit. The selection of industries under focus is widely communicated to taxpayers; for example, the DGOT issued a press release when the mining industry was selected. The list of industries under specific focus is reviewed annually by the Directorate of Potential, Compliance and Revenue.

Geographic focus

Practical considerations and legislative direction (such as relevant compliance rulings) drive the choice of jurisdictions for review. Typically, transactions with major trading partners, low-tax jurisdictions, non-treaty partners and domestically headquartered companies


are reviewed in the scope of audits. The top jurisdictions (in order, as per the current caseload of transfer pricing reviews) of the relevant counterparties are:

• Singapore

• Hong Kong and Macau

• Japan

• Western Europe tax haven countries


Types of transactions under scrutiny The DGOT has specifically identified certain transactions that are currently the focus of transfer pricing reviews. The nature of such transactions and the corresponding composition of the current caseload of transfer pricing reviews are summarized in the table below.

Transaction Current caseload %

Tangible goods 60%

Cost sharing/cost pooling arrangements

30%

Intra-group services 10%

The DGOT expects to place greater emphasis on scrutinizing transactions involving IP (e.g., royalties, licensing) and intra-group services over the coming years.

Audit triggersThe central transfer pricing unit governs the selection of cases for transfer pricing review. Currently, cases are

being selected based on risk analyses performed by specific tax officers, considering factors such as:

• A high level of audit risk regarding taxpayer’s controlled transactions

• Availability or the taxpayer’s willingness to provide documentation substantiating the arm’s length nature of the controlled transactions

• An economically unrealistic profit trend, as compared to the industry trend

Going forward, case selection is expected to be based on a systematic approach considering the following factors:

• Consistent commercial loss for five years

• Significant value of related-party transactions compared to taxpayer’s turnover and operating profit

• An economically unrealistic profit trend, as compared to the industry trend

In addition to the above factors, the taxpayer’s tax audit history is also an important consideration in selection of cases for transfer pricing scrutiny.

Indirect and customs taxThe work of the DGOT transfer pricing enforcement resources is integrated (e.g., in terms of sharing of information) with that of indirect tax specialists. As such, the same transfer price needs to be used for corporate (direct) tax and indirect tax purposes.


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Comparable dataTypically, local country comparables are preferred. Alternatively, regional comparables based on companies located in the same continent as the taxpayer could also be used.

The Indonesian tax authorities allow the use of regional comparables, provided they enhance comparability of the information with the tested party. The DGOT prefers the use of internal comparables over external comparables.

In preparing and presenting comparable data, there are specific requirements in relation to the number of years of financial information, the method for calculating an arm’s length range and the method for determining an appropriate PLI. There is a general preference for weighted average over simple average and for pooling of financial data over averaging.

Mandatory guidance regarding financial adjustments to comparable data is contained in Directorate General (DG) Decree Number Kep-01/PJ.7/1993 and DG Circular Letter Number SE-04/PJ.7/1993.

Transfer pricing methods Indonesian transfer pricing legislation (as contained in policy statements Kep-01/PJ.7/1993 and SE-04/PJ.4/1993) specifies a hierarchy of transfer pricing methods to determine arm’s length remuneration for controlled transactions. The CUP method and the traditional transaction methods are to be applied in priority to the other methods.

Yield/performance of transfer pricing reviews In the context of measurement of performance of transfer pricing reviews within Indonesia, approximately 90% of review cases involve an adjustment to the taxpayer’s income and 60% of adjustment cases are sustained on appeal. Further, 50% of the taxpayers are assessed as high risk, while only 10% are in compliance with documentation requirements.

Transfer pricing disputes In the context of disputes, there are more than ten ongoing cases in domestic appeal (preceding court action) and one case pending in a MAP.

Current influences on transfer pricing World Customs Organization developments and OECD initiatives have influenced a change in transfer pricing policy in Indonesia, since some of Indonesia’s counterpart countries are members of these organizations.

Likely trends in transfer pricing activityOver the next two years, the Indonesian tax authority expects to place greater emphasis on transfer pricing compliance measures, dispute resolution and yield targets.


Resources the taxing authority is devoting to transfer pricing The Japanese tax authorities’ transfer pricing examinations are centrally coordinated by the National Tax Agency (NTA), which is ultimately under the control of the Japanese Ministry of Finance. There are 11 Regional Taxation Bureaus (RTBs) in Japan, but only the three largest RTBs, (the Tokyo RTB, Osaka RTB, and Nagoya RTB) have resources fully dedicated to transfer pricing examinations of large MNEs. Transfer pricing examinations are conducted by the RTBs, who report to the Director of International Examinations at the Examination Division of the NTA’s Large Enterprise Examination and Criminal Investigation Department. The role of the NTA is to provide central direction with respect to transfer pricing enforcement efforts in order to ensure uniform treatment of transfer pricing cases.

The Japanese tax authorities currently have approximately 157 FTE employees involved in transfer pricing examinations, of whom approximately 5% are located centrally within the NTA, with the remainder at the RTBs (79% are located at the Tokyo RTB, 13% at the Osaka RTB and 3% at the Nagoya RTB). While there has been an increase of approximately 25% in the number of full-time resources over the last two years, the existing level of resources is not expected to increase significantly over the next two years.

The resources involved in transfer pricing

examinations in Japan could best be described as generalists. The Japanese tax authorities place strong emphasis on on-the-job training, internal training (e.g., through its National Tax College), and cross-tax experience through internal rotations within various tax departments (inside the RTBs or between RTBs and the NTA).

Industry focusFactors such as the importance of intellectual property, profitability and whether the activities of the industry are significant within Japan are taken into account when identifying specific industries for transfer pricing examinations. Industries that are currently under particular scrutiny by Japan’s tax authorities are automotive and automotive parts, consumer products, pharmaceuticals, medical devices, technology, banking and capital markets, and insurance.

Geographic focusThe Japanese tax authorities continue to target Japanese and foreign MNEs, generally focusing on taxpayers engaged in transactions with Japan’s major trading partners or low-tax jurisdictions. In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties are:


• Australia

• Singapore


Japan*


• China

• Thailand

Types of transactions under scrutinyThe nature of transactions that are typically the focus of Japanese transfer pricing examinations and the corresponding composition of the current caseload of transfer pricing examinations are summarized in the table below.


Tangible goods 55%

Intellectual property (IP) (e.g., royalties, licensing)

23%


Financial transactions (e.g., loans, other debt instruments)

2%

Transfer pricing penalties Japan does not have a specific transfer pricing penalty regime. Nonetheless, Japanese corporate tax avoidance penalties may be imposed in transfer pricing cases. The basic penalty is 10% of the additional tax. If the amount of the additional tax exceeds the greater of ¥500,000 or the amount of tax paid when the return was filed originally, a 15% penalty is applied. In the case of fraud, a penalty may be levied at 35%. The delinquency tax (interest) rate may range between 4% and 14.6% per annum.

In cases where there are multiple comparables with a high degree of comparability, the arm’s length price may be computed as a weighted average of those comparable results. In applying the TNMM, the most common PLIs used are the operating margin and mark-up on total costs. Other PLIs, such as return on assets or Berry ratio, are typically less commonly used.

There is no formal or mandatory guidance provided about adjustments to comparable data. Such adjustments are optional and are more frequently seen in APAs, under certain circumstances, rather than in examinations.

Audit triggersThe RTBs decide which taxpayers will be subject to transfer pricing examinations. The selection of taxpayers and the scope of the audit are mainly driven by factors such as:



• Issues identified during previous tax audits of the taxpayer


Indirect and customs taxThe work of Japan’s transfer pricing examination resources is not directly


integrated with that of indirect tax specialists. As such, there is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataJapan’s tax authorities have a very strong preference for local (i.e., Japanese) comparables. Pan-Asian comparables might be acceptable under certain circumstances; for example, if no local comparables are available. The comparability criteria are generally strictly applied.

Japan’s transfer pricing regulations do not specifically adopt the use of ranges when testing whether a taxpayer’s transfer pricing is at arm’s length.

In cases where there are multiple comparables with a high degree of comparability, the arm’s length price may be computed as a weighted average of those comparable results. In applying the TNMM, the most common PLIs used are the operating margin and mark-up on total costs. Other PLIs, such as return on assets or Berry ratio, are typically less commonly used.

There is no formal or mandatory guidance provided about adjustments to comparable data. Such adjustments are optional and are more frequently seen in APAs, under certain circumstances, rather than in examinations.

Transfer pricing methodsAs outlined in Article 66-4 of the Special Taxation Measures Law, Japan’s transfer pricing regulations require the application of the three transaction-based methods (i.e., CUP method, RPM and cost plus method) first before considering the application of other methods (such as the TNMM or profit split method).

The use of the comparable profits method is considered inappropriate in Japan. Although the TNMM was introduced in Japan in 2004, its use in transfer pricing examinations is rather limited, as Japan’s tax authorities typically try to use a profit split approach for inbound transactions. However, the TNMM has become the most frequently used method in APAs (where it is used for about 55% of the transactions covered by APAs).

Advance Pricing Agreements (APAs)Japan has a formal APA program accessible to all taxpayers. In practice, Japan’s tax authorities reserve the right to reject APA applications in certain cases (e.g., where a local entity in Japan is still in a start-up period and lacks sufficient history in the Japanese market) or if the application is deemed to be part of a tax avoidance scheme.

The APA team received 113 APA requests during the year ended June


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2008, representing an 8% increase over the previous year. Approximately 222 applications were in progress during the year ended June 2008. The average duration for conclusion of APAs is approximately one year in the case of unilateral APAs and two years for bilateral APAs. Top treaty partners that have concluded bilateral APAs with Japan are the United States, Australia and Singapore.

Additionally, approximately 125 cases of double taxation were resolved during the year ended June 2008, under the competent authority procedure. The average duration of such proceedings was between one and two years.


The main performance measurement criteria for the effectiveness of transfer pricing examination activities in Japan are the number of transfer pricing examinations undertaken and the amount of income adjustments.

Transfer pricing disputes In the context of transfer pricing disputes, there are currently 279 cases in the MAP stage in Japan. Taxpayers seeking resolution in these cases are mainly in sectors such as the automotive, automotive parts and electronics industries. The top three jurisdictions

involved in these cases are the United States, Australia and Asian countries (such as Singapore, China and Thailand). It should be noted that litigation has not been a common method used by taxpayers to resolve transfer pricing disputes in Japan.

Current influences on transfer pricing The transfer pricing environment in Japan is responsive to implementation of centralized business and tax models. Japan’s tax authorities tend to closely examine and scrutinize business restructurings that would result in a reduction of profits in Japan. For instance, if, in the course of setting up a regional principle structure in a low-tax jurisdiction such as Singapore, a full-fledged distributor in Japan is converted into a commissionaire, the restructuring is likely to attract scrutiny from Japan’s tax authorities.

Likely trends in transfer pricing activityJapan’s tax authorities are likely to place greater emphasis on dispute resolution over the next two years.


Korea

Resources the taxing authority is devoting to transfer pricing The National Tax Service (NTS) administers taxes in the Republic of Korea. In principle, there is no centralization with respect to transfer pricing reviews, and any of the local tax offices may review transfer pricing related issues. However, there is a central division in charge of examining cross-border intercompany transactions involving large corporations, and the APA office of the NTS (formally, the International Cooperation Division) reviews and evaluates all APA applications.

The Seoul Regional Tax Office has approximately 100 FTE examiners involved in transfer pricing reviews, in addition to the regular tax examiners at the local tax offices who are sometimes engaged in transfer pricing reviews. This level of resourcing has remained consistent over the last two years. However, in response to the increasing number of APA requests, resources involved in APAs are anticipated to increase (whereas the amount of resources for transfer pricing reviews is expected to remain unchanged). In terms of their backgrounds, the majority of the tax examiners are trained in accounting, tax law or economics.

Industry focusThere is no formal program prioritizing the review of taxpayers in a particular industry or industries. In fact, the

selection of taxpayers is done on a random, computerized basis.

Types of transactions under scrutinyAlthough there is no formal focus on specific transaction types by the NTS, the NTS has identified that a majority of the transactions under review in the context of APAs involve tangible goods, IP or intra-group services. There have also been instances of APA requests for cost sharing/pooling arrangements.

Transfer pricing penalties The NTS has the power to impose transfer pricing penalties. There are two types of penalties that may be imposed.

• An underreporting penalty — approximately 10% of the additional tax resulting from a transfer pricing adjustment

• An underpayment penalty (similar to an interest payment) — approximately 10.95% per annum of the additional tax for the period following the due date for the filing of the corporate income tax return up to the date of payment

Additionally, a penalty of up to KRW30 million may be imposed for a failure to submit documentation requested by the NTS within the specified time (normally 60 days).

Where imposed, penalties have historically ranged up to 25% of the additional tax resulting from a transfer


pricing adjustment. Penalties are calculated on a computerized basis. The NTS has also set up an internal review system as well as internal guidelines governing the enforcement of penalties, to ensure their consistent application. The current approach towards penalties is not expected to change over the next two years.

Audit triggersInstigation of a transfer pricing audit is undertaken on a centralized, computerized basis by the NTS and is mostly (i.e., in 90% of cases) triggered by a standard audit cycle/program.

Indirect and customs taxThe commissioner of the Customs office and the commissioner of the NTS recently entered into a Memorandum of Understanding to share information in relation to prior transfer pricing examinations. However, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe NTS prefers the use of local comparables to eliminate the effects of market differences. However, regional comparables are also permissible on a case-by-case basis.

In preparing and presenting comparable data, generally three to five years of financial data need to be used. The

inter-quartile range is the preferred method for calculating the allowable arm’s length range, as defined in the Law for Co-ordination of International Tax Affairs (LCITA). The Korean transfer pricing regulations prescribe generally acceptable PLIs. The most reasonable PLI, however, is determined on a case-specific basis. In the context of pooling versus the averaging of financial data, the pooling method is not applied in Korea.

There is no formal or mandatory guidance provided for undertaking adjustments to comparable data. Such adjustments are optional and are likely to be supported by the NTS if they are justifiable and enhance the comparability of the information with the tested party.

Transfer pricing methodsAccording to the LCITA, the traditional transaction methods — the CUP method, the RPM and the cost plus method — take priority over the transactional profit methods (i.e., the profit split method and the TNMM). In cases where none of these methods are applicable, the regulations permit the use of any other reasonable method(s).

Advance Pricing Agreements (APAs)The APA process in Korea is accessible to all taxpayers. Jurisdictions that have concluded bilateral APAs with Korea are the United States, Japan and member states of the European Union.


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It is anticipated that more APAs will be concluded with China in the future.

The APA team received 32 APA requests from taxpayers during 2007; 7 bilateral APAs and 13 unilateral APAs were processed during that year. According to LCITA guidelines, a unilateral APA must be processed within two years. The average processing time for a bilateral APA is approximately two to three years. The APA office is making efforts to reduce the processing time for unilateral and bilateral APAs. The NTS began publishing APA annual reports in 2008; the first report pertains to the year 2007.

The number of requests for resolution under the competent authority procedure has been increasing recently.

Current influences on transfer pricingThe transfer pricing environment in Korea is responsive to OECD initiatives. Changes to the OECD Transfer Pricing Guidelines may trigger similar changes to Korea’s transfer pricing regulations. The 2006 revision to Korea‘s transfer pricing regulations is an example of such an effect. Efforts are being made to decrease the processing time for APAs, especially unilateral APAs. The new government’s business-friendly approach has helped sustain a transparent transfer pricing policy and overall tax environment.

Likely trends in transfer pricing activityThe NTS expects to place greater emphasis on transfer pricing compliance measures over the next two years.


Malaysia

Resources the taxing authority is devoting to transfer pricingThe Inland Revenue Board of Malaysia (IRB), which administers Malaysia’s taxes, recently established a department entirely dedicated to transfer pricing-related issues. The Jabatan Cukai Multinasional, or Multinational Tax Department (MTD), forms part of the Compliance Division of the IRB. It is structured with subdivisions responsible for different aspects of the IRB’s transfer pricing activities, namely: the APAs/MAP subdivision, the Transfer Pricing Multinational Audit subdivision, the Transfer Pricing Policy subdivision and the Transfer Pricing Compliance subdivision.

Two years ago, only a few FTE resources were dedicated to transfer pricing, and resources from the large pool of audit and investigation personnel would share the transfer pricing responsibilities. The MTD’s Multinational Audit subdivision now has 13 FTE resources dedicated to transfer pricing examinations, which comprises approximately half the total number of resources within the department. These employees are predominantly field-based, whereas the remaining resources in the APAs/MAP, Compliance, and Policy sub-divisions are based in the central unit. The IRB expects the number of resources to grow to 40-50, as a department, to cope with the anticipated workload brought about by the increase in focus on transfer pricing by the IRB.

In terms of backgrounds, the 13 transfer pricing specialist resources consist of (ranked in order by percentage of total resources) accountants, economists and those with business and finance backgrounds. In addition to the transfer pricing specialists, the rest of the resources are generalists with some transfer pricing knowledge. The IRB anticipates increased training, both internal and external, with more mature jurisdictions to increase the number and proficiency of its transfer pricing specialists.

Industry focusThe IRB does not target specific industries. Instead, transfer pricing audit targets are selected by the IRB’s computer system. A score is attached to high risk companies. A company’s ranking as high-risk is attributable to a number of criteria not specified by the IRB. These criteria do, however, include performance metrics such as profitability as well as the amount of related-party transactions and dealings with low-tax jurisdictions/tax havens. If ranked as high risk, companies within the same industry may be revisited.

The IRB has examined companies in the consumer products, media and entertainment, pharmaceuticals, technology and telecommunications industries.


Geographic focusThe IRB does not target companies in certain jurisdictions for transfer pricing reviews.

Rather, it leverages on the score system and the company designated as a high-risk company through the score system. Any perceived focus on one jurisdiction (i.e., over another) is merely due to the larger proportion of MNEs from that jurisdiction being based in Malaysia. The IRB does not specifically target particular jurisdictions but would examine companies having dealings with low-tax jurisdictions/tax havens based on circumstances.

Types of transactions under scrutinyThe IRB does not select companies for transfer pricing review based on transaction classes. The selection is score-based and computer-generated. However, there appears in practice to be a larger number of transfer pricing audits done on tangible goods followed by transactions involving IP and intra-group services.

Transfer pricing penalties The IRB has graduated rates of penalties in place (currently imposed on taxpayers whose financials have been subject to transfer pricing adjustments). These range from an average of 25% (in cases where taxpayers have transfer pricing documentation prepared),

35% (where no transfer pricing documentation is available) and 45% (for general corporate tax adjustments) on the balance of tax underpaid. These graduated rates, however, are not formalized, although they are communicated to taxpayers.

The IRB is considering the relative merits of issuing a formalized list of graduated rates of penalties to ensure transparency and consistency in the application of penalties levied for various transfer pricing-related offences. Penalties currently range from 25% to 50% of the balances of tax underpaid by the taxpayer.

The average penalty imposed was between 25% and 35% of the balance of tax underpaid by the taxpayer. The IRB expects the severity of the current penalty regime to remain the same as it maintains its campaign to increase overall tax compliance. The IRB is expected to impose lower penalties on transfer pricing adjustments, where taxpayers prepare contemporaneous documentation, based on the taxpayer’s attempt in good faith to determine and comply with the arm’s length principle.

Audit triggersThe MTD decides which companies are selected for audit. Various statistics in the computer-generated score attached to a prospective audit target are examined. The main factors considered involve the company’s profitability as well as the proportion/extent of its related-


party transactions and dealings with low-tax jurisdictions/tax havens. These criteria (ranked in order of prevalence) are:

• Profitability

• The volume of related-party transactions undertaken by tax payers

• Dealings with low-tax jurisdictions/tax havens

Indirect and customs taxThe IRB does not actively share information with the Royal Customs and Excise Department (RCED) because of confidentiality provisions in tax legislation. There is no official legislative or regulatory requirement that the same transfer price be used for both corporate direct tax and indirect tax purposes.

Comparable dataThe IRB has a strong preference for local country comparables, due to the enhanced comparability on the basis of similar economic circumstances. However, there are no formal requirements to present comparable data in a particular format in transfer pricing documentation.

The IRB in practice examines the tested party’s margins in reference to the arm’s length range of the comparables on a year-by-year basis, instead of pooled, averaged or weighted-average statistics over the period under examination.

Working capital adjustments are optional, and the IRB generally accepts them, provided it can be clearly demonstrated that the relevant adjustments increase the comparability with the tested party. Additionally, the IRB may require that working capital adjustments be performed on the comparable set for their consideration.

Transfer pricing methodsUnder the IRB Transfer Pricing Guidelines issued in July 2003, there is a hierarchical order of preference of the CUP method, RPM and cost plus method (or traditional methods) over the TNMM and profit split method (transactional methods). The IRB will accept all transfer pricing methods based on their respective merits in relation to their reliability in examining arm’s length pricing. However, there is no direct reference to the CPM in the IRB Transfer Pricing Guidelines. There are no additional transfer pricing methods provided in the IRB Transfer Pricing Guidelines, but the IRB would consider these methods based on their respective merits. The hierarchical order of preference of transfer pricing methods (i.e., traditional versus transactional) is publicly stated in the IRB Transfer Pricing Guidelines.

Advance Pricing Agreements (APAs)APAs are specifically provided for in local legislation (Section 138C of the


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Malaysian Income Tax Act, 1967), effective 1 January 2009. Formal guidelines on the specifics of the APA application process are expected to be released shortly. The IRB has received some applications for unilateral APAs, in spite of the lack of formal process guidelines. Participation in the APA program is optional for taxpayers; however, the terms of the APAs are at the discretion of the IRB. Of the current caseload, most applications are dealing with unilateral APAs.

Yield/performance of transfer pricing reviews The IRB measures the performance of its MTD based on cases settled as well as on the overall tax revenue collected by the IRB. While the increase in number of assessments generated by the MTD constitutes a part of this overall tax revenue, this performance metric is indicative of the increased compliance amongst taxpayers, which is the overall goal of the Compliance Division of the IRB as a whole.

Transfer pricing disputes With respect to disputes, there are two ongoing cases in MAPs involving transfer pricing adjustments.

Current influences on transfer pricingThe IRB has not made any change in policy or practice due to the current global economic situation and influences,

nor does it anticipate any change at this stage. The IRB acknowledges that this crisis will affect taxpayers to different degrees. The economic circumstances of taxpayers are being considered by the IRB in examining the arm’s length nature of their related-party transactions.

The IRB reiterates that most changes or developments, such as the specific legislation of Section 140A of the Malaysian Income Tax Act, 1967 on transfer pricing and the issuance of IRB Transfer Pricing Guidelines and further rules/guidance, are driven by the taxpayers. All factors effecting change in transfer pricing legislation or regulation will be considered based on their impact in a Malaysian context. The IRB has no fixed time frame for these changes, as transfer pricing legislation/regulation is still a relatively new area; however, changes are anticipated in due course.

Likely trends in transfer pricing activityThe IRB will continue to increase its focus on transfer pricing. Its overall target is an increase in tax revenue as a whole, as indicative of an increased level of compliance from taxpayers. Additionally, the IRB hopes to continue to educate taxpayers as to the benefits of compliance with a view towards continuing to increase compliance statistics in the nation.


New Zealand

Resources the taxing authority is devoting to transfer pricing The Inland Revenue Department (IRD) administers taxes in New Zealand. Within the IRD, transfer pricing reviews are carried out by a centralized unit which acts as an advisor and provides assistance to the general IRD field audit operations. There has been an increase in the number of FTE resources involved in transfer pricing examinations, from approximately three and a half to five and a half over the last two years. This number is not expected to change over the next two years.

In terms of background, the transfer pricing resources of the IRD consist of one economist, while the other resources are accountants. All of these resources are specialists in transfer pricing.

Industry focusNew Zealand transfer pricing audits currently focus on the automotive, banking and capital markets, insurance, oil and gas, pharmaceuticals, technology, and telecommunication industries. Significant business activity in New Zealand, the importance of IP and the predominance of foreign MNEs are the factors driving the selection of industries for particular focus.

The selection of industries currently under specific focus from a transfer pricing perspective is widely communicated to taxpayers. This list of industries is reviewed annually.

Geographic focus

The IRD does not target companies in certain jurisdictions for transfer pricing reviews.


• Australia



• Japan

• Germany

Types of transactions under scrutinyIP transactions and financial transactions are currently the focus of the IRD for transfer pricing review. Key transactions that make up the current caseload of transfer pricing reviews (ranked in order of prevalence) are:




• Tangible goods

• Cost sharing/cost pooling arrangements (although fairly uncommon in New Zealand)


Transfer pricing penalties New Zealand does not have a specific transfer pricing penalty regime; the general penalty regime is applied. A consistency committee looks at the imposition of penalties across all tax types. Over the last two years, penalties were applied in up to 25% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they generally ranged up to 20% of the transfer pricing adjustment — the average shortfall penalty rate applied for lack of reasonable care or an unacceptable tax position. The rate is reduced to 10% for a first offense. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersTransfer pricing audits are instigated through a general audit, where transfer pricing questionnaires are sent to clients. The central Transfer Pricing Unit has input into the process. A variety of considerations are taken into account in determining which taxpayers to audit, including (ranked in order of prevalence):

• The outcome of a risk-based assessment by the IRD




• The nature of related-party transactions

• A standard audit cycle or program


Indirect and customs taxThe transfer pricing enforcement resources do not work in an integrated way with indirect tax specialists. However, the IRD has a close relationship with Customs. The IRD can ask Customs for information. Despite the exchange of information, there is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe IRD has no strict requirement for local comparables. The data that is considered as the best comparable and exhibits the closest key economic characteristics is used. However, since the markets in New Zealand and Australia are considered to be similar, comparables from these locations are preferred. The IRD prefers comparables from the United States or the United Kingdom over comparables based on Asian companies. The IRD factors a risk margin (1% to 3%) into transfer pricing studies that rely wholly on overseas comparables, as New Zealand is a relatively small market. The IRD gives recognition to economies of scale, competition, higher cost of capital and higher distribution costs in New Zealand, when using US or European comparables.


In preparing and presenting comparable data, there are no strict requirements, and each case is evaluated on the basis of its own circumstances.

The IRD expects three to five years of financial data and emphasizes creating a reliable comparable set without strictly prescribing any particular acceptable points within a range. In terms of PLIs, the IRD generally accepts weighted averages and often uses the EBIT margin, Berry ratio, and other relevant PLIs.

The IRD views adjustments with some skepticism. With regard to working capital adjustments, the IRD considers that the complex algebra is “generally not worth the trouble as the resulting adjustments are very minor.” The IRD places greater emphasis on identifying if and why there are significant deviations between the working capital levels of the taxpayer and the suggested comparables, rather than prescribing standard adjustments.

Transfer pricing methodsThere is no formal hierarchy between transfer pricing methods. Local legislation supports five methods (CUP, resale price, cost plus, profit split and CPM). The CPM is considered of no practical difference to the TNMM, and profit split includes full profit split or residual profit split. The IRD will, in practice, consider any method that provides the most reliable solution. Two interesting points of note in relation to transfer pricing methods in New Zealand are:

1) The IRD does sanction cost contribution and cost sharing methods.

2) The IRD has a practice note that talks of a rule of thumb for royalties being no more than 25% of EBITR.

Advance Pricing Agreements (APAs)New Zealand has a formal APA program. A unilateral APA is obtained through the binding rulings process that prescribes certain general formalities as to applications. The IRD receives five to seven applications per year. The IRD has given open access to the APA program, for taxpayers. There are five applications currently in process for the APA program, out of which three applications are for bilateral APAs and two applications are for unilateral APAs. The top two countries involved for bilateral APAs are Australia and the United States. It generally takes six to twelve months to complete an APA process. Approximately three competent authority cases are resolved annually, and it takes six months on an average to resolve these cases. There is currently one competent authority case unresolved.

Yield/performance of transfer pricing reviews The IRD measures the effectiveness of transfer pricing review activities by coverage of the taxpayer base, particularly at the large enterprise level.


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It looks at how effectively it is monitoring transfer pricing policies and results on the taxpayer base. The IRD seeks to review all large taxpayers periodically as part of an ongoing review process.

Transfer pricing disputes In the context of disputes, there is one ongoing case and one pending case in domestic appeals (preceding court action). No transfer pricing-specific case has proceeded to be heard by courts in New Zealand as yet.

Likely trends in transfer pricing activityThe IRD has stated their three areas of future focus to be:

1) Arrangements which look to import losses into New Zealand, generally ensuring that loss-making companies justify their performance (i.e., that it is not as a result of pricing policies)

2) Companies looking to take advantage of undue volatility of spreads in credit markets

3) Adventurous pricing of hybrid debt instruments, such as mandatory convertible notes

In addition to these areas, the IRD will focus on intangibles, business restructurings and financial arrangements.


Resources the taxing authority is devoting to transfer pricing The Inland Revenue of Singapore (IRAS) administers taxes in Singapore. Transfer pricing is a relatively new area of focus in Singapore, so the approach of the IRAS towards transfer pricing is at a developmental stage. The comments made below are based on current experience, and the approaches to transfer pricing may develop further/may change.

Within the IRAS, transfer pricing reviews are carried out by a group of seven transfer pricing specialists who handle transfer pricing cases and other international tax work. Another team in the corporate tax division undertakes transfer pricing consultations (and related) work. The group of seven transfer pricing specialists is involved in a relatively large number of APAs and some MAP cases. The corporate tax division is involved in the initial phases of transfer pricing consultation work, such as issuing questionnaires and collating responses. Transfer pricing consultation is the IRAS’s process for ascertaining the level of taxpayers’ compliance with Singapore through the issuance of questionnaires, Transfer Pricing (and related) Guidelines, field visits and meetings. The consultation process involves gathering information about how taxpayers are conducting their transfer pricing practices in the light of the recommendations made in the Singapore Transfer Pricing Guidelines.

The IRAS plans to undertake field visits to taxpayer offices and facilities as part of the consultation process for taxpayers, i.e., where queries are not sufficiently addressed in the initial questionnaires. Currently, however, the IRAS does not have transfer pricing specialists based in the field.

There was an increase in the number of FTE resources involved in transfer pricing examinations two years ago — from five to six. There are approximately two resources based in the central unit. The number of transfer pricing resources is likely to increase over the next two years due to the level of requests for APAs as well as the IRAS’s desire to facilitate the transfer pricing consultation process further.

The team that deals with transfer pricing has resources with a mix of backgrounds. The team is trained in transfer pricing specifically and tends to deal with a wide range of transfer pricing issues.

Types of transactions under scrutinyThe IRAS’ focus on transfer pricing is relatively new in Singapore. The IRAS is not focusing on a particular type of transaction to target for transfer pricing reviews. However, the IRAS has recently issued guidelines relating to intra-group service charges and intra-group loans.

Although the IRAS does not restrict its reviews/consultations to these types of transactions, historical practices


Singapore*


in Singapore relating to interest-free related-party loans and other transactions remunerated on a cost plus basis with a markup of 5% are likely to need clarification. The guidelines indicate that the IRAS expects appropriate consideration of the arm’s length principle in relation to both loans and services. In the case of loans, the IRAS expects Singapore lenders to lend on terms consistent with the arm’s length principle in relation to cross-border loans (and this must be in place by 1 January 2011). In the case of services, the IRAS believes cost plus 5% to be appropriate for routine services as defined in the Singapore guidelines. However, the IRAS requires the method selection to be appropriately supported and the economic analysis to be appropriately documented for other types of services.

Historically, the IRAS has reviewed and raised queries predominantly about inbound and outbound service charges.

Transfer pricing penalties Singapore does not have a specific transfer pricing penalty regime; the general penalty regime is applied. Under the general tax provisions relating to the understatement of income, the penalty range is 100% to 400% of the tax underpaid. Penalties are most likely to be applied if the taxpayer has insufficient or no transfer pricing documentation when a transfer pricing adjustment is made. The IRAS has laid down procedures to ensure that penalties are appropriately applied and reviewed. To date, the IRAS

has not imposed penalties on transfer pricing-specific issues.

The IRAS anticipates that appropriate compliance will occur as a result of clear guidelines from the IRAS and further specific recommendations made through the transfer pricing consultation process. Hence, the IRAS anticipates that it will not need to impose a significant level of penalties going forward in transfer pricing cases. However, it is anticipated that penalties will inevitably be assessed in the next two years, owing to a stronger focus on transfer pricing matters.

Audit triggersGiven the relatively recent focus on transfer pricing in Singapore, there is no significant history of or indicators for transfer pricing audits in Singapore. General and typical audit triggers seen in other countries are likely to give rise to transfer pricing queries from the IRAS and potentially further review, such as:

• Whether the taxpayer has appropriately assessed and documented its transfer pricing risk



Indirect and customs taxTransfer pricing enforcement resources share information across the IRAS (to the extent necessary).


The IRAS expects the same transfer price to be used for direct tax and indirect tax purposes, and any differences between the accounting and tax positions needs to be appropriately explained when queried by the IRAS.

Comparable dataThe IRAS prefers local comparables. The IRAS understands that the sample size of Singapore uncontrolled comparable data for certain types of transactions can be limited, and, therefore, it accepts appropriate regional comparable data in such cases. However, the IRAS would expect the use of Singapore-based CUP in the case of loans denominated in Singapore dollars, as it believes Singapore-based CUPs are readily available for this purpose, based on public data. The IRAS expects the taxpayer’s analyses to support the basis for the geographic territories covered in any benchmarking data.

In preparing and presenting comparable data, the IRAS does not have any specific requirements; however, it does agree with the recommendations of the OECD Transfer Pricing Guidelines on economic cycles and the need to consider an appropriate period of data in transfer pricing analyses. The IRAS expects the taxpayer to document the reason(s) for selecting the applicable PLI and document supporting reasons for why certain statistical techniques have been used.

The IRAS does refer to adjustments in the Singapore Transfer Pricing

Guidelines. It believes that certain circumstances will necessitate adjustments be made to data to improve comparability. The IRAS expects the rationale for making financial adjustments to be explained in the taxpayer’s transfer pricing documentation.

Transfer pricing methodsThe IRAS expects taxpayers to use appropriate methods to remunerate related-party transactions. The IRAS recognizes the five transfer pricing methods outlined in the OECD Guidelines. Cost sharing and the strict flow-through of costs in certain circumstances are the other two methods allowed by the IRAS. This position is based on recommendations that the IRAS has made in the Singapore Transfer Pricing Guidelines as well as in recent guidelines on related-party loans and services. The IRAS believes that the method that produces the most reliable results should be selected and applied (taking into account the availability of data and accuracy of adjustments).

Advance Pricing Agreements (APAs)Singapore has a formal APA program. The IRAS’s circular (Supplementary Administrative Guidance on Advance Pricing Arrangements, published on 20 October 2008) outlines procedures relating to unilateral, bilateral and multilateral APAs. Before the publication


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of this circular, the IRAS also referred to the availability of APAs in the Singapore Transfer Pricing Guidelines issued on 23 February 2006.

The IRAS receives approximately ten applications per year, and this number is expected to increase. The IRAS has given taxpayers open access to the APA program. However, it is at the discretion of the IRAS to accept the APA request. The IRAS commits to respond to the taxpayer if it will process the request further within one month of the pre-filing meeting request. The IRAS wants to make APAs available to all taxpayers that request an APA. However, if an APA is rejected, the IRAS provides an appropriate explanation to the taxpayer outlining its reasons for not accepting the request for further consideration.

More than 14 applications for bilateral APA and 4 applications for unilateral APAs are currently being processed. In general, approximately 75% of the applications received by the IRAS deal with bilateral APAs, while the remaining deal with unilateral APAs. The top three countries involved in bilateral APAs are Japan, China and Australia. It generally takes two years to complete a bilateral APA process, and typically six to twelve months to complete a unilateral APA process.

Yield/performance of transfer pricing reviews The IRAS is focusing on measuring compliance with, as well as facilitating, APA and MAP requests where applicable.

Current influences on transfer pricing The IRAS expects to see the impact of the current economic environment on the type of documentation prepared and on the commercial reasons given to explain why financial results and/or transfer pricing methods have changed.

Likely trends in transfer pricing activityThe IRAS will continue to focus on understanding the level of taxpayer compliance through the transfer pricing consultation process. The IRAS expects taxpayers to continue to focus on factually accurate and technically appropriate analyses in their transfer pricing documentation. The IRAS will also focus on providing support to taxpayers through APAs and MAP (where appropriate).


* Country chapter completed based on the insights of Ernst & Young professionals and publicly available information.

Resources the taxing authority is devoting to transfer pricing The Taxation Agency is responsible for approving transfer pricing adjustment, supervising transfer pricing examinations and evaluating effectiveness of transfer pricing reviews within Taiwan. The Audit Division of the Taxation Agency and local offices of the National Tax Administration are authorized to establish task forces to undertake transfer pricing examinations.

The tax staff members are not fully dedicated to transfer pricing examinations. When a transfer pricing review is considered necessary, it is performed by tax staff who are also responsible for other tax activities. Most of the transfer pricing resources are allocated to audit units in local offices and the Fifth Division of the Taxation Agency.

Geographic focus

Practical considerations drive the choice of jurisdictions for review. The tax authority specifically targets companies with intercompany transactions with affiliates located in low-tax jurisdictions.

Types of transactions under scrutinyThe following types of transactions are currently the focus of the Taxation Agency for transfer pricing reviews (ranked in order of prevalence):

• The transfer of tangible goods


• ►IP-related transactions (e.g., royalties, licensing)

Transfer pricing penalties The Taiwan Taxation Agency has the power to impose transfer pricing penalties. However, no transfer pricing penalties have been imposed to date. The authority expects an increase in transfer pricing penalty assessments over the next two years.

Audit triggersTransfer pricing audits are instigated by the relevant decentralized taxation offices, depending on the head count of available staff and specific need. Typically, corporations identified as potentially high risk (e.g., those more likely to underreport income) are selected as targets for transfer pricing audits. The selection of taxpayers for review is based on a number of considerations, such as:

• The outcome of a risk-based assessment



• Any transfer pricing issues identified during previous tax audits of the taxpayer

Indirect and customs taxThe transfer pricing auditors are given access to data stored on the indirect tax

Taiwan*


(VAT) database. However, there are no provisions requiring arm’s length transfer pricing in the context of indirect taxes (specifically VAT) in Taiwan.

Comparable dataRegional (i.e., within the same continent as the taxpayer) comparables are generally acceptable.

In preparing and presenting comparable data, there are specific requirements in relation to the number of years of financial information, the method for determining an appropriate PLI, and the pooling or averaging of financial data.

Transfer pricing adjustments are mandatory when appropriate.

According to the Taiwan Transfer Pricing Guidelines, Section 7, Article 8, “If there is a substantial difference on the aforesaid factors (characteristics of the assets or services, functions performed, contractual terms, risks assumed, economic and market conditions, business strategies, and other factors affecting the degree of comparability) between the circumstances of a profit-seeking enterprise and its Unrelated Parties, or between its Controlled Transaction and a Uncontrolled Transactions made between Unrelated Parties, an adjustment shall be made to the prices or profits in the comparable Uncontrolled Transaction taking into account the impact of such differences.”

However, there is no mandatory guideline for how such adjustment shall be made.

Transfer pricing methodsThe transfer pricing methods that are generally considered acceptable are mentioned in Taiwan Transfer Pricing Guidelines. Typically, taxpayers are required to apply the most appropriate transfer pricing method based on the type and nature of the related-party transactions.

According to the Taiwan Transfer Pricing Guidelines, the transfer pricing methods available to taxpayers include the CUP method, the RPM, the cost plus method, the CPM, the profit split method and other appropriate methods approved by the Ministry of Finance.

Advance Pricing Agreements (APAs)Taiwan government has issued the Directions Governing the Application for an Advance Pricing Arrangement by a Profit-seeking Enterprise. The local offices of the National Tax Administration are in charge of processing APA applications.

Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is measured by factors such as an increase in the tax yield, the percentage of review cases involving adjustment to a taxpayer’s income and the extent of experience sharing.


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Likely trends in transfer pricing activityThe Taiwan Taxation Agency expects to place greater emphasis on transfer pricing compliance measures as well as on interaction with customs and other indirect taxes over the next two years.



Resources the taxing authority is devoting to transfer pricing The Thai Revenue Department has a specific transfer pricing team at the head office under the Bureau of Large Business Tax Administration (LTO). In addition to performing transfer pricing reviews of large taxpayers, the LTO’s transfer pricing team also handles all unilateral, bilateral and multilateral APA applications.

It should be noted, however, that while transfer pricing reviews are centralized, the tax authorities at Area Revenue Offices and Area Revenue Branch Offices have the power to request transfer pricing documentation and even carry out transfer pricing assessments on local taxpayers. The tax officers at Area Revenue Offices and Area Revenue Branch Offices are generalists and follow the Thai Transfer Pricing Guideline closely when performing their duties.

There are approximately 13 transfer pricing specialists at the LTO who have strong technical backgrounds in transfer pricing issues. This level of resourcing has changed over the last two years, decreasing from 15 transfer pricing specialists to the current resource level of 13.

In terms of background, the transfer pricing resources are mostly economists and registered accountants.

Industry focus Factors such as the profitability of

the industry (for instance, consistent losses, diminishing profits or profits lower than the confidential benchmark range of profits set by the Thai Revenue Department) and the importance of IP to the industry are taken into account in identifying specific industries for scrutiny. The industries currently under focus for transfer pricing reviews in Thailand are automotive, consumer products, media and entertainment, metals, technology (plus electronics), telecommunication, and power and utilities. This list is generally kept confidential and is revised at the discretion of the Thai Revenue Department.

Geographic focus Practical considerations, based on the Thai Revenue Department’s discretion, drive the choice of jurisdictions for review. Typically, transactions involving major trading partners and perceived low-tax jurisdictions as well as circumstances of significant intercompany transactions and/or consistent losses are reviewed.

Types of transactions under scrutinyThe transactions currently under focus for transfer pricing reviews in Thailand are:

• Transactions involving tangible goods


Thailand*



• Cost sharing/cost pooling arrangements

Transfer pricing penalties Thai law does not provide for specific transfer pricing penalties. Instead, penalties and surcharges related to the assessment of additional corporate income tax and the reduction of deductible expenses under the Thai corporate income tax system apply to transfer pricing assessments. The current rate of the surcharge is 1.5% per month (or 18% per annum) applied to the shortfall tax, capped at 100% of the amount of the shortfall tax. In addition, a one-time penalty may be imposed on the shortfall tax if the tax authority issues a notice of assessment. In practice, however, most transfer pricing audits are closed or settled by way of negotiation before the authority issues the notice of assessment.

Over the last two years, penalties have been applied in up to 18% of the cases where transfer pricing adjustments were issued. Where penalties were imposed, they generally ranged up to 18% of the shortfall tax. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersTypically, transfer pricing audits are initiated pursuant to annual (at least once a year) routine visits by the Thai

Revenue Department. The selection of the taxpayer and the scope of the audit are typically driven by considerations (ranked in order of prevalence) such as:




Indirect and customs taxThe Thai tax authorities use their discretion in sharing information with customs and indirect tax specialists. As such, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe local database is available to the Thai tax authority; therefore, local country comparables are preferred. In cases where local comparables are not available, regional comparables may be used at the tax authorities’ discretion.

In preparing and presenting comparable data, there are specific requirements in relation to the number of years of financial information, the use of simple versus weighted averages, the method for calculating an arm’s length range and the method for determining an appropriate PLI.

No formal or mandatory guidance is provided about adjustments to be made



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to comparable data. Such adjustments are optional and are likely to be supported by the Thai tax authorities if they enhance the comparability of the information with the tested party.

Transfer pricing methodsIn practice, the TNMM is the most commonly applied transfer pricing method. Other acceptable methods include RPM, cost plus and profit split.

Advance Pricing Agreements (APAs)Thailand has no formal APA program, but all Thai taxpayers have the right to enter into an APA. The APA team has received fourteen bilateral APA requests to date, out of which only two bilateral APAs with Japan have been concluded. Currently, three bilateral requests are in process, while the remainder are still pending. The two bilateral APAs with Japan were concluded in just under three years. The number of APA requests is expected to increase in the next two years.

Following increasing bilateral APA requests from Japan (as a result of stringent transfer pricing reviews of Thai-Japanese transactions in Japan), the Thai Revenue Department is expected to introduce new transfer pricing guidelines specifically for bilateral APAs.

Yield/performance of transfer pricing reviews The Thai tax authority has no specific tax yield targets set internally; therefore, there is no measurement as to the effectiveness of its TP review activities. Over the next two years, the Thai tax authority expects to place greater emphasis from a transfer pricing perspective on compliance measures.

Transfer pricing disputes It should be noted that most transfer pricing disputes are typically closed or settled by way of negotiation before domestic appeal. It is understood that currently there are four cases of corresponding adjustment in MAP. The taxpayers in these cases are in the electronics industry with Japan as the counterparty.



Resources the taxing authority is devoting to transfer pricing The General Department of Taxation (GDT) administers taxes in Vietnam. Vietnamese transfer pricing regulations were passed in 2006, and the GDT is still trying to develop a core of transfer pricing resources to conduct transfer pricing audits. The core transfer pricing team of the GDT is located in Hanoi. There are approximately five FTE resources currently involved in transfer pricing examinations, and all of them are based in the central unit. This number is expected to increase over the next two years.

In terms of background, the core transfer pricing resources are all generalists, although the GDT is currently trying to develop their transfer pricing competency. The GDT has also provided overseas training to tax auditors who are now acting as transfer pricing auditors.

Industry focus Vietnam transfer pricing audits currently focus on the automotive, pharmaceuticals, goods processed for export (e.g., shoes, garment), and agriculture product industries, as well as services and cost contribution agreements (CCAs). Enterprises that post losses during their tax incentive period and enterprises that fail to submit the transfer pricing disclosure form when filing their corporate income tax returns are also areas of focus of the GDT. The selection of industries currently under specific focus from a transfer

pricing perspective is not formally communicated to taxpayers.

The first three transfer pricing audits in Vietnam have involved automotive companies.

Geographic focus The GDT does not target companies in certain jurisdictions for transfer pricing reviews.

In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties are:

• Taiwan

• Singapore

• Korea

• Japan

• Germany


Types of transactions under scrutinyRelated-party transactions involving tangible goods, IP, services and financial transactions are currently the focus for transfer pricing reviews. Taxpayers are required to disclose details of these transactions on the transfer pricing disclosure form. As the transfer pricing disclosure form also requires the disclosure of foreign exchange gains and losses, transfer pricing auditors may examine foreign currency transactions between related parties.

Vietnam*


Key transactions that make up the current caseload of transfer pricing reviews (ranked in order of prevalence)are:

• Tangible goods





Transfer pricing penalties According to the Vietnam transfer pricing regulations, the GDT may adjust taxable income or income tax payable if transfer prices are not at arm’s length. No other penalties are imposed on transfer pricing adjustments, other than the price adjustments themselves. However, in the case of the violation of other tax rules relating to transfer pricing (e.g., a failure to file the disclosure form), administrative penalties for tax violations apply. There are no processes to ensure the consistent application of transfer pricing penalties. However, the regulations do provide a method for making adjustments to income or expenses in cases where transfer prices are found to be not at arm’s length.

Adjustments made by the GDT in the transfer pricing audit of an automobile company related to warranty expenses. The percentage of adjusted warranty expenses in relation to gross revenue was less than 10%.

Audit triggersTransfer pricing audits are instigated by a central decision-making body. The core transfer pricing team based at the central office determines the companies to be audited for transfer pricing. It is anticipated that, in the future, when the tax authorities at the provincial and city levels become more knowledgeable about transfer pricing regulations, case selection may be decentralized. A variety of considerations are taken into account in determining which taxpayers to audit, including:




• VAT, employment, customs or other indirect tax reviews


• The outcome of a risk-based assessment by the GDT


The GDT has undertaken only two transfer pricing audits to date, both of which involved automobile companies. A third automobile company was audited for transfer pricing, but the final assessment resulted in tax assessments with no transfer pricing findings or


adjustments. The lack of transfer pricing audits in Vietnam to date is because the regulations are still relatively new and the GDT has yet to develop a sophisticated approach to transfer pricing.

It is anticipated that transfer pricing reviews may be triggered in the future by a company’s failure to file the necessary transfer pricing disclosure form and by a company’s level of profitability.

Indirect and customs taxThere is very little interaction between the transfer pricing core team of the GDT and the customs officials (from the General Department of Customs). There is no specific requirement that the same transfer price be used for direct and indirect tax purposes. However, both regulations provide that the authorities may adjust the transfer price based on the criteria set out in the respective regulations.

Comparable dataThe GDT has not specified any preference for local or regional comparables; it requires that comparability must consider market conditions. While, in practice, the GDT prefers the use of local comparables, the use of regional comparables is permitted.

Since the markets in Singapore, Malaysia, Thailand, Philippines, Hong Kong and Japan are considered to be similar, comparable data from these locations are preferred by the GDT. The GDT also considers data from the Southeast

Asian sub-continent to be comparable. In preparing and presenting comparable data, the GDT expects a minimum of three consecutive years of financial data to be used.

In terms of PLIs, there is no specific requirement on whether simple or weighted average is accepted, but the GDT use the terms “average” value or “median” value and there are specific formulas to determine the appropriate PLIs. The PLIs follow the choice of transfer pricing methodology. The GDT provides guidelines for making financial adjustments to comparable data and considers their use to be mandatory if adjustments are required to increase comparability of transactions.

The allowable arm’s length range refers to the standard market price margin, which is either of the following two values:

1) Values calculated from independent transactions selected for comparison when three comparable or fewer transactions are used

2) Values falling between the first and the third quartiles of the statistical operation of probability of quartiles, calculated from the market price margin of independent transactions when more than three comparable transactions are used

Transfer pricing methodsLocal legislation supports the following methods: the comparison of prices in independent transactions, RPM, cost


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plus, profit split, TNMM and CPM. There are no other methods permitted under the domestic regulations. There is no formal hierarchy between transfer pricing methods.

However, the use of comparison of prices in independent transactions is preferred by the GDT. The regulations allow the use of a combination of any of these methods or the use of two or more methods concurrently. This information is based on Circular 117/2005/TT/BTC (the Circular). This Circular was issued by the Ministry of Finance to implement legislation.

Transfer pricing disputes Given the relatively recent nature of the transfer pricing regulations in Vietnam, there are a limited number of disputes. The jurisdiction involved as a counterparty currently involved in a MAP is Germany, in a dispute involving an automotive company.

Current influences on transfer pricing Any amendments to Vietnam’s approach to transfer pricing are most likely to be driven by the local experiences gained from the Circular’s first two years of implementation. Stimulus packages have recently been announced in the areas of corporate and indirect taxes in an attempt to combat the global financial crisis. However, a change in transfer pricing policy due to the global economic crisis is not foreseen.

Likely trends in transfer pricing activityIt is anticipated that compliance measures and yield targets (i.e., increasing the tax take based on audit activity) will be areas of increased focus by the GDT over the next two years.


Surveyed countries Europe, Middle East,

India, Africa (EMEIA)


Austria

Resources the taxing authority is devoting to transfer pricing There is no centralized group specializing in transfer pricing within the Austrian Ministry of Finance (the Austria Tax Authority (ATA)). Instead, there are decentralized tax groups for international tax affairs, which also deal with the review of transfer pricing issues. These tax groups employ approximately 50 FTE resources involved in transfer pricing examinations. Approximately 40% of the resources are transfer pricing specialists, with a strong technical background in transfer pricing issues. The number of resources engaged in transfer pricing has increased by approximately 70% over the last two years.

In terms of background, the resources consist of a few economists, while the majority are regular tax officials trained in-house on transfer pricing matters. These resources are kept abreast of key transfer pricing developments by provision of periodic training and special transfer pricing courses at the designated Federal Tax Academy.

The Austrian Ministry of Finance is currently undergoing a significant restructuring of its operations. As part of this reorganization, it is expected that a centralized specialist group, which will also include transfer pricing experts dealing with international taxation issues, will be established in the near future.

Industry focus Transfer pricing audits in Austria currently focus on the automotive, consumer products, pharmaceutical and high-tech industries. The importance of IP to the industry, profitability levels and information from external resources like publicly available industry analyses are the factors driving the selection of industries for particular focus. The list of industries is currently seldom reviewed by the ATA; however, this is expected to change in the near future, with annual reviews likely.

Geographic focus The ATA targets companies in certain jurisdictions for transfer pricing reviews with the focus of attention on transactions with parties located in tax havens. Typically, transactions with Austria’s major trading partners and low-tax jurisdictions (particularly where transaction volumes are high) are reviewed in the scope of audits. For this purpose, jurisdictions where the tax rates are low (or nil) due to rulings, tax holidays or other incentives are also considered as low-tax jurisdictions. As per the current caseload of transfer pricing reviews, the top five jurisdictions of the relevant counterparties are:

1) Switzerland2) Luxembourg3) The Netherlands4) Ireland5) Malta


Types of transactions under scrutinyThe ATA has specifically identified certain transactions that are currently the focus of transfer pricing reviews. The nature of such transactions and the corresponding composition of the current caseload of transfer pricing reviews are summarized in the table below.


IP (e.g., royalties, licensing)

30%


25%

Tangible goods 20%



5%

The ATA has also identified business restructurings as an area of interest.

Transfer pricing penaltiesAustria does not have a specific transfer pricing penalty regime; also, such penalties are not expected to be introduced in the near future.

Audit triggers Transfer pricing audits are instigated by the relevant decentralized tax groups. A variety of considerations are taken into account in determining which taxpayers to audit, including (ranked in order of importance):

• The existence of evidence of business restructurings




• Previous audits of the taxpayer

Indirect and customs taxThe transfer pricing enforcement resources work in an integrated way with indirect tax specialists. However, there is no formal requirement that the same transfer price be used for corporate (direct) tax and customs purposes.

Comparable data Typically, local country comparables are preferred. Regional comparables are generally accepted only in cases where local comparables could not be identified. Where local comparables are not available, the ATA prefers pan-regional data from the “old” 15 EU member states (prior to 1 May 2004) over all current EU member states.

The ATA expects comparable searches to be in line with the principles set out in the OECD Guidelines. Generally, financial data for three years is expected. The inter-quartile range is the preferred method for calculating the allowable arm’s length range. Application of the full range is only acceptable if the comparables are virtually perfectly


comparable to the tested party and the full range is narrow. The simple average is preferred to the weighted average.

There is no preference for any specific type of PLI; generally, the PLI chosen by the taxpayer is likely to be accepted, provided it is reasonable. While the ATA does not have any specific preference between pooling and averaging of financial data, the pooling method is rarely applied in Austria.

There is no guidance provided about adjustments to comparable data. The acceptance of adjustments is reviewed on a case-by-case basis.

Transfer pricing methodsThe ATA follows the OECD Guidelines, which identify a hierarchy of methods, included in the policy statement issued by the Austrian Ministry of Finance, to be used in determining the arm’s length remuneration for controlled transactions. The traditional transaction methods are preferred to the transactional profit methods. Cost sharing/cost contribution arrangements mentioned under Chapter 8 of the OECD Guidelines are also permissible. While the profit split method is one of the identified transfer pricing methods, a full profit split is generally not acceptable to the Austrian tax authorities.

Advance Pricing Agreements (APAs) Austria does not have a formal APA program. An APA program is expected to be introduced and implemented in the

next one to two years by the Austrian Ministry of Finance.

The Austrian Ministry of Finance publishes nonbinding opinions on a case-specific basis in answer to queries by taxpayers concerning individual transfer pricing issues. In addition, it is possible to file a request for a binding ruling on domestic (or unilateral) matters with the ATA.

Yield/performance of transfer pricing reviewsThe effectiveness of the transfer pricing review activities is not separately measured by the ATA. However, adjustments resulting from the review of benchmarking studies are measured against the associated costs of performing these studies (such as license fees for external databases) to determine whether costs incurred have been justified.

Transfer pricing disputesIn the context of disputes, there are approximately 50 ongoing cases in MAP and 2 ongoing cases under arbitration. The treaty partners involved in a majority of these cases are Germany, the Netherlands and the United States.

Current influences on transfer pricingThe transfer pricing environment in Austria is responsive to factors such as the global economic slowdown, OECD initiatives, EU initiatives (such as the EU Joint Transfer Pricing Forum) and



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the implementation of centralized business and tax models. For instance, it is expected that, in light of the global economic slowdown, the ATA will likely accept losses of local distribution entities.

Likely trends in transfer pricing activityIn the recent past, the transfer pricing focus has largely been on issues such as IP migration, entities with operating losses and business restructurings. The ATA expects to place greater emphasis on yield targets (i.e., focus on increasing tax revenues based on audit activity) and interaction with customs and other indirect taxes over the next two years.


Belgium

Resources the taxing authority is devoting to transfer pricing Transfer pricing audits at the Belgian tax authority, are handled on a centralized basis by a special Transfer Pricing Audit Cell (TPAC), consisting of trained transfer pricing experts. The TPAC has been very active in sending lengthy information requests to selected taxpayers. They also serve as a knowledge resource on transfer pricing issues for the field tax inspectors, who have varying levels of transfer pricing experience.

There are eight FTE specialist transfer pricing resources located centrally at the TPAC. There are no specialist decentralized resources. All transfer pricing issues are to be reported to the TPAC. The TPAC may then handle these issues or may, as a minimum, provide support to field tax inspectors as to how they should be handled. The existing level of resourcing has remained the same over the last two years. However, this number is expected to increase in the future, given the ever-growing importance of transfer pricing in today’s international business relationships and the increased attention from foreign tax authorities in this respect.

In terms of background, all the specialist transfer pricing resources are economists and have significant experience in dealing with transfer pricing issues.

Industry focusThere are no formal programs prioritizing the review of taxpayers in any particular industry or industries. Factors such as whether the activities of the industry are significant within the country, the importance of IP to the industry, and the profitability of the industry are taken into account in identifying taxpayers for review.

Geographic focusGeographic considerations, as such, are not drivers for the selection of taxpayers for review. However, transactions with major trading partners and low-tax jurisdictions are typically reviewed in the scope of audits. The top five jurisdictions (in order, as per the current caseload of transfer pricing reviews) of the relevant counterparties are:

• France

• Japan

• Luxembourg

• Ireland

• Germany/the United Kingdom

Types of transactions under scrutinyThe Belgian tax authority has identified the following transactions (in order of prevalence) that are currently the focus of transfer pricing reviews in Belgium:

• Business restructurings




• Cost sharing arrangements

• Tangible goods


Transfer pricing penalties No specific transfer pricing penalty regime applies, since transfer pricing adjustments are within the scope of the ordinary Belgian tax penalty framework. The TPAC has the authority to autonomously decide on the penalty rate, and hence there is consistency in application of penalties. Penalties vary from 10% to 200% (in very exceptional cases) of the additional tax levied under the amended assessment. The rate applied in any particular case depends on the degree of intent to avoid tax or the degree of the taxpayer’s negligence. Additionally, taxpayers also incur interest liability for the late payment of additional tax.

Over the last two years, penalties have been applied in over 75% of cases where transfer pricing adjustments were issued. In practice, if the transfer pricing audit ends in a settlement between the taxpayer and the TPAC, the penalty is typically reduced to nil. Where penalties are imposed, they generally range up to 10% of the additional tax. This is, however, determined on a case-by-case basis. This approach to penalties is not anticipated to change in the next two years.

Audit triggersThe TPAC typically selects its own files for transfer pricing audits. Additionally,

local field tax inspectors have the power to independently decide to review transfer pricing issues during a tax audit.

The selection of the taxpayer and the scope of the audit are typically driven by various factors, such as (ranked in order of prevalence):



• The outcome of a risk-based assessment by the tax authority

• The volume of the taxpayer’s related-party transactions


Indirect and customs taxThe work of Belgian transfer pricing enforcement resources is not integrated with that of indirect tax specialists. As such, there is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe use of regional pan-European comparables is widely accepted in Belgium — this is even acknowledged in the Belgian administrative guidelines on transfer pricing. In the standard approach, a pan-European comparison often means the inclusion of the 15 countries of the European Union as it existed before 1 May 2004 plus Switzerland, Norway and Iceland.


Increasingly, the wider European region is being used, subject to meeting comparability criteria.

Where local country and pan-European information is not available, the use of non-European or global information is accepted subject to maintenance of strong documentation to support the comparability criteria.

In preparing and presenting comparable data, typically financial data for three years needs to be used (unless under APA negotiations, where information for four years is required). The inter-quartile range (encompassing the results between the 25th percentile and the 75th percentile of the observation derived from uncontrolled comparables’ inter-quartile ranges) is the preferred method for calculating the arm’s length range. The weighted average is preferred to the simple average. Operating margin and markup on costs are the most commonly used PLIs. Pooling as well as averaging of financial data is accepted.

There is no formal or mandatory guidance provided as to adjustments to comparable data. Such adjustments are optional and will likely be supported by the Belgian tax authority where they enhance the comparability of the information with the tested party. For instance, in the case of limited risk structures, adjustments for inventory, receivables and intangibles are typically accepted.

Transfer pricing methodsBelgium follows the OECD Guidelines for transfer pricing and hence conceptually adheres to the hierarchy of transfer pricing methods outlined in the guidelines. The CPM is one method considered to be inappropriate by the Belgian tax authority.

If none of the OECD-approved transfer pricing methods can be applied to determine the arm’s length remuneration for the transaction under review, other transfer pricing methods can be considered. However, their selection and the rejection of the OECD-approved transfer pricing methods should be soundly documented.

Advance Pricing Agreements (APAs)Belgium has a formal APA program, accessible to all taxpayers.

About 99% of the current caseload of APAs represents unilateral APA requests. The number of bilateral APA requests is, however, increasing (from three applications during the year 2008 to three applications during the first quarter of the year 2009). The top three treaty partners in these bilateral APA requests are Japan, France and the Netherlands. The average duration of the APA process is approximately up to 9 months for unilateral APAs and 14 months for bilateral APAs.


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Yield/performance of transfer pricing reviews The tax yield (other than tax yield through field audits) realized by the special TPAC was approximately €15m in 2008 (compared to €13m in 2007 and €10m in 2006). Approximately 70% to 80% of the transfer pricing audits carried out by the TPAC result in an adjustment to the taxpayer’s income. Most cases handled by the TPAC are settled during audit. Only a few cases move into the administrative appeal phase. So far, none of these cases have progressed into a transfer pricing court case.

Transfer pricing disputes The status of current transfer pricing disputes in Belgium is as below.

Ongoing Pending

Domestic appeal (preceding court action)

4 1

Litigation 0

Mutual agreement procedure

1

Arbitration 10

The above information relates to transfer pricing audits performed by the TPAC. Information regarding other field audits where transfer pricing adjustments were imposed is not included in the above table. The jurisdictions most frequently involved in these cases are France, Germany and the Netherlands.

Current influences on transfer pricing The transfer pricing environment in Belgium is responsive to factors such as initiatives at the OECD and EU levels and the implementation of centralized business and tax models. For instance, the profit allocation between head offices and branches and the OECD Draft on Business Restructurings are having an impact on the approach to transfer pricing in Belgium.

Likely trends in transfer pricing activityOver the next two years, the Belgian tax authority expects dispute resolution activities to increase, in response to the introduction of transfer pricing rules across a number of relevant jurisdictions.


Czech Republic

Resources the taxing authority is devoting to transfer pricing Within the Czech tax administration, separate specialized groups perform transfer pricing audits of large taxpayers and address transfer pricing matters in the context of APAs and MAPs. Transfer pricing reviews of small taxpayers are typically carried out by the tax authorities locally. Thereafter, the Czech Ministry of Finance is competent for potential foreign negotiation.

More than 30 FTE resources are involved in transfer pricing reviews of large taxpayers in the Czech Republic. This level of resourcing has been consistent over the last couple of years and is not expected to change.

While there are no specific preferences in terms of the background of the resources, there has been a growing emphasis on imparting ongoing education to increase the transfer pricing competencies of these resources. It is expected that there will be greater focus on training the resources to enhance their practical skills in risk assessment. Transfer pricing training is also being given to other members of tax audit teams to enable them perform simple transfer pricing checks and risk analyses.

Industry focusThere is no formal program prioritizing the review of taxpayers in a particular industry or industries. However, due to the presence of a large number of

taxpayers in the automotive industry, this sector is most frequently scrutinized by the Czech tax administration.

Types of transactions under scrutinyWhile there is no formal focus on specific transaction types by the Czech tax administration, the authorities have identified the review of transactions involving tangible goods, provision of services and more complex transactions of all types as areas of interest.

Transfer pricing penalties Czech law does not provide for the imposition of specific transfer pricing penalties. The unified system of penalties applies to all taxpayers and assessments, including transfer pricing cases. There is a possibility for taxpayers to apply for a tax pardon under specific circumstances where tax penalties are imposed by the Czech tax authority. This approach to penalties is not anticipated to change in the next two years.

Audit triggersTransfer pricing audits are instigated by the relevant local authorities based on a risk analysis. Though not based on any published guidance, generally, a variety of factors influence the selection of taxpayers for review, such as:


• The nature and volume of related- party transactions




Indirect and customs taxThe work of Czech transfer pricing enforcement resources is integrated (especially in terms of sharing information) with that of indirect tax specialists. As such, the same transfer price needs to be reported for income tax and VAT purposes.

Comparable dataThe Czech Ministry of Finance has a general preference for comparable information from the European/Central European region. In the absence of specific local guidance or recommendations, the OECD recommendations are generally followed for the selection of comparable data.

There are no specific requirements related to the method for calculating an arm’s length range, the method for determining an appropriate PLI, or the pooling or averaging of financial data. While specific requirements do not exist, in preparing and presenting comparable data, typically a three-year running average is used to eliminate market deviations.

Transfer pricing methodsThe Czech Republic follows the OECD Transfer Pricing Guidelines, which identify a hierarchy of methods to

be used in determining arm’s length remuneration for controlled transactions.

Advance Pricing Agreements (APAs)The Czech Republic has a formal APA program that is accessible to all taxpayers. The APA ruling program, including provisions for unilateral as well as for bilateral APAs, was introduced in 2006. The APA team has as yet only received unilateral APA requests. Ten unilateral APA requests have been received from taxpayers per year on average, and there are approximately four applications currently in process. The average time for completion of unilateral APAs is approximately eight months.

Yield/performance of transfer pricing reviews Approximately 50 tax audits per year are focused on transfer pricing. Around 50% of these audits result in transfer pricing adjustments. While the precise benefit of transfer pricing reviews to the tax authorities is difficult to measure, an increase in taxpayer compliance is perceived as the most significant benefit. The Czech tax system combines the results of various tax aspects examined; therefore, additional tax assessed on transfer pricing adjustments cannot be separately quantified.


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Transfer pricing disputes In the context of disputes, there is currently one ongoing proceeding between the Czech Republic and Germany. Another case with Germany is expected soon.

Current influences on transfer pricing The transfer pricing environment in the Czech Republic is responsive to the OECD initiatives and the EU Joint Transfer Pricing Forum initiatives. Business restructurings and centralized intra-group services have been identified as the areas of focus for transfer pricing reviews. Furthermore, the Czech Ministry of Finance is closely considering the effects of the current global financial crisis on comparability of data.

Likely trends in transfer pricing activityOver the next two years, the Czech Ministry of Finance expects to place greater emphasis on development of processes pertaining to MAPs and also to encourage bilateral APA requests from taxpayers.


Denmark

Resources the taxing authority is devoting to transfer pricing The Danish tax authorities (SKAT) administers taxes within Denmark. Within SKAT, transfer pricing reviews are carried out by the decentralized Transfer Pricing Center (approximately 12 full-time resources) and the Center for Large Companies (approximately 65 to 75 full-time resources). There has been no recent increase in the number of resources involved in transfer pricing examinations, and the number of transfer pricing resources is expected to remain the same over the next two years.

In terms of background, the resources involved in transfer pricing reviews consist of approximately 5% economists, 11% lawyers and 20% accountants by background, while the remaining employees have a bachelor’s degree in tax law and accounting. The background of resources currently involved in transfer pricing examinations has remained roughly the same over the last two years. SKAT anticipates the background of resources currently involved in transfer pricing reviews to change significantly by including more economists and more resources with a specialized background in transfer pricing.

Geographic focusSKAT does not target companies located in certain jurisdictions for audit. However, SKAT’s experience is that strong grounds to challenge cases have existed where

companies have been dealing with perceived low-tax jurisdictions. Typically, transactions with Denmark’s non-treaty partners and perceived low-tax jurisdictions are reviewed in the scope of audit. Practical considerations are the key drivers for certain jurisdictions being selected by SKAT.

Types of transactions under scrutinyIP transactions, intra-group services, financial transactions and loss-making/low-margin companies are currently the focus of SKAT for transfer pricing reviews.

Transfer pricing penalties Denmark has a specific transfer pricing penalty regime, which was recently implemented. However, to date, there have been no cases involving transfer pricing penalties being imposed under this regime. The new regime for transfer pricing penalties is linked to poor transfer pricing documentation. Other penalties (surcharges and interest) apply in the case of an income adjustment that is not necessarily linked to a lack of or poor transfer pricing documentation.

Audit triggersTransfer pricing audit strategy is determined by a central decision-making body. However, it is the local centers that implement this strategy. Various considerations are taken into account in determining which taxpayers to audit, including:




• The nature of related-party transactions undertaken by the taxpayer (e.g., those involving IP)

• The volume of related-party transactions undertaken by the taxpayers as part of a overall risk assessment

Indirect and customs taxThe resources involved in transfer pricing reviews generally do not work in an integrated way with indirect tax specialists as the integral risk concept is applied. There is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataAs a starting point, SKAT prefers local comparables. However, in practice, due to the lack of local comparables, regional comparables are often accepted. Since the markets in Denmark, other Nordic countries and Europe are considered similar, comparables from these locations are accepted by SKAT. On a high level, the regional comparables are considered in the following order of priority:

• Denmark

• Nordic countries

• Pan-European

SKAT expects a minimum of three to five

years of financial data to be used for comparison and emphasizes the averaging of financial data (preferring weighted averages to simple averages). However, a pooling method could also be used if it is relevant. The use of an inter-quartile range is considered appropriate for determining the arm’s length range of a comparable set. There is no guidance provided by SKAT on the financial adjustments performed on comparable data.

Transfer pricing methodsDenmark follows the OECD Guidelines hierarchy of methods to be used in determining arm’s length remuneration for controlled transactions. The TNMM is the method most used by taxpayers.

Advance Pricing Agreements (APAs)Denmark has no formal APA program. However, bilateral APAs are allowed in accordance with the Danish double taxation agreements (DTAs). APAs are dealt in an informal way in practice.

The APA team received ten applications last year, out of which seven are now completed. APAs are an area of high focus for SKAT. There are twelve bilateral APA applications currently in process. The average duration of the APA process ranges from 24 to 36 months. Binding rulings are the other alternative types of advanced rulings available.


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The transfer pricing department does participate in competent authority processes. Five to ten competent authority cases are resolved annually.

They take approximately 24 months on average to resolve. There are currently no unresolved cases.

Likely trends in transfer pricing activitySKAT expects compliance measures, dispute resolution, and interaction with customs and other indirect taxes to be areas of increased focus over the next two years. SKAT is focusing on meeting taxpayers up front to improve compliance and is focusing on more APAs for dispute resolution.


Egypt

Resources the taxing authority is devoting to transfer pricing Egypt formally introduced the transfer pricing and arm’s length concepts for the first time under Article 30 of the Income Tax Law 91/2005. Transfer pricing guidelines are expected to be issued in the near future. Therefore, it should be noted that transfer pricing tax practice in Egypt is still in its early stages; as such, transfer pricing examinations have not yet commenced in Egypt.

Recently, the Egyptian Tax Authority (ETA) established a centralized group in charge of international taxation affairs including transfer pricing. The group is responsible for introducing transfer pricing guidelines. In addition, the central group will monitor the transfer pricing implementation process including transfer pricing reviews. However, transfer pricing audits will be performed by the tax offices under the supervision of the centralized group.

There are 11 FTE resources in the centralized group. This level of resourcing is expected to increase based on the expected workload. In terms of background, 70% of the resources are accountants, 20% are economists and the rest are lawyers. A training plan has been prepared to enhance tax auditors’ transfer pricing capabilities. Therefore, a significant change is expected over the coming years in the background of these resources.

Transfer pricing penalties Egyptian law does not provide for the imposition of specific transfer pricing penalties. The penalties that generally apply in the case of an infringement of tax laws also apply to transfer pricing cases.

Audit triggersTax audits are required to be carried out through a risk-based sampling process. Case selection is done electronically, based on specific criteria.

Indirect and customs taxThe work of the ETA is integrated (e.g., in terms of sharing of information) with that of indirect tax specialists. The issue of whether the same transfer price needs to be used for corporate (direct) tax and indirect tax purposes is likely to be addressed in the transfer pricing guidelines, which are expected to be released shortly.

Comparable dataThe requirements relating to comparable data are likely to be addressed in the transfer pricing guidelines, which are expected to be released shortly.

Transfer pricing methodsEgyptian transfer pricing regulations specify a hierarchy of transfer pricing methods to determine arm’s length remuneration for controlled transactions. The regulations follow the hierarchy specified by the OECD Guidelines. In



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cases where none of the specified methods are suitable, the regulations permit taxpayers to use any other appropriate method.

Advance Pricing Agreements (APAs)Although the Egyptian Income Tax Law allows the tax commissioner to conclude APAs with taxpayers, Egypt has not yet set up a formal APA program.

Likely trends in transfer pricing activityGiven the pending introduction of new guidelines, from a transfer pricing perspective, the ETA expects to place greater emphasis on compliance measures.


Estonia

Resources the taxing authority is devoting to transfer pricing The Estonian Tax and Customs Board (ETCB) administers taxes in Estonia. Within the ETCB, transfer pricing reviews are carried out by a centralized unit consisting of ten inspectors, one coordinator and one tax advisor. The inspectors are not fully dedicated to transfer pricing examinations, and they are also involved in reviewing other important tax-related matters. There has been an increase in the number of FTE resources involved in transfer pricing examinations, from three to twelve, over the last two years. This number is not expected to change over the next two years.

In terms of background, there are equal numbers of economists and registered accountants amongst the FTE resources involved in transfer pricing examinations. Lawyers are invited to take part in the transfer pricing audit process, if necessary.

Geographic focusAlthough transactions with low-tax jurisdictions are currently the focus for Estonian transfer pricing audits, geographic considerations are not drivers for the selection of taxpayers for review. In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties are:

• Latvia and Lithuania

• Sweden

• Finland

• Denmark

Types of transactions under scrutinyWhile there is no formal focus on specific transaction types by the ETCB, the ETCB has indicated that the majority of the transactions reviewed involved the sale of tangible goods (50% of cases) and services (mainly management services, loans, etc.).

Transfer pricing penalties The ETCB has the power to impose transfer pricing penalties. A penalty of €3,200 may be imposed for a failure to submit transfer pricing documentation. Further, default interest of approximately 22% per annum on unpaid or late taxes is also likely be levied. There are no processes in place to ensure consistent application of transfer pricing penalties. Though penalties are considered in the case of intentional tax avoidance, assessment of penalties is not a priority to the ETCB.

Under Estonian tax law, the ETCB has the power to instigate criminal proceedings for intentional tax avoidance.

Audit triggersTax inspectors make an assessment of each case as to whether the likely costs of performing the tax audit can


be justified when compared with the possible outcome of the audit.

The reasonableness to perform tax audits is thus determined, and potential tax risks are identified. This process forms the basis for screening of taxpayers for review and for setting targets.

Factors that play an important role in the selection of taxpayers for review include:


• The nature and volume of related-party transactions

Generally, the ETCB aims to place minimal administrative burden on taxpayers from transfer pricing audits.

Indirect and customs taxThe Estonian transfer pricing enforcement resources are not strictly dedicated to transfer pricing examinations. The tax inspectors have general competency and are able to review various tax issues, including matters related to indirect and customs taxes. From a pricing perspective, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataComparable information from Estonian databases is generally preferred. The use of regional comparable data is permitted on a case-by-case basis.

In preparing and presenting comparable data, no standardized requirements have been laid out in relation to the number of years of financial information to be used, the use of simple versus weighted averages, the method for calculating an arm’s length range, the method for determining an appropriate PLI, or the pooling or averaging of financial data.

Transfer pricing methodsIn practice, five transfer pricing methods (CUP, RPM, cost plus, profit split and TNMM) are used. There is no strict hierarchy between the methods. However, there is a general preference for internal comparables over external comparables. If none of the five methods can be applied in a particular case, then the law permits the use of any other suitable and justifiable method.

Advance Pricing Agreements (APAs)Estonia does not have a formal APA program. However, the ETCB encourages requests by taxpayers for advanced rulings on domestic (or unilateral) transfer pricing matters. The ETCB expects to place greater emphasis on the use of APAs over the next two years.

Yield/performance of transfer pricing reviews The effectiveness of the transfer pricing review activities is, to some extent, measured by comparison of revenue


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from tax audit with costs related to such audits.

Transfer pricing disputes Transfer pricing audits generally take between three months and one year to complete. If no transfer pricing risks are indentified, then the audits are closed. However, tax audits may remain open if no comparable price or transaction can be identified.

There are up to approximately five cases per year regarding transfer pricing issues in Estonia. In the context of disputes, there is one ongoing case and three pending cases in domestic appeals (preceding court action).

Current influences on transfer pricing The transfer pricing environment in Estonia is responsive to developments at both the OECD and the EU level. Direction from these bodies is constantly reviewed and considered in determining Estonia’s transfer pricing policy. A policy change is likely, following the recently announced stimulus packages aimed at combating the global financial crisis.


Finland

Resources the taxing authority is devoting to transfer pricing The Konserniverokeskus (Large Taxpayers’ Office (KOVE)) administers taxes of large taxpayers, and the local tax offices administer taxes of all the other taxpayers in Finland. Within the KOVE, transfer pricing reviews are carried out on a centralized basis by specialized individuals. Additionally, a network of transfer pricing experts has also been set up, including two representatives from each local tax office.

There are approximately 45 experts involved in transfer pricing reviews at the Finnish tax authority, of which approximately one-third are located centrally in the KOVE, with the remainder in local tax offices. This level of resourcing has been consistent over the last few of years, although this number is anticipated to grow. In terms of background, there is an equal representation by economists, lawyers and registered accountants amongst the resources involved in transfer pricing reviews. Approximately 40% of the resources are transfer pricing specialists, with a strong technical background in transfer pricing issues.

Industry focusTransfer pricing audits in Finland currently focus on the technology, machine and forestry industries.

Geographic focusGeographic considerations are not drivers for the selection of taxpayers for review. However, transactions with neighboring countries (specifically Sweden and Norway) and Finland’s other major trading partners represent the majority of the current caseload of transfer pricing reviews.

Types of transactions under scrutinyWhile there is no formal focus on specific transaction types by the KOVE, the KOVE did identify the review of transactions involving IP as an area of interest. Key transactions forming the current caseload of transfer pricing reviews (ranked in order of prevalence) are:



• Tangible goods



Transfer pricing penalties The Finnish tax authority has the power to impose transfer pricing penalties. In cases involving transfer pricing adjustments, an additional penalty of up to 30% of the amount of the adjustment


may be levied. Penalty interest may also be levied on a late payment or an underpayment of taxes resulting from transfer pricing adjustments.

A penalty of up to €25,000 may be imposed for a failure to comply with the transfer pricing documentation requirements regardless of whether the pricing of the transactions has been at arm’s length. The KOVE has put in place best practices and audit principles to ensure consistent application of the transfer pricing penalty provisions.

Over the last two years, penalties have been applied in most of the cases where transfer pricing adjustments were assessed. Where penalties are imposed, they generally are in the range of 5% of the transfer pricing adjustment. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersTransfer pricing audits are instigated by the relevant decentralized offices. Various considerations are taken into account in determining which taxpayers to audit, including (ranked in order of importance):

• The outcome of a risk-based assessment by the KOVE





• Transfer pricing issues identified during the review of other areas of taxation

Indirect and customs taxThe work of Finnish transfer pricing enforcement resources is not integrated (e.g., in terms of sharing of information) with that of indirect tax specialists. As such, there is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataSince there is only a limited amount of local company information, in practice, regional (Scandinavian) comparables are preferred. However, pan-European and even global comparables are accepted, where they increase the reliability of comparable information. The selection of a region for the identification of comparables is at the discretion of the taxpayer.

In preparing and presenting comparable data, there are no specific requirements in relation to the number of years of financial information, the use of simple versus weighted averages, the method for calculating an arm’s length range, method for determining an appropriate PLI, or the pooling or averaging of financial data.


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There is no formal or mandatory guidance provided as to adjustments to comparable data. Such adjustments are optional and are likely to be supported by the KOVE where they enhance the comparability of the information with the tested party.

Transfer pricing methodsFinland follows the OECD Guidelines hierarchy of methods to be used in determining arm’s length remuneration for controlled transactions. This principle is included in relevant transfer pricing legislation. In addition to the transfer pricing methods specifically mentioned in the OECD Guidelines, the Finnish tax administration’s guidelines also refer to the use of discounted cash flows in connection with the valuation of intangibles.

Advance Pricing Agreements (APAs)Finland does not have a formal APA program. Nevertheless, it should be possible for Finland to conclude APAs with treaty partners, in cases where the treaty contains a specific article providing for resolution of double taxation (i.e., via MAP between competent authorities). The KOVE also encourages requests for advanced rulings on domestic (or unilateral) transfer pricing matters.

Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is, to some extent, measured with regard to the increase in tax yield. The annual transfer pricing adjustments have been approximately €100m.

Transfer pricing disputes In the context of disputes, there are approximately ten pending cases in MAP and one ongoing case under Arbitration.

Current influences on transfer pricing The transfer pricing environment in Finland is responsive to OECD initiatives and EU initiatives, which have been taken into account and implemented as and when applicable.

Likely trends in transfer pricing activityFrom a transfer pricing perspective, the KOVE expects to place greater emphasis on compliance measures (with the objective of increasing general taxpayer awareness levels) and dispute resolution (aimed at increasing the possibility to use MAPs and APAs) over the next two years.


France

Resources the taxing authority is devoting to transfer pricing The Direction Générale des Finances Publiques (DGFiP) administers taxes in France. There are local tax audit departments throughout the country, but they are managed by a central administration department. The central administration department includes a team dedicated to international affairs, in particular the monitoring of transfer pricing.

Additionally, there is a department within the Tax Legislation Directorate, dedicated to setting up international tax standards, including those related to transfer pricing, and the negotiation and interpretation of tax treaties. The Tax Legislation Directorate also acts as the competent authority in matters of MAPs and arbitration.

Transfer pricing reviews of big businesses are within the purview of Direction Nationale de Contrôle (National Audit Department) and are handled by a team of transfer pricing-dedicated inspectors. In all other cases, transfer pricing reviews are handled by general tax examiners during the course of regular tax audits, in consultation with transfer pricing specialists in the audit management divisions.

Due to its organization, resources of the DGFiP devoted to transfer pricing are not relevant in France. However, the central administration department’s team dedicated to international matters

includes around 15 transfer pricing specialists. This level of resourcing is not expected to change over the next two years. The DGFiP provides active training to its inspectors to increase their transfer pricing competencies.

As an indication, the tax audit results for the last two years show that approximately 85% of tax reassessments concerning transfer pricing in France are issued by inspectors who are specialists in the subject or who are supervised by such specialists.

Industry focus In view of the manner in which audits are scheduled in France (a standard audit cycle), special attention on transfer pricing controls is not paid to any particular industry sector. The national recommendations given to inspectors are general; they must pay attention to transactions performed between companies belonging to the same group to make sure that the remuneration allotted to French companies corresponds to the functions they have carried out.

Geographic focusGeographic considerations are generally not drivers for the selection of taxpayers for review. However, in view of the position taken by France in the fight against tax havens and the national recommendations given to tax audit managers, any intra-group transactions involving companies set up in a tax haven country are


monitored closely and examined in depth in the course of a tax audit.

Transfer pricing penalties French law does not provide for the imposition of specific transfer pricing penalties. However, businesses are under an obligation to document transfer pricing. It is expected that a further obligation may soon be added in the French Tax Code to provide for the imposition of a fine if the taxpayer does not produce the required transfer pricing documentation, upon the inspector’s request.

Audit triggersGiven France’s standard audit program, taxpayers with international transactions can expect to be audited on a regular basis.

Indirect and customs taxThe organization of the DGFiP does not lead to a distinction between departments that deal with direct taxes and others that deal with indirect taxes. Therefore, tax inspectors are competent to review all the taxes and duties payable by the businesses they inspect. Further, subject to the inspector’s discretion, some information may be shared between Tax Administration inspectors and indirect tax specialists if required.

The prices fixed by the DGFiP inspectors are used for the purposes of both direct and indirect taxes. However, to the extent that the methods used to fix transfer prices in tax matters and customs values are not identical, the adjustments made

to transfer pricing by the DGFiP are not necessarily used by the Customs Administration, and vice versa.

Comparable dataThe comparables selected should be reliable. They should most closely resemble the characteristics of the tested party, including market conditions and nationality, and they should require minimal adjustment.

Transfer pricing methodsFrance follows the OECD Transfer Pricing Guidelines, which identify a hierarchy of methods to be used in determining arm’s length remuneration for controlled transactions.

Advance Pricing Agreements (APAs)France has a formal APA program. The APA team receives approximately 20 bilateral APA requests from taxpayers per year, and there are approximately 40 applications currently in process. Approximately 80% of the caseload relates to bilateral or multilateral APAs.

The average duration of the APA process is between 18 to 24 months in the case of bilateral or multilateral APAs and between 12 to 14 months in the case of unilateral APAs. Treaty partners that have most frequently concluded bilateral APAs with France are the United Kingdom, Switzerland, Germany and the United States.


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+33 4 78 63 17 10


Yield/performance of transfer pricing reviews Monitoring the performance of transfer pricing audits takes into account various data that concern factors such as the number of businesses that have been the subject of transfer pricing reassessments, the amount of reassessments notified, the departments that have performed these reassessments and the significance of the audits maintained after negotiation within the framework of MAPs.

Current influences on transfer pricing In general, any changes in legislation and administrative practices may be the result of changes in jurisprudence (at European or national level), modifications to the principles set by the OECD or the result of pan-European discussions. The practices of international groups may lead to a change in certain administrative practices or, at the very least, in the arguments used by the tax audit departments to justify their reassessments. For instance, the guidelines of the EU member states concerning the documentation to be set up by businesses to justify their transfer pricing policies, which result from community discussions, could soon be integrated into French legislation. In the context of combating the global financial crisis, measures are being contemplated to address transactions with tax havens.

Likely trends in transfer pricing activityTransfer pricing efforts are focused on continued training of tax inspectors and development of their transfer pricing expertise. Legal provisions could soon specify the nature of the documentation that companies must keep in order to justify their transfer pricing policies. The OECD’s work on the subject of business restructurings will be monitored closely so as to take into account, if necessary, the principles that may be identified in discussions with businesses (in APAs as well as during tax audits).

From the perspective of transfer pricing dispute resolution, France intends to continue to hold joint commissions regularly with its major treaty partners to optimize and accelerate the handling of cases under MAP.


Germany

Resources the taxing authority is devoting to transfer pricing The German Federal Central Tax Office (Bundeszentralamt für Steuern), together with German state tax authorities, administers taxes in Germany. The responsibility for tax audits, including transfer pricing audits, however, lies with the German state tax authorities (or the Bundesländer). Some states have set up regional specialist groups for international taxation. While, generally, transfer pricing audits could be performed by any local tax auditor, in certain cases, the federal tax auditor may be called in for this purpose.

In terms of background, the resources involved in transfer pricing reviews consist of a few economists and some lawyers, while the majority of resources are regular tax officials who have received specific training on transfer pricing matters. The transfer pricing resources are kept abreast of key transfer pricing developments through periodic training.

Industry focus Transfer pricing audits are largely driven by the size of taxpayers. There is no formal program prioritizing the review of taxpayers in a particular industry or industries.

Geographic focusPractical considerations drive the choice of jurisdictions for review. Typically,

transactions with Germany’s major trading partners and low-tax jurisdictions are reviewed in scope of audits. Additionally, domestically headquartered companies are also included in the regular audit cycle.


1) The United States 2) ►Japan 3) France 4) ►The United Kingdom 5) Korea

Transfer pricing penalties German tax authorities have the power to impose transfer pricing penalties. However, over the last two years, penalties have been applied in a negligible number of cases where transfer pricing adjustments were issued. Where penalties are imposed, they generally range up to 25% of the transfer pricing adjustment. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersInstigation of a transfer pricing audit is undertaken by the relevant decentralized resources in the various states within the framework of a routine audit cycle. A variety of considerations are taken into account in determining which taxpayers to focus on and the scope of the audit, including:






Comparable dataTypically, for inbound cases, regional (pan-European) comparables may be used, and for outbound cases, local comparables in the region/country of the foreign tested party would need to be used.

In preparing and presenting comparable data, there are no specific requirements related to the number of years of financial information, the use of simple weighted averages or the method for determining the appropriate PLI. It should be noted that the German tax authorities in general require the use of inter-quartile ranges for determination of the arm’s length range unless fully comparable comparables exist.

There is no formal/mandatory guidance provided about adjustments to comparable data.

Transfer pricing methodsGermany follows a hierarchy of transfer pricing methods, as outlined in the German Foreign Tax Act, to determine the arm’s length remuneration for controlled transactions. The CPM is specifically identified by the German tax authorities as an inappropriate method.

Advance Pricing Agreements (APAs)Germany has a formal APA process for bilateral APAs and a formal ruling process for unilateral APAs. These processes are accessible to all taxpayers.

The APA team receives approximately 20 bilateral APA requests from taxpayers per year, and there are approximately 60 applications currently in process. The average duration of the APA process could range anywhere between one to three years. Top treaty partners that have concluded bilateral APAs with Germany are the United States, Japan, France and the United Kingdom.

Additionally, approximately 80 cases of double taxation are resolved annually under the competent authority procedure. The average duration of such proceedings could range anywhere between three to four years. Approximately 530 applications are currently in process, with 80 of these in arbitration.

Transfer pricing disputes In the context of disputes, there are approximately 450 ongoing cases in MAP and 80 ongoing cases under arbitration. Taxpayers seeking resolution in these cases are mainly involved in industries such as automotive, pharmaceuticals, banking and retail. The treaty partners involved in a majority of these cases are the United States, Japan, France and the United Kingdom.


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Current influences on transfer pricing The transfer pricing environment in Germany is responsive to OECD initiatives and EU initiatives. For instance, Germany is expected to introduce new provisions relating to permanent establishments (PEs), following the OECD’s amendments to the commentary on Article 7 of the Model Tax Convention. Legal provisions have been put in place regarding the “transfer of functions” in the context of business reorganizations.

Likely trends in transfer pricing activityThe German tax authorities expect increased focus over the next two years on the Executive Order Law on General Transfer Pricing, circulars on General Transfer Pricing and Transfer of Functions, new provisions on partnerships and PEs.


Hungary

Resources the taxing authority is devoting to transfer pricing The Adó- és Pénzügyi Ellenőorzési Hivatal (Hungarian Tax and Financial Control Administration (HTFCA)) administers taxes in Hungary. Within the HTFCA, transfer pricing audit strategy is formulated by the President of the HTFCA, and this strategy is communicated through the audit guidelines published each year. The strategy is Implemented by local offices. There has been a continuous increase in the number of resources involved in transfer pricing examinations, and the HTFCA anticipates this trend to continue.

In terms of background, the majority of resources are economists and accountants, with some lawyers. There has been no change in this profile of resources in recent years, and no change is expected in the near future.

Industry focus There is no specific industry focus applied to transfer pricing audits by the HTFCA. Transfer pricing audits are conducted in line with the yearly audit guidelines issued centrally. However, industry profitability in Hungary is taken into consideration in determining which taxpayers to target for audits.

Geographic focusThe HTFCA does not target companies in certain jurisdictions for transfer pricing reviews, except for those located

in, or undertaking transactions with, jurisdictions considered to be tax havens. Types of transactions under scrutiny

Types of transactions under scrutiny Intra-group services and IP transactions are currently the focus of the transfer pricing reviews by the HTFCA. In addition, financial transactions and cost sharing arrangements are also transactions of particular interest. The current caseload of transfer pricing reviews predominately relate to intra-group service transactions.

Transfer pricing penalties The HTFCA applies general tax penalties to transfer pricing adjustments. A noncompliance penalty for inadequate transfer pricing documentation may also be applied. Penalties are assessed on a case-by-case basis and by taking into account the attitude of the taxpayer (i.e., whether the taxpayer did everything reasonable in the given situation to comply with the law). The HTFCA has issued guidelines on the processes that are in place to ensure a consistent application of transfer pricing penalties.

Over the last two years, penalties were applied in virtually all cases. A default level of penalty is seen as between 20% and 30% of the relevant tax adjustment. The average penalty rate applied was 40%.

Audit triggers


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Transfer pricing audits are instigated in accordance with the central audit guidelines of the HTFCA.

A variety of considerations are taken into account in determining which taxpayers will be the focus of audits within Hungary’s standard audit program, including (in order of importance):




The HTFCA also anticipates increasing the number of planned investigations as per the 2009 audit plan.

Indirect and customs taxIn most instances, the same team audits both direct and most indirect taxes. Customs audits are performed by a separate organization. There is formal cooperation between the customs office and tax specialists of the relevant authorities. Corporate tax and VAT-related findings are made on the basis of similar pricing principles; however, this is not necessarily the case with customs duties.

Comparable dataThere is no developed practice in relation to comparable data. Each case is evaluated individually on the basis of specific facts, circumstances and possibilities by the HTFCA.

Transfer pricing methodsTraditional methods are preferred by the HTFCA, in line with provisions in the Hungarian Corporate Income Tax Act. The HTFCA will, in practice, consider any other method if none of the traditional methods can be applied in a specific case. However, the choice of any nontraditional method should be explained in the taxpayer’s transfer pricing documentation.

Advance Pricing Agreements (APAs)Hungary has a formal APA program. The HTFCA receives four to five applications per year. The HTFCA anticipates the number of APA application to increase in the coming years. There are approximately two to three applications currently in process, all of which are unilateral APAs. It generally takes four to eight months to complete an APA process. There is currently one competent authority case in progress, initiated by a foreign tax authority.

Likely trends in transfer pricing activityThe HTFCA expects that compliance measures will be an area of increased focus over the next two years.


caseload of transfer pricing reviews (ranked in order of prevalence) are:


• Tangible goods




Transfer pricing penalties Indian law provides for the imposition of the following specific transfer pricing penalties.

Default Nature of penaltyIn case of a post-inquiry adjustment, there is deemed to be a concealment of income.

100%-300% of tax on the adjusted amount

Failure to maintain documents.

2% of the value of each international transaction

Failure to furnish documents.

2% of the value of the international transaction

Failure to furnish accountant’s report.

Rs. 100,000

In most cases, penalties are generally kept in abeyance until the matter is settled in appeals. The existing approach to penalties is not expected to change over the next two years.

India

Resources the taxing authority is devoting to transfer pricing The Income Tax Department (ITD) administers taxes in India. Within the ITD, the transfer pricing audit team is currently headed by the Director General of International Taxation and comprises nine directors (of which seven are dedicated to transfer pricing) and 23 transfer pricing officers (TPOs) based in major cities in India. The number of transfer pricing resources has increased substantially over the last two years, from a core team in 2006 of five directors and seven TPOs. The level of resourcing going forward will largely depend on the amount of work and the number of cases under scrutiny.

TPOs are generally senior tax officers of the rank of Joint Director or Additional Director. They regularly interact with OECD experts on transfer pricing to understand global best practices. All the resources currently involved in transfer pricing examinations are transfer pricing specialists with a strong technical background in transfer pricing issues. By background, the TPOs are all Indian Revenue Services officers, and a few of them are also accountants and lawyers.

Types of transactions under scrutinyThere is no formal focus on specific transaction types by the ITD. However, the transaction types forming the current


Audit triggersThe selection of cases for scrutiny is presently based on the monetary value or volume of the taxpayer’s international transactions. The guidelines prescribing the monetary thresholds are laid down by the Central Board of Direct Taxes (CBDT).

Indirect and customs taxA joint working group has been set up to explore the possibility of sharing information in an integrated manner between transfer pricing enforcement resources and indirect tax specialists. However, currently there is no formal framework for the same. Furthermore, there is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataTypically, the ITD only accepts local country comparables. Indian transfer pricing regulations require the use of contemporaneous data (i.e., data relating to the financial year when the international transaction has taken place). Further, the Indian transfer pricing regulations allow for the use of multiple-year data in the event that such data is likely to influence the determination of transfer prices in respect of the international transaction. Averaging of financial data is most common in the presentation of comparable data.

There are no specific requirements in relation to the use of simple versus weighted averages, the method for calculating an arm’s length range, or the method for determining an appropriate PLI.

Financial adjustments to comparable data are optional. The Indian regulations provide that a transaction can be considered as comparable if reasonably accurate adjustments can be made to eliminate differences that are likely to materially affect the price, cost or profit between a controlled and an uncontrolled transaction.

Transfer pricing methodsThe Indian transfer pricing regulations do not prescribe any hierarchy of transfer pricing methods. The Indian transfer pricing regulations prescribe the use of the following five methods only:

1) CUP2) RPM3) Cost plus method4) Profit split method5) TNMM

The past four cycles of transfer pricing audits in India have indicated the reliance of taxpayers on the TNMM on account of the paucity of reliable price and gross margin data in the public domain. The ITD recognizes the limitations of information available in databases and taxpayers’ inability to apply some of the transaction-based methods.


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Advance Pricing Agreements (APAs)To date, an APA program has not been implemented in India. However, the authorities are exploring the feasibility of this option. Although a mechanism exists in India for advance rulings, as transfer pricing is a valuation issue, it is not admitted by the Advance Ruling authority.

Likely trends in transfer pricing activityOver the next two years, the ITD expects to place greater emphasis on transfer pricing compliance measures as well as on the interaction with customs and other indirect taxes.


Resources the taxing authority is devoting to transfer pricingThe Israeli Tax Authorities (ITA) administer taxes in Israel. Within the ITA, transfer pricing reviews are carried out by a centralized group that consists of the Transfer Pricing Department and the Assessment Division. The number of individuals involved in transfer pricing examinations depends on circumstances. Transfer pricing examinations are generally part of complex tax audits and are done by the same tax officers. There are no transfer pricing specialists in local tax bodies.

There are three FTE resources currently involved in transfer pricing examinations, all of them economists by background, and all of them based in the central unit. There has been no increase in the number of resources involved in transfer pricing examinations over the last two years. This number is expected to increase marginally by one over the next two years.

Industry focusThe biotechnology, pharmaceutical, technology and telecommunication industries appear to be the current focus for Israeli transfer pricing audits. Significant business activity in Israel and profitability are the factors driving the industries selected for particular focus. However, the selection of industries under specific focus from a transfer pricing perspective is not formally communicated to taxpayers. The list

of industries under specific focus is reviewed every one to two years.

Geographic focusThe ITA specifically targets the United States, transactions with Israel’s major trading partners and transactions with low-tax jurisdictions in audits.

Practical considerations are the key drivers for certain jurisdictions being selected by the ITA. In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties are:


• Member states of the European Union

• Offshore jurisdictions

Types of transactions under scrutinyThe ITA currently focuses on sales of tangible goods, IP, intra-group services and stock-based compensation as a component of other transactions for transfer pricing review. The approximate percentage of the total caseload involving the following transactions are:



Tangible goods 30%


30%


Israel*


Audit triggersInstigation of a transfer pricing audit is rarely governed by a central decision-making body; rather, the decision is made on a case-by-case basis by the local assessing office. A variety of factors are taken into account in determining which taxpayers to focus resources on in the context of Israel’s standard audit cycle, such as:



• Whether there were previous tax audits of the taxpayer

Indirect and customs taxThe transfer pricing enforcement resources do not work in an integrated way with indirect tax specialists, and there is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe ITA prefers local or regional comparables with respect to comparable data; however, very limited information or databases exist. Therefore, comparables from the following regions are also permissible where local comparables cannot be found: North America, Western/Eastern Europe, the Far East and global comparables.

The ITA expects a minimum of three years of financial data, with a preference for averaging rather than pooling of financial data. The ITA has no formal preference for weighted averages versus simple averages. Israeli law provides for selection of the appropriate PLI.

Financial adjustments to comparable data are optional, and no additional guidance is provided by the ITA.

Transfer pricing methodsThe relevant law provides the following transfer pricing methods: CUP, RPM, cost plus, TNMM, CPM, and full profit split and residual profit split methods. The order of preference for the transfer pricing methods is found in the local regulations. The ITA considers CUP as a priority method with respect to all transfer pricing transactions. No method is specifically outlined as being considered inappropriate by the ITA.

Advance Pricing Agreements (APAs)Israel has a formal APA program. Thus far, it is estimated that there have been approximately fifteen APAs processed in Israel and that the APA team receives approximately five unilateral APA requests from taxpayers per year, with approximately one to three APA requests currently in process. The average duration of the APA process is approximately six months.


Lior [email protected]+972 3 623 2749


Transfer pricing disputes In the context of disputes, approximately 99% of ongoing cases are in domestic appeal (preceding court action), with only 1% of ongoing cases proceeding to litigation.

Current influences on transfer pricing The transfer pricing environment in Israel is responsive to OECD initiatives, and the ITA meets regularly with OECD representatives. No change is perceived in policy or practice based on any stimulus packages recently announced in an attempt to combat the global financial crisis.

Likely trends in transfer pricing activityThe ITA expects compliance measures and dispute resolution to be areas of increased focus over the next two years.



Resources the taxing authority is devoting to transfer pricing The Italian Tax Authority (ITA) administers taxes in Italy. The ITA is currently undergoing restructuring under which regional offices will be in charge of managing assessments as far as large taxpayers are concerned. Transfer pricing groups have been established within the tax administration both at the central and regional levels. The APA team is located in the central office. The ITA expects that, in the future, transfer pricing specialists will be concentrated at the regional/central level, as large taxpayers are to be assessed by regional offices as well as the central office.

The ITA considers transfer pricing to be a key assessment area. As such, the ITA is increasing the number of resources dedicated to transfer pricing and is improving the technical skills of these resources. Transfer pricing specialists operate as well within the APA team. These specialists also support tax officers in the field and in tax settlement procedures.

In terms of background, the resources of the ITA involved in transfer pricing reviews consist mainly of accountants, with a few economists.

Industry focus Italian transfer pricing audits currently focus on the banking and capital markets, consumer products, oil and gas, and pharmaceutical industries.

Significant business activity in Italy (with focus on large and middle-size taxpayers), the importance of IP to the industry, and profitability (profit fluctuations and year-end adjustments) are factors driving the selection of industries for particular focus.

The selection of categories of taxpayers currently under specific focus from a transfer pricing perspective is communicated to taxpayers. Laws, circulars and official press releases are issued annually to provide indications on the activity to be performed by the tax inspectors.

Geographic focusThe ITA specifically targets companies in blacklisted countries and countries that have tax regimes more favorable than Italy’s. Typically, transactions with Italy’s non-treaty partners, with countries with limited exchange of information and low-tax jurisdictions are reviewed in an audit. Additionally, domestically headquartered companies (where foreign tax credit discipline plays a role) are also included in the regular audit cycle. Transfer pricing reviews often involve low tax jurisdictions (both blacklisted and non-blacklisted countries).

Both legislative direction and practical considerations appear to be the key drivers for certain jurisdictions being selected by the ITA. In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties include low-tax

Italy*


jurisdictions (i.e., both blacklisted and non-blacklisted countries).

Types of transactions under scrutiny The sale of tangible goods and IP, other IP transactions (such as the payment of royalties or license fees), intra-group services, financial transactions, cost sharing or cost pooling arrangements, the intra-group sale of business concerns and stock-based compensation are the related-party transactions that are currently the focus for transfer pricing review. Key transactions comprising the current caseload of transfer pricing reviews (ranked in order of prevalence based on observations) are:



• IP

• Intra-group sales of business concerns

• Tangible goods


Transfer pricing penalties Italy does not have a specific transfer pricing penalty regime. The general tax penalty regime is applied. Over the last two years, penalties were applied in a minimum of 50% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they ranged from a minimum of 100% up to 200%

of the transfer pricing adjustment. It is anticipated that the assessment of penalties will remain the same in the next two years.

Audit triggersTransfer pricing audits are instigated at both the local and at a central level, depending on the size of the taxpayers involved. Large taxpayers are often selected at central level or regional level. A variety of considerations are taken into account in determining which taxpayers to audit. Companies undertaking business restructurings, including those involved in M&A activity with other companies or groups and taxpayers that have intra-group transactions with companies resident in low-tax jurisdictions are under particular focus. The ITA specifically focuses on major and midsize taxpayers.

The factors that usually trigger transfer pricing reviews in the jurisdiction (ranked in order of importance based on observations) are:

• Previous tax audits


• Risk-based assessment

• Nature of related-party transactions

• Profitability

• Volume of transactions

• Standard cycles/programs

A Circular Letter was recently issued (on 3 March 2009) by the Italian Tax Police.


This circular provides new and updated instructions concerning tax audit activity. It addresses corporate income tax, VAT and regional tax on production activities, as well as other indirect taxes.

There are specific sections (including checklists) concerning transfer pricing, costs related to blacklisted countries and PE issues. The Italian tax authority has placed more emphasis on intra-group services and intra-group transactions concerning intangibles, with respect to transfer pricing. A Circular Letter of the Tax Administration dated 9 April 2009 identifies intra-group transactions, the transfer of goods, intra-group financing and intra-group transactions concerning intangibles as potentially critical.

Indirect and customs taxThe ITA resources involved in transfer pricing reviews work in an integrated way with indirect tax specialists when transfer pricing challenges are identified. Audits of custom duties are usually performed separately from other audits. As such, though there is some exchange of information with respect to customs and transfer pricing, this is less frequent than in other instances.

There is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes. The arm’s length principle, which is the basis for determining transfer prices for direct tax purposes, is not automatically applicable for indirect tax purposes.

Comparable data The ITA has no formal transfer pricing documentation requirements and no guidelines as to how to conduct comparable searches. Though local data is often preferred by the Italian tax administration, comparable analysis performed on a pan-European basis might be acceptable.

Performing comparable analyses involving jurisdictions outside of Europe involves greater transfer pricing risks given comparability issues. In the absence of specific Italian requirements, it is the taxpayer’s decision to evaluate the comparability of the markets and then define the geographical area where the analysis should be performed (taking into account the provisions of the OECD and the EU Code of Conduct on Transfer Pricing).

In preparing and presenting comparable data, there are no strict requirements. The ITA may consider three to five years of financial data appropriate. An inter-quartile range is usually considered as the most reliable range. In terms of PLIs, the tax authority generally accepts both simple and weighted averages and often uses the operating margin. Data pooling may be used for corroboration, but data pooling is very rarely applied without average data. The structure of Italian financial statements does not allow for automatically determining gross margins for companies. Financial adjustments to comparable data are recommended where they can provide reliable results


and materially improve the comparability of the controlled and uncontrolled transactions.

Transfer pricing methodsRegarding acceptable transfer pricing methodologies, Italian Regulations on transfer pricing identify the standard methods to be used for determining the transfer pricing of the intercompany transactions, which are the CUP, the resale minus method and the cost plus method. In addition the mentioned Regulations set forth some additional minor methods, including the global profits allocation, the CPM, the return on invested capital and the gross margin for the economic sector. However, it is specified that the nonstandard methods should be taken into consideration only as mere instruments to be applied along with the standard ones.

Cost contribution and cost sharing mechanisms are other transfer pricing approaches applied, generally in the case of intra-group services.

Advance Pricing Agreements (APAs)Italy has had a formal APA program since 2004. The ITA has given open access to the APA program for taxpayers.

Only unilateral APAs are applicable in Italy, and the number of applications received per year is limited. The average duration of the APA process may range from one to two years. Currently, there are no other advanced ruling options

available for transfer pricing. However, there are some other rulings available, including tax haven discipline and anti-avoidance rules.

The EU Arbitration Convention is preferred to MAPs (under the relevant double tax treaties) for cases involving EU companies. Both EU arbitration and MAPs have been rarely adopted in the past. The information on these procedures is not publicly available. There are technical uncertainties regarding the application of these processes.

Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is, to some extent, measured having regard to the increase in tax yield and the percentage of taxpayers assessed as high risk.

Transfer pricing disputes The ITA is reducing tax litigation by encouraging taxpayers to reach settlements, thereby avoiding expensive and long litigation. New settlement opportunities are being introduced that allow taxpayers to reduce penalties up to one-eighth (if the taxpayer agrees with the findings of the tax inspectors before any tax assessment notice is formally issued). The tax settlement procedure is a way of managing transfer pricing controversies and penalties, and penalty reductions down to one-fourth of more standard penalty levels may be achieved


Davide [email protected]

+39 02 851 4409


Current influences on transfer pricing The transfer pricing environment in Italy is responsive to the OECD initiatives, EU initiatives and the implementation of centralized business and tax models. The EU Joint Transfer Pricing Forum has been stimulating the ITA to reactivate the EU Arbitration Convention. OECD provisions, EU provisions and their updates are usually considered during Italian tax audits.

It is anticipated that an update of local transfer pricing rules will be issued by the ITA. However, there is no clear indication currently available on when the new rules will be issued nor about their content.

Likely trends in transfer pricing activityThe ITA expects dispute resolution to be an area of increased focus over the next two years. Although the number of dispute resolutions in process is still limited, they are increasing.


Resources the taxing authority is devoting to transfer pricing The Tax Committee of the Ministry of Finance (TCMF) administers taxes in Kazakhstan. Within the TCMF, transfer pricing reviews are carried out by a centralized group which consists of between five and ten individuals. Transfer pricing examinations are generally undertaken as part of complex tax audits and are carried out by the same tax officers. There are no transfer pricing specialists in the local tax bodies; they are all concentrated in the TCMF. The number of transfer pricing resources is expected to increase over the next two years.

Industry focus Kazakhstan transfer pricing audits currently focus on the banking and capital markets, mining and metals, oil and gas, and power and utilities industries. Significant business activity in Kazakhstan, profitability, and strategic importance are the factors driving the industries that are selected for particular focus.

The selection of industries currently under specific focus from a transfer pricing perspective is not officially communicated to taxpayers.

Geographic focusThe TCMF targets companies in certain jurisdictions to some extent. Typically, reviews focus on transactions with Kazakhstan’s major trading partners and low-tax jurisdictions. Transactions with non-treaty partners are also a focus.

Legislative direction and practical considerations are the key drivers for certain jurisdictions being selected by the TCMF.

Types of transactions under scrutinyThe transactions receiving the most focus from the TCMF for transfer pricing review are currently the sale of tangible goods, intra-group services and financial transactions. According to the Kazakh Transfer Pricing Law, transfer pricing control applies to transactions between related and unrelated parties (unlike OECD transfer pricing principles).

Transfer pricing penalties Kazakhstan does not have a specific transfer pricing penalty regime. The general tax penalty regime is applied. The Code on Administrative Violations establishes the legislative requirements. Over the last two years, penalties applied have generally applied in up to 100% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they generally ranged up to 75% of the transfer pricing adjustment. It is anticipated that the assessment of penalties will increase in the next two years.

Audit triggersTransfer pricing audits are instigated by a central decision-making body in the context of the standard audit program in Kazakhstan. A variety of considerations are taken into account in determining


Kazakhstan*


which taxpayers to audit, including:


• The volume of related-party transactions undertaken


Indirect and customs taxThe resources involved in transfer pricing reviews work in an integrated way with indirect tax specialists, and they actively share information. Despite the exchange of information, there is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe TCMF has no specific rules requiring the use of local comparables or for financial adjustments to comparable data. Nor have specific rules been laid out in relation to the number of years of financial information that should be considered, the use of simple versus weighted averages, the method for calculating an arm’s length range, the method for determining an appropriate PLI, or the pooling or averaging of financial data.

Transfer pricing methodsThere is a formal hierarchy between the transfer pricing methods. The methods should be used in the following order:

• CUP

• Costs plus method

• Subsequent resale price method

• Profit split method

• Net margin method

Advance Pricing Agreements (APAs)Kazakhstan has a formal APA program. The TCMF has given taxpayers open access to the APA program. It takes 60 working days to complete an APA process, as outlined in local legislation. There are no specific provisions in Kazakhstan’s Transfer Pricing Law that stipulates that an APA is binding for the tax authorities.

Yield/performance of transfer pricing reviewsThe TCMF expects compliance measures and yield targets (i.e., an increase in the tax take based on audit activity) to be areas of increased focus over the next two years.


Roman [email protected]+7 727 258 5960


Current influences on transfer pricingThe transfer pricing environment in Kazakhstan is responsive to the implementation of centralized business and tax models. The new transfer pricing legislation that came into effect on 1 January 2009 was largely in response to the impact of these types of restructurings.


Kenya

Resources the taxing authority is devoting to transfer pricing The Kenya Revenue Authority (KRA) administers taxes in Kenya. The KRA does not have a centralized center for transfer pricing reviews. As such, no resources are dedicated to performing transfer pricing review, and typically, resources are drawn from other departments to perform reviews. Going forward, the KRA intends to establish a specialized team to lead efforts toward establishing a framework for transfer pricing reviews.

In terms of background, the resources engaged in transfer pricing reviews are revenue officers with the following backgrounds: accountants, followed by economists and lawyers. The KRA plans to invest in transfer pricing, and the number of transfer pricing resources is expected to increase in the coming years.

Industry focusThe KRA mainly focuses on companies with high-risk transactions; therefore, factors such as profitability of the industry, level of royalties paid and the level of activity of the industry within Kenya are relevant factors in the selection of industries for scrutiny.

Geographic focusPractical considerations drive the choice of jurisdictions for review. Typically, transactions with perceived tax havens and low-tax jurisdictions are targeted for

audits. The top jurisdictions (in order, according to the current caseload of transfer pricing reviews) of the relevant counterparties are:


• Other European jurisdictions (Switzerland, the Netherlands)


Types of transactions under scrutinyThe composition of the current caseload of transfer pricing reviews is summarized in the table below.


Tangible goods 60% to 70%



10%

Transfer pricing penalties Kenyan law does not provide for the imposition of specific transfer pricing penalties. The penalties generally applicable under the Income Tax Act also apply to transfer pricing cases.

Over the last two years, penalties have been applied in fewer than 25% of cases where transfer pricing adjustments were issued. Where penalties are imposed, they generally range up to 25% of the additional tax. However, it is expected that the level of penalties imposed by the KRA will increase over the next two years.


Audit triggersTransfer pricing audits are instigated by local KRA offices and divisions, and there is no central process for determining which cases should be looked at. The selection of the taxpayer and the scope of the audit are typically driven by factors such as:

• A risk-based assessment by the KRA




• The incidence of business restructurings

• The previous audits of the taxpayer

Indirect and customs taxThe transfer pricing enforcement resources are granted access to the Simba system used by the Customs department and can share information with it. Within Kenya, the same transfer price needs to be used for corporate (direct) tax and indirect tax purposes.

Comparable dataTypically, local country comparables are preferred, although the use of global comparables is also acceptable.

In preparing and presenting comparable data, specific requirements apply in relation to the method for calculating an

arm’s length range. There is no formal or mandatory guidance provided regarding adjustments to comparable data. Such adjustments are optional and are likely to be supported by the KRA if they enhance the comparability of the information with the tested party.

Transfer pricing methodsKenyan transfer pricing legislation allows the use of the most suitable transfer pricing method for determining arm’s length remuneration for controlled transactions, provided the choice of method can be justified and is documented. The transfer pricing methods are outlined in the Income Tax (Transfer Pricing) Rules 2006 and follow the methods in the OECD Guidelines. The rules do not explicitly permit the comparable profits method. However, the rules give the taxpayer discretion to use such other method as may be prescribed by the Commissioner, where, in his opinion and in view of the nature of the transaction, the arm’s length price cannot be determined using any of the methods specified in the guidelines.

Advance Pricing Agreements (APAs)Kenya does not have a formal APA program. Requests for resolution of double taxation cases under the competent authority procedure typically take longer than one year to resolve.


Geoffrey G. Karuu [email protected]

+254 20 2715300


Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is measured by the percentage of review cases involving an adjustment to the taxpayer’s income.

Transfer pricing disputes In the context of disputes, most of the cases are ongoing in domestic appeal (pending court action). The most prevalent industries in such cases are agriculture, manufacturing and production. The top jurisdictions (in order, according to the current caseload of transfer pricing reviews) of the relevant counterparties are the United Kingdom, countries in Europe and the United States. Having previously lost a transfer pricing case in the High Court, the KRA has tended to avoid going to court over transfer pricing disputes.

Likely trends in transfer pricing activityOver the next two years, from a transfer pricing perspective, the KRA expects to place greater emphasis on compliance measures, dispute resolution, yield targets, and interaction with customs and other indirect taxes.


Lithuania

Resources the taxing authority is devoting to transfer pricing The State Tax Inspectorate (STI), a unit of the Ministry of Finance, administers taxes in Lithuania. Within the STI, tax audits are handled by the Large Taxpayers Department (LTD). Transfer pricing review is an integral part of any tax audit and is carried out by general tax examiners. While the LTD has a specialty transfer pricing group, these transfer pricing specialists are primarily responsible for training the generalists and for planning and providing general assistance in transfer pricing audits. The transfer pricing specialists may be directly involved in a tax audit only on a case-specific basis.

There are nine specialist transfer pricing resources at the STI, split between the central unit and local tax offices. These resources are predominantly accountants. There has been an increase in the number of specialist transfer pricing resources, from three to nine, over the last two years. However, this number is not expected to increase going forward.

Industry focusIn determining particular industries to focus on, the STI considers such factors as the level of activity within Lithuania and the profitability of the industry. Currently the STI has a focus on consumer products and pharmaceuticals industries. This list of priority industries is specifically communicated to the

taxpayers and periodically reviewed. However, industry sector is only one of a number of factors used by the STI to determine audit targets. Geographic focus

The STI targets companies with transactions with low–tax jurisdictions. This is determined both by a formal blacklist for certain jurisdictions as well as by practical considerations.

Types of transactions under scrutinyThe STI has specifically identified certain transaction types that are currently the focus of transfer pricing reviews. The composition of the current caseload of transfer pricing reviews is summarized in the table below.



Tangible goods 30%


20%

Transfer pricing penalties Lithuanian law does not provide for the imposition of specific transfer pricing penalties. The penalties that generally apply to infringements of the tax laws also apply to transfer pricing cases.

Over the last two years, penalties have been applied in approximately 25% to 50% of cases where transfer pricing


adjustments were issued. Where penalties are imposed, they generally range between 25% to 50% of the additional tax. It is not anticipated that this approach to penalties will change in the next two years.

Audit triggersThe relevant decentralized offices instigate transfer pricing audits, taking into account recommendations issued by the LTD. The selection of taxpayers and the scope of audits are typically driven by a risk-based assessment, taking into account:



• Issues arising in previous tax audits of the taxpayer

Indirect and customs taxAs transfer pricing reviews form part of general audits, there is a correlation between direct tax and indirect tax reviews. However, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataIn performing transfer pricing analysis, local country comparables are preferred, although regional comparables (either from the Baltic states or, more broadly, including member states of the European Union) may also be used.

In preparing and presenting comparable data, there are no specific requirements in relation to how comparable data is presented. No formal guidance is provided as to adjustments to comparable data, but such adjustments are recommended, and are likely to be supported by the STI if they enhance the comparability of the information with the tested party.

Transfer pricing methodsLithuanian transfer pricing legislation specifies a hierarchy of transfer pricing methods to determine an arm’s length remuneration for controlled transactions. The STI has specifically identified the CPM as an inappropriate method.

Advance Pricing Agreements (APAs)Lithuania does not have a formal APA program. Nevertheless, it is possible for taxpayers to apply for an advanced ruling in cases where there is a double taxation agreement. An APA program is expected to be formally introduced in the near future.

Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is measured using various considerations, such as an increase in the tax yield, the percentage of review cases involving an adjustment to the taxpayer’s income, and the percentage of taxpayers in compliance with documentation requirements.


Leonas [email protected]+370 5 274 2279


Transfer pricing disputes In the context of disputes, there is one ongoing case in litigation. The taxpayer in this case is in the pharmaceutical industry.

Current influences on transfer pricingThe transfer pricing environment in Lithuania is responsive to European Union initiatives (such as the EU Joint Transfer Pricing Forum). For instance, Lithuania is expected to change its transfer pricing documentation requirements following introduction of the European Union’s Code of Conduct on transfer pricing documentation.

Likely trends in transfer pricing activityOver the next two years, the STI expects to place greater emphasis on compliance measures from a transfer pricing perspective.


Norway

Resources the taxing authority is devoting to transfer pricing The Directorate of Taxes administers taxes in Norway. Within the Directorate of Taxes, transfer pricing reviews are currently being carried out by three out of the five regional offices. There has been an increase in the number of FTE resources involved in transfer pricing examinations, from approximately 50 to between 80 and 100 over the last two years. This number is expected to level off at approximately 100 over the next two years. Resources are highly decentralized, with a team of four central transfer pricing specialists supporting field officers.

In terms of background, the resources comprise approximately 50% lawyers, 30% accountants and 20% economists. The background of resources currently involved in transfer pricing examinations has changed significantly in the recent years, due to difficulties with recruiting accountants.

Industry focusTransfer pricing audits in Norway currently focus on the consumer products, insurance, oil and gas, pharmaceuticals, technology, oil services and telecommunication industries. Significant business activity in Norway (especially for oil and gas/oilfield services) and the importance of IP to the industry are key factors driving the selection of industries for particular focus. The selection of

industries currently under specific focus from a transfer pricing perspective is not communicated to taxpayers and is reviewed annually.

The Directorate of Taxes especially focuses on the attribution of profits to PEs.

Geographic focusThe Directorate of Taxes specifically targets companies located in tax havens and low-tax jurisdictions. Typically, perceived low-tax jurisdictions are reviewed in the scope of audits. Additionally, domestically headquartered companies are also included in the regular audit cycle. Transfer pricing reviews often involve low-tax jurisdictions (including both blacklisted and non-blacklisted countries).

This is reflected in the current caseload of transfer pricing reviews, with particularly high numbers of cases involving Switzerland, Belgium, Ireland and the Netherlands.

Types of transactions under scrutinyThe Directorate of Taxes focuses on IP transactions, intra-group services and financial transactions (loan/thin cap) for transfer pricing review. The approximate percentage of the total caseload involving the following transactions are:



IP (e.g., royalties, licensing) 20%



40%

Transactions arising from business restructuring

20%

Transfer pricing penalties Norway does not have a specific transfer pricing penalty regime. The general penalty regime is applied in transfer pricing cases. There are no processes in place to ensure consistent application of transfer pricing penalties within Norway. Over the last two years, penalties were applied in up to 30% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they generally ranged up to 30% of the tax adjustment.

In addition, it is noted that failure to submit a documentation of sufficient quality may result in a loss of the right to appeal against the assessment.

Audit triggersA variety of considerations are taken into account in determining which taxpayers to audit, including:

• The profitability of the local taxpayer — loss-making businesses

• Business restructurings (identified from a form submitted with the tax return)

• Disclosures made on a special transfer pricing form (RF 1123) to be submitted with tax return

In addition, any taxpayer with questions arising as a result of form RF 1123 is most likely be asked to submit transfer pricing documentation.

Indirect and customs taxGenerally, the transfer pricing resources do not work in an integrated way with indirect tax specialists.

Comparable dataThe Directorate of Taxes adheres to the OECD approach when performing a comparability analysis, where a search for comparables is part of this analysis. The comparables could both comprise internal or external ones, but must satisfy the five comparability factors. In a search for external comparables, it is preferred for these to be as local as possible. However, since the markets in Scandinavia, Nordic region and Northern Europe are considered to be more similar, comparables from these locations are acceptable.

In preparing and presenting comparable data, the Directorate of Taxes expects a minimum of three years of financial data to be used and the method for calculating the allowable arm’s length range to be based on an assessment of the transactions and information available (i.e., not an automatic elimination of the lower and upper quartiles).


The methods for determining the proper PLI (e.g., the operating margin) should be based on the suitability of the PLI and the value driver for the transaction.

Furthermore, the use of database searches could be recognized as proof of an arm’s length range if the comparable set is reliable. It is recommended that financial adjustments be made to comparable data, if adjustments can be made and will improve the reliability of the data/comparison. However, a comparable set may provide support that the price level used is at arm’s length.

Transfer pricing methodsNorway follows the OECD Guidelines, which identify the methods to be used in determining arm’s length remuneration for controlled transactions. The position relating to preferred transfer pricing methods is not based on legislative provisions but, rather, on general practice.

Advance Pricing Agreements (APAs)Norway does not have a formal APA program. If a mutual agreement procedure (MAP) is initiated before reassessment is finished, the process may be very similar to a bilateral APA.

Yield/performance of transfer pricing reviews The Directorate of Taxes measured the effectiveness of transfer pricing review

activities in the period 2005 to 2007 by the increase in tax yield. Transfer pricing disputes

In the context of disputes, there are approximately 100 pending cases in domestic appeals (preceding court action), 30 to 40 cases in litigation and 20 to 30 case in MAP. The jurisdictions most frequently forming the counterparties to the underlying transactions of these disputes and currently under MAP/arbitration are Denmark, Germany, the Netherlands, the United Kingdom, the United States and Sweden.

Current influences on transfer pricingThe transfer pricing environment in Norway is responsive to the global financial crisis or credit crunch, the implementation of centralized business and tax models, and OECD initiatives, which have been taken into account and implemented when applicable.

The Norwegian tax authorities have changed their policy to provide an increased scrutiny of the implications of tax efficient supply chain models and other business restructuring or conversion issues as described by the OECD Discussion on Business Restructurings draft released in 2008.

Norway will also follow up the new legislation in the future. This policy has increased the risk of a reassessment due to a change in functions, risks or


Marius [email protected]+47 24 00 23 86


assets (especially IP) in connection with conversion to commissionaire structures or other centralized business models.

The Directorate of Taxes will also monitor closely the impact of the global financial crisis on existing business models.

Likely trends in transfer pricing activityThe Directorate of Taxes expects dispute resolution and increasing the resources involved in MAPs (double taxation issues) to be areas of increased focus over the next two years.


Poland

Resources the taxing authority is devoting to transfer pricing The Ministry of Finance, the Tax Inspection Department, the Income Tax Department for Advance Pricing Agreements and the Tax Administration Department are the relevant bodies that administer transfer pricing in Poland.

The Tax Inspection Department in the Ministry of Finance supervises the departments involved in the inspection of related-party transactions in the Tax Inspection Offices all over Poland. Generally, the inspectors employed in the local departments do not focus solely on transfer pricing issues. Currently, there are 250 FTE resources employed for the inspection of the related-party transactions in the Tax Inspection Offices in Poland. There are 8 people in the team in the Ministry of Finance responsible for the supervision of the activity of the departments for the inspection of related-party transactions. There are 16 heads of the teams who work at the office in the Tax Inspection offices. There are 234 inspectors working in the field on transfer pricing inspections. There were 224 FTE resources two years ago. The number of FTE resources is expected to increase over the next two years.

In terms of background, the resources involved in transfer pricing reviews consist of approximately 60% economists, 30% lawyers, 5% accountants while the other resources have science and humanities backgrounds. There have been no

significant changes in the background of the resources for the last two years.

There are Tax Offices in Poland supervised by the Tax Administration Department in the Ministry of Finance, which are authorized to inspect taxpayers in the area of transfer pricing as well. The statistics for the Tax Offices’ activities were, however, not included in this report, which is based solely on the data of the Tax Inspection Department and the Income Tax Department for Advance Pricing Agreements.

Industry focusTransfer pricing audits in Poland currently focus on the consumer products, pharmaceuticals, real estate, technology, power and utilities, construction and chemical industries. Significant business activity in Poland and the profitability of the local taxpayer are the factors driving the selection of industries for particular focus. Other considerations driving the selection of industries include being part of multinational capital groups, being a branch of a foreign taxpayer, having foreign contractors and the quantum of activities.

The selection of industries for specific focus from a transfer pricing perspective is not widely communicated to taxpayers. The list of industries in focus changes without any specific time frame and takes account of the results (e.g., the size of irregularities) of audit activities.


Geographic focusThe Polish tax authorities target companies in certain jurisdictions for transfer pricing reviews with the focus of attention on the transactions with parties located in tax havens. Typically, transactions with Poland’s major trading partners, non-treaty partners and companies with headquarters in tax havens are reviewed in the scope of audit.

Legislative direction is the key driver for certain jurisdictions being selected by the Polish tax authorities. There is an official list of the tax havens published in a Ministry of Finance Decree dated 16 May 2005.


1) Germany2) Luxemburg3) Cyprus4) France5) Switzerland

Types of transactions under scrutinyTransfer pricing reviews by the Polish tax authorities currently focus on the sale of tangible goods, IP transactions, intra-group services, financial transactions and cost sharing/cost pooling arrangements.

Transfer pricing penalties A penalty tax rate of up to 50% may be applied in transfer pricing cases where

an adjustment is made as a result of a tax inspection. The penalty tax rate can only be applied if a taxpayer did not provide the tax authorities with the transfer pricing documentation required under Polish law.

Over the last two years, penalties were applied in up to 25% of cases where transfer pricing adjustments were issued by the Tax Inspection Offices. Where penalties were imposed, they generally ranged up to 25% of the transfer pricing adjustment. It is not anticipated that this approach to penalties will change in the next two years, and it is expected to remain roughly the same. In 2008, the tax inspection offices applied the penalty tax rate in three cases for the amount of PLN890,000 (approximately US$280,000).

Audit triggers Transfer pricing audits are not instigated by a central decision-making body. A variety of considerations are taken into account in determining which taxpayers should be the focus of audit activity, including (ranked in order of importance):







• The outcome of a risk-based assessment by the Polish tax authorities


The central team in the Ministry of Finance does not directly decide on the selection of particular cases for audit but, based on a coordinated approach, sets the industries on which inspectors should focus and indicates other criteria, based on which the selection for transfer pricing audits should be made.

Indirect and customs taxThe transfer pricing enforcement resources work in an integrated way with indirect tax specialists. Generally, the same transfer price should be applied in practice. However, technically, it is possible to have different pricing, as the VAT law has its own definition of market value and circumstances requiring adjustments, and therefore there could be a difference in prices.

Comparable dataLocal comparables are preferred as they are considered to be more reliable, and as such, they are given greatest weight in most cases. Where Polish comparables cannot found, Central/Eastern European comparables may be used.

In preparing and presenting comparable data, there are no specific requirements,

and many analytical tools are applied in practice. The analysis should be made in a way that results in the most reliable and comparable data. The Polish tax authorities recommend making financial adjustments to comparable data to improve comparability with the tested party. The Polish tax authorities expect the best comparable data to be selected out of the market data available and that the particular price/margin/PLI used falls within the arm’s length range identified.

Transfer pricing methodsThe transfer pricing methods and their hierarchy are outlined in the relevant Polish law. This hierarchical order of preference follows the OECD Guidelines. However, there is no direct reference to the CPM in the Polish transfer pricing guidelines. Under the Polish law, the tax authorities need to verify the arm’s length character of the transfer prices by using the CUP, resale minus, cost plus, TNMM or profit split methods. Cost sharing and cost contribution arrangements are not listed as the transfer pricing methods. However, the transfer pricing law gives some indication on how to establish the arm’s length value in case of such type of arrangements.

Advance Pricing Agreements (APAs)Poland has a formal APA program that entered into force in 2006. There were twelve applications filed in 2006, three


Aneta [email protected]+48 22 557 8996


applications filed in 2007, five applications filed in 2008 and one application in 2009 under the APA program. Seven APA cases are currently in process in the Ministry of Finance, of which six applications are for unilateral APAs and one application is for a bilateral APA. The average length of time required to complete an APA process is fourteen months.

The strategy of the Ministry of Finance is to strengthen the APA process and to develop APAs as a tool for taxpayers to reduce their potential transfer pricing risks. Therefore, Ministry of Finance expectation is that, thanks to the experience gathered so far, the efficiency of the procedure will improve through maintaining the best practices in the communication with taxpayers and shortening the average length of time required. It is also the Ministry of Finance’s strategy to increase the number of bilateral APA cases.

Yield/performance of transfer pricing reviews The Polish tax authorities measure the effectiveness of transfer pricing review activities by the increased tax yield and the percentage of review cases where an adjustment is sustained on appeal. In 2008, 338 transfer pricing inspections were conducted by the Tax Inspection Offices. In 41 cases (out of the 338 inspections conducted), an adjustment was made to the transfer price, and additional income was assessed on taxpayers.

Transfer pricing disputes In the context of disputes, there are ten ongoing cases in the domestic appeals process (preceding court action), four ongoing cases and two pending cases for litigation, two ongoing cases for MAP and six initial discussions for arbitration. The two jurisdictions most frequently represented by counterparties to the underlying transactions in these disputes are Germany and France.

Likely trends in transfer pricing activityThe Polish tax authorities expect yield targets (i.e., an increase in the tax take based on audit activity) and the interaction with customs and other indirect taxes to be the areas of increased focus over the next two years.



Resources the taxing authority is devoting to transfer pricing The Directorate General for Taxes (Direcção Geral dos Impostos) (the DGT)administers taxes in Portugal. Within the DGT, transfer pricing reviews are carried out by a special transfer pricing unit within the Tax Inspection Group.

There has been an increase in the number of FTE resources involved in transfer pricing reviews, from less than 10 resources to a level that fluctuates below 50 resources over the last two years. It should be noted, however, that of these resources, approximately 10 could be considered transfer pricing specialists. This number is expected to sharply increase over the next two years.

In terms of background, the specialist transfer pricing resources in the Tax Inspection Group are mainly economists. The background of resources currently involved in transfer pricing examinations is anticipated to change significantly, with the increase in percentage of lawyers over the coming two years.

Industry focusTransfer pricing audits in Portugal currently focus on the automotive, banking and capital markets, consumer products and real estate industries. Significant business activity in Portugal and the business turnover of industry participants are the factors driving the selection of idustries for particular focus.

The selection of industries currently under specific focus from a tax perspective, and therefore also from a transfer pricing perspective, is widely communicated to taxpayers. This list of industries is reviewed annually. A list of companies that will be subject to a special scrutiny, taking into account indicators such as turnover, tax losses and use of tax benefits, is published every four years. The last one was published in the current year.

Geographic focusThe DGT does target companies in certain jurisdictions for transfer pricing reviews. Typically, perceived low-tax jurisdictions are reviewed in the scope of an audit. Additionally, domestically headquartered companies are also included in the regular audit cycle.

The stated policy of the Portuguese authorities is the key driver for certain jurisdictions being selected by the DGT. In the current caseload of transfer pricing reviews, the most prevalent jurisdictions of the relevant counterparties are:

• Blacklisted offshore jurisdictions

• EU and EFTA jurisdictions with more favorable treatment of certain categories of income such as trading, IP and hybrid instruments

• EU and EFTA jurisdictions with a system of rulings that provide for substantial reduction of taxable burden in all categories of income such as trading, IP and hybrid instruments

Portugal*


Types of transactions under scrutinyThe DGT is currently focusing on the following transaction types for transfer pricing reviews: the sale of tangible goods, IP transactions, intra-group services, business model conversions, and the sale of a business. Key transactions that make up the current caseload of transfer pricing reviews (ranked in order of prevalence) are:


• ►IP (e.g., royalties, licensing)

• Tangible goods

• ►Intra-group services

• Business model conversions

Transfer pricing penalties Portugal does not have a specific transfer pricing penalty regime; the general penalty regime applies (for example, failing to prepare the annual tax documentation, when required by law, attracts a penalty of up to 100,000 euros). In some cases, such as when documentation was necessary and not created and when misleading information was provided in the transfer pricing annexes of the Annual Tax Declaration, criminal ramifications may be at stake for the company’s chartered accountant (TOC) or/and the management. However, the transfer pricing legislative agenda, foreseen in the preamble to Decree-Ruling 1446-C/2001, establishes

the objective of the preparation of a specific transfer pricing penalty regime. Over the last two years, penalties were applied in up to 100% of cases where transfer pricing adjustments were issued. It is anticipated that penalties assessed in relation to transfer pricing matters will increase in the next two years.

Audit triggers Transfer pricing audits are instigated by the DGT. A variety of considerations are taken into account in determining which taxpayers to audit, including (ranked in order of importance):

• The outcome of a risk-based assessment by the DGT





Indirect and customs taxTransfer pricing enforcement resources work in an integrated way with indirect tax specialists, especially in the context of assessing the potential existence of a PE of a foreign entity based on registration in Portugal for VAT purposes. There is a requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.


Paulo [email protected]

+351 21 791 2045


Comparable dataThe Portuguese transfer pricing law gives prevalence to local comparables, and these are given the highest weighting from a comparables perspective. Iberian data is considered the next-best alternative by the DGT where Portuguese comparable information is not available. If both types of comparable data are not available, which should be clearly highlighted in the comparables search, then pan-European data is considered as the last resort.

In preparing and presenting comparable data, the DGT expects a minimum of three to five years of financial data to be used. The DGT generally accepts simple averages and prefers the averaging of financial data rather than a pooling approach. The PLI is determined depending on the type of business model.

The Portuguese transfer pricing law, and the DGT, considers financial adjustments (e.g., working capital adjustments, asset intensity adjustment) made to the comparable data to be mandatory.

Transfer pricing methodsThere is no formal hierarchy between transfer pricing methods in Portugal. The choice of an appropriate transfer pricing method depends on the type of business model and the transactions involved. The CUP, RPM, cost plus method, profit split method and the TNMM are explicitly listed in the local legislation law. A CPM may be applied if it is demonstrated by

the taxpayer to be the best available method. Specific rules for CCAs and service agreements are also foreseen in the law. The position with regard to preferred transfer pricing methods is based on legislative provisions.

Advance Pricing Agreements (APAs)Portugal has a formal APA program. Taxpayers have the right to apply for an APA; however, it is within the discretionary powers of the DGT to move the APA forward.

It generally takes a maximum of one year to complete an APA process. However, different timings are foreseen in the law, depending on the type of APA applied for. There are no other alternative advanced ruling options available other than an APA.

Likely trends in transfer pricing activityThe DGT expects dispute resolution and yield targets (i.e., increasing tax take based on audit activity) to be areas of increased focus over the next two years.


Romania

Resources the taxing authority is devoting to transfer pricing The National Agency of Fiscal Administration (NAFA) administers taxes in Romania. Transfer pricing examinations are performed by general tax audit inspectors based in the field. However, a central transfer pricing unit has been set up within the NAFA, to work in cooperation with the field-level inspectors.

There are approximately 10 FTE resources1 at the central transfer pricing unit. Only a few of the resources involved in transfer pricing examinations are transfer pricing specialists. Most of the examiners based in the field are generalists.

Types of transactions under scrutinyThe NAFA has specifically identified that the following transactions (in order of prevalence as per the current caseload) are currently the focus of transfer pricing reviews:



• Tangible goods

Transfer pricing penaltiesFailure to present transfer pricing documentation or the presentation of incomplete documentation within the specified time may trigger a fine of up

to €3,500 and an estimation of the appropriate transfer prices by the tax authorities in place of those determined by the taxpayer. The adjustments trigger a profits tax liability of 16% on any additional income, and late payment interest of around 36% per annum is also be levied. Romania has put in place legislative provisions to ensure consistent application of the transfer pricing penalty provisions.

Over the last two years, penalties have been applied in approximately 25% of cases where transfer pricing adjustments were issued. Where penalties are imposed, they generally range from 25% to 50% of the additional tax. Penalty assessments are expected to increase over the next two years.

Audit triggersTransfer pricing audits are instigated by the central transfer pricing unit. Within Romania’s standard audit program, the selection of the taxpayer for further review and the scope of the audit are driven by various considerations such as (ranked in order of importance):

• ►The profitability of the taxpayer


• ►The nature and volume of the taxpayer’s related-party transactions

Indirect and customs taxThe work of Romanian transfer pricing enforcement resources is integrated with that of indirect tax specialists,

1 Based on information available to Ernst & Young, these FTE resources comprise mostly of economists and registered accountants.


insofar as instigation of a transfer pricing audit is concerned — for instance, VAT reimbursement requests often trigger transfer pricing audits. However, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataTypically, local comparables are preferred. The Romanian transfer pricing documentation legislation specifically mentions that the comparability analysis should consider territorial criteria in the following sequence: Romania, European Union and other International territories. The transfer pricing documentation should detail the criteria based on which potential Romanian comparables, if any, were rejected.

In preparing and presenting comparable data, the inter-quartile range is preferred for calculating the allowable arm’s length range. There are no specific requirements in relation to the number of years of financial information, the use of simple versus weighted averages, the method for determining an appropriate PLI, or the pooling or averaging of financial data.

There is no formal/mandatory guidance provided about adjustments to comparable data. Such adjustments are likely to be supported by the Romanian tax authorities, as long as any adjustments are in line with the OECD Transfer Pricing Guidelines.

Transfer pricing methodsRomanian transfer pricing legislation specifies a hierarchy of transfer pricing methods to determine arm’s length remuneration for controlled transactions, which is line with the hierarchy laid down in the OECD Transfer Pricing Guidelines.

Advance Pricing Agreements (APAs)Romania has a formal APA program, which is accessible to all taxpayers. Currently, four APA requests are in process. The average duration for processing of APA requests is 12 months for unilateral APAs and 18 months for bilateral or multilateral APAs.

Current influences on transfer pricing The transfer pricing environment in Romania is responsive to the global economic slowdown and the initiatives at the OECD and the EU levels. It is expected that these factors will result in an increase in the number of transfer pricing audits going forward. Further, with the introduction of specific Romanian transfer pricing documentation requirements in the year 2008, transfer pricing has become one of the key issues in tax audits of multinational enterprises.


Alexander [email protected]+402 1402 4000


Likely trends in transfer pricing activityOver the next two years, the Romanian tax authority expects to place greater emphasis on compliance measures and yield targets from a transfer pricing perspective.



Resources the taxing authority is devoting to transfer pricing In Russia, transfer pricing reviews are not undertaken by dedicated transfer pricing specialists or transfer pricing departments. However, as part of the expected reform of the Russian transfer pricing rules, the Russian tax authority may set up a separate department to handle such cases.

There is an increased emphasis on transfer pricing education. The Russian tax authority has, in the past, arranged transfer pricing training sessions by representatives of, among others, the OECD and the Danish tax authority to increase the transfer pricing competency of its resources. It is expected that transfer pricing awareness and knowledge will continue to increase as a result of the increased attention to this issue.

Industry focusIn terms of absolute numbers of cases, one of the most frequent issues that the Russian tax authority applies the transfer pricing provisions to is the leasing and renting, and buying and selling, of office space and apartments at a nonmarket price. However, this is not to say that the real estate industry is the most common focus for scrutiny in Russia. In general, the Russian tax authority pays special attention to commodities industries (oil, gas, metals and timber) and, in particular, to exporters, which have, historically, been known to use aggressive transfer pricing structures.

Geographic focusNo specific geographic focus has been observed whereby the Russian tax authorities pick up transactions with certain foreign jurisdictions — although, as many Russian companies use offshore jurisdictions, several cases do involve such countries. However, perhaps surprisingly, the majority of transfer pricing court cases in Russia have involved domestic transfer pricing issues.

Types of transactions under scrutinyIn our experience, the most frequently reviewed transactions (ranked in order of prevalence, based on a review of available court cases) relate to the export of tangible goods, the rental or leasing of real estate and intra-group services charges (cost sharing).

The Russian tax authority does not often challenge foreign MNEs in relation to their import of goods. The tax authority might refer to the transfer pricing provisions when challenging service fees, but such charges are primarily challenged on the basis of nondeductibility (as not economically justifiable or for insufficient evidence of services being rendered) and not only on the transfer price itself.

IP transactions should not fall within the scope of the Russian transfer pricing rules, based on a literal interpretation of those rules. However, the Russian tax authority has tried to broaden the

Russia*


interpretation of the transfer pricing rules and, in one case, has successfully lowered the royalty rate paid for a trademark.

But, in general, IP transactions are likely to be challenged on the basis of nondeductibility on the basis that the charge is not economically justifiable.

Transfer pricing penalties Russia does not have a specific transfer pricing penalty regime. In some cases, the Russian courts have chosen to apply the general penalty regime, which results in penalty of either 20% or 40% of undeclared taxes plus late payment interests. In general, the Russian courts have taken the view that penalties do not apply to transfer pricing cases, as transfer pricing is an “estimation exercise” for which the Tax Code does not provide the taxpayer with a right or wrong answer.

Over the last two years, penalties have been applied in fewer than 25% of cases where transfer pricing adjustments were issued. Where penalties are imposed, they generally range up to 20% of the additional tax. If Russia decides to go ahead with the expected transfer pricing reform, we would expect the assessment of penalties to increase, and a specific transfer pricing penalty regime may be a part of these reforms.

Audit triggersProfitability may trigger transfer pricing related challenges; for example, if a

company’s profitability drops following the introduction of a service charge or royalty. However, in general, to date, the only structured trigger for transfer pricing-related audits seems to have been if a company exports commodities to a perceived low-tax jurisdiction. Otherwise, there is no clear pattern behind what triggered the other transfer pricing cases that have so far been heard before the Russian courts.

Indirect and customs taxHistorically, the work of Russian transfer pricing enforcement resources has not been integrated with that of indirect tax specialists. In general, the Russian tax authority and customs authority have tended to treat each other as rivals and have not shared information. However, this may change in the near future, as the Russian tax and customs authorities have called for royalty payments to be included in the price of goods declared for customs purposes, if a Russian-based distribution company is to pay a trademark royalty (although this is a customs and not a transfer pricing issue).

As such, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataOnly comparable data provided from official sources, such as the State Statistics and Price Setting Authority, experts and independent appraisers,


official information regarding exchange quotations and information regarding market prices published in printed publications, would be considered in the case of a dispute. Such data is primarily of Russian origin.

The term “official source” is not defined in the Tax Code, but these sources have been listed in clarification letters issues by the Ministry of Finance’s Department of Tax and Customs Policy.

In preparing and presenting comparable data, there are no specific requirements related to the number of years of financial information, the selection of method for calculating the arm’s length range, the use of simple versus weighted averages, or the pooling or averaging of financial data. In the context of PLIs, it should be noted that the Russian transfer pricing rules make reference to the use of “operating income” when applying the local versions of the RPM and cost plus method. It is also interesting to note that the Russian transfer pricing rules only refer to the “market price” (i.e., in effect, it is assumed that there is only one market price for any given product or service at a given point in time). Finally, there is no formal or mandatory guidance provided about adjustments to comparable data.

Transfer pricing methodsRussia follows a hierarchy of transfer pricing methods, which includes (ranked in order of preference) the CUP method, the RPM and the cost

plus method. The traditional RPM and cost plus method (as defined under the OECD Guidelines) could be considered potentially inappropriate, as the Russian transfer pricing rules refer to the use of operating income in applying these methods. The Russian equivalents of the RPM and cost plus method are, in fact, variations of the TNMM. In turn, they can also be said to be variations of the CPM, depending on the specific fact pattern. The Russian transfer pricing rules also do not recognize the profit split method (regardless of whether full profit split or residual profit split).

In addition to the methods identified above, the Russian tax authorities have also upheld the use of the discounted cash flow approach in a specific case involving IP (trademark royalty rate).

Advance Pricing Agreements (APAs)Russia does not have a formal APA program. The formulation of such a program is likely under consideration as part of the expected transfer pricing reform in Russia.

There are no options to obtain official advanced rulings. However, a taxpayer may obtain a clarification letter from the Ministry of Finance. Although this does not serve as a formal ruling, a clarification does provide a high degree of support should a local tax inspector seek to challenge the taxpayer’s transactions or tax position.


Henrik [email protected]+7 495 648 9608


Yield/performance of transfer pricing reviews The Russian tax authority loses approximately 85% to 90% of all court cases relating to transfer pricing, and this trend has not changed over the past five years.

Therefore, increasing the success rate of court cases is probably the authority’s main performance indicator. Transfer pricing disputes

Litigation is the favored means of resolving transfer pricing (and tax) disputes in Russia. In the years 2006, 2007 and 2008, there were approximately 600 to 800 court cases each year referring to the Russian transfer pricing rules. This figure is based on information available at Federal Arbitration Court-level only (i.e., the court of third instance) as limited public information is available from the cases settled in the courts of first or second instance.

Current influences on transfer pricingThe Ministry of Finance and the Ministry of Economics have agreed on and formalized a concept for Russian transfer pricing reform and are expected to release the draft law by 1 August 2009 at the latest. It is currently expected that the draft law will be submitted to parliament in late autumn and enacted as of 1 January 2010.

The two ministries note that transfer pricing reform is needed, as foreign multinationals use transfer pricing as a mechanism to transfer profits out of their Russian subsidiaries, thereby minimizing their tax burden in Russia. Additionally, it is acknowledged that Russian companies also use transfer pricing to shift their tax bases between regions or even offshore. The reformed transfer pricing law is expected to serve as an effective tool in enabling the Russian tax authority to crack down on tax evasion.

It seems likely that foreign multinationals will be listed as the primary target or selling point for the transfer pricing reform, as the Russian government is looking for additional revenues, and subsidiaries of foreign multinationals currently seem to have more taxable income than domestic companies. Most Russian multinationals have suffered economically as a result of the global economic crisis and, as a consequence, have limited profits (if any) to shift offshore.

Likely trends in transfer pricing activityIf the expected transfer pricing reform is put in place, we anticipate Russia will adopt a more effective transfer pricing law that would provide the tax authority with a real possibility to crack down on transfer pricing abuses. It is likely the starting point for the new regime would be compliance measures followed by yield targets.


Slovak Republic

Resources the taxing authority is devoting to transfer pricing A specialized transfer pricing group has been created at the level of Tax Directorate in the Slovak Republic. Additionally, three small specialized, decentralized transfer pricing groups have also been created at Košice, Banská Bystrica and Trnava. However, transfer pricing compliance examination may be carried out by any tax authority during a tax audit, without involvement of the specialized transfer pricing groups.

Of the eight specialist transfer pricing FTE resources at the Slovak tax authority (STA), five resources are located centrally in the Tax Directorate, and one resource is located in each of the decentralized, specialized transfer pricing groups. These specialized groups have been set up only recently, and the number of resources is expected to increase in the next two years.

All the specialist transfer pricing resources are economists, who can be described as generalists with some level of transfer pricing knowledge. There is a growing emphasis on increasing the transfer pricing competencies of the resources through internal/international training on transfer pricing matters.

Geographic focusThere is no formal program prioritizing the review of taxpayers in a particular jurisdiction. However, typically, transactions with low-tax jurisdictions

and tax havens are reviewed in audits. The most frequently observed counterparties in the current caseload of transfer pricing reviews are:

• Germany

• ►The United States

• The Netherlands

Types of transactions under scrutiny The STA has specifically identified the following transactions (ranked in order of prevalence) that are currently the focus of transfer pricing reviews:


• ►Tangible goods



• ►Cost sharing/cost pooling arrangements

Additionally, the authority has identified stock-based compensation as an area of interest.

Transfer pricing penaltiesSlovak law does not provide for the imposition of specific transfer pricing penalties. The penalties generally applicable according to the Act on Tax Administration No 511/1992 (as amended) also apply to transfer pricing cases.


Over the last two years, penalties have been applied in approximately 35% of cases where transfer pricing adjustments were issued. Where penalties are imposed, they generally range up to 25% of the additional tax payable. This approach to penalties is not anticipated to change in the next two years.

Audit triggersTransfer pricing audits are instigated either by the Tax Directorate or by the local tax authorities, on a case-by-case basis.

Indirect and customs taxThe work of the transfer pricing resources is not integrated with that of indirect tax specialists. There is also no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes. The STA is expected to jointly administer direct taxes and customs duties in the next two years.

Comparable dataTypically, local country comparables are preferred. Alternatively, regional comparables with comparable market conditions, located in the same continent as the taxpayer, may also be used.

There is no formal or mandatory guidance provided as to adjustments to comparable data. Such adjustments are generally to be made in the case of significant differences in the transactions or functions being compared.

Transfer pricing methodsThe Slovak transfer pricing legislation specifies a hierarchy of transfer pricing methods to determine arm’s length remuneration for controlled transactions. The traditional transaction methods are preferred to the transactional profit methods. If none of the specifically identified methods are suitable for determining the arm’s length price, the taxpayer is permitted to adopt any other suitable method.

Advance Pricing Agreements (APAs)The Slovak Republic does not have a formal APA program. Typically, taxpayers are allowed to approach the tax authorities and seek their approval on the transfer pricing method adopted. It should be noted that the authorities can only approve the methodology and do not have the power to approve a specific price or percentage for the taxpayers’ related-party transactions.

Yield/performance of transfer pricing reviews The effectiveness of transfer pricing review activities is measured based on various considerations, such as an increase in the tax yield, the percentage of review cases involving an adjustment to the taxpayer’s income, the percentage of review cases where an adjustment is sustained on appeal and the percentage of taxpayers in compliance with the documentation requirements.


Gunter [email protected]

+421 2 333 39610


Transfer pricing disputes Generally, most of the decisions of the tax authorities on the assessment of a penalty due to non-compliance with transfer pricing requirements are followed by taxpayer appeals. There have been no court disputes, litigation, mutual agreements or arbitration in this respect yet.

Likely trends in transfer pricing activityOver the next two years, the STA expects to place greater emphasis on compliance measures (to ensure greater taxpayer compliance with transfer pricing documentation requirements) and joint administration of direct taxes and customs duties, as well as on ensuring closer cooperation in the field of transfer pricing.


Slovenia

Resources the taxing authority is devoting to transfer pricing The Ministrstvo za finance, Davcna uprava Republike Slovenije (DURS) administers taxes in Slovenia. The DURS has a dedicated group of 30 inspectors who undertake transfer pricing reviews. These transfer pricing resources make up approximately 7% of the total of active inspectors. Some inspectors of transfer pricing group are highly specialized in international taxation, but some of them conduct other types of audits. The work of the transfer pricing group of inspectors is coordinated by the General Tax Office.

This level of resourcing has been consistent over the last seven years. Other inspectors are also regularly informed about transfer pricing legislation and procedures for inspecting taxpayers’ transfer pricing arrangements.

In terms of the background of the transfer pricing specialist resources, 90% of them are economists while the remaining 10% are lawyers.

Industry focus Factors such as whether the activities of the industry are significant within the country, the importance of IP to the industry and the profitability of the industry are relevant in identifying specific industries for scrutiny. Occasionally, the tax authorities make

public announcements of the specific types of businesses being closely examined.

Geographic focusPractical considerations and legislative direction (such as a formal blacklist of certain jurisdictions) drive the choice of jurisdictions for review. Typically, transactions with Slovenia’s major trading partners and low-tax jurisdictions are reviewed in the scope of audits.

Types of transactions under scrutiny The DURS has specifically identified the following transactions (ranked in order of prevalence) that are currently the focus of transfer pricing reviews:


• Tangible goods




Transfer pricing penaltiesUnder relevant legislation, the DURS may impose a penalty for not filing the prescribed transfer pricing documentation. The assessment of penalties is expected to increase in the next two years.


Audit triggersThe General Tax Office instigates transfer pricing audits within Slovenia. The selection of the taxpayer and the scope of the audit are driven by various considerations such as:



• The outcome of a risk-based assessment by the DURS


• Transfer pricing issues identified during previous tax audits of the taxpayer

• Information available from reports in the media and from Amadeus and other public databases

Indirect and customs taxThe work of Slovene transfer pricing enforcement resources is integrated (especially in terms of sharing of information) with that of indirect tax specialists. However, there is no requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe choice of local versus regional comparables depends upon the nature of the industry and the number of comparables that may be obtained, as

well as upon the taxpayer’s discretion. In the absence of local comparable information, regional comparables located in the same continent as the taxpayer or those located in certain specified countries may be used.

Transfer pricing methodsThe Slovene transfer pricing legislation specifies a hierarchy of transfer pricing methods to be used in determining arm’s length remuneration for controlled transactions. If none of the specifically identified methods are suitable for determining the arm’s length price, the taxpayer is permitted to adopt a suitable combination of such specified methods.

Current influences on transfer pricing The transfer pricing environment in Slovenia is responsive to developments such as the current global economic slowdown, the implementation of centralized business and tax models, and initiatives at the OECD and the EU levels.

Slovenia implemented fundamental provisions of the OECD Guidelines in its legislation with the tax reform in 2005. With the tax reform effective in 2007, Slovene legislation with respect to transfer pricing was further harmonized with legislation of the other EU member states.

Based on the provisions of the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union


Lucijan [email protected]+386 1 583 17 21


(EU TPD – 2006/C176/01), Slovenia introduced provisions relating to transfer pricing documentation requirements in Tax Procedure Act-2.

The DURS monitors the global economic situation and takes into consideration market conditions that affect transfer pricing inspecting policies.

Likely trends in transfer pricing activityThe DURS carries out tax audits with the strategic objective of reducing the tax gap in the budget of the Republic of Slovenia. The DURS also strives to take preventive action to increase the level of voluntary payments of tax liabilities. The DURS is keen on establishing a tax environment that will nurture its relationships with taxpayers and tax advisors based on mutual trust and cooperation.


Spain

Resources the taxing authority is devoting to transfer pricing The Agencia Estatal de Administración Tributaria (the Spanish Tax Authority (STA)) administers taxes in Spain. Within the STA, transfer pricing reviews are carried out by decentralized units, with the exception of efforts dedicated towards large taxpayers. There is no centralization within the taxing authority, but, in practice, coordination is done at a higher level. Approximately 20% of the FTE resources currently involved in transfer pricing examinations are transfer pricing specialists, while approximately 10% of the total transfer pricing resources are decentralized. The STA expects to dedicate a high number of professionals over the next two years to transfer pricing. However, no specific budget has been allocated to this.

In terms of background, the transfer pricing resources consist of approximately 50% economists, 40% lawyers and 10% engineers. The STA does not anticipate any change in background of resources currently involved in transfer pricing examinations.

Industry focus Currently, the focus for transfer pricing audits in Spain are the automotive, consumer products, media and entertainment, mining and metals, oil and gas and pharmaceutical industries. The importance of IP to the industry and industry profitability are the factors

driving the selection of industries for particular focus.

The selection of industries that are currently under specific focus from a transfer pricing perspective is not widely communicated to taxpayers. This list of industries is reviewed every three years.

Geographic focusPerceived low-tax jurisdictions, evidence of limited-risk business structures (e.g., involving limited risk distributors (LRDs) or commissionaire entities) and issues concerning the existence of a PE for VAT purposes are the drivers for the selection of countries for focus by the STA. In the current caseload of transfer pricing reviews, the top three most prevalent jurisdictions of the relevant counterparties are:

• Switzerland

• ►The United States

• Germany

Types of transactions under scrutiny The STA currently focuses on the sale of tangible goods (especially in the chemical and pharmaceuticals industries), IP transactions and intra-group services for transfer pricing reviews.


The approximate percentages of the total caseload involving the following transactions are:


Tangible goods 20%


20%



10%

Transfer pricing penaltiesSpain has a specific transfer pricing penalty regime. However, there are no processes in place to ensure the consistent application of transfer pricing penalties in the jurisdiction. Over the last two years, penalties were applied in up to 10% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they generally ranged up to 25% of the transfer pricing adjustment. It is anticipated that the level and frequency of penalties will increase in the next two years. It is also expected that the application of penalties will broaden from the current focus on reassessment related penalties to include more frequent penalties for failing to comply with documentation requirements.

Audit triggersTransfer pricing audits are not instigated by a central decision-making body. A variety of considerations are taken into

account in determining which taxpayers to audit, including (ranked in order of importance):




Indirect and customs taxThe transfer pricing enforcement resources work in an integrated way with indirect tax specialists. However, there is no formal requirement that the same transfer price be used for corporate (direct) tax and indirect tax purposes.

Comparable dataThe STA has no strict requirement for local comparables. The data considered as the most comparable and exhibiting the closest key economic characteristics to the tested party are used. However, where local comparables are not available, the STA prefers pan-regional data from the “old Europe 15” (i.e., the 15 EU member states prior to 1 May 2004) plus Norway and Switzerland.

In preparing and presenting comparable data, there are no specific requirements in relation to the number of years of financial information, the method for calculating the allowable arm’s length range, the use of simple versus weighted averages, the pooling or averaging of financial data, or the method for determining the appropriate PLI.


Juan Jose Terraza [email protected]

+34 933 663 741


The STA is considering the option of providing guidance related to the financial adjustments to be made to the comparable data. However, no decision has been taken on this as of June 2009.

Transfer pricing methodsThere is a formal hierarchy between transfer pricing methods under the relevant Spanish law. The CUP, RPM and cost plus methods constitute the methods in the highest level of the hierarchy. The profit split method and TNMM form the second level of the hierarchy. Applying a discounted cash flow methodology is the other method specifically mentioned as permitted in the Spanish legislation.

Advance Pricing Agreements (APAs)Spain has a formal APA program, with the right to access the APA program open to all taxpayers. The STA receives approximately 25 applications per year out of which 6 are applications for unilateral APAs. There are 22 applications currently in process under the APA program. The top three countries involved for bilateral APAs are the United States, the United Kingdom and France. It generally takes eight months to conclude a unilateral APA and more than fourteen months to conclude a bilateral APA.

Approximately 20 competent authority cases are resolved annually.

Transfer pricing disputes The jurisdictions most frequently forming the counterparties to transactions underlying transfer pricing disputes with Spain are the United States, the United Kingdom, Germany and France. Disputes involving the pharmaceuticals and automotive industries are the most frequent in Spain.

Current influences on transfer pricingThe transfer pricing environment in Spain is responsive to OECD and EU initiatives, such as the EU Joint Transfer Pricing Forum. Indeed, with regard to documentation requirements and domestic MAP and arbitration procedures, Spain is closely following the developments coming from the Joint Forum.

Likely trends in transfer pricing activityCompliance measures and dispute resolution are the likely focus areas for the taxing authority in the next two years.


Sweden

Resources the taxing authority is devoting to transfer pricing The Skatteverket (Tax Agency) administers taxes in Sweden. Within the Tax Agency, transfer pricing reviews are carried out by a centralized project team with members of the project located in Stockholm, Gothenburg and Malmö, established in 2008. All transfer pricing-related questions that arise during an inquiry are reported to this project team. There are 25 FTE resources assigned to the team.

In terms of background, the resources consist of economists, auditors and lawyers. Competent authority matters are handled by a separate unit, not by the centralized project team.

Geographic focus Although there is no formal geographic focus, the Tax Agency targets transactions with countries where it perceives that the arm’s length principle is not applied in accordance with the OECD Guidelines or where the proper application of the arm’s length principle is distorted. Hence, the geographic location of counterparties to a transaction may be a factor that influences the risk analysis (amongst many other factors).

Types of transactions under scrutinyThe Tax Agency applies a risk analysis model, which focuses on a number of potential risk areas.

These include certain types of transactions including:

• IP-related transactions


• “Limited risk” structures


• PEs (attribution of profits)

Transfer pricing penaltiesSweden does not have a specific transfer pricing penalty regime, but rather the general penalty regime is applied on transfer pricing adjustments. Generally, penalties are levied by the Tax Agency if an income adjustment is made. According to Swedish tax legislation, penalty fees can be charged if the taxpayer has hidden information or disclosed misleading information in the tax return. Penalty fees are typically charged at 40% of the tax not paid as a result of the incorrect information/lack of information. Interest is also charged on the additional tax imposed.

Audit triggers A variety of considerations are taken into account in determining which taxpayers to audit, including:

• The outcome of a risk-based assessment by the Tax Agency

• Evidence of business restructurings


Mikael [email protected]

+46 8 520592 35


Indirect and customs taxThe transfer pricing enforcement resources do generally not work in an integrated way with indirect tax specialists although they may liaise with each other on specific cases. The Customs authority is a separate agency.

Comparable dataThe Tax Agency prefers Swedish or Nordic comparables. However, regional comparables are not rejected for the sole reason that they are not Swedish or Nordic. Pan-European comparables are accepted by the Tax Agency depending on the facts and circumstances. Assessments are based on the comparability factors used, including whether the economic circumstances in the selected countries are reasonably comparable.

In preparing and presenting comparable data, no explicit systematic requirements apply with regard to features such as the number of years of financial data to be considered and statistical tools to be used. These requirements would depend on the facts and circumstances and what would be the closest approximation to an arm’s length result. In practice, the Tax Agency has a general preference for three years or multiple year periods of financial data. The Tax Agency considers the use of full range or the inter-quartile range depending on the facts and circumstances. Financial adjustments

are considered by the Tax Agency only where it can be argued that they improve comparability.

Transfer pricing methodsThere is no formal hierarchy between transfer pricing methods other than what follows from the OECD Guidelines and the Swedish regulations support the use of an appropriate method rule. The Tax Agency accepts the methods in the OECD Guidelines.

Advance Pricing Agreements (APAs)Sweden does not have a formal APA program, although bilateral APAs have been concluded with treaty partners under Article 25 of the Model Tax Convention. The Ministry of Finance has handled these APAs. Formal APA legislation is expected in the near future, likely from 1 January 2010.

Likely trends in transfer pricing activityThe Tax Agency has a program for informing and educating companies (in particular small and medium enterprises (SMEs)) in transfer pricing-related matters.

The activities of the Tax Agency are aimed at achieving a consistent application of the arm’s length principle and the uniform treatment of taxpayers.


Switzerland

Resources the taxing authority is devoting to transfer pricing Within Switzerland, tax audits are the responsibility of the individual Cantonal tax administrations. The Division of International Affairs within the Federal Tax Administration (FTA) is responsible for MAPs and bilateral APAs.

There are approximately 500 FTE resources involved in tax audits across the Cantonal tax administrations, with two centrally located transfer pricing specialists located within the FTA. Both of these centrally located transfer pricing specialists are economists. The level of resourcing has not changed over the last two years. However, the current level of resourcing may grow depending on the number of transfer pricing review cases.

Geographic focus Practical considerations drive the choice of jurisdictions for review. Typically, transactions involving tax havens are reviewed during audits.

In the current caseload of transfer pricing MAPs/APAs, the top five most prevalent jurisdictions of the relevant counterparties are:

1) Japan2) France3) United States4) Canada5) The United Kingdom

Types of transactions under scrutinyThere is no particular focus on specific transactions types within Switzerland. As per the current caseload of transfer pricing reviews, the following are the most prevalent transactions scrutinized:


Tangible goods 60%


20%


20%

Audit triggersTransfer pricing audits are instigated by the relevant decentralized resources. Taxpayer selection is typically based on a standard audit cycle/program.

Indirect and customs taxIn general, the same transfer price needs to be used for direct tax and indirect tax purposes, although there are some exceptions to this provision. However, the Swiss transfer pricing enforcement resources do not work in an integrated way with the indirect tax/customs specialists.

Comparable dataThere is no strict guidance concerning the comparable data to be presented by taxpayers. Typically, local or regional


Raoul [email protected]

+41 58 286 35 08


(preferably the same continent as the taxpayer) comparables may be used.

In calculating ranges, the weighted average is generally preferred to the simple average. The PLIs that are generally used are the gross margin, net margin, return on capital employed and the Berry ratio. The choice of the pooling method or the method of averaging of financial data is based on the number of available comparables. In preparing and presenting comparable data, financial data covering three to five years are usually used.

There is no formal or mandatory guidance provided about adjustments to comparable data. Such adjustments are optional and are likely to be supported if they enhance the comparability of the information with the tested party.

Transfer pricing methodsSwitzerland does not formally identify a hierarchy of transfer pricing methods, although, in practice, preference is given to the CUP method. The methods set out in the OECD Guidelines are considered to be appropriate.

Advance Pricing Agreements (APAs)Switzerland does not have a formal APA program. However, it is possible for Switzerland to conclude APAs with treaty partners, in cases where the treaty contains a specific article providing for

resolution of double taxation (i.e., via MAP between competent authorities).

Additionally, approximately ten cases of APAs are resolved annually under the competent authority procedure. The average duration of such proceedings is around two years.

Transfer pricing disputes There are currently approximately 50 cases pending (including APAs) resolution through MAP. The most common treaty partners involved in these cases are Japan, Korea and Australia.

Current influences on transfer pricing The transfer pricing environment in Switzerland is responsive to OECD initiatives. The transfer pricing reviews and initiatives by the FTA and the Cantonal tax administrations are aligned with the OECD Transfer Pricing Guidelines.

Likely trends in transfer pricing activityThe FTA is likely to place greater emphasis on dispute resolution over the next two years.


The Netherlands

Resources the taxing authority is devoting to transfer pricing Within the Belastingdienst (Dutch Tax Authority, (DTA)), the Transfer Pricing Coordination Group (TPCG) is responsible for coordinating administration in the field of transfer pricing and for enforcement of transfer pricing policies. The TPCG is a nationwide operating organization and consists of four regional coordinators, a coordinator within the APA-team and a network of members located in the respective local offices.

The TPCG and the APA team currently have approximately 25 FTE resources, with the majority being decentralized. This level of resourcing has been consistent over the last couple of years, although this number is anticipated to grow in the coming years. The resources include the DTA’s benchmarking specialists. In addition to the specialist resources, all of the DTA’s inspectors have transfer pricing included in their training. In terms of background, around 75% of all resources are registered accountants, while the remainder are from a tax background.

Industry focusWhile within the DTA, tax inspectors are identified as industry specialists, there is no formal program prioritizing the review of taxpayers in a particular industry or industries at the current time.

Geographic focus Although transactions with low-tax jurisdictions and non-treaty parties are considered by the DTA when performing a holistic risk analysis, geographic considerations are not drivers for the selection of taxpayers for review. Details of the most frequently reviewed jurisdictions were therefore not provided.

Types of transactions under scrutinyWhile there is no formal focus on specific transaction types, the DTA has identified the review of headquarter costs and intra-group service charges as areas of interest, along with transactions with entities in low effective tax rate countries and on the allocation of profits to PEs in the case of construction projects. This focus is largely consistent with transaction types identified during Ernst & Young’s last Authority Survey in 2005–2006.

Transfer pricing penaltiesNo specific transfer pricing penalty regime exists in the Netherlands. However, when applying general penalty provisions to transfer pricing reviews, the penalty is generally applied in a more tolerant manner, with penalties generally only applied in cases of intentional non-compliance with the arm’s length principle. It is not anticipated that this approach to penalties will change in the next two years.


The approach of the DTA to penalties is evidenced by the fact that in recent years, penalties have been applied in less than 25% of instances where transfer pricing adjustments were issued by the DTA. Where penalties are imposed, however, they are often sizeable, generally ranging between 50% and 100% of the amended tax payable.

Audit triggersThere is no standard audit cycle in the Netherlands, and transfer pricing audits are, therefore, instigated by the relevant decentralized resources in the various regions. A variety of considerations are taken into account in determining which taxpayers to audit, including:

• Profitability

• Bbusiness restructurings

• Previous audits of the taxpayer


Indirect and customs taxIn the Netherlands, while VAT is the responsibility of the DTA, Customs is managed by a separate body (the Douane). There is a increased cooperation between the DTA and Customs. The DTA in cooperation with the Douane is willing to include custom issues when discussing a possible APA.

Comparable dataThe Netherlands does not require the use of local comparables. This decision is at

the discretion of the taxpayer. The DTA would obviously support the use of local comparables where they increase the reliability of comparable information.

In preparing and presenting comparable data, there are no specific requirements in relation to the number of years of financial information, the use of simple versus weighted averages or the method for calculating an arm’s length range. With regard to the selection of an appropriate PLI, it should be noted that the DTA generally does not accept the Berry ratio as the correct PLI for sales-related activities (however, it may still be used as a secondary “sanity” check for the level of remuneration received).

There is no formal guidance provided as to adjustments to comparable data, which are supported by the DTA where they enhance the comparability of the information with the tested party. Working capital adjustments are perceived as the most objective of those adjustments made, and diagnostic ratios may also be applied to comparable data.

Transfer pricing methodsIn general, the DTA follows the OECD Transfer Pricing Guidelines hierarchy of methods to be used in determining arm’s length remuneration for controlled transactions. There is no “best method” rule applied by the DTA.

Due to the limited availability of comparable information, in practice, taxpayers apply traditional transactional methods less often. In this respect, the


Erik [email protected]+31 10 406 8630


TNMM is widely applied by taxpayers in the Netherlands, and this approach is agreed by the DTA.

Advance Pricing Agreements (APAs)The APA process in the Netherlands is well established and accessible to all taxpayers. The DTA Ruling Team currently receives approximately 230 to 280 applications from taxpayers per year, and there are currently approximately 161 applications in process. The average duration of the APA process is approximately 54 days. Most APAs in the Netherlands involve unilateral APAs.

Yield/performance of transfer pricing reviews The DTA does not measure the effectiveness of the transfer pricing review activities undertaken.

Transfer pricing disputes There is a very limited number of domestic appeals in the Netherlands at the current time. There were 155 MAP cases open in the last quarter of 2008, of which approximately one-third involved transfer pricing. The pending transfer pricing MAPs are considered to be the tip of the iceberg, as many taxpayers are currently unaware or unconvinced that a procedure under Art. 25(5) of an applicable treaty can successfully eliminate (economic) double taxation.1

Likely trends in transfer pricing activityThe DTA has introduced a new way of working with taxpayers called “horizontal control.” Under horizontal control the tax authorities and the taxpayer work together based on common trust. The DTA will support the increased use of horizontal control moving forward.

The DTA also expects the interaction of transfer pricing and indirect taxes (VAT and customs) to be an area of increased focus, both from its perspective and from the perspective of taxpayers.

1 Transfer pricing and Mutual Agreement Procedures; Bert van der Kolk, Theo Elshof; International transfer pricing journal March/April 2009.



Resources the taxing authority is devoting to transfer pricing Responsibility for tax within Turkey is split between four separate groups across the Ministry of Finance and the tax authority (GİIB) (covering tax inspectors, revenue controllers, tax reviewers and inspectors). Each of these four groups has the authority to conduct a transfer pricing audit. However, the only full-time transfer pricing resources are within the GIİB, with a core team consisting of ten members. However, this group is involved in execution matters and, as such, does not perform tax audits. This team has only been established over the past two years, and the level of knowledge of technical transfer pricing matters outside this team is limited.

Tax auditors mainly have a background in economics, finance and business administration at undergraduate level. The number of transfer pricing audits is expected to increase over the next two years, which will correspondingly require an increase in specialized transfer pricing experts.

Industry focus The pharmaceutical industry in Turkey has seen the most activity in terms of transfer pricing audits, although other industries are also likely to come under scrutiny. Factors such as the profitability of the industry and the volume of related-party transactions are taken into account in identifying specific industries for scrutiny.

Types of transactions under scrutinyWhile there is no formal focus on specific transaction types by the GİIB, the review of transactions involving IP, intra-group services and tangible goods are key areas of interest for transfer pricing reviews.

Transfer pricing penaltiesTurkish law does not provide for the imposition of specific transfer pricing penalties. The general penalty rules mentioned in the Tax Procedures Code also apply to transfer pricing cases. A tax loss penalty, equal to the additional tax, may be levied, in addition to late payment interest at the rate of 30% per annum.

Turkey has put in place appropriate measures to ensure consistent application of the transfer pricing penalty provisions. The transfer pricing penalty assessments within Turkey are expected to increase in the next two years.

Audit triggersThe relevant decentralized offices instigate transfer pricing audits within Turkey. Audit plans are developed to determine specific sectors to be considered in the scope of an audit. These plans are sometimes shared publicly. The selection of the taxpayer and the scope of the audit are driven by factors such as:

• ►The profitability of the taxpayer

Turkey*


Feridun [email protected]+90 212 368 5204



• The extent of business restructurings

Indirect and customs taxAlthough the same transfer price needs to be used for direct tax and indirect tax purposes, the work of Turkish transfer pricing enforcement resources is not currently integrated with that of indirect tax specialists.

Comparable dataThere are no publicly available databases in use in Turkey for searching comparable information. As such, while local comparables are preferred, there is no legislative provision prescribing a preference for local comparables, and, therefore, regional comparables within Europe could also be used.

In preparing and presenting comparable data, there are no specific requirements in relation to the number of years of financial information required, the use of simple versus weighted averages, the method for calculating an arm’s length range, the method for determining an appropriate PLI, or the pooling or averaging of financial data.

No formal guidance is provided about adjustments to comparable data.

Transfer pricing methodsTurkish transfer pricing legislation specifies a hierarchy of transfer pricing

methods to determine an arm’s length remuneration for controlled transactions. The traditional transactional methods are preferred, but the taxpayer may use any other method if a reasonable explanation can be provided as to why traditional methods are not suitable for the transactions under review.

Advance Pricing Agreements (APAs)Turkey has a formal APA program, accessible to all corporate income taxpayers. However, to date, no bilateral or multilateral APAs have been concluded.

Likely trends in transfer pricing activityOver the next two years, there is expected to be greater emphasis on determining compliance and documentation measures.


United Kingdom

Resources the taxing authority is devoting to transfer pricing Her Majesty’s Revenue and Customs (HMRC) has recently made a significant effort to increase the transfer pricing capabilities within the organization. Previously there were a limited number of full-time transfer pricing specialists at the International and Large Business Section (LBS) levels, but there were a large number of nonspecialists who pursued enquiries on transfer pricing issues at the local level.

When the Transfer Pricing Group (TPG) was established in April 2008, it was envisaged that there would be around 60 people nationwide (of whom 20-30 would be based at the Business International unit in London) and that all transfer pricing cases would be handled by this group. Typically, each TPG specialist also supervises nonspecialists in handling transfer pricing enquiries. In addition to aiding better targeting of inquiries and improved quality, the new structure also helps to ensure continuity for inquiries if the local case handler for a taxpayer changes.

The makeup of teams involved in transfer pricing inquiries varies depending on the needs of the specific case. When appropriate, the TPG may call upon dedicated transfer pricing economists, economists from a broader pool not designated to transfer pricing or even external advisors, if appropriate. The TPG may also call upon commercial

sector specialists, lawyers, accountants and systems analysts, who do not tend to be dedicated transfer pricing resources.

Industry focusHMRC does not focus on particular industries. Rather, the approach taken is on the basis of a risk assessment for each entity that takes into account all relevant factors including industry. Clustering in some industries may, however, result from the accumulation of knowledge and experience by individual Inspectors, but this is not due to a policy to focus on particular industries.

Geographic focusThe approach adopted by HMRC is risk-based with all entities reviewed on an equal footing, and there is no explicit geographic focus. The geographic location of counterparties to a transaction may be a factor that feeds into the risk assessment (amongst many other factors). However, this factor typically would not trigger a transfer pricing inquiry by itself.

Types of transactions under scrutinyDuring a risk assessment, HMRC analyzes all transactions and considers some transactions to have a higher risk than others, depending on the facts and circumstances.

For financial services transactions there is a specialist financial services team.


Stock options are a current area of focus as part of the overall risk assessment.

Transfer pricing penalties The penalty regime for transfer pricing is the same as for other direct tax infringements; there is no specific penalty regime for transfer pricing. The Business International Division and the appropriate Transfer Pricing Panel (TPP) are involved in all cases potentially involving penalties as part of an overall settlement so as to ensure consistency in approach.

HMRC considers that it is too early to say whether the new penalty regime in the United Kingdom will lead to more penalties becoming eligible in transfer pricing settlements.

Audit triggersCase selection is undertaken at the local level and is based on a risk assessment and the preparation of a business case. However, final approval on selection for an inquiry is given by the relevant TPP or, in some cases, the Transfer Pricing Board. The TPP reviews risk assessments and the business case for all proposals to take up a transfer pricing inquiry; sign-off by the panel is required before an inquiry may commence. This process helps to ensure better targeting so that only worthwhile cases are taken up. A small number of cases have been rejected at this stage.

A risk-based assessment is undertaken that will be geared to the facts and circumstances of the particular taxpayer.

The LBS uses a scoring approach in its case selection process, which is not specific to transfer pricing.

Indirect and customs taxJoint inquiries with indirect and customs taxes can be undertaken if appropriate.

Comparable dataThe HMRC approach, as set out in the UK legislation and in HMRC’s International Manual, is to apply the OECD Guidelines within the context of specific facts and circumstances. On this basis, local comparables may well be best, but suitability depends on the activities being benchmarked and the economic similarities between different markets. There is also an acknowledgement that the lack of data availability may sometimes make the identification of local comparables difficult. In summary, there are no prescriptive rules, and any comparables set should be supported by robust, persuasive analysis in conformity with the OECD Guidance.

Adjustments are encouraged where they improve the comparability of a data set. However it was noted that the application of several material adjustments may invite the question of whether the set is actually comparable in the first place.

Transfer pricing methodsHMRC’s position is that the most appropriate method, with reference to the transfer pricing methods laid out in


the OECD Guidelines, should be applied. The preference is for the CUP method, followed by whichever other method is most appropriate.

HMRC is open to the use of alternative approaches, e.g., CCAs, if appropriate to the situation.

Advance Pricing Agreements (APAs)The UK has a formal APA program. HMRC expects the number of applications for the APA program to increase this year. Allowing taxpayer participation in the APA program is at the discretion of HMRC. In cases involving sufficient complexity to warrant an APA, HMRC welcomes an “expression of interest” dialogue with the taxpayer at a very preliminary stage, before much detailed modeling and drafting has been undertaken, to discuss whether this criterion is met. The average length of time required to complete an APA process is 18 to 21 months (from the receipt of the formal application to completion). Historically, taxpayers have not shown much interest in unilateral APAs. Bilateral APAs have also been of more value to HMRC, because they obviate competent authority (CA) disputes.

Transfer pricing disputes There are currently six CAs (one is full time and the others have additional roles within HMRC). Companies with a valid case under MAP often miss out due to not paying proper attention to the time limits. Since a case is not prejudiced by putting in a protective MAP claim, taxpayers are advised to put in a protective claim as early as possible, without necessarily waiting for a final position in the other jurisdiction.

Current influences on transfer pricing HMRC has a major focus on improving compliance by taxpayers.

In addition, the new transfer pricing process and panels provide a more robust way of supervising transfer pricing MAP claims and reduces the risk of a UK adjustment being withdrawn at MAP.

The UK is heavily involved in the work of the various OECD working parties on transfer pricing and PEs and in the work of the EU Joint Transfer Pricing Forum.


David [email protected]+44 020 795 18846


Likely trends in transfer pricing activityThe new transfer pricing process is in place in the UK and seems to be working well from initial assessment. The UK is closely involved in the ongoing work of the OECD. Any updates to the OECD Guidelines would require a Treasury Order before they can apply under UK legislation (Schedule 28AA(2)(3)(b)).

Overall, HMRC approves the OECD discussion draft on business restructurings, although it acknowledges the need for further work on some of the Issues Notes. Much of the content of the notes is wholly consistent with HMRC’s policy and practice.


Transfer pricing contacts


Global contacts

Esther [email protected]+44 20 7980 0720

John [email protected]+44 207 951 6438

Alexander [email protected]+31 88 40 71223

▌ Argentina

Carlos [email protected]+54 11 4318 1619

▌ Australia Paul [email protected]+612 9248 4952

▌ Austria

Andreas [email protected]+43 1 211 70 1041

▌ Belgium

Herwig [email protected]+32 02 774 9349

▌ Canada

Greg [email protected]+1 604 891 8221

▌ Brazil

Gil [email protected]+55 11 2112 5466

▌ Colombia

Gustavo [email protected]+1 571 651 2210

▌ Costa Rica

Rafael [email protected]+1 212 773 4761

▌ Croatia

Robert [email protected]+385 1 2480 540

▌ Czech Republic

Jiri [email protected]+420 225 335 327

▌ Ecuador

Javier [email protected]+1 593 2 255 5553

▌ Denmark


▌ Chile

Sergio [email protected]+156 2 6761676

▌ Egypt

Sherif [email protected]+202 3336 6627

▌ Estonia

Ranno [email protected]+372 611 4578

▌ Finland

Sari [email protected] 207 280 190

▌ France

Franck [email protected]+33 4 78 63 17 10

▌ Germany

Oliver [email protected]+49 211 9352 10627

▌ Greece

Stelios [email protected]+30 210 28 86 414

▌ Hong Kong

Patrick [email protected]+852 28469905

▌ Hungary

Denes [email protected]+36 1 451 8209

▌ China

Joanne [email protected]+86 10 58153380

Jessica [email protected]+86 21 58152806


▌ Ireland

Joe [email protected]+353 1 2212 457

▌ Israel

Lior [email protected]+972 3 623 2749

▌ Italy

Davide [email protected]+39 02 851 4409

▌ Japan

Kai [email protected]+49 89 14331 16711

▌ Kenya

Geoffrey G. Karuu [email protected]+254 20 2715300

▌ Kazakhstan

Roman [email protected]+7 727 258 5960

▌ Korea

Kyung Tae [email protected]+82 2 3770 0921

▌ Latvia

Ilona [email protected]+371 704 3836

▌ Malaysia

Janice [email protected]+6 03 7495 8223

▌ Mexico

Jorge [email protected]+1 55 5283 8671

▌ New Zealand

Mark [email protected]+64 9 300 7085

▌ Norway

Marius [email protected]+47 24 00 23 86

▌ Peru

Marcial [email protected]+151 1 411 4424

▌ Lithuania

Leonas [email protected]+370 5 274 2279

▌ Phillipines

Romulo [email protected]+63 2 894 8392

▌ Poland

Aneta [email protected]+48 22 557 8996

▌ Romania

Alexander [email protected]+402 1402 4000

▌ Russia

Henrik [email protected]+7 495 648 9608

▌ Singapore

Jesper [email protected]+65 6309 8038

▌ Slovenia

Lucijan [email protected]+386 1 583 17 21

▌ Slovak Republic

Gunter [email protected]+421 2 333 39610

▌ Portugal

Paulo [email protected]+351 21 791 2045

▌ India

Vijay [email protected]+91 981049 5203

▌ Indonesia

Rachmanto [email protected]+62 21 5289 5000


▌ UK

David [email protected]+44 020 795 18846

▌ Venezuela

Katherine [email protected]+58 212 953 5222

▌ Vietnam

Carlo [email protected]+84 4 831 5100

▌ USA

Purvez [email protected]+1 713 750 8341

▌ Turkey

Feridun [email protected]+90 212 368 5204

▌ The Netherlands

Erik [email protected]+31 10 406 8630

▌ Sweden

Mikael [email protected]+46 8 520592 35

▌ Switzerland

Raoul [email protected]+41 58 286 35 08

▌ Taiwan

George [email protected]+86 21 2228 8888

▌ Spain

Juan Jose Terraza [email protected]+34 933 663 741

▌ Thailand

Narumol Limprasert [email protected] +66(0)2264 0777 ext: 21017

Transfer pricing contacts

▌ South Africa

Corlie Hazell [email protected]+27 11 772 3990


We would like to sincerely thank the tax authority representatives who responded to this survey and the Ernst & Young transfer pricing professionals who provided their perspectives and insights, garnered from their experience of working with the tax authorities in their jurisdictions. All these efforts were facilitated by a central core team, whom we would like to acknowledge for their contribution: Alexander Lorimer, Ana-Maria Janschek, Dan Karen, David Tracey, Esther Dahmen, Nitin Jain, Paul Griffiths, Ralf Heussner and Tammy LeGrys.

Acknowledgments

Ernst & Young

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About Ernst & Young’s Transfer Pricing and Tax Executive Supply Chain Management servicesWe bring you a global perspective on transfer pricing and tax effective supply chain management (TESCM), based on our long-standing experience of what really works. We help you configure your supply chain effectively and design and implement sustainable transfer pricing policies. Our multi-skilled teams support you in implementing proactive, pragmatic and integrated strategies that address tax risks and help your business achieve its potential. It’s how Ernst & Young makes a difference. © 2009 EYGM Limited. All Rights Reserved.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

TAX Pub Global Transfer Pricing Survey Report 2009

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