Transfer Pricing and OECD BEPS Action 13

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Disclaimer

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Disclaimer

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

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Background

► What does BEPS stand for?► Base Erosion and Profit Shifting

► Who is the OECD ?► OECD (Organization for Economic Cooperation and Development)► The OECD is a forum where the governments of 34 democracies with market

economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.

► What is the objective of BEPS and other transparency and tax avoidance provisions?► The OECD, the EU and other countries are concerned about aggressive tax

planning:► The issue is political: governments are facing budget shortfalls and they, along

with others (e.g., the media) are questioning whether multinational companies pay their ‘fair share’ of taxes.

► The OECD created action plan that resulted in recommendations (Action items) to address the aggressive planning.

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BackgroundGlobal transparency proposals and activity

BEPS• 15 Actions• OECD+G20

Anti-Tax Avoidance (ATA)• 6 Directives• EU/EEA

EU State Aid• Multiple investigations• Many taxpayer

adverse rulings

Interrelated efforts to address perceived abuses by MNC and erode local tax basesMany actions implemented with immediate effect

Regional or Local Country Initiatives Inspired by BEPS• Australia publishes taxes 2014 paid for top +1000 companies• UK Anti-hybrid rules and Tax Strategy Disclosure (2017 implementation)• EU proposed disclosures on taxes paid, business activities by country and in “tax havens”

OECD EU EU

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Country-by-Country report

High level information about MNC’s jurisdictional

allocation of revenue, profit, taxes, assets and employees

to be shared with all tax authorities where MNC has

operations

Impacts: new tax reporting requirements under Action Item 13► CbCR: Final US regulations issued on

June 29, 2016 apply to FY commencing June 30, 2016.

► CbCR: Reporting threshold of $850 million and greater in global revenue.

► CbCR: consistent approach to data requirements and definitions where adopted.

► Master file and local file requirements for calendar 2016 in approximately 50 countries: UK, France, Germany, Italy, China, India, Korea and Mexico to name a few.

► Greater engagement of non-tax functions (finance, legal, HR, investor relations) to support tax with these new requirements.

Themes across companies

► Should I file voluntarily with the IRS for 2016?

► What resources do I need to address CbC reporting

► Engaging with stakeholders outside of tax – if the data becomes public

Master fileHigh level information about MNC’s business, transfer pricing policies

and agreements with tax authorities in single

document available to all tax authorities where MNC

has operations

Local fileDetailed information about

MNC’s local business, including related party

payments and receipts for products, services,

royalties, interest, etc.

Tax authorities will have access to your global tax footprint via CbCR data, master file and the local file

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Organizational structure Business description Intangibles

Intercompany financial activities

Financial and tax positions

Structure chart:► Legal ownership► Geographic

location

Important drivers of business profit

Overall strategy description

Financing arrangements for (related and unrelated) lenders

Annual consolidated financial statements

New information with more invasive disclosures

Supply chain of:► Five largest products/services

by turnover► Products/services generating more than 5%

of sales

List of important intangibles and legal owners

Identification of financing entities

List and description of existing unilateral advance pricing agreements (APAs) and other tax rulings

Align to CbCR & local file

Main geographic markets of above products

List of important intangible agreements

Details of financial transfer pricing policies

US does not require,but…

List and brief description of important service arrangements

R&D and intangible transfer pricingpolicies

Is now a requirement in many countries to be compliant

Functional analysis of principal contributions to value creation by individual entities

Details of important transfers

Business restructuring/ acquisitions/ divestitures during fiscal year

Master file – information required

Master file

Local file

CbC report

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Local file – information required

Local entity Controlled transactions Financial information► Management structure► Local organization chart► Details on individuals to whom

local management reports

► Description of material controlled transactions and context in which they take place

► Identification of associated enterprises party to controlled transactions and relationship

► Functional analysis► Transfer pricing methods used► Comparables and details of methodology

► Local entity financial statements► Reconciliation to show how financial data

used in applying the transfer pricing method ties to the financial statements

► Summary of relevant financial data for comparables and sources from which data was obtained

Description of business and business strategy pursued

Amounts of intra-group payments and receipts for controlled transactions (products, services, royalties, interest, etc.)

► R&D and intangible transfer pricing policies

► Details of important transfers

Details of business restructurings and/or intangible transfers

Unilateral and bilateral/multilateral APAs and other tax rulings related to the controlled transactions

► Companies historically prepare LF► Consider how LF story ties to CbCR data

Key competitors Master file

Local file

CbC report

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Country-by-country report – information required

Tax jurisdiction

RevenuesProfit (loss)

beforeincome tax

Cash tax paid (CIT and WHT)

Current year tax accrual

Statedcapital

Accumulated earnings

Tangible assets other than

cash and cash equivalents

Number of employees

Unrelated party

Relatedparty Total

1.

2.

3.

4.

5.

Tax jurisdiction

Constituent entities

resident in the tax

jurisdiction

Tax jurisdiction of organization

or incorporation

if different from tax

jurisdiction of residence

Main business activity(ies)

R&

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arke

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in.,

mgm

t or

supp

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ervi

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Prov

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part

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Inte

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1.

2.

3.

4.

5.

Table 1:

Table 2:

Country-by-country reporting template

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CbCR timelines and due dates

► Requirements in non-US jurisdictions could:► Cause official notifications by December 2016 (NL and Lux)► Cause a US Parent HQ to file in calendar 2017 for the CY

covering 2016.

► Some countries are imposing punitive measures to ensure compliance (e.g., criminal liability (NL), and loss of government contracts (MX)).

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CbC reporting readinessIs your company where it wants to be?

► Perform an initial dry run and assess current state of CbC profile

► Identify issues that would be raised by tax authorities

► Analyze master and local file gaps

► Recommend and plan structural remediation

► Finalize a plan for first-year implementation and how it will impact follow-on year implementations

► Incorporate CbC forms into filing calendars

► Set up data extraction and year one compliance process

► Configure audit trail functionality

► Design and implement technology tool or utilize a third-party provider

► Implement and/or enhance technology tools

► Establish data governance► Automate data extraction

and mapping ► Improve process and tools

for data analytics► Improve process for report

generation and filing

► Understand the rules and application to your company

► Align on policy decisions► Identify both financial and

nonfinancial information sources

► Identify stakeholders and operating model

► Connect to master and local files and determine gaps

2. Assess risks and

opportunities

3. Prepare for and conduct

year one reporting

4. Sustain future

compliance

1. Getting started

Key

act

iviti

esK

ey o

utco

mes

► Source data and policy decisions

► Assessment and communication plans

► Risk assessment and remediation plan

► Implementation plan(s)

► Integrated calendar► CbC form and filing with

tax authority(ies)► Action plans for changes to

transfer pricing and legal structure

► Sustainable process and tools

► Automated reporting and analytics

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How companies are responding to Action 13

► Communications:► Prepare executive level briefing► Engage foreign operations leadership► Request review by stakeholders in legal and shareholder relations functions

► Align key stakeholders► Increasingly important that tax, legal, treasury and business are aligned with regard to decision

making► CbC reporting:

► Understand US and foreign rules and application to your Company► Consider voluntary filing for calendar 2016 to address OUS ‘secondary’ reporting requirements► Analyze CbC report data and options for remediation► Determine strategy and work plan for CbC reporting compliance

► Master/local file:► Map timeline and identify when the Master File needs to be ready► Engage with non-tax sources to gather enhanced business data required

► Supply Chain mapping► Intangibles strategy and footprint

► Multiple new countries are enacting local file requirements – impacts on budgets and need for centralized oversight

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Jeffrey VelekePittsburghITS – Transfer PricingTel: 412-644-0418EYCOMM: 5858353E-mail: jeffrey.veleke@ey.com

►Jeff Veleke is an Executive Director with E&Y’s Transfer Pricing Group in Pittsburgh.

►Experience includes the preparation of transfer pricing documentation for international and state and local tax purposes, economic and financial studies for tax planning and other corporate planning purposes, and assisting companies with setting up their supply chain in a tax effective manner.

► Over 19 years of economic and financial consulting experience with companies in a variety of industries.

► Prior to joining E&Y, Jeff worked for one of the current Big 4 Firms in both Pittsburgh and Dallas.

►Jeff received his MBA in Finance from Southern Methodist University and his undergraduate degree in Engineering from University of Wisconsin. Jeff has earned the designations of Chartered Financial Analyst (CFA), Accredited Senior Appraiser (ASA) of the American Society of Appraisers, and Registered Professional Engineer (inactive).