Guide to International Transfer Pricing

Law, Tax Flanning and Compliance Strategies

Duff & Phelps

Wolters Kluwer

Table of Contents

Editor Biographies v

List of Contributors vii

List of Abbreviations lxiii

Preface lxix

CilAI'TKK 1 Overview/Best Practices Mark Bronson, Miclwlh' Johnson, Kate Sullivan, Justin Radziewicz & Arthur Balizan 5

§1.01 What Is Transfer Pricing and Why Does It Exist? 5 IA| Transfer Pricing Example 6 IB] Arm's-Length Standard 8

111 Arm's-Length Standard Defined in the US Transfer Pricing Regulations 9

[2] Arm's-Length Standard Defined in the OECD Guidelines 9 [3] Exceptions to the Arm's-Length Standard 9

[C] hnportance of Transfer Pricing to Today's Multinational Companies 10 [ 11 Who Cares about Transfer Pricing? 11

[a] Tax Departments 11 [b] Chief Financial Officers 12 [c] Operations 13 [d] Accounting Departments 14 [e] Legal Counsel 14 [f] Government Authorities 14 [g] Board of Directors 15 [h] Independent Auditors 15

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[i| Tax Maninil;', aml ('oinphaiue Ad\ i-.ni •• §1.02 Transfer Pricing l.ifeevele

[A] Phase 1: Planning [1] ldeiltilying lntereompanv Tiauvirlion-. im Auah-a-. [21 Types of liitercompanv Ti.ms.u time.

|a| T.mgilile l'ropertv Tiaus.u tions |l)| Intangible I i.ms.n tioii\ |c| Services I i.ms.n tious |d) P'innneing and Insulance I inn-mi time. )e| Cost Conti ilmtiou Aiian,',enn-no.

[3) How to l'rioriti/e Risk Aiea--[4] How to Cnndiic! PiiiH tioii.il AiiahMS Internen.-. [51 Determining Ilow to l'nee Inten onipanv I lair-ai tion-. 16] Selecting Transfer Pricing Methode

(a) Priorilization of Methoils ol Anah a-, [7] ldentifying Coniparable ( onipaiiies

[a) Comparabilitv C'onsuleiations (bI Geographie Differences

)8) Arm's-Length Range (9] Single-Year versus Multiple Yeai l'ata 'S [10] Specific Transaetion.il Consideiatimis h,

(a) I,oau Guarantees 17 [bj Stoek Option P.xpense '7

[B] Phase 2: Implementation -'2 [1] Key Implementation Steps and Timeline IS

[a] Step 1: Comiininieating Tr.uistei Piuaug l'oheies to Key Stakeholders 'S |i] I.oeal Cotmtrv lax l'eisonnel 'S |ii) Senior Management 'S |iii| Operations l'eisonnel 'l) [iv) IT and Aeeouiitinj; Departments 10 [v] Legal Department 41 1 vi] Tax Mümling and Compliance Advisois 42

[b] Step 2: Drafting and executing Inteirompanv Agreements 42

[c] Step 3: Deteriiiining Internal Pricing Met hanisni 44 [d] Step 4: Monitoring '(> [e] Step 5: Developing Transfer Pricing l'olicv and

Procedure Manuals 48 [i] Acconnting and Systems Manuals 48 |ii] Headquarter Service Allocalion Manuals 49 [iii] Tax Department l'olicv and Procedtires Manuals 49

[C] Phase 3: Compliance and Docmnentation 49 [1] Documentation Strategies and Consideratious 49

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|a) Performing a Risk Assessment to Optimize Docuinentation Strategy |i] What Protection Do Transfer Pricing

Docuinentation Reports Provide? |ii) Evaluating the Cost/Benefit of Docuinentation

|b] Decisions Conceming Local Country Docuinentation |i| Direct Local Country Docuinentation [ii| Country-by-Country Docuinentation |iii| OECD Global Policy Reports and the

Masterfile Concept |c| Planning Reports [d] Limited Study

121 Docuinentation Review and Updates |DJ Phase 4: Audi! and Controversy

111 Best Practices for Transfer Pricing Audits |a| Understand Your Risk |b) Centralize Efforts and Develop a Clear Chain of

Command |c| Control Information Flow |d] Do Not Panic

[2] Addressing Transfer Pricing Disputes between Countries [a| Nature of Conflicts (b| Mutual Agreement Procedures |c| Advanced Pricing Agreements

§1.03 Resources for Basic Information on Transfer Pricing Rules and Regulations, Docuinentation Requirements and Penalties

§1.04 Conclusion

CIIAITI-K 2 OECD Transfer Pricing Guidelines Andrew Cousins & Danny Beeton

§2.01 The OECD Transfer Pricing Guidelines [ A] Purpose of the OECD Transfer Pricing Guidelines | B] Contents of the 2010 OECD Transfer Pricing Guidelines

111 Arm's Length Standard [a] Statement of the Arm's Length Principle (bJ A Non-Arm's Length Approach: Global Formulary

Apportionment [c] Guidance for Applying the Arm's Length Principle

[2] Transfer Pricing Methods [a] Traditional Transactional Methods

[i] Comparable Uncontrolled Price Method

51

51 52 52 52 54

54 56 57 58 59 59 59

60 61 61 62 63 64 66

67 69

71

73 73 75 76 76

77 77 79 80 80

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[ii) Resale Price Metliod Kl [iii| Cost Plus Metliod K.'.

[b] Transaction.il Profit Melluids K3 [i] Transaction.il Net Marlin Metliod K3 (ii| Transactional Profit Split Metliod K-l

[3] Comparability Aiialvsis K l [4] Administrative Appro.n lies to Avuidinp, and Rcsolvuig

Transfer Pricing Disputes S(> [5] Docuiiieiitation Standards S7 [6] Special Considerations for lntelleetn.il Propei t\ K7 [7] Intra-Group Services KK [8] Cost Contribntion Arrangements KP [9] Business Restructuring ''I

§2.02 2010 Report on tlie Attribution of Profits to Periiianeiit Establishment-, 02 §2.03 2010 and Beyond - More Reccnl OPCD Transfer Pricing, Initiatives 03

[A] Administrative Aspects of Transfer Pricing 'H [lj Analysis of Existing Transfer Pricing Siuiplitir-.it 1011

Measures l,l [2] Safe Harbours l)-l [3] Transition to BEPS l'-l

[B] Transfer Pricing Aspects of Inlangibles l>3 [C] Transfer Pricing Risk Assessnient l>(,

§2.04 The OECD/G20 BEPS Project l>o [A] Origins of the OEC11/G20 BEPS Protect % [B] Status of the Transfer Pricing Work undcr BEPS l)l> [C] Proposed Changes to the Transfer Pricing Guidelines 100

[1] Chapter I - The Arm s Eengtli Principle 100 [a] Delineation of the Actiial Trans.ictiou 100 [b] Risk 101 [c] Recognition of the Accuratoly Delineated Trans,ictiou 101

[2] Chapter II - Transfer Pricing Metliods 101 [3] Chapter V - llocunientation 102

[a] Masterfile 102 [b] Local file 102 [c] CbC Report 103

[4] Chapter VI - Intangible Property 103 [5] Chapter VII - Intra-Group Services 104 [6] Chapter VIII - Cost Contribntion Arrangements 103

[D] Additional Follow-Up Work to Be Uiidertakeu in 2010/2017 103 [1] Profit Attribution to PEs 103 [2] Toolkits for Developing Nntions 103 [3] Dispute Resolution 100

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§2.05 Ol her Transfer Pricing Guidance 106 [A1 The KU Joint Transfer Pricing Forum 106

111 Code of Conduct for the Effective Implementation of the Arbitration Convention (2004) 107

12) Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the EU (2005) 107

[5] Guidelines for Advance Pricing Agreements (APAs) in the EU (2007) 107

(4J Gttidelines on Low-Value-Adding Intra-Group Services (2011) 107

15) Potential Approaches to Non-EU Triangulär Cases (2011) 108 |6] Report on Small and Medium Enterprises (SMEs) and

Transfer Pricing (2012) 108 [7] Report on Cost Contribution Arrangements on Services

Not Creating Intangible Property (IP) (2012) 108 [8] Report on Secondary Adjustments (2014) 108 |9] Report on Transfer Pricing Risk Management (2014) 109 [10] Report on Compensating Adjustments (2014) 109 1111 Report on Improving the Functioning of the Arbitration

Convention Including a Revised Code of Conduct for the Effective Implementation of the Arbitration Convention 109

|12] Work Programme 109 IB| The UN Proctical Transfer Pricing Manual for Developing

Countries 110

ClIAI'TKK 3 Argentina Mal ins Fedcrim I.ozano & Cristian E. Rosso Alba 111

§3.01 Importonce of Transfer Pricing for Multinational Enterprises Opcrating in Argentina 113

§3.02 Regulatory Framework 115 IA] Legal Authority 115 |B| Transfer Pricing Penalty Framework 116

[ 11 Failure to Comply with Formal Obligations of International 117

{2) Failure to Retain Documentation 118 |3| Failure to Comply with Income Tax Payment Obligations 118 (4] Relationship between Fulfilling Documentation

Requirements and Protection from Adjustments 118 [C] Arm's-Length Standard 119

§3.03 Determining the Appropriate Intercompany Price 120 IA] Method Selection 120

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[B] Comparables Seleetion 1.11 [1] Range of Comparables I.U [2] Comparables l.'.l

[aj Tested l'arty Rules I.'..' [bj Methoiis 1.11

[i] Comparable Uneonlrolleil l'nce Method (l'reeio Comparalile enlre Partes Independientes) l.'t

[ii] Resale l'riee Melluul (Pieeio de Kevenla etiiie Partes Independienies) 1.1s

|iii| Cost Plus Method (Costo nus Bimeheios) 1.17 [iv] Profit Splil Method (Division de CUII.IIICI.IN) l.'.S Iv] Transaetional Net Margm Method (Maigen

Neto de la Transannon) I.H> |vi| Quotation l'riee at the Slupment Date Method

(If Higher than the Conti aetual l'riee) oi Sixtli Method (l'reeio de Coti/.ieion a la Fei ha de Embarque) 131

[C] Transfer Pricing Adjustments l s l §3.04 Developing Support for Aetual Pricing PCI

[A] Transfer Pricing Documentation Requireuieiils l s l [1] Documentation Requested in Operations,with

Unrelated Parties I 34 [a] Semestrai Return with Unrelated Parties |P P I I) 1 s-1 [b] Annuni Return witli Unrelated Parties (F.H07) 135

[2] Documentation Requested in Operations with Related Parties 135

[3] Transfer Pricing Report 137 [4] Document Retention Requirenients I35 [5] Example of Requested Documentation I3S [6] Conservation of Documents 135

[B] Relationship between Fulfilling Documentation Requirenients and Protection from Adjustments 140

[C] Sufficiency of Compliance Reports for l'urposes of Applvmg Penalties 140

§3.05 Hot Topics/Special Considerations in l.ocal Countrv Flauster Pricing 140 §3.06 Local Country Administrative Practices 140

[A] Availability of Advanced Pricing Agreements I II [B] Access to Competent Authority 142 [C] Other Items 143

§3.07 Significant Transfer Pricing Litigation 143 [A] Industrial Manufacturing Sector 143 [B] Pharmaceutical Industry 145 [C] Commodity Export Sector 146

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Ol AMT.K 4 Australia Shannon Smit <9 Adriana Calderon 149

§4.01 Tlie Importance of Transfer Pricing for Multinational Companies Operating wilhin Australia 151

§4.02 Regulatory Framework 152 [A| Legal Authority 152

[ 11 Subdivision 815-A of the 1TAA 1997 153 [21 Tax Laws Amendments (Countering Tax Avoidance

and Multinational Profit Shifting) Bill 2013 (the Bill) 153 [a] Arm's-Length Conditions 154 |h| Transfer Pricing Benefit 154 1 c) OECD Guidance 155 [d] Economic Substance Requirement 155 [e| Reconstruction Powers 155 [f] Tliin Capitalization 156 [g] Subdivision 815-C: Arm's-Length Principle for

Permanent Establishments 156 [h] Subdivision 284-E: Special Rules about Unarguable

Positions for Cross-Border Transfer Pricing 156 |i| Subdivision 815-D: Special Rules for Trusts and

Partnerships 157 |j| Penalties 157

[3] Other Sections of the Income Tax Legislation 157 [4] Double Tax Agreements (DTAs) 157

[a] D I A Article 5: Permanent Establishment 158 (1)] DTA Article 7: Business Profits 159 [c| DTA Article 9: Associated Enterprises 159

15] Transfer Pricing Ridings and Publications 159 |B| Relationship with OECD Guidelines 162 |C1 Transfer Pricing Penalty Framework 162 |D| Arm's-Length Standard 166

§4.03 Determining the Appropriate Intercompany Price 166 |A1 Method Selection 166

111 Selection of the 'Most Appropriate' Method 166 [2| Internal Pricing Mechanism versus Independent

Testing of Transfer Prices 166 |3] Discussion of the Arm's-Length Methods 167 [4] Types of Dealings Transfer Pricing Methods Typically

Applied to 168 |B] Comparables Selection 170

(1) Functional Analysis 171 [2] Practical Issues Associated with Identifying

Comparable Companies in Australia 174

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[3] Use of Foreign Comparables in AuMiaha 175 (4] Use of Databases in Austi.IIL.I 17s

§4.04 Developing Support for Actual Prieing 17S [A] Transfer Prieing noeumentniion Reiiuiicmeius 173

[11 Statntorv Keiiuireinents 17s [2] Siinplified Transfer l'ricing Recoul Keeping I 7(> [3] Tax Retnrn Disclosures ISO [4] The ATO's l ive Key (Jucstious Appio.u h 1S1 [5] OFCD Aetion 13 of tlie BLI'S Initiative' t oiinii v In

Country Reporting IS2 [6] Deadline to Prepare Dociuneniation 1S3

[B] Relationship between Fnlfilling Dociuneniauou Re,|uueineiit^ and Protection froin Adinstments ISS

[C] Sufficiency of Compliance Reports toi Puiposes ot Applvmg Penalties I S(,

§4.05 Hot Topics/Special Considerations in l.ocal t'onntiv Tian-Uei Pi n nie, I S(, [A] Intra-Gronp Finance Guarantees and l.oans ISO [B] Business Restmctiiring ISS

§4.06 Local Country Administrative Practices ISO [A] Availability of Advanced Prieing Agreements ISO

[1] APA Process PK) [a 1 Step 1: Pre-I.udgmenl Meetings P'l fb) Step 2: l.odgment of Formal Application PC [cj Step 3: Analysis/F.valuation PC [d 1 Step 4: Negotiation and Agreement PC |e] Step 5: Concluded APA PC

[2] Annual Compliance Reports aud Gonipeiisaiing Adjustments PC

[B] Access to Competent Authoritv PC [1] The MAP Process PC

[C] The ATO Risk Review and Risk Assessment Process PC [1] The ATO's View on Transfer Prieing Risk Management PK' [2] ATO Transfer Prieing Risk Review Process PK'

§4.07 Significant Transfer Prieing Litigation P'l) [A] Chevron Australia Holdings Pty l.ld v. I'CT P,l)

[B] SNF (Australia) Pty Ltd v. FCT73 200 [C] Roche Pty Ltd v. FCT74 201

[1] Powers of Amendment: Division 13 and D I A Powers 201 [2] Methodology Adopted 201 [3] Loss-Making Businessos 202 [4] Separate Years 202 [5] Business Divisions Subject to Separate Reviews 202 [6] Adjustment Outcomes 202

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§4.08 Country-Specific Flanning Opportunities §4.09 l.ist of Abbreviations

ClIAI'TI'.K S Belgium Natalie Keypnis

§5.01 Importance of Transfer Pricing for Multinational Companies Operating witliin Belgium

§5.02 Regulatory Framework [A| Legal Authority

[1| Article 185 Section 2 ITC |a) Scope of Application | b | Adjustments

[2] Abnormal or Benevolent Advantage Granted: Article 26 ITC [a| Escape Clause [b] Exceptions to the Escape Clause

[31 Abnormal or Benevolent Advantage Received: Articles 79 and 207 ITC

[4] lnterconnection between Article 185 §2 ITC and Articles 26, 79 and 207 ITC

[5) Other Provisions [B| Relationship to OECD Guidelines |C| Transfer Pricing Penalty Framework |LI| Arm's-Length Standard

§5.03 Determining the Appropriate Intercompany Price |A] Method Selection

111 Traditional Transaction Methods [a] Comparable Uncontrolled Price Method [b] Resale Price Method |c] Cost Plus Method

[21 Transactional Profit Methods [a] Profit Split Method [b| Transactional Net Margin Method

[3] Transaction Analysis [4] Method Selection by Transaction Type

[a] Service Activities [b| Finance Activities [c] Distribution Activities [d] Manufacturing Activities [e] Intangibles

IB] Comparables Selection §5.04 Developing Support for Actual Pricing

202 203

205

207 208 208 209 209 210

211 213 214

216

218 219 221 221 222 224 224 224 224 224 225 226 226 226 228 229 229 230 231 232 232 232 233

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[A] Transfer Pricing Docuinentation Requiieiueiiis ,M3 [B] Relationship between Fulfilling Documeniaimu Rrqum uum .

and Protection from Adjustinents .MS [C] Sufficiency of Compliance Reports toi l'iuposos ui Apphiiu:

Penalties .MS §5.05 Hot Topics/Special Considerations in l.ocal Cninin\ I i.ui^in Piump, .Mo §5.06 Local Country Administrative Practices .Mo

[A] Availability of Advanced Pricing Agreements .Mo [1) The Riding Commission .Mii

(a) Riding Procedure 3So [b] Transfer Pricing Ridings .'AS

[B] Access to Competent Authoritv .'3l> [C] Other Heins .'11

[1] Transfer Pricing Audits .' II §5.07 Significant Transfer Pricing Litigation .'12

[A] Transfer Pricing Methodologe .' LI [B] Empirical, Pragmatic and Snbjective Approaches to ihr

Arm's-Length Standard .' IS [C] Profit Shifting to l.oss Making Entities 2)5 [D] The Arm's-Length Price of Shares 2-10

§5.08 Country-Specific Planning Opporlnnilies .'17 [A] 'Excess Profit' Ridings -'17 [B] Notional Interest Deduction (NID) .'AD [C] Patent Income Peduction 3A1

§5.09 Appendices -AS §5.10 List of Abbreviations 203

CHAPTER 6 Brazil Luis Rogerio Farinelli, Cristiane M.S. Magalhacs. Stephanie Mahnt & Amanda Alves Brandäo. 205

§6.01 Introduction -'.(>7 §6.02 Importance of Transfer Pricing for Multinational Companies

Operating within Brazil 267 §6.03 Regulatory Framework 271

[A] Legal Authority 271 [B] Relationship to OECD Guidelines 272 [C] Transfer Pricing Penalty Framework 273 [D] Arm's-Length Standard (or Alternative Standard) 27-1

§6.04 Determining the Appropriate Intercompany Price 275 [A] Method Selection 275

[1] Summary under Local Country Rules 275 [a] Transactions Subject to Transfer Pricing 275

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[b] Transfer Pricing Methods for Acquisitions and Imports

(c) Transfer Pricing Methods for Exports |d] Common Rules on Imports and Exports |e] Transfer Pricing Rules on Interest [ f) Practical Cases [gl Differences in Method Selection Criteria by

Transaction Type | B) Comparables Selection

§6.05 Developing Support for Actual Pricing [A| Transfer Pricing Documentation Requirements [B| Relationsbip between Fulfilling Documentation Requirements

and Protection frotn Adjustments [C| Sufficiency of Compliance Reports for Purposes of Applying

Penalties §6.06 Hot Topics/Special Considerations in Local Country Transfer Pricing

[A| Specificities of National Tax Law [B| Scrutiny of Transactions Involving Intangibles [C| Interposed Persons I DJ Sales of Equity Stahes |E| Basket Approach [T] Prevalence of Tax Treaties over Domestic Legislation

§6.07 National Administrative Practices [A| Availability of Advanced Pricing Agreements [B] Access to Competent Authority

§6.08 Significant Transfer Pricing Litigation §6.09 Local Country Flanning Opportunities

[A| Safe Harbours [ B | Worksbeets |C] Intercompany Transaction Prioritization Matrix [D| Implementation Checklist [E| Information Exchange [F[ Case Study 1: Selecting An Appropriate Method [G| Case Study 2: Prioritizing Transfer Pricing Documentation

Initiatives §6.10 List of Abbreviations

ClIAI'TKK 7 Canada Jennifer Shulinan

§7.01 Importance of Transfer Pricing for Multinational Companies Operating within Canada

§7.02 Regulatory Framework [A| Legal Authority

279 283 286 287 288

288 289 290 290

292

293 293 293 293 293 295 298 298 301 301 301 304 305 305 306 308 308 309 311

313 314

317

319 320 320

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[1] Penalties Reinting; to Intet Company lieht [2] Section 1 5(2): Shareholdet lieht |3) Section 17; Ariiotmt Owmg h\ Nim te-adent [4] Section 8t).4 l.oans j5] Section 78(1): llnpaid Ainoiiiits [6] Conseqtiences lot Faihire to l'mvtde Dm iimetit.itioir

Section 231.0: Foreign Based Inioi iti.ition m Dociiinentntion

[B] Relationship to OECD Guidelmes [C] Transfer Pricing Penalty ITaniewoi k

(1] Transfer Pricing Adiustmeiit l'enalties [D] Arm's-Length Principle

§7.03 Determining the Appropriate Intercoinpanv Prien [A] Method Selection

[1] Suminary of Applicable Metltods [2] Cotnparahle Uncontrolled I'rice Method

[a| CUP: Application [3] Cost Pins Method

[a] Cost Plus Method: Application [4] Resale Price Method

|a| Resale Price Method: Application [b] Profit Split Method

[i] Profit Split Method: Application [5] Transactional Net Margin Method

[aI TNMM: Application [6] Application of Transfer Pricing Methods

[a] Method Selection for Intra grottp Services [b] Method Selection for Transfers of Intangihle

Property [c] Methods to Price Qualifying Cost-Contrilnilion

Arrangements [B] Comparables Selection

§7.04 Developing Support for Actual Pricing [A] Transfer Pricing Documentation Requireinents [B] Relationship between Fulfilling Docunientation Requireinents

and Protection from Penalties [C] Sufficiency of Compliance Reports for Purposes of Applying

Penalties [1] Compliance versus Accuracy [2] Demonstrated Efferts [3] Administrative Bürden

§7.05 Hot Topics/Special Considerations in CANADA concerning Transfer Pricing [A] Range Issues [B] Business Restructuring

522 522 525 525 525

524 521 524 525 526 527 527 528 528 528 529 529 531 331 333 333 335 335 336 336

337

338 340 342 342

343

343 344 345 346

346 346 348

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|C] Custotns 348 11)| Bundled Transaetions 349

§7.06 National Administrative l'ractices 351 |A| Availability of Advance l'ricing Agreements 351

111 Advance l'ricing Arrangements 351 (21 When Slioidd a Taxpayer Consider an APA? 355 |A | Annual Report 356

|B] Access to Competent Authority 357 111 Accelerated Competent Authority Procedure 360 121 Minding Arbitration 360 1A | Annual Report 361

(C| Ol her Items 362 111 Transfer l'ricing Audit 362

§7.07 Significant Transfer l'ricing Legal Cases 366 |A) Tax Häven Cases 366

111 Spur Dil 366

(2| Irving Oil 367 | A| indalex 367

|B| Targeted Industries 367 111 The l'ulp and Paper Industry 367

|n| Crestbrook 367 (21 Pharmaceutical Industry 368

i a j Wyeth 368 (b | ClaxoSmithKIine 368

|3| Technology Industry 370 |a| Alberta Printed Circuits 370

iC) Cuarantee Ree 370 111 General Electric Capital Canada Inc. 370

|[)| Other Cases 371 | a | Teletech 371 1 b | McKesson 372 |c] Soft-Moc Inc. 373

§7.08 National Planning Opportunities 374 §7.09 l.ist of Abbreviations 375

CliAI'l'CR 8 China Glenn DeSonza 377

§8.01 Introduction 379 §8.02 Macro Trends 381 §8.03 Importance of Transfer Pricing for Multinationals in China 381 §8.04 SAT View: Why China Deserves More Profit 383 §8.05 BEPS Development 384

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§8.06 BEPS: Fifteen Practices §8.07 Practical Impact on Foreign Firnis

[AI Practices 5-7: Link Profits to Value Chain [B] Practice 8: No Overpricing of lntangibles [C] Practice 9: Respect the Specific Qualities of the Chinese Market [D] Practice 11: No Unreasonable Expense lleiinctions [E] Practice 7: No Bosses for Single-Fnnction Enterprises [F] Practice 10: More Profit from HNTEs

§8.08 UN Manual: Additional Considerations §8.09 Domestic Company Transfer Pricing §8.10 TP Cases

[A] Xiamen Case [B] Chengdu Case

§8.11 Regulatory Framework [A] Political and Tax Structure [B] Types of Taxes in China [C] Hierarchy of Laws [D] Circular 2 Overview

§8.12 Developing Support for Actual Pricing [A] The Documentation Requirements [B] Exemptions from Documentation [C] Penalties for Failure to Document [D] Definition of Related Party [E] Transactions Covered by Circular 2 [F] TP Disclosure Forms [G] Documentation Format [H] SAT Templates [I] Documentation for Loss-Making Companies [J] Thin Capitalization Documentation [K] Arm's-Length Interest Rates [L] Collecting and Grading Documentation

§8.13 Determining the Appropriate Intercompany Price [A] Available Methods [B] Comparable Uncontrolled Price Method [C] Resale Price Method [D] Cost Plus Method [E] TNMM [F] Profit Split Method [G] Methods in Practice versus Documentation [H] Illustration of Method Selection [I] Special Methodological Boxes

§8.14 Comparables [A] The China Challenge [B] Chinese Comparables

xl

384 385 385 385 386 386 386 387 387 387 388 388 389 390 390 392 392 393 394 394 394 394 395 395 396 396 397 399 400 401 402 403 403 403 404 404 404 405 405 405 406 407 407 407

Table of Contents

(C) Daiabnsus am! Websites 408 (D) Hon;; Kon;; Listings 409 (E| NASDAt) l.istin;;s 409 (F| Forei;;u Komparables 410 (G] Füll Index of l'ublie Comparables 410

§8.15 Representutivo Offices and Permanent Establishments 411 |A] Deetned Profit Concepl 411 (B) Service IT: 412 [C] Permanent Establishment of a Non-resident Taxpayer 414 [D| Profit Split and PK 415

§8.16 Custoins 416 (A| Request for 1 PO 416 (B) Custoins Metlmds 416 (C) The Deiluctive Method Application 416

§8.17 Local Administrative l'ractices 417 (Aj batest Audit Statistics and Self-Examinations 417 (B| Who Conducts tbe Audit 417 (C( Information Reipiested 418 [D] Wim Geis Audited 418 IE] Special Audit Situations 418 (F] Closin;; an Audit 418 (G| Advanced Priem;; Agreement and Competent Authority 419

111 Evolution and Statistics 419 12( APA Re;;ttlations 420 |S] Sliould You Gel an APA? 421 14) Competent Authority 422

§8.18 Significam Transfer l'ricing Litigation 422 [A| Why 'l ax Litigation Is Rare 422 [B] The Process 423 [C] Shandong Gase 424 ]D] Appeals 425

111 Administrative Review Procedures 425 |2| Administrative Litigation Procedures 426 (31 Notice 13 and Notice 16 427

§8.19 Business Reslructuring 428 [A] Heuling with China s l astest Growing Area of Tax Enforcement 428 [B] The Capital Gains Tax Explosion 428 [C] Notice 698 Declares War on SPVS 429 |D] Chinese Regulations on lncome Method Valuation 431 [E] A China Model for Equity Transfers 434 IF] Action Plan for Restructuring 439

§8.20 Bulletin 16 and BEPS 440 [A] Non-Deductible Payments under Bulletin 16 440

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[B] Transfer Pricing Knie or lVdtietibihiv Knie-[C] Chinese Tax Flanning Strategies in Light ol Bulletin Ii,

§8.21 Conclusions §8.22 List of Abbreviations

CHAPTER 9 France Felicie Bonnet & Arnand Le Boulnn^ei

§9.01 Importance of Transfer Pricing für Multin.itiun.il Compamcs Operating within France

§9.02 Regulatory Framework [A] Legal Authority

[1] Fundamental Rules for Transfer l'ricmg Adimaments in France [aj Transactions witli Related Coinp.nnes [bj Transactions witli Compames in Fielet icd Tax

Regimes [cj Failure to Provide Information

[2] Statute of Limitation linder Kreuch Corporate Tax Law as Applicable to Transfer ITiciug Malters

[B] Relationship to OLCD Guidelines [C] Transfer Pricing Penalty Framework

[1] Penalty for Missing or Incomplete 'FPU [a] Penalty Pruvided in the Frauiework of tlie Formal

Documentalion Re(|ihrement (Articles 1.13 AA and LI3 AB of tlie ITPC and Artiele I 735ter of tlie I FC)

[b] Penalty for the Failure to Frovide Annually tlie F'FA witli Simplified TPD

[c] Penalty for the Failure to Answer to an Fl A s Request Based on Artiele 1. 1.1 11 of the FTPC

[2] Interest for Laie Paynient [3] Deliberate Breach and Fraud Penalties

[D] Arm's-Length Standard §9.03 Determining the Appropriate Interconipany Price

[A] Method Selection [1] Statutory Rules [2] Administrative Guidelines

[a] How Transactions Should He Analyscd [b] Transfer Pricing Methods

[i] Comparable Uncontrolled Price Method [ii] Resale Price Method

441 441 44.1 44.1

447

449 430 430

4SI 432

43.1 433

433 434 454 454

454

455

455 456 456 457 457 457 457 458 458 458 458 460

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|iii| Cost Plus Method 461 [iv] Profit Split Method 462 (v] Transactional Net Margin Method 463 [vi| Other Specifications regarding Transfer

Prices Setting 464 [3] Gase Law 465 [4] PTA's TP Guide 465

|B] Comparables Selection 466 [1] Internal Comparables 466 [2] External Comparables 466

[a| Databases Used 466 [b| Practical Conduct of a Benchmark Study 467 [c] Outcome of the Search 467

§9.04 Developing Support for Actual Pricing 468 [A] Transfer Pricing Documentation Requirement 468

111 Code of Conduct on TPD for Associated Enterprises in the European Union 468

[2) TPD Requirements in France: Articles L 13 AA, L 13 AB and LI 3 B of the FTPC and Article 223 Quinquies B of the PTC 470 |a] Formal TPD Requirements (Articles L 13 AA and

L 13 AB of the FTPC) 470 [i] Scope of the TPD 470 [ii] Content of the TPD Required under French

Law 471 [iii| Timing of the Documentation Requirement 472

[b| Transfer Pricing Requirements under Article 223 Quinquies B of the FTC 472

[c] Transfer Pricing Requirements under Article L 13 B of the FTPC 473 [i] Circumstances under Which Information

May Be Required 473 Iii] Information That May Be Required 474 [iii] Timing of the Documentation Requirement 475

[B] Relationship between Fulfilling Documentation Requirements and Protection from Adjustments 476

[C] Sufficiency of Compliance Reports for Purposes of Applying Penalties 476

§9-05 Hot Topics/Special Considerations in France concerning Transfer Pricing 476 [A] Specificities of French Tax Audits: Audit of Electronic

Accounting Records 476

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[B] Consolidated and Analytical Accouniing nisrlosiiie 47g [C] Scrutiny of Transactions Involving Intangihles 47g

§9.06 France Administrative Practices 474 [A] Availability of Advanced Pricing Agreements 479

[1] Historical Fvolntion of AI'A Proeeduies 479 [a] 1999: First Step: Bilateral and Mnltilaiei.il

Agreements 479 [b] 2004: Second Step: Unilateral Agreements 479 [c] 2006: Tltird Step: Simplil'ied l'rocednre toi SMI.s 481 [d] International Outlook 482 [ej Assessment of llie linpleiueniatioii of AI'A ITocedure 482

[2] The APA Procedure 482 [a] Step 1: l're-filing Singe 483 [b] Step 2: The Official Subinission lo 'MFJFF 483

|i| Official Subinission of the Kequesi 483 [ii] Required Oocuinentation 484

[c] Step 3: Fvaluation and Negotiation of the APA 487 Iii Fvaluation of the APA 487 Iii] Negotiation of the APA 488

[d] Step 4: The Conclusion of the Agreement 488 [3] APAs and Tax Audits 490 [4] Monitoring the Implementation of the APA 490 [5] The Renewal of the Agreement 491

[B] Access to Competent Authority 491 [1] The Mutual Agreement Procedure 492 [2] The Arbitration Procedure 494

[a] Arbitration Procedure Opened 011 the Basis of the European Arbitration Convention 495

[b] Arbitration Procedure in Other Treaties 498 [3] Other Items 499

[a] The Practica! Conduct of a TP Tax Audi: in France 499 [b] Consequences of a TP Adjustment 499

Ii] Withholding Tax 499 Iii] Business Tax 500 [iii] Profit Sharing Scheines 500

[c] Resolving Controversy at the National Level 500 §9.07 Significant Transfer Pricing Litigation 501

[A] Transfer Pricing Methods 501 [B] Market and Competitive Conditions to Be Taken into Account 502 [C] Compensation of Several Transactions 502

§9.08 National Flanning Opportunities 502 §9.09 List of Abbreviations 503

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CHAPTKR 10 Germany Angelika Tinos 505

§10.01 linporlanee of Transfer Pricing for Multinational Companies Operating within Germany 507

§10.02 Regnlatory Framework 508 [A| Legal Authority 508

111 Statutory Rules 508 [21 Administrative Decrees 513 [31 Statutory Period of Limitation 515

(H| Relationship to OECD Guidelines 515 [C] Transfer Pricing Penalty Framework 516 [D] Arm's-Length Standard 516

§10.03 Determining the Appropriate Intercompany Price 517 [A] Method Selection 517

[1] Product and Service Transactions 520 [2] Interest on Loans 521 [31 Use of Patents, Know-How and Other Intangible Assets 522 [4) Contract Research and Development 522 [5| Administrative Services 523 [6] Cost Sharing Agreements 523

[B| Comparables Selection 525 §10.04 Developing Support for Actual Pricing 527

|A| 'Transfer Pricing Documentation Requirements 527 [ 11 General Requirements for Cross-Border Transactions 527 12) Specific Documentation Requirements for Cost

Sharing Agreements 529 [B| Relationship between Fulfilling Documentation Requirements

and Protection from Adjustments 530 [C| Sufficiency of Compliance Reports for Purposes of Applying

Pennlties 530 §10.05 Hot Topics/Special Considerations in Local Country Transfer Pricing 531

[A| Change of Business Concepts 531 [B] Transfer of Business Functions 534 [C] Income Determination of a Permanent Establishment 537

§10.06 Local Country Administrative Practices 539 [A] Availability of Advanced Pricing Agreements 539 [B1 Access to Competent Authority 541

[1| Tax Riding 541 [2] Mutual Agreement Procedure and EU Arbitration

Convention 542 [C] Other Items 542

[1] Tax Assessment 542 [2] Tax Audit 543

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543 544

544

[3] Legal Procedures §10.07 Significant Transfer Pricing Litigation

[A] Documentation Requirements: Decision of the Föderal Tax Court (BFH) of 17 October 2001

[B] Marketing Costs: Decision of the Föderal Tax Court {BIT I) of 17 February 1993 S45

[C] Interest-Free Loan: Decisions of the Föderal Tax Court (Hl II) of 30 May 1990 and 25 June 2014 S46

§10.08 Country-Specific Flanning Opportunities S47 §10.09 List of Abbreviations S48

CHAPTER 11 Ireland Joe Duffy & Barry McGettrick 549

§11.01 Importance of Transfer Pricing for Multinational Companios Operating within the Country 551

§11.02 Regulatory Framework 552 [A] Legal Authority 552

[1] Legislation 552 [a] Circumstances in Which the Transfer Pricing

Rules Apply 552 [b] Consequences of the Application of the Transfer

Pricing Rules 552 [c] Interpretation of the Irish Transfer Pricing Rules 553 [d] Important Concepts 553

[i] Arrangement 553 [ii] Association 553 [iii] Control 554

(a) Company 554 (b) Partnership 554

[iv] Trading 554 [v] Domestic Transactions 556 [vi] Exemptions from the Transfer Pricing Rules 556

(a) Small- or Medium-Sized Enterprises Exemption

(b) Grandfathered Transactions 556 (c) Section 110 Securitization SPVs 557

[2] Non-Statutory Guidance/Reference/Authority 558 [a] The Revenue Commissioners' Tax and Duty Manuals 558 [b] The Revenue Commissioners' Notes for Guidance

on Legislation 558 [c] The Revenue Commissioners' Tax Briefings 558 [d] The Revenue Commissioners' Guidance on APAs

[B] Relationship to OECD Guidelines

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559 559

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[C] Transfer Pricing Penalty Framework II ] Tax-Geared Penalties [2] Penalty for Lack of Proper Records

§11.03 Determining the Appropriate Intercompany Price [A| Method Selection

III Particular Views of the Irish Tax Authorities on the OECD Methods

[B] Cotnparables Selection [C] Interqnartile Range

§11.04 Developing Support for Actual Pricing [A] Transfer Pricing Documentation Requirements

[ 11 Time at Wbich Documentation Should Exist |B] Sufficiency of Compliance Reports for Purposes of Applying

Renaltics §11.05 Hot Topics/Special Considerations in Irish Transfer Pricing

[A[ Hot Topics [ 11 Transfer Pricing Compliance Reviews [2[ Increased Competent Authority Resources

[B| Thin Capitalization/Lending/Guarantees/Leasing 111 Thin Capitalization [2 [ l.ending

[a] Interest |b| Cash Pooling

[3| Guarantees [4| Leasing

[C[ Interest-Free Loans ED) Management Services

§11.06 Local Country Administrative Practices [A) Availability of Advance Pricing Agreements [B) Access to Competent Authority [C) Ol her Items

[ 11 Transfer Pricing Enquiries [2| Risk Assessinent

§11.07 Significant Transfer Pricing Litigation [A| Current Cases [BJ Historical Cases of Note

§11.08 Country-Specific Flanning Opportunities §11.09 List of Abbreviations

CHARTER 12 Israel Jonathan Lubick

§12.01 Importance of Transfer Pricing for Multinational Companies Operating within the Country

xlvii

559 560 562 562 562

562 563 563 564 564 565

566 566 566 566 566 567 567 567 567 568 569 570 571 572 573 573 573 574 574 575 576 576 576 577 577

579

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§12.02 Regulatory Framework 533 [A] Legal Authority S83 [B] Relationship to tlie OECD Guidelines S86 [C] Transfer Pricing Penalty Framework 586 [D] Arm's-Length Standard 586

§12.03 Determining the Appropriate lntercoinpany Price 586 [A] Method Selection 587

[1] Methods under Israel Transfer Pricing Rnles 587 [B] Comparables Selection 590

§12.04 Developing Actual Support for Transfer Pricing 592 [A] Transfer Pricing Documentation Reiiuirements 592 [B] Relationship between Fulfilling Documentation Reiiuirements

and Protection from Adjustments .593 [C] Sufficiency of Compliance Reports for Purposes of Applving

Penalties 593 §12.05 Hot Topics/Special Considerations in Israeli Transfer Pricing 594 §12.06 Local Country Administrative Practices 595

[A] Availability of Advanced Pricing Agreements 595 [B] Access to Competent Authority 595 [C] Other Items 595

§12.07 Significant Transfer Pricing Litigation 596 §12.08 Country-Specific Flanning Opportunities 596 §12.09 List of Abbreviations 596

CHAPTER 13 Italy Marco Valdonio, Aurelio Massimiano <S Mirko Sevcri 597

§13.01 Regulatory Framework 599 [A] Legal Authority 599

[1] Legislative Framework 599 [a] History 599

[2] Control 600

[3] Bürden of Proof 601

[4] ITA/ITA Transactions 601

[B] Relationship to OECD Guidelines 603

[C] Transfer Pricing Penalty Framework 603

[1] Administrative Penalties 603

[2] Criminal Penalties 604

[D] Arm's-Length Standard 603

§13.02 Determining the Appropriate Transfer Prices 603

[A] Method Selection [1] General Framework 60

[2] Traditional Transaction Methods 606

[a] Comparable Uncontrolled Price ('CUP Method') 606

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[b] Resale Price Method 607 |c| Cost Plus Method 608

[3] Transactional Profit Methods 608 |a| Profit Split Method ('PSM') 608 [b] Transactional Net Margin Method ('TNMM') 609

[B| Comparable Selection 610 111 Use of Foreign Comparables 610 [2| Use of Databases 610

§13.03 Developing Support for Actual Pricing 610 [A] Transfer Pricing Documentation 610

[1] General Framework 610 |2) The Masterfile 611 [3| The Country File 613

[B] Relationship between Fulfilling Documentation Requirements and Penalty Protection from Adjustments 614

§13.04 Hot Topics/Special Considerations in Italy Concerning Transfer Pricing 615 [A] Service Agreements 615 [B| IP 617 [ C | l.everaged-Buy-Out 617 [D] Business Restructuring 618 [E] Allocation of Income to Permanent Establishment 618

§13.05 Italian Administrative Practices 619 [A] Availability of Advanced Pricing Agreements 619 [B] Access to Competent Authority 621

111 Double Taxation 621 [21 The Competent Authorities 622 [3] Submission Terms 622 [4] Relationship with Internal Dispute 622 [5] Relation with Internal Settlement Procedures 623 [61 Collection of Taxes 624 [71 The Role of the Taxpayer 625 [8] The Arbitration Clauses under Double Tax Treaties 625 [9] The 'Serious Penalty' Concept under the EU Arbitration

Convention 625 [C] Other Items 626

§13.06 Significant Transfer Pricing Litigation 626 [A] List of Some Court Decisions 626 [B] Notes on Main Rütings 630

§13.07 National Flanning Opportunities 637 §13.08 List of Abbreviations 637 Annex: Non-Official Translation of the Italian TPG Made by the Italian

Revenue Agency 639

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CHAPTER 14 Mexico Yoshio Uehara & Gustavo Mcndez

§14.01 Transfer Pricing in Mexico [A] Legislation Framework [B] Contemporaneous Transfer l'ricing Documeutatiou [C] Advance Pricing Agreements [D] Financial Information [E] Selection of Comparables [F] Transfer Pricing Adjustments [G] Pro rata expenses [H] Maquila Companies

§14.02 Hot Topics in Transfer Pricing [A] Energy Reform

[1] Background [2] Transfer Pricing Provisions

[B] Base Erosion Profits Shifting Initiative (BEI'S) [C] Audit Trends [D] Additional Reporting and Compliance [E] Conclusions

CHAPTER 15 The Netherlands Rogier Sterk & Patrick van Oppen

§15.01 Importance of Transfer Pricing for Multinational Companies Operating within the Netherlands

§15.02 Regulatory Framework [A] Legal Authority [B] Article 8b CITA

[1] Related Entities [2] Adjustments

[C] Decrees of the State Secretary with regard to the Dutch APA/ATR Practice [1] 2013 Transfer Pricing Decree

[a] Introduction [b] The Arm's-Length Principle [c] Transfer Pricing Methods [d] Secondary Adjustments [e] Arm's-Length Determination when the Valuation

at the Moment of the Transaction 1s Highly Uncertain

649

651 652 653 654 654 654 655 656 65 7 658 658 658 658 659 659 661 661

663

665 666 666 666 667 668

668 669 669 669 671 672

672

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|f] Intra-Group Services 673 [gl Cost Contribution Agreements 674 [h| Transfer of (in)Tangible Assets 675 [i] Intra-Group Procurement Activities 676 |j| Intra-Group Guarantees 677 [k) Intra-Group (Captive) Insurance Activities 678 [l| Financial Transactions 679 [in| Subsidies, Fiscal Incentives and Expenses That Are

Partially Deductible 681 [n| Oocumentation Requirements 681 [o| Early Consultation in Gase of a Mutual Agreement

Procedures 681 [2] Advance Pricing Agreement (APA) Decree 682 [3] Ilecrees on Financial Intermediary Entities 683 [4] Question and Answer Decree 685

[a] Equity Risk Remuneration (ERR) 685 [b] Financial Remuneration (FR) 686 [c| Interest on Inter Company Loan 686

[5] Decree on Mutual Agreement Procedures and EU Arhitration Convention 686

[6] Decree on Allocation of Profits to Permanent Establishments 687

[7] Other Transfer Pricing Decrees 688 [D] Relationship to OECD Guidelines 689 [E[ Transfer Pricing Penalty Framework 689

§15.03 Determining the Appropriate Intercompany Price 690 [A] Method Selection 690

111 Service Activities 690 [a [ Group Service Activities 690 [b[ Head Office Services 691

[2] Finance Activities 691 |a| Write-Off on a Loan Provided to an Affiliated Party 691 [b| Establishing an Arm's-Length Interest Rate 692 [c| Conclusion 692 [d] Guarantees 692

[3] Distribution Activities 693 [4] Manufacturing Activities 694 [5] Procurement Activities 694 [6] Intangibles 694

[a] Participation in CCA 694 [b] Transfer of Intangibles 695 [c] Comparable Selection 695

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698 698

§15.04 Developing Support for Actual Prieing 695

[A] Transfer Prieing Documentation Requireinems 695 [1] Bürden of Proof 6%

[2] No Safe Harbour Rules 696 [3] Timing of tlie Documentation 697 [4] Interaction between Dutcli Documentation

Requirements and CbCR Report 697 §15.05 Hot Topics Special Considerations

[A] Continuous Work of OECD in the HERS Projeet [B] EC Action Plan for Fair and Efficient Corporate Taxation in the

EU/Link with Transfer Prieing 698 [C] State Aid Investigations 699

§15.06 Dutch Administrative Practiees 701 [A] APA/ATR Procedure 701 [B] Customs Value and Transfer Prieing in the Netherlands 701

[1] Advance Prieing Agreements 704 §15.07 Significant Transfer Prieing Litigation 704

[A] Transfer Prieing Methodology 704 [1] HR 28 JUNI 2002, No. 36 446, VN 2002/ 34.9

(Car Importer) 704 [B] Tangible Property Transaetions 705

[1] Supreme Court, 1 July 1969, BNB 1969/217 705 [2] Supreme Court, 11 Oetober 2000, BNB 2001/142

(Tangible Property Transaetions) 705 [3] Court of Appeal, the Hague, 22 January 1982,

BNB 1983/109 (Tangible Property Transaetions) 706 [4] Court of Appeal, Amsterdam, 11 February 2009,

No. 04/04338 (Sale and Lease-Back, Goodwill Realisation) 706 [5] Supreme Court, 4 January 2013, No. 11/00762

(Swiss Paper Trader) 707 [C] Intangible Property Transaetions 707

[1] Supreme Court, 25 June 1969, BNB 2010/93 (Transfer of Intellectual Property Rights) 707

[2] Supreme Court, 17 August 1998, BNB 1998/385 (Intangible Property Transaetions) 708

[3] Court of Appeal, The Hague, 10 May 1984, BNB 1986/8 (CUP)

[D] Services [1] Court of Appeal, Amsterdam, 15 June 1978,

BNB 1979/188 (Services) 708 [2] Supreme Court, 28 November 1984,

BNB 1989/114 (Services/'Bankgirocentrale') [E] Financial Transaetions

[1] Court of Appeal, Leeuwarden, 19 September 1997, VN/1998/30.17 (Interest on Loans) 704

[2] Court of Appeal, The Hague, 16 January 2001, VN 2001/37.15 (Guarantee)

708 708

709 709

709

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[3] HNB 1998/3 (Supreme Court, 29 August 1997), BNB 2004/265 (Supreme Court 12 December 2003) VN 2005/2.15 (Supreme Court, 17 December 2004) (Guarantee) 710

|4| Supreme Court, 1 March 2013, No. 11/01985 (Umbrella Guarantee) 710

[5| Supreme Court, 8 November 1995, BNB 1996/64 (Currency Exchange Results) 711

[6] Supreme Court, 28 February 2001, BNB 2001/199 (Currency Fxchange Results) 711

[71 Tower Court of the Hague, 11 July 2011, No. AWB08/9105 (Captive) 711

[8] Tower Court of Zeeland/West-Brabant, 17 January 2014, No. AWB11/3717 712

§15.08 Country-Specific Flanning Opportunities 712 [A[ In formal Capital 712 [B| Innovation Box 713

[ 11 Qualifying Business Assets 714 [2] Qualifying Business Assets 714 [3[ Self-Created 714 |4| For Wliich a Patent or S&O Certificate Has Been Obtained 714 [5] Fffective Tax Rate of 5% 714 [6] Practica! Aspects of the Application of the Innovation Box 714

|a| Not Applicable to Intangibles That Existed before 1 January 2007 714

|b| Flection 715 [c| Profit Allocation 715 [d] Modified Nexus Approach 715

§15.09 Tist of Abbrevations 716

CHARTER 16 South Korea Tae Yeon (TY) Natu, Jac Silk (JS) Park & Christopher Sung 719

§16.01 Importance of Transfer Pricing for Multinational Companies Operating within Korea 721

§16.02 Regulatory Framework 722 [A] Tegal Authority 722

[ 11 Tegislation 722 [a| Tax Taw and Regulations 722 [b] Other Government Regulations 723

[2] Tax Administrations 723 [a] Ministry of Strategy and Finance 723 [b] National Tax Service 724

[B] Relationship to OECD Guidelines 724

liii

724 724 725 725 725 725 725 726 726 728 728 728 728 728 728 729 729 729 730 730 730 731 731 731 732 733 733

733 734 734 734 734 734 735 735 735 736 737

Table of Contents

[C] Transfer Pricing Penalty Framework [1] Underreporting Penalty [2] Underpayment Penalty [3] Penalty for Failure to Submit Documentation

[D] Arm's-Length Standard [1] Historical Development of Arm's-Length Principle [2] Concepts of 'Associated Hnterprises' and 'ControF

[a] Equity Ownership Test [b] Substantial Control Test

[E] Substance-Over-Form Principle [1] Set-Offs

§16.03 Determining the Appropriate Intercompany Price [A] Method Selection

[1] 'Most Reasonable Method' Rule [2] Description of Methods Available

[a] CUP Method [b] RPM [c] CPM [d] PSM [e] TNMM [f] Other Reasonable Methods

[3] Criteria for Method Selection [4] Considerations by Transaction Type

[a] Intercompany Services [b] Intercompany Loans [c] Cost Sharing Arrangement [d] Transfer and Use of Intangible Property [e] Business Restructuring and Supply Chain

Management [B] Comparables Selection

[1] Comparability Factors [2] Use of Domestic Transaction as Comparable [3] Calculation of Arm's-Length Range [4] Use of Database

§16.04 Developing Support for Actual Pricing [A] Transfer Pricing Documentation Requirements

[1] Annual Documentation [2] Upon Request Documentation [3] Contemporaneous Documentation

[a] Overview [b] Documents Required [c] Timing of Documentation

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Table of Contents

|d) Determination of'Reasonableness' 738 [B] Relationship hetween Ftilfilling Documentation Requirements

aiui Protection front Adjustments 739 [C] Snfficiency of Compliance Reports for Purposes of Applying

Penalties 739 §16.05 Hot Topics/Special Considerations in Korean Transfer Pricing 739

[A] Management Service Ree 739 [B] Substance-Over-Forni Rille 740 [C] Aggregation of Transactions 740 [D[ Use of Mttlli-Year Data and Downward Income Adjustment 740 [E] Coordination of Transfer Pricing and Customs Valuation 741

§16.06 Local Conntry Administrative Practices 742 [A] Availability of Advanced Pricing Agreements 742

[1] Overview 742 [21 Application 743 [3| Coverage 744 [4] Processing Time 744 [51 Annnal Report 744 [6] APA Statistics 745

[B] Access to Competent Autbority 745 [ 11 Overview 745 [2[ Requirements to Request Competent Autbority Resolution 745 13[ Other Considerations 745

[a [ Coincidence with Domestic Litigation 745 [b| Time Limits 746 [c| lnterest On Unpaid Taxes 746

[C] Other Ileitis 746 [ I [ Consequences of Transfer Pricing Adjustment 746

(a| Primary Adjustment 746 [b] Secondary Adjustment 746 [c| Corresponding Adjustment 746 [d| Return of Additional Income 747

[2] Tax Audit 747 [3] Appeal Procedures 747

§16.07 Significant Transfer Pricing Litigation 748 [A] Application of Cup Metliod to Pharmaceutical Products 748 [B] Transfer Pricing of Indent Transactions 748

§16.08 Country-Specific Planning Opportunities 749 [A] Expanded Application of Map Result 749 [B] Proactive Dispute Resolution by a Combined Filing of APA and

ACVA 750 [C] Regulatory Change in the MIRPs and Strategie Adjustments 750

§16.09 List of Abbreviations 751

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CHARTER 17 United Kingdom Shiv Mahalingham

§17.01 Importance of Transfer Pricing 755

§17.02 Regulatory Framework 756

[A] Legal Authority [1] Legislation 756

[a] History 756

[b] Adjustment Mechanism 757 [2] Participation/Association 75g

[a] Persons to Wimm Ilm Association Test Applies 759 [3] Control

[a] Joint Ventnres 760 [b] Acting Together 760

[4] Indirect Control 761 [5] UK/UK Transactions 761

[a] Compensating Adjustments 762 [b] Balancing Payments 762

[6] Exemptions from the Transfer Pricing Rnles 763 [a] Small Enterprise Exemption 763 [b] Medium-Sized Enterprise Exemption 764 [c] Dormant Company Exemption 764

[7] Country by Country Reporting 765 [8] Non-Statutory Guidance/Reference/Aothority 766

[B] Relationship to OECD Guidelines 767 [C] Transfer Pricing Penalty Framework 767

[1] Tax-Geared Penalties 768 [2] Penalty for Lack of Proper Records 768 [3] Penalties 011 Company Officers 768

[D] Arm's-Length Standard 769 §17.03 Determining the Appropriate Intercompany Price 769

[A] Method Selection 769 [1] Particular Views of UK Tax Authorities on the OECD

Methods 770 [a] Comparable Uncontrolled Price Method (CUP) 770 [b] Transactional Net Margin Method (TNMM) 771 [c] Cost Plus Method 772 [d] Resale Price Method 774 [e] Profit Split Method 774

[B] Comparables Selection 774 [C] Interquartile Range 774

§17.04 Developing Support for Actual Pricing 775

[A] Transfer Pricing Documentation Requirements 775

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[ 11 Time at Which Documentation Should Exist 777 [B] Relationsliip between Fulfilling Documentation Requirements

and Protection front Adjustments 777 [C] Sufficiency of Compliance Reports for Purposes of Applying

Penalties 777 §17.05 Hot Topics/Special Considerations in UK Transfer Pricing 778

[A| Tltin Capitalization/Interest/Guarantees 778 [1] Deemed Dividend Treatment Removed 779 [2] Clearance» 779 [3] Specific UK Legislation 780 [4] Gnarantees and Cuarantee Fees 781

[B] Interest-Free I.oans 782 [C] Management Services 782

111 Allocation Keys 782 [2) Need for Markup 783 [3] Sharc Option» 784

§17.06 Local Conntry Administrative Practices 784 [A] Availability of Advance Pricing Agreements 784 [BJ Access to Competent Autbority 786 [C] Ol her Items 787

[1| Transfer Pricing Enquiries 787 [2] Risk Assessoren! 788 |3) Real Time Working 789

§17.07 Significant Transfer Pricing Litigation 789 [A] DSG Retail Ltd & Otliers versus HMRC 790 [B] Employee Sltare Option»: Waterloo 793

§17.08 Country-Specific Planning Opportunities 793 §17.09 List of Abbreviations 794

CHAPTER 18 United States Ml Weise, Stefanie l'errella & Rod Koborsi 795

§18.01 Regulatory Framework 797 [A] Overview and Legal Authority of Sections 482 and 6662 797 [B] Relationsliip between Section 482 and the OECD Guidelines 798

111 Choice of Method 799 [2] The Use of Safe Harbours 800 [3] Profit-Based Methods: CPM versus TNMM 800 [4] Cost Sharing Agreements/Cost Contribution Agreements 801

[C] Suntmary of Transfer Pricing Regulatory Framework 802 (1 ] Intercompany Transactions: Identification and

Characterization 802 [2] Functional Analysis 803

[D] Arm's-Length Standard 804

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111 Avnilable Metlnuls and tlie Hest-Method Knie 805

12] Ann's-l.en;;th Kanpe 8()8

§18.02 Deterniining the Artn's l.ength l'ricing lmm a IIS Perspective ao8

IA1 1 angible Property Transactions 8Q8

111 Coniparable Uncontrolled l'rice Melliod 809 (a| Description 809 |b| Application Kxample 809

[2] Resale l'rice Methml 8jg I a ] Description 8]Q |b| Application Px.imple 810

[3] Cost Plus Method 811 [a] Descript ion 811 [b| Application Kxample 812

|B] Intangible Property Transactions 812 [1] Coniparable Uncontrolled Transaction Method 813

[a] Descript ion 813 Ib] Application Kxample 813

[2] Coniparable Profits Method 814 [a] Description 814 [b] Application Kxample 814

|3| Profit Split Method 815 [a] Description 815 [b] Application Kxample 816

[4] Unspecified Method 817 [C] Service Transactions 817

[1] Services Cost Method 819 [a] Description 819 [b] Application Kxample 819

[2] Coniparable Uncontrolled Services l'rice Method (CUSP) 820 [a] Description 820 [b] Application Kxample 820

[3] Gross Services Margin Method 821 [a] Description 821 [b] Application Kxample 821

[4] Cost of Services Plus Method 821 [a] Description 821 [b] Application Kxample 821

[5] Comparable Profits Method (CPM) 822 [a] Description 822 [b] Application Kxample 822

[6] Profit Split Method 823 97 3 [a] Description

[b] Application Kxample 823

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[D] Loans 824 [1] Description 824 [2] Application Kxauiple 826

[E] Cost Sharing 826 [1] Evolution of tlie Regulations 826 [2] Pre 4 January 2009 Regulations 827

|a| Buy-In Payments for Pre-existing IP 827 |b| Determination and Allocation of Cost Pools 828 fcj Documentatioii and Administrative Requirements 828

[3] 2008 Temporary Regulations 829 [a] Payments Made for Pre-existing IP 829 (b) Determination and Allocation of Cost Pools 831 |c| Periodic Adjustments 831 |d) Documentatioii and Administrative Requirements 832

[4] 2011 Final Regulations 832 [a] Payments Made for Pre-existing IP 833 [b| Determination and Allocation of Cost Pools 834 |c| Periodic Adjustments 834 |d| Documentatioii and Administrative Requirements 835 |e| Other Updates to tlie 2008 Temporary Regulations 835

§18.03 Penalties for Non-compliance 835 |A| US Transfer Pricing Documentation Requirements 835 [B] US Transfer Pricing Penalty Framework 836

111 Reported Results 837 [21 Tlie Transactional Penalty 837

[a] Substantial Valuation Misstatement 838 Ib] Gross Valuation Misstatement 838

[3] The Net Adjustment Penalty 839 Ia 1 Substantial Valuation Misstatement 839 |b) Gross Valuation Misstatement 839

|4) Coordination of Penalties 840 Ia] Coordination of a Net Section 482 Adjustment

Subject to tlie Net Adjustment Penalty and a Gross Valuation Misstatement Subject to the Transactional Penalty 840

(b| Coordination of a Net Section 482 Adjustment Subject to the Net Adjustment Penalty and Substantial Valuation Misstatement Subject to the Transactional Penalty 841

[5] Reasonable Cause and Good Faith 841 [6] Specified and Unspecified Method Requirements 842 [7] Carrybacks and Carryovers 842

[C] Sufficiency of Documentation Reports for Purposes of Avoiding Penalties 843

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!? 18.04 Special Consiilerations in US Transfer Pricing 84, |A] ITN 48 Consideiatiou ^

111 .lustihcnlion for Issuing EIN -KS 844

|2] l'IN 48 Scope 844

[3| l'IN 48 Implementation Guideliues 845

14] l'IN 48 Disclosures 847 |5| l'IN 48 aiul Transfer Priems; 848 |6] Impleinenting l'IN 48 for Transfer Pricing 849

[a] Step 1: kientily Unit of Accounts 849 [b| Step 2: Preliminary Analysis 849 |c) Step 3: Detailed Review 850 |d] Step 4: Implementation 850

171 Schedule and Instructions lor llncertain l ax l'ositions 851 IB1 Global Dealing 852

[1] Introduction 852 [2] Permanent Establishment 853 [3] The Rede of Capital 854 [4] Guarantees 855

[C] Advanced Pricing Agreements 856 [1] APA Program Background 856 [2] APA Process 858

[a] Step 1: APA Application 858 [b] Step 2: Due Diligence 861 [c] Step 3: Analysis 861 [d] Step 4: Discussion and Agreement 862 [e] Step 5: Drafting, Reviewing, and Executing the

Agreement 862 [3] Other Considerations 863 [4] Administering and Renewing the APA 863 [5] Proposed Revision of Procedures for APAs 864 [6] Conclusion 865

[D] State and Local Tax Considerations 865 [1] State Adoption of Treasury Regulation Section 1.482

Principles 867 [2] Other State Mechanisms 869

[E] Tax Audits and Related Controversy Procedures 870 [1] Transfer Pricing Audit Roadmap 870 [2] Request for Documentation 871 [3] Notice of Proposed Adjustment 871 [4] Appeals and Alternative Dispute Resolution 872

[a] Appeals Fast Track Settlement Procedure 872 [b] Early Referral to Appeals 872 [c] Delegation Orders 872

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[d] Appeals Mitigation and Arbitration 873 |c| Advanced Pricing and Mutual Agreement Program 873

§18.05 Significant US Transfer Pricing Litigation 873 [A] Asiatic Petroleum co. v. Commissioner (1936) 874

[1] Gase Sutninary 874 [2] Commentary 874

[B] PPG Industries, Inc. v. Commissioner (1970) 874 [1| Gase Summary 874 [21 Commentary 875

[C| LI Ilupont I1L Nemours & Co. v. United States (1979) 875 111 Gase Summary 875 [2] Commentary 875

[D[ Hospital Corporation of America v. Commissioner (1980) 876 [ 11 Gase Summary 876 [2] Commentary 876

[E] ELI Lilly & Co. v. Commissioner and G.D. Searle & Co. v. Commissioner (1987)190 876 [1] Case Summary 876 [2] Commentary 877

[F] Bausch & I.omb, Inc. v. Commissioner (1989) 877 [1] Case Summary 877 [2] Commentary 878

[G] Westreco, Inc. v. Commissioner (1992) 878 [1] Case Summary 878 [2] Commentary 879

[H] Compaq Computer Corporation and Subsidiäres v. Commissioner (1999) 879 111 Case Summary 879 [2] Commentary 879

[I] DHL Incorporated and Subsidiaries v. Commissioner (2002) 880 [1] Case Summary 880 [2] Commentary 881

[J[ Xilinx, Inc. v. Commissioner (2009) 881 [ 11 Case Summary 881 (2 ] Commentary 881

[K] Veritas Software Corporation v. Commissioner (2009) 882 [1] Case Summary 882 [2] Commentary 882

[L] Altera Corporation v. Commissioner (2015) 883 [1] Case Summary 883 [2] Commentary 883

§18-06 List of Abbreviations 884

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Annexes 887

ANNI.X 1 l'taitslet Pricing Knies Snnnn.ny 889

ANNKX II l'iansler Pricing Implementation Checklist 903

'l'able of Cases 907

Index 911