Indirect tax forum

Transfer Pricing and VAT

www.pwc.co.uk

November 2017

PwC

Agenda

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What is operational transfer pricing?

Key VAT issues arising from transfer pricing adjustments

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Scenario 1: Procurement and global purchasing model

Scenario 2: Global business models – sales and distribution 3 4

Scenario 3: Supply chains, goods and true-up calculations

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PwC

November 2017

What is operational transfer pricing?

Indirect Tax Forum

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PwC

• Operational TP is the implementation of TP policy in the books and records of MNE groups

• Execution of goods, services, royalties and financing transactions in line with “arms-length standard”

• Requirement is to implement pricing in ERP, monitoring, true-ups, reporting and controversy (the “TP lifecycle”)

• With BEPS, many groups are reassessing their TP polices and CbCR will certainly lead to increased controversy (good or bad?)

• Some Groups are looking for increased frequency/accuracy over price setting, monitoring and true-ups and moving to prospective as opposed to retrospective adjustments

• VAT and customs requirements are a key considerations

What is operational transfer pricing?

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November 2017

Key VAT issues arising from transfer pricing adjustments

Indirect Tax Forum

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PwC

Transfer Pricing adjustments – fundamental VAT questions

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• Is a supply taking place for VAT purposes?

• What is the value of the supply?

• What is the nature and VAT liability of the transaction?

• What is the place of supply?

• What is the time of supply?

Some indirect tax rules to consider:

- Price adjustment/true-up takes place – VAT and Customs Duties valuation?

- Valuation – do any special rules apply?

- Tax points – do any special rules apply?

- Reverse charge and anti avoidance provisions

PwC

Challenges we often see

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5 4

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Availability of data – ease of identifying TP adjustments

Is the TP adjustment cash settled or a tax return adjustment

Complex value chains with multiple group entities involved

Charges to and from a centralised budget location can create additional indirect tax cost

Transaction involves an establishment of a UK VAT group member

Pass through costs and supplies for VAT purposes

Aligning TP adjustments and intra-group documentation

Identifying any netting off of TP adjustments

PwC

November 2017

Scenario – Procurement and global purchasing model

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PwC

Global functions and procurement models

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UK Head Office/UK Regional Hub

Overseas Head Office/Overseas Regional Hub

• Purchases goods and services in the UK from local and overseas suppliers

• Costs and VAT incurred in the UK

• Is it a pass through or a recharge of costs plus a mark up to branches and subsidiaries (reflecting a service)?

• VAT recovery entitlement, cost base for mark-up (gross/net)?

• Cost allocation models (e.g. waterfall)

• Further indirect tax incurred locally?

• Receiving establishment cost plus?

• Purchases goods and services outside the UK

• Centralised functions – e.g. CEO, Group Legal

• Costs plus a mark up recharged into the UK

• Identifying and valuing for UK reverse charge purposes, netting

• Allocation of cost incurred and VAT recovery entitlement

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PwC

Global procurement models

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• Analysis of services and costs

• VAT incurred and VAT recoverable

• Location of cost and budget

• Transfer of budget versus charge for services

• True-up adjustments, timing and value of VAT accounted for

• Identifying transactions for VAT purposes - CCAs

• Global contracts – recharges, Zurich, ‘use and enjoyment’

• Is local billing preferable?

Potential Options

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November 2017

Scenario – Global Sales and Distribution

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Global sales and distribution models

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May include the following operational roles:

• Transaction sold by relationship manager in Country A

• Transaction executed in Country B

• Transaction income booked in Country C

Charging models:

• Cost plus mark up

• Revenue share or profit split

• Minimum return/’top slice’ models

PwC

Key VAT considerations

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3

• Is there a supply for VAT purposes?

• Fee for services or CCA?

• VAT registration liabilities?

• What is the value of the supply?

• Minimum return/’top slice’ payments – different VAT treatment?

• Netting?

• Where is the place of supply for VAT purposes?

• Force of attraction rules?

• VAT treatment and reporting of charges?

PwC

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Scenario – Goods: Sales Principal Models and true-up calculations

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Principal Models - Buy-sell

Some key features

Procurement Principal

• Spend owners (strategic supply, buyers) centralised

• No impact on customer relations

• Interim step for fuller supply chain

Sales Principal

• Toll/Contract manufacturers are rewarded for their services with a benchmarked cost plus return.

• Ability to limit the risk borne by Distributors – balancing payments

Local distribution entity

Local customer

Territory 3Territory 1

Territory 2

Supply of goods/legal title flow

Flow of goodsRoyalty

Payments

Balancing payments

ForeignPrincipal (FP)

Manufactures (M)

IP Owner

PwC

Principal model – Buy/Sell

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VAT Customs Duties

• Where do VAT registration obligations exist?

• Which party is transporting the goods? Application of Zero Rating

• Fixed establishment of Principal in the Distributor country?

• Application of domestic reverse charge provisions – cash flow issue for the Principal?

• Do balancing payments impact whether the distributors are making supplies for VAT purposes?

• Invoicing/billing

• Does this model increase the value for customs duty purposes?

• What is the impact for preference rates?

• Is the royalty dutiable?

• Identifying the value for export from the manufacturer?

• Who needs authorisation for warehousing/ manufacturing/reliefs?

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