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Your bridge to worldwide transfer pricing services

Transfer Pricing Handbook for the Oil & Gas Industry

August 2012


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Your bridge to worldwide transfer pricing services 2

All materials, content and forms contained in this handbook are the intellectual property of TPA, and may not be copied,reproduced, distributed or displayed without TPA's express written permission

TPA does not warrant, either expressly or implied, the accuracy, timeliness, or appropriateness of the information contained inthis handbook TPA disclaims any responsibility for content errors, omissions, or infringing material and disclaims anyresponsibility associated with relying on the information pro!ided in this handbook

"opyright # 2012 by Transfer Pricing Associates $%All rights reser!ed

About this document


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Introduction | co!e and Pur!ose

Pur!ose

&( is looking to gain practical insights into transfer pricing theory and practice in an effort to create atransfer pricing function in its organi)ation and create a sustainable transfer pricing system

co!e

* TPA will explain the transfer pricing principles, +(" and (uropean approaches in dealing withtransfer pricing

* TPA will share its experience in the oil - gas sector and pro!ide generic case studies on !arioustransactions

* TPA will describe its approach to transfer pricing process and pro!ide guidelines how to deal withTP processes and manage TP risks within the organi)ation


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Your bridge to worldwide transfer pricing services "

Table of #ontents

Title Page

.egulatory Transfer Pricing /ramework

+il - as ndustry %alue "hain 13

Transfer Pricing Aspects of Possible ntercompany Transactions in the +il - as ndustry 0

+il - as ndustry4 "ustoms uties and (xcise uties in the (5 67

+rgani)ational Aspects of Transfer Pricing 8 Transfer Pricing "ontrol /ramework 33

A lobal Transfer Pricing Policy 76

Appendix 4 ntroduction to Transfer Pricing Associates 73

Appendix 4 "omparability Analysis 101

Appendix 4 +rgani)ational Aspects of Transfer Pricing 8 TPA9s Transfer Pricing Process 103

Appendix %4 :ist of ;" Agreement Templates 120


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$egulatory Transfer Pricing %rameork


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Your bridge to worldwide transfer pricing services '

$egulatory Transfer Pricing %rameork | Agenda

* ntroduction < the +rganisation for (conomic "o


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Your bridge to worldwide transfer pricing services (

The Organisation for )conomic #o*o!eration and +e,elo!ment -O)#+.

* The +(" was established in 1761, head>uartered in Paris

* The +(" has groups ? member countries committed to democratic go!ernment and the market economy t pro!ides aforum where go!ernments can compare and exchange policy experiences, identify good practices and promote decisionsand recommendations to produce better policies for better li!es

* ecisionuest, re!iew and contribute to work undertaken by the+(" ecretariat

* The work mandated by the "ouncil is carried out by the +(" ecretariat The ecretariat in Paris is made up of some 2@00 staff who support the acti!ities of committees, and carry out the work in response to priorities decided by the +(""ouncil


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The O)#+ TP Guidelines

The +(" Transfer Pricing uidelines pro!ide guidance to multinational enterprises and go!ernments toapply the arm9s length principle

5nder the arm9s length principle, the conditions of transactions between associated enterprises Beg membersof a multinational enterpriseC should not differ, for tax purposes, from the conditions that would ha!e beenagreed by independent parties in comparable circumstances


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1ist of Publications by O)#+ | Transfer Pricing

* .e!ision of the pecial "onsiderations for ntangibles in "hapter % of the +(" Transfer Pricing uidelines and .elatedPro!isions, iscussion raft 8 =une 2012

* ealing (ffecti!ely with the "hallenges of Transfer Pricing 8 =anuary 2012

* Transfer pricing and intangibles4 scope of the +(" proDect 8 =anuary 2011

* +(" Transfer Pricing uidelines for &ultinational (nterprises and Tax Administrations 8 =uly 2010

* 2010 .eport on the Attribution of Profits to Permanent (stablishments 8 =uly 2010

* The 2010 update to the &odel Tax "on!ention 8 =uly 2010

* "/A response to "omments .ecei!ed on the eptember 2007 raft .e!ised "hapters


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The O)#+ TP Guidelines | Technical introduction

Associated enter!rises

Two enterprises are associated enterprises with respect to each other if one of the enterprises meets the conditions of Article 7,sub


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The O)#+ TP Guidelines | Transfer Pricing 6ethods -.

#om!arable 7ncontrolled Price

#ost Plus

$esale Price

Transactional 8et 6argin 6ethod

Profit !lit

Traditional transaction methods

Transactional !rofit method

Ihere a traditional transaction method and a transactional profit method can be applied in an e>ually reliable manner, thetraditional transaction method is preferable to the transactional profit method &oreo!er, where the comparableuncontrolled price method B"5PC and another transfer pricing method can be applied in an e>ually reliable manner, the

"5P method is to be preferred

Source: the OECD Transfer Pricing Guidelines 2010


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The O)#+ TP Guidelines | Transfer Pricing 6ethods -2.

#om!arable 7ncontrolled Price

A transfer pricing method that compares the price for property or ser!ices transferred in a controlled transaction to the pricecharged for property or ser!ices transferred in a comparable uncontrolled transaction in comparable circumstances


+il producer

.elated party refinery

rdparty refinery

rdparty trader

rdparty trader

33 J;barrel

71 J;barrel

3@ J;barrel

x J;barrel

Assuming exact comparabletransactions, arm9s length range for x

is

from 3@ to 71


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#ost Plus

A transfer pricing method using the costs incurred by the supplier of property Bor ser!icesC in a controlled transaction Anappropriate cost plus mark up is added to this cost, to make an appropriate profit in light of the functions performed Btaking into

account assets used and risks assumedC and the market conditions Ihat is arri!ed at after adding the cost plus mark up to theabo!e costs may be regarded as an arm9s length price of the original controlled transaction


&anufacturingser!ices

"ost Plus mark


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The O)#+ TP Guidelines | Transfer Pricing 6ethods -".

$esale Price

A transfer pricing method based on the price at which a product that has been purchased from an associated enterprise is resoldto an independent enterprise The resale price is reduced by the resale price margin Ihat is left after subtracting the resale

price margin can be regarded, after adDustment for other costs associated with the purchase of the product Beg custom dutiesC,as an arm9s length price of the original transfer of property between the associated enterprises


.efinery "ustomers and markets

.esale margin K et sales < "ost of goods

Trader

Transaction A Transaction$

et sales"ost of goods

imilarly to "ost Plus method functionalityis the key determinant of the resale margin in .esale Price method

The analysis has to be performed on the gross le,el of profitability


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Transactional 8et 6argin 6ethod -T866.

A transactional profit method that examines the net profit margin relati!e to an appropriate base Beg costs, sales, assetsC that ataxpayer realises from a controlled transaction


T&& is applied similarly to "ost Plus or .esale Price methods The analysis has to be performed on the

net le!el of profitability with a wide range of profit le!el indicators, eg, net BoperatingC margin, net markuarter - back office ser!ices


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Oil & Gas ,alue chain | 6ain Transfer Pricing As!ects -.

* )>!loration

8 /unding the in!estment Band associated riskC and the rights to access any losses

8 (xtraction rights ; licenses4 ownership and relationship with rights to profit

8 /inancial and performance guarantees including obligations to Gput land rightH, insurance costs and indemnities8 Access to engineering expertise and technologies 5se of centrali)ed ser!ice centres, people, technology - expertise

and e>uipment

8 "entrali)ed ser!ices such as procurement and other support ser!ices

* Production

8 /unding issues

8 .elationship with oilfield ser!ices companies

8 &anagement and design of production infrastructure

8+wnership ; leasing of e>uipment8 esign B.-C and manufacture of e>uipment ; royalties ; leasing ; ser!ice fees Bpeople, technology, e>uipmentC

8 upport ser!ices

8 nsurances and indemnities, attribution of liabilities and risk

* Intake

8 esign and ownership of facilities and infrastructure

8 n!estment in relation to same and rights to reward

8 +wnership and management of logistics aspects and relationships

8 "haracteri)ation of acti!ity and attributable !alue

8 upport ser!ices


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Oil & Gas ,alue chain | 6ain Transfer Pricing As!ects -2.

* $efining

8 .- and P ownership in relation to refining processes and protocols etc

8 Plant property and e>uipment 8 design, in!estment ; funding, ownership, characteri)ation

8 "haracteri)ation of refining acti!ities Btolling, contract processor, risk


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Your bridge to worldwide transfer pricing services 2"

Ho to design your transfer !ricing system?

The Transfer Pricing Process developed by Transfer Pricing Associates is all about treating transfer pricing as abusiness process. The steps in this process are illustrated in the following diagram:

Addressingthefollowingkeyissues:

1. How to identify the relevant business context

2. How to design an appropriate transfer pricing system and arrange for proper implementation

3. How to document the transfer pricing system

4. How to manage (pre! controversy of the transfer pricing system


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6atching O)#+@ managerial and legal labels

* The following table links the labels used when looking at transfer pricing from a tax, management accounting and legalperspecti!e4

O)#+ labels 6anagerial labels 1egal labels

#7P (xpense;cost;re!enue centre er!ices agreement

$esale !rice .e!enue;profit centre istribution agreement

#ost*!lus (xpense;cost centre

.esearch and de!elopment

agreement

Profit s!lit Profit;in!estment centre ales and marketing agreement

T866

.e!enue;profit centre

"ommission agent

agreement


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Royalty

"

#

#

#

#

#

ProtCenter

!nvestmentCenter

!PCompany"#!nvestmentCenter$

# $% creation & management#

#

#

#

#

%CostCenter$contractors'anufacturing

&)

*ogistics

%ac+aging,,-

#RevenueCenter$sales"

serviceshubs# ,ales'ar+eting

# epair & /arranty# -all -enter

#ProtCenter$

# )ashboard'atchma+er

access to residual result

no access to residual result

%CostCenter$contractors

'anufacturing

&)

*ogistics

%ac+aging

,,-

,upplier

,upplier

-ustomer

#RevenueCenter$sales"

serviceshubs

# ,ales'ar+eting# epair & /arranty

# -all -enter

-ustomer

Ho to locate intangibles in your ,alue chain?

Addressingthefollowingkeyissues:1. /hat labels are used to address

intangibles0

2. How do you recognie intangibles0

3. How to determine ownership of

intangibles0

4. How to pricevalue any transfer of

intangibles0


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Oil & Gas ,alue chain | Intangibles

Product related intangibles Process related intangibles 6arket and 6arketing intangibles Hybrids

Patent

n!ention

Pattern

&ethods

"opyright esign ; &odel

/ormulae;.ecipes

oftware

:iterary, musical, or artistic

composition ; film

Technical data ; documentation

Prescription drug files

:ibrary

atural resources

atabase

Permit

.egulatory license eg fromcentral bank

Trade secrets

Nnowuota

"ustomer relationships

istribution network - agreements

.etail shelf space

ubscription lists

Publications;thought leadership

.eputation

$ook of business

/ranchise

Permit ; right ; license Bair, water,

land, drilling, emission,

broadcastingC

omain name 5ni>ue location

Source: TPAs reresentation to OECD on intangi!les ro"ect

68) intangible assets

* .- pipeline

* rights to in!entions, industrial prototypes and utility model* rights to computer programs and database* rights to trademarks and ser!ice marks* protected results of intellectual acti!ities and indi!iduali)ation means* exploration, production and other licenses* taff Bsoft intangiblesC* Nnow how Bsoft intangiblesC* &anagerial expertise Bsoft intangiblesC* upply and offtake contracts Bsoft intangiblesC* Trading expertise Bsoft intangiblesC* +ther


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Ho $&+ acti,ities lead to onershi! of Intangibles?

$&+ #ost

#entraliBed +ecentraliBed

$&+ acti,ities

#entraliBed ole owner"ost contribution

;cost sharing

+ecentraliBedole owner F contract

.-"ost "ontribution

;cost sharing

Throughdetermininga!olicyforsingle,ersussharedonershi!

)>am!le!roductintangibles

Addressingthefollowingkeyissues:

1. How do you protect your product and process intangibles02. /hat single versus multiple ownership denition do you use03. /hat type of intercompany agreements are in place for &) activities04. How do you deal with geographies transfers of &) activities0

##A d # li d i -.


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##A and #entraliBed er,ices -.

$elationshi! beteen cost contribution@ intra grou! ser,ices and intangible licensing

Participatingroup

"ompany A

Participatingroup

"ompany $

+perating group companies

roupcompany;ser!ice

pro!ider

ntra groupser!ices

" ntangible licensing B+(", chp 6C

$ ntra group ser!ices B+(", chp ECA "ost contribution arrangements B+(", chp 3C

ntra groupser!ices5ser rights ; licensing

##A d # t li d i -2.


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##A and #entraliBed er,ices -2.

AC #ost contribution 5C Intragrou! ser,ices #C Intangible licensing

"ost definition

Allocation keys Ocost;benefits9

$uy


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Ho to deal ith substance issues for IP com!anies?

Through defining do4s and dont4s

o9s ont9s

dentify key decision makers &inimi)e key decision makers

ufficient physical presence, OMome base9&ake binding decisions abroad unless properauthori)ation procedure

Payroll plit payroll if not consistent with physical presence

+n site decision making &inimi)e physical presence of key personnel

$e inconsistent with own policies

Through a!!ro!riate audit trails -!a!er and digital.

ecision making policy &inutes of meetings;agenda9s

ndi!idual decision making egotiations

Agreements Phone bills

Authority ;responsibilities Tra!el document

Pricing policy igital agenda

Acti!ity

Addressingthefolloingkeyissues

1 Mow to ensure a critical mass of key decision makers to geographically anchor P ownershipQ

2 Mow can T support or undermine your caseQ

Mow to deal with modern ways of communications and commutingQ

? Mow to manage beha!ioral aspectsQ


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Transfer Pricing As!ects of Possible Intercom!any Transactions in 68) Grou!

Transfer !ricing as!ects of !ossible intercom!any transactions in 68) Grou! |


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)uro!ean a!!roach

* Transfer pricing aspects of possible i;c transaction in &( roup

* (ngineering

* "ontract .- er!ices

* .ental of Professional taff

* .ental of (>uipment

* +il and gas extraction

* .efining

* Transformation of refinery acti!ities into contract refinery Bcon!ersion issuesC

* Trading

* Mead>uarter and upport er!ices

* hared er!ice "entre

* "ost $ase "harges

* "apti!e insurance

* /inancing

* ( "apital :andmark TP case

Transfer !ricing as!ects of !ossible iDc transaction in 68) Grou!


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Transfer !ricing as!ects of !ossible iDc transaction in 68) Grou!

Shared service centre services:

* General management

* IT* HR* Legal* Marketing

* Accounting & financial administration* Treasury

ID# transactions | )ngineering E contract $&+ ser,ices


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ID# transactions | )ngineering contract $&+ ser,ices

"ontract .- centres carry .- acti!ities for the benefit of principal who takesownership of the P de!eloped4

* An expense centre* T&& is applied* nternal comparables 8 comparability adDustments* (xternal comparables 8 A&A(5 or other database

ome !ariations4* "ost contribution arrangements* :ease of personnel or e>uipment

ID# Transactions | )ngineering E #ontract $&+ er,ices


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| g g

$&+ centre

-cost centre.

Princi!al

-in,estment D !rofit centre.

%unctions

/ormulation of a problem ; concept

Planning and budgeting

Pro!iding initial information ; material

.esearch and de!elopment

.eporting

uality assurance

$isks

ProDect failure risk

"redit risk

"ost control and poor budgeting

"urrency risk

Assets

.- centre Principal

.e>uest for .- ser!ices and funds

e!eloped P

$ental of !rofessional staff


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!

In !rinci!le to different models for rental of

!rofessional staff e>ist

* 6odel


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* The hourly !rofessional staff rental fee

A irect cost component4

$asic alary and +!ertime cost

tandard (mployee cost Beg lea!e, 1 thmonth, etcC

"ountry pecific (mployee cost Beg o!erseas allowancesC "ountry pecific (mployee benefits Beg super annuationC

eneral tatutory .e>uirement (mployee benefits Beg ocial ecurity, pensionsC

$ ndirect cost component

Total indirect cost including depreciation ; amorti)ation cost

+!erhead cost4 T related excluding branding and management fees

" Annual direct hours Bnormal and o!ertimeC

Total normal hours4 see definition on next sheet

Plus

The a!erage number of o!ertime hours

Arm9s length prof it mark up4 (C9F

$ental of !rofessional staff


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Annual direct hour definition Bnormal time onlyC4

Other !rice considerations

* Actual tra!el expenses will be charged separately to the G.ecipientH company

* Tra!elling hours will be charged to the G.ecipient companyH Bstarting from the time the GPayroll"ompanyH employee lea!es home, with a maximum of 3 hours per day, without any special additionalcharge for tra!elling o!ernight or on weekendsC

* Transfer prices need to be calculated for each of the personnel categories

efinition Annul Girect MoursH without o!ertime

"ontract Mours Mours as stipulated at the employee9s contract

lesssick hours ick hours paid

lessMoliday;lea!eKA!ailable Mours

Moliday and lea!e hours paid

lessndirect Mours All hours not chargeable to clients Bcertification time


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The eui!ment fee consists of the folloing com!onents

* Time ,alue com!onent

* #ost com!onent

* Occu!ational degree of eui!ment

* Profit u!lift

$ental of eui!ment


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IC Time ,alue com!onent

A Mistorical price of the e>uipment

$ (stimated useful life of the e>uipment in years

#ote: ti$e %alue co$onent e&uals: 'A()*

8 Per t+e of e&ui$ent ,e ,ill decide uon the nu$!er of +ears

IIC #ost com!onent

aC Annual financial interests

bC Annual insurance cost

cC Annual maintenance costdC eneral o!erhead costs

#ote: ercentages to !e calculated on the historical rice of e&ui$ent

IIIC Occu!ational degree of eui!ment

I;C Profit u!lift

etermined on basis of benchmark

$ental of eui!ment


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Your bridge to worldwide transfer pricing services "2

aily e>uipment rental fee4

+ther considerations4

* &obili)ation and demobili)ation costs to be charged separately

* .ates in local currency of lending company* Transport time charged

* /or some items, minimum packaging charge

* "onsumables for party using the e>uipment Bback to back charge ie no margin at intermediaryC

* Template a!ailable !ia "orporate

ID# transactions | Oil and gas !roduction


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Production acti!ities in!ol!e4

* Migh !alue P 8 licences* (xploration, regulatory - en!ironmental risk* 5sually, a profit;in!estment centre, although can be disaggregated into key

entrepreneurial risk taking functions and separate intangible assets to bestriped down to a cost ;expense centre

* "5P method or T&& for the other transacting party* nternal comparables 8 comparability adDustments* (xternal comparables 8 Platts >uotes, comparability adDustments

Oil and gas !roduction E #7P a!!lication on oil !roducts


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* Inde>

8 "ommodity exchange

8 Platts >outes

8 Argus

8 (tc

* +ifferentials

8 :ogistics4

* ncoterms

* pillage and waste

8 uality4

* ra!ity ; density

* ulfur

* Acidity, etc

8 $argaining ; Trader9s intelligence4

* Timing, market situation

* .elati!e position of buyer;seller, relati!e supply of similar products

* .efining capacity utili)ation, etc

ndex F;< differentials

ID# transactions | $efining


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* .efinery as a profit centre4

* /ully stand alone organisation4 maindecision makers and intangible assets

* "5P method is applied* nternal comparables !s external

comparables BPlatts >uotesC

* .efinery as a cost centre Btolling refineries

are a !ery usual practice in (uropeC4* T&& method Bcost plus if therefinery still bears the risks , ie notreal tollingCS

* .+A;.+( or &ark


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Your bridge to worldwide transfer pricing services "'

Transformation of refinery acti!ities into contract refinery Bcon!ersion issuesC

%unctional ma!!ing E 2 business models


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Your bridge to worldwide transfer pricing services "(

6odel 6odel 2

Agent model

here Trading hub o!erates as a!rocurement agent on behalf of $efinery

Princi!al model

here Trading hub takes the !rinci!alrisks and !ays $efinery a !rocessing fee

Trading hub .efinery Trading hub .efinery

/unctions Procurementntake, trading,

processing, sale andtransport

Procurementintake, trading, sale and

transportProcessing

.isks.isks relating to

procurement acti!ities incase of gross negligence

All other significant risks All other significant risks.isks relating to

processing acti!itiesin case of gross

negligence

Assets

* &anagerial expertise* Trading T systems

* upplier relationship* Trading expertise* :P model Bdecision

makingC

* Physical refiningassets

* upply and off


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* A!ailability of trained;expert professionals Bmain functions to be shifted4 (conomics, cheduling,

upply - "ommercial, Trading, /inance, and TCS

* +ptimi)ing balance sheet position to support trade positionsS

* +ptimi)ing tax efficiency Bboth on migration between models as well as co!ering O future state9CSand

* Assess business restructuring risks upon con!ersion from one business model to the other

Im!lementation !itfalls


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* nter


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* !ecific acti,ities hich can be e>ecuted by $efinery are any refining acti,ities@ iCeC being

8 eneral management of the refineryS

8 Administrati!e acti!itiesS

8 $uilt up of any related refining and technical intelligence for running the refineryS

8 Performance of the actual refining processS

8 ecisions on production planningS

8 ecisions on maintenance planningS

8 Assuring the >uality of the refining processS

8 &anaging and assuming of all refinery related technical risksS

8 &anaging and assuming of all refinery related operational risksS

8 &anaging safety, health and en!ironmental issues related to the refineryS and

8 "ontractual transportation of the finished product

* !ecific acti,ities hich can not be e>ecuted by refinery are any commercial acti,ities@ iCeC being

8 o employees on the refinery payroll performing any commercial acti!itiesS

8 $uilt up of any commercial intelligence at refineryS

8 o purchasing of crude oilS

8 o intake of crude oil or any logistics thereofS

8 o trading or any support of trading acti!ities Bie order processingCS and

8 o sale of the finished products;debt reco!ery and management;exposure

$ecommendations and ne>t !hase -for illustration !ur!oses only.


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* "ase to establish tolling model is compelling although exit charge for refinery needs to be minimised

* (stablishing and recruiting trading hub organisation and infrastructure on critical path

* Trading hub organisation should be in place before additional refining assets are added to reduce furtherexit charge risk

* +rganisational impact at refinery needs to be aligned with other changes

* Appropriate tolling agreement to be drafted to balance risk and reward

ID# transactions | Trading


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istribution Bsales and marketingC acti!ities canbe categorised as4

* .elationship management* $rokerage* Trading

imilar categori)ation applies to procurementand sourcing acti!ity

Ty!e of distribution -sales & marketing. functions


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/unctions &arketing, client relations :imited sales acti!ities, salesadministration

/ull distributor acti!ities

.isks o maDor risks %olume - budget risk &arket risk

Assets o assets o assets Possible assets

.esponsibility profile "osts centre .e!enue centre Profit centre

TP methods T&& "5P, T&& "5P, .esale &inus

P: &arkuotes, .esalemargin

ID# transactions | Headuarter and u!!ort er,icesDhared er,ice #entres


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hared ser!ice centre acti!ities4

* .outine, back office ser!ices* "ost centre* T&& to be used by applying a mark


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* 5enefit test

* Identification of !otential market references and choice of transfer !ricingmethod

* Allocation schedule for costs of !ro,iding intra*grou! ser,ices

8 ubtract extraordinary costs

8 Allocate indirect o!erhead costs

8 ubtract shareholder acti!ities costs

8 irect charges for specific ser!ices

8 ontraordinary costs

ubstract

e>traordinary costs

Identify

direct charges

Identify

direct charges

ubstract

hareholder costs

ubstract

hareholder costs

Allocate remainder

-indirect charges.

Allocate

indirect charges

8o cost allocation

!ossible

8o cost allocation

!ossible

Allocate general

su!!ort costs

Allocate o,erhead

costs

Are services rendered&Are services rendered&

Headuarter and back office ser,ices | #ost base charges


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* Allocation criteria

8 Turno!er

8 umber of employeesB/T(sC8 n!ested funds

8 umber of computers

8 (tc

* 5udgeted cost ,sC actual costs

* Arm4s length mark*u!

8 $undling BweightingC of ser!ices or specific mark


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"apti!e insurance acti!ities4

* efined by the functionality and risk profileof the insurer

* "an be cost or profit centre* T&& for cost centre* Profit centre would use Oother method9 8 a

mathematical model usually used ininsurance industry

ummary of functions@ risks and assets undertaken during the insurance !rocess

t f th

J d i i $ ibl t


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tage of theinsurance !rocess

Jey decisions $es!onsible !arty

#a!ti,eInsurer

#a!ti,e4scontractors

Treasury entity ofthe Grou!

Product management D!roductde,elo!ment

&arket researchathering and maintaining claims statistics&athematical calculation of the premium:egal stipulation of the e


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%irst 6odel econd 6odel Third 6odel

"riteria i!ersification of risk o es es

"apti!e is making key decisions o o es

"apti!e possesses ade>uatecapital to absorb insurance andinsured risks

o o es

+utcome of the test .esponsibility of the capti!e ;A "ost centre Profit centre

Typical transfer pricing model ;A

"ost plus Bon"apti!e9soperatingexpensesC

G"5PH or premium calculationbased on41.isk adDusted return on capital2:oss predictions"ompensation for the capti!e9s

operating expenses

ID# transactions | %inancing


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Three most common types of financing acti!itiesfor a treasury hub4* :ong


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an+s*enders

roup lender

(*ong term loans!

5acility6greements

-ash poolleader

roupguarantor

roupcompanies

*ongterm

funding

,horttermfunding

through the

cash pool

%rovision ofguarantee

Addressingthefollowingkeyissues:1. How to deal with intermediate nance companies02. How to determine intercompany guarantee fees03. How to allocate the benet in a group wide cash pool structure0

4. How to price long term loans0

Throughproperpricingofthefollowingintercompany nancial

transactions

7nlending of fundssourced fromban+slenders

Analysis of Treasury 'unctions " Risks " Assets


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Your bridge to worldwide transfer pricing services '2

* TPA9s approach is based on the recommendations pro!ided by the +(" uidelines, specifically on the.eport on the Attribution of Profits to Permanent (stablishments B=uly 2010C

* /unctional analysis focuses on4

1 :oan +rigination2 :oan &anagement .isks? Assets

* "haracteri)ation of treasury acti!ities4

1 "ost "entre2 .e!enue "entre Profit "entre? "ombination of the abo!e

%unctional and risk analysis | an e>am!le


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*egend8 9 : involved regarding own capital or funds; : limited involvement

: not involved

!"C Transactions ( 'inancing ) *ong+term 'inancing


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Your bridge to worldwide transfer pricing services '"

Choice of method &

Economic Analysis

1. Direct financing via long-term cross-border loans

"ost ; .e!enue"entre

Profit "entre.esponsibility Profile

TP &ethod "5P "5P

"ost "entre

"ost plus

Annual fee F (>uity.isk Premium

(conomic Analysis&arket nterest .ate

"redit .ating

atabase used&oody9s

-P/in nfo "o.euters

:oan "onnector

&ark


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!"C Transactions ( 'inancing ) Cash Pool


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Your bridge to worldwide transfer pricing services ''

Choice of method &

Economic Analysis

. !rovision of "#arantees

Alternati,e %inancing #ost #om!ound 6odelTPA9s Approach

TP &ethoduarantee /ee K "ost credit facility R

BspreadC 8 "ost alternati!e financing with noguarantee

uarantee /ee K "ommitment fee F Bnterest

&arket .ate U Probability of defaultC

"redit rating

pread on "orporate $onds

(conomic Analysis$enchmark focused on

identifying

1 "ommitment fee in syndicated loantransactions

2 efault fee $orrower "redit .ating

#ase tudy


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Your bridge to worldwide transfer pricing services '(

( "apital :andmark TP case

Case ,tudy + - Capital *andmark TP case /Canada0

C f C d / CC 0


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Your bridge to worldwide transfer pricing services '/

Ta1 Court of Canada /#TCC$0

CRA2s Position:1.


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'ederal Court of Appeals / 'CA 0

CRA2s Position5our errors of law8

1.


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3ecision of the 'ederal Court of Appeals /'CA0

* The Crown2s appeal dismissed

* The errors of law identied by the Crown were dismissed:8


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Oil and Gas Industry #ustoms duties and e>cise duties in )7

Rules"Risk'actors 5usiness6odel"Risk'actors

9ow to deal with customs planning and risk management


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Your bridge to worldwide transfer pricing services (2

Customs7alue

elated party testsJoyalties & license feesJ

&)J )ebitcredits


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* Ihen imported into (52E member tates4

< The !ast maDority of BcrudeC oil and gas products are subDect to 0R customs duty, or duties arehowe!er suspended, gi!en the (5 deficiency of these resources

< A number of refined products are subDect to customs duties in the range @R 8 6@R of theOcustoms !alue9 of the products4 they are Oad !alorem9 duties, thus there can be interplay betweentransfer price and customs !alue

* tarting from =anuary 2012, some oil and gas products originating in 5, Turkey, "anada aresubDect to additional duties Bantidumping measuresC when imported into the (5

;aluation 6ethods customs ,alue and transfer !rice E traits d$#nion


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Your bridge to worldwide transfer pricing services ("

%' c#stoms lang#age

1 Transaction %alue BT%C

2 < %alue dentical orimilar oods

? educti!e %alue

@ "omputed %alue

6 /lexible Application of methods 1


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Addressingthefolloingkeyissues1 Mow to deal with price ; profit adDustments when your financial results depart from targeted arm9s length outcomesQ2 Mow to structure and implement internal procedures and controls to comply with arm9s length standard world


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Your bridge to worldwide transfer pricing services ('

* &ineral oils are subDect in the (5 to excise duties when released for consumption into one of the (5 member tates

* (xcise duty is an indirect tax which is le!ied on the consumption of mineral oils such as leaded petrol, unleaded petrol, gasoil, hea!y fuel oil, li>uid petroleum gas, methane, kerosene, etc

* (xcise duty is not le!ied on the basis of the !alue declared of the products 8 they are Ospecific9 duties which apply based onthe weight; !olume of the products concerned

* The (5 excise duty system is harmoni)ed throughout its 2E member tates !ia (5 irecti!es, establishing the regulatorystandards for production and circulation of mineral oils across member tates and defining minimum tax rates !alid in allmember tates for each product Boption for each tate to increase the tax ratesC

* &ain features of (5 excise duty system4

8 "onsumption is taxable

8 "onsumption is national Bexcise duty of member tate shall applyC

)uro!ean 7nion E e>cise duties on Oil & Gas


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Your bridge to worldwide transfer pricing services ((

* cope of (5 suspension arrangements4

< Processing of excisable goods Beg processing of crude oilC

< Molding of excisable goods Beg mo!ement of mineral oils from refinery to warehousingC

* Tax warehouse4

A place where excise goods are produced, processed, held, recei!ed or dispatched under duty


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Your bridge to worldwide transfer pricing services (/

1eaded Petrol

6ember tate currency e>cise duty !er litres

(5 minimum tax rate E-. ?21

taly E-. E0?2

"yprus E-. ?21

:at!ia E-. ?@12

:ithuania E-. @E7

Mungary E-. ?22

etherlands E-. 31@

Austria E-. @@?

Poland E-. @3E

Portugal E-. 6@0

weden E-. E015N E-. E3E2


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OrganiBational As!ects of Transfer Pricing E Transfer Pricing #ontrol %rameork

Transfer Pricing #ontrol %rameork


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* Ho to set u! a


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e. =xperience level

f. Lumber of


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Your bridge to worldwide transfer pricing services /2

Transfer Pricing #ontrol %rameork | P)OP1)

To address the in


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* :e!el;degree of education and number of years experienceS

* "ontinuing educationS

* .oles and responsibilitiesS

* /ull time e>ui!alents !s part


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Your bridge to worldwide transfer pricing services /"

* o!ernance model relating to transfer pricing Balready in existence and part of the o!erall go!ernance structureCS

* lobal transfer pricing policy paper4 a management board signed policy paper used as a communication tool and

back


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i for design;planning

ii for documentation

ii i for benchmarking

i! for implementation;financials

! contro!ersy management

!i &( specific workflows embedded

!ii e


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Your bridge to worldwide transfer pricing services /'

R 2SST


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Your bridge to worldwide transfer pricing services /(

R 2SST uality across dataextraction, andtracking filings as wellas documentation

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Your bridge to worldwide transfer pricing services //

E one sourcePebbleAge GTP

-release 23.

TP esign ; Planning ;A Partially BfinancialsC ;A Partially

TP ocumentation /ully BstandardsC Partially BfinancialsC /ully BflexibleC /ully BflexibleC

TP $enchmarking /ully ;A Partially ;A

TP mplementation ; financials ;A /ully /ully ;A

TP "ontro!ersy ;A Partially ;A Partially

Iorkflows embedded ;A Partially ;A Partially

Training;euestX Wupon re>uestX Wupon re>uestX Wupon re>uestX

nstalled base Y00 Z@ Z10 ;A

Other !ro!ositions * NP&9s TP "ube F nterpreter* TP "atalysts B$!C Bwwwb!dinfocomC* Transfer Pricing enie Bwwwtp


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b Automate local TP documentation

c Automate global TP risk management

d Automate local TP risk management

e +ther, please specify

* hat is your mediumDlong term TP softare ambition?

a A structured 2


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Organisational As!ects of Transfer Pricing E Transfer Pricing ProKect ork!lans

Transfer Pricing ProKect ork!lans


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* Possible o!erall Transfer Pricing Iorkplan* Iorkplan for a documentation proDect

* Iorkplan for an APA proDect

* APA case management

O,erall Transfer Pricing ork!lan -.

The workplan is based on the following assumptions4

1 etermine key factors and ambition le!els on &(9 transfer pricing control framework in terms of BiC People BiiC .eporting


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1 etermine key factors and ambition le!els on &( transfer pricing control framework in terms of BiC People, BiiC .eporting:ines, BiiiC Iork /lows, Bi!C oftware olutionsS

2 etermine the 'key !alue dri!ers' per business unitS

etermine whether the current transfer pricing system is aligned with the current business model Bie means 'economicreality' K 'legal reality' K 'statutory;tax books reality'C, including drafting a global &( transfer pricing policy paper Bwithinexisting go!ernance model applied by &(CS

? +rgani)e software;intranet solution for collecting and capturing all existing documentation Bdetermine 'as is' documentationa!ailableCS

@ efine missing documentation and workplan to produce rele!ant documents to ensure compliance with global;regional;localdocumentation re>uirementsS

6 %alidation check on intercompany agreements and accounting manualsS

E efine milestone sessions each month to monitor progress by in


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L The ste!s abo,e are based on TPA Mbest !racticesM@ but reuire refinement to the 68) s!ecific needs and !rioritiesC

O,erall Transfer Pricing ork!lan -3.


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L The ste!s abo,e are based on TPA Mbest !racticesM@ but reuire refinement to the 68) s!ecific needs and !rioritiesC

Transfer Pricing ProKect ork!lan | +ocumentation ProKect

Steps %etailed description #ime and Scope 'harter %elivera"le+s,-esponsi"le

part


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Step . 8ick"off meeting & informationgathering

nterview

and/orconference

call

Inter'ie# minutes TA & 99

Step 0:raft of company; industry and

functional analysis; choice of Tmethod

1rite2up of compan3industr and functionalanalsis3 choice of #P

method

!rite"up of company;industry; function al analysis

and choice of T method

TA; re'ie# *y99

Step 4erformance of


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APA #ase 6anagement


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ource4 A Practical uide to APAs, GPan (uropean APA 8 .e>uest ProcessH, Transfer Pricing Associates B2007C


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A Global Transfer Pricing Policy Pa!er

A Global Transfer Pricing Policy Pa!er by 57

Transfer Pricing Policy tatement %2 57 N

PO1I# Transfer prices between the $5 V companies shall be similar to those which would be agreed upon between independent partiesTh b i d t t bli h i h ll b i d l l d d t d d thi d t ti h ll b t i d f


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The basis used to establish prices shall be re!iewed regularly and documented, and this documentation shall be retained for as many yearsas the rele!ant transactions are subDect to re!iew by fiscal or trade authorities

P7$PO) To ensure that transfer prices set for the transfers of goods, ser!ices and intangibles between $5 V companies are consistentwith "ompany V9s long


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A!!endi> I Introduction to Transfer Pricing Associates


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# ,uperior client service with Iuic+ turnaround

# F,enior professionals involvementG throughout proects

# 6 Fhands onG approach to implementation issues

# -onsistent global approach and performance

# Your best choice for global transfer pricingK tax valuation and customs solutions

# -oaching role8 moves intelligence to corporates# *ow overheads and competitive pricing

#


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* Tax authorities identifying Ghigh risk transactionsH and high risk industries

* ncreasing transparency due to increased disclosures and increased sophistication in re!enue authority computer systemsand search ; datauested by multinationals4 year


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A!!endi> II #om!arability Analysis

O)#+ 9 #om!arability %actors


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* "haracteristics of property or ser!ices

* /unctional analysis* "ontractual terms

* (conomic circumstances

* $usiness strategies

#om!arability Analysis


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Source: E5cert fro$ the OECD Transfer Pricing Guidelines Chater 666 7Co$ara!ilit+ anal+sis8 u!lished 22 9ul+ 20104

Arm4s 1ength $ange

Arm4s length range e>!lanation* differences in the figures that comprise the range may be caused by the fact that in general the application of the arm9s

length principle only produces an approximation of conditions that would ha!e been established between independent


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length principle only produces an approximation of conditions that would ha!e been established between independententerprises

* different points in a range represent the fact that independent enterprises engaged in comparable transactions undercomparable circumstances may not establish exactly the same price for the transaction

Source: OECD Transfer Pricing Guidelines 2010

tatistical measures

*.eason

*Application

*&istakes

#7P #onsiderations

* "5P method if one of two conditions is met4

8 none of the differences Bif anyC between the transactions being compared or between the enterprises undertakingthose transactions could materially affect the price in the open marketS or,


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y p p S ,

8 reasonably accurate adDustments can be made to eliminate the material effects of such differences

* \ similar type, >uality, and >uantity as those sold between two associated enterprises, assuming that the controlled anduncontrolled transactions occur at about the same time, at the same stage in the production;distribution chain, and undersimilar conditions

* Practical considerations dictate a more flexible approach to enable the "5P method to be used and to be supplemented asnecessary by other appropriate methods

Source: OECD Transfer Pricing Guidelines 2010

* (xact !s inexact comparables

* "5P manual

* Price setting Breal timeC !s price checking Bperiod endC

* Tolerance range

* Application in the (uropean TP setting

Interest $ate +etermination earch for Interest $ate #om!arables

* /or comparability analysis of loans the following factors ha!e to be addressed4

8 Amount

8 "urrency


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y

8 Term

8 ecured or unsecured8 uarantees

8 "reditworthiness of the borrower

8 ituation in the financial markets

* Assessment of the creditworthiness can be done using methodologies;tools of the credit agencies4 &oody9s n!estorser!ice, tandard - Poor9s and /itch.atings

* :oan "onnector and $loomberg can be used to obtain market comparables

* nternal comparables4 public corporate debt


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A!!endi> III OrganiBational As!ects of Transfer Pricing E TPA4s Transfer Pricing Process

The following transfer pricing process has been de!eloped by TPA as a structured manner to get from a 'business model' to a'defensible and workable transfer pricing system', ie also referred to as the lifecycle of transfer pricing t !isuali)es thenecessary steps Bsee ? boxes belowC to obtain a systematic scalable and user friendly workflow approach to transfer pricing

TPA4s Transfer Pricing Process | " 5o>es


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necessary steps Bsee ? boxes belowC to obtain a systematic, scalable and user


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TPA4s Transfer Pricing Process | +esign & Im!lement


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$ox 2 re>uires &( to define the rele!ant intercompany transactions from a business unit perspecti!e and make an assessment of whetherthe current transfer pricing model is fully aligned with the current business model Band the '!alue dri!ers' identified in $ox 1C

n addition, to pro!ide a generic 'Transfer Pricing policy' template, which is being used by many multinationals to communicate in a 1


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Addressingthefollowingkeissues:

1 :oes your IT system support your T system$

% !hat >amendments of? legal agreement,s are needed$

( Ho# to monitor compliance$

) Ho# to keep track of rele'ant *usiness de'elopments$

# )raftK sign & implement an intellectual property policy

# )raftK sign & implement a transfer pricing policy

# )raftK sign & implement a yearend adustment manual

# )raftK sign & implement a (series of! intercompany agreement

# )raftK assess & implement managerial aspects of transferpricing systems (e.g. Q%$s for bonus!

# )raftK complete and sign all relevant transfer pricing compliance forms on a countrybycountry basis

# 6nnual chec+ and updates of intercompany agreements

# 6lign Flegal realityG with Feconomic realityG i.e. businessmodel

# -ustoms scan and audit program (e.g. -


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$ox re>uires to define the need for BiC global documentation Beg capti!e insurance transfer pricing report A treasury transferpricing policyC BiiC regional documentation Beg sales and marketing margin for (5 region captured in a so called panuired to be compliant with thelocal legislationC Bi!C transaction specific documentation Beg financial intermediary !ehicles in most Durisdictions would re>uire somedocumentation to support the arm9s length nature of the marginC B!C specific disclosure and transparency re>uirements towards taxauthorities Beg !arious local forms as Appendix to local corporate income tax returnsC

Ty!e of analysis

* &aster file documentation

* :ocal documentation

* nter


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* Transfer Pricing method needs to be disclosed in the statutory filing in certain Durisdictions

* "ertain Durisdictions re>uire independent !erification of Transfer Pricing methodologies by a public accountant

* ummary of income statements of o!erseas affiliates to be disclosed in the Transfer Pricing disclosure forms

* Tax authorities gather information for risk assessment, also use public sources

* .isk assessment software, pre


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To define your strategy on conflict a!oidance and conflict resolution, the following considerations would ha!e to be taken into account4

* /ocus and appetite on transparency and disclosureS

* efine a policy on the use of conflict resolution instruments like APAs BrollbackC and &utual Agreement ProceduresS and

* TPA has published a book APAs < a practice guide

Ty!e of analysis

* Transfer pricing audit

* "ompetent authority

* Arbitration

* Ad!ance Pricing agreements BAPAsC

Transfer*!ricing !re*contro,ersy management ste! could include

* managing the risks identified in $ox 1, 2, and ?, through adDustments in thebusiness or adding more layers of support relating to an identified highuestions as4 Iho is themain line of communication with the tax authoritiesQ hould the external auditorshare his working papers with the tax authoritiesQ

TPA4s Transfer Pricing Process | Ho to deal ith transfer !ricing contro,ersy

5>PR8PRPRPARAT!8?A?3-

%reaudit

provisioni

ng

6%6


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ng

6udit

'6% :itigation

uarter charges intercompany loans and guarantee fees


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head>uarter charges, intercompany loans and guarantee fees

* Motspots of aggression4 ermany, enmark, /rance, taly, "anada, 5A, Australia, Norea, "hina, ndia, ndonesia and$ra)il

* "ountries where we ha!e seen acti!ity4 1@ countries in (urope, Australia, ndonesia, "hina, %ietnam, 5A, "anada

TPA4s Transfer Pricing Process | 9 te! A!!roach to 6anage our Ta> $isk and #ontro,ersy

* Adopt a global approach to tax risk and contro!ersy managementS


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* (!aluate global resources, processes and systems for tax risk managementS

* Address tax risk and contro!ersy at a strategic le!elS

* &ake strong corporate go!ernance in tax a priorityS

* tay connected with global legislati!e, regulatory and tax administration changes

TPA4s Transfer Pricing Process | Issues to Tackle Today

* Tax authorities around the world become more aggressi!e and focused4 see our hot spots]


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* Migh pace of legislati!e change creates more risk and uncertainty4 each week a new set of TP legislation and;or updates arepublishedS

* rowing disclosure and transparency re>uirements4 being exposed]

* (xpansion in emerging markets is creating tax risk and uncertainty4 how will the $." actQ

* A new breed of tax acti!ism emerges4 the fatal impact of media on corporate image]

* (nhanced relationships opportunities are spreading4 how do you communicate and interact with your tax inspectorQ

TPA4s Transfer Pricing Process | TPA4s $ecommended A!!roach

* efine areas of 'dispute' in transfer pricing, customs and;or !aluation mattersS


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* Agree with client on 'case management' plan to resol!e the 'dispute'S

* etermine a 'critical time path' to get to a resolutionS

* "hoose the 'best a!ailable contro!ersy toolbox' and 'contro!ersy team' to handle the caseS and

* :e!erage from own resources and 'extended global contro!ersy network' offered by a firm like TPA


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A!!endi> I; 1ist of ID# Agreement Tem!lates

1ist of ID# Agreement Tem!lates -TPA 1ibraryC

* "ommissionaire Agreement

* "onsignment &anufacturing Agreement


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* "ontract with a "ommercial Agent

* "ost "ontribution Agreement

* eneral er!ice Agreement

* ntercompany e!elopment Agreement

* :imited .isk istributor Agreement

* Procurement Agreement

* Production and upply Agreement

* Production "oordination er!ices Agreement

* ales and &arketing er!ice Agreement

* ales and Purchase Agreement

* Trademark :icense and istribution Agreement

About Transfer Pricing Associates


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About Transfer Pricing Associates


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p p y

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Program Benefit Framework

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