The Transfer Pricing Policy Towards a New World Order? 28 November, 2012.

The Transfer Pricing Policy

Towards a New World Order?

28 November , 2012

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Business restructuring

and exit charges

Location advantages

More audits, disputes and

litigation

Non OECD approaches

Scope of rules expanding

More and more complex

regulation

Aggressive practices by

tax authorities

Dissatisfaction with profit

based methods

Lately…..


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Developing Country Debate

OECD vs United Nations

Non OECD approaches becoming codified?

Public Backlash on Transfer

Pricing

Arm’s Length vs Formula

Apportionment

Today…..

Tax Transparency


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The Backlash

“It is common knowledge that most multinationals …are actively engaged in these practices, with the aim of transferring their profits to countries with the most favorable tax regimes…”

“Improper transfer pricing practices cost the developing world $400 billion to $440 billion between 2000 and 2008.” ____________________________Global Financial Integrity 2011

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“…a technique known as transfer pricing…carves an estimated $60 billion a year from the U.S. Treasury as it combines tax planning and alchemy.”

“Transfer pricing is the corporate equivalent of the secret offshore accounts of individual tax dodgers,” said U.S. Senator Carl Levin…

_____________________Bloomberg 2010


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The problem is that because of synergies within large corporations….the economic relationships between entities within a group are not the same as between unrelated parties. The practical problem is the lack of truly comparable transactions…”

Congressional Testimony by Martin Sullivan, Phd Economist and contributing editor of Tax Analysts, 2011

OECD approach to transfer pricing, both theoretically, andempirically, falls apart” Michael Durst, former APA Director of IRS.

“The Arm’s Length Problem”

“Companies and government spend extraordinary amounts …on efforts at compliance and documentation….yet companies and the IRS typically are dramatically far apart in their determination of arm’s length pricing”The Hamilton Project, Brookings Institution 2007

“The central question is……: Are the rules of the game so permissive that even if applied correctly, multinationals can decide the amount of taxes they pay?

- Roberto Schatan (ex-OECD), Tax Notes International, January2012

“The arm’s length method simply is not working…it offers little more than a general framework for negotiations, in which MNEs hold an upper hand….”

"Transfer pricing is the leading edge of what is wrong with international tax” Lee Sheppard, editor of Tax Notes International and Forbes blogger, 2012


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Perceptions matter – the SAB Miller Story

In 2010, ActionAid publishes its 40 page report: “Calling Time, why SAB Miller should stop dodging taxes in Africa”.

Led to numerous tax investigations in several African countries and was one of key drivers behind Ghana enacting Transfer Pricing legislation in 2012.

The report has been voted as one of the five leading global forces in Transfer Pricing in 2012, by the readers of the Transfer Pricing Week.


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Developing countries

“The OECD guidelines only protect the interests of OECD countries which are parties to such convention”…..”it is improper to suggest that they represent internationally agreed guidance….”

Indian Government letter to the UN, March 2012.

“Developing countries….face a set of unique issues which have not been addressed….by the OECD Guidelines.”

China Country Practices, UN Transfer Pricing Manual, October 2012.


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The China View (from the UN process)

＋＝

Brand

Management

Supply ChainManagement

R&D

HQ China

Market Premium

Cost Savings

Pollution Permission

Total

Profit

Manufacturing

Distribution

Manufacturing

Double Taxation

＞ MAP?


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The Future?

Increased Disclosure and Transparency?

Institutionalized Double Taxation?

Convergence vs Regulatory

Competition?

Hybrid Models? ALP to prevail?


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Will the Arm’s Length Principle prevail?

CUP TNMM PROFIT SPLIT RPM/

C+FORMULA

APPORTIONMENT

ARM’S LENGTH PRINCIPLE

FORMULA APPORTIONMENT≠


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OECD T

he

Au

stra

lian

“The current transfer pricing rules are difficult for governments to

implement, not just for developing countries but for OECD countries… we have overcomplicated some of the rules”. Pascal Saint-Amans, Director, OECD Centre for Tax Policy, 2012

“Tax officials from 90 countries agreed on the need to simplify transfer pricing rules, strengthen the guidelines on intangible issues and improve the efficiency of dispute resolution.”

The OECD press release on 28 March 2012 following OECD’s first Global Forum on Transfer Pricing,


12© 2011 KPMG Tax Limited, a BVI limited liability company operating in Hong Kong and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong.

What can you do?

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Transfer Pricing ManagementFramework

Plan and Design

Implement and

Document

Dispute Resolution

Assess Risk/

Define Strategy


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Presenter’s contact details:

Kari PahlmanPrincipal

Asia Pacific LeaderGlobal Transfer Pricing Services

+852 2143 [email protected]

The Transfer Pricing Policy Towards a New World Order? 28 November, 2012.

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