Transfer pricing in practice: April 2019

Fundamental sources

• Tax treaties, based on OECD Model: Article 9; also Article 7; and “special relationship” in Articles 10-12;
• OECD sources (Model Convention Commentary, TP Guidelines, Attribution of Profits to PEs, other discussion papers);
• UN Model Commentary;
• EU Codes of Conduct (EUJTPF);
• Local domestic law, illustrating various national examples where they substantially differ from OECD guidelines;
• Selected leading cases e.g. National Semiconductor, Bausch & Lomb, Sundstrand, Xilinx (US), Glaxo, Ford (Canada), DSG (UK), Roche (Australia), Aztech, Mentor Graphics, Ranbaxy (India)

The arm’s length principle and comparability

• Interpretation of the arm’s length principle and current dialogue;
• Associated enterprises;
• The role of comparables; rationale and limits. Situations where no comparables or only imperfect comparables are found;
• Transaction analysis;
• Recharacterisation issues. To what extent should contractual terms between associated enterprises be respected?

Transfer pricing methods and comparability analyses in practice

• OECD methods; explanation of each method with worked examples Selecting the method based on functional analysis results and information available (including reference to FAR analysis, entity characterisation and availability of comparables);
• Typical process proposed by the OECD;
• Aggregation of a taxpayer’s transactions / use of non-transactional third party data;
• Information on the foreign associated enterprise;
• Sources of information on comparable uncontrolled transactions: internal / external comparables; “secret comparables”;
• Comparability adjustments;
• Arm’s length range;
• Timing issues in comparability;
• Compliance issues

Functional analysis

• Goals of functional analysis;
• Analysis of functions, assets and risks;
• Relating functional analysis to selection of transfer pricing method;
• Entity characterisation (e.g. characterisation as “entrepreneur”, stripped risk manufacturer, commissionaire etc. etc.?)

Permanent establishments

• Article 7 (old and new) of the Model Tax Convention ; the 2010 Report on the Attribution of Profits to PEs;
• Model tax convention;
• Recognition of dealings;
• The arm’s length principle applied to transactions between associated enterprises and to the attribution of profits to permanent establishments: similarities and differences

Compliance issues

• TP documentation;
• Penalties;
• TP risk management

Avoiding double taxation/dispute resolution

• Internal TP adjustments: corresponding adjustments, secondary adjustments;
• Mutual agreement procedure;
• Tax treaty arbitration, new Article 25(5);
• EU Arbitration Convention;
• APAs (unilateral, bilateral, multilateral)

Specific transactions

• Intangible property
  • The life cycle of intangibles (development, exploitation, exit strategy)
  • Different types of intangibles.
  • Two possible models to structure the development of intangibles: contract research and development versus cost contribution / cost sharing arrangements.
  • Two possible models for exploiting intangibles: principal structure versus licensing out
  • Valuation of intangible assets
• Business restructurings
  • The nature of business restructuring
  • The OECD guidance on the transfer pricing aspects of business restructurings (Chapter IX of the TP Guidelines) including risk, compensation and characterisation
• Intra-group services
  • Different types of intra-group services
  • Transfer pricing methods: CUPs vs Cost Plus; when Cost Plus is not enough
  • Direct/indirect charging; allocation keys
  • EUJTPF guidelines on reviewing low value-added services
• Financing
  • Loan pricing
    • creditworthiness; thin capitalisation
    • interest rates
    • discussion: is thin capitalisation a transfer pricing issue?
    • guarantees – when they would be given
    • guarantee fees: the GE Canada case
    • an example of treasury services: cash pooling