Post on 07-Feb-2018
Finalized TP Documentation Framework
From policy to implementation – are you in control?
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Agenda
1. Introduction: Snapshot of new TP documentation rules
2. Conversion: “BEPS proof” TP documentation in FY16
3. Focus items: CbC reporting and Transparency management
4. Practical issues and our experiences up to date
5. Take aways: key action points
Appendices
From policy to implementation – are you in control? 3 november 2015
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1. Introduction Snapshot of new TP documentation rules
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BEPS Action 13 Three-tiered approach laid down in OECD TP Guidelines chapter V
Master File High level information about group’s business, global TP
policies and agreements with tax authorities, available to
all tax authorities where the client has operations
Local File Detailed information about the local business, including
related party payments and receipts for products,
services, royalties, interest, etc
Country-by-Country Report High level information submitted annually about the
jurisdictional allocation of profits, revenues, employees
and assets
Implementation
Master / Local File: to be delivered or
maintained directly by the client to all tax
authorities in countries where it does
business
Filing: generally ultimate parent to file CbC
report in jurisdiction of residence
Timing: First set of CbC reports to be filed
by 31 December 2017 for fiscal years
beginning on 1 January 2016 or (in other
cases, the term for filing will be one year
from the close of the fiscal year)
Final BEPS deliverables: released on 5
October 2015
Dutch legislation: proposals issued on 15
September 2015
(Additional local compliance requirements may apply)
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Transfer pricing process life cycle
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Application of Action 13 Frontrunners
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More countries to follow…
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2. Conversion “BEPS proof” TP documentation in FY16
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Main changes Consistency and transparency
From policy to implementation – are you in control?
1 Description of full
global value chain and
global policies in the
Master File
Reconciliation of TP
methodology to local
annual accounts in the
local files
Coverage of ALL material
inter-company
transactions =>
Products, services, IP,
finance
Disclosure of unilateral
APA’s and other tax
rulings 2
3
4
Alignment between:
► Master file and local file
► Each individual local file
► Master file, local files and
CbCR
► Three tiered TP doc, TP
policies and contracts
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What do you think?
Do you have a complete
overview of all intercompany
transactions, including
financial transactions?
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Full Action 13 cycle – EY Approach Global versus Regional / Local
Local compliance requirements
Cb
CR
L
oca
l F
ile
le
ve
l M
ast
er
File
le
ve
l
CbCR
Other Local Files
Other Local Files
TODAY TOMORROW
Additional BEPS
content
Local File for European HQ
European Master File
BEPS
Global policy considerations
Single point of contact / accountability
New Global Master File
Additional BEPS
content
Additional BEPS
content
New under BEPS
WHO?
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TP documentation cycle Timing is everything
From policy to implementation – are you in control?
BEPS scan
CBCR risk assessment
Gap
analysis
Transition plan
Global master file
Today 31 Dec 2016
Implementing new documentation guidance
1 Jan 2016
Preparation phase
31 Dec 2017
First
CbCR filing
Local
files (incl. template)
Finalize
local file
Compliance and Reporting – automated?
Continuous Monitoring
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Suggested approach Step 1 : be prepared
► Large groups: consolidated revenue exceeds EUR 750 million CbCR
► Medium groups: consolidated revenue between EUR 50-750 million new
► Small groups: consolidated revenue below EUR 50 million old (8b CITA)
& & CbCR risk
assessment Gap
analysis BEPS scan
Transition plan
Optional Recommended Must have Must have
From policy to implementation – are you in control?
Practical tool: a local compliance requirements questionnaire covering all
countries you have presence in
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Preparation results in transition plan Including a heat-map and documentation strategy
► EY recommends to develop a heat-map to determine which countries require the most attention and
resources in view of the Local Country Files
Materiality Controversy
attitude
Local
regulations
Documentation requirements
Heat map – determine focus and priority for Local Country File documentation
Transfer pricing landscape Business landscape
Transfer pricing
complexity
Ongoing contro-versy
CbC Reporting risk profile
The CbCR assessment output
should be included in the heat-
map development to address any
potential “outliers” identified
From policy to implementation – are you in control?
TP
Ris
k
Materiality
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Step 2 = drafting documentation “new style” Full or “light” scenarios possible
Regulatory landscape
► Domestic legislation in place which differs
significantly from OECD TP Guidelines
Documentation landscape
► Documentation requirements in place
which significantly deviate from Action 13
► Documentation to be provided with tax
return / upon very short notice in audit
Controversy landscape
► High audit risk
► Strict penalty regime
Business landscape
► Significant presence in country
► High CbCR risk, based on assessment
OECD Master File only?*
Full Local File
Local File template + building
blocks
Regulatory landscape
► No TP legislation, or in line with
OECD TP Guidelines
Documentation landscape
► No specific local documentation
requirements
Controversy landscape
► Low audit risk
► No / low penalty regime
Business landscape
► Limited / moderate presence in
country
► Low CbCR risk, based on
assessment
Regulatory landscape
► TP legislation in line with OECD TP
Guidelines
Documentation landscape
► In line with Action 13 OECD standard
► Documentation to be provided with tax return
/ upon relative short notice in audit
Controversy landscape
► Moderate audit risk
► Low / moderate penalty regime
Business landscape
► Moderate / significant presence in country
► Moderate CbCR risk, based on assessment
1 2 3
* In countries where new Action 13 legislation is already announced / implemented, only a Master File is no longer sufficient
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Step 3 = monitoring and transparency Pro’s and con’s of new style documentation
► Can be drafted in building blocks => easier to maintain
► Can be used to explain and tailor local deviations
► Provides insights and continuous monitoring tool => more control
► Can trigger disputes due to high level of detail and inconsistencies
► First time conversion takes considerate time and effort (2016)
► Benchmarks in Local files
► Decentralized tax process becomes more challenging
-
+
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What do you think?
Do you think
conversion will take
much more of your
time?
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3. Focus items CbC reporting and Transparency management
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Action 13 - CbCR EY’s CbCR Methodology – Three Phases
Phases
Actions
Risk and
Readiness
Analysis
Compliance
and Reporting
Continuous
Monitoring
► CbC Reporting ‘dry run’ using most recent available data
► Identify anomalies and potential areas of controversy
► Define remediation strategy
► Implementing robust processes for data collection and reporting within current IT infrastructure
► Run different iterations of data analysis to decide on appropriate sources
► Reduce surprises by monitoring CbC Reporting position
► User and administrator guides and training manuals
► Feedback summary
► Develop overview of IT landscape for CbCR
► Identify challenges in the ‘real world’ for CbCR
► Early identification of system/data gaps
► Build overall CbCR data inventory
► Identify controls and processes for future state CbCR
► Propose solutions to address final data and process challenges
► Implement final data / system solution within the current IT infrastructure
► Configure CbCR Data repository for Tax
► Deliver CbC report, master and local file reports
An
aly
tic
s a
nd
c
om
pli
an
ce
Syste
ms a
nd
D
ata
TP & ITS TP & GCR & TPA
TP & GCR & TPA
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Are you prepared for the outcome? Case study 1: Financing / holding companies
Brief scenario description
A multinational group operates through local OpCos
which pay interest and royalty to a central financing /
holding company (established in a low-tax jurisdiction
with minimal substance).
Scenario Illustration
Main focus area
The Tax Director of the group is aware that significant
income is routed through the holding jurisdiction.
But how will tax authorities see this in the future?
Financing / holding jurisdiction
Certain
holding/financing
jurisdiction (e.g. the
Netherlands) may have
high income entities.
Such high incomes may
be explained by
financing / royalty
structures in place.
Is it possible to
defended such
structures?
The graphs of the CbCR
tool allow for a quick
analysis which
countries may raise
attention and questions
from tax authorities
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Are you prepared for the outcome? Case study 2: Significant branch income
Brief scenario description
A multinational group operates through local sales
support branches which are remunerated on a cost-plus
basis.
Scenario Illustration
Main focus area
Regardless of the relatively low cost-plus remuneration,
significant revenue may be generated in the branch
countries. Can you use the CbCR for internal
monitoring and / or to determine TP strategy?
It is important to
focus on revenues in
branch countries.
Internal monitoring:
Head office may
‘hide’ behind branch
revenues
TP Strategy: Heat
map to determine the
focus on TP local
files.
Head office
Branch countries
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Are you prepared for the outcome? Case study 3: Consistency of margins
Brief scenario description
A multinational group operates through limited risk
distributors in a number of jurisdictions. As per the TP
policy, all limited risk distributors should earn a 5%
operating margin.
Scenario Illustration
Main focus area
The TP policy is just the ‘starting point’.
Is the TP policy correctly implemented?
The CbCR
assessment will
provide a clear
overview on
implementation.
Increased exposure
when a settlement is
made in a
controversy case –
for example for a 7%
operating margin.
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Are you prepared for the outcome? Case study 4: Unexpected high ETR
Brief scenario description
A multinational group operates through limited risk
distributors in a number of jurisdictions.
Scenario Illustration
Main focus area
The CbCR review shows that certain entities pay
significantly higher taxes than expected.
The CbCR review
may be used for
internal / business
review purposes.
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4. Our experiences up to date
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Master file Practical experience – questions from clients
► Should TP doc already be “BEPS proof” or not?
► How to deal with Netherlands already implementing Action13 guidance in their domestic law, but
HQ jurisdiction not yet
► European tax director: “it is the responsibility of HQ now, not (or no longer) mine”
► Consistency
► Are your (regional) master files telling a consistent story when one is compared to the other?
► Are you master files fully aligned with your local files?
► Exchange of information
► “I already have a master file today – what is so new about this?”
► Already having a pre-Action Point 13 master file in place is not the same as being prepared for proactive exchange
of that document
► Portfolio companies – Global HQ with several independently operating BUs
► “Do we need one master file?”
► One document vs cross references
► “I want to have a separate document for FS TP transactions”
► Does the concept of a regional / European Master File still exist?
► The content that used to be in the European master file will now be contained in the local file in the country
where the European HQ is located
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Local file Practical experience – questions from clients
From policy to implementation – are you in control?
► “If you were me, would you prepare a full local file in every European country where I have
operations?”
► Is a template enough? Penalty protection vs more controversy ready
► Local files could meet minimum (local) requirements only, to avoid reversal of burden of proof and penalties, or
more robust local files could be prepared to be ready for controversy that will surely increase within Europe
► One-sided analysis no longer sufficient
► Describing a policy for HQ services is part of the master file; the detailed substantiation of the actual charges
(i.e. the implementation of that policy) is part of the local file
► What will really change? - Consistency & transparency
► Consistency between different local files (i.e., more central coordination) becomes increasingly important
► Have you seen different behaviour from tax authorities? - Implementation
► Tax authorities are shifting their focus from TP policy to actual implementation of that policy
► Localized benchmark studies vs pan-European
► In TP audits, some local tax authorities are increasingly asking for local comparables
► My auditor asks my tax advisor to review the TP policy, is this sufficient for them to sign off?
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Questions and practical points on CbCR
Have you run a pilot program yet? And if so, how will you
address potential anomalies or risks in your model/data?
Did you think about automating the compliance process?
Have you designed a process to identify and manage the
various national implementations yet?
Would public dissemination of information potentially cause
risk or reputational damage?
Is it clear who will be responsible for CbCR – tax, finance,
tax accounting?
Are your internal policies/communication protocols
prepared for a push for global consistency of all the TP
docs?
Questions to ask
Accounting
standard
differences
Timing and
responsibility
Dealing with
PEs
Spikes or
outliers? Consistent
results?
Opportunity
to use
broader
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What do you think?
What stage are you
currently at?
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What stage are you at? End-to-end process
Actions
Phases
1
Risk assessment
Feasibility study
► CBCR risk
assessment (tax audit
simulation)
► Prioritization / heat
map
► Account / data
mapping
► Gap analysis
► Feasibility study
► Roadmap / business
case
2
Conversion
Implementation
► Conception of group
specific solution
► Design and
implementation of
related business
processes / workflows
► Design and
implementation of
data interfaces
► Definition of reporting
3
Sustainable
reporting
► Consistency among
master and local files
and CbC report
► Preparation and
maintenance of
reports incl. audit trail
► Reporting manual
► Compliance
management
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5. Take aways: key action points
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Which actions will you take tomorrow?
Prepare
• Include work in FY16 tax budget
• Large: CbCR risk assessment & policy
Convert
• Large and medium: GAP analysis
• Documentation strategy & execution
Monitor
• Strategy for transparency management and controversy, data gathering process
From policy to implementation – are you in control? 3 november 2015
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Appendices
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Masterfile – what’s new? Information required
Organizational
structure Business description Intangibles
Intercompany
financial activities
Financial and
tax positions
Structure chart:
► Legal
ownership
► Geographic
location
Important drivers of business profit Overall strategy
description
Financing
arrangements for
(related and
unrelated) lenders
Annual consolidated
financial statements
Supply chain of:
► Five largest products/
services by turnover
► Products/services generating
more than 5% of sales
List of important
intangibles and legal
owners
Identification of
financing entities
List and description
of existing unilateral
APAs and other tax
rulings
Main geographic markets
of above products
List of important
intangible
agreements
Details of financial
transfer pricing
policies
List and brief description of
important service arrangements
R&D and intangible
transfer pricing
policies
Functional analysis of principal
contributions to value creation by
individual entities
Details of important
transfers
Business restructuring/
acquisitions/divestitures
during fiscal year
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Local file – what’s new? Information required
Local file – information required Local entity Controlled transactions Financial information
► Management structure
► Local organization chart
► Details on individuals to
whom local management
reports
► Description of material controlled transactions and
context in which they take place
► Identification of associated enterprises party to
controlled transactions and relationship
► Functional analysis
► Transfer pricing methods used
► Comparables and details of methodology
Local entity financial statements
Description of business and
business strategy pursued
Amounts of intra-group payments and receipts for
controlled transactions (i.e., products, services,
royalties, interest, etc.)
Reconciliation to show how financial
data used in applying the transfer
pricing method ties to the financial
statements
Details of business
restructurings and/or intangible
transfers
Unilateral and bilateral/multilateral APAs and other tax
rulings related to the controlled transactions
Summary of relevant financial data
for comparables and sources from
which data was obtained
Key competitors R&D and intangible transfer pricing
policies
Details of important transfers
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CbC reporting in three tables Table 1 template
Tax
jurisdiction
Revenues Profit (loss)
before
income tax
Cash tax paid
(CIT and
WHT)
Current year
tax accrual
Stated
capital
Accumulated
earnings
Tangible assets
other than cash
and cash
equivalents Number of
employees
Unrelated
party Related party Total
1.
2.
3.
4.
5.
6.
7.
Etc.
Notes: ► Aggregated rather than consolidated data
► Flexibility in data sources allowed
► Entity data aggregated on the basis of tax residence
► Revenue defined to include turnover, royalties, property, interest
► Revenue specifically excludes intercompany dividends
► Profit/loss before income tax includes extraordinary items
► Cash tax paid includes tax withheld by other parties on payments to the constituent entity
► Current year tax accrual is tax on current year operations only
► Number of employees may include external contractors
From policy to implementation – are you in control? 3 november 2015