Country-by-Country Reporting, Transfer Pricing Documentation Templates and other TP Issues

IIB Annual Tax Seminar June 17, 2014

Panel

Marc Levey, Partner, Baker & McKenzie LLP Kathryn Horton O'Brien, Principal, PwC

Rema Serafi, Principal, KPMG Humberto Reboredo, Global Head of TP, Credit Suisse

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Agenda

Discussion of 3 Key Areas in the Transfer Pricing Arena: 1.  TP Documentation and Country by Country Reporting

2.  OECD Draft on Intangibles

3.  IRS Transfer Pricing Audit Roadmap

IIB Annual Tax Seminar June 17, 2014

Rema Serafi, New York

OECD Discussion Draft on Transfer Pricing Documentation and CbyC Reporting

4 © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Transfer pricing risk assessment

Ensure taxpayers give appropriate consideration •  Contemporaneous documentation •  Penalty regimes

Provide tax administrations

information to audit the transfer pricing practices

Objectives and Approach

Objectives of Documentation

Approach

•  Master File •  Local Files

5 © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Discussion Draft on Transfer Pricing Documentation and CbyC Reporting

Transfer Pricing Documentation Is a Matter of Local Law

Local laws should be amended to be

consistent with the OECD

Master File and Country-by-Country

Report

Should be prepared under the direction of the parent company

Will be requested by the local tax

authority

Provided directly or through treaty

exchange?

6 © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Proposed Revised Template (April 18, 2014)

CbyC Template – Page 1

Revenue

Country Related Party

Unrelated Party

Total Profit (loss) before income tax

Income tax paid (on a cash basis)

Income tax accrued – current year

Stated Capital and Accumulated Earnings

Number of employees

Tangible Assets other than Cash and Cash Equivalents

Country A

X X X X X X X X X

Country B

X X X X X X X X X

CbyC Template – Page 2 (onwards)

Activities

Country Constituent entities resident in country

Country of organisation or incorporation if different from country of residence

R&

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Exte

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Reg

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finan

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Insu

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Hol

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Dor

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Country A

Entity A Country B √   √  

Entity B √   √   √  

7 © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Country-by-Country Reporting Template

Category Content Key Issues Challenges Financial Reporting Revenues, EBIT, Taxes

Paid Determine top-down or bottom-up approach

Reconciliation of any large differences between statutory and financial statement reporting Data gathering and validation

Economic Substance Number of Employees, Tangible Assets

Ensure Master File provides context for these data to prevent misinterpretation/misuse by tax authorities (i.e., provide context/explanation for high revenues-low taxes paid –low employees situations, as well as for contractual allocation of risk)

Authorities could rely on these data as proxies for economic activity and implicitly apply a formulary apportionment approach in resulting transfer pricing adjustments

Timing Determine optimal timing and consistency with Master and Local Files

Different timing for tax returns and statutory financials

8 © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Concerns of Business

q  Use of information

q  “risk assessment” vs. transfer pricing enforcement

q  Interaction with intangibles rules – potential for “fishing expeditions”

q  Dispute resolution

q  Confidentiality

q  Treaty vs. non-treaty access

q  Materiality

q  Implementation costs

q  Implementation process and timeline

PwC

Revised Intangibles Discussion Draft

•  First discussion draft published June 2012

•  Public consultation November 2012

•  Revised Discussion Draft (RDD) published July 30, 2013

•  68 comment letters received

•  Public consultation November 12-13, 2013 in Paris

•  Completion expected by Sept. 2014

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PwC

Revised Intangibles Discussion Draft

•  No changes regarding: -  local market, -  location savings, -  assembled workforce, and -  group synergies

•  Definition of intangibles

•  Reserve on risk and recharacterization/coordination with Action Item 9

•  View of naked legal ownership

•  TPMs, including DCF; consider realistic alternatives

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IRS LB&I TP Exam Roadmap

‒  The TP Exam Roadmap was issued February 14, 2014 ‒  The Roadmap consists of detailed procedures and

timelines for conducting a transfer pricing examination. ‒  Unlike prior TP Directives (E.g. Cost Sharing CIP) no

substantive guidance is provided. ‒  The Roadmap largely organizes and references

existing case processing procedures or emerging procedures (IDR response process).

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IRS Roadmap Timeline TRANSFER PRICING AUDIT ROADMAP

Transfer Pricing Audit Roadmap Phases Timeline Planning Phase (up to a 6 month process)

A. Pre-examination Analysis Pre-exam analysis occurs before the cycle begins

Opening Conference starts the 24 month audit cycle

Planning activities occur during months 1 to 6 of the audit cycle

• Preliminary assessment of potential • 6662(e) Documentation Review • Planning Meetings

B. Opening Conference (starts the 24 month cycle) C. Taxpayer Orientations D. Preparation of Initial Risk Analysis and Examination Plan

• Initial Risk Analysis • Examination Plan, Timelines and Key Milestones

Execution Phase (up to a 14 month process) A. Fact Finding and Information Gathering

Fact finding and issue development occurs during months 3 to 17 of the audit cycle

• Additional IDRs • Functional Analysis • Mid Cycle Risk Assessment

B. Issue Development • Economic Analysis • Preliminary Report and Findings

Resolution Phase (up to a 6 month process)

A. Issue Presentation Issue Resolution occurs during months 18 to 24 of

B. Issue Resolution C. Case Closing/RAR

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IRS Roadmap Stages TRANSFER PRICING AUDIT ROADMAP

Quality Examination Process (QEP) QEP Phases

Planning Execution

Resolution Transfer Pricing Audit Stages & Timeline

Cycle Time in Months Non-cycle time 1st to 2nd 3rd 4th 5th 6th 7th to 15th 16th 17th 18th 19th 20th to 23rd 24th

Pre-Examination Analysis

Opening Conference, Transfer Pricing Orientation

Preparation of Initial Risk Analysis, Exam

Plan & Key Milestones Fact Finding and Additional IDRs, Functional

Analysis Mid Cycle Risk

Assessment Issue Development

and Preliminary Reports

Pre-NOPA Issue

Presentation Resolution

Discussions Final NOPA and

Case Closing

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Changing Landscape of Transfer Pricing Audits

‒  Questions? §  Does the Roadmap prolong the Audit or make it more

effective? §  Does Roadmap provide more transparency to Taxpayers? §  Does the Roadmap require the production of excessive or

often irrelevant data? §  Does the Roadmap transcend critical facts? §  How far along the Roadmap does the IRS need to proceed

to determine if a case should be further scrutinized or resolved?

§  Are the audit teams overwhelmed with factual data so that the issues become obscured?