IP Alignment in a Post BEPS World · 2018-04-04 · IP Alignment in a Post BEPS World Tracee Fultz...

International Fiscal Association USA Branch

New York Region

International Tax Seminar | Thursday, July 13, 2017

IP Alignment in a Post BEPS World

Tracee Fultz

Principal, Northeast Region Transfer Pricing Leader

EY LLP

Nelly Korsun

Principal, Transfer Pricing

PwC LLP

B. Chase Wink

Partner

Skadden, Arps, Slate, Meagher & Flom LLP

Steve Wrappe

Deputy Head, Transfer Pricing & Dispute Resolution

KPMG LLP

2International Fiscal Association │ New York Region International Tax Seminar | July 13, 2017

Supply Chain – common profiles

• IP Ownership

– Cost sharing or licensing model with low-tax jurisdiction

– Cost sharing model with multiple participants

– US or non-US ownership of new technology platform or product in

high-tax jurisdiction

– Dispersed ownership with desire to centralize

• Recent developments

– Acquisition of IP in new jurisdictions

– Supply Chain Changes – acquisition integration, distribution

model, IT implementation

– Controversy – transfer pricing, State Aid, permanent

establishment (PE), withholding tax, etc.

– Other Pressure – corporate policies, negative public relations,

consumers, etc.


Current Environment


Current Challenges

• Transfer Pricing for IP

– BEPS Action Items 8-10 (DEMPE Control and Oversight)

– State Aid

• Hybrid Mismatch Rules

– UK early adoption

– Global implementation (e.g., Anti-Tax Avoidance Directive)

• PE / Diverted Profits Tax (DPT) / Royalty Withholding Tax (WHT)

– Direct sale (commission, marketing support) versus local sales (distributor, reseller)

models

– Net tax versus gross tax

– Controversy environment

• More transparency

– Country-by-Country Reporting, Master and Local File (BEPS Action Item 13)

– Exchange of information on rulings

• Operational and Reputational Risk


Global transfer pricing controversy trends

• IRS audit transformation underway

– IRS goal to identify and develop good litigation vehicles continues

• “TPO’s goals continue to be to find good, strategic cases it can win . . . so we can get some victories for

the U.S. government and the IRS in the transfer pricing area.”

• “We’re developing cases so that any particular one could be litigation-ready, all of our cases in theory

should be litigation-ready.” IRS TPO Director, April 2015

– IRS audit “campaign” initiative under development

• Canada Revenue Authority exhibiting an increased appetite for litigation as a resolution

tool

• Revised HM Revenue & Customs guidance curbs transfer pricing discussions outside

APA framework

• China SAT’s insistence on “location savings” position complicates resolution of issues

• European tax authorities increasingly scrutinizing recurring losses

– Presumption that transfer pricing is triggering the losses

– Is the corporate group benefiting from the losses?

• DPT and similar regulations being issued by many companies

• State Aid cases considering past positions


Perceived IRS transfer pricing risks

• Transfers of “value” continue to receive scrutiny

– Recasting related party transactions

– Bootstrapping section 936(h)(3)(B) or Treas. Reg. §1.482.4 (“any

similar item”) onto transfers of “value”

• High-value or non-routine services (e.g., oil and gas

industry)

• Treas. Reg. § 1.385-2(c)(2) indebtedness factors may be

perceived as bright-line rules for documentation

• Contractual de-risking of related parties

– Did the functions and risks borne by the parties also change?

– Are the functions and risks consistent with the agreements?


Timeline: key European developments

Transparency

► Exchange of tax ruling

summaries based on

Action 5 started

State aid

► EC concluded on state

aid cases

► Used own transfer

pricing concept

► Rulings and regimes

Parent subsidiary

directive changed

► Intra-EU anti-hybrid

rule

► GAAR

Old EU IP regimes

► No new entrants

► Phase out /

grandfathering until

July 2021

Transparency

► CbCR introduced in all

EU Member States

► Exchange of tax ruling

summaries based on

EU Directive started

United Kingdom

► UK Anti-Hybrid rules

effective as of 1/1/17

► BREXIT procedure

started

Publication of EU list of

tax havens

Action 15 multilateral

instrument (MLI)

► Signing ceremony in

June

Transparency

► First exchange of CbC

reports

EU Arbitration

Convention

► Dispute resolution

mechanisms

transposed into local

law of EU Member

States and effective

per 1/1/18

Ireland

► New TP framework

(Action 8–10) likely to

be effective in Ireland

ATAD rules effective

1/1/19

► Interest deduction

limitation rules (30%

EBITDA)

► Controlled Foreign

Company rules

► GAAR

United Kingdom

► BREXIT effective

3/29/19 (unless

extended unanimously

by EU Member States)

Action 15 MLI

► MLI will likely be

effective in relation to

first treaties

CCTB

► Common corporate tax

base throughout EU

► Mandatory for groups

with turnover of EUR

750m


1/1/20

► Exit tax rules

► EU Anti-Hybrid rules,

addressing mismatches

within the EU and

with third countries

Ireland

► End of Non-resident

Ireland (NRI) regime

2016 2017 2018 2019 2020 2021

Old EU IP regimes

► Grandfathering of old

IP regimes ends July

2021

CCCTB

► CCTB + Single

calculation of taxable

income and single tax

return for all EU

operations

► Taxable profits shared

between Member

States based on

apportionment formula

(1/3 sales, 1/3 labor,

1/3 assets (excluding

intangible assets))

2022


1/1/22

► Reverse hybrid entity

rules

Red = Reality

Blue = Very high likelihood

Gray = Uncertain

No timing indicated

Public CbCR

Amendments Interest / royalty Directive


Compliance with Actions 5, 8-10 and 13


Legal ownership and DEMPE functions

Entitlement to intangibles return

• Action 8 focus is on Development, Enhancement, Maintenance,

Protection and Exploitation (DEMPE) functions relating to intangible

assets

Development of

intangible asset

Enhancing

value of

intangible

asset

Maintenance

of intangible

asset

(eg: quality

control)

Protection

of intangible

asset against

infringement

Exploitation

• There is no automatic return on account of mere legal ownership of

intangible

• Requirement to directly perform or to control the performance of

DEMPE functions and related risks

• Return retained by an entity in group depends on the contributions it

makes through DEMPE functions to the anticipated value of intangible

relative to contributions made by other group members



Entitlement to intangibles return Cont’d

Routine return for

IP ownership (a)

Risk adjusted rate of

return (b)

Residual

returns

Total system

returns

Legal ownership

Pure Funding

DEMPE functions

Legal ownership +

Funding obligations +

DEMPE functions

Legal ownership +

Funding obligations

(a) + (b)



Changing perceptions of entitlement to profit from intangibles

1980’s 2014 1990’s

Owner

Legal Owner Legal Owner

Economic Owner

Investor

Controller/Functional Contributor

Developer Developer

Routine Developer

Developer/Functional Contributor

User User

Pure User

Value Contributor

Non-routine (residual claimant)

Routine


Country-by-Country Template

CbyC Template – Page 1*

Revenue

Country

Related

Party

Unrelated

Party Total

Profit

(Loss)

Before

Income

Tax

Income

Tax Paid

(on Cash

Basis)

Income Tax

Accrued –

Current

Year

Stated

Capital

Accumulated

Earnings

Number

of

Employe

e

Tangible

Assets Other

than Cash

and Cash

Equivalents

Country A X X X X X X X X X X

Country B X X X X X X X X X X

CbyC Template – Page 2* (Onwards)

Country

Constituent

Entities

Resident in

Country

Country of

Organisation

or

Incorporation

if different

from Country

of Residence Ho

ldin

g o

r

Man

ag

ing

IP

Pu

rch

asin

g &

Pro

cu

rem

en

t

Man

ufa

ctu

rin

g &

Pro

du

cti

on

Sale

s,

Mark

eti

ng

&

Dis

trib

uti

on

Ad

min

istr

ati

ve

,

Man

ag

em

en

t &

Su

pp

ort

Serv

ice

s

Pro

vis

ion

of

serv

ice

s t

o

un

rela

ted

part

ies

Inte

rnal

Gro

up

Fin

an

ce

Reg

ula

ted

Fin

an

cia

l S

erv

ice

s

Insu

ran

ce

Ho

ldin

g s

hare

s o

r

oth

er

eq

uit

y

instr

um

en

ts

Do

rman

t

Oth

er

Country A Entity A Country B √

Entity B √ √ √

*Information obtained from Annex III to Chapter V of OECD/G20 Base Erosion and Profit Shifting

Project: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting


Moving Forward


Scale and timing considerationsKey questions to ask yourself?

• What is the group’s current risk profile and where are the pressure

points? How does this compare to others? For example, existing

controversy or unhelpful facts may prompt a more urgent change.

• Is a direct move to a “BEPS-resistant” structure feasible or not due to

e.g., budget-, timing-, logistics- and/or resources restrictions? What

will be the overall impact on the current business model?

• What should you do in the interim period? It turns out that a ‘wait and

see’ approach is often not sufficient.

• Who, outside the tax department, should be part of the change

process and what should you be communicating to your board and/or

shareholders (or other stakeholders)?


Responses

• DEMPE Control and Oversight

– Board of Directors

– IP Management Committees

– Employee substance, including US or other branch operations

• PE / DPT / WHT

– Restructure

• Substance in HQ or Regional HQ Company/Hub

• Distribution model (actual or “synthetic” buy-sell)

• DEMPE Control and Oversight

– Transfer pricing changes

• Return on sales

• Profit split


Responses (2)

• Hybrid mismatch

– Change check-the-box (CTB) elections

– Royalty-free license

– “Temporary” Onshore – e.g., Usufruct

– Onshore

• Lower tax (Barbados, Curacao)

• Other (Ireland, UK, Netherlands, Singapore, etc., etc.)

• Effective Tax Rate Considerations

– IP Transfers

• Foreign taxes

• ARB 51 implications

– Tax incentives

• Amortization

• IP / Innovation / Patent Box – new “modified nexus” regimes in Singapore,

Israel

– US Tax Reform


IP alignment – onshore vs. offshore

Onshore

• When considering IP alignment in light of the global legislative tax

developments, on-shoring of IP could be considered as a potential solution.

Considerations include:

– Flexibility to unwind – once onshore, the respective location (and value) may be

‘locked in’ and flexibility to unwind may be limited.

– DEMPE – At the onshore location, all relevant people need to be available to

manage the required functions, risks and assets. We are seeing more tax authority

challenge from source countries on this. Is significant substance in IP location

practically feasible?

– Tax accounting implications (as well as regulatory changes, such as repeal of ARB

51) should be carefully considered given Effective Tax Rate (ETR) implications.

• Based on OECD Transfer Pricing (TP) principles, the onshore location should

earn an at arm’s length remuneration in excess of a routine return given its

assets, functions and risks. Depending on the tax regime of the onshore

territory, this may be offset by incentives such as IP boxes, R&D credits,

amortization, and/ interest expenses.


IP alignment – onshore vs. offshore

Offshore

• Retaining an offshore IP structure with the appropriate substance

provides for the utmost flexibility, including an ultimate on-shoring, but

will likely be met by increasing challenge from source territory tax

authorities.

• Under certain circumstances, the remuneration of both the onshore

HQ company and the offshore IP company can be substantiated by

means of a two-sided TP approach, e.g., profit split methodology.

• Monitor legislative responses to BEPS Action 2 (hybrid mismatch

arrangements) in relation to reverse hybrid IP holding structures.

Furthermore, the EU will publish a blacklist by the end of 2017.


Supplemental Guidance for Determining AL Conditions in Cases Involving Intangibles (Section D)

Hard-to-value intangibles (D.4)

• Examples of HTVI (6.190)

– Intangibles that are only partially developed;

– Intangibles that are not anticipated to be exploited commercially

until several years following the transaction;

– Intangibles that separately are not HTVI but which are integral to

the development or enhancement of other intangibles which fall

within the category of HTVI;

– Intangibles that are expected to be exploited in a manner that is

novel at the time of the transfer

– IP meeting the definition of HTVI has been transferred for a lump

sum payment

– The IP is used in connection with or developed under a CCA

• For these types of intangibles, information asymmetry

may be acute (6.191)


US Tax Reform

• Worldwide tax system without deferral (Trump campaign

proposal)

• “Territorial”

• Border Adjustment (GOP Blueprint)

• Camp’s 2014 proposal

• Considerations

– Impact on IP Ownership Exploitation, including cost sharing

arrangements

– Impact of Border Adjustment Taxes on supply chain decisions

– Impact on US tax treaty networks


Impact of BEPS C-by-C on TP Risk

• Greater transfer pricing risk in more countries from C-by-

C information

• Exposure to double tax is increased, without substantial

increase in resources to resolve


Impact of BEPS C-by-C on Tax Function

• Greater risk may encourage more centralized

management of global transfer pricing by taxpayers

– Consistency

– Efficiency

• In turn, centralized management may encourage

additional in-house staffing and software

– Efficiency

– Control

IP Alignment in a Post BEPS World · 2018-04-04 · IP Alignment in a Post BEPS World Tracee Fultz...

Documents

Transcript of IP Alignment in a Post BEPS World · 2018-04-04 · IP Alignment in a Post BEPS World Tracee Fultz...