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New BEPS Country-by-Country Reporting Requirements:

International Tax Reform Planning and Compliance Challenges

THURSDAY, JUNE 2, 2016, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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FOR LIVE PROGRAM ONLY

June 2, 2016

New BEPS Country-by-Country Reporting Requirements

Susan Fickling-Munge, Managing Director

Duff & Phelps, Chicago

susan.fickling-munge@duffandphelps.com

Mark C. Gasbarra, CPA, National Managing Director

Forte International Tax, Evanston, Ill.

mgasbarra@forteintax.com

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Any tax advice included in this communication is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

Forte International Tax, LLC All rights reserved | www.forteintax.com

BEPS Country-By-Country and International Tax Reform

Mark C. Gasbarra, CPA

Forte International Tax, LLC

Susan Fickling-Munge, CBE

Duff & Phelps, LLC

6 6

• Understand the global tax trends affecting:

– Multinational enterprises.

– Small to midsized firms with international operations.

• Educate clients on how to:

– Optimize their historic tax attributes.

– Plan for increased tax transparency and tax law changes.

• Prepare clients on how to meet the challenges ahead, including:

– Potential international tax reform.

– BEPS/other reporting requirements.

Objectives

7 7

Like 3-Dimensional Chess!

8 8

LEVERAGING TECHNOLOGY TO DELIVER TAX SAVINGS AND PROCESS IMPROVEMENTS

• International tax consulting practice founded in 2004 and headquartered in

Chicago (Evanston); has been listed on Inc. Magazine’s “500 Fastest Growing

Private Companies in America”.

• VantagePoint™ Global Tax SaaS Platform dynamically supports global tax

planning and advisory services using a single integrated database.

• Core competencies include repatriation planning, the U.S. foreign tax credit,

transfer pricing, and U.S. manufacturing and export tax incentives.

• Plans for major changes immediately facing the global/international tax

environment and identifies tax and savings opportunities for clients.

Forte International Tax and VantagePoint™

9 9

National Managing Director

• Previously international tax practice leader for E&Y and

international tax partner at PWC

• Developed ITMS/FTMS at PWC now owned by Thomson

• Tax attribute database for planning at EY

• Forte’s VantagePoint – Global Tax Advisory Platform

• Service specialties include the full range of international tax

services including structuring, transfer pricing, foreign tax

credit utilization and U.S. manufacturing and export tax

incentives (“IC-DISC”)

Mark Gasbarra, CPA

10 10

• Help clients achieve global tax efficiency at the lowest possible cost

by leveraging international tax expertise through a shared technology

platform.

• VantagePoint accesses a single integrated global tax database to

support multiple purposes, including:

– Global Tax Analytics – transfer pricing, repatriation, effective tax rate.

– Tax Optimization – export, domestic production, foreign tax credit.

– Tax Reporting – financial reporting and electronic filing.

• VantagePoint interfaces with and supplements financial reporting and

tax compliance software.

Forte’s Strategic Mission

11 11

Susan Fickling-Munge, CBE

Managing Director, Valuation Advisory Services

Susan Fickling-Munge is a managing director in the Chicago office of Duff & Phelps. She is a member

of the Transfer Pricing practice, leveraging more than 20 years of transfer pricing and valuation

experience. Susan has worked closely with global companies in a vast range of industries, assisting them

with transfer pricing planning, documentation and defense.

Susan has extensive experience in international and multistate tax planning projects, employing various

transfer pricing techniques to help support her clients’ tax strategies. She has also assisted clients on

unilateral advance pricing agreements. She has helped to develop real options models and valuation

techniques to support complex transfer pricing and tax structuring scenarios.

Susan has assisted numerous retailers and consumer products companies with transfer pricing planning

for the intercompany use of brand names,

Before joining Duff & Phelps, Susan was a vice president of transfer pricing for Charles River

Associates, a transfer pricing manager in the international tax division of Arthur Andersen LLP and a

transfer pricing consultant at KPMG LLP.

Susan earned her MBA at the University of Chicago Booth School of Business and her BA from Scripps

College. She also studied at the Universidad San Francisco de Quito in Quito, Ecuador, and is fluent in

Spanish. Susan is also a Certified Business Economist.

12 12

Duff & Phelps

Size and Scale • Leading independent valuation and corporate finance advisor

• More than 1,000 employees in over 30 offices globally

• Largest independent valuation advisory firm

• Largest integrated valuation and transfer pricing practice in

North America

• Global footprint enables rapid deployment of resources with local

market knowledge to meet client needs

Technical Expertise • Interrelated disciplines of valuation, taxation, transfer pricing,

transaction advisory and investment banking are seamlessly aligned

to provide maximum benefit to our clients

• Our Office of Professional Practice informs our professionals of real-

time financial reporting and tax developments impacting our clients.

• Deep knowledge of corporate finance principles and valuation

implications of accounting and tax rules

• Solid, defensible analyses

Our Professionals • Deep technical and industry expertise

• Strong analytical, modeling and consulting skills

• Reliable and highly responsive

• Independent, objective and free from conflicts of interest

• Majority of our senior professionals have Big Four accounting firm

experience

Market Leadership • Leading provider of valuation advisory services

• Transfer pricing leadership continuously recognized as world’s

leading transfer pricing advisors

• Serve 57% of the Fortune 100 companies and nearly 70% of the

top PE firms and hedge funds

• Routinely advise regulatory bodies on valuation implementation

issues and best practices

• Recognized transfer pricing thought leader as well as other

valuation disciplines

13 13

• U.S. International Tax System

– Overview/Historical Perspective

• BEPS Action Items

– Country-by-Country Reporting Requirements

– Data Required, Other Potential Uses, Overlap with Other Disclosures

• U.S. International Tax Reform

– Camp, Administration, Bipartisan Support, Predictions

• Global Tax Analytics

• Q&A

Discussion Topics

14 14

14

Background – U.S. International Tax System

15 15

• Overview

– Worldwide vs. Territorial

• Evolution

– Sixteenth Amendment TRA 1986 Path Act

• Major Components

– Foreign Tax Credit, Deferral/Anti-Deferral/APB23

– DISC/FSC/ETI/DPAD

– R&D and Intellectual Property

• Implications

U.S. International Tax System

16 16

• 1913 – Sixteenth Amendment Revenue Act of 1913 (WW)

• 1918 – Foreign Tax Credit to Avoid Double Taxation

• 1934 – Arm’s Length Transfer Pricing Standard

• 1962 – Subpart F to Tax Highly Mobile Low-taxed Income

• 1972 – Domestic International Sales Corporation

• 1977 – Allocation/Apportionment Regulations (861-8)

• 1986 – TRA 1986 Major Changes with Increased Complexity

• 1996 – Check-the-Box Regulations – Entity Classification

U.S. International Tax Milestones

17 17

• Foreign Corporations are generally entitled to deferral until repatriation

• U.S. GAAP ASC 740/APB 23 – Indefinite Reversal Criterion

• Subpart F Rules Enacted in 1962

• Categories of Subpart F Income

– Passive Foreign base Company Income

• Rents, Royalties, Interest and Dividends

– Foreign Base Company Income

– Investments in U.S. Property

• Exceptions – high-taxed or Same Country

– Exceptions to the Exceptions payments that reduce Subpart F

– Active Financing

– Section 954(c)(6)

• Indirect Foreign Tax Credit

Deferral and Anti-Deferral

18 18

• 1918 – Foreign Tax Credit to Avoid Double Taxation

• 1921 – Overall Limitation and Source Rules

• 1932 – Lesser of Per Country or Overall Limitation

• 1954 – Per country Limitation Only

• 1960 – Irrevocable Election – Overall or Per country

• 1962 – Separate Basket for Passive Income

• 1976 – Elimination of Per Country Rules

• 1977 – Allocation/Apportionment Regulations (861-8)

• 1986 – TRA 1986 Multiple Baskets

• 2004 – Reduced Baskets to Active and Passive

U.S. Foreign Tax Credit Milestones

19 19

• 1934 – Arm’s Length Standard

• 1968 – Transactional Methods – CUP, Resale Price, Cost Plus

• 1982 – Section 936(h)(3)(B) Intangible Property Income

• 1982 – Section 367(d) Transfers of Intangible Property

• 1986 – Section 482 Commensurate with Income Standard

• 1994 – Detailed Contemporaneous Documentation Regulations

• 1995 – Cost Sharing Regulations

• 1996 – Final Penalty Regulations

• 2009 – New Services Regulations

• 2011 – Final Cost Sharing Regulations

U.S. Transfer Pricing Milestones

20 20

• $100 Trillion – Worldwide Product

• 80% – G20 Countries Share of the world economy

– EU/UK, US, China approximately $50 Trillion

– Japan, Germany, France, Brazil, India, Italy, Russia, Canada, Australia,

South Korea, Mexico, Indonesia, Turkey, Saudi Arabia, Argentina, South

Africa approximately $30 Trillion

• $18 Trillion – Annual Worldwide International

• 60-70% – through Intercompany Transactions

• Governments Want More Revenue

Focus on Transfer Pricing

21 21

21

G20/OECD – BEPS Action Items

22 22

The BEPS Environment | Recent key Developments

OECD / BEPS

Rapid electronic dissemination of CbC reports – March 2015 The exchange of the CbC reports is envisaged to be automatic under the 3 agreements covering this (in respect of DTCs, TIEAs and the MAAC – the Multilateral Convention for Mutual Administrative Assistance in Tax Matters)

OECD Country by Country (“CbC”) Reporting (Action Item 13) – Sept 2013 & Feb 2015 OECD released a guidance on implementing the CbC reporting template, master file and local file for multinational companies. CbC reporting is recommended to be required for tax years beginning on or after January 1, 2016 for multinational companies with consolidated revenues over €750 million (~$840 million).

Discussion Draft on BEPS Actions 9 and 10 (including Risk, Recharacterisation, and Special measures) – Dec 2014 & Feb 2015 New OECD measure requiring “economic substance” to be associated with intercompany agreements. Focus shifts from intercompany pricing to intercompany agreement substance.

OECD Revised DRAFT Transfer Pricing Aspects of Intangibles (Action Item 8) – Sept 2014 OECD released a Revised Discussion Draft on intangibles related to transfer pricing that tries to address correct allocation of “return related to an intangible”.

US IRS/ Congress

US Corporate Income Tax Overhaul Congress unlikely to make comprehensive tax revisions in 2015 due to many pressing funding deadlines and 2016 presidential election.

US to Implement CbC Reporting Template US expected to develop a form for taxpayers to file that looks like CbC reporting template and could require companies to file the first template for tax years beginning on or after January 1, 2016.

Unilateral BEPS Measures

UK Diverted Profit Tax – announced Dec 2014 The proposed Diverted Profit Tax will assess 25 percent tax on profits deemed to have been artificially diverted out of the UK.

China Using BEPS to Support Profit Splits Public comments indicate that China is using BEPS drafts to support positions applying profit splits and to downplay the role of capital. Issued GAAR in Dec 2104 and re-drafting Circular 2 containing China’s TP rules. March 2015 release of Public Notice 16 calls for elimination of deduction for outbound payments made to entities without substance.

India Challenging Contract R&D Arrangements India has issued circulars stating that contract R&D arrangements should not be respected if the contracting party has no substance. Thus, intangible related returns should accrue to the Indian entity.

23 23

BEPS Timeline & Unilateral Actions Taken

Oct 2014:

Draft Action 7

(PE)

Sept 2014:

Drafts of 7 of

15 actions

released

(including

intangibles)

Nov

2014:

Draft

Action 6

(treaty

abuse)

Dec 2014:

Drafts

Actions 4, 8,

9, 10 and 14

(TP, Value,

Risk Profit

split)

Dec

2014:

China

issues

GAAR

Dec 2014:

UK

announces

Diverted

Profits tax

Jan

2015

Singapo

re

issues

TP doc

Master

File

require

ment

Mar 2015

China

issues

service fee

payment

rules

• CFC Rules

• Financial

Transactions

• Data collection

and analysis

• Hybrid

mismatches • Master File TP Doc

• Cost Contribution

arrangements

• Dispute

Resolution ??

• Difficult to

Value

Intangibles

• UNILATERAL

ACTIONS

• Multilateral

instrument

• Revised China

TP rules (Circ 2)

• SPECIAL

MEASURES

• Internet taxation

• PE

Dec 2015

OECD BEPS

Target

Completion

July 2013

OECD BEPS

Launched

(15 Actions)

• CbC and information

sharing

24 24

Risks and Impacts of BEPS

MNC Entity HQ / Parent Corporation

Holding Company

IP Company Principal Local Operations Low-tax Finco

Disclosures Reporting

Documentation

Permanent Establishment consideration

s (e.g., location of

management)

Review of hybrid

financing transactions

Alignment of intangible value

and use of intangibles

Alignment of functions and

risks with intercompany transactions

Increased local scrutiny on

transfer pricing issues from tax

authorities

Review of hybrid

financing transactions

Master File / Local

Documentation

Requirements

Treaty abuse Hybrid

structures Treaty abuse

Potential entity recharacterizations

Limitations on Base Erosion

CFC rules in various

jurisdictions

Challenges on R&D ownership

Challenges on residual profit

earned by principal

Increased disclosures

Additional TP requirements for financial transactions

Conflict Resolution

Delays

Hybrid structures

Permanent establishments

Treaty abuse

25 25

BEPS Overview

Source: “The Revenue Effects of Multinational Firm Income Shifting, Kimberly Clausing, Tax Notes, March 2011

26 26

BEPS Overview

Source: “The Revenue Effects of Multinational Firm Income Shifting, Kimberly Clausing, Tax Notes, March 2011

27 27

BEPS Action Items

Action Item OECD Recent Actions

Action 1 – Address the tax challenges of the digital economy Draft Discussion Delivered – December 2014

Action 2 – Neutralize the effects of hybrid mismatch arrangements Draft Discussions Delivered – September 2014

Action 3 – Strengthen CFC rules Draft Discussion Expected – April 2015

Action 4 – Limit base erosion via interest deductions and other financial payments Draft Discussion Delivered – December 2014

Action 5 – Counter harmful tax practices more effectively, taking into account transparency and substance

Draft Report Delivered – September 2014 (Revisions to Existing Criteria expected by December 2015)

Action 6 – Prevent treaty abuse Draft Discussion Delivered – November 2014

Action 7 – Prevent the artificial avoidance of PE status Draft Discussion Delivered – October 2014

Action 8 – Assure that transfer pricing outcomes are in line with value creation: intangibles Report Delivered – September 2014

Action 9 – Assure that transfer pricing outcomes are in line with value creation: risks and capital Draft Discussion Delivered – December 2014

Action 10 – Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions

Draft Discussion Delivered – December 2014

Action 11 – Establish methodologies to collect and analyze data on BEPS and the actions to address it

Request for Public Opinions Issued – August 2014; Discussion Draft expected – April 2015

Action 12 – Require taxpayers to disclose their aggressive tax planning arrangements Draft Discussion Expected – March 2015

Action 13 – Re-examine transfer pricing documentation (CbC) Draft Discussion Delivered – February 2015

Action 14 – Make dispute resolution mechanisms more effective Draft Discussion Delivered – December 2014

Action 15 – Develop a multilateral instrument OECD Proposing an International Tax Conference starting in December 2015.

28 28

Direct Effects of OECD BEPS / Action Items

Compliance/Documentation Requirements: Action item 13 changes documentation guidance from Chapter V. The CBCR template is, in particular, a new component of documentation requirements. OECD countries have agreed that only MNEs with consolidated revenues in excess of 750 million Euro in the prior year will need to file the template. The first year of such a requirement for countries adopting CBCR will be for tax years beginning on or after January 1, 2016. The deadline for filing the CBC report will be one year after the end of the tax year in question.

Potential fundamental changes in transfer pricing guidance As countries adopt BEPS-driven measures into law (including incorporation of revised OECD Transfer Pricing Guidelines, by reference), there may be major changes in interpretations of the arm’s length standard across a number of important topics.

– Note: even in the absence of explicit regulatory incorporation, guidelines may come into play in the resolution of double tax cases between treaty partners.

For instance, PATA countries agree to resolve transfer pricing double tax cases using OECD Guidelines.

Other treaty protocols for interpretation of arm’s length standard under article IX may make direct reference to OECD guidelines.

29 29

Substantial potential for increase in double tax cases under current draft guidance.

– Even if adopted worldwide, guidance in current form would be likely to result in substantial increase in disagreements between revenue authorities

– Current draft guidance appears to be far from a consensus document.

– Indications are that US does not support risk draft. If drafts are adopted only partially or only by a subset of countries, fundamentally different interpretations of the arm’s length standard might result, leading to a sharp increase in double tax cases.

Increase in Unilateral BEPS measures: Many countries are enacting (or attempting to enact) BEPS-prevention measures unilaterally in advance of finalization of the OECD action item reports. Examples include:

– Diverted Profits Tax which will assess 25 percent tax on profits deemed to have been artificially diverted out of the UK

– Indications that China is using BEPS drafts to support positions applying profit splits and downplay role of capital, and assign partial ownership of IP to contract entities in China, even in spite of clear contracts

– India has issued circulars stating that contract R&D arrangements should not be respected if the contracting party has no substance – in these cases, intangible related returns should accrue to the Indian entity.

Direct Effects of OECD BEPS / Action Items

30 30

30

Brief TP Action Item Summaries

31 31

Action Item 8 (Intangibles)

• Draft guidance suggesting the mere funding does not entitle a party to residual returns from

intangibles. It is important to consider performance, control, and management in assessing

which entities are entitled to routine returns.

• Draft guidance suggesting that transactions may be disregarded or re-characterized if

economically rational independent parties wouldn’t engage in the transactions entered into

by the related parties.

• Guidance reasserting the advantages of transactional methods (when available) for

intangible transfers, coupled with more explicit recognition that finding reliable

transactional comparables may not be feasible.

• May be difficult for database comparables to be reliable transactional comparables

• Acquisition prices may provide basis for transactional methods in some cases.

• PPA values are not determinative – guidelines are generally dismissive of PPA values

32 32

Action Items 8-10 (Intangibles, Risk, Re-characterization)

Delineating (i.e., describing or portraying) the transaction

– Accurately delineating a transaction requires identifying the “economically relevant characteristics” (e.g., contractual terms, functions performed, assets employed, risks assumed and managed, characteristics of property transferred or services provided, economic circumstances of the parties and market, and the business strategies of the parties).

– Examining the actual conduct of the parties in addition to what is stated in the contract.

When a contract is incomplete or contradicts the actual conduct of the parties, the actual conduct of the parties should be used to delineate the transaction.

Identifying risks in commercial or financial relations

– Goes hand-in-hand with identifying functions and assets.

– Actual conduct of the parties must be examined to determine the actual allocation of risk, with particular attention paid to how the parties actually manage the risk identified.

33 33

Action Items 8-10 (Intangibles, Risk, Re-characterization)

Two main economic frameworks underlie the OECD’s draft discussion on risk – moral hazard and the risk-return trade-off.

1. Moral Hazard

Moral hazard exists when a party that controls a risk is not the party that bears the burden of that risk (e.g. insurance).

Concept that unrelated parties would seek to avoid scenarios in which one party assumed a risk without being able to manage the behavior of the party creating the risk.

Imposes the moral hazard framework on related party transactions, and emphasizes the need to align risks (and therefore expected returns) with the parties that are controlling and managing those risks.

2. Risk-Return Trade-Off

Establishes equivalence on a present value basis between a higher but less certain stream of income and a lower but more certain stream of income.

Supports the idea that it is economically rational to take on (or lay off) risk in return for higher (or lower) anticipated nominal income.

34 34

Risk is defined as “the effect of uncertainty on the objectives of the business.” It includes strategic and marketplace risks, infrastructure or operational risks, financial risks, transactional risks, and hazard risk, among others.

Risk management is defined as the capability to: (1) make decisions regarding risk-bearing opportunities; (2) make decisions on whether and how to respond to the risks associated with the opportunity; and (3) mitigate (i.e., manage) risk.

– In a group situation, risk management may be carried out at several levels and not solely by the legal entity that incurs risk through its operations.

– Performance of risk management may have an important effect on determining arm’s length pricing.

The parties’ contractual assumption of risk, even if followed, does not in itself determine that they should be allocated the risk for transfer pricing purposes.

– Need to assess how the risks are controlled and which party’s functions enable it to face and mitigate the risks associated with business activities.

– Consideration should be given to where the capability and functionality exist in the group to manage the risks.

Does not assign any meaningful role to capital as a determinant of which parties bear risk, and consequently, as a driver of expected returns.

– Capital alone would not be allocated any risk (and associated expected return) absent there being risk management functions related to that contribution of capital.

Action Items 8-10 (Intangibles, Risk, Re-characterization)

35 35

Non-Recognition

– Sets out circumstances in which the transaction between the parties as

accurately delineated can be disregarded/re-characterized for transfer

pricing purposes.

Non-recognition provision should not be used simply because a transaction is

difficult to price.

Rather, it will occur when an intercompany transaction does not have the

“fundamental economic attributes” of arrangements between unrelated parties.

An arrangement exhibiting the “fundamental economic attributes” of

arrangements between unrelated parties would offer each of the parties a

reasonable expectation to enhance or protect their commercial or financial

positions on a risk-adjusted basis compared to their realistically available

alternatives.

Note that it does not need to be a transaction that is actually observed between

unrelated parties.

Action Items 8-10 (Intangibles, Risk, Re-characterization)

36 36

Part II: Special Measures

OECD believes there is a need for special measures because of the

potential for systematic mispricing where no reliable comparables

exist, where assumptions used in valuation are speculative, and

where information asymmetries are acute.

– Option 1: Hard-to-Value Intangibles (HTVI)

– Options 2 and 3: Independent Investor and Thick Capitalization

– Option 4: Minimal functional entity

– Option 5: Ensuring appropriate taxation of excess returns

37 37

BEPS Action Item 10 – Profit Splits Functional Matrices

• Functional matrix to weight contributions of related parties with

respect to value creation seems to indicate use of a Profit Split. • RACI – Responsible, Accountable, Consulted, Informed

• Potential pitfalls

– Does the approach provide for appropriate consideration of quantitative calculations?

– Can the analysis factor in the Purpose of a structure, historical contributions, use on a prospective basis?

– Assignment of categories and weights is subjective. Categorization and magnitude of attributes are not standard among practitioners.

– Stakeholders may have different thresholds on what constitutes “responsibility”.

– Is the CPM really broken for transactions with limited risk entities?

38 38

BEPS Action Item 10 – Ex Ante Considerations

• Profit split approaches have been suggested as a way to address significant differences between ex ante and ex post results.

• In reality: – Both anticipated and unanticipated events can lead to profitability that is different

that anticipated (ex ante). – Ex post results may appear unfair in hindsight, but arm’s length results are often

not fair.

• At arm’s length, most negotiation and agreement on the mechanism for splitting profits takes place ex ante, when many important considerations are still unknowns:

– Actual costs; – Consumer demand; – Development success; – Competitor moves; – Regulatory changes;

• Profit Splits are to be performed on the basis of information known or reasonably foreseeable by the associated enterprises at the time transactions are entered into.

• The avoidance of hindsight is extremely challenging once uncertainties have been resolved.

39 39

39

Action Item 13: CBCR / Documentation

40 40

Action 13 – Overview

Goals 1. To ensure taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions

between associated enterprises and in reporting the income derived from such transactions in their tax returns

2. To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment

3. To provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing

practices of certain entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional

information as the audit progresses.

41 41

Action 13 – Masterfile / Local File

Masterfile Requirements

The master file should provide an overview of the MNE group business, including the nature of its

global business operations, its overall transfer pricing policies, and its global allocation of income and

economic activity in order to assist tax administrations in evaluating the presence of significant transfer

pricing risk.

• Transfer pricing policies;

• Legal entity charts;

• Supply chain mapping for largest products/services;

• Functional analysis of individual entities;

• List of intragroup service arrangements;

• List of IP;

• IP ownership and intragroup IP arrangements;

• Description of internal and external financing arrangements; and,

• List and brief description of unilateral APAs and other tax rulings relating to allocation of income

among countries.

42 42

Action 13 – Local File / Masterfile

Local File Requirements

The local file provides more detailed information relating to specific intercompany transactions. The

information required in the local file supplements the master file and helps to meet the objective of assuring

that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting

a specific jurisdiction.

• Relevant financial information in respect of transactions; comparability analysis;

• selection and application of most appropriate transfer pricing method;

• Description of local management structure, business strategy, related party payments and receipts for

products, services, royalties, interest, etc. (per jurisdiction);

• intercompany agreements;

• functional analysis of related parties with which local party transacts, etc.;

• APAs (uni/ and bi/multilateral) as well as rulings for other countries that are connected to transactions of

local entity.

43 43

43

Action Steps

44 44

Future of TP Data Transparency for FYE 2016 and Beyond

45 45

Evaluating Global Value Chain Analysis Assess Alignment of Global Business Activities with TP Policies

46 46

Internal Value Drivers

BU Segment 1 BU Segment 2

Brokerage

BU Segment 4

Financing / Loans /

BU Segment 3 BU Segment 5

Transportation Processing

Distribution

Corporate Strategy

Manufacturing

R&D Services Global Infrastructure Procurement

Corporate Services

Meant to capture 100% of the global profits by segments and corresponding functions, risks and assets

Intangible Assets

Physical Assets

Risks

Financial Assets

47 47

Global Functional, Risk and Intangible Asset Matrix (New Functional Analysis Process)

Transactions

Business Segments

BU Segment

1

BU Segment

2

BU Segment

3

Bu Segment

4

Bu

Segment 5

Operational Transactions

Sale of Semi-finished Products 3P & IC 3P & IC 3P & IC 3P & IC --

Sale of Finished Products 3P & IC 3P & IC 3P & IC 3P & IC --

Provision of Toll/Contract Manufacturing Services IC -- -- IC --

Provision of Sourcing and Procurement Services IC -- IC -- --

Provision of Sales and Promotion Services IC -- IC IC --

Provision of R&D (Application Development) -- -- -- IC --

Licensing of IP -- -- -- IC --

Support Transactions

Provision of Other Technical Services IC IC IC IC --

Provision of Corporate Services IC IC IC IC IC

Provision of Financing and Insurance Services -- -- -- -- IC

Assets and Risks Embedded within pricing of transactions

48 48

Benefits of Proactive TP BEPS Process Opportunities & Risk Management

Risk management

Compliance with OECD BEPS guidance and resultant country requirements

Raise awareness within organization

Prepare accounting departments for CbC reporting template

Meet expected compliance requirements for Master File / Local documentation and CbC reporting templates

Financial statement and SOX risks

Review CBCR and value chain for opportunities to strengthen structure and reduce controversy risks

Anticipate and address position, financial statement risk, external auditor concerns and manage ASC 740-10 reserves

Audit support

Be prepared for potential audit information requests, questions and transfer pricing controversy

Demonstrate good faith in complying with OECD-pattern disclosure and documentation requirements

Articulate substance of intercompany transactions

Avoid tax “firedrills” and focus on business

Increase quality control and easier tracking of material prepared at the local level

Manage risk of local country audits and double taxation

49 49

49

U.S. International Tax Reform

50 50

• Mega Trends Driving Bipartisan Support

– BEPS, $2.5 Trillion Lockout, and Inversions

• Territorial, Worldwide or Hybrid

• End Deferral? Expand Subpart F?

• What happens to DPAD? Will we have a Patent Box Regime?

• Repatriation Holiday or Toll Charge

• Camp, Administration’s FY 2016 Proposal, Senate Working

Group, and the Bipartisan Framework

• And, of course the Presidential Hopefuls

U.S. International Tax Reform

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Corporate Tax Rates

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G20 Corporate Tax Rates 2015

Graphic from “A guide to UK taxation.” Published March 2013 by UK Trade & Investment

53 53

Inversions In The Press

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• Mega Trends Driving Bipartisan Support

– BEPS, $2.5 Trillion Lockout, and Inversions

• Territorial, Worldwide or Hybrid

• End Deferral? Expand Subpart F?

• What happens to DPAD? Will we have a Patent Box Regime?

• Repatriation Holiday or Toll Charge

• Camp, Administration’s FY 2016 Proposal, Senate Working

Group, and the Bipartisan Framework

• And, of course the Presidential Hopefuls

U.S. International Tax Reform

55 55

• Strengthen the International Tax System

– To Encourage Domestic Investment

• 28% = Top Corporate

• 19% = Minimum Tax on Foreign Earnings (no deferral)

– Less Foreign Tax Credit = 85% pre-country average effective tax rate

• 14% = One-Time Tax on Unrepatriated Foreign Earnings

– Less Proportional Foreign Tax Credit (14/35 = 40%)

• Increase the Domestic Production Activities Deduction

– 10.7% to bring the effective tax rate to 25%

President’s Framework

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56

Global Tax Analytics – Base Case Assessment

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• Base Case Assessment

– BEPS Country-by-Country Report

– Local Country Transfer Pricing Financial Metrics

– Historic Tax Attributes

• Foreign E&P/Tax Pools

• Foreign Tax Credit Position

– Global Effective Tax Rate

• Accessing Global Tax Analytics

• Protecting Tax Assets

– Mitigating Tax Risk and Optimizing Favorable Tax Attributes

Global Tax Analytics Study

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• Global Legal/Tax Structure

• Accesses and Utilizes Historical Tax Attributes

• Flexible Parameter Driven

– Supports alternative tax positions, structural and tax law changes

• Multi-Jurisdictional

• Multi-year Analysis

• Multi-Purpose (Book and Tax)

• Supports Planning, Provision and Compliance

• Legal/Tax Structural and Transactional Analysis

– M&A, Supply Chain, Transfer Pricing, Repatriation

Global Tax Analytics – Requirements

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• Legal/Tax Structure – U.S. and Local Jurisdiction Classifications

• Income Tax Rates – Country & Extra-jurisdictional

• Historical Tax Attributes

– E&P/Tax Pools/Layers, NOL, ODL, OFL, Carryovers

• ASC 740/APB 23 Position

• Financial Information – Current Year and Forecast

– Income Statement and Balance Sheet

– Tangible and Intangible Property

• Income Taxes Paid and Accrued

• Intercompany Transactions and Agreements

– Look-thru payments and Supply Chain

Data Elements

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• What is the tax impact of alternative transfer pricing positions?

• What is the impact of E&P planning, including check-the-box elections?

• How would supply chain changes impact my selection of profit level

indicators?

• How will tax reform impact repatriation planning and APB23 assertions, and

our domestic production activities deduction?

• How will my repatriation plans impact my DPAD results?

• How will changes be reflected in the client’s country-by-country report?

• What is the impact on the global effective tax rate?

• Result – identify/quantify risk & optimize tax attributes.

Global Tax Analytics

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• Organization Structure – Display Effective Tax Rate

• Effective Tax Rate – By Entity, By Country

• E&P Summary Report – All CFC’s & Switzerland

• Country-by-Country Report – Table 1, Table 2

• Local Country File – Profit Level Indicators

• Transfer Pricing Adjustments

• Repatriation Analysis

• ASC 740 – Roll-up Deferred Tax Liability

Global Tax Analytics – Reports

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Organization Chart & Effective Tax Rate

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E&P & Tax Pools – All CFCs

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E&P/Tax Pools Switzerland

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Country-by-Country Report – Table 1

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Country-by-Country Report – Table 2

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Local Country File – Profit Level Indicators

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Transfer Pricing - Adjustments

69 69

Repatriation Analysis

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ASC 740 – Roll-Up DTL

71 71

Scenario Comparison Report

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• BEPS is the Advent of Global Tax Transparency

– Global Transfer Pricing Documentation Standards

• U.S. International Tax Reform – Uncertain but Inevitable

– Protect Your Tax Assets (FTC, DPAD, ETR)

• Global Tax Analytics - Requirements

– A Strong Foundation “Base Case Assessment”

– Powerful comprehensive calculation engine

• Questions?

• Thank you!

Wrap-Up - Q&A

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Questions and Contact Information

For additional questions on topics related to this discussion, please contact:

Mark Gasbarra, CPA

National Managing Director

Forte International Tax, LLC

mgasbarra@forteintax.com

(847) 733-0645

forteintax.com

Susan Fickling-Munge, CBE

Managing Director

Duff & Phelps, LLC | Chicago

Susan.Fickling-Munge@DuffandPhelps.com

(312) 697-4647

DuffandPhelps.com