—KPMG Business School
TEI HoustonCross-Border Tax IssuesHouston, TexasMay 1, 2017
Global Transfer Pricing:Controversy Update
Anjit BajwaMark HorowitzKPMG LLP
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
2
Agenda— Trends in IRS Transfer Pricing Enforcement Personnel and policy changes at Large Business and Int’l (LB&I) Examination trends regarding transfer pricing issues
— Trends in US Advance Pricing Agreements (APAs) and Mutual Agreement Procedures
— Transfer Pricing Litigation
— Global Controversy Environment
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
4
LB&I Structure – 2017
Tina MeauxAssistant Deputy Commissioner -
Compliance Integration
Combined MAP/APA Team
Rosemary SeretiDeputy Commissioner
Theodore SetzerAssistant Deputy Commissioner -
International
Sharon PorterDirector -
Treaty and Transfer Pricing Operations
Douglas O’DonnellLB&I Commissioner
Jennifer BestDFO – Transfer Pricing
Practice
Deborah PalacheckDirector – Treaty Administration
John HughesActing Director –
APMA
TAIT, EOI, JITSIC
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
5
TTPO Structure – 2017
Combined MAP/APA Team
Sharon PorterDirector -
Treaty and Transfer Pricing Operations
Jennifer BestDFO – Transfer Pricing
Practice
Deborah PalacheckDirector – Treaty Administration
John HughesActing Director –
APMA
TAIT, EOI, JITSIC
Shah MobedTPP North
Matt HartmanTPP East
Nancy BronsonTPP West
Deborah Dickson
TPP SouthTPO IPNs
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
6
LB&I Future State Initiatives— Shift to a centralized issue-focused enforcement strategy Replaces current decentralized case selection model Publication 5125, LB&I Examination Process (LEP) replaced Quality
Examination Process• Provides examination framework for new issue-focused approach• Effective May 1, 2016
— Treaty activities and the Transfer Pricing Practice merged to form TTPO All field economists reassigned to TPP International examiners added to TPP
— IRS Transfer Pricing Audit Roadmap (the Roadmap) Provides recommended audit steps for IRS transfer pricing examiners Released February, 2014
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
7
Current TP Enforcement — Case selection currently occurs in the field – continual
audits are common— Transfer pricing specialists typically are brought onto a
case mid-cycle to conduct risk assessment Leads to tight audit timelines (statute extensions?) Transfer pricing issues may not be fully developed Unfocused audit plans lead to “any and all” and unnecessary
IDRs Productive communication between the IRS and taxpayers
suffers— “Acting” managers and transfer pricing specialists working
remotely are common – decision maker difficult to identify
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
8
The Roadmap— The Roadmap is organized around the planning, execution, and
resolution audit phases The Roadmap is not a template (“one size does not fit all”) The Roadmap provides insight into what to expect during a transfer
pricing examination— Describes audit tasks and steps to consider/complete in a well-
developed transfer pricing case — IRS is emphasizing increased transparency and communications
in its transfer pricing enforcement activities
Caution . . . IRS audit teams are not always transparent
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
9
The Roadmap— Key themes Upfront planning is essential to a transfer pricing exam The success of a transfer pricing case hinges on the facts
• Use of the Acknowledge of the Facts IDR being re-assessed• Examiners are instructed to consider all relevant facts, including those
weighing in the taxpayer’s favor, before issuing a NOPA The 24 month notional examination model is retained
• Illustrates how transfer pricing audit steps and phases are sequenced• The Roadmap is clear that a complex transfer pricing case may
take 2 – 3 years or longer to thoroughly develop
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
10
IRS Audit Campaigns— Issue-focused audit strategy hinges on a centralized approach
to tax issue selection: data analysis and “campaign” proposals submitted by the field
— The issue-focused strategy is expected to yield resource efficiencies Examiners are assigned to a campaign once a tax issue is identified
for exam Campaigns may span multiple taxpayers or industries
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
11
IRS Audit Campaigns— Initial tranche of 13 campaigns released January 31, 2017
include Offshore Voluntary Disclosure Program Mid-market tax-free repatriation structures Form 1120-F non-filers Inbound distributors
— Will centralized campaigns represent a “national” position where outcomes are predetermined? What authority will field audit teams possess? Will functional, legal, and economic analysis be conducted?
— IRS has not provided information as to how campaign implementation will occur
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
12
IRS Transfer Pricing Audit Trends— Intensive transfer pricing exam processes are being
observed Earlier involvement of outside experts Transfer pricing orientations focusing on profitability analysis
and tax planning Site visits Functional interviews of taxpayer personnel
— Overly broad and unfocused IDRs continue to be issued “Any and all” IDRs Unfocused IDRs unrelated to audit hypothesis
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
13
IRS Transfer Pricing Audit Trends— Early TPO Legacy (circa 2010 policy and organizational changes)
Emphasis on litigation-like techniques at examination stage. Examples include: multiple interviews, expansive and burdensome IDRs, summons,
IRS Counsel lawyers involved at an early stage in some cases.— Role of the TPP in Exams
Runs the spectrum, but they can be quite involved. Result: local exam team and IE have less power and discretion, meaning your
relationships with local exam may not matter in some cases.— TPP role previews the future: issue-focused exams with less involvement by local team –
local team acts more as coordinators rather than primary examiners.— What does this mean for you?
Exams may take longer and be less organized from the taxpayer perspective.
There may be less visibility and knowledge of what is going on for the taxpayer.
If someone finds an issue, it may be thoroughly examined by “specialists.”
13
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
14
IRS Transfer Pricing Audit Trends— I/C agreements are being reviewed Are the terms firm or easily modifiable? Is the conduct of the parties consistent with the terms? Identifying obligations/risks assigned to each party
— Trend toward applying consistent IRS audit positions across taxpayers and industries
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
15
TIGTA Report: Barriers Exist in Transfer Pricing Audits— Key findings of Treasury Inspector General for Tax Administration (TIGTA) Report
(September 28, 2016) Transfer pricing issues represent about half of all international issues under audit The Roadmap is not being consistently followed by the IRS Backlog of unaudited transfer pricing inventory exists (only 20% of transfer pricing
audits are sourced from LB&I referral system) Surprisingly low reported amount of transfer pricing audit adjustments In 2012 through 2014, out of approximately $10.5 billion in proposed transfer
pricing adjustments, the IRS Office of Appeals reduced the original proposed adjustment amounts by $8.5 billion.
Leadership turnover has created impediments to the development of a long-term transfer pricing strategy
— How will the IRS react?
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
17
APMA structure – 2017Acting Director, APMA
John Hughes
Assistant Director Peter Rock
Team 11Chuck LarsonEconomists
Team 1Vacant
Team 6Vacant
Team 2Russell KwiatEconomists
Team 7Keith Doce
(Acting)
Team 3Judith Cohen
Team 4Mark Dunshee
(Acting)
Team 5Burton Mader
Team 8Gregory Spring
Team 9Patricia Fouts
Team 12Ho Jin LeeEconomists
Team 10Dennis Bracken
Assistant Director Vacant
Assistant Director Vacant
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
18
IRS APA StatisticsFISCAL YEAR
FILED(uni-, bi-, and multilateral)
EXECUTED(uni-, bi-, and multilateral)
Year End Inventory
2012 126 140 391
2013 111 145 331
2014 108 101 336
2015 183 110 410
2016 98 86 398
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
19
Bilateral APA Closures in 2016
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
20
US Competent Authority StatisticsFISCAL YEAR
US INITIATED FOREIGN INITIATED Year End InventoryReceived Disposed Received Disposed
2011 25 18 141 119 312
2012 51 16 130 74 403
2013* 48 40 218 119 524
2014 86 48 200 85 718
2015 50 22 187 171 755
*2013 figures are for transfer pricing cases only.
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
22
Litigation – Court Cases— Medtronic, Inc. v. Commissioner, T.C. Memo. 2016-112 (2016);— Guidant/Boston Scientific;— United States v. Microsoft, W.D. Wash., No. 2:15-cv-00102;— Coca-Cola Co. v. Commissioner , T.C., No. 031183-15;— Facebook, Inc. v. Commissioner;— Eaton Corp. v. Commissioner, T.C., No. 5576-12;— And others….
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
23
Litigation – Court Cases— In Amazon, Inc. v. Commissioner, 148 T.C. No. 8, T.C., No. 31197-12, 3/23/17, the
Taxpayer faced a determination that it had undervalued the intangible property transferred as part of a CSA by over $3 billion.
— In making its adjustment, IRS utilized a discounted cash flow analysis as the best method and rejected the taxpayer’s CUT method. The IRS also assumed that the transferred intangibles had an indefinite useful life.
— The Court held in the Taxpayer’s favor for the following reasons: DCF analysis failed to restrict valuation to the ‘pre-existing intangible property’ Rejected akin to a sale approach Useful life of the intangible property at issue was not indefinite
— Tax Court relied upon a transactional CUT method, with adjustments, rather than using a profit-based approach in reaching its conclusions
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
25
BEPS backgroundThe changing landscape
Increased political focus on perceived tax avoidance by multinationals
Governments under extreme fiscal pressure as a consequence of the global economic crisis
The G20 was concerned that current international tax rules and frameworks were/remain inadequate
The G20 was applying political support/pressure to push for change
The OECD response to growing pressure was to release the Base Erosion and Profit Shifting (BEPS) report
There is a drive to develop a tax system that is fit for purpose for today’s multinationals and digital age
Transfer pricing is at the heart of the debate
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
26
■ Objective: Risk Assessment■ Approach: Provides an overview of the multinational group and
businessMaster file
■ Objective: Appropriate considerations in setting transfer prices■ Approach: Provides additional detail on the operations and
transactions relevant to that jurisdictionLocal file
■ Objective: Prioritization of Audit Issues■ Approach: Provides summary data by jurisdiction including
revenue, income, taxes, and indicators of economic activity
Country-By-Country(CbyC) Report
BEPS Action 13 guidanceThree-tired approach for documentation
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
27
Confidentiality and audit readiness issues• Treaty protection for CbyC• Treaty disclosure (bilateral, multi-lateral)
- How widely available will CbyC information be, and will it eventually become public?
• Separate European transparency initiative for CbyC like data- In today’s world, any public information is available for
everyone• Only local protections for Master File• What approach for Master File? Minimal compliance versus
detailed explanation?
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
28
Historically, MNEs Have: Used contracts to move assets and
risks to principal companies Moved the economic responsibility for,
and key benefits from, important local functions to principal companies
Limited local returns
The OECD and Other Key G20 Countries Pushed to: Increase the importance attached
to people and local functions Focus on key decision makers and
where they are located Limit profits associated with
“naked” contractual rights
Risks
Assets Functions
Key Themes in Chapter I of OECD Transfer Pricing Guidelines
Contractual arrangements and actual conduct should be considered
Need to look at the location of decision-makers and the decisions they have made, especially with respect to risk
Transfer Pricing Generally Focuses on:
Actions 8 – 10: Focus on people & functions
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
29
Identify economically significant risks with specificity1
Identify contractual assumption of the specific risk2
Functional analysis. Establish conduct and which enterprises perform control functions and risk mitigation functions and have the financial capacity to assume the risk
3
Is the contractual assumption consistent with the conduct? Do the entities follow the contractual terms and does the party assuming risk exercise control and have the financial capacity to assume risk?
4
If the party assuming the risk does not control the risk or does not have the financial capacity to assume the risk, then allocate the risk to the group company having most control and having the financial capacity to assume the risk
5
Price the accurately delineated transaction taking into account the financial and other consequences of risk assumption, as appropriately allocated6
Six-step analytical risk framework
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
30
Understanding DEMPE Functions Existing “IP” models did not always include an analysis of the parties responsible for: Legal ownership Funding [economic ownership]
Many “IP” planning strategies did not clearly define “IP”. Often it means, “anything” leading to profits above “routine” or “normal” profits. Model was applied for all industries, from high tech to consumer goods, in a similar way
A review of DEMPE functions may require changes to the allocation of profits in the value chain
New emphasis on control: people with the relevant knowledge to make decisions
What is DEMPE? Development, Enhancement, Maintenance, Protection and Exploitation
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
32
Speakers
Mark HorowitzPrincipal
Economic & Valuation Services(713) 319-2840
Anjit Bajwa, Ph.D.Principal
Economic & Valuation Services(713) 319-3759
© 2016 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
kpmg.com/socialmedia
Top Related