june 22nd - 23rd - pwc · 2015-06-03 · agenda • global transfer pricing landscape • ifrs and...
TRANSCRIPT
Agenda
• Global Transfer Pricing Landscape
• IFRS and Transfer Pricing
• CFC Rules and Transfer Pricing
• GAAR and Transfer Pricing
Significant Developments – Transfer PricingOECD Guidelines on comparability
and business restructuring
ATO’s Strategic
Compliance Initiative
German Government’s
Business Restructuring
Rules
Canada’s “ACAP
Program”
IRS Final Service Regulations; Obama proposals on IP
Slide 5August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
PricewaterhouseCoopers
• Dispute Resolution Panel
• Safe Harbour Rules • Advance Pricing
Arrangement (proposed)
• General Anti-Avoidance Rules
• DTC
PricewaterhouseCoopers
IFRS and TP
Slide 7August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
Phase I – April 2011
Phase II – April 2013
Phase III – April 2014
Net worth > Rs 1000 crShares listed abroad
Nifty 50BSE 30
All listed companies
Net worth > Rs 500 cr
Transition to IFRS in India is Expected in Three Phases • Compare ‘like with like’
• Tested party & comparables may be adopting different accounting standards
• Use of PLIs, economic adjustments are highly sensitive to accounting standards used
• Limited information available to adjust for differences in accounting standards
Result Economic conditions remaining same, a company may not meet arm’s length
criterion under IFRS
PricewaterhouseCoopers
Fundamental changes in accounting and TP implications
Slide 8August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
India
US
US Co.Principal
Indian Co.LRD Customer
Transfer of riskTransfer
of title
Transfer of title
Example 1: Limited Risk Distributor
Profit & Loss A/c GAAP IFRS
Sales/Income 100 10
Cost of goods sold (CoGS) 90 -
Gross profit (GP) 10 -
Operating expenses (OE) 8 8
Operating profit (OP) 2 2
Return on sales 2% 20%
PricewaterhouseCoopers
Fundamental changes in accounting and TP implications
Slide 9August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
Profit & Loss A/c GAAP IFRS
Sales to AE 100 95
Interest income from AE 5
Cost of goods sold (CoGS) 70 70
Operating expenses (OE) 15 15
Operating profit (OP) 15 10
Return on Cost 17.64% 11.76%
US Co.Principal
Indian Co.Contract
Manufacturer
IndiaUS
Sale under long credit period Non operating
Example 2: Contract Manufacturer
PricewaterhouseCoopers
Fundamental changes in accounting and TP implications
Slide 10August 2010
May affect key aspects of CSA:• Reasonably anticipated benefits
based on future revenue/ profits• Revenue/ profits impacted by
Accounting Standards• May impact cost sharing ratio• Commensurate with income
standard require value of IP contributed to be proportional to income
• Material difference in actual and projected income TP adjustment
Indian GAAP IFRS
Parties 1 2 1 2
Revenue (RAB) 50 50 60 40
Cost sharing ratio 50% 50% 60% 40%
In case Party 1 adopts IFRS & Party 2 continues with GAAP Will corresponding
adjustment be allowed to Party 2 ?
Example 3: Cost Sharing Arrangements (CSA)
Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
PricewaterhouseCoopers
Fundamental changes in accounting and TP implications
Slide 11August 2010
Impact on Restructuring/ Combinations:• IFRS 3 all excess value over
acquired book value cannot be recognized as goodwill without analysis
• Purchase Price Allocation all acquired assets & liabilities including intangibles & contingent assets recorded at fair value
• Value of all assets & liabilities including goodwill to be allocated to each subsidiary
• Allocation of goodwill expected profits post merger transfer pricing policy
Others
Plant / Property / Equipment
Goodwill
Others
Trademark
Customer list
Goodwill
PPE
Purc
hase
Pric
eGAAP IFRS
Example 4: Business Combinations
Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
PricewaterhouseCoopers
Transition to IFRS – Positive outcome in Transfer Pricing
Slide 12August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
• IFRS in more than 100 countries uniformity in accounting standard to enable:
• Global Core Documentation reduced compliance cost
• Application of Profit Split Method simplified
• Better comparability analysis due to detailed disclosure
• Transparency Multinationals to report how much of group’s profits / tax are declared / paid in each country
• Regional benchmarking eased due to similar disclosure standards
Profit Split Method
Transparency
Better Comparability
Regional Benchmarking
Global Core Documentation
PricewaterhouseCoopers
CFC Regime and Transfer Pricing
Slide 14August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
Scope of Controlled Foreign Companies (CFC) Rules
Passive income parked outside India at level of intermediate Hold Co, taxed in India
I Co
Hold Co[CFC]
Op Co
100% equity
• Revised discussion draft on DTC proposes introduction of CFC Rules
• Dividend income parked at level of Hold Co (treated as CFC), would be taxed in India as “deemed dividends” prevents deferral of tax
• No proposal for granting “underlying tax credit” as yet
• Dividend income (under CFC rules) will attract double taxation once at level of Op Co and again at level of India Co [assuming zero tax at level of Hold Co on dividends]
100% equity
PricewaterhouseCoopers
CFC Regime and Transfer Pricing
Slide 15August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
• Report of Working Group on Non Resident Taxation (2003) observed some features of CFC rules in context of other countries :– Threshold of “control”/ “ownership” varies between 10% to 50%– Two alternative approaches –
• Transactional approach CFC rules apply to passive incomes (irrespective of target jurisdiction)
• Jurisdictional approach CFC rules apply for target low tax jurisdictions
• Passive incomes dividend, interest, royalties (without substance), foreign base company sales (contract manufacturing structure), etc
• “Motive” exemption for CFCs not established to avoid tax• What is interplay between CFC & TP ?• Can TP be used as a planning tool
PricewaterhouseCoopers
CFC Regime and Transfer Pricing
Slide 16August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
Arm’s length pricing and its effect on CFC taxation
Case 1: TP adjustment for deemed income from CFC
I Co
F Co 1[CFC]
F Co 2 F Co 3
100% equity
Assumed scenario:• F Co 1 is a CFC• F Co 1 owns IP & also acts as funding vehicle• F Co 1 earns royalty from F Co 2 and interest from F
Co 3, both of which are ‘passive incomes’• F Co 1’s passive income is taxable in hands of I Co as
deemed dividend income
Potential TP adjustment• Revenue contends that both royalty and interest rates
are low• Can Revenue extend scope of Indian TP regulations
to compute arm’s length interest and royalty that ought to be earned by F Co 1 and thereby increase deemed dividend?
• Would such action result in extra-territorial application of Indian TP laws?
Interest income
Royalty
PricewaterhouseCoopers
CFC Regime and Transfer Pricing
Slide 17August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
Arm’s length pricing and its effect on CFC taxation
Case 2: TP adjustment to transactions between CFC and another group company
I Co 2I Co 1
F Co 1[CFC]
Interest free loan
F Co 2
Interest
100% equity
Assumed scenario:• F Co 1 is a CFC• I Co 2 (group company) lends interest free loan to F
Co 1• F Co 1 lends onwards to F Co 2 and earns interest
income which is ‘passive income’• CFC’s passive income is taxable in hands of I Co 1
as deemed dividend income (no exemptions available)
• Arm’s length interest income computed in the hands of I Co 2
• Double taxation of same income in hands of I Co 1 (CFC rules) & I Co 2 (TP rules)
• CFC rules to be robust to address above issue; else TP adjustment to get preference as per foreign legal precedent
PricewaterhouseCoopers
CFC Regime and Transfer Pricing
Slide 18August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
Interplay between CFC and TP
Passive income parked outside India at level of intermediate Hold Co, taxed in India
I Co
Hold Co[CFC]
Op Co
100% equity
• Can Hold Co be converted into an IP headquartered company, by moving “substance” and “IP” to Hold Co?
• Transfer Pricing planning could mitigate hardship of double taxation, through portability of entrepreneurial profits at level of I Co (in case it serves Group’s objectives) single level of tax in India
100% equity
PricewaterhouseCoopers
General Anti Avoidance Rules (‘GAAR’) and Transfer Pricing
Slide 20August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
• GAAR under draft DTC – impermissible avoidance arrangement, if
– entered into with the objective of obtaining tax benefit
and,
– creates rights or obligations, which would not normally be created if the transaction was implemented at arm’s length; or
– results in, directly or indirectly, misuse or abuse of the provisions of the Code; or
– lacks commercial substance in whole or in part; or
– is not for bonafide purpose.
PricewaterhouseCoopers
GAAR and Transfer Pricing
Slide 21August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
• Tax consequences if GAAR is invoked :
– Disregard, combine, re-characterize part or whole of the arrangement
– Disregard any accommodating party
– Deem persons who are connected to be one and the same person
– Re-characterize or re-allocate income
– Re-characterize multi-party financing transaction
– Re-characterize debt financing as equity or vice versa
• Onus on taxpayer to demonstrate obtaining tax benefit was not main purpose of arrangement
• No compensatory adjustment provisions
PricewaterhouseCoopers
GAAR and Transfer Pricing
Slide 22August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
• Thin capitalisation :
– Recharacterisation of loan to equity disallowance of relevant interest, even if rate at arm’s length
– How would non-deductible interest be treated ? Dividend, subject to DDT secondary adjustment ?
• Business restructuring :
– Commercial substance (transfer pricing) + commercial justification (GAAR) ?
– Exit cost upon conversion (transfer pricing) + acceptance of low risk model post conversion (GAAR) ?
PricewaterhouseCoopers
Key Takeaways
Slide 23August 2010Thriving Through Challenging Times – An Interactive Session on Transfer Pricing
• Economic Substance
• Robust Documentation
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