transfer pricing news

Transfer Pricing News

Welcome to the first editionof Grant Thornton’sTransfer Pricing News.

Transfer Pricing News No. 1: April 2012 1

Welcome Argentina Australia Canada China India Italy Japan Mexico Netherlands Poland Russia SouthAfrica

Spain UnitedKingdom

Who’swho

Go to page…

2 Argentina

3 Australia

5 Canada

8 China

9 India

11 Italy

13 Japan

14 Mexico

16 Netherlands

17 Poland

18 Russia

22 South Africa

23 Spain

24 United Kingdom

26 Who’s who

This issue contains transfer pricingupdates from a number of countriesacross the globe – a necessity in theglobal economy we all now inhabit. So ifyou want to know about newdevelopments in transfer pricing aroundthe world this is the place to look.

To find out more about the topicsfeatured in Transfer Pricing News do nothesitate to get in touch with the GrantThornton transfer pricing team. Thecontact details are included on the lastpage of this newsletter.

This information has been provided by member firms withinGrant Thornton International Ltd, and is for informationalpurposes only. Neither the respective member firm norGrant Thornton International Ltd can guarantee theaccuracy, timeliness or completeness of the data containedherein. As such, you should not act on the informationwithout first seeking professional tax advice.


Argentina

Recent changesThe Argentinean taxauthorities recentlyintroduced new

information reporting requirements. Thenew ‘annual transfer pricing informationreturn form’ (F.969), extends theinformation required by the original F.743form, that will remain in place. The newannual form must be filed within 15 daysof the income tax return’s due date and iseffective retrospectively for tax yearsending on or after 31 December 2010.

The new annual form will require adetailed account of all transfer pricingrelated information in respect of exports,imports and other transactions. Theinformation included in any of thesetransfer pricing reports that is not inSpanish must be accompanied by a signedtranslation performed by a sworn andregistered Argentinian translator.

Fernando FucciGrant Thornton ArgentinaE [email protected]


Spain UnitedKingdom

Who’swho

mailto:[email protected]


Australia

2012 is expected to be a watershedfor Australian transfer pricing

In recent years, theAustralian TaxationOffice (ATO) has focused

heavily on the enforcement of Australia’stransfer pricing rules. This focus isexpected to intensify in 2012 as a result oftwo major developments: 1. The initiative of the federal

government to reform Australia’stransfer pricing rules for multinationalcompanies

2. The introduction by the ATO of anew International Dealings Schedule(IDS) that will replace Schedule 25Aand the Thin Capitalisation Schedule(TCS).

The introduction of the new IDS and theproposed changes to the transfer pricingrules represent a big step towards theATO’s aim of implementing a moresophisticated risk assessment andmitigation framework.

Proposed changes to Australia’stransfer pricing rulesThe government initiative is a response tothe federal courts’ recent finding againstthe ATO’s approach to transfer pricingcases. The federal court rejected theATO’s use of the transactional net marginmethod in favour of the taxpayer’scomparable third party transactioninformation.

The court highlighted discrepanciesbetween Australia’s transfer pricinglegislation and the ATO’s application ofthe arm’s length principle, which favoursusing traditional transaction transferpricing methods to price intercompanydealings.

Included among the proposedchanges to Australia’s transfer pricingregulatory framework are the endorsingand regulating of the OECD guidelines;incorporating the arm’s length principleinto law; and limiting the existingdiscretionary powers of the taxcommissioner to determine the arm’slength outcome for intercompanydealings.

Also proposed are legislative andtreaty amendments for moving to a‘functionally separate entity’ for theattribution of profits to a permanentestablishment.

In addition, taxpayers with certainvolumes of intercompany dealings willhave a statutory obligation to preparecontemporaneous documentation, andestablish processes to set and review theirtransfer prices.

The government’s intention toendorse ‘profit allocation rules’ as part ofthe new transfer pricing regulatoryframework in Australia has been ofparticular interest to the taxpayers as itwill limit the erosion of the Australian taxbase. This is in contrast with guidanceprovided by the OECD that recommendsthe application of the arm’s lengthprinciple to ensure that the terms andconditions of intercompany dealings arethe same as those expected to be agreedbetween non-related parties.

At the moment it is a case of ‘watchthis space’ with draft legislation expectedto be released soon.


Spain UnitedKingdom

Who’swho


New international dealings disclosurerequirementsThe introduction of a new income taxschedule for international dealingsestablishes the framework for the ATO’sstrategy of closely monitoring taxpayers’international dealings.

When completing the new IDS,taxpayers should expect to providegreater levels of detail in disclosuresconcerning international dealings (asopposed to previous Schedule 25A andTCS), and consequently, an increase in theresources and time invested in preparingthis schedule. In addition, the new IDSform is reflective of the ATO’s greateremphasis on the responsibility of acompany’s public officer to ensure thatinternational dealing disclosures arecompleted accurately and are supportedby bona fide information.

On the other hand, taxpayers shouldexpect that with the introduction of thenew IDS the ATO will be able to apply amore systematic and analytical approachto review a taxpayer’s internationaldealings. As a result, a proliferation oftargeted transfer pricing reviews andaudits initiated by the ATO isanticipated.

ConclusionThe message is clear – the ATO is lookingclosely at a taxpayer’s international relatedparty dealings, supported by greaterdisclosure requirements, moresophisticated scrutiny tools and theadoption of a transfer pricing regulatoryframework that is in line withinternational best practice.

Although greater consistency withtrading partners in the ‘internationaldealings’ arena will be viewed as a positivedevelopment for Australia, taxpayers areadvised to be prepared for the ‘newinternational dealings environment’ andreview their policies and practices, as wellas ensuring that the appropriatedocumentation and support are in place.

Jason CasasGrant Thornton AustraliaE [email protected]


Spain UnitedKingdom

Who’swho



Canada

Straight from the source – Canada’sfirst supreme court transfer pricingcase

On 13 January 2012,arguments were heard bythe supreme court of

Canada in the matter of Her Majesty theQueen v. GlaxoSmithKline Inc. The caseinvolves the pricing of intercompanytransactions between Glaxo Canada, aCanadian corporation, and relatedcorporations in the United Kingdomand Switzerland, Glaxo Group Ltd.(Glaxo Group) and Adechsa S.A.(Adechsa), respectively, during the 1990to 1993 tax years.

As this is the first internationaltransfer pricing matter to be consideredby Canada’s highest court, we find itinstructive to consider the issues andquestions on which the Justices seemedto focus during the hearing. Such ananalysis may be useful in shedding lighton the possible future of the arm’s lengthprinciple in Canada.

BackgroundIn 1972, Glaxo Canada entered into a‘consultancy agreement’ with GlaxoGroup which granted Glaxo Canadaaccess to various services andintangibles, including the right tomanufacture, use trademarks of and sellcertain Glaxo Group drugs. GlaxoCanada, in turn, paid a 5% royalty forthese rights.

In 1976, Glaxo Group discoveredranitidine, the active pharmaceuticalingredient used in the manufacture ofthe branded compound Zantac, a drugused for the treatment of stomach ulcers.

In 1988, the ‘consultancy agreement’was replaced with a ‘licensingagreement’ to explicitly include theprovision for services and intangiblesrelated to Zantac. In return for theseservices and intangibles, Glaxo Canadapaid a 6% royalty on net sales.

In 1987 and 1989, two independentdrug companies Apotex Inc. (Apotex)and Novopharm Ltd. (Novopharm)began selling generic ranitidine productsin Canada.

Both Apotex and Novopharmpurchased their ranitidine fromunrelated manufacturers at significantlylower prices (approximately 80% less)than the prices charged by Adechsa. Theunrelated manufacturers did not holdany patents and were not Glaxo-approved sources of ranitidine.

In 1993, Glaxo Canada was audited,and in 1996 the minister reassessedGlaxo Canada for the taxation years inquestion and increased Glaxo Canada’staxable income for each of the yearspursuant to subsection 69(2) of theIncome Tax Act (the Act). Thereassessment pertained to the supplyagreement only.


Spain UnitedKingdom

Who’swho


In 1998, Glaxo Canada appealed tothe tax court of Canada (TCC) and thedispute proceeded to trial.

Subsection 69(2) was in effect in thetaxation years at issue, though thestatute has since been repealed andreplaced by Section 247.

TCC decisionIn the TCC’s judgment on 30 May 2008,the presiding Justice Rip agreed with thecrown court’s approach and concludedthat Glaxo Canada had overpaidAdechsa for ranitidine. He determinedthat the prices Glaxo Canada had paid toAdechsa were not ‘reasonable in thecircumstances’, as Glaxo Canada couldhave obtained ranitidine from genericmanufacturers at substantially lowerprices.

Glaxo Canada appealed the decisionof the TCC to the federal court ofappeal (FCA).

FCA decisionIn the FCA’s judgment on 26 July 2010,the presiding justices determined JusticeRip had erred in his interpretation of thephrase ‘reasonable in the circumstances’in subsection 69(2) and that ‘all relevantcircumstances which an arm’s-lengthpurchaser would have had to consider’must be taken into account. The FCA’sapproach differed from that of the TCCby employing a ‘reasonable businessperson’ test to determine whether anarm’s length party in Glaxo Canada’sposition would have been willing to paythe same price Glaxo Canada paid toAdechsa. The FCA allowed the appealand sent the matter back to the TCC forreconsideration based on assessing whatan arm’s length distributor of Zantacwould have been willing to pay, ratherthan what a generic arm’s lengthdistributor of ranitidine drugs wouldhave been willing to pay.

Supreme court of Canada (SCC)hearingThe crown continued to take theposition that the only relevant issue waswhether the pricing of ranitidine was atarm’s length and reiterated that no othercircumstances should be considered.The crown argued that subsection 69(2)of the Act, and more specifically thestatement ‘reasonable in thecircumstances’, precluded the notion ofasking whether a distributor could sellZantac if it purchased ranitidine from ageneric manufacturer.

While a number of the justicesquestioned the parties regarding thefacts and circumstances, hypotheticals,implications of tax-planning strategies,and possible legislative interpretations, itis worth noting that the bulk of thequestioning seemed to be driving atwhich circumstances should be rightlyconsidered in determining ‘thereasonable amount’ under subsection69(2).


Spain UnitedKingdom

Who’swho


IssuesAccording to our observations, theprimary issues of interest to the SCCjustices, and thus the most likely pointsto be addressed in the forthcomingdecision, could be stated as follows:1. What is the correct interpretation of

‘reasonable’ in these circumstances?Should it take into consideration allrelevant circumstances surroundingthe transaction? Specifically in theGlaxo case, should consideration begiven to the fact Glaxo Canadapurchased ranitidine for the purposeof marketing and selling Zantac (abranded pharmaceutical) rather thanselling a generic drug?

2. The interpretation of paragraph1.42-1.44 of the 1995 OECDguidelines. For transactions that are closely connected, when is itreasonable for the transactions tobe evaluated as a package and whenis it reasonable for the transactionsto be evaluated separately?

Specifically, for the sale of goods,when is it reasonable for productpricing to include certain servicesand intellectual property?

3. Is the arm’s length principle satisfiedby packaged transactions that wouldhave been agreed to by unrelatedparties, or might the Canada revenueagency retain the power to reassessspecific terms of such agreementswhere it deems them (when viewedon their own) to not conform to thearm’s length principle?

These questions require someclarification, and multinationalenterprises with Canadian operations, aswell as Canadian transfer pricingpractitioners, have reason to beoptimistic that the SCC’s forthcomingdecision will provide some level ofguidance and clarity to these challengingissues.

The full article, which includes amore detailed discussion of the TCCdecision, FCA decision and the SCChearing is available to download fromwww.grantthornton.ca/insights/articles

Michael PeggsGrant Thornton CanadaE [email protected]


Spain UnitedKingdom

Who’swho



Standardising and streamliningtransfer pricing investigationprocesses

The China StateAdministration ofTaxation (SAT) will issue

two internal circulars, named the‘Internal Working Procedure (Trial) ofSpecial Taxation Adjustment’ and ‘JointAssessment Procedure (Trial) for KeyCases of Special Taxation Adjustment’.These two circulars aim to standardiseand streamline the transfer pricinginvestigation processes adopted by thetax authorities across the country.

As background, China has beenviewed as one of the most aggressive taxregimes in the Asia Pacific region whenit comes to transfer pricing assessment,and this trend is unlikely to change inthe near future. In 2011, each transferpricing investigation case by the SATended up with an average assessmentamount of 15 million Renminbi (RMB)(approximately 2.5 million US Dollars(USD)).

As time progresses, Chinese taxofficials are also becoming moresophisticated in the transfer pricingarena, exploring new frontiers such asintangible licensing, equity transfer, thincapitalisation and location saving, toname just a few.

Rose ZhouGrant Thornton ChinaE [email protected]

China


Spain UnitedKingdom

Who’swho



1. Update on safe harboursDuring the past months,there has been significantmovement on safe

harbours, with the last meeting of theSafe Harbour Executive Committeeconvened on 29 July 2010.

Included below are some high levelrecommendations that the committeehas received from industry associationsand consultants: • only limit the benefit of safe

harbours in respect of ‘non-integral’or ‘economically insignificant’activities

• prescribe a threshold limit foravailing the benefit of a safe harbour

• deny the benefit of safe harbours incases where ‘internal comparables’are available

• limit the misuse of safe harbours bysetting out scrutiny norms, based ona randomised selection of cases.

Our recommendation at this stagewould be for taxpayers to adopt a ‘waitand see’ policy. The norms that willultimately be prescribed could be verydifferent and may in most probability beaccompanied by stringent compliancemeasures.

2. Update on the Dispute ResolutionPanel (DRP) proceedings for theannual year (AY) 2006-07 and AY2007-08 The DRPs across the country haveprovided their instructions to theAssessing Officer (AO), in most of thecases for AY 2006-07 and before. ForAY 2007-08, the Transfer PricingOfficers (TPOs) have released theirorders which shall be incorporated bythe AOs in their draft orders to beissued to the taxpayers. The time limitfor AOs to complete this process for AY2007-08 was 31 December 2010.

Although in the majority of cases theorders of the TPOs have been upheld,contrary to the general apprehension,the DRPs have also actually ruled infavour of the assessees.

In a recent Mumbai conferencediscussion, it was commented that based on first year experiences, theDepartment of Revenue is looking atinternally making some changes in theDRP mechanism to help the taxpayerachieve its objective of minimisingconflicts.

The discussion also revealed that inapproximately 24% of the cases, reliefwas given under the DRP option. Alsoin a few recent income tax appellatetribunal decisions the cases werereferred back to the DRP for theirdecisions.

India


Spain UnitedKingdom

Who’swho


3. TPOs Information technology (IT) –Information technology enabledservices (ITES) benchmark sets forAY 2007-08TPOs are in the process of working outtheir comparable sets for the IT-ITESindustry segments for AY 2007-08. Theyhave firmed up their mark-ups for theIT segment at about 25-26% and for theITES segment at about 33%.

As in the past, the TPOs in a fewlocations are proactively allowing thetaxpayers to adjust the comparablemark-up for differences in the workingcapital employed by the taxpayer ascompared to the comparables.

Normally, captive IT-ITEScompanies in India work on advancesand this always has the effect ofreducing the mean mark-up expected bythe TPOs.

TPOs in some other locations aregranting working capital adjustments ifthese are claimed by the taxpayer. Aswith past audits, TPOs have not grantedany relief on account of the differencesin the risk profiles of the captivescompared to the risk-bearingentrepreneurial companies selected inthe benchmark set.

Karishma PhatarphekarGrant Thornton IndiaE [email protected]


Spain UnitedKingdom

Who’swho



Domestic transfer pricingdocumentation

A new measure from therevenue agency directorhas incentivised Italian

companies involved in cross-bordertransactions to prepare adequate transferpricing documentation, thus complyingwith the OECD guidelines and the EUcode of conduct recommendations. Ifthe above companies indicate in theirannual tax return (2011 being the firstyear of application) that they havetransfer pricing documentationcompliant with the structure andcontent provided by the above measure,they can benefit from a penaltyexemption in the case of a tax audit ontransfer pricing issues.

This provision is particularlyrelevant since current penalties may varyfrom 100% to 200% of the assessedtaxable base.

As a consequence, many companiesinvolved in cross-border transactionshave currently prepared their transferpricing documentation for past yearsand are preparing reports for the currentyear. The measure deals essentially withthe correctness of the transfer pricingreport content and structure.Nevertheless, tax litigation cases on thetruthfulness and reliability ofcomparability have started. Some issueswould still need some clarification(among others the lack of materialitythreshold of transactions is to beanalysed in the documentation).

Advanced price agreements (APAs) – international rulingsThe number of unilateral APAs has beengrowing in recent years. Currentavailable official data (valid for theperiod from 2004-2009) shows 52proposed rulings, 19 of them havingbeen signed already. Although a fewunilateral APAs have been signed in afew months, the average length of theprocedure is about twenty months, dueto the complexity of the issues analysed.This average length is however in linewith similar cases in other EU countries.

Despite new official data to beavailable in April 2012, local taxauthorities confirmed unofficially thatthe total number of proposed rulings hasgrown further to approximately 70 atthe end of 2011.

The most significant news is notonly the increased number of APAs, butalso that the Italian tax authorities havestarted to negotiate bilateral APAs, witheight cases already registered.

The Italian tax administration startedto negotiate bilateral APAs within theframework of the mutual agreementprocedure provided by ‘Article 25’ ofthe ‘OECD Model Tax Convention’.Differently from unilateral APAs, thereis no domestic law regulating thisprocedure. The introduction of thetransfer pricing documentation with apenalty protection system and the APAprocedures with the extension tobilateral APAs will enhance therelationship between taxpayers and thetax administration, based on atransparent and proactive approach.Furthermore, in recent years the Italiantax authorities have increased theircooperative attitude with other EU andnon-EU tax administrations.

Italy


Spain UnitedKingdom

Who’swho


Criminal relevance of tax avoidancebehaviour connected to businessrestructuringThe criminal relevance of certainbusiness restructuring operationssuspected to have a tax avoidancepurpose is one of the most importantissues arising from a recent domesticcase law.

In this respect, a new decision by theItalian supreme court deals with the caseof a pan-EU business restructuringimplying the transfer of assets andfunctions outside the national territory.

The court argued that the wholetransaction was performed essentiallyfor tax avoidance purposes. In particular,although an exit tax consideration hadbeen paid, the tax authoritiesdisregarded the business soundness ofthe operation and also assessed adifferent arm’s length value of the assettransferred.

The general principle set out by thecourt is that tax avoidance behavioursset out by a taxpayer (among them, amissing or untruthful tax return) arelikely to be subject to criminal sanctionsin addition to the administrativesanctions usually applied. The basis forthis is that it is possible for the taxpayerto obtain an advance ruling from the taxauthorities, and if the taxpayer does notmake a request then they might becharged with criminal sanctions in thecase of a tax audit.

Paolo BesioGrant Thornton Bernoni & PartnersE [email protected]


Spain UnitedKingdom

Who’swho



Japan’s response to the 2010revisions to the OECD transfer pricingguidelines for multinationalenterprises and tax administrations

Japan has adopted a‘most appropriatemethod’ rule that is

effective for fiscal years starting on orafter 1 October 2011. To date, the threetraditional transaction-based methods –comparable uncontrolled price, resaleprice, and cost plus – have been thepreferred methods of the national taxagency and have had preference inJapan’s transfer pricing regulations.

The reforms which are effective from2011 expressly allow for the applicationof three types of profit split methods –comparable, residual, and a contributionapproach whereby the arm’s length priceis determined according to the value ofthe contribution made by each taxpayerto the combined operating profit or loss.To date this has been included in the‘special taxation measures law circular’.

In addition, the concept of a range ofacceptable arm’s length prices has beenadopted in the reforms. The price wouldthen be acceptable if it fell within thestated and appropriate arm’s lengthrange. Current rules do not expresslyallow for a range of arm’s length prices.

Toshiya Kimura Grant Thornton JapanE [email protected]

Japan


Spain UnitedKingdom

Who’swho



Risk profilesIn Mexico, the TaxAdministration Service(SAT) is in the process of

creating a taxpayers risk profile, in orderto identify those taxpayers who are notproperly complying with their taxobligations or are implementingaggressive tax strategies. This hasallowed the SAT to focus their auditingefforts on these specific taxpayers.

Transfer pricing auditsIn the case of transfer pricing audits, theSAT has focused on businessrestructurings, service transactions, andthe pharmaceutical and hotel industries.

When the recipient of the service is aMexican taxpayer, it must be verifiedthat the service is needed and thatthrough the supporting documentationit was actually provided; the taxpayermust then prove to be compliant withthe arm’s length principle.

SAT is in the process of modifyingthe format of the informative return onrelated party transactions, which isintended to include more detailedinformation, as well as information ondomestic related party transactions.

Court cases related to transferpricingAs audit activity increases, the courtactivity also increases. There have beensome new resolutions from the taxcourt, as detailed below.

One of these resolutions is inconnection with a distributor whoacquired products from a related partyabroad. In its transfer pricing study, thetaxpayer analysed this transaction usingthe resale price margin (RPM) and itconcluded that the transaction wascarried out at arm’s length.

As a result of an audit performed bythe SAT, they concluded that the RPMwas the appropriate method and alsoincluded three additional comparablecompanies to the analysis. In thereplying documentation, the taxpayerincluded the additional comparablecompanies and also used thetransactional net margin method as asanity check or secondary method. Inthe analysis, the company performed thefollowing adjustments: Accountsreceivable, inventories and a uniqueadjustment due to operating expensesintensity. It also considered three fiscalyears for its financial data versus thethree years of financial information fromthe comparable companies.

The final statement from the SATstated that the controlled transactionwas not carried out at arm’s length,arguing that the adjustment due tooperating expenses intensity was notreasonable. Finally, the SAT claimed thatthe financial information that should beused in the analysis is the fiscal year forthe tested party, compared to a threeyear cycle for the comparablecompanies.

The case was filed for a trial betweenthe taxpayer and the SAT and the courtissued a favourable resolution to thetaxpayer.

Mexico


Spain UnitedKingdom

Who’swho


The basis of the resolution was thatMexican income tax law states thatreasonable adjustments should be madeand that, in order to stabilise theeconomic cycle, the taxpayer can use itsinformation from several years. Despitethis, regulations are set in order toimprove the comparability of theindependent parties information and thelaw does not state the number of yearsof an economic cycle or the adjustmentsthat should be performed.

The second case is related to theimport of certain active ingredientsmade by a pharmaceutical company. TheSAT used secret comparable informationand product information gathered bythe Mexican customs office, whichconsidered the price of the activeingredients imported.

According to the Mexican taxofficers, this information source wouldonly be considered when it is absolutelyclear that the transactions between therelated parties were not carried out atarm’s length. The resolution in this casewas in favour of the SAT.

Ricardo Suarez Grant Thornton MexicoE [email protected]


Spain UnitedKingdom

Who’swho



Transfer pricing developments: Permanent establishment decree

A new decree wasintroduced regarding theallocation of profits to a

permanent establishment (PE) on 27January 2011. This decree endorses theconclusions of the OECD report on theattribution of profits to PEs andprovides details on the Dutch position.

Court casesThere are three court cases that aresignificant to mention in 2011, includinga landmark case with respect to non-arm’s length loan transactions.

1. Non-arm’s length loanIn the supreme court case of 25November 2011, the taxpayer claimed adeduction of a non-recoverable loan inits tax return taking into account theborrower’s negative financial situation.The supreme court considered theamount as non-deductible since the taxpayer assumed the credit risk undernon-arm’s length conditions andcircumstances. No third party wouldhave accepted such a credit risk underthe same facts and circumstances.Therefore, the supreme court ruled thatthe loan was provided in a capacity of ashareholder not as a creditor.

Furthermore, the court ruled that theinterest rate for a non-arm’s length loancan be based on what the borrowerwould need to pay to a third party forsuch a loan with a guarantee under thesame conditions.

This case has a large impact on thestructuring of financial transactions bydetermining under what circumstancesloans can be regarded as non-arm’slength. It may also give some planningopportunities.

2. Correction of transfer pricesIn the court of Breda case dated 9February 2011, a large breedingcompany in its appeal to a preliminarytax assessment, recalculated the transferprices used in its transactions with itsrelated party.

The court later ruled that therecalculation would not occur at arm’slength and therefore there were nogrounds for lowering the Dutchcompany’s taxable income.

This court case illustrates theimportance of having solid transferpricing documentation. When acompany prepares solid transfer pricingdocumentation, the burden of proofwith respect to the arm’s length natureof transfer prices remains with theDutch tax authorities.

3. Correction of reinsurance profit(captive case)In the court of the Hague case of 7 July2011, the taxpayer is engaged inoperating bungalow parks and providingrelated services including the provisionof insurances.

The tax inspector increased thetaxable profit in the Netherlands bydisregarding the activities of its captiveinsurance related company in Ireland.

The court did not agree with the taxinspector in its position and ruled thatthe taxpayer had a business reason torestructure and establish a captiveinsurance company in Ireland.

This is the first such case since theDutch tax authorities restarted activelyauditing captive insurance structures.

Michiel van den Berg Grant Thornton NetherlandsE [email protected]

Netherlands


Spain UnitedKingdom

Who’swho



Poland is one of the fewEuropean countrieswhere transfer pricing

documentation is not required (but inpractice there are some doubts about it)to prove the correctness of prices.Conducting an analysis of whether thepricing of a transaction is at market levelis not an obligatory part of the taxdocumentation.

In 2010, a project to change the ruleson transfer pricing documentation andthe clarification of this issue wasproposed. The draft guidelines includeda proposal for the tax documentation topresent the comparable market datajustifying that arm’s length conditionsapplied in the transaction.

However, the project was abandonedin the course of further legislative work.We can expect a return of the concept inthe future.

The increasing number of tax auditsTax control offices examine issuesrelated to transfer pricing. This is aconsequence of the minister of finance’sannual instructions. Since 2010, theminister of finance imposed a specialemphasis on transfer pricingdocumentation with related parties. Thisyear will largely be a continuation ofthese activities.

Inspections by the tax authorities arenot limited to formal assessments of thecorrect transfer pricing documentationpreparation but more often are aimed atthe verification of whether theconditions between related partytransactions are in line with the arm’slength principle.

The Polish tax authorities havebegun creating special departmentsdedicated to transfer pricing relatedissues. Over the past three years,penalties of approximately 140 millionPolish zloty (PLN) increased theamount of income taxes additionally

levied by the tax authorities forcompanies contravening transfer pricingrules and in transactions between relatedparties.

Advance pricing agreements (APA)The Polish minister of finance may issuea decision as to whether he finds a givenmethod of determining the transfer pricebetween related parties acceptable.Under the law, the decision will bebinding upon the tax authorities in thecase of other tax procedures (such as taxaudits and tax-legal proceedings).

The ministry of finance imposes acharge for the APA application. This isequal to a 1% value of the transactionthat is subject to APA application(minimum 5,000 PLN, maximum200,000 PLN). Entities who decide todraw up an APA have to preparedocumentation containing detailedinformation about realised transactions,especially the method used to calculatetransaction values and information

about all the costs connected with thetransaction. Entities will bear theadditional cost of professionalconsultants who have the know how toprepare the appropriate documents.

Recent statistics on APAs show verylittle interest in this form of riskelimination in Poland.

Since 2006, the ministry of financehas issued just 26 decisions in this regard(up to 10 October 2011). Taxpayersrarely decide to conclude an APAbecause of the long duration (average 19months) and high cost of proceedings.

Agnieszka Staniszewska Grant Thornton PolandE [email protected]

Poland


Spain UnitedKingdom

Who’swho



New rules 2012Transfer pricing isbecoming a hot topic inRussia these days.

Although the current legislationcontains relevant provisions, they havenot worked efficiently since theirimplementation in 1999.

However, new Federal Law (#227-FZ) of 18 July 2011 (the Law) enactedcomprehensive transfer pricing rulescoming into force starting 1 January2012.

According to the Law, companiesthat fall under the scope of transferpricing rules will be obligated to discloserelated party transactions and providetax authorities with a transfer pricingstudy documenting the intercompanyprices used.

This article gives companies ageneral overview of the new transferpricing rules effective from 2012,enabling companies to identify if theyare subject to them.

If your business is likely to beaffected by the new rules we will behappy to assist you in developing anaction plan and a transfer pricing policyin order to be compliant with the newlegislation.

Key changesThe ownership ratio necessary to declareparties related has increased from 20-25%. The new rules provide for beingrelated through participation via a chainof ownership of more than 50% each.

Starting in 2012 sister companies arealso within the scope.

Companies can also be treated asrelated parties due to control on theboard of directors, provided that: • more than 50% of the directors of

these companies are the sameindividuals

• not less than 50% of the directorsare appointed/ chosen by the sameindividual.

Similarly, courts will have the right todeclare the parties as related if therelationship between them may have animpact on the conditions and outcomeof the transaction performed by theseparties or the results of their economicactivity.

Controlled transactionsThe Law provides for the following listof controlled transactions:• related parties cross-border

transactions (no volume threshold isdefined).

• foreign trade transactions withcommodities that have a totalincome exceeding 60 million RussianRubles (RUR)(approximately twomillion USD) per calendar year.

• transactions with companiesincorporated or residing in offshorejurisdictions (including non-relatedparties). This list established by theRussian Ministry of Finance includesterritories with beneficial tax regimesand non-transparent fiscal bodies. Athreshold of 60 million RUR percalendar year has been establishedfor such transactions.

• transactions between relatedparties carried out via unrelatedintermediary companies, providedsuch companies do not perform anyadditional functions, assume anyrisks or employ any assets.

Russia


Spain UnitedKingdom

Who’swho


• domestic transactions betweenrelated parties will be subject tocontrol in the following three cases:1. If the amount of such

transactions exceeds three billionRUR (approximately 105 millionUSD) in 2012, two billion RUR(approximately 70 million USD)in 2013 or one billion RUR(approximately 35 million USD)from 2014.

Transactions betweenprofitable Russian companiesregistered in the sameadministrative region are exemptfrom transfer pricing control,provided they do not have anysubdivisions in otheradministrative regions withinRussia or abroad.

2. Certain types of transactions thatqualify for at least one of thefollowing conditions and wherethe aggregate income exceeds 60million RUR per calendar year(approximately two millionUSD):• if one party to a transaction is

subject to the mineralextraction tax and the goodsare subject to the above tax ata percentage rate

• if one party to a transaction isexempt from profits tax orapplies a 0% tax rate, whilethe other party is a profits taxtaxpayer in Russia and doesnot apply a 0% tax rate

• if one party to a transaction isresident in a special economiczone, while the other is notresident in that specialeconomic zone (effectivefrom 1 January 2014).

3. Transactions where one partyapplies the unified agriculturaltax or a unified imputed incometax, while the other party paystax under the general rules. Thistype of transaction is recognisedas controlled starting from 1January 2014 if the aggregateincome exceeds 100 million RURper calendar year (approximately3.5 million USD).

Transfer pricing methodsThe Law sets five methods fordetermining the transaction price: 1. Comparable uncontrolled price

(CUP) method2. Resale price method3. Cost plus method4. Transactional net margin method5. Profit split method.

The CUP method is named as apreferred method. However, if it is notapplicable a company may use the mostappropriate method. If the abovementioned methods do not accuratelydefine the price of an individualtransaction it can be determined throughan independent valuation.


Spain UnitedKingdom

Who’swho


Sources of dataThe Law provides a list of informationsources that can be used to determineprices of comparable transactions andmargin levels.

According to the Law comparablesfrom the Russian financial statementsshould be used. Foreign comparables areapplicable only if Russian ones do notexist.

Thus, even if the group of companieshas a global or regional transfer pricingstudy based on foreign comparables, itmight be necessary to carry outbenchmarking using Russiancomparables.

Transfer pricing reportingAccording to the Law, companies willhave to notify the tax authorities of thecontrolled transactions that occurredduring the previous year by 20 May.These notifications shall be limited inscope, such as subject, parties and totalamount of the transaction.

Transfer pricing documentation termsTransfer pricing documentationsupporting the arm’s length nature ofprices applied and the method used maybe requested by tax authorities notearlier than 1 June of the year followingthe calendar year when the controlledtransactions took place.

Once it is requested the companyhas 30 days to present transfer pricingdocumentation for the tax authority’sreview.

The transitional period allowscompanies with controlled transactionsunder 100 million RUR (approximately3.5 million USD) for the year 2012 and80 million RUR (approximately 2.8million USD) for the year 2013 to enjoyan exemption from filing notificationand preparing transfer pricingdocumentation. However, starting in2014, the thresholds will be abolished.

Transfer pricing documentationcontentThe documentation shall include thefollowing information: • description of the controlled

transaction, its parties andconditions, including the descriptionof the pricing method (if any) andother information on the transaction

• information on each parties’functions (if a functional analysis iscarried out by the taxpayer), assetsemployed (related to the controlledtransaction) and commercial risks.

If a taxpayer uses methods establishedby the tax code, the followinginformation should also be provided: • the grounds for the choice and

applicability of the method used• the sources of data• calculation of the market prices

interval (profitability interval) usedfor the benchmarking

• the grounds for the choice andapplicability of comparables

• information about other facts, whichhad influence on the controlledtransaction price (margin) etc.


Spain UnitedKingdom

Who’swho


Advance pricing agreementsTaxpayers may be entitled to apply foran APA. However, this is only possiblefor Russian companies registered as the‘largest taxpayers’.

To conclude an APA a taxpayershould prepare an application with adescription of methods, sources ofinformation, etc. and pay a state duty of1.5 million RUR (approximately 50,000USD).

APAs protect the company frompotential tax assessments, penalties andlate payment interest.

Transfer pricing auditsTransfer prices will be audited by the taxauthorities in the course of a separatetransfer pricing audit with certaintransitional provisions prescribed by theLaw.

In particular, an audit for the year2012 may only be initiated before 31December 2013, while a 2013 audit mayonly be initiated before 31 December2015. After the above provisions expire,a transfer pricing audit may cover threeyears preceding the year when the auditis initiated.

Transfer pricing penaltiesThe Law exempts any transactions thatoccur during the years 2012 and 2013from transfer pricing penalties. Apenalty of 20% will apply totransactions occurring during the period2014-2016. Starting from 1 January2017, a 40% penalty will be imposed incases where a transfer pricingadjustment was applied. The submissionof transfer pricing documentationprotects a taxpayer from penalties evenif an adjustment is made. In contrast toAPAs no exemption is established inrelation to the amount of tax assessmentand late payment interest.

Mirror adjustmentsIn cases where tax authorities have madea tax assessment for one party of thetransaction, the other party has the rightto mirror the adjustment. Thisadjustment can only be made after thetax assessment is settled. Mirroradjustments are only allowed in respectto transactions within the RussianFederation.

Nadya ZubkovaGrant Thornton RussiaE [email protected]


Spain UnitedKingdom

Who’swho



Recent South African developmentsSection 31 of the IncomeTax Act No.58 of 1962(the Act) contains the

main legislative provisions relating totransfer pricing. The South Africantransfer pricing rules essentially requirethat an arm’s length/market related pricebe paid/charged in respect of the cross-border supply of goods or servicesbetween connected persons.

Should the commissioner for theSouth African revenue service (SARS) beof the opinion that an arm’s length pricehas not been paid or charged, he isentitled to adjust the consideration forthe transaction in order for it to reflectan arm’s length price, resulting in apotentially higher tax liability for thetaxpayer.

The old section 31 has recently beensubstituted with a new section 31 interms of the Taxation Laws AmendmentAct No. 7 of 2010. This change wasimplemented due to the wording of theold section causing structural problemsand uncertainty as it placed excessiveemphasis on isolated transactions ratherthan overall arrangements.

Undue emphasis was also placed onthe comparable uncontrolled pricemethod rather than other more practicaltransfer pricing methodologies. Inaddition, SARS was of the opinion thatthe wording should focus on ‘profits’rather than ‘price’ as this is moreconsistent with the wording of thedouble tax treaties concluded by SouthAfrica.

The new wording focuses on theeconomic substance of transactions andis more in line with the OECDguidelines. The new section willessentially apply to any transaction,operation, scheme, agreement orunderstanding directly or indirectlyentered into between cross-borderconnected parties where:• any term or condition of that

transaction, operation, scheme,agreement or understanding thatdeviated from any term or conditionthat would have existed betweenthose parties dealing at arms-length

• the transaction, operation, scheme,agreement or understanding resultsor will result in a tax benefit beingderived by either party.

There has also been major discussionsurrounding the thin capitalisation rulesand whether the 3:1 debt equity ratiosafe-harbour applied in the case offinancial assistance has in effect fallenaway. The safe harbour is contained in aseparate practice note and it is not clearwhether this has in fact been withdrawnby SARS. This amendment would resultin taxpayers being required to establishwhat amounts they would have been ableto borrow in the open market, on whatterms and conditions and at what rate.This has stirred debate as to whether ornot the amendment is plausible and thus,SARS is to issue guidance in this respect.

In line with most countries, SARS hasacknowledged transfer pricing as a mainincome source and focus has been placedon this area with audits now beingconducted across all industries by thetransfer pricing unit, a specialist unit atthe large business centre in Johannesburg.

AJ Jansen van NieuwenhuizenGrant Thornton South AfricaE [email protected]

South Africa


Spain UnitedKingdom

Who’swho



Spainish supreme court decision:Swiss principal has Spanishpermanent establishment through itssubsidiary in Spain

Roche Vitamins is theSpanish subsidiary ofRoche Vitamins Europe

(based in Switzerland), that restructuredits business in 1999. The subsidiaryprevioulsy performed the functions ofmanufacturing, importing anddistributing goods, as a full riskentrepreneur.

After the restructuring, thesubsidiary concluded two contracts withits related party Roche Vitamins Europe.The Spanish subsidiary became acontract manufacturer and sales agent,whose profits were considerably lowerthan those received by a full riskentrepreneur.

It should be noted that thesubsidiary had no capacity to contract ornegotiate for the parent company, andthe products were sold and the priceswere fixed by the Swiss company.

The progression through the courtshas taken more than nine years, and therecent ruling by the Spanish supremecourt on 12 January supports the taxauthorities position and the nationalhigh court in that the Spanish companyis a dependent agent of the Swissprincipal.

The national high court argued thatthe dependent agent clause in the Swiss-Spanish treaty was to be interpretedbroadly and applied not only tosituations where the agent has authorityto conclude agreements on behalf of theprincipal, but also when, in the nature ofits activity, an entity has involvement inthe business activities at the nationallevel.

Although the subsidiary had nocapacity to contract or negotiate for theparent company, this did not prevent theapplication of the dependent agencyclause in the Swiss-Spanish tax treaty.

The agency contract obligated thesubsidiary to promote the goods sold bythe parent, which the court feltconstituted a greater involvement in theSpanish market and showed that thesubsidiary did not only process purchaseorders issued by its parent. So finally, itwas held that the subsidiary companyconstituted a permanent establishmentbased on article 5.1 of the tax treaty andarticle 5.4 because all the activity of thesubsidiary was directed, organised andmanaged by its parent, and thereforeassumed more risks with the economicactivity in Spain.

Another important issue that thesupreme court considered was that theSpanish entity had only one client (theSwiss company), and that themanufacturing prices were merely arefund of cost which is not truly amarket price.

As a result the profits derived frommanufacturing and distribution havebeen attributed to the permanentestablishment in Spain.

The ruling goes against the FrenchZimmer case and the Norwegian DellCase with the interpretation of article5.4 of the dependent agency clause of thetax treaty, because it did not focus on theliteral meaning of the clause, that theagent has the authority to concludebinding contracts for the parent.

Gabriel YakimovskyGrant Thornton SpainE [email protected]

Spain


Spain UnitedKingdom

Who’swho



Controlled Foreign Companies (CFCs)Draft legislation has beenreleased introducing newrules for CFCs. The new

measures are intended to moreaccurately target artificially diverted UKprofits and keep the compliance burdento a minimum, although it is debatablehow far this objective has been achieved.

In some cases (e.g. where themanagement and control of the CFC’sand assets are entirely outside the UK)there will be no CFC change. In othercases it will be necessary to considerwhether any ‘significant peoplefunctions’ (SPFs – as described in theOECD report on attribution of profitsto a permanent establishment) are basedwithin the UK.

The final CFC legislation is beingpublished as part of the Finance Bill2012.

Branch exemptionA company has been able to elect the profits of its foreign permanentestablishments to be exempt from UKcorporation tax since March 2011.Conversely any losses made by the PEwill not attract relief in the UK. As theelection is irrevocable, and applies to allexisting and future permanentestablishments of the company, thedecision to make an election is not oneto be taken lightly.

Where the UK has a full treaty inplace with the permanent establishmentjurisdiction, the attribution is to be madein accordance with that treaty.

If there is no full treaty in place, theexempt profits are those that would beattributed to the permanentestablishment if an OECD treaty was in place. In addition, a number of exclusions are provided and an anti-diversion rule applies.

Patent boxThe introduction of this new regime willapply a 10% corporate tax rate for allprofits attributable to qualifyingintellectual property (IP) from 1 April2013. Qualifying IP includes patentsgranted within the UK and Europeanpatent offices.

The UK regime goes further thanmany countries in allowing profit fromproducts which include a patented itemand from patented processes.

It is intended to encouragecompanies to locate high-value jobs andactivities associated with thedevelopment, manufacture andexploitation of patents in the UK.

The patent box will apply to existingas well as new IP, and to acquired IPprovided that the group has furtherdeveloped it. This should potentiallybenefit a wide range of companies whichreceive patent royalties, sell patentedproducts, or use patented processes aspart of their business.

Thin capitalisationAdvanced thin capitalisation agreements(ATCAs) are formal binding agreementsunder the APA legislation and theprocess is designed to help resolvefinancial transfer pricing issues whichhave a significant commercial impact onan enterprise’s results, where the issueswould be unlikely to be regarded as ‘lowrisk’ by Her Majesty’s Revenue andCustoms (HMRC), or where the arm’slength provision is a matter of doubt.

The biggest advantage of having anATCA in place is the high level ofcertainty that it provides.

The ATCA process represents a pro-active way of managing UK taxexposures on UK connected party debt.

A new draft ATCA has beenpublished as part of a new statement ofpractice (SOP). This replacementupdates the legislative references andreflects HMRC’s current practice.

United Kingdom


Spain Who’swho

UnitedKingdom


The SOP includes a model ATCA toensure greater consistency betweenagreements and hopefully shorten theperiod of time it takes to reach anagreement.

HMRC’s recent statistics indicate themedian time to reach an ATCAagreement once submitted is currentlyaround seven months, i.e. 50% areagreed within seven months.

More transfer pricing statisticsDelays in the resolution of transferpricing issues have in the past been amajor concern to large businesscustomers, but HMRC has been seekingto improve this.

For the year 2010/11 the mediantime to resolve transfer pricing enquireswas just over 12 months and 50% ofAPAs are agreed within 14 months. ForMutual Agreement procedures themedian time to resolve cases is 19months.

Wendy NichollsGrant Thornton UKE [email protected]


Spain UnitedKingdom

Who’swho



Who’s whoContributors

Fernando FucciGrant Thornton ArgentinaE [email protected]

Jason CasasGrant Thornton AustraliaE [email protected]

Michael PeggsGrant Thornton CanadaE [email protected]

Rose ZhouGrant Thornton ChinaE [email protected]

Karishma Phatarphekar Grant Thornton IndiaE [email protected]

Paolo Besio Grant Thornton Bernoni & PartnersE [email protected]

Toshiya Kimura Grant Thornton JapanE [email protected]

Ricardo SuarezGrant Thornton MexicoE [email protected]

Michiel van den BergGrant Thornton NetherlandsE [email protected]

Agnieszka StaniszewskaGrant Thornton PolandE [email protected]

Nadya ZubkovaGrant Thornton RussiaE [email protected]

AJ Jansen van NieuwenhuizenGrant Thornton South AfricaE [email protected]

Gabriel YakimovskyGrant Thornton SpainE [email protected]

Wendy NichollsGrant Thornton UKE [email protected]

© 2012 Grant ThorntonInternational Ltd. All rightsreserved.

This information has beenprovided by member firmswithin Grant ThorntonInternational Ltd, and is for informational purposesonly. Neither the respectivemember firm nor GrantThornton International Ltd can guarantee theaccuracy, timeliness orcompleteness of the datacontained herein. As such,you should not act on theinformation without firstseeking professional taxadvice.

Grant Thornton InternationalLtd (Grant ThorntonInternational) and themember firms are not a worldwide partnership.Services are deliveredindependently by themember firms.


Spain UnitedKingdom

Who’swho















transfer pricing news

Economy & Finance

transfer pricing changes

indiatransfer pricing

whos whotransfer pricing

new annual form

grant thornton international

new ids

tax base

result of proposed changes