OECD Transfer Pricing Guidelines for Business Restructurings and Intangibles

1. OECD Transfer Pricing Guidelines for Business Restructurings and Intangibles Martin Busenhart , Tax Partner 7th CIS Local Counsel Forum Yerevan, 8 June 2012

2. Overview • Introduction OECD Guidelines • Transfer pricing aspects of business restructurings (Chapter XI) • Revised transfer pricing aspects of intangibles (Chapter VI)

3. Introduction OECD Guidelines • Art. 9 OECD Model Convention on “Associated Enterprises” • Need to define the “arm’s length price” of cross-border transactions between associated enterprises • OECD Transfer Pricing Guidelines (TPG) originally approved by the OECD Council in 1995 and completed with additional guidance on cross-border services, intangibles, costs contribution arrangements and advance pricing arrangements in 1996-1999 and on dispute resolutions in 2009

4. Introduction OECD Guidelines • Transfer pricing methods provided for in the OECD Guidelines • Traditional transactional methods • comparable uncontrolled price method (CUP) • Resale price method • Cost plus method • Transactional profit methods • Transactional net margin method (TNMM) • Transactional profit split method

5. Introduction OECD Guidelines • Further content of the OECD Guidelines: • Documentation requirements • Assists taxpayers to identifying documentation that is helpful in showing that controlled transactions are at arm’s length • Ways to solve disputes • Mutual agreement procedures • Advance pricing agreements • Arbitration • Special considerations for IP or intra group services • These transactions are difficult to evaluate for tax purposes and require special attention

6. Introduction OECD Guidelines • The 2010 amendment • Application of the “most appropriate transfer pricing method” (instead of the old OECD hierarchy of methods) • Guidance on how to apply transactional profit methods (TNMM and Profit split method) • Guidance on how to perform a comparability analysis • New chapter IX “transfer pricing of business restructuring” • Announcement of revised chapter VI on intangibles

7. Transfer Pricing Aspects of Business Restructurings New Chapter IX introduced in 2010 Business Restructuring (BR) is defined as cross-border reallocation of functions, assets and/or risks Reallocation can follow from : a transfer of functions, assets and / or risks and / or the termination or substantial renegotiation of existing arrangements 21/08/14 7

8. Transfer Pricing Aspects of Business Restructurings Difference between business restructuring and change in transfer pricing policy Example 1 : Company Z is a well known distributor of luxury products. It owns valuable trade name, valuable retail points and valuable long term contracts with suppliers Company Z is acquired by a MNE group which operates under a global business model --> restructuring to align Z operating model Company Z transfers its trademarks to V in Country V, its suppliers contracts to Country W, and its retails points to Country X A compensation must be paid for the business restructuring 21/08/14 8

9. Transfer Pricing Aspects of Business Restructurings Difference between business restructuring and change in transfer pricing policy Example 2 : Company Y is a manufacturer of timing mechanisms for mass-market clocks. Due to new economic situation, the group newly applies a cost plus 3 method instead of the former cost plus 5 method to remunerate company Y The taxable profit in Country Y is reduced There is no reason for levying an exit tax 21/08/14 9

10. Transfer Pricing Aspects of Business Restructurings Mains issues Understanding the restructuring itself Transfer of something of value (e.g. an asset or a going concern) Indemnification of the restructured entity for the termination or substantial renegotiation of existing arrangements 21/08/14 10

11. Transfer Pricing Aspects of Intangibles Proposed changes to Chapter VI of the TPG issued on 6 June 2012 a proposed revision of the provisions of Chapter VI of the TPG and (ii) a proposed revision of the Annex to Chapter VI containing examples illustrating the application of the provisions of the revised text of Chapter Written comments on this Discussion Draft can be made by 14 September 2012 Intention to hold public consultation on this Discussion Draft in Paris during the week of 5 November 2012 21/08/14 11

12. Transfer Pricing Aspects of Intangibles Key aspects Cornerstone of transfer pricing should be based on how independent third parties would behave in comparative situations rather than on accounting or legal definitions or general tax purposes No differentiation between trade versus marketing intangibles; soft versus hard, or routine versus non-routine Differentiation between intangible and intellectual property and market conditions that are not capable of being owned, controlled or transferred by a single enterprise. 21/08/14 12

13. Transfer Pricing Aspects of Intangibles Key aspects Goodwill and going concern should not be considered separately as intangibles (with certain exceptions but should be taken into account as part of a business’s assets Distinction between two classes of transactions involving intangibles: where intangibles are used by one or both parties in the controlled transaction for sales of goods with no transfer of intangibles where the rights to intangibles are transferred as part of the controlled transaction 21/08/14 13

14. Transfer Pricing Aspects of Intangibles Key aspects The discussion draft also confirms that permanent establishments do not necessarily organise their affairs in the same way as independent third parties 22 examples providing practical guidance on how to apply the principles discussed in the draft 21/08/14 14

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