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TRANSFER PRICING AS THE TOOL FOR AVOIDING EROSION OF THE TAX BASE

Promoting V oluntary T ax C ompliance as a C ommon P riority of Slovakia and the EU 17. 05. 2013, Hotel Bôrik. TRANSFER PRICING AS THE TOOL FOR AVOIDING EROSION OF THE TAX BASE. TOOLS FOR MONITORING THE TAXPAYERS' CONDUCT.

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TRANSFER PRICING AS THE TOOL FOR AVOIDING EROSION OF THE TAX BASE

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  1. Promoting VoluntaryTax Compliance as a CommonPriority of Slovakia and the EU 17. 05. 2013, Hotel Bôrik TRANSFER PRICING AS THE TOOL FOR AVOIDING EROSION OF THE TAX BASE

  2. TOOLS FOR MONITORING THE TAXPAYERS' CONDUCT

  3. Recent works of the OECD and the EU Joint Transfer Pricing Forum (JTPF) have established that the successful resolution of Transfer Pricing disputes rely on: • Developing a targeted knowledge strategy • Systematic use of appropriate techniques and methodologies • Identifying Best practices and adopting good governance process Introduction • EU JTPF – October 2012 - Transfer PricingRisk management : http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2012/jtpf_019_2012_en.pdf • EU JTPF – June 2012 – Discussion Paper on furtherWork in the Area of Transfer PricingRiskassessment: http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2012/jtpf_011_2012_en.pdf • OECD DraftHandbook on Transfer PricingRiskassessment (April 2013): http://www.oecd.org/tax/transfer-pricing/Draft-Handbook-TP-Risk-Assessment-ENG.pdf • OECD – DealingEffectivelywith the Challenges of Transfer Pricing: http://www.oecd.org/site/ctpfta/49428070.pdf

  4. Finite Resources for the Tax Administration to balance with complex issues and significant Tax Base erosion risks An effective and efficient management of transfer pricing cases meets the common interest of Taxpayers and Tax Administration: key for a successful outcome for the Tax Administration and legal certainty/possible neutralization of the tax assessment for the Taxpayers Why and How to make tools efficient?

  5. Riskassessment and risk management: • Riskfactors and quantification • Recurring transactions • Large & complex « one time » transactions • Riskindicators • Profitability • Transactions withrelated Parties in low-taxjurisdictions • Intra-group service transaction • Marketing or procurementcompaniesabroad • Excessive debt/interestexpenses • Transfer or use of intangibles to a related Party • CCA • Business restructurings • Sources of information: contemporaneous TP documentation, Questionnaires, Information returns, Public data and registers • Governancetools: Riskassessmentprocess and Riskassessment reports TOOLs for efficient transferpricing audits

  6. Conducting the audit: • Follow-up of pre-audit phase: Case selectionand selection of fieldswith high reassessmentprobability • Assessment of the quality of the transferpricingdocumentation • Function & risk matrix analysis • Value chain • Segment-analysis • Interviews TOOLs for efficient transferpricing audits

  7. Value Chain analysis - EXAMPLE • Source: UN - Eighth Session of the Committee of Experts on International Cooperation in Tax Matters • 15–19 October 2012, Geneva

  8. Function and Risk matrix - EXAMPLE • Source: UN - Eighth Session of the Committee of Experts on International Cooperation in Tax Matters • 15–19 October 2012, Geneva • http://www.un.org/esa/ffd/tax/eighthsession/Appendix-II_Documentation%20with%20ICC%20doc_20121007_v5_ML.pdf

  9. SEGMENT ANALYSIS: EXAMPLE

  10. SEGMENT ANALYSIS: EXAMPLE • Source: UN - Eighth Session of the Committee of Experts on International Cooperation in Tax Matters • 15–19 October 2012, Geneva

  11. SELECTION of FIELDS WITH HIGH REASSESSMENT PROBABILITY: ILLUSTRATION • Source: Deloitte Germany 2010

  12. Advance Price Agreements (APAs) Alternative administrative procedures, e.g.Safeharbors «Enhanced engagement approach»: the UK and Netherlandsexamples Tools for dispute avoidance or alternative dispute resolution

  13. UK example • Source: HMRC site - International Manual at INTM480540 et seq. http://www.hmrc.gov.uk/manuals/intmanual/intm480540.htm

  14. THE NETHERLANDS EXAMPLE • Source: HM Site – Horizontal monitoring within the Medium to Very Large Business Segment http://download.belastingdienst.nl/belastingdienst/docs/horizontal_monitoring_very_large_businesses_dv4061z1pleng.pdf

  15. TAX EVASION PREVENTIVE MEASURES

  16. Observation: overalleffect of BEPS structures is to associate more profit withlegalconstructs and intangible rights and to shift riskintra-group, reducingshare of profit associatedwith substantive operations • Improvements or clarifications to transferpricingrules to addressspecific areas wherecurrentrulesproduce « undesirableresultsfrom a policy perspective » • Currentproject on intangibles • Simplifiedappication of the TP guidelines • Documentation requirements • Measuresin relation to the shifting of risks and intangibles, the artificialsplitting of ownership of assetsbetweenlegalentities: Germany and Sweden examples See Business restructurings and Transfer Pricing in Sweden and Germany hj.diva-portal.org/smash/get/diva2:159038/FULLTEXT01 - Företagsomstruktureringar och internprissättning i Tyskland och Sverige Recentrecommendations

  17. German LEGISLATION on SHIFTING OF FUNCTIONS - EXAMPLE No General TP principlesapply Event characterizing a "Relocation of functions" (§1 of the Decree Law FVerIV) Yes TaxPayerprovethat no Essential Intangible asset & advantages are transferred or thatindividualprices complies with the overall value Yes General TP principlesapply No Evidence that "Overallresult of individualprices = value of the package as a whole"? Package deal assumed – Transfer Package valuationrequired Yes Relocation of Functions (sec. 1 par 3 sentences 9-10 FTA) Source: Germany's Transfer Pricing Provisions;: A conflictwithInternationallyAgreedPrinciples? Hartmut FörsterTax Management Jan. 28, 2010 Available Comparables for the transfer package as a whole? Base the Transfer Package valuation on comparables Yes Taxpayer has to determine the range of agreement based on the profit expectations of both parties If no adjustment clause has been agreedupon, the provision on assumingsuch clause apply. Assumptioncanberefuted by Tax payer Most reliableprice in the range as substantiated by Tax Payer, otherwisemean value

  18. EU approach: exchange of information, simultaneous audits The examples of BRICs and Australia CONSENSUS on EXCHANGE OF INFORMATON

  19. Australia

  20. JOINT COMMUNIQUE of THE HEADS OF REVENUE OF BRICS – NeW DEHLI Jan. 18, 2013

  21. How to adjust and adopt a consistent approach in terms of penalties How to manage double taxation issues « Side » Measures

  22. Thank you for your attention ! Name: Morgan Guillou Contact: morgan.guillou@ec.europa.eu

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