TRANSFER PRICING CASE STUDIES WORKSHOP SAN JOSE 31 MARCH - 4 APRIL 2 014

1. TRANSFER PRICING CASE STUDIES WORKSHOP SAN JOSE 31 MARCH - 4 APRIL 2014 3-a. Transfer Pricing - Introduction OECD freely authorises the use of this material for non-commercial purposes. All requests for commercial uses of this material or for translation rights should be submitted to rights@oecd.org. The opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the official views of the OECD or of the governments of its member countries.

2. What is Transfer Pricing? ManufacturerParent Co. Wholesale distributor for Central American Region Goods Distributorfor each country End-Customers • Is there a transfer pricing issue? • What are the risks to businesses • and governments?

3. What is Transfer Pricing?

4. Relevance of the Subject • Approximately 60-70% of world trade is carried on within Multinational Groups of Enterprises (MNEs) • Cross-border dimension of transactions... • ...due to globalisation and economies of scale • Transfer prices ... are prices at which an enterprise transfers goods, services or intangible property to associated enterprises • What is an “associated enterprise”?

5. Definition of “Associated Enterprises” • Definition in Article 9 OECD Model Tax Convention: “Direct or indirect participation in the • management, • control or • capital of an enterprise” • No minimum level of participation • Enterprises are associated where: • one enterprises participates in the management control or capital the other, or • the same person(s) participate in the management, control or capital of both

6. Participation in management, control or capital • Potentially quite wide • Domestic rules may refine or expand what transactions or arrangements are subject to the transfer pricing rules • Shareholding (de jure control): sometimes > 50% • De facto control, e.g. • same directors in both enterprises • sole customer or supplier • Association need not be proven

7. Participation in management, capital or control Company A 51% Are A and C associated enterprises? Company B Other share-holders 26% Company C

8. Control Company A 51% 51% Company C Company B 26% Transaction Company D Are B and D associated enterprises?

9. Relevance of the Subject • Reliance on the Arm‘s Length Principle (ALP)... • ...contained in Article 9 (1) OECD Model Tax Convention • ALP entails the Separate Entity Approach, i.e. associated enterprises are taxed as if they were dealing wholly independently (i.e. at arm‘s length) • “Where...conditions...in [the] commercial or financial relations [between the associated enterprises] which differ from those which would be made between independent enterprises” • “...profits which would...have accrued...may be included in the profits of the enterprise and taxed accordingly”

10. OECD MTC and OECD TPG Arm’s Length Principle* embodied in Article 9 (1) OECD MTC OECD MTC basis for 3,600 legally binding bilateralIncome & Capital Tax Treaties OECD TPG interpretative tool for Article 9 of the MTC * Also applicable to the UN Model Double Taxation Convention. ALP may also be mentioned in legislation (enacted in domestic law), regulations, rulings, case law or guidelines.

11. OECD Transfer Pricing Guidelines • Consensus definition of the arm’s length principle • Pricing methods and guidance used by countries around the world

12. OECD Transfer Pricing Guidelines • Chapter I: Guidance for applying the ALP • Chapter II: Transfer Pricing Methods • Chapter III: Comparability Analysis • Chapter IV: Administrative approaches to avoiding &resolving TP disputes (MAP, APAs, etc.) • Chapter V: Documentation • Chapter VI: Intangibles • Chapter VII: Intra-Group Services • Chapter VIII: Cost Contribution Arrangements • Chapter IX: Business Restructurings

13. Transfer pricing and profit shifting Intra-Group Transaction Manufacturer Country A Costs = 100 Distribution Subsidiary Country B Resale Price = 300 Arm’s Length Transfer Price 150? 200? 250? 300? 350? Profit A 50 100 150 200 250 Gross Profit B 150 100 50 0 - 50 Group Profit 200 200 200 200 200 13

14. Transfer Pricing and profit shifting Intra-Group Transaction Manufacturer Country A Costs = 100 Distribution Subsidiary Country B Resale Price = 300 Transfer Price 250 Profit B = 50 Tax 30% = 15 Profit A = 150 Tax 10% = 15 Total = 200 Total = 30 14

15. Transfer Pricing and profit shifting Intra-Group Transaction Manufacturer Country A Costs = 100 Distribution Subsidiary Country B Resale Price = 300 Transfer Price 300 Profit A = 200 Tax 10% = 20 Profit B = 0 Tax 30% = 0 Total = 200 Total = 20 15

16. Transfer Pricing Adjustment andEconomic Double Taxation Intra-Group Transaction Manufacturer Country A Costs = 100 Distribution Subsidiary Country B Resale Price = 300 Transfer Price 300 Transfer Pricing Adjustment by B (50) 250 Profit A = 200 Tax 10% = 20 Profit A reported = 200 Tax 10% = 20 Profit B = 0 Tax 30% = 0 Profit B adj. =+50 Tax 30% = 15 Total = 200 Total = 20 Total = 250 Total = 35 16

17. Transfer Pricing Adjustment andEconomic Double Taxation Manufacturer Country A Costs = 100 Distribution Subsidiary Country B Resale Price = 300 Intra-Group Transaction Transfer Price 300 Transfer Pricing Adjustment by B (50) 250 Profit B = 0 Tax 30% = 0 Profit B adj. =+50 Tax 30% = 15 Profit A = 200 Tax 10% = 20 Profit A reported = 200 Tax 10% = 20 Total = 200 Total = 20 Total = 250 Total = 35 Profit doubly taxed = 50 17

18. Elimination of Double Taxationby Corresponding Adjustment Intra-Group Transaction Transfer Price 300 Manufacturer Country A Costs = 100 Distribution Subsidiary Country B Resale Price = 300 Corresponding adjustment by A (-50) Profit A reported = 200 Tax 10% = 20 Profit A reported = 200 Corr. adjustment - 50 Profit A adjusted = 150 Tax 10% = 15 Profit B adj. = +50 Tax 30% = 15 Profit B adj. = 50 Tax 30% = 15 Total = 250 Total = 35 Total = 200 Total = 30 18

19. Questions and/or comments?