Transfer Pricing Trends in Emerging Economics Shikha Gupta September 24, 2005

1. Transfer Pricing Trends in Emerging Economics Shikha GuptaSeptember 24, 2005

2. Global TP Rules & Enforcement 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Taiwan Peru Peru Germany Germany Germany Hungary Hungary Hungary Denmark Denmark Denmark Columbia Columbia Columbia Columbia Venezuela Venezuela Venezuela Venezuela Portugal Portugal Portugal Portugal Russia Russia Russia Russia Japan Japan Japan Japan Japan Poland Poland Poland Poland Poland India India India India India Netherlands Netherlands Netherlands Netherlands Netherlands Italy Italy Italy Italy Italy Italy Belgium Belgium Belgium Belgium Belgium Belgium Belgium Argentina Argentina Argentina Argentina Argentina Argentina Argentina Canada Canada Canada Canada Canada Canada Canada UK UK UK UK UK UK UK China China China China China China China China Slovakia Slovakia Slovakia Slovakia Slovakia Slovakia Slovakia Slovakia Slovakia Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Korea Korea Korea Korea Korea Korea Korea Korea Korea Korea France France France France France France France France France France Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa South Africa USA USA USA USA USA USA USA USA USA USA USA USA

3. Economic Scenario Is Changing • Foreign investment now led by stronger market fundamentals: • Sustained reforms…Robust growth rates • Consumer boom…Huge market opportunities • Low cost base…Sourcing destination • Skilled labor…manufacturing excellence • Intellectual brain power…Outsourced services • Tax incentives to attract foreign investment relegated • Governments leveraging growing economy for resource mobilization Greater source based taxation is anticipated

4. Which Way Will Emerging Markets Go? Global Future • MoUs on substantive issues…effective competent authority relief • “Pragmatic” implementation of bi/multi-lateral APAs Regional Block • Harmonization of tax regimes including transfer pricing • Share information and experience on collective themes such as location savings, intangibles Nationalist • New legislation…steep learning curve • Strong local focus..Selective adoption of OECD/ international “practices” • Stringent enforcement through aggressive audits Now Learning Co-operation Convergence

5. Emerging Issues And Practices… • Growth in Business Process Outsourcing (“BPO”) activities • Assertion of PE theory…e.g. BPO enterprise could potentially constitute dependent agent or fixed base PE • Emerging OECD rules on attribution of profits will likely find favour • Emerging markets are manufacturing hubs • Assertion that profits arising from cost savings need to be taxed • Tax authorities likely to seek allocation of location savings…greater economic activity to enhance competitive power

6. Emerging Issues And Practices • Locally generated intangibles and growth in ‘knowledge’ economy • Compensation where value of intangibles enhanced by the local enterprise • Valuation of intangibles and tighten IP protection to guard legal ownership • Gradual phase out of special tax incentives • MNE’s could restructure supply chain to allocate risks to other tax preferred environments • Tax authorities likely to challenge business purpose in case local profits are reduced…conversion issues

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