The Chamber of Tax Advisers of Russia International Tax Congress Moscow 3 February 2012

1. The Chamber of Tax Advisers of Russia International Tax Congress Moscow 3 February 2012 David Russell QC

2. Transfer Pricing in Asia and Oceania: Practice, Problems and Court Decisions

3. Role of Presentation • General outline of topic • Full paper available on Chamber website or russell@wentworthchambers.com.au

4. The Transfer Pricing background • Not necessarily a tax avoidance issue • Differs from usual tax disputes because taxpayer is often the meat in the sandwich • Complex evidentiary issues • Economic rather than legal analysis • Difficulty getting consistent result across all jurisdictions

5. GlaxosmithKline • UK and USA, so not tax avoidance • Difference in functional analysis approach in both jurisdictions • USA – value distribution network • $US 4 billion

6. Issues • Interrelationship between domestic law and international double taxation agreements; • The transfer pricing methodology to be adopted; • Utility of judicial challenge to transfer pricing adjustments; and • Transfer pricing documentation and administration of the law.

7. Sources of law • Domestic legislation • Double Taxation Agreements • OECD Model Convention Articles 7 and 9 • Are these consistent? • If not, which prevails?

8. Transfer Pricing Methodology • Transactions or relationships? • Functional Analysis • What goods or services are being provided? • GlaxosmithKline in the USA

9. Methodology (continued) • Comparable Uncontolled Price • Profit Split (e.g. SNF in Australia) • Transaction Net Margin Method • OECD Guidelines (paper p.20)

10. OECD • There are, however, cases where the traditional transaction methods cannot be reliably applied alone or exceptionally cannot be applied at all. These would be considered cases of last resort. Such cases arise only where there is insufficient data on uncontrolled transactions (possibly because of uncooperative behaviour on the part of the taxpayer relative to these Guidelines), or where such data are considered unreliable, or due to the nature of the business situation.

11. OECD (Cont.) • The recognition that the use of transactional profit methods may be necessary is not intended to suggest that independent enterprises would use these methods to set prices. Instead, transactional profit methods are being recognised as methods to assist in determining in cases of last resort whether transfer pricing complies with the arm's length principle.

12. OECD (Cont.) • . In such cases of last resort, practical considerations may suggest application of a transactional profit method either in conjunction with the traditional transaction methods or on its own. However, even in the case of last resort, it would be inappropriate to automatically apply a transactional profit method without first considering the reliability of that method.... as a general matter the use of transactional profit methods is discouraged. • As discussed in this Report, there are substantial concerns regarding the use of the transactional net margin method, in particular that it may be applied without adequately taking into account the relevant differences between the associated enterprises and the independent enterprises been compared • .

13. OECD (Cont.) • 3.52 Very few countries have much experience in the application of the transactional net margin method and most consider it experimental and therefore prefer to use the profit split method in cases of last resort.

14. OECD (Cont.) • 3.56 In all cases, considerable caution must be used to determine whether a transactional profit method as applied to a particular aspect of a case can produce an arm's length answer, either in conjunction with a traditional transaction method or on its own … (Italics supplied)

15. Court Challenges • CUP • What is truly comparable? • Secret Comparables • Evidence – how to obtain

16. Documentation • Multiple jurisdictions • Common documentary requirements e.g. PATF • Requirement for regular updates

17. Solutions • OECD Article 24 • Proposed compulsory arbitration • APAs • Bilateral APAs

18. Conclusion • Many governments use Transfer Pricing not to protect integrity of tax system but as a revenue grab • Costs associated with administration of transfer pricing rules are a major impediment to international trade • There needs to be substantial reform in this area of the law.

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