CHUYEN GIA TRANSFER PRICING avcxasd

CHAP TRANSFER PRICING LECTURER: Dang Thi Bach Van(MA) 5/9/18 Dang Thi Bach Van CONTENT Definition Arm’s length principle Transaction-based methods of determining arm’s length prices Transaction profits-based methods Other profits-based methods BEPS Transfer pricing documentation requirements 5/9/18 Dang Thi Bach Van INTRODUCTION • • MNEs/ MNCs use transfer prices for sales and other transfers of goods and services within their corporate group (see ex/p.56) Transfer prices are also used by individuals dealing with corporations or other entities under their control and by individuals dealing with close family members INTRODUCTION • • A transfer price is a price set by a taxpayer when selling to, buying from, or sharing resources with a related person  avoid the income taxes of a country through their manipulation of transfer prices introduction • Related persons are defined to include two or more persons that are owned or controlled, directly or indirectly, by the same interests •  They have the ability to set transfer prices that differ from market prices introduction • In a well-designed income tax system, the tax authorities should have the power to adjust the transfer prices: • Power to allocate gross income, deductions, credits, and other allowances among related persons so that the country collects its fair share of tax revenue from economic activities conducted within its borders • Prevent taxpayers from shifting income to related persons organized in tax havens or in countries where they enjoy some special tax benefit (low tax rate, tax holiday, tax incentive, tax-deductible loss…) •  arm’s length method has been adopted by most countries in the world The basic problem illustrated Multinat Plc has two trading subsidiaries One is tax resident in the country of Konganga where the effective rate of corporation tax is 10% This company extracts and exports greensand, the raw material used in the group’s production processes The open market price for greensand is $100 per tonne The other subsidiary is resident in the country of Ruritania, where the effective tax rate is 40% The Ruritanian subsidiary buy its raw materials in bulk from the Konganga subsidiary The quantity purchased each year is 80,000 tonnes Multinat Plc wishes to instruct the two subsidiaries to adopt a pricing policy that optimizes the after-tax profits for the group as a whole Questions to be considered are: • • Should the price charged by Konganga be lower or higher than the price it might charge to an unrelated customer? Which government might object to the pricing policy and why? See p.434-435 5/9/18 Dang Thi Bach Van Arm’s length principle • • 5/9/18 This principle states that the prices charged within multinational groups of companies or between companies and their permanent establishment must be comparable to those that would be charged between independent enterprises  to achieve a fair share of a multinational group’s tax base for all the tax jurisdictions in which it operates by preventing the artificial manipulation of profits for tax purposes earned in various countries through uncommercial pricing practices Dang Thi Bach Van Transaction-based methods of determining arm’s length prices • • • 5/9/18 Comparable uncontrolled price Resale price minus Cost-plus Dang Thi Bach Van 10 Comparable uncontrolled price - CUP • The rationale behind CUP is to compare the actual transfer prices with comparable prices applying between unrelated parties • The main problem with this method is the difficulty in finding an exact match in terms of product, firms, market, risk, geographic location and so forth  this is a controversial practice • 5/9/18 EX 12.2/p444 Dang Thi Bach Van 11 Resale price minus • • • 5/9/18 This method tends to be the most appropriate where a group company (Co.A) sells on to another group company (Co.B) which makes the sale to the final (unconnected) consumer with a minimum of processing or otherwise adding value to the goods The method works by taking the price charged by Co.B to the final consumer and deducting an appropriate gross margin – the resale price margin Ex p.445 Dang Thi Bach Van 12 Cost plus • This is popular because it can be applied to transactions where there are no comparable sales of the commodity concerned to independent third parties • This method takes cost of production plus an “arm’s length” profit • 5/9/18 Ex 12.4/p446 Dang Thi Bach Van 13 Transactional profits-based methods A transactional profit method looks at the profits that arise from particular controlled transactions Two methods are: • • Transactional net margin method Profit split method These methods differ from comparable uncontrolled price, resale price minus and cost plus in that they look at net profit on a transaction rather than the gross profit 5/9/18 Dang Thi Bach Van 14 Transactional net margin method • This method is not really transactional, as it involves a comparison of the earnings before interest and tax of a company suspected of having depressed profits due to manipulative transfer pricing practices with that of unrelated companies in the same country • 5/9/18 Ex 12.5/p448 Dang Thi Bach Van 15 Profit split method Aim to split the total profit earned on a transaction by all the group companies involved in it using an “ equitable” formula (eg by reference to capital employed) Two steps in applying this method: • • 5/9/18 Identifying the profit to be split for the associated enterprises from the controlled (comparable) transactions in which the associated enterprises are engaged Splitting those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm’s length Dang Thi Bach Van 16 Profit split method • • • 5/9/18 The principle difficulty is the lack of information about the likely split of profits publicly available Used in industries where there is a high degree of vertical integration: group companies supply everything from raw materials, through processing, right up to the finished product, ex telecommunication, pharmaceuticals and automobile industries Ex 12.6/p450 Dang Thi Bach Van 17 Other profits-based methods • • • 5/9/18 Where none of the methods considered so far produce an acceptable result, other profit-based methods can be used These might include the “ rate of return” method or the use of the Berry ratio, sometimes used in cases where there is a manufacturing company with complicated costs (eg high research and development, and a company which simply acts as a selling and marketing company) See p.454-457 Dang Thi Bach Van 18 BEPS ACTIONS The Action Plan required the guidance on its application to be clarified and strengthened, and accepted that it was possible that special measures may be required either within or beyond the arm’s length principle The three key areas dealt with are: • • • 5/9/18 Intangibles – Action Risk and capital – Action Other high risk transactions – Action 10 Dang Thi Bach Van 19 Transfer pricing documentation requirements Documentation requirements vary considerably and that attempts to achieve uniformity have not been very successful The two-tier structure is recommended comprising a master file and a local file • • 5/9/18 Master file: to provide a complete picture of the global business, financial reporting, debt structure and tax position of the MNE; Local file: to provide assurance as to compliance with the arm’s length principle for material transfer pricing position Dang Thi Bach Van 20 5/9/18 Dang Thi Bach Van 21 5/9/18 Dang Thi Bach Van 22 5/9/18 Dang Thi Bach Van 23 5/9/18 Dang Thi Bach Van 24 ... profits-based methods BEPS Transfer pricing documentation requirements 5/9/18 Dang Thi Bach Van INTRODUCTION • • MNEs/ MNCs use transfer prices for sales and other transfers of goods and services... ex/p.56) Transfer prices are also used by individuals dealing with corporations or other entities under their control and by individuals dealing with close family members INTRODUCTION • • A transfer. .. the ability to set transfer prices that differ from market prices introduction • In a well-designed income tax system, the tax authorities should have the power to adjust the transfer prices: •