The Transfer Pricing Changes Introduced by the BEPS Action Plan Dr. Raffaele Petruzzi, LL.M. Managing Director, WU Transfer Pricing Center Transfer Pricing Advisor

The BEPS timeline BEPS Action Plan February 2013 July 2013 October 2015

BEPS Action Plan July 2013 Realities in MNE are better understood 28.08.2018 BEPS Action Plan July 2013 Realities in MNE are better understood As the economy became more globally integrated, so did corporations… Multi-national enterprises (MNE) represent a large proportion of global GDP, intra-firm trade represents a growing proportion of this overall trade. Globalisation has resulted in a shift from country-specific operating models to global models based on matrix management organisations and integrated supply chains that centralise several functions at a regional or global level. The growing importance of the service component of the economy, and of digital products that often can be delivered over the Internet, has made it much easier for businesses to locate many productive activities in geographic locations that are distant from the physical location of their customers. These developments have been accompanied by an increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning, thus providing MNEs with more opportunities/confidence in taking aggressive tax positions….

BEPS and transfer pricing Coherence Hybrid Mismatch Arrangements (2) Harmful Tax Practices (5) Interest Deductions (4) CFC Rules (3) Substance Preventing Tax Treaty Abuse (6) Avoidance of PE Status (7) TP Aspects of Intangibles (8) TP/Risk and Capital (9) TP/High Risk Transactions (10) Transparency Methodologies and Data Analysis (11) Disclosure Rules (12) TP Documentation (13) Dispute Resolution (14) Digital Economy (1) Multilateral Instrument (15) Linked to TP

The 2017 OECD Transfer Pricing Guidelines Aligning transfer pricing outcomes with value creation Approved by OECD Council on 23 May 2016 This link to value creation is achieved by modifying the 3 core elements of the ALP: Entity-by-entity approach (vs group impacts) Contractual arrangements (vs actual conduct) Comparability (vs hypothetical behaviour)

The 2017 OECD Transfer Pricing Guidelines The arm’s length principle Transfer pricing methods Comparability analysis Administrative approaches Documentation Intangibles Intra-group services Cost Contribution Arrangements Transfer pricing of business restructurings Annexes: Guidelines for Advance Pricing Agreements (...) 2017 updates

The 2017 UN Transfer Pricing Manual A.1. Introduction A.2. Theory of the Firm and Development of Multinational Enterprises A.3. Legal Structure A.4. Managing the Transfer Pricing Function in a Multinational Enterprise B.1. Introduction to transfer pricing B.2. Comparability Analysis B.3. Methods B.4. Intra-Group Services B.5. Transfer Pricing Considerations on Intangible Property B.6. Cost Contribution Arrangements B.7. Transfer Pricing Aspects of Business Restructurings B.8 General Legal Environment C.1. Establishing and Updating Transfer Pricing Regimes C.2. Documentation C.3. Audits and Risk Assessment C.4. Dispute Avoidance and Resolution C.5. Establishing Transfer Pricing Capability in Developing Countries D.1. Brazil Country Practices D.2. China Country Practices D.3. India Country Practices D.4. Mexico Country Practices D.5. South Africa Country Practices 2017 updates

The changes introduced Identifying the commercial or financial relations Recognition of the accurately delineated transaction Location savings and other local market features Assembled workforce MNE group synergies Commodity transactions Intangibles Low value-adding intra-group services Cost Contribution Arrangements Raffaele Petruzzi

What’s next? Hard-to-value intangibles (HTVI) (Discussion draft) Attribution of profits to permanent establishments (Discussion draft) Transactional profit splits (Discussion draft) The toolkit for addressing difficulties in accessing comparables data for transfer pricing analyses (Final) Further guidance on country-by-country reporting Transfer pricing aspects of financial transactions (?) Raffaele Petruzzi

Key message 1 Apply properly the arm’s length principle! 4. Application of the most appropriate transfer pricing method 3. Selection of the most appropriate transfer pricing method 2. Recognition of the accurately delineated transaction 1. Identification of the commercial or financial relations

Key message 2 No risk, no fun! HQ R&D Centre Group operating companies License of IP Royalties Cost+ remuneration Contract R&D services Sale of products Management services Management services Management fees Management fees IP owner CEO, CFO, CTO VP Marketing VP Business Development VP Sales VP R&D VP Engineering Legal director Supply Chain Director IT and finance teams Patent lawyers Trademark ownership Patent ownership R&D funding R&D Director Scientists Engineers Application specialists Production plant Plant management Sales force Sales director Marketing director Logistics manager … Substance? Substance? Substance? Substance? Substance? Substance? Substance? Substance?

Key message 3 Document everything!

Conclusions Time to change!

Contact details Dr. Raffaele Petruzzi, LL.M. Department of Public Law and Tax Law Institute for Austrian and International Tax Law Welthandelsplatz 1, Building D3, 1020 Vienna, Austria T +43-1-313 36-5065 raffaele.petruzzi@wu.ac.at www.wu.ac.at/taxlaw, www.wu.ac.at/dibt