™ Transfer Pricing Audit Management Transfer Pricing Associates Steef Huibregtse and Richard Slimmen 13 April 2012 FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™

™ Introduction FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™

FINANCE & STRATEGY PRACTICE ™ DESIGN & IMPLEMENT DOCUMENTATION CONTROVERSY/ DISPUTES How to design your transfer pricing system The Transfer Pricing Process is all about treating transfer pricing and the business risks around it as a business process. The steps in this process are illustrated in the following diagram: OUTPUT: INPUT: A MANAGEABLE AND COMPANY’S DEFENSIBLE TRANSFER B BUSINESS MODEL PRICING SYSTEM CAPTURE THE DYNAMICS IN INDUSTRY AND BUSINESS MODEL Addressing the following key issues: 1. How to identify the relevant business context 2. How to design an appropriate transfer pricing system and arrange for proper implementation 3. How to document the transfer pricing system 4. How to manage (pre-) controversy of the transfer pricing system

Addressing the following key issues: 1. What are the options available? 2. What is your ‘risk appetite’? 3. What is your best controversy strategy? 4. How to best negotiate with tax authorities? BY PROPER PREPARATION AND GUIDANCE Audit Pre-audit/ provisioning MAP APA Litigation Through conflict avoidance Through process management Through Conflict resolution How to deal with transfer pricing controversy

FINANCE & STRATEGY PRACTICE ™ U.S. transfer pricing controversy issues FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™

FINANCE & STRATEGY PRACTICE ™ Form 5701 (a) Respond to 5701 (b) Hot Interest (c) Fast Track Settlement (d) Early Referral to Appeal IRS appeals (a) Review of Transfer Pricing Cases (b) Simultaneous Appeals and Competent Authority (c) Post Appeals Mediation (d) Arbitration Competent authority (a) Introduction - Potential Double Tax Cases - Fiscal Residence Cases (b) Inventory of Double Tax Cases- Adding Insult to Injury (c) Persuasive Information (d) Effect of Agreements or Judicial Determinations (e) Determination of Creditable Foreign Taxes (f) Arbitration U.S. Issues – Part 1

FINANCE & STRATEGY PRACTICE ™ U.S. Advance Pricing Agreement program (a) Jurisdictional Matters - Section 482 and Treaty Cases - PE Allocations and Other Collateral Issues (b) Nature of APAs (c) Benefits of Advance Pricing Agreements Litigation (a) Taxpayer Cannot Resolve Case Through Administrative Channels (b) Prior to Paying the Tax (c) Untimely Filing of Petition or Avoiding the Tax Court Simultaneous examination program (a) Renewed Interest in SEP (b) TIEAs Pre-filing agreements (a) PE and US Trade or Business (b) Related Pricing Through APA Compliance assurance process (a) Scope (b) Participation (c) Transfer Pricing Elements U.S. Issues Part 2

FINANCE & STRATEGY PRACTICE ™ 1. What risk mitigation instruments fix your defense strategy? 2.What percentage of your risk management is TP controversy based? 3.Who is responsible in your company to run these risk processes? 4.How to deal with more than 2 countries on TP matters at the same time and comply with rules of full transparency towards all stakeholders? Key Issues

FINANCE & STRATEGY PRACTICE ™ EU transfer pricing controversy issues FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™

FINANCE & STRATEGY PRACTICE ™ Controversy landscape Topics covered: intangibles, valuation, PE risks, sales commission, duplication, business restructuring, marketing spend, head quarter charges, intercompany loans and guarantee fees; Hotspots of aggression: Germany, Denmark, France, Italy, Canada, USA, Australia, Korea, China, India, Indonesia and Brazil. Countries where we have seen activity: 15 countries in Europe, Australia, Indonesia, China, Vietnam, USA, Canada.

FINANCE & STRATEGY PRACTICE ™ Germany/Switzerland: audit on royalty and marketing intangibles Royalty charge Switzerland Germany German marketing intangibles Royalty payment non-deductable Rejection 50% of German marketing spend

FINANCE & STRATEGY PRACTICE ™ Court case on business restructuring moving intangibles Before business restructuring After business restructuring with selling of assets to Swiss entity List of IP Technology Patents Know-how Acceptable valuation method, The use of the expert witness Seller’s vs. buyer’s perspective

FINANCE & STRATEGY PRACTICE ™ Italy/US: audit on royalties and service fees IP related services US Parent European headquarter Italian distributor IP IP = know-how Duplication issues Provision of services versus provision of know how

FINANCE & STRATEGY PRACTICE ™ US/Denmark: APA in Denmark on commissionaires + buy-sell model Production of patented drags Production of generic drags Danish distribution company Customer Critical conditions Allocation issues Combined APA vs. separate APAs

FINANCE & STRATEGY PRACTICE ™ UK/Germany: audit on German branch of UK Head office Services versus sales Key accounts vs. local customers Cyclical nature of industry Japanese HQ UK regional HQ Distributor German Branch Sales support German Customers Sales ???? Sales or Sales support?

FINANCE & STRATEGY PRACTICE ™ Switzerland/Row: Multi-country APA approach together with the Swiss tax authorities Teaming model with Swiss tax authorities Unilateral vs. bilateral (MAP) Swiss parent company Local countries Intercompany transactions

FINANCE & STRATEGY PRACTICE ™ Netherlands/Row: joint audits platform to settle European cases on I/C transactions involving the Netherlands OECD report Field officer vs. ministry of finance Joint audit vs. EU Arbitration Convention

FINANCE & STRATEGY PRACTICE ™ India/Japan: marketing intangibles Suzuki, a Japanese company, owned over 50% of Maruti Suzuki India (“Maruti”), an Indian company. India’s tax authority stated that Maruti should be compensated by Suzuki for developing a “marketing intangible” (beyond a routine distributor’s role & responsibility). High Court of Delhi found in favor of the defendant Maruti and the name was within the discretion of Maruti and not granted to Suzuki or contained in any legal agreement.

FINANCE & STRATEGY PRACTICE ™ TPA’s recommended approach to transfer pricing FINANCE AND STRATEGY PRACTICE Tax Director Roundtable™

FINANCE & STRATEGY PRACTICE ™ 5 step approach to manage your tax risk and controversy Adopt a global approach to tax risk and controversy management; Evaluate global resources, processes and systems for tax risk management; Address tax risk and controversy at a strategic level; Make strong corporate governance in tax a priority; Stay connected with global legislative, regulatory and tax administration change.

FINANCE & STRATEGY PRACTICE ™ Issues to tackle today Tax authorities around the world become more aggressive and focused: see our hot spots! High pace of legislative change creates more risk and uncertainty: each week a new set of TP legislation and/or updates are published; Growing disclosure and transparency requirements: being exposed! Expansion in emerging markets is creating tax risk and uncertainty: how will the BRIC act? A new breed of tax activism emerges: the fatal impact of media on corporate image! Enhanced relationships opportunities are spreading: how do you communicate and interact with your tax inspector?

FINANCE & STRATEGY PRACTICE ™ TPA’s recommended approach Define areas of 'dispute' in transfer pricing, customs and/or valuation matters; Agree with client on 'case management' plan to resolve the 'dispute'; Determine a 'critical time path' to get to a resolution; Choose the 'best available controversy toolbox' and 'controversy team' to handle the case; and Leverage from own resources and 'extended global controversy network' offered by a firm like TPA.

FINANCE & STRATEGY PRACTICE ™ Options to consider High level TP risk scan TP Risk Management Strategy TP Audit defense Joint audit Advance Pricing Agreement Mutual Agreement Procedure Arbitration Mediation 2nd Opinion

FINANCE & STRATEGY PRACTICE ™ 24 © 2012 The Corporate Executive Board Company. All Rights Reserved. CATnumber/version About Transfer Pricing Associates Transfer Pricing Associates is the leading independent provider of global transfer pricing and valuation services and part of the Transfer Pricing Associates Global group. The Transfer Pricing Associates Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs services, headquartered in Amsterdam and with our own offices and coverage in over 50 countries around the world. Transfer Pricing Associates provides high quality transfer pricing advice and assistance to multinationals of all sizes, wherever they are located. For more details of our innovative services, please visit our website at About Transfer Pricing Associates

CORPORATE EXECUTIVE BOARD ™ For further information please contact: Cody Villella