Transfer Pricing – Industry Perspective Residential Refresher Course IFA-India (WRC) IFA-India (WRC) Presentation by : Presentation by : Kaushal Kapadia

Introduction "This incident, in which I almost lost my life, involved an encounter with a primitive ruthless creature who stalks the ocean depth...A Great White Shark."

Agenda Setting the context Setting the context Environment – external & internal Environment – external & internal Managing your risk Managing your risk Top audit triggers Top audit triggers Setting TP policies Setting TP policies TP documentation TP documentation Practical difficulties Practical difficulties Some common issues Some common issues

Example – Bitt & Co Large MNC with operations in 120 countries Large MNC with operations in 120 countries Listed in the US & Luxembourg Stock Exchange Listed in the US & Luxembourg Stock Exchange 6 main segments, 54 profit centers, 145,000 SKUs, 12 brands 6 main segments, 54 profit centers, 145,000 SKUs, 12 brands Functional management style Functional management style Group has centralised Treasury, Financing & Trading ops in NY Group has centralised Treasury, Financing & Trading ops in NY 1200 legal entities in the group 1200 legal entities in the group 40% of trade/services & all financing is inter-co 40% of trade/services & all financing is inter-co Profits $6bn, Sales $50bn, Assets $20bn Profits $6bn, Sales $50bn, Assets $20bn Bitt & Co has acquired 3 large MNEs in the last 10 years Bitt & Co has acquired 3 large MNEs in the last 10 years Systems have not yet been integrated with the last 2 acquisitions Systems have not yet been integrated with the last 2 acquisitions TAX department of 300+ people in 40 countries TAX department of 300+ people in 40 countries YOU – are the head of transfer pricing within TAX YOU – are the head of transfer pricing within TAX

Setting the context Brand IP R&D Captive insurance Intra-group financing Product flows Centralised recharges De-centralised recharges Need to price at “Arm’s Length” terms & maintain a defence file Risks Benefits Costs of defending Penalties Costs of arbitration &/or competent authority Double taxation Financial reporting mis-statement Reputation risk Maximise utilisation of group tax attributes Losses Foreign tax credits Low tax jurisdictions Cash tax savings Manage tax charge in financial reports Supply Chain Forward trading Asset optimisation Share options

TP’s a fine balancing act… Country A Income tax Fiscal requirements Country B Customs duty Business constraints RiskOpportunity

Environment - external WTO estimates 50% of global trade in Inter-co transactions WTO estimates 50% of global trade in Inter-co transactions 25% of M&A estimated to be cross-border 25% of M&A estimated to be cross-border New investment is going mainly to emerging economies of the world – they are looking for more revenues New investment is going mainly to emerging economies of the world – they are looking for more revenues Corporate sector continues to remain key tax target around the world Corporate sector continues to remain key tax target around the world Attention of the regulators Attention of the regulators More effort into TP laws & audits More effort into TP laws & audits Growing need for transparency in multi-nationals Growing need for transparency in multi-nationals SOX compliance on controls & financial reporting SOX compliance on controls & financial reporting

Environment - internal Business models/pricing change constantly Business models/pricing change constantly Cost pressure Cost pressure CFO & CEO are looking for more assurances – no “surprises” ! CFO & CEO are looking for more assurances – no “surprises” ! Mistakes are costly & distracting Mistakes are costly & distracting TP remains a key tax issue for most tax managers TP remains a key tax issue for most tax managers

Managing your risk Knowing what you don’t know.. Knowing what you don’t know.. Portfolio effect in a large business Portfolio effect in a large business Materiality is key Materiality is key Tax exposure - reporting process Tax exposure - reporting process How much to provide for tax exposures ? How much to provide for tax exposures ? Looking at risk - local v/s central perspective Looking at risk - local v/s central perspective Fallout of Country A audit on Country B Fallout of Country A audit on Country B Be aware that what you document is discoverable Be aware that what you document is discoverable

Top audit triggers Increase in the enforcement & audit targets Increase in the enforcement & audit targets Changes in transfer pricing Changes in transfer pricing Monetary volume of transactions Monetary volume of transactions Changes in taxable income of the company Changes in taxable income of the company Past history of issues Past history of issues New legislation in a country New legislation in a country Restructuring of business/operations Restructuring of business/operations Complexity of transactions Complexity of transactions

Setting TP policies Written policy statement Written policy statement Who is responsible for setting policy ? Who is responsible for setting policy ? Periodic review of policies Periodic review of policies Managing changes to TP policies Managing changes to TP policies When ? Why ? How ? Effect ? When ? Why ? How ? Effect ? Policy implementation ?? Policy implementation ?? Spreading & sharing the knowledge Spreading & sharing the knowledge

TP documentation Minimum documentation standards Minimum documentation standards Local v/s central approach Local v/s central approach Who’s responsible for what ? Who’s responsible for what ? Your “Defense file” Your “Defense file” How & where do you store it ? How & where do you store it ? “Fit for purpose’’ in the transaction context “Fit for purpose’’ in the transaction context Avoid duplication of efforts Avoid duplication of efforts In house or external effort ? In house or external effort ?

Practical difficulties TP is subjective – there is no right answer ! TP is subjective – there is no right answer ! Getting quality comparable data Getting quality comparable data Unique business models Unique business models Making “the right choices”… Making “the right choices”… Differences in laws/approach of tax authorities Differences in laws/approach of tax authorities Impact on MI & Performance Metrics Impact on MI & Performance Metrics Eg, Royalty or Product trading Eg, Royalty or Product trading JV operations JV operations Eg, Management services from HO Eg, Management services from HO Resources - managing multiple priorities Resources - managing multiple priorities Leakage of important pricing data to competition Leakage of important pricing data to competition Genuine losses Genuine losses

Common Issues - Intangibles Definition of what is the intangible ? Definition of what is the intangible ? Who owns it ? Who owns it ? How much is it worth ? How much is it worth ? Approaches to benchmarking value Approaches to benchmarking value Accretions to the cost/value of the intangible Accretions to the cost/value of the intangible Barriers to moving ownership to a tax favorable location – practical ? Barriers to moving ownership to a tax favorable location – practical ? Parent Sub IPCo

Common Issues – InterCo service Is it really a service ? Is it really a service ? Benefit analysis from a local lens Benefit analysis from a local lens Mark-up or cost Mark-up or cost Mark-up on what ? Mark-up on what ? Allocation Keys Allocation Keys Cost to provider or recipient ? Cost to provider or recipient ? Problems of using CCAs Problems of using CCAs Contemporaneous arrangement ? Contemporaneous arrangement ? IP & Shareholder costs IP & Shareholder costs Consistency in approach Consistency in approach Parent Sub1

Questions ?