Nexia International Tax Conference New York – May 2010 Transfer Pricing Update Rajesh Sharma, Smith & Williamson Limited, London Ton Kroll, Horlings, Amsterdam

Recent Developments Approach for SMEs Introduction to the case studies

Recent Developments OECD Discussion Draft (extracts only) –Methologies –10 step guide to Good Practice Recent Case Law Transfer Pricing Audits

OECD Discussion Draft Released September 2009 [ ] pages comprehensive document Original and updated preference for the traditional methods (and the profit split and ) Recognition of the transactional methods

10 Step Guide to Good Practice 1.Analysis of taxpayers circumstances 2.Period covered 3.Controlled transactions – functional and risk analysis + 4.Review of internal comparables 5.Determination of external comparables 6.Method selection and profit level indicators 7.Potential comparables 8.Comparability adjustments 9.Interpretation of comparative data and determination of arms length price. 10.Support process and adjustments for material changes.

Transfer Pricing Audits Risk assessment of the taxpayer Future of the controlled transactions Relationship between the parties Sums involved Quality of supporting data

Nexia International Tax Conference New York – May 2010 Transfer Pricing Update Rajesh Sharma, Smith & Williamson Limited, London Ton Krol, Horlings, Amsterdam

Recent Developments Approach for SMEs Introduction to the case studies

Recent Developments OECD Discussion Draft (extracts only) –Methologies –10 step guide to Good Practice Recent Case Law Transfer Pricing Audits

OECD Discussion Draft Released September 2009 Proposed revision of Chapters I - III of the Transfer Pricing Guidelines Original and updated preference for the traditional methods (and the profit split and TNMM) Recognition of the transactional methods

10 Step Guide to Good Practice 1.Analysis of taxpayers circumstances 2.Period covered 3.Controlled transactions – functional and risk analysis 4.Review of internal comparables 5.Determination of external comparables 6.Method selection and profit level indicators 7.Potential comparables 8.Comparability adjustments 9.Interpretation of comparative data and determination of arms length price. 10.Support process and adjustments for material changes.

Transfer Pricing Audits Risk assessment of the taxpayer Nature of the controlled transactions Relationship between the parties Sums involved Quality of supporting data

Approach for SMEs Documentation: Why? Benefits? –Reduce of risk of TP audits, adjustments and penalties –Opportunity to get business organised –Proper pricing of inter-company transactions

Approach for SMEs Consequences of inadequate documentation? –Burden of proof –Penalties –Adjustments –Interest on additional tax –Higher audit risk –Risk of double taxation

Approach for SMEs What is TP (for SMEs)? –Like dividing a pizza Making sure every country gets the right sized slice of the pizza –Risk based approach Audit risk vs money involved –Using economic data readily available for free Start with the companies financial data

Approach for SMEs Documentation Model ICC’s recommendation – –Under Policy Statements, Rules & Codes Master file with country specific files Risk-function analysis Financial analysis: total, per entity/bus.unit/country/region –How has the pizza been divided and is it fair? Benchmark with public data available It’s all about shift the burden of proof to the tax authorities

Expatriate Tax Case Study Dale Mason, The Wolf Group

Time Schedule 11:15 – 11:35 Overview of case study 11:35 – 12:15Breakout groups 12:15 – 12:40Panel discussion

Overview of Case Study U.S. Inc (NY based consulting firm) 5,000 worldwide employees 50 expatriates LT Assignees - 30 German / 20 US citizens ST Assignees – 25 Assignees Assignments to Your Country

Long-Term Assignees (3-5 years) Kept on home country payroll Home county income tax and social security withheld No certificates of coverage obtained Host country sub pays housing & 20% of salary Host county withholds tax only on housing & 20% of salary. Does not declare home country salary Home country does not report foreign allowances to home country tax authorities Home country salary and allowances are recharged to host country subsidiary

Short-Term Assignees Kept on home country payroll No assignment allowances Assignments last from 2 – 12 months All salary and costs are recharged to the host country subsidiary No host country tax paid

Issues Address tax, penalty and HR issues: –Individual income tax –Economic employer and legal employer issues –Social security tax and payroll issues –Assignment policy and expatriate tax policy

Individual Income Tax U.S. citizens taxed on a worldwide basis Income must be reported by U.S. employer on a worldwide basis –Host country housing reportable –Host country 20% salary reportable

Penalties Assuming employee does not report host country allowances –IRS may assess tax against employer or employee –.5% per month of underpaid tax –Annual interest assessment currently 4% –Foreign Bank Account Report: Greater of 50% of highest account balance $100,000

U.S. Social Security U.S. employees that are employed by an American employer are subject to U.S. social security tax. Totalization Agreements –Social Security Agreements –Typically, employees employed by home country and on assignment to a host country for less than a 5 year period may remain on home country social security. –Certificate of coverage often required to establish exemption from host country social tax.

Assignments Groups 1 & 2 - Issue 1 Groups 3 & 4 - Issue 2 Groups 5 & 6 - Issue 3 Groups 7 & 8 - Issue 4

Nexia International 2010 Annual Tax Conference

International Tax Conference New York – May 2010 Indirect Tax

VAT in Europe Financial crisis in Europe has resulted in many EU member states increasing their standard rate of VAT Average standard rate in EU over 20% Range from 15% to 25% 1% in the UK generates tax income of over £4 billion VAT is an important tax in the EU!

VAT in the USA? “If you are facing a 1.6 trillion state deficit and suspect you need to introduce VAT to pay for it, but don’t want to spook the voters, what do you do? In the US you establish a review committee cunningly called the “National Commission of Fiscal Responsibility and Reform”. Is VAT on its way to the USA?

The world

Europe

The 27 EU member states Finland Ireland UK Sweden Estonia Latvia Lithuania Poland Slovakia Hungary Slovenia Austria Italy Malta Greece Netherlands Czech Cyprus Spain Portugal France Luxemburg Belgium Germany Denmark Monaco Andorra

Canada, North and South America

The 53 States Canada United States of America

EU Inbound business For many businesses inbound to the EU, VAT can be a tax which is easy to forget. You should be asking your clients, are you selling goods and/or services into the EU? If the answer is yes, your client should be thinking about VAT. It is not necessarily relevant that your client may not be physically present in the EU. E commerce.

Introduction to VAT aspects of e commerce At the end of the last century the concept of e commerce was still relatively new Existing tax legislation was over 50 years old and not able to deal with the concepts Did we need a new indirect tax to deal with e commerce? World governments were meeting to reach a consensus on how to tax e commerce How would private users of e commerce be taxed? Agreed need for neutrality, efficiency, certainty, effectiveness and flexibility in the approach to governing e commerce BUT non EU providers to EU consumers had an advantage – no requirement to charge VAT. Need to create a level playing field.

What do we mean by e commerce for VAT purposes? A service delivered by electronic means (eg over the internet), and The nature of the service is reliant on IT for delivery eg. the services is automated with minimal human involvement. The use of the internet to make an order which is delivered in the traditional way, or simply to communicate is not e commerce. E commerce is reliant on the internet to complete the transaction eg search and retrieve information from a database.

Examples of electronically supplied services Website supply and web hosting Distance maintenance of software Supplies of software and updates Making database available Supply of images, music, films, gambling, broadcast events (eg. sporting, artistic etc) Distance teaching

Examples of exclusions from electronically supplies services Goods supplied where only the order is taken over the internet Supplies of tangible media eg CD’s, DVD’s etc Services of professionals that use to correspond Teaching services where the content is delivered over the internet by a teacher Telephone services provided through the internet NOTE there are specific VAT rules for services of telecommunications, and radio and television broadcasting services

What do EU inbound e commerce businesses have to think about? 1.Confirm the nature of the supplies being made. Are they considered to be e commerce? 2.Confirm the status of the client B2B or B2C. 3.B2B should not (generally) be a problem 4.B2C will require your client to register for VAT in the EU. 5.Where to register – special scheme rules. 6.Should your client create an establishment in the EU? If so, where? Are there any advantages?

Why should your client worry about registering? Who will find out? Growth in exchange of information. Commercial reputation. How does your client know if supplies are B2B or B2C? How do I know where the services are “used and enjoyed”? How do I know where the customer belongs? Penalties

Reverse charge pitfall EU businesses must account for VAT on the value of services received from non local suppliers. Businesses failing to do this could face a significant VAT charge and penalties. Example – An American financial services business sets up a subsidiary in London. During the set up the parent company provides the subsidiary with legal, marketing and accounting services. The London subsidiary is a financial broker and exempt from VAT registration in relation to its UK activities, BUT it must still register and account for VAT on the value of the services it receives from its parent. This VAT is irrecoverable and therefore a cost to the business. Failure to recognise the need to register and account for VAT can lead to penalties.

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