1. 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main methods. Cost contribution Agreements. Cost contribution Agreements. Advanced pricing agreements Advanced pricing agreements etc etc

2. 2 Transfer Pricing OECD Model Convention OECD Model Convention No specific article No specific article No specific prohibitions in domestic law No specific prohibitions in domestic law Article 9 Model Convention Article 9 Model Convention Associated Enterprises Associated Enterprises Article 24 Model Convention Article 24 Model Convention Non Discrimination Non Discrimination

3. 3 Transfer Pricing min e Source country Operating Co. Source Country Parent Co. Australian Holding Co. AUSTRALIAN PUBLIC COMPANY dividends Australian Shareholder s dividends Foreign Shareholder s

4. 4 Transfer Pricing Risk to source country Risk to source country Manipulation of revenue / sale price Manipulation of revenue / sale price manipulation of expenses manipulation of expenses essential imput costs essential imput costs management services management services use of tangible property; leasing use of tangible property; leasing use of intangible property; IP use of intangible property; IP Cost contribution agreements Cost contribution agreements Research & development Research & development but NO royalty income but NO royalty income

5. 5 Transfer Pricing Labour Technical Technical Assistance Finance Essential inputs Assistance Finance Essential inputs exploration Capital exploration Capital activities Research and equipment activities Research and equipment development development mine Source country Operating Co. Source country Parent Co. PROFIT TRAP TAX HAVEN: Hong Kong. Australian group

6. 6 Transfer Pricing Conventional Result Transfer Pricing, Thin capitalisation, Leasing, capital allowances. Difference Revenue10075(25) Expenses(50)(75)25 Net Profit Before Tax 50NIL(50) Tax at 50%(25)NIL(25) Net Cash255025

7. 7 Transfer Pricing The problem parent controls source county subsidiary. Not acting at arms length, manipluation of prices WILL occur The problem parent controls source county subsidiary. Not acting at arms length, manipluation of prices WILL occur Traditional methods Traditional methods comparable uncontrolled price (cup) comparable uncontrolled price (cup) resale price methods resale price methods cost plus cost plus Profit split Profit split Comparable profits Comparable profits Profit split method Profit split method

8. 8 Transfer Pricing Which method Which method Choice based on degree of comparability. Completeness and accuracy of data. Reliability of assumptions Sensitivity of results to data deficiencies

9. 9 Transfer Pricing Target industries Target industries Petrochemicals Pharmaceuticals Motor trade Financial services Computers, consumer electronics Branded consumer goods Media

10. 10 Transfer Pricing (1) Inflated expenses direct Parent co transaction Sale $100 Revenue Sale $90 Expense Third Party Source Source Sub Parent Resident Source Market Sale $50 Source sub Third PartyParentDifferenceSolution Revenue100 - Expenses(50)(90)(40)(50) NPBT5010(40)50 Tax 50%(25)(5)(20)(25)

11. 11 Transfer Pricing (2) Inflated expenses indirect third party sells first to parent co Sale $90 expenses Third Party Source Source Sub Parent Resident Source Market Sale $50 Sale $100 revenue Sale $50 Source subThird PartyParentDifferenceSolution Revenue100 - Expenses(50)(90)(40)(50) NPBT5010(40)50 Tax 50%(25)(5)(20)(25)

12. 12 Transfer Pricing : (3) reduced revenue Sale $60 $100 Market Parent Resident Source Sub Costs Third Party Source Sale $100 $50 Source subThird PartyParentDifferenceSolution Revenue10060-100 Expenses(50) (40)(50) NPBT5010(40)50 Tax 50%(25)(5)(20)(25)

13. 13 Transfer Pricing Sale $75 Sale $75 Comparable Uncontrolled price: cup Unrelated Party Sub Co. Parent Co. Unrelated Party Sale $100 Sale $75

14. 14 Transfer Pricing The problem of comparability The problem of comparability Suitability. Degree of comparability. Lack of comparable prices. Problem areas: quantity quality level of the market Intangibles Foreign exchange Business strategies Burden of proof

15. 15 Transfer Pricing Resale price method: (resale minus) Resale price method: (resale minus) Distributors: work back from sale price Price earned by the controlled entity from third party sales LESS, Arms length GROSS margin for a comparable uncontrolled transaction EQUALS, Arms length price for transaction with related party. Emphasis is on functional comparability NOT product comparability.

16. 16 Transfer Pricing Cost plus method Cost plus method Similar to RSPM but works back from the other end ie the sale price is suspect not the imput Start with cost of the product or service ADD, Arms length gross profit mark up EQUALS, Arms length sale price to related party. Focus on functional comparability.

17. 17 Transfer Pricing Comparable profits Comparable profits Based on comparable ratios ROI ROE GP Berry ratio. Suitability. Advantages cf to transactional methods. Disadvantages.

18. 18 Transfer Pricing The problem of comparability The problem of comparability Characteristics of the property / service. Characteristic of the intangible Contractual terms Economic circumstances Business strategies

19. 19 Transfer Pricing Advanced Pricing Agreements Advantages Certainty, Non adversarial, Development of actual policies. Disadvantages Disclosure, Prior years Inflexible Overseas associates

20. 20 Transfer Pricing Scrap value $5 Old Asset Improvements “New” Asset MNC Related Party MNC Source Sub Sale $25 Sale $50 Cost $5$10 Market value Source SubThird PartyMNCDifference Revenue$100 - Capital Allowances(10)(50)(40) NPBT9050(40) Tax 50%4525(20)