1. The Transfer Pricing Policy Towards a New World Order? 28 November, 2012

2. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 1 1 Business restructuring and exit charges Location advantages More audits, disputes and litigation Non OECD approaches Scope of rules expanding More and more complex regulation Aggressive practices by tax authorities Dissatisfaction with profit based methods Lately…..

3. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 2 2 Developing Country Debate OECD vs United Nations Non OECD approaches becoming codified? Public Backlash on Transfer Pricing Arm’s Length vs Formula Apportionment Today….. Tax Transparency

4. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 3 The Backlash “It is common knowledge that most multinationals …are actively engaged in these practices, with the aim of transferring their profits to countries with the most favorable tax regimes…” “Improper transfer pricing practices cost the developing world $400 billion to $440 billion between 2000 and 2008.” ____________________________ Global Financial Integrity 2011 3 “ A Swiss corporation discovers a drug at its research lab in England, manufactures it in Belgium and sells it in the US. The difference between production cost and selling price is large but where does the profit arise? Surely not in the Netherland Antilles, where the company that owns the patent is resident.” __________________ Financial Times 2011 “What’s more that they are aided in this by major financial consultancy and audit firms.” Eurodad 2011 “…a technique known as transfer pricing…carves an estimated $60 billion a year from the U.S. Treasury as it combines tax planning and alchemy.” “Transfer pricing is the corporate equivalent of the secret offshore accounts of individual tax dodgers,” said U.S. Senator Carl Levin… _____________________ Bloomberg 2010

5. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 4 4 The Australian The problem is that because of synergies within large corporations….the economic relationships between entities within a group are not the same as between unrelated parties. The practical problem is the lack of truly comparable transactions…” Congressional Testimony by Martin Sullivan, Phd Economist and contributing editor of Tax Analysts, 2011 OECD approach to transfer pricing, both theoretically, and empirically, falls apart” Michael Durst, former APA Director of IRS. “The Arm’s Length Problem” “Companies and government spend extraordinary amounts …on efforts at compliance and documentation….yet companies and the IRS typically are dramatically far apart in their determination of arm’s length pricing” The Hamilton Project, Brookings Institution 2007 “The central question is……: Are the rules of the game so permissive that even if applied correctly, multinationals can decide the amount of taxes they pay? - Roberto Schatan (ex- OECD), Tax Notes International, January 2012 “The arm’s length method simply is not working…it offers little more than a general framework for negotiations, in which MNEs hold an upper hand….” "Transfer pricing is the leading edge of what is wrong with international tax” Lee Sheppard, editor of Tax Notes International and Forbes blogger, 2012

6. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 5 5 Perceptions matter – the SAB Miller Story  In 2010, ActionAid publishes its 40 page report: “Calling Time, why SAB Miller should stop dodging taxes in Africa”.  Led to numerous tax investigations in several African countries and was one of key drivers behind Ghana enacting Transfer Pricing legislation in 2012.  The report has been voted as one of the five leading global forces in Transfer Pricing in 2012, by the readers of the Transfer Pricing Week.

7. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 6 Developing countries “The OECD guidelines only protect the interests of OECD countries which are parties to such convention”…..”it is improper to suggest that they represent internationally agreed guidance….” Indian Government letter to the UN, March 2012. “Developing countries….face a set of unique issues which have not been addressed….by the OECD Guidelines.” China Country Practices, UN Transfer Pricing Manual, October 2012.

8. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 7 The China View (from the UN process) ＋ ＝ Brand Management Supply Chain Management R&D HQChina Market Premium Cost Savings Pollution Permission Total Profit Manufacturing Distribution Manufacturing Double Taxation ＞ MAP?

9. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 8 The Future? Increased Disclosure and Transparency? Institutionalized Double Taxation? Convergence vs Regulatory Competition? Hybrid Models? ALP to prevail?

10. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 9 Will the Arm’s Length Principle prevail? CUPTNMM PROFIT SPLIT RPM/ C+ FORMULA APPORTIONMENT ARM’S LENGTH PRINCIPLE FORMULA APPORTIONMENT ≠

11. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 10 OECD The Australian “The current transfer pricing rules are difficult for governments to implement, not just for developing countries but for OECD countries… we have overcomplicated some of the rules”. Pascal Saint-Amans, Director, OECD Centre for Tax Policy, 2012 “Tax officials from 90 countries agreed on the need to simplify transfer pricing rules, strengthen the guidelines on intangible issues and improve the efficiency of dispute resolution.” The OECD press release on 28 March 2012 following OECD’s first Global Forum on Transfer Pricing,

12. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 11 © 2011 KPMG Tax Limited, a BVI limited liability company operating in Hong Kong and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. What can you do? 11 Transfer Pricing Management Framework Plan and Design Implement and Document Dispute Resolution Assess Risk/ Define Strategy

13. © 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Presenter’s contact details: Kari Pahlman Principal Asia Pacific Leader Global Transfer Pricing Services +852 2143 8777 kari.pahlman@kpmg.com