1. Advanced Dispute Resolution Workshop TP Minds Africa 23 November 2015 Presented by: Dr. DN Erasmus & Prof A Venter

2. 2. Technical considerations 1. Tax Administration 4. Case Study 3. APAs & MAPs WORKSHOP CONTENT

3. TAX ADMINISTRATION

4. CONSTITUTION TAX ADMIN FRAMEWORK AUDIT PROCEDURE ADMIN DOMESTIC TP LEGISLATION DETAILED TP GUIDANCE/ REGULATIONS

5. CONSTITUTION  All law and conduct must conform  Sets out fundamental rights  Determines administrative justice  International law and interpretation FOUNDATION OF LAW AND PROCEDURE

6. TAX ADMIN FRAMEWORK  ADMINISTRATIVE JUSTICE PRINCIPLES  DETERMINES FAIR AND VALID CONDUCT BY ADMINISTRATIVE OFFICIALS  GIVES EFFECT TO FUNDAMENTAL RIGHTS

7. AUDIT ADMIN PROCEDURES  LAW, REGULATIONS OR REVENUE AUTHORITY SERVICE CHARTER  PROTECTS THE TAXPAYER’S RIGHTS  WHAT TO EXPECT DURING AN AUDIT  PARAMETERS FOR CONDUCT AND SERVICE DELIVERY

8. DOMESTIC TP LEGISLATION  POWER TO ADJUST INCOME  SCOPE OF TP LEGISLATION  ONUS  ARM’S LENGTH REQUIREMENT OR ANTI- AVOIDANCE ADJUSTMENT SPECIFIC SCOPE AND POWER

9. DETAILED GUIDANCE OR REGULATIONS DOMESTIC RULES OECD GUIDANCE NO DETAILED GUIDANCE

10. TECHNICAL CONSIDERATIONS

11. Intangibles Management Fees Guidance Case Law

12. INTANGIBLES – GUIDANCE

15. INTANGIBLES – OECD PAR 6.38 ANALYSIS CONTEXT: No reimbursement ISSUE: Extent of the ability of the marketer to share in benefit from activities CRITERIA: Substance of the rights of the parties EXAMPLE: COMPARABLE RETURNEXAMPLE: ADDITIONAL RETURN LOW RISK EXAMPLEHIGH RISK EXAMPLE TERM/LENGTH PROTECTION LEVEL OF EXPENDITURE LONG TERM, SOLE RIGHTS BENEFIT THROUGH SALES AND MARKET SHARE COMPARABLE: DISTRIBUTOR WITH SIMILAR CIRCUMSTANCES EXTRAORDINARY EXPENDITURE DECREASED PRODUCT PRICE OR DECREASED ROYALTY RATE WILL NOT OBTAIN EXPECTED BENEFIT WITHOUT ADDITIONAL COMPENSATION

16. INTANGIBLES – OECD PAR 6.38 ANALYSIS BENCHMARK: Level of marketing investment: 2% of sales Period: 10 years Protection: sole rights EXPECTATION: marketing investment of R100 000 will generate sales of R 5 million This will be achieved over 10 years if sole distribution rights are obtained. EXAMPLE: COMPARABLE RETURNEXAMPLE: ADDITIONAL RETURN LOW RISK EXAMPLE HIGH RISK EXAMPLE Contracts of no less than 10 years: sufficient opportunity to gain benefit through sales Contracts with the at least sole distribution rights: Allowed the necessary market share to be developed to obtain the expected benefit Contracts with an expectation of marketing Investment of no more than 2% of sales Contracts of less than 10 years: at risk of not generating R 5 m in sales due to time constraints Contracts with non-exclusive rights: insufficient protection to develop the expected market share. Contracts with an expectation of investment of more than 2% of sales: risk of lower profit

17. INTANGIBLES – CASE LAW DHL CASE GLAXO CASE LG ELECTRONICS CASE SONY ERICSSON CASE BMW CASE

18. INTANGIBLES – EXAMPLE

19. STEP 2: BRAND EARNINGS (Brand contribution to excess profits) STEP 1: INTANGIBLE EARNINGS (EXCESS PROFITS) STAGE 2: SPLIT THE COMBINED PROFITS ROYALTY 1.Excess Profits 2.Attributable to Brand STAGE 1: DETERMINE COMBINED TRANSACTIONAL PROFITS Total average 3,3% of revenue (page 15 and 39) FORMULA: Intangible earnings (STEP 1) X Role of Brand (35%) (page 36-40) FORMULA: Profit after Tax LESS: capital charge (Capital employed x WACC) = Economic Value add (EVA) (page 36)

20. STEP 2: Intangible earnings x Role of Brand STEP 1: INTANGIBLE EARNINGS STAGE 1: DETERMINE COMBINED TRANSACTIONAL PROFITS STAGE 2: SPLIT THE COMBINED PROFITS ROYALTY LICENSEE PROFIT Excess Profit: Intangibles Earnings Excess Profit from other Intangibles (65%) Excess Profit from Brand specifically (35%) Normal Profit TRANSACTIONAL PROFITS TO BE SPLIT (BRAND EARNINGS)

21. STEP 2: BRAND EARNINGS STEP 1: INTANGIBLE EARNINGS STAGE 1: DETERMINE COMBINED TRANSACTIONAL PROFITS STAGE 2: SPLIT THE COMBINED PROFITS STEP 2 Brand Strength Index (Position Brand in royalty range (2% max rate) (CONTROVERSIAL) STEP 1 Benchmarking (CUPs) AL royalty range (0,25% - 1,6%) ROYALTY Determine the licensor’s portion by using benchmarking: 1% (30% of the full 3,3% brand earnings)

22. SERVICES - GUIDANCE OECD AND BEPS DOMESTIC LAW UN MANUAL

23. MAPs & APAs

24. SettlementsAPAsMAPs

25. SETTLEMENTS  When to consider a settlement?  Key success factors

26. ADVANCED PRICING ARRANGEMENTS (APA)  Timing  Criteria in regulations  Implementation  Risks

27. MUTUAL AGREEMENT PORCEDURES (MAPs)  Double Tax Agreements: Section 25 and Section 9  MAPS and Domestic Remedies  Triggers  Procedure  Arbitration

28. CASE STUDY COMPANY ZZ SUBSIDIARY Z KENYA SUBSIDIARY Z MALAWI SUBSIDIARY Z ZIMBABWE SUBSIDIARY Z BOTSWANA SUBSIDIARY Z TANZANIA TRADEMARK MANAGEMENT FEES PENALTY