3. Addressing Challenging Transfer Pricing Items which Arose from BEPS - Enrique Rayon

Thinking about your business is a big part of ours
ADDRESSING CHALLENGING TRANSFER
PRICING ITEMS WHICH AROSE FROM BEPS
Bucharest, 11 May 2018
Transfer Pricing | 2017

Agenda
• Introduction
• Transfer Pricing Documentation
• Value Chain Analysis
• Profit Split
• A note on Comparability post-Brexit or U.S. Tariffs
Transfer Pricing | 2017

Introduction
• “The BEPS project put meat on the bones of the arm’s length principle.”
Pascal Saint-Amans, Director, OECD Centre for Tax Policy and
Administration (Bloomberg BNA, Transfer Pricing Report, October
15, 2015)
• “BEPS project’s primary objective is to ensure that profits are reported
for tax purposes where economic activities are carried out and where
value is created.”
Raffaele Russo, Head of the OECD/G20 BEPS project group
Transfer Pricing | 2017

Introduction
Typical Allocation of
Economic Returns
Routine
Distribution
Routine
Manufacturing
Intangibles
Transfer Pricing | 2017

Transfer Pricing Documentation
• OECD BEPS Action 13, 2015 Final Report “Transfer Pricing Documentation and
Country-by-Country Reporting”
• i.e., Transfer Pricing Documentation under the TPGs’ new Chapter V
• Three tiers
– Master file
– Local file
– Country-by-Country Report
• Many countries’ TP documentation regulations have implemented MF and LF
requirements (e.g., CN, MX, NL, etc.) while others have not changed or do not
require a MF and LF (e.g., U.S., U.K., RO, CA, etc.)
Transfer Pricing | 2017

Value Chain Analysis
• The arm’s length principle and value creation, not formulary apportionment
• Value Creation ≠ Value Chain Analysis
• Selected countries require a value chain analysis is to be included in transfer
pricing documentation, e.g., CN, NL, etc.
• How and where is value created in the company?
• VCA ≈ Art+Science
• Delineate the intercompany transaction
• Functional analysis (functions, risks, assets)
• Economic Value of functions/risks/assets, again, not a formulary profit allocation
Transfer Pricing | 2017

Value Chain Analysis
Conventional Supply Chain
Manufacturing
Co.
(Country A)
Distribution
Co.
(Country B)
Customers
: Sales of Products
Transfer Pricing | 2017

Value Chain Analysis
A new look at the Supply Chain
Contract R&D
Co.
Shared Services
Co.
Sales Services
Co.
Contract
Manufacturing
Co.
Principal Co.
Customers
Procurement
Co.
Logistics /
Warehousing
Co.
: Sales of Products
: Provision of
Services
Transfer Pricing | 2017

Profit Split
• Transactional profit split method, OECD TPGs Chapter II, Section C
• The guidance is undergoing revisions as mandated by BEPS Action 10 to clarify
the application of the profit split method in the context of global value chains
• The profit split method is not a one-sided method like the TNMM
• It is a two-sided (or more) method, i.e., two or more companies transacting and
making non-routine contributions in the transaction (i.e., integrated transactions
involving IP or high-value services)
• Focus is on the total profit associated with the intercompany transaction
• Allocates a portion of total profits to each entity based on relative functions, risks,
and assets
• May apply when Traditional Transaction Methods do not apply
• It is not a formulary apportionment method
Transfer Pricing | 2017

Profit Split
π
Typical Allocation of
Economic Returns
Routine
Distribution
Routine
Manufacturing
Intangibles
Routine
Profit
Nonroutine
Profit
(aka:
residual profit)
Transfer Pricing | 2017

Profit Split
π
Typical Allocation of
Economic Returns
Routine
Distribution
Routine
Manufacturing
Intangibles
Routine
Profit
Nonroutine
Profit
(aka: residual
profit)
Value Creators ----->
Transfer Pricing | 2017
Contribution 1 Contribution 2
Contribution 3

A note on Comparability
• Selection of the most appropriate transfer pricing method to the circumstances of the
case
– Traditional transaction methods
– Transactional profit methods
• Transactional Net Margin Method (TNMM)
– Based on net profit indicators, more tolerant to some functional differences than
gross profit margins
– Product comparability takes (took) less importance than functional comparability
• Comparability of Pan-European benchmarks post-Brexit
• Comparability of non-product-specific benchmarks post-U.S. tariffs
– U.S. distributors
– European and China manufacturers
– China distributors vis-à-vis Pan-Asian distributors
• Impact to the MNEs’ supply chains
Transfer Pricing | 2017

Thank you for
your attention.
Transfer Pricing | 2017