ford rhodes sidat hyder & co. chartered accountants t transfer pricing – trends and dispute...

Ford Rhodes Sidat Hyder & Co.Chartered Accountants t

Transfer Pricing – Trends and Dispute ResolutionSouth Asian Tax Summit 2008Karachi15 - 16 April 2008Presentation byEBRAHIM SIDAT

Ford Rhodes Sidat Hyder & Co.Chartered Accountants

Transfer Pricing – Trends and Dispute Resolution

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Global survey findings

Ernst & Yong’s “Global Transfer Pricing Survey 2007 – 2008” reveals:

►growing number of countries devoting attention to transferpricing;

►increased enforcement and regulatory activity;►diversity of transfer pricing issues facing Multinational Enterprises (MNEs).

This presentation is mainly based on the Ernst & Young’s 2007 Survey.



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Global legislative trends in transfer pricing

► Both corporate and tax regulators have intensified the burden on MNEs to actively report and justify the impact of their tax planning.

► In September 2006, the 39 member countries that comprise the Organization for Economic Co-operation and Development’s (OECD) Forum for Tax Administration adopted the “Seoul Declaration”. The Seoul Declaration commits the member countries to cross-border information-sharing and improved “practical cooperation” to counter noncompliance.



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► In March 2007, Brazil and the US signed a tax information-exchange agreement, which stemmed from informal discussions between the two countries’ tax authorities about transfer pricing, permanent establishment, and other issues.

► At a recent technology tax conference, OECD and the US Internal Revenue Service officials jointly stressed the increasing importance for tax authorities to improve communication and information exchange to combat, among other abuses, the actual or perceived manipulation of transfer prices.



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► The increasing collaboration among tax authorities on information exchange, however does not necessarily address fundamental differences among them in how the information is applied.

► Inconsistencies in the interpretation and application of information, as well as the underlying transfer pricing rules themselves, continue to cause incompatible compliance burdens and risk of double taxation.



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Most developed and developing countries now have transfer pricing rules

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Taiw anPeru Peru

Germany Germany GermanyHungary Hungary HungaryDenmark Denmark Denmark

PAKISTAN PAKISTAN PAKISTAN PAKISTANColumbia Columbia Columbia ColumbiaVenezuela Venezuela Venezuela VenezuelaPortugal Portugal Portugal PortugalRussia Russia Russia Russia

Japan Japan Japan Japan JapanPoland Poland Poland Poland PolandIndia India India India IndiaNetherlands Netherlands Netherlands Netherlands Netherlands

Italy Italy Italy Italy Italy ItalyBelgium Belgium Belgium Belgium Belgium Belgium BelgiumArgentina Argentina Argentina Argentina Argentina Argentina ArgentinaCanada Canada Canada Canada Canada Canada CanadaUK UK UK UK UK UK UK

China China China China China China China ChinaSlovakia Slovakia Slovakia Slovakia Slovakia Slovakia Slovakia Slovakia SlovakiaBrazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil

New ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandMexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico Mexico MexicoKorea Korea Korea Korea Korea Korea Korea Korea Korea KoreaFrance France France France France France France France France France

Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia AustraliaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth Africa

USA USA USA USA USA USA USA USA USA USA USA USA



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Countries with effective documentation rules

1994-1997 1998-2000 2001-2002 2003-2004 2005-2007 Expected soon

USA USA USA USA USA China

Australia Australia Australia Australia Australia Russia

France France France France France

Mexico Mexico Mexico Mexico Mexico

Brazil Brazil Brazil Brazil Brazil

Canada Canada Canada Canada

S. Korea S. Korea S. Korea S. Korea

UK UK UK UK

Denmark Denmark Denmark Denmark

Venezuela Venezuela Venezuela Venezuela

South Africa South Africa South Africa South Africa

Germany Germany Germany Germany

Belgium Belgium Belgium Belgium

Argentina Argentina Argentina Argentina

J apan J apan J apan

Poland Poland Poland

Kazakhstan Kazakhstan Kazakhstan

India India India

Portugal Portugal Portugal

Colombia Colombia Colombia

Netherlands Netherlands Netherlands

Thailand Thailand Thailand

Malaysia Malaysia

Indonesia Indonesia

Norway Norway

New Zealand New Zealand

Peru Peru

Spain Spain

Taiwan TaiwanHungary HungaryLithuania Lithuania

EcuadorVietnamSingaporeSwedenIsraelFinland

Estonia



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Transfer pricing dominates the agenda

Globally, more companies identified transfer pricing as the most important tax issue they faced than any other issue.

3%

5%

8%

8%

8%

28%

39%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Customs duties

Foreign tax credits

Value-added taxes

Double taxation

Tax controversy

Tax minimization

Tranfer pricing



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Transfer pricing dominates the agenda

The level of importance that MNEs place on transfer pricing can vary considerably by industry.

8%

15%

20%

22%

25%

26%

41%

45%

47%

49%

76%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Insurance

Media & entertainment

Real estate

Oil & Gas

Utilities

Banking & capital markets

Telecommunciations

Biotechnology

Consumer products

Automotive

Pharmeceuticals



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What are the audit triggers?

Global Survey 2007 conducted by Ernst & Young shows that when asked which circumstances are most likely to trigger transfer pricing disputes with tax authorities, both parent and subsidiary respondents agreed that an “increase in audit and enforcement targets by fiscal authorities” is the leading cause.

51%

55%

56%

57%

57%

60%

64%

67%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Restructured operations

Complexity of transactions

Recorded losses

Fluctuations in taxable income of the audited entity

New legislation

Signif icant monetary volume of transactions

Change in transfer prices

Increase in audit and enforcement targets by f iscal authorities



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What are the audit triggers?

While a comparison of the 2007 and 1997 Survey results shows that almost all transactions are perceived as being more vulnerable now than ten years ago, there was a 74% increase in the number of parent respondents identifying administrative or management services as targets. 2007 1997 Relative

change

Administrative or managerial services 54% 31% 74%Intercompany f inancing 41% 25% 64%Technical services 36% 24% 50%Transfer or sales of f inished goods for resale 36% 33% 9%License of intangible property 35% 24% 16%Technology cost-sharing agreements 25% 21% 19%Commission for sales/ transfer of goods 25% 20% 25%Sales of raw materials or components betw een group companies 21% 25% 16%



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Risk mitigation is a key priority

Sixty-five percent of parent respondents believe transfer pricing documentation is more important now than it was two years ago (fewer than 1% say it is less important). The 2007 Survey also shows that MNEs’ priorities for preparing documentation are changing. In our 2005 Survey, “consistency of documentation” was the top priority in preparing transfer pricing documentation. In our 2007 Survey, consistency was displaced by “risk mitigation or reduction” as the top priority.

34%

27%

9%

8%

8%

7%

4% 3%

Risk mitigation/reduction

Consistency of document

Ability identify tax planning opportunities

Audit defense

Compliance with financial reporting standards

Minimize compliance costs

Historic practice/company policy

Judged case-by-case/strategic or reactive decision



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Transfer pricing methods

In managing transfer pricing risk, it is helpful to have a general sense of the transfer pricing methods commonly applied for the various types of transactions.

Tangible goods

Services Intangible property

Financing Cost-sharing

CUP 32% 19% 54% 56%Resale price

17%CP M/TNMM 11% 14% 13%Cost 13% 29%

Cost-plus 29% 60% 49%P rofit-split 4% 10% 7%Other/not stated 6% 7% 22% 24% 22%



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Controversy management

After exhausting the domestic appeals procedures, taxpayers generally have three alternatives when it comes to managing and resolving transfer pricing disputes with tax authorities:

1. Advance Pricing Agreements (APAs)

2. Competent Authority relief via the Mutual Agreement Procedure provisions of the relevant treaty

3. Litigation



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Controversy management

Globally, there appears to be a moderate trend for both parent and subsidiary respondents to rely less on the Competent Authority process. However, despite the slight decline in the use of the Competent Authority process, it is clearly the preferred approach of parent respondents for resolving transfer pricing disputes.

47%

28%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Competent authority APA Litigation



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Approaches to mitigate transfer pricing-related financial statement risk

The 2007 Survey results show that MNEs adopt a number of practices to manage their transfer pricing-related financial statement risk.

The relative popularity of APAs as a risk mitigation strategy, however, trends to be higher among parent respondents headquartered in jurisdictions traditionally thought to have APA-or ruling-friendly environments.

5%

1%

2%

27%

31%

48%

67%

74%

81%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Other

Training programs

Review by external advisors

Advance pricing agreements

Complete TP documentation after f iling account

Complete TP documentation after the fact but before f iling account

Complete TP documentation contemporaneously

Perform periodic review s

Maintain records and data



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Pakistan specific status

► In July 2002, provisions relating to transfer pricing were introduced in the Income Tax Ordinance, 2001 through Section 108.

► Transfer pricing Rule 20 to 27 stipulating certain definitions and pricing methods have been enacted in our tax law.



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► In January 2003 listed companies were directed to comply with disclosure and regulatory requirements relating to transfer pricing under the Companies Ordinance, 1984

► In April 2003, the Karachi Stock Exchange prescribed procedural, reporting and disclosure requirements relating to transfer pricing as part of the Code of Corporate Governance.



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► What audit approaches might be adopted by competent authorities in Pakistan is not yet clear as due to self assessment procedure, no significant transfer pricing issues have come to surface.

► Disclosure and regulatory requirements relating to transfer pricing introduced by the Companies Ordinance and the Karachi Stock Exchange have been put in abeyance since their introduction.

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