OECD Transfer Pricing Guidelines for Business Restructurings and

OECD Transfer Pricing Guidelines for Business Restructurings and Intangibles Martin Busenhart , Tax Partner 7 th CIS Local Counsel Forum Yerevan, 8 June 2012

Overview – Introduction OECD Guidelines – Transfer pricing aspects of business restructurings (Chapter XI) – Revised transfer pricing aspects of intangibles (Chapter VI) 03. 11. 2020 2

Introduction OECD Guidelines – Art. 9 OECD Model Convention on “Associated Enterprises” – Need to define the “arm’s length price” of cross-border transactions between associated enterprises – OECD Transfer Pricing Guidelines (TPG) originally approved by the OECD Council in 1995 and completed with additional guidance on cross-border services, intangibles, costs contribution arrangements and advance pricing arrangements in 1996 -1999 and on dispute resolutions in 2009 03. 11. 2020 3

Introduction OECD Guidelines – Transfer pricing methods provided for in the OECD Guidelines – Traditional transactional methods – comparable uncontrolled price method (CUP) – Resale price method – Cost plus method – Transactional profit methods – Transactional net margin method (TNMM) – Transactional profit split method 03. 11. 2020 4

Introduction OECD Guidelines – Further content of the OECD Guidelines: –Documentation requirements – Assists taxpayers to identifying documentation that is helpful in showing that controlled transactions are at arm’s length –Ways to solve disputes – Mutual agreement procedures – Advance pricing agreements – Arbitration –Special considerations for IP or intra group services – These transactions are difficult to evaluate for tax purposes and require special attention 03. 11. 2020 5

Introduction OECD Guidelines – The 2010 amendment – Application of the “most appropriate transfer pricing method” (instead of the old OECD hierarchy of methods) – Guidance on how to apply transactional profit methods (TNMM and Profit split method) – Guidance on how to perform a comparability analysis – New chapter IX “transfer pricing of business restructuring” – Announcement of revised chapter VI on intangibles 03. 11. 2020 6

Transfer Pricing Aspects of Business Restructurings – New Chapter IX introduced in 2010 – Business Restructuring (BR) is defined as crossborder reallocation of functions, assets and/or risks – Reallocation can follow from : – a transfer of functions, assets and / or risks and / or – the termination or substantial renegotiation of existing arrangements 03. 11. 2020 7

Transfer Pricing Aspects of Business Restructurings – Difference between business restructuring and change in transfer pricing policy – Example 1 : Company Z is a well known distributor of luxury products. It owns valuable trade name, valuable retail points and valuable long term contracts with suppliers – Company Z is acquired by a MNE group which operates under a global business model --> restructuring to align Z operating model – Company Z transfers its trademarks to V in Country V, its suppliers contracts to Country W, and its retails points to Country X – A compensation must be paid for the business restructuring 03. 11. 2020 8

Transfer Pricing Aspects of Business Restructurings – Difference between business restructuring and change in transfer pricing policy – Example 2 : Company Y is a manufacturer of timing mechanisms for mass-market clocks. Due to new economic situation, the group newly applies a cost plus 3 method instead of the former cost plus 5 method to remunerate company Y – The taxable profit in Country Y is reduced – There is no reason for levying an exit tax 03. 11. 2020 9

Transfer Pricing Aspects of Business Restructurings – Mains issues - Understanding the restructuring itself - Transfer of something of value (e. g. an asset or a going concern) - Indemnification of the restructured entity for the termination or substantial renegotiation of existing arrangements 03. 11. 2020 10

Transfer Pricing Aspects of Intangibles – Proposed changes to Chapter VI of the TPG issued on 6 June 2012 – a proposed revision of the provisions of Chapter VI of the TPG – and (ii) a proposed revision of the Annex to Chapter VI containing examples illustrating the application of the provisions of the revised text of Chapter – Written comments on this Discussion Draft can be made by 14 September 2012 – Intention to hold public consultation on this Discussion Draft in Paris during the week of 5 November 2012 03. 11. 2020 11

Transfer Pricing Aspects of Intangibles Key aspects – Cornerstone of transfer pricing should be based on how independent third parties would behave in comparative situations rather than on accounting or legal definitions or general tax purposes – No differentiation between trade versus marketing intangibles; soft versus hard, or routine versus non-routine – Differentiation between intangible and intellectual property and market conditions that are not capable of being owned, controlled or transferred by a single enterprise. 03. 11. 2020 12

Transfer Pricing Aspects of Intangibles Key aspects – Goodwill and going concern should not be considered separately as intangibles (with certain exceptions but should be taken into account as part of a business’s assets – Distinction between two classes of transactions involving intangibles: – where intangibles are used by one or both parties in the controlled transaction for sales of goods with no transfer of intangibles – where the rights to intangibles are transferred as part of the controlled transaction 03. 11. 2020 13

Transfer Pricing Aspects of Intangibles Key aspects – The discussion draft also confirms that permanent establishments do not necessarily organise their affairs in the same way as independent third parties – 22 examples providing practical guidance on how to apply the principles discussed in the draft 03. 11. 2020 14

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