The Transfer Pricing Changes Introduced by the BEPS

The Transfer Pricing Changes Introduced by the BEPS Action Plan Dr. Raffaele Petruzzi, LL. M. Managing Director, WU Transfer Pricing Center Transfer Pricing Advisor XV Tax Evening The Serbian Fiscal Society and the University of Belgrade Faculty of Law Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw © WU Transfer Pricing Center

The BEPStimeline Action Plan February 2013 July 2013 October 2015 Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw © WU Transfer Pricing Center

BEPS Action Plan July 2013 Realities in MNE are better understood As the economy became more globally integrated, so did corporations… § Multi-national enterprises (MNE) represent a large proportion of global GDP, intra-firm trade represents a growing proportion of this overall trade. § Globalisation has resulted in a shift from country-specific operating models to global models based on matrix management organisations and integrated supply chains that centralise several functions at a regional or global level. § The growing importance of the service component of the economy, and of digital products that often can be delivered over the Internet, has made it much easier for businesses to locate many productive activities in geographic locations that are distant from the physical location of their customers. § These developments have been accompanied by an increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning, thus providing MNEs with more opportunities/confidence in taking aggressive tax positions…. Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw © WU Transfer Pricing Center

BEPS and transfer pricing Coherence Substance Hybrid Mismatch Arrangements (2) Preventing Tax Treaty Abuse (6) Interest Deductions (4) Harmful Tax Practices (5) Methodologies and Data Analysis (11) Avoidance of PE Status (7) TP Aspects of Intangibles (8) CFC Rules (3) Transparency TP/Risk and Capital (9) Disclosure Rules (12) TP Documentation (13) TP/High Risk Transactions (10) Dispute Resolution (14) Digital Economy (1) Multilateral Instrument (15) Linked to TP Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 4 © WU Transfer Pricing Center

The 2017 OECD Transfer Pricing Guidelines § Aligning transfer pricing outcomes with value creation § Approved by OECD Council on 23 May 2016 This link to value creation is achieved by modifying the 3 core elements of the ALP: § Entity-by-entity approach (vs group impacts) § Contractual arrangements (vs actual conduct) § Comparability (vs hypothetical behaviour) Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 5 © WU Transfer Pricing Center

The 2017 OECD Transfer Pricing Guidelines I. The arm’s length principle II. Transfer pricing methods III. Comparability analysis IV. Administrative approaches V. Documentation VI. Intangibles VII. Intra-group services VIII. Cost Contribution Arrangements IX. Transfer pricing of business restructurings Annexes: Guidelines for Advance Pricing Agreements (. . . ) 2017 updates Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 6 © WU Transfer Pricing Center

The 2017 UN Transfer Pricing Manual A. 1. Introduction A. 2. Theory of the Firm and Development of Multinational Enterprises C. 1. Establishing and Updating Transfer Pricing Regimes C. 2. Documentation A. 3. Legal Structure C. 3. Audits and Risk Assessment A. 4. Managing the Transfer Pricing Function in a Multinational Enterprise C. 4. Dispute Avoidance and Resolution B. 1. Introduction to transfer pricing B. 2. Comparability Analysis B. 3. Methods C. 5. Establishing Transfer Pricing Capability in Developing Countries D. 1. Brazil Country Practices B. 4. Intra-Group Services D. 2. China Country Practices B. 5. Transfer Pricing Considerations on Intangible Property D. 3. India Country Practices B. 6. Cost Contribution Arrangements B. 7. Transfer Pricing Aspects of Business Restructurings D. 4. Mexico Country Practices D. 5. South Africa Country Practices B. 8 General Legal Environment 2017 updates Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 7 © WU Transfer Pricing Center

The changes introduced § Identifying the commercial or financial relations § Recognition of the accurately delineated transaction § Location savings and other local market features § Assembled workforce § MNE group synergies § Commodity transactions § Intangibles § Low value-adding intra-group services § Cost Contribution Arrangements Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw © WU Transfer Pricing Center

What’s next? § Hard-to-value intangibles (HTVI) (Discussion draft) § Attribution of profits to permanent establishments (Discussion draft) § Transactional profit splits (Discussion draft) § The toolkit for addressing difficulties in accessing comparables data for transfer pricing analyses (Final) § Further guidance on country-by-country reporting § Transfer pricing aspects of financial transactions (? ) Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw © WU Transfer Pricing Center

Key message 1 Apply properly the arm’s length principle! 1. Identification of the commercial or financial relations 2. Recognition of the accurately delineated transaction 3. Selection of the most appropriate transfer pricing method 4. Application of the most appropriate transfer pricing method Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 10 © WU Transfer Pricing Center

Key message 2 No risk, no fun! HQ Management services Substance ? Management fees Management services Contract R&D services R&D Centre Substance ? CEO, CFO, CTO VP Marketing VP Business Development Substance VP Sales ? VP R&D VP Engineering Legal director Supply Chain Director Substance Management IT and finance teams ? fees IP owner Cost+ remuneration R&D Director Scientists Engineers Application specialists Production plant Plant management Sales force Sales director Marketing director Logistics manager … License of IP Royalties Group operating companies Patent lawyers Trademark Substance ownership ? Patent ownership R&D funding Substance ? products Sale of Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw © WU Transfer Pricing Center

Key message 3 Document everything! Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 12 © WU Transfer Pricing Center

Conclusions Time to change! Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 13 © WU Transfer Pricing Center

Contact details Dr. Raffaele Petruzzi, LL. M. Department of Public Law and Tax Law Institute for Austrian and International Tax Law Welthandelsplatz 1, Building D 3, 1020 Vienna, Austria T +43 -1 -313 36 -5065 raffaele. petruzzi@wu. ac. at www. wu. ac. at/taxlaw, www. wu. ac. at/dibt Institute for Austrian and International Tax Law www. wu. ac. at/taxlaw 14 © WU Transfer Pricing Center