A series of articles based on our Global Transfer Pricing

Conference in Toronto, Canada – October 2016

Transfer Pricing Perspectives:

The new normal: full TransParency

www.pwc.com/transferpricingperspectives
Transfer Pricing Perspectives: The
Fit for
newthenormal:
Future full TransParency

Foreword
Almost 700 enthusiast transfer policies is a good example. There The articles in this October
pricing practitioners from both are also novel best practices 2016 edition of Transfer Pricing
outside and within PwC gathered approaches such as our PwC Perspectives are based on our
in Toronto at our annual Global Value Chain Analysis that sessions in Toronto, and we hope
Transfer Pricing Conference. require an objective approach to they will help you be even better
No doubt it is again one of the demonstrate our clients’ efforts equipped for the changes we’re
most successful events we have to come to a fair intercompany expecting to see in the coming
ever hosted in our network. pricing with a business hat on. months. For this year’s edition,
One also needs to grapple with the we would like to highlight new
When asked what drives our European Commission’s agenda on and refined service offerings
clients to work so close with us in combatting so-called “illegal state that are best suited to tackle the
Isabel Verlinden navigating today’s complexities of
Global Leader, Transfer Pricing
aid”. If transfer pricing deserves new challenges: with business
the quickly evolving international one trophy in “Brussels”, it would operating models, we take a
PwC Belgium
tax landscape, TransParency definitely be the one for “Soft holistic approach and link tax
+32 2 710 4422 stands out. (Public) country-by- Target of the Year”. Finally we expertise with deep business
isabel.verlinden@be.pwc.com country reporting, ideally as part are all anxious to see the United understanding. Global Coordinated
of an end-to-end compliance Nations’ long awaited update of its Documentation with the Master
strategy from robust contracts transfer pricing manual very soon. File and Local File, as well as
till implementation of pricing country-by-country reporting
Transfer Pricing Perspectives: The
Fit for
newthenormal:
Future full TransParency

have changed the perception and

added to the complexity of TP
compliance in a significant way.
Finally, we continue to “bridge the
gap” between tax and industry
expertise, which is why we are
happy to share several excerpts on
industry developments as well.

We hope you enjoy the read. Your

PwC contact(s) can’t wait to engage
further in a dialogue with you to
jointly roll-up their sleeves.

Isabel Verlinden
Transfer Pricing Perspectives: The
Fit for
newthenormal:
Future full TransParency

Contents

Greetings from Canada.......................................................................... 1 New rules for transfer pricing transparency in China –
challenges and change for pharma and life sciences companies............ 28
Final BEPS guidance places renewed emphasis on
intercompany agreements..................................................................... 4 Implications of the new permanent establishment definition
on retail and consumer multinationals................................................. 34
Rethinking value chain analysis........................................................... 10
Transfer pricing analytics: The exploitation of Big Data and
Audit readiness in transfer pricing....................................................... 15 emerging technologies in transfer pricing............................................ 38
BEPS Action Plans 8-10 and the oil and gas industry............................ 20 The post BEPS world in the automotive industry.................................. 43
TP Lab – PwC’s virtual think tank to generate transfer pricing Global transfer pricing documentation strategies................................. 48
thought leadership............................................................................... 25
Contacts.............................................................................................. 52

4 PwC – Transfer Pricing Perspectives/October 2014: A series of articles based on our global transfer pricing conference in Switzerland
Transfer Pricing Perspectives: The new normal: full TransParency

Greetings from Canada

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Greetings from Canada

Canada is the largest country in the western While Canada has abundant natural
hemisphere and one of the largest in the resources and a strong banking system, the
world. It has a stable government, a highly recent drop in crude oil prices is taking a
skilled workforce, and its residents enjoy toll on both the oil and gas sector and the
a high standard of living. The country has overall economy. On the bright side, lower
a well-developed transportation system energy costs are helping consumers and
and is rich in natural resources. Canada’s non-resource based sectors, and the lower
official languages are English and French, Canadian dollar and improved US economy
and its federal capital is Ottawa. It is a are increasing Canada’s manufacturing
parliamentary democracy and is divided sector’s exports to the US. Consumers are
into 10 provinces and three territories. enjoying low gas prices and, combined with
continued low interest rates, are able to spend
Canada has a thriving free-market more, though as consumer debt increases
economy, with businesses ranging from they may begin to exercise fiscal restraint.
small owner-managed enterprises to Likewise, most provincial governments are
multinational corporations. While its generally continuing to rein in spending to
economic development was historically balance their books and will likely make only
based on the export of agricultural staples minimal contributions to overall economic
and the production and export of natural growth in 2016 and 2017. In contrast, the
resource products like minerals, oil and federal government plans to incur large
Canada has a thriving free-market economy, with gas, and forest products, Canada now ranks deficits in the next few years to improve
businesses ranging from small owner-managed as one of the top manufacturing nations of
the world and boasts a rapidly expanding
Canada’s infrastructure and stimulate the
economy. The 2016 federal budget states
enterprises to multinational corporations. service industry. that over CA$120 billion will be spent on
infrastructure over the next 10 years and that
this, along with other budgetary measures,
will “raise the level of real gross domestic
product by 0.5% in the first year and by 1% by
the second year”.

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Greetings from Canada

In terms of transfer pricing developments, The CRA also acknowledged increasing

the 2016 federal budget also includes a concern among the general population Authors
number of base erosion and profit shifting about individuals and companies that don’t
In terms of transfer
(BEPS)-related proposals as Canada pay their fair share of tax. It emphasised pricing developments, Gord Jans
continues to be a leading participant in the the importance of responsible enforcement
global movement toward tax transparency and declared Canada’s intention to share
the 2016 federal budget PwC Canada

and accountability. These proposals include knowledge with developing nations to help also includes a number of +1 416 815 5198
draft amendments to the Income Tax Act them acquire the technical tools necessary
adopting country by country reporting to apply BEPS fairly and efficiently. Canada
BEPS related proposals as gordon.r.jans@ca.pwc.com

(CbCR), effective for the 2016 taxation is also in favour of more arbitration and Canada continues to be a Andy McCrodan
year, and penalties for failing to meet the proactive approaches such as advance
Organisation for Economic Co-operation pricing agreements.
leading participant in the PwC Canada
and Development’s (OECD’s) common global movement toward +1 416 869 8726
reporting standard, under which Canada is Last, a shout out to our global TP conference
to make its first information exchanges in host city, Toronto, which was ranked third,
tax transparency and andrew.f.mccrodan@ca.pwc.com
2018 on financial accounts held in Canada behind London and Singapore, as one accountability. Anna Stancer
by foreign residents. of the best cities to live and work in (see
PwC’s latest Cities of Opportunity 7 1 report, PwC Canada
Canada’s longstanding support of the a biennial global study that benchmarks +1 416 869 8764
OECD’s global tax initiatives was confirmed 30 cities against an extensive set of
at a recent transfer pricing conference, indicators and underlying variables to anna.stancer@ca.pwc.com
where the assistant commissioner examine the social and economic
(International) with the Large Business qualities that make cities thrive).
and Investigation Branch of the Canada
Revenue Agency (CRA) stated that the new Congratulations, Toronto!
BEPS guidance merely reinforces Canada’s
current approach to international tax. As
such, though the new CbCR legislation will
likely have a significant effect on taxpayers,
the Canadian transfer pricing rules are
expected to essentially remain unchanged.

1 www.pwc.com/us/en/cities-of-opportunity
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Final BEPS guidance

places renewed emphasis
on intercompany
agreements

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Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

Summary legal written agreements, then the actual

On 5 October 2015, the Organisation for functions undertaken, risks borne, and
Economic Co-operation and Development assets employed by the parties ultimately
(OECD) released its final report on transfer should determine the factual substance that
pricing documentation and country by will affect the determination of the arm’s-
country (CbC) reporting, an outcome length conditions.
of the OCED’s Base Erosion and Profit
Shifting (BEPS) Action Plan. Developed as Historically, rules regarding intercompany
a replacement for the existing Chapter V agreements have varied widely from
(Documentation) of the Transfer Pricing country to country. For example, US
Guidelines for Multinational Enterprises transfer pricing rules generally do not
(MNEs) and tax administrations (OECD require intercompany agreements to
Guidelines), last revised in 1995, the new be in place in order for related-party
guidance prescribes specific documentation transactions to be respected by the Internal
to be compiled by multinational enterprises Revenue Service (IRS). On the other hand,
to support their structuring and pricing of without intercompany agreements, some
intercompany transactions. Specifically, countries, such as Nigeria, may disallow
among other things, the final guidance calls tax deductions for expenses resulting from
for taxpayers to include a list of “important intercompany charges. In a number of
agreements” pertaining to intangibles in countries, including Argentina and South
Specifically, the OECD has stated that written contracts the Master File and copies of all “material Africa, agreements are needed to facilitate
alone should not drive the economic outcome. intercompany agreements” in the local the remittance of cash out of the country.
transfer pricing documentation files of their
worldwide affiliates. In 2013, well before the OECD issued its
final BEPS guidance, Australia enacted
As multinational entities focus on their substantive changes to its transfer pricing
intercompany agreements in light of these laws, specifically requiring that the legal
new disclosure requirements, careful form of intercompany transactions be
attention should be paid to the guidance reviewed against their substance. To
provided by the OECD with respect the extent the two do not align, the law
to contractual terms between related directs that the actual conduct of the
parties. Specifically, the OECD has stated parties overrides the legal agreement
that written contracts alone should not in determining an arm’s-length result.
drive the economic outcome. If the actual Moreover, the Australian law also
characteristics of a transaction between requires that, where the intercompany
related parties are inconsistent with the transactions are inconsistent with

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Final BEPS guidance places renewed emphasis on intercompany agreements

‘commercial’ independent arrangements, Final BEPS guidance In the final Action 13 deliverable, the agreements concluded by the local entity”
taxpayers must disregard the intercompany In 2013, the OECD and G20 countries new Chapter V of the OECD Guidelines, to be included in the Local File. In this
transactions and replace them with an adopted the 15-point BEPS Action Plan. The MNEs are directed to prepare transfer context, materiality is considered from the
alternate hypothesis. Given the current stated objective of the BEPS initiative was pricing documentation consisting of perspective of the local country, as opposed
focus on substance among tax authorities to develop a global framework to address a Master File and Local Files for each to the consolidated group. In relation to
worldwide, other jurisdictions may perceived flaws in international tax rules jurisdiction. As well they should complete the Master File, a list of ‘important’ related
introduce similar requirements. that were seen by revenue authorities to three templates intended to capture party agreements related to intangibles
result in the misallocation of income and specific data points and functional and (including cost contribution arrangements),
As more and more countries around the expense among jurisdictions. Essentially, other relevant information on a CbC basis. principal services agreements and license
world adopt the OECD’s new documentation the OECD’s focus was on coordinating and With respect to the Local Files, under agreements is required. Corporate tax
guidance, now is the time for MNEs to harmonising international tax rules to the heading “Controlled Transactions,” professionals should note that the term
assess the level of intercompany agreement eliminate mismatches and incongruities the final guidance specifically calls for ‘important’ is subjective and undefined.
coverage for their material transactions between the laws of different jurisdictions “copies of all material intercompany
globally and take action to remedy any that result in double non-taxation (i.e.,
identified gaps. Such an analysis is critical income, that is not taxed in any country)
for many multinational companies that, as well as instances where profits are
historically, may not have prepared and perceived as geographically divorced from
executed intercompany agreements as a the activities that gave rise to that income.
matter of course. With respect to Action 13, the OECD’s
stated goal was to increase transparency
Moreover, as part of this intercompany for tax administrations along with
agreement coverage analysis, MNEs promoting certainty and predictability
should also reconcile the presentation of for taxpayers through improved transfer
the functions performed, assets employed, pricing documentation and a template for
and risks borne by the related parties CbC reporting.
to the intercompany agreements with
the analyses presented in the transfer
pricing documentation, particularly in the
Master File. Historically, rules regarding
intercompany agreements
have varied widely from
country to country.

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Final BEPS guidance places renewed emphasis on intercompany agreements

In addition to formal, written contracts, the Commerciality

OECD Guidelines highlight that contractual Under the arm’s-length principle, related
terms may also be found in correspondence entities are required to realise outcomes
between the parties – a reminder to consistent with those that would be
taxpayers to always to be conscious of the achieved between independent parties. In
content of their internal communications this context, particular attention should be
including written memoranda, email, text paid to the precise explanation provided for
messages, and instant messages. each party’s assumption of risk.

Where written contracts do not exist, For example, if one party bears foreign
the OECD Guidelines indicate that the exchange risk in a particular transaction,
conduct of the parties and the economic this risk should be documented in the
principles that generally govern agreement (e.g., by denominating the
relationships between independent currency of an intercompany payment).
enterprises should apply.
Further, any relevant terms that may affect
As countries around the world implement the price of the intercompany transaction
Where written contracts In Chapter I, contractual terms are
guidance from Action 13 and other BEPS should be documented. For example, in
addressed in the context of the factors
do not exist, the OECD for determining comparability between a
actions, MNEs proactively should identify intercompany funding arrangements,
any gaps between their current transfer taxpayers should include all relevant terms
Guidelines indicate that the controlled transaction (or taxpayer) and
pricing documentation components that typically would be present in third-
uncontrolled comparables. The OECD
conduct of the parties and Guidelines consider that an analysis of
and the new Chapter V of the OECD party funding arrangements that would
Guidelines, particularly with respect to influence the interest rate applied – not
the economic principles contractual terms should be part of the
intercompany agreements. only should the currency, term, and amount
functional analysis, which looks to identify
that generally govern and consider the functions performed,
be included, but also subordination,
Leading practices guarantees, covenants, and security.
relationships between assets employed, and risks borne by
MNEs are best advised to memorialise the
the relevant entities to the controlled
independent enterprises transactions under review.
actual conduct of their related parties in
line with the substance of the intercompany
should apply. activities through written agreements
executed in advance of the transactions
commencing, considering leading practices
to mitigate potential risk.

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Final BEPS guidance places renewed emphasis on intercompany agreements

Contemporaneous Consistency of service agreements, care should be taken

Intercompany agreements should be Consistency of contractual terms and to enumerate the explicit functions that
drafted and executed prior to a transaction standardisation of definitions across will be performed by the service provider.
being effected. Contracts made effective agreements can be beneficial for corporate The explicit functions described and
prior to the date of execution are tax and legal professionals with a large documented in the legal agreements must
unacceptable in many jurisdictions and inventory of intercompany agreements then be consistent with the description of
the practice may increase risk. Ensuring to manage. Drafting a model agreement the benefits the service recipient receives
coverage of material intercompany for use in memorialising intercompany in its local transfer pricing documentation.
transactions in real time is also key to risk transactions may aid in efficiency To the extent that agreements relate to
Under the arm’s-length mitigation, and corporate tax personnel are and cost control. Specifically, a model tangible or intangible assets, clear and
principle, related entities well advised to collaborate with in-house agreement may help ensure that defined specific descriptions of the assets in
counsel to develop, maintain, and monitor terms are clear and consistent across the question are also important.
are required to realise a catalogue of intercompany agreements, organisation, that contracts reflect the
outcomes consistent including a summary matrix setting out appropriate allocation of risk and warranty When drafting agreements applicable in
the parties to the contract, execution date, language, and that standard terms are jurisdictions that respect the arm’s-length
with those that would expiration date, and type of transaction included in the contract (e.g., choice of standard, the foundational principle of
be achieved between covered. If this centralised catalogue is law, arbitration or mediation clauses, most transfer pricing regimes, taxpayers
missing, there is a risk that the listing of indemnity provisions). may want to consider including language
independent parties. intercompany agreements in the Master File stating that the consideration paid will be
could be incomplete. Although a model agreement may help arm’s length rather than giving a specific
to reduce compliance costs and reduce percentage or figure. This phrasing can
administrative burden, every intercompany help avoid a common pitfall where an
contract must still be tailored to the type of intercompany agreement specifies payment
transaction and, most importantly, reflect of a certain dollar amount or a fixed mark-
the rules of the local jurisdiction. Local up that over the course of a multiple-year
counsel should review all intercompany agreement could yield a non-arm’s-length
agreements prior to execution to ensure result. This approach may also contribute to
compliance with applicable rules. cost savings because it will not be necessary
to update the agreement every time the
In addition, when drafting intercompany comparables on which the remuneration is
agreements, corporate tax professionals and based fluctuate.
in-house counsel should pay close attention
to the way in which the contractual terms
reflect the functional profile of the parties
to the agreement. Specifically, in the case

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Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

In instances where the consideration for the Confidentiality The road ahead
transaction is based on a cost-plus mark- Many taxpayers have expressed Given many tax authorities currently Authors
up or expressed as a percentage of a given concern about maintaining confidential require contemporaneously executed
amount (e.g., revenue, operating profit), information in the face of seemingly intercompany agreements, in order to Jenny Elliott
corporate tax personnel should ensure that extensive information sharing among tax respect local deductions and that some PwC Australia
the cost or income base to which the rate authorities. With the OECD calling for all tax authorities already mandate the local
will be applied is specified. Frequently, material intercompany agreements to be registration of executed agreements, the +61 3 8603 3753
companies will focus on the percentage and included in the Local Files MNEs prepare requirement that the Local File contain jenny.elliott@pwc.com
leave the pool of costs or revenue to which for the jurisdictions in which they operate, all material intercompany agreements
the rate will be applied undefined. This there is the potential for exposure of is another factor contributing to the Clementine Thompson
mistake can be costly in practice as minor confidential information, particularly in the advisability of documenting intercompany
PwC Australia
changes to the cost or revenue included in context of intercompany technology and arrangements. Further, it is anticipated that
the base can create significant fluctuations intellectual property license agreements. tax authorities will continue to focus on +61 3 8603 0251
in taxable income even when modest rates Taxpayers must use discretion when the conformity between a MNE’s internal
clementine.thompson@pwc.com
are applied. including proprietary information in their legal agreements and the outcomes of its
intercompany agreements, balancing the intercompany transactions.
Kathryn O’Brien
A careful balance is required in drafting need for completeness with respect to the
agreements to ensure there is enough detail contained in their contracts with the In this uncertain environment, taxpayers PwC US
explicit information for the agreements to need to protect proprietary information. are best advised to assess their established +1 202 414 4402
be meaningful, consistent with substance, Taxpayers may want to consider drafting intercompany agreements proactively and
and easily reconciled to transfer pricing confidentiality clauses and survival clauses take steps to eliminate any gaps. Further, kathryn.horton.obrien@us.pwc.com
documentation prepared on the one hand, to ensure that sensitive information is by adopting leading practices with respect
but also flexible enough to continue to apply not misappropriated. to intercompany agreement drafting, MNEs Liz Sweigart
as the business evolves over time. can improve their documentation practices PwC US
and potentially achieve efficiencies resulting
in lower compliance costs. Given the speed +1 713 356 4344
with which countries around the world are elizabeth.a.sweigart@us.pwc.com
Taxpayers may want to consider drafting confidentiality adopting the final BEPS guidance, the time
for action by taxpayers is now.
clauses and survival clauses to ensure that sensitive
information is not misappropriated.

Reprinted from Tax Notes Int’l, April 18, 2016, p. 281

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Transfer Pricing Perspectives: The new normal: full TransParency

Rethinking value
chain analysis

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Transfer Pricing Perspectives: The new normal: full TransParency

Rethinking value chain analysis

As controversial as transfer pricing can be

in many regards, there is an established
set of principles and methods generally
agreed upon under the Transfer Pricing
Guidelines for Multinational Enterprises
and Tax Administrations issued by the Much of the BEPS discussion
Organisation for Economic Cooperation focuses on how to effectively and
and Development (OECD Guidelines) and
most local statutes and regulations. Most accurately interpret the functions,
of the controversy is in interpreting the risks and assets (tangible and
facts and applying the available methods
based on evidence from third party intangible) of a multinational
transactions. Typically, only the simplest enterprise (MNE).
sides of transactions are looked at, while
the entrepreneurial entities and the full
value chain receive limited review. We refer
to this as classical transfer pricing. newly developed BEPS framework such VCA is not an easy task, especially for BEPS initiative and VCA
that the value chain of the consolidated an MNE with complex function and risk The OECD has finalised a number of
Classical transfer pricing approaches taxpayer is considered in assignments of matrices spread across different entities. BEPS action papers, many of which posit
and techniques are under review as the profitability (and associated transfer prices) Transfer pricing practitioners have been that classical transfer pricing must be
members of the OECD (and G20) are to individual entities. debating the “right” way to conduct a VCA interpreted and applied in the context of
debating and publishing action papers in such situations. This article explores the the entire value chain of the MNE, urging
focused on the concept of base erosion Many taxpayers these days are considering two leading approaches to the VCA; the the need for proper application of classical
and profit shifting (BEPS), urging the and often using this comprehensive Formulaic VCA and the Empirical VCA. We transfer pricing.1 The OECD is addressing
importance of applying what classical approach to transfer pricing called value argue that in certain cases, Empirical VCA demands from governments to be able to
transfer pricing principles intended to chain analysis (VCA). The approach could be the more defensible approach as see the entire value chain of a business
achieve; ensuring the arm’s length nature involves an investigation into the functions, it attempts to align with the arm’s length without being limited to the part that
of intercompany transactions. Much of risks, and assets of the controlled group principle, which continues to be the one is residing in their country. Much of the
the BEPS discussion focuses on how to as a whole, and an evaluation of how they enduring principle in the ever changing discussion revolves around identifying
effectively and accurately interpret the integrate with the group’s key value drivers. world of transfer pricing. the appropriate entrepreneurial principal
functions, risks and assets (tangible and The conclusions from these analyses are
intangible) of a multinational enterprise often used to attribute group profits to key 1 The OECD finalised Action Papers 8-10: Aligning
(MNE). An understanding of the MNE’s functions, risks, assets, and value drivers of Transfer Pricing Outcomes with Value Creation
full value chain is at the heart of the the business. as well as Action Paper 13: Guidance on Transfer
Pricing Documentation and Country-by-Country
Reporting. The OECD also released a discussion
draft concerning the use of profit splits in a value
chain context.
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Rethinking value chain analysis

entity or entities in the MNE group transfer BEPS Action Papers 8–10 require a review Different approaches to VCA The second approach is based on the
pricing arrangements and verifying the of the entire MNE and a supporting The OECD refers to VCA but the construction maximum use of arm’s length information
profits assigned not only to the routine economic substance and risk analysis for of a proper value chain is still undefined. and applies classical transfer pricing
service providers in the controlled group, allocations of entrepreneurial profit to Two schools of thought have been leading tools to principal group peers to evaluate
but to the entrepreneur(s) as well. As principal entities. Master file, local file, and the VCA debate. One approach, the the entire value chain of the MNE. This
a result, an analysis of the MNE’s key country-by-country reporting requirements formulaic approach to VCA (Formulaic VCA), is a relatively new approach, relying on
operational and management activities under BEPS Action Paper 13 will require has been in use by some practitioners for classical transfer pricing skills to develop
generating entrepreneurial profit may much more thorough documentation than several years. The formulaic approach is key insights into the value chain using
lead to the transfer pricing structure being has historically been required. This is the based more on creating minutely detailed objective third party evidence. The
recharacterised if the facts and economic new environment of transfer pricing, with weighting and scoring templates regarding analysis is supplemented by insights and
substance of the arrangements differ from VCA at the forefront. key business activities and company business information supplied by management, and
the transfer pricing arrangements in place. processes. These weights and scores are with maximum use of classical transfer
Classical transfer pricing and the arm’s often developed through extensive company pricing tools. We call this the empirical
There is a worry that such length standard are still the prevailing management workshops, and involve approach to VCA (Empirical VCA).
recharacterisations could be applied too principles of transfer pricing; however, the developing management’s views into the
often and too widely. To limit the potential requirements for supporting a company’s detailed weighting and scoring templates
for unsupportable recharacterisations, transfer pricing system are rapidly evolving that rank and score business processes and
a transfer pricing structure should be and are demanding a more complete functions. The outcome of this approach Classical transfer pricing
based on sound findings of fact from a
carefully executed and thorough functional
review of the entire value chain. This trend
should not be perceived as a deviation from
is effectively a global profit split approach
based on the identified value drivers. This
and the arm’s length
analysis, and fully grounded in principles classical transfer pricing since the value approach is quite practical for taxpayers standard are still the
of finance and economics. As such, it is
critical in the post-BEPS environment
chain perspective is, in fact, engrained in
what classical transfer pricing intended
operating in industries where third party
information about peers is limited or
prevailing principles of
to enforce the classical transfer pricing to achieve. Only by creating a carefully unavailable. In cases where third party transfer pricing; however,
framework with a VCA mindset. The arm’s
length principle should be respected at
designed, thoroughly documented, and
well-executed and maintained transfer
data are widely available, however, the
Formulaic VCA could be more susceptible
the requirements for
all times and performance of functions pricing system looking at the entire value to tax authority challenge as the tax supporting a company’s
and entrepreneurial risks and ownership
structures should be evaluated based on
chain of a controlled taxpayer group can
a taxpayer gain some relative comfort
authorities may try to replicate the findings
of the Formulaic VCA using the third
transfer pricing system
arm’s length evidence. and protection from over-reach by tax party evidence. are rapidly evolving and
authorities in the future. are demanding a more
complete review of the
entire value chain.

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Rethinking value chain analysis

Empirical VCA
The structure-conduct-performance Figure 1: Four phases of empirical VCA
(SCP) paradigm and the core competency
framework that is based on peer analysis
are at the heart of Empirical VCA design,
which provides powerful insights for
Core competency
the entire value chain of a business. The
Peer analysis Entity mapping Evaluation
approach relies on third party evidence to analysis
formulate a structure that complies with
the core intent of classical transfer pricing.
Empirical VCA has four primary steps: peer
analysis, core competencies analysis, entity
mapping, and evaluation of results (see
Figure 1).

Peer analysis phase function of the taxpayer, evaluating the areas of the taxpayer vis-à-vis its peers. to determine arm’s length profitability
functional competency of taxpayer vis-à-vis Determining the core competencies of the ranges for each routine function and core
A peer analysis is conducted for the overall functionally comparable peers. taxpayer and comparing these with its peers competency area. If necessary, functional
consolidated group and it is broader is a crucial part of an Empirical VCA. and geographic segmentation of peer
and applies to the entire value chain Core competencies analysis phase financials, where available, accounting
of the organisation. The peer analysis The core competencies phase of the analysis adjustments, and other comparability
is intended to identify the sources of The array of competencies of the MNE are will allow practitioners to use arm’s length adjustments should be employed to account
sustainable competitive advantages for identified and analysed under Empirical data and publicly available information, for comparability differences between the
the taxpayer relative to its peers. The VCA. Here, the functions performed, along with information provided by the taxpayer and the peers.
peer analysis in this phase is different risks assumed, and assets owned by the MNE’s management, to identify layers of
from the comparable company analysis consolidated group are documented, and profitability that can be attributed to the Entity mapping phase
employed in one-sided tests. Industry the profits or losses attributable to each primary functions and core competencies
peers are selected for the consolidated competency are determined. This phase is of the MNE. In this phase, practitioners Third, profits or losses attributable to core
group and represent comparability on a conducted based on a thorough functional should also identify the interaction of core competencies and routine functions are
consolidated level. This analysis requires interview and a careful review of publicly competencies with risks and investments, mapped to each legal entity based on its
a thorough review of publicly available available information and analyst reports managerial control of risks, and financial specific facts and competencies, employing
data for the MNE’s primary competitors about a taxpayer company group. The end capacity to bear risks, which are the classical transfer pricing techniques to the
and peers in its industry. In certain cases, product for this analysis will be a heat-map hallmarks of economic substance. Classical extent possible. This phase identifies which
the peer analysis may focus on a specific type illustration showing core competency transfer pricing tools should be employed functions, core competencies, and elements

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Rethinking value chain analysis

of economic substance can be attributed enough insights about core competencies Conclusion
to each entity in the controlled taxpayer that it can effectively differentiate routine Overall, Empirical VCA makes maximum use Authors
group. A focus on intercompany agreements functions from core competencies and of third party data through the application of
and economic substance, with a maximum allocates profits accordingly via the profit- classical transfer pricing techniques. Rather Emre Furtun
use of third party evidence, will indicate an split approach or any other approach that than looking only at the prices of individual PwC US
allocation of profit within the MNE group may be suitable. transactions or at the profitability of the
that will be supportable by: i) the arm’s simplest side of intercompany transactions, +1 713 356 4702
length standard; ii) established principles Evaluation phase the empirical approach to VCA looks at the emre.furtun@us.pwc.com
of risk and investment; and iii) the BEPS consolidated totality of the MNE and its
Action Papers 8-10. Under this method, In the final phase, a variance analysis peers. This approach assigns arm’s length John Burgess
entities employing routine functions will is performed between the taxpayer’s returns to each entity in the consolidated
PwC US
be entitled to routine returns, whereas existing transfer pricing policies and MNE group based on the overall body of
entities performing core competencies with the conclusions of the Empirical VCA to arm’s length evidence for each participant in +1 617 530-5128
economic substance will receive applicable identify any areas of risk and opportunities the value chain and provides direct support
john.burgess@us.pwc.com
entrepreneurial returns. When a split of to bolster or improve existing transfer not only to the routine service providers
entrepreneurial profit is required between pricing policies. This phase involves a gap in the MNE group but to the principal
Adam Cooper
entities performing core competencies, analysis between the conclusions of the entities as well. We believe that, in certain
often approaches other than the classical entities analysis and the current allocation cases, Empirical VCA is a powerful tool PwC Canada
approaches need to be employed. Further, of profits within the controlled taxpayer that can reasonably satisfy tax authorities’ +1 416 687 8376
in cases where intangibles are involved, group based on currently administered growing interest to evaluate taxpayers’ total
appropriate allocations of profits to entities transfer pricing policies. If the MNE’s value chain before evaluating appropriate adam.j.cooper@ca.pwc.com
performing development, enhancement, current transfer pricing policies and the allocation of profits to specific transactions.
maintenance, protection, and exploitation results of the Empirical VCA entity mapping Hannes Kammerer
(DEMPE) functions, as described in the are in alignment, then the Empirical VCA PwC Germany
BEPS Action 8 report, should be considered. approach will provide strong support for
existing transfer pricing policies. If the +49 69 9585 5386
The entity mapping phase is a profit- review indicates a need for better alignment hannes.kammerer@de.pwc.com
split exercise under Formulaic VCA, by in certain areas, then the existing policies
design. Empirical VCA, on the other hand, can be reviewed and potentially modified
provides the taxpayer with the ability to to bring them into alignment with the VCA
identify where in the value chain excess conclusions, strengthening support for the
Rather than looking only at the prices of individual
profits are earned and core competencies taxpayer’s transfer pricing arrangements transactions or at the profitability of the simplest side of
are employed, and it does not default to a going forward.
profit-split-type apportionment. It provides
intercompany transactions, the empirical approach to VCA
looks at the consolidated totality of the MNE and its peers.

14
Transfer Pricing Perspectives: The new normal: full TransParency

Audit readiness in
transfer pricing

15
Transfer Pricing Perspectives: The new normal: full TransParency

Audit readiness in transfer pricing

Are you ready for an audit of your company administrations request information and
in key jurisdictions? Will this result in documentation to support that income
double taxation, interest, and penalties? has been properly recognised and that
This article deals with some of the most deductions comply with the requirements
common threats to taxpayers in transfer established by the relevant provisions.
pricing audits.
Frequent challenges by tax authorities
International taxation issues have been
a top priority in the political agenda in An important aspect to consider among
recent years. The integration of economies multinational enterprises (MNEs) from
and national markets has increased a transfer pricing perspective is business
substantially, threatening the tax systems reorganisations and restructurings within
of countries. Several governments have a corporate group. The reviews are based
agreed to a comprehensive package on different angles, including exit tax,
of measures that require coordinated existence of permanent establishments,
implementation through domestic and substance. From a tax administration
legislation and international treaties, perspective, the reallocation of
and these will be enhanced by selective significant risks of a business derived
monitoring and increased transparency. from a restructuring between associate
Many of the traditional strategies that enterprises without supported economic
enable double non-taxation will be substance, will be challenged. Based on
restricted if widespread adoption of such the above, taxpayers must consider that
measures is achieved, particularly the a restructuring cannot not be supported
alignment of national standards with best solely by contractual terms, but must also
practice guidelines. be consistent with the conduct of such
enterprises as concerns the allocations of
In order to initiate a tax audit procedure, risks, which must comply with the arm’s
tax administrations are planning and length principle. In that sense, a company’s
programming their reviews by considering business restructuring must be planned and
the types of transactions companies engage monitored not only from an economic and
in, including intercompany transactions, accounting approach, but also from a legal,
This article deals with some of the most common threats level of revenues, treaty shopping tax, and transfer pricing perspective.
indicators, restructurings, recurring
to taxpayers in transfer pricing audits. losses, and types and quantity of assets,
among others. During such reviews, tax

16
Transfer Pricing Perspectives: The new normal: full TransParency

Audit readiness in transfer pricing

In addition, certain payments among Another aspect to be considered by MNEs reliability of information, as well as the lack of supporting documentation
related parties such as interest and involves intercompany management fees, defence of tax positions, when evidence is and information; absence of economic
royalties, back-to-back loans and expense which are challenged by tax administration not prepared prior to or contemporaneous substance of the transaction; failure to
allocations, including for research and on the basis that the taxpayer has not with the transactions. The main objectives comply with the formal requirements
development (R&D), will be closely demonstrated in supporting documentation of a defence file should be to reduce the stated in the tax provisions; and lack of
scrutinised. For such activities, MNEs (contracts, deliverables, and appropriate risk of disputes and defence costs and to compliance with the arm’s length principle
must consider not only the generation of a allocation of expenses in the case of strengthen tax positions, considering that for related parties transactions.
possible source of wealth and withholding allocation agreements, among others) in almost all cases tax authorities challenge
tax rules in a specific country, but also the that such services have been effectively the tax treatment of a specific item derived
specific rules and requirements of each tax rendered and a benefit obtained. Further, in from a transaction based on the following:
jurisdiction that allow the deduction of the some countries, including Mexico, allocated
expense. If these rules are not considered, expenses are routinely disallowed.
such disallowance could result in economic
double taxation, interest and penalties. Finally, the process of assessing the
Finally, the process of assessing the consistency of a
consistency of a taxpayer’s risk allocation taxpayer’s risk allocation with the arm’s length principle
Some of the issues observed by tax
administrations regarding passive income
with the arm’s length principle can be
burdensome and costly. However, it is a
can be burdensome and costly.
include the thin capitalisation rules, good practice for taxpayers to implement
back-to-back loans, and interest rates that a process to establish, monitor, and review
comply with the arm’s length principle, their transfer prices, taking into account the
along with maintaining documentation size and complexity of their transactions,
that proves a loan is necessary for the the level of risk involved, and whether
business and that the entity can obtain they are performed in a stable or changing
the necessary cash flow to pay the loan environment. Where an MNE detects a
balance in accordance with its contractual possible risk through a review of its transfer
obligations. Similarly, purported ownership prices, it is preferable that a voluntary self-
or migration of intangibles to low tax correction be made by the enterprise before
jurisdictions involving ongoing local a tax audit is initiated.
expenses to advertise and promote brands
and trademarks are closely reviewed, as Preventive measures – defence files
well as allocated expenses (including R&D),
payments for technical assistance versus Many times, audits are conducted long
know-how, and royalty-free agreements, after transactions take place, and several
among others. factors can affect the availability and

17
Transfer Pricing Perspectives: The new normal: full TransParency

Audit readiness in transfer pricing

A complete functional analysis should statute of limitations in each jurisdiction

identify key value drivers, the appropriate involved in the transaction, as well as local
transfer pricing method, as well as other requirements (e.g. formal agreements,
opportunities that may be relevant for translation to local languages, apostils
the company. For example, it may be and notarisations), to be valid and suitable
necessary in an audit defence to give as evidence of the tax treatment given
special attention to preparing an analysis to each item. For example, if services
from the perspectives of different tax were rendered to a Mexican entity (five-
jurisdictions and being responsive to year statute of limitations) by a foreign
examiner requests, or strategic positioning related party in the United States (three-
and communication. Nearly all subsequent year statute of limitations), the Mexican
components of a transfer pricing study tax administration could request the
depend heavily on the reliability and deliverables issued by the US entity five
thoroughness of the functional analysis. years later in order to evidence the services
carried out.
A crucial point to consider is that a transfer
pricing analysis requires the collection of On the other hand, private letter rulings,
One of the most important As mentioned, among different tax
reliable information not only to complete legal and tax opinions by an expert, no-
jurisdictions, one issue to consider from
aspects that the taxpayer a taxpayer perspective is supporting
the study, but also to have the most suitable name basis approaches with tax authorities,
picture of the economic substance of each as well as advance pricing agreements
must contemplate is documentation and evidence for each
transaction and compliance with each from the transfer pricing unit of each tax
transaction carried out by the MNEs.
the management of For transfer pricing purposes, a solid
country’s transfer pricing guidelines and administration are resources that are worth
rules. Furthermore, the more complete and considering in order to have a stronger
information in case of functional analysis is fundamental because
reliable the information, the more prepared position in case of a tax audit.
it provides the basis for performing transfer
an exchange. pricing analyses of comparability with
it will be upon audit.
Procedural aspects to consider on
transactions with or among independent
It is also worth noting that various multijurisdictional audits
parties, and must consider the economically
documentation (such as invoices,
significant activities and responsibilities
contracts, deliverables of services Considering that nowadays the exchange of
undertaken, assets used, and risks assumed
rendered, policies, invoices, accounting information between tax administrations
by the parties to the transactions.
records, and certificates of residence for of different jurisdictions is a fact, and
the fiscal year that a treaty benefit has countries have been engaging in joint
been applied, among others) should be tax audits in order to review a taxpayer
kept by the taxpayer considering the simultaneously, each in its own territory,

18
Transfer Pricing Perspectives: The new normal: full TransParency

Audit readiness in transfer pricing

MNEs must carry out the necessary actions

that allow them to deal with these types Authors
of procedures.
Prof. Dr. Stephan Rasch
One of the most important aspects that PwC Germany
the taxpayer must contemplate is the
management of information in case of +49 89 5790 5378
an exchange. The parties involved in the stephan.rasch@de.pwc.com
review process must be prepared with
consistent information and documentation Raul Angel Sicilia
in case each tax jurisdiction requests
PwC Mexico
evidence locally pursuant to an exchange of
information procedure. +52 55 5263 5701
raul.angel.sicilia@mx.pwc.com
Also, an important resource to consider
on international issues, is the advisability
Fernando Lorenzo
of filing a protective claim when a right to
initiate a mutual agreement procedures or PwC Mexico
a bilateral advance pricing agreement is +52 55 5263 5879
contingent on future events and may not
be determinable until after the statute of fernando.lorenzo@mx.pwc.com
limitations expires.

Finally, MNEs must define transfer

pricing global policies regarding their
intercompany transactions, assets, risks,
and quality of the information kept and
provided to transfer pricing specialists and
tax authorities. These policies must not
only be defined at a worldwide level, but
must also be as flexible as possible so that
they may be adjusted to comply with the
regulations of each jurisdiction.

19
Transfer Pricing Perspectives: The new normal: full TransParency

BEPS Action Plans 8-10

and the oil and gas
industry

20
Transfer Pricing Perspectives: The new normal: full TransParency

BEPS Action Plans 8-10 and the oil and gas industry

that tax authorities may misunderstand General challenges for O&G

capital intensive industries like O&G, BEPS and capital-rich, low
A goal of the BEPS Report conflate bodies on the ground with relative function entities
was to clarify guidance contributions to the group as a whole, and
attempt to implement something that looks Historically, ownership of MNC assets has
on and strengthen the more like formulary apportionment than been typically viewed to accrue to those
arm’s length principle, and the arm’s length principle. capital-rich entities which have provided
the funding under an implicit “if you pay for
where TP risks remained, In a post-BEPS world, E&P, OFS, and it, you own it” doctrine. The BEPS Report
to depart from the arm’s offshore O&G companies should look to challenges this historic view and places
review their structures paying specific more emphasis on “the level of activity
length principle via attention to the location of decision-making undertaken by the funding company.”
“special measures.” activities, the location of financial capacity Particularly, where a tax authority should
to bear risks, the multinational company’s view a capital-rich entity as not exercising
(MNC) position on its intangibles (if any), sufficient control or capacity to assume
and how such factors map to the allocation contractually assumed risks, the BEPS
The base erosion and profit shifting Risk, capital, and value creation in
of revenue, costs, and/or profits. This is Report recommends that such returns
(BEPS) Actions 8-10 final report (the BEPS the context of BEPS
particularly relevant as the BEPS Report associated with the risks be re-allocated
Report), published by The Organisation for A key theme in the BEPS Report is the
emphasises substance over (legal or elsewhere and the entities providing the
Economic Cooperation and Development interplay between contractual allocations
contractual) form and provides several funding be provided no more than a risk-free
(OECD) in October 2015 aims to align of risk, financial capacity to bear risk,
specific examples where a tax authority’s return on the funding provided.
transfer pricing (TP) outcomes with value and exercise of control over such risk
re-characterisation of a given transaction
creation.1 A goal of the BEPS Report was (i.e., related substance of the associated
may be warranted. Whereas the pre-BEPS The examples in the BEPS Report of the
to clarify guidance on and strengthen enterprise). In examining contracts,
world placed more of an emphasis on capital-rich, low function entities focus
the arm’s length principle, and where TP the BEPS Report emphasises the risk
limiting tax-related distortions on business on intercompany financing, and place a
risks remained, to depart from the arm’s bearing entity’s capacity to perform risk
operations, the post-BEPS changes may specific emphasis on headcount and people
length principle via “special measures.” management decision-making functions
actually warrant that MNCs re-examine functions. Nonetheless, MNCs in asset
Specifically, the BEPS Report looks to as well as actual performance of those
their operations to see whether and how heavy industries (financial assets, physical
end “misapplication” of the arm’s length functions. This is a consistent theme in
changes in taxation may warrant real assets, or otherwise) like O&G may expect
principle in the areas of intangibles, the BEPS Report, which generally covers
operational change. to see tax authorities place more emphasis
risk and capital, and other high risk the importance of capital, risk, people
transactions. This creates new challenges functions, and intangibles, but tends to
1 On 5 October 2015, the OECD published a package of 13 final reports covering the 15 Actions of the OECD/G20
for exploration and production (E&P), focus more on people functions. Together BEPS Project with a goal of promoting comprehensive, coherent, and coordinated reform of international tax rules.
oilfield service (OFS), and offshore oil & with other BEPS initiatives that focus on 2 Offshore support vessels (OSVs), floating production storage and offloading vessels (FPSOs), seismic
gas (O&G) companies in their treatment of overall headcount rather than relative companies, jack-ups, semisubmersibles, ROV assets, drillships, and others. E&P can mean independent E&P
companies, or fully integrated E&P companies including National Oil Companies (NOCs) and International
capital, risk, and people functions, some of contributions of those people to business Oil Companies (IOCs). In some cases, we also only describe the downstream side of a fully-integrated E&P
which we outline below.2 success or failure, there is increased risk company, i.e., lubricant or petrochemical production and distribution.

21
Transfer Pricing Perspectives: The new normal: full TransParency

BEPS Action Plans 8-10 and the oil and gas industry

on people functions in spite of the economic E&P companies, tax authorities may fail to
reality that capital and returns to capital consider all of the facts and circumstances
often play a more critical role in business and incorrectly conclude that any
success or failure. inconsistencies in financial performance are
the result of profit shifting. Overall, these
Operational asymmetries in the post- BEPS-related changes and the associated
BEPS world risks may lead O&G/E&P companies to
re-examine their TP transactional models
The BEPS Report emphasises a holistic and structures or to reconsider their TP
approach to understanding TP and together documentation and supporting defence files.
with the group-wide reporting requirements
of BEPS Action 13 could be interpreted Timing mismatches in the exploration,
to imply that differences in cross-country development and production cycle
profitability of MNC group members
with similar functional profiles relates There can be considerable time between
purely to the shifting of profits. This can exploration (pre-capture) and actual
be particularly challenging for O&G/E&P production and many such exploration costs
companies where differences in production are often incurred prior to a legal entity being Headcount and people functions in the
sharing agreement (PSA) regimes may established. During the 90 percent plus of post-BEPS world The examples in the BEPS
place restrictions on the eventual pricing of the time when exploration is unsuccessful,
production and will often cap (or disallow) the parent or affiliated entity cannot recover Technology intangibles in addition to
Report of the capital-
deductions for interest, technical services those pre-work costs. Going forward, E&P tangible sets can play a large role in rich, low function entities
(i.e., centralised/shared geoscientists or companies may want to consider whether operations of OFS companies. The BEPS
geophysicists), or procurement (capital and how to allocate such costs throughout Report places particular emphasis on profit
focus on intercompany
expenditure, CAPEX) charges, thereby the broader group, including what portion of shifting via the use of intangibles and financing, and place
creating large differences in profitability such costs should be considered “shareholder” is critical of relying on legal ownership
among otherwise equal companies. Fully versus rechargeable costs and where not as a means to allocate profits. The BEPS
a specific emphasis on
integrated E&P companies also often rely deemed as shareholder costs, establishing Report instead indicates that intangible- headcount and people
on index-based pricing (MOPS, ICIS, etc.) group-wide protocols to capture and bear related profits should accrue to those
for transfer pricing in their downstream such costs as well as the upside of successful entities that development, enhancement,
functions.
businesses which can lead to large production.3 The decision to allocate or not maintenance, protection, and exploitation
differences in profitability across countries allocate these costs throughout the wider of intangibles (i.e., entities performing
or time periods for similar activities. group is particularly sensitive given the BEPS (DEMPE) functions). As a result, companies
Although these types of differences are Report’s emphasis on corporate services as a having centralised intangible owning
often a normal part of operations for O&G/ “tool to shift profits.” entities or making use of royalties may want
3 All of which can be further complicated by
PSA regimes.

22
Transfer Pricing Perspectives: The new normal: full TransParency

BEPS Action Plans 8-10 and the oil and gas industry

to re-examine their group’s operations, in the country or based at regional hubs.

paying special attention to DEMPE-related The BEPS Report, taken together with BEPS
economic substance considerations and Actions 7 and 13, can lead tax authorities
ensuring key decision making functions are to challenge this particular model,
aligned with intangible asset owners. particularly when seeing very high top-
line revenues, very low people count, and
As another example, commodity trading relatively modest in-country profit margins.
can play a significant role in a fully- As a result, in the post-BEPS world,
integrated E&P company’s business model petrochemical companies may want to pay
with respect to its ability to hedge risk special attention to their TP transactional
and manage group capacity related issues. models to thoroughly document where key
Due to the scale and frequency of these decisions take place and any intangible
transactions, even small margins can assets within their group so as to reduce
generate substantial profits for a full- future TP and permanent establishment
risk commodity trading company with challenges from tax authorities.
limited personnel. Given the BEPS Report’s
emphasis on contractual terms has led
perceived emphasis on people functions, Challenges for offshore
companies with significant commodity O&G companies
to manipulation and profit shifting. As a
result, contractual relationships like BBCs
Technology intangibles
trading operations may anticipate
additional challenges. These challenges
Key contractual arrangements such as
bareboat charter arrangements (BBC),
can be expected to face a new level of in addition to tangible
can either be in the jurisdiction itself or wherein a capital intensive, asset owner
scrutiny. Tax authorities may increasingly
use their own views on functions, assets,
sets can play a large role
in other jurisdictions with relatively more
headcount and lower profit margins due to
leases the asset to a contracting party that
provides services to a third-party, can be
and risks to challenge specific provisions in operations of OFS
tax authorities’ misunderstanding of the expected to face additional scrutiny due to
in intercompany agreements or to re-
characterise the transaction entirely.
companies. The BEPS
business model. several items addressed in the BEPS Report.
Specifically, the BEPS Report recommends Report places particular
The role of scale and people functions De-emphasising the importance
re-characterising the terms of the
transaction with respect to allocations of
emphasis on profit shifting
can have an impact on tax risk for
petrochemical companies, as well.
of contracts
risk “which may not correspond with the via the use of intangibles
Dealing in commodity chemicals, regional A general theme repeated throughout
activities actually carried out” in favour
of entities exercising control or having
and is critical of relying on
sales and marketing entities within lean
organisations like petrochemical MNCs may
the BEPS Report is that the arm’s length
principle has been interpreted to over
capacity to bear those risks. legal ownership as a means
generate sales in very large quantities with emphasise contractual allocations of to allocate profits.
just a few sales people, either based directly functions, assets, and risks and that over

23
Transfer Pricing Perspectives: The new normal: full TransParency

BEPS Action Plans 8-10 and the oil and gas industry

Requirement to understand the conduct residual profits/losses. A future outcome contract resulting in continuous losses, and
of all parties to the transaction and may be a residual profit split (value chain an independent operating company would Authors
potential comparable transactions analysis) between lessor entities and other not insist on enforcing contract terms that
within the MNC key entities within the group responsible for drive a valuable business partner into Dan Axelsen
commercial and decision-making functions bankruptcy, it may be reasonable for O&G PwC UAE
The BEPS Report places a requirement on (CAPEX decisions, fleet location, etc.). companies to re-examine their own TP
tax authorities to carefully delineate the policies and intercompany agreements in +971 2 694 7563
actual transaction through understanding Transfer pricing in a downturn light of economic reality. dan.axelsen@ae.pwc.com
both contractual terms and conduct In the current economic downturn
of all parties contributing value to the impacting the O&G industry, there is a Conclusion Chetan Patel
transaction. Specifically, tax authorities likelihood of creating “phantom income,” The OECD’s BEPS Report aims to align TP
PwC US
that have historically been content to that is, limited risk operating companies outcomes with value creation through a
understand only what is happening receiving income in various jurisdictions focus on capital, risk, people functions, +1 713 356 4010
(functions performed, risks assumed, assets while the overall group experiences a and intangibles, but arguably puts more
chetan.patel@us.pwc.com
employed) within their specific jurisdiction system loss. This imposes a tax burden on weight on people functions. Although the
are beginning to look outside their the limited risk operating companies in BEPS Report aims to strengthen the arm’s
Jeffrey Baird
borders with more detailed information MNC groups that is not borne by similar length principle and better match taxable
requests and full functional analyses independent companies that are free to income with economic reality, this apparent PwC UAE
on all direct and indirect parties to the make losses and create tax assets during an over emphasis on people functions and
+971 2 694 7401
transaction. Moreover, tax authorities industry-wide recession. During a short- de-emphasis of contractual allocations of
which may not have made comparisons lived downturn, this implied restriction on risk may produce challenges for industries jeffrey.baird@ae.pwc.com
across similar transactions within the limited risk operating companies within where capital and risk play a larger role
group are beginning to look at a particular MNC groups to be profitable may even be than headcount in creating value. In this
transaction within the context of the MNC consistent with their risk profile. post-BEPS world, O&G companies may
group as a whole. want to consider re-examining their TP
In periods of prolonged downturn, transactional models and operations to see
Going forward, this may put stress on however, it may be appropriate to recognise if a re-aligned TP model is necessary.
one-sided tests such as the comparable that independent third-parties, operating
profits method/ transactional net margin at arm’s length, will consider their available
method. This is particularly pertinent with alternatives and elect to renegotiate
respect to BBCs where the BEPS Report may contracts when the contract terms are
recommend looking to people functions no longer consistent with economic and
as being responsible for residual profits/ operational reality. In the same way that an
losses with less importance on the asset independent entrepreneur or asset owner
(i.e., capital and risk) to explain those same would not be perpetually bound to fulfil a

24
Transfer Pricing Perspectives: The new normal: full TransParency

TP Lab – PwC’s virtual

think tank to generate
transfer pricing thought
leadership

25
Transfer Pricing Perspectives: The new normal: full TransParency

TP Lab – PwC’s virtual think tank to generate transfer pricing thought leadership

We are convinced that deep

technical expertise is key
in delivering value-adding
services to our clients. In this
context, TP Lab continuously
acts as one of our key
thought leadership initiatives
for transfer pricing.

What is TP lab? How does TP Lab operate? General survey-type intelligence on topics Current research assignments
Kicked off in January 2011, TP Lab is a TP Lab’s goal is to conclude between of particular interest (e.g. known best Current research assignments
virtual research laboratory made up of six and eight research projects per year. practices regarding the interaction of relate to value chain analysis, risk
nominated members of the global PwC Each project is staffed by experienced transfer prices and customs). and recharacterisation, and the
transfer pricing network (the Network). members of the Network with an additional digital economy,  as follows:
TP Lab generates solutions, approaches, sponsoring partner per research project. • Industry-specific analyses of particular
and  tools to address technical issues and Members are newly assigned per project, questions of interest in transfer pricing • In their research on value chain
needs identified by the Network. Solutions i.e. Typically, TP Lab assignees work on one (e.g. analysis of contractual agreements analysis (VCA), Adam J. Cooper (CA),
are designed to reflect the coordinated project and then cycle back out of TP Lab. in pharma in terms of impact of Emre Furtun (US), Hannes Kammerer
wisdom, skills, and depth of the Network contractual details on pricing). (DE) and John Burgess (US) have
and aim to benefit clients around the globe. General scope of research developed a framework to perform the
The scope of TP Lab research assignments The number and variety of research core competency analysis and entity
We are convinced that deep technical covers all aspects of transfer pricing, covered by TP Lab since 2011 is remarkable. mapping steps of a VCA. Their research
expertise is key in delivering value-adding including the following: In addition to the earlier examples, contributes to PwC’s VCA service
services to our clients. In this context, TP Lab previous research topics include location offering, which is a novel top-down
continuously acts as one of our key thought • Specific technical issues within a savings analysis best practices, analytical approach to analyse a company’s value
leadership initiatives for transfer pricing. certain transfer pricing sub-domain approaches to making risk adjustments, chain that makes use of objective
TP Lab serves as a resource to the Network (e.g. determining appropriate discount reviews of best practices in determining the data from comparable third party
by providing globally consistent solutions rates for intangible property valuation). useful life of intangibles, and many others. multinationals. Recently, VCA has
that are based on worldwide transfer pricing
expertise and insights.
26
Transfer Pricing Perspectives: The new normal: full TransParency

TP Lab – PwC’s virtual think tank to generate transfer pricing thought leadership

become an important tool under Summary

the base erosion and profit shifting As a virtual research laboratory, TP lab TP Lab delivers solutions Authors
(BEPS) initiative of the Organisation brings together joint expertise of the entire
for Economic Co-operation and Network in order to further PwC’s thought for important transfer W. Joe Murphy
Development (OECD), and TP lab leadership in transfer pricing. TP Lab pricing topics and thereby PwC US
successfully proved to be the right delivers solutions for important transfer
place to develop and define the pricing topics and thereby contributes to contributes to PwC’s +1 617 530 4289
components of a VCA. PwC’s proposition to offer innovative and proposition to offer w.joe.murphy@us.pwc.com
value-adding transfer pricing services
• In a complex effort, Alejandro Lozano
for our clients. innovative and value- Dirk Wilcke
(MX), Jim Matthews (US), Kenny
Sun (CH), Marco Fiaccadori (US), adding transfer pricing PwC Germany
Michael S. Mills (US), Pavel Sarghi services for our clients. +49 69 9585 6547
(LV), Regina Martinez (US) and Ryan
M. Decker (US) are surveying current dirk.wilcke@de.pwc.com
trends and perceptions on risk and
recharacterisation and designing
(building on, among others, work by
Kartikeya Singh and W. Joe Murphy)
an analytical framework to address risk
in transfer pricing analyses.
• Himanshu Bhandari (IN), Francisco
Garcia Valdivia (MX), Marion David
(FR) and Sina Litterscheid (DE) are
working on a paper that summarises
the potential implications of OECD
thinking on digital business models
from a transfer pricing perspective.
Their research is designed to identify
solutions for digital economy topics in
transfer pricing, which will certainly be
a hot topic in transfer pricing over the
next decade.

27
Transfer Pricing Perspectives: The new normal: full TransParency

New rules for transfer

pricing transparency in
China – challenges and
change for pharma and
life sciences companies

28
Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

In June 2016, China introduced new the pricing methods of local and foreign
transfer pricing compliance rules around PLS companies for potential anti-trust
the same time the Organisation for violations, looking for price manipulation
Economic Co-operation and Development among competitors or through the
(OECD) released its Guidance on distribution chain.
Implementation of Country by Country
Reporting (Action 13 guidance). Reflecting PLS multinationals operating in China
China’s support of Action 13, the new rules also face a difficult and uncertain Chinese
overhaul the related party transaction tax and transfer pricing environment.
disclosure forms and introduce country Unfortunately, China’s new transfer pricing
by country reporting (CbCR), as well as requirements may only serve to further
Master File and Local File transfer pricing increase the compliance and administrative
documentation requirements. burden. The PLS industry is a priority
industry for China’s State Administration
Current regulatory and tax of Taxation (SAT), and as such is subject
environment in China to close scrutiny, with PLS multinationals
Although China has become one of the facing sweeping transfer pricing audits
world’s largest and fastest growing across the country. This is particularly
pharmaceutical and life sciences (PLS) the case for PLS multinationals with more
markets, growth has slowed in recent than one Chinese subsidiary undertaking
The pharmaceutical and life sciences (PLS) industry is years. General economic headwinds have different types of activities (e.g.,
a priority industry for China’s State Administration of undoubtedly played an important part, manufacturing, distribution, research and
and pressure from recently introduced development), which may face simultaneous
Taxation, and as such is subject to close scrutiny with government cost containment measures centrally coordinated national and local
PLS multinationals facing sweeping transfer pricing and investigations into anti-competitive audits. Securing tax certainty in China is
practices also factor into the equation. difficult, with limited opportunity to pursue
audits across the country. PLS is one of the most heavily regulated unilateral or bilateral advance pricing
sectors in China, and new regulatory agreements (APAs) given the long and
initiatives such as the “two invoices” system congested queue of outstanding cases and
and the introduction of government- the low number of PLS APAs successfully
negotiated drug prices into medical concluded to date. To further add to the
insurance are expected to put downward uncertainty, depending on the location of
pressure on multinationals’ drug prices your Chinese operations, an APA application
in China. Chinese regulators such as may invite a transfer pricing audit for
the National Development and Reform historical years. The rigidity of the Chinese
Commission are also closely examining customs regime restricts the ability of

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Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

multinationals to adjust their transfer prices • Value chain analysis, which is As is commonly the case in China, the new on multinationals’ global and commercial
into and out of China for fear of customs generally described in the new rules to rules are light on detail and are therefore value chains to support these types of
authority challenge, and the existence of include group transaction flows, latest open to interpretation. In particular, the analyses and ultimately support proposed
foreign exchange controls further limits the financial statements, measurement, value chain analysis requirement remains tax adjustments.
options for multinationals to make year- and attribution of “location specific somewhat ambiguous. Regardless of this
end price adjustments. These challenges factors” contributing to value creation uncertainty, with the first China local file Most multinational tax departments will
are significant enough to have caused some and the allocation of group profit across due for all taxpayers by 30 June 2017, PLS already be familiar with the Action 13
PLS multinationals to seek alternative the global value chain (including the multinationals must immediately study guidance on the importance of identifying
methods to achieve arm’s length transfer allocation basis). these new rules, evaluate the potential value drivers and analysing intangible
pricing results – for example, with service implications for your business, and develop property (IP) development, maintenance,
• Key factors affecting pricing of
fee arrangements. This creates additional a strategy to comply. protection, and exploitation activities (the
transactions, including intangibles,
complexity and challenge for multinationals so-called DEMPE functions) across the
and an analysis of location specific
trying to maintain a globally consistent and Chinese tax authority views on value value chain. This forms the cornerstone of
factors such as local China cost savings
cohesive transfer pricing model. chain analysis understanding intangibles in a multinational
and China market premium (described
The new Chinese disclosure requirements organisation and is a key part of the value
below). The Chinese authorities
The new Chinese requirements differ from the Action 13 guidance in certain chain analysis required to be included
typically consider aspects such as labour
The new rules introduce a range of key respects, reflecting the Chinese tax in the Master File. Aligned with this, the
costs, environmental costs, market
additional transfer pricing filing and authorities’ unique and results-oriented new Chinese rules require a description
size, market competition, consumer
disclosure requirements covering potentially views on value chain analysis and location of value drivers and the locations where
purchasing power, substitutability
sensitive and subjective data and analysis. specific factors in particular. They are DEMPE functions are performed across the
of goods or services, and regulatory
The CbCR requirement will typically be specifically designed to enable the Chinese worldwide value chain. This differs from the
controls in analysing these topics.
addressed through tax authority exchange of authorities to obtain additional information approach typically adopted up to now, which
information provided the general conditions
described in the Action 13 guidance are
met. The Master File documentation
also generally follows the Action 13 The Local File replaces
guidance, with a few additional China- the old Chinese
specific disclosures covering items such as
changes in operational structure and the contemporaneous
functions, assets, risks, and personnel of the documentation rules
group’s research and development (R&D)
facilities. The Local File, on the other hand, and contains potentially
replaces the old Chinese contemporaneous significant new disclosure
documentation rules and contains
potentially significant new disclosure requirements.
requirements, including the following:

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Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

importance of location specific factors, these transactions separately using one-

suggesting additional returns should be sided tests would result in under-recognition
allocated to China – the two most common of China’s contribution to the global value
being local cost savings as compared with creation and hence in an under-allocation
other countries and higher prices of foreign of profit to China. As a PLS multinational
goods and services in China (China market with operations in China, you should be
premium) as compared with other markets. prepared to address this through your value
Interestingly, the fact that labour is not chain analysis.
typically a highly significant cost for PLS
multinationals may weigh against the local Specific PLS value chain challenges
cost savings argument, and Chinese price PLS multinationals operating in China face
regulations and anti-trust investigations a particular set of challenges due to the
may serve to limit the potential to attribute regional principal company models they
additional profits to China. The fact that commonly adopt, where strategic business
new PLS products are usually launched management activities and value creation
with premium prices in more developed are concentrated in centralised locations.
has relied on one-sided tests to support the
Authorities are likely returns of the Chinese operations on the
markets before they are introduced in
China with lower prices may also serve as a
These types of principal models will be the
subject of particular scrutiny by the Chinese
to ask the taxpayer to basis that they are generally characterised as
less complex than their foreign counterparts.
counterargument against the existence of a tax authorities going forward. Given the
provide more than one- China market premium. Nevertheless, the
burden of proof rests with the taxpayer in an
30 June 2017 China local file deadline for
FY2016 documentation, PLS multinationals
sided tests to defend its With the new Chinese rules, it appears the
SAT is focused on trying to identify value
audit situation, and the authorities are likely need to begin preparing for potential
transfer pricing, including, created and contributed by local Chinese
to ask the taxpayer to provide more than
one-sided tests to defend its transfer pricing,
challenges immediately.

potentially, an analysis of entities through local enhancement,

exploitation, and promotional activities
including, potentially, an analysis of system Take the following simplified example
system profit allocation. (e.g. R&D, marketing, and sales) with a
profit allocation. — a US PLS multinational with an Asia
regional principal located outside China
view to justifying higher local returns
Additionally, Chinese tax authorities may and four Chinese subsidiaries performing
or profit allocations. Although it is not
attempt to use a holistic analysis approach contract R&D, contract manufacturing,
clear that PLS multinationals necessarily
to argue the existence of synergies among licensee manufacturing and limited risk
or generally perform high value-adding
multiple functions being performed in China distribution. Group operating margin is
activities in China, you should anticipate
(e.g., manufacturing, distribution, and 25% and the Chinese entities earn margins
these types of China tax authority positions
R&D), whether in one or more entities. Their of 3–15% depending on their activities.
and be prepared to defend against them.
hypothesis is that analysing the returns of
The Chinese authorities emphasise the

31
Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

Product sale As a PLS multinational under audit, you will be crucial for PLS multinationals in
Parent (US) Royalty should expect the Chinese tax authorities supporting their tax and transfer pricing
Contract R&D services to focus on the following types of questions positions in China.
Headcount and analysis:
5000 25% Profit (operating margin) PwC’s value chain analysis approach
• Compare the Chinese returns (3% – VCA
Related – 15%) with global and regional There are two main schools of thought on
party LRDs returns (25%). How do you explain how best to conduct value chain analysis –
Asia (Asia) and support the lower profits of the the traditional “formulaic” approach and
Principal Asia Chinese affiliates? the empirical approach. The formulaic
customers
approach is essentially a global profit split
500 25% Third party • Investigate the nature and cost base
using weighting and scoring techniques
distributors of China R&D and manufacturing
(Asia) to allocate system profit based on value
activities. Are there any local IP or
Outside China drivers. This approach is quite practical
process enhancement, exploitation or
for taxpayers, but may be susceptible to
China promotional activities, or cost savings
tax authority challenge given its inward
due to the location of these activities?
focus and reliance on internal management
Contract Contract mfg License mfg Limited risk • Analyse sales and marketing activities reporting data. In contrast, the empirical
R&D (Export) (Domestic) distributor and expense levels of the limited risk approach is based primarily on third
(China) (China) (China) (China) distributor. Are there any unique China party data. PwC has developed our own
market development activities that empirical value chain analysis approach,
50 10% 200 10% 250 15% 250 3% might create marketing intangibles? which we call VCA, to assist multinationals
Do your products command a price meet the standards of the Action 13
premium in China? guidance and ensure they are prepared to
China address potential tax authority questions
• Are there any synergies for your
customers or challenges such as those described
organisation associated with having
above for China. In light of all of the BEPS
a range of activities (e.g., R&D,
developments and the new environment
manufacturing and distribution)
of tax transparency, multinationals will
in China?
be best served with a single value chain
Are there any synergies for your organisation analysis providing a globally consistent
These are the types of arguments the
associated with having a range of activities (e.g., R&D, Chinese authorities typically pursue to
story that can be provided to any tax
authority around the world, rather than
manufacturing and distribution) in China? support their position and propose tax
attempting to develop different analyses or
adjustments. Anticipating these questions
arguments to serve different purposes or
and developing a strategy to address them

32
Transfer Pricing Perspectives: The new normal: full TransParency

Final BEPS guidance places renewed emphasis on intercompany agreements

for different jurisdictions. The key to our compares the multinational-specific VCA possible. The road ahead remains complex
empirical VCA approach is maximising the findings back to the industry and peers, and challenging, but an early start on your Authors
use of arm’s length industry and third party identifying any gaps and opportunities value chain analysis should help to ensure
publicly available information, applying for alignment where appropriate. The you enter the new China compliance and Steven Tseng
traditional transfer pricing analysis to resulting output is a strategic and audit cycle with your best foot forward. PwC US
industries and peers, and supplementing thoughtful empirical VCA supporting
this with appropriate internal management the multinational’s allocation of profits +1 646 471 8285
information where necessary. This across the global value chain. An executive steven.s.tseng@us.pwc.com
approach seeks to minimise inward-looking summary describing the VCA findings
subjectivity and risk of successful tax would be included in the master file and Shane McEvoy
authority challenge by tying as much as this could also be used to also support local
PwC US
possible back to industry and third party country compliance requirements (e.g.,
data and analysis. China local file) where required. Elements +1 646 471 1831
of the more detailed VCA report may also be
shane.p.mcevoy@us.pwc.com
Our VCA comprises four steps: peer group extracted and used as part of local country
analysis, core competencies, entity mapping audit defence where appropriate.
Qisheng Yu
and evaluation. The objective of the peer
group analysis is to identify competencies Next steps – navigating the PwC China
or attributes that are a source of sustainable compliance and audit cycle +86 10 6533 3117
competitive advantage for a multinational. As a PLS multinational with operations
The core competencies analysis involves in China, your next steps are critical and qisheng.yu@cn.pwc.com
analysing the associated functions, assets, your strategic assessment of the impact of
and risks to identify appropriate profit or the new Chinese rules on your positions Paul Tang
loss outcomes for each competency. To should start immediately. Given the 30 June PwC China
address China-specific considerations, 2017 China local file deadline, you should
a PLS industry analysis may cover, for move quickly to develop your value chain +86 21 2323 3756
example, public labour cost data and the analysis, ensuring you fully understand and paul.tang@cn.pwc.com
findings of Chinese government anti-trust can support the allocation of profit across
investigations to help shed light on true your global value chain, taking remediation
value drivers and defend against Chinese steps to address any gaps if necessary.
tax authority arguments on location specific You should begin to consider whether you The road ahead remains complex and challenging, but
factors. Entity mapping explains how
profits or losses map to types of entities
have any particular challenges in China as
well as how these might be addressed and
an early start on your value chain analysis should help to
based on factors such as functions, risks, incorporated into your global value chain ensure you enter the new China compliance and audit cycle
investments, assets, and contractual
relationships. Evaluation essentially
analysis using industry and third party
empirical data and analysis to the extent
with your best foot forward.
33
Transfer Pricing Perspectives: The new normal: full TransParency

Implications of the new

permanent establishment
definition on retail and
consumer multinationals

34
Transfer Pricing Perspectives: The new normal: full TransParency

Implications of the new permanent establishment definition on retail

and consumer multinationals
One of the most far-reaching outcomes of The key changes to the definition of a
the Organisation of Economic Co-operation PE can be summarised as follows:
and Development’s (OECD’s) base erosion The key changes to the definition of a PE
and profit shifting (BEPS) project is the can be summarised as follows:
modification of the definition of a PE.
• Dependent agent PE. Currently a PE
In Action 7 of the BEPS project, the OECD arises when an agent acting on behalf
tries to tackle common tax avoidance of a foreign enterprise habitually
strategies used to prevent the existence exercises authority to conclude
of a PE, including through agency or contracts in the name of the enterprise,
commissionaire arrangements instead of unless the agent is an independent
establishing related distributors. Action 7 agent (legally and economically
also aims to prevent the misuse of specific independent from its principal) acting
exceptions to the PE definition, which in the ordinary course of its business.
relate to activities of a preparatory and Since the current definition is limited
auxiliary character. The changes in the PE to the formal conclusion of contracts,
definition have significant consequences the OECD widened it to also include
for international groups. Some sectors, situations in which an agent habitually
especially the retail and consumer (R&C) plays the principal role leading to the
industry, seem to be even more exposed conclusion of contracts that are then
than others to the changes. routinely concluded without material In Action 7 of the BEPS project, the OECD tries to tackle
modification by the enterprise. common tax avoidance strategies used to prevent
Effecting the changes to the PE definition
will require amendments to bilateral tax
• Specific activity exemptions and anti- the existence of a PE, including through agency or
fragmentation rules. Under the current
treaties. To facilitate this process, the OECD
regulations, a PE is deemed not to exist commissionaire arrangements instead of establishing
is working on a multilateral instrument that
will implement the results of tax treaty-
when a place of business is engaged related distributors.
solely in certain activities (such as
related BEPS measures in existing bilateral
maintenance of stocks of goods for
tax treaties. The instrument should be
storage, display, delivery or processing,
ready for signature by the end of 2016. It is
purchasing of goods or merchandise,
expected that the changes proposed by the
collection of information). With the
OECD may be effective from 2017.
revised regulations, the exclusion will
apply only when these activities are
preparatory or auxiliary in relation to the
business as a whole. Anti-fragmentation

35
Transfer Pricing Perspectives: The new normal: full TransParency

Implications of the new permanent establishment definition on retail

and consumer multinationals
rules have also been introduced to forms an essential and significant part of The other model used by multinationals
prevent the breakup of an operating the overall activity of the enterprise. In involves a central purchasing department
business into several small business units particular, the activity cannot be regarded that provides support services for the
in order to benefit from the preparatory as of a preparatory or auxiliary nature operating companies that purchase
or auxiliary exemption. As a result of the when the general purpose of the activity goods directly from suppliers. Such
new provisions, the activities performed performed by the place of business is the support usually includes selecting and
by different related parties are to be same as the general purpose of the whole recommending suppliers, negotiating
combined (analysed on an aggregated enterprise. For companies operating in the global purchase agreements with suppliers,
basis) when assessing whether they R&C industry, activities such as purchasing and supporting negotiations with local
can be regarded as of a preparatory or or warehousing typically correspond to a suppliers. So far, such activity has not been
auxiliary nature. company’s core business activities and thus sufficient to create a PE.
these companies may no longer benefit
• Splitting up of contracts. According
from the existing activity exemptions. Under the new regulations, one may argue
to the existing provisions, a PE arises
Further considerations on the potential on the one hand that in this scenario the
when work on a construction site lasts
influence of the new PE regulations on dependency condition is not met, as the
at least 12 months. In order to prevent
purchasing and warehousing functions are central department does not follow the
splitting up contracts artificially into
presented below. instructions of the operating companies but
shorter periods, the OECD advocates for
rather instructs them on how to execute
a principal purposes test,1 or a specific
Purchasing the purchasing process. Thus, the central
provision that allows for combining
purchasing department should be perceived
the activities of the related enterprises
R&C multinationals often use central as an independent agent. However, because
carried out at one construction site
buying entities to streamline purchases. in principle such services are provided
during different periods of time, each
These entities are typically represented for the benefit of group entities only, tax
exceeding 30 days, when determining
in local markets by related party service authorities might claim that the central
the duration of work.
providers or purchasing offices. In principle, purchasing department does not in fact
responsibilities of such local units include meet the independent agent condition,
What are the main concerns of these
searching, auditing, and selecting suppliers which would result in the creation of a
changes for R&C multinationals?
as well as negotiating with suppliers with PE (provided that all other conditions are
The most significant impact on R&C
regard to products and the commercial met). This example shows that the inherent
multinationals will likely result from the
terms of cooperation. Under the new PE subjectivity of the new provisions triggers
changes to the specific activity exemptions.
definition, such local places of business will a risk of creating a PE even when tax is not
constitute a PE, as the purchasing function the key driver behind the arrangement.
According to the OECD, the decisive factor
is an essential and significant part of the
used to assess whether a given activity can
enterprise’s overall activity (consisting of 1 This rule is one of the outcomes of Action 6 of the BEPS project on the prevention of treaty abuse. According
be regarded as preparatory or auxiliary
selling these goods). to this rule, if one of the principal purposes of a transaction or arrangements is to obtain treaty benefits, these
involves determining whether the activity benefits will be denied unless granting them would be in line with the object and purpose of the provisions of
carried out by the place of business in itself the treaty.

36
Transfer Pricing Perspectives: The new normal: full TransParency

Implications of the new permanent establishment definition on retail

and consumer multinationals
of an enterprise’s distribution business In order to prepare for the new regulations,
and therefore do not have a preparatory multinationals should review their existing
or auxiliary character. As a result, under structures or planned arrangements.
the new PE definition, these local places In particular, they should analyse the
of business are likely to constitute a PE of activities performed by their entities/
the enterprise. places of business from the perspective of
the value chain of the whole enterprise in
Overall impact of the changes order to identify activities that could give
The existence of a PE does not rise to a PE, and measure the impact of any
automatically mean a material increase potential PE on the business. Depending
in tax exposure (although it is likely to on the outcomes of this analysis, taxpayers
trigger additional compliance costs and might need to revise their business models
administrative burden for businesses), or gather and document arguments
especially where the local place of business supporting their position.
already receives arm’s length remuneration.
In most cases, remuneration based on costs
incurred by the PE should be appropriate,
though there may be situations in which
remuneration based on commission
would be more suitable. This might apply Authors
in particular when a local unit either
Warehousing Susann van der Ham
concludes contracts with suppliers or plays
Currently, most R&C the principal role leading to the conclusion PwC Germany
Currently, most R&C multinationals
multinationals are are involved in online sales, with some
of contracts that are then routinely
+49 211 981 7451
concluded without material modification by
involved in online sales, international sellers engaged solely in
the enterprise. Selection of the appropriate susann.van.der.ham@de.pwc.com
digital sales. Online sales usually require
with some international that an enterprise maintain a warehouse
method of profit attribution to the PE,
as well as determining whether or not a Robert Halat
sellers engaged solely in abroad (with an adequate number of
given place of business constitutes a PE,
employees) where goods owned by the PwC Germany
digital sales. enterprise are stored and delivered
are the areas where there is heightened
risk of a dispute with tax authorities. This +49 211 981 4376
to local customers (once sold by the
translates into uncertainty and increased
enterprise). It seems indisputable that halat.robert@de.pwc.com
compliance costs, and may also result in
storage and delivery activities to fulfil
double taxation.
online sales constitute an essential part

37
Transfer Pricing Perspectives: The new normal: full TransParency

Transfer pricing
analytics: The
exploitation of Big
Data and emerging
technologies in
transfer pricing

38
Transfer Pricing Perspectives: The new normal: full TransParency

Transfer pricing analytics: The exploitation of Big Data and emerging technologies
in transfer pricing
Though it may sound like a cliché, most every aspect of the transfer pricing life 3. measuring the successful achievement In sum, descriptive analytics allows
of us have heard various business leaders cycle, from strategy and planning to price of any potentially relevant metrics or for improving and deepening the
talk about data as the “new oil,” the “new setting, maintenance, documentation, KPIs; and understanding of certain information that
currency,” and make similar statements and even dispute resolution. In addition, is routinely gathered but usually buried into
4. identifying, bucketing, and packaging
about the overall impact of data and new technologies that allow for data infinite amounts of quantitative data and
information in a manner that
analytics. We live in a world that is management, analysis, and visualization sorted into large Excel files.
improves and supports the decision-
increasingly impacted by data. Every aspect are being developed and released at a
making process.
of our lives – from the sports we watch to staggering pace. This rapid progression of
the way we shop to the daily advertisements technology is finally helping to move data
we see – is impacted by enhanced analysis closer to the artificial intelligence
computing power and improved analytical objectives set by technologists thirty
tools. These technological advances have years ago.
given us the ability to quickly analyse
data sets that were previously too large Data analytics is a very broad concept that
or complex to handle without the use of includes various angles and objectives that
a supercomputer and many hundreds of can be achieved in the world of transfer
man hours. The emergence of Big Data is pricing. The first and most common
disrupting our current way of thinking, application of Big Data can be labelled
causing us to re-examine everything we as descriptive analytics. It consists of
thought we knew. Transfer pricing is no analysing large data sets to derive trends
different than any other business process; and patterns from a descriptive standpoint.
however, it is in a better position to leverage In the transfer pricing world, this may
rich and unique data sets to provide serve multiple purposes and provide a
business insights. large variety of insights to the tax payer,
including but not limited to:
Our discipline is at the core of the
information collection process, including 1. providing a clear and compelling
transactional data, legal entity company overview of financial results across
information, benchmarking data, regions, jurisdictions, legal entities, The emergence of Big Data is disrupting our current way
legal settlements and other sources of business units, or stock keeping
information impacting intercompany units (SKUs); of thinking, causing us to re-examine everything we
pricing. These data sets exist across a
2. facilitating the tracking of transfer thought we knew.
variety of sources and systems. The ability
pricing policy implementation results;
to capture and analyse data is transforming

39
Transfer Pricing Perspectives: The new normal: full TransParency

Transfer pricing analytics: The exploitation of Big Data and emerging technologies
in transfer pricing
Although descriptive analytics has been
around for decades, new technological
solutions – centred around data
visualisation tools such as Tableau,
Qlickview, PowerBI (to name a few) Descriptive analytics Predictive analytics Prescriptive analytics
as well as data computation tools and to understand to understand what is (use of predictive models
database management software – allow what has happened likely to happen to determine the best
us to significantly expand the amount (reporting on key metrics) (modelling and trend detection) course of action)
of data we analyse and efficiently grow
data analytics to include a predictive and
prescriptive angle.

Predictive analytics is the use of data

and analytics to provide insights into the
potential outcomes of various what-if adviser. Our clients expect us to deliver from source systems and stored complex calculations (e.g., across legal
scenarios and hypotheses. This analysis end-to-end assistance, from strategy centrally for efficient use. entities, business units, consolidated
of historical trends and patterns to through to execution. By leveraging data groups) and mitigate overall risk via
2. Data storage and basic manipulation:
anticipate and predict the future allows for analytics and visualisation tools we can greater control.
Excel is the predominant tool leveraged
a more efficient and impactful decision- provide clients with tailor-made solutions
for storing, calculating, and analysing 4. Data visualisation and dynamic
making process. Finally, prescriptive and transactional insights to secure the
tax data, which can be effective but modelling: Tax calculation results are
analytics utilises the power of data monitoring and implementation of transfer
is often time consuming to maintain highly aggregated and documented
management, visualisation tools, and pricing policies. We can also generate
and review. Adding data and in static reports (e.g., PowerPoint,
artificial intelligence solutions not only valuable information that improves
analytics solutions (e.g., SQL, Alteryx, Word), requiring these deliverables to
to analyse data at a deeper level but also the strategic decision-making process
PowerPivot) to the current Excel be manually updated each time data
to further assist the user (and, to some and facilitates the reduction of risks
environment can augment the potential is refreshed and minimising end-user
extent, replace it) in the articulation of going forward. These benefits may be
for automation (and reduce time and functionality to dynamically interact
approaches and policies designed to achieve achieved holistically or at a specific level
level of effort). with reported data. Visualisation
a specific outcome. of the transitional data life-cycle, defined
solutions (e.g., Tableau, MicroStrategy,
as follows: 3. Complex data computation: Updating
Qlikview, etc.) are leveraged and
Our Transfer Pricing Analytics practice and reviewing calculations in complex
tack directly onto the calculation
understands the importance of data 1. Data extraction: Within most Excel models can be time consuming
engine(s) (e.g., SQL, Alteryx, Excel)
and analytics for solving traditional and organisations, data is manually and adds risk of error to the process.
to create web and mobile-enabled
emerging transfer pricing issues. Our gathered from disparate sources and Data analytic tools (e.g., SQL, Alteryx,
dynamic dashboards and to provide
practice has been developed on the premise cannot be analysed cohesively. Via PowerPivot) can bolt onto existing Excel
enhanced data insights, enabling end
that focusing on technical excellence is Extract, Transform and Load (ETL) models, or replace the use of Excel all
users to efficiently make strategic
no longer enough to be a differentiated tools, data can be pulled automatically together, to increase the scalability of
business decisions.
40
Transfer Pricing Perspectives: The new normal: full TransParency

Transfer pricing analytics: The exploitation of Big Data and emerging technologies
in transfer pricing
As shown in the table below, our solutions Sample process flow leveraging data analytics and visualisation technologies
span over the entire data life-cycle. With
capacity and technological solutions from
Leverage ETL tools to
data extraction to data visualisation,
pull data efficiently
our approach allows for enhanced
Repeatable, leverageable
customisations of tailored-made solutions,
databases can efficiently
based on the very specific needs of clients
replace manual Excel
across industries. This is a clear competitive
processes
advantage in a space where solutions
usually tend to focus on standardised
Client GL
output, and seldom sufficiently takes
into consideration the client’s capacity to Data Visualization
maintain sustainable back-end solutions. Calculation
Source data deliverable(s)
engine(s) (Alteryx/
PBC in Excel (e.g., Tableau, Qlik,
SQL/PowerPivot)
Microstrategy)
Other client
data source

ETL = Extract, transform and load GL = General ledger PBC = Prepared by client

41
Transfer Pricing Perspectives: The new normal: full TransParency

Transfer pricing analytics: The exploitation of Big Data and emerging technologies
in transfer pricing
The positioning of transfer pricing analytics • Legal entity output: end-to-end is anticipated to disrupt our traditional
within our global transfer pricing service solution for the development of legal service offering for the benefit of our clients Tax authorities in
offering and the larger cross-service entity results based on aggregated throughout the network. Tax authorities in
environment is key in understanding general ledger for compliance, planning, many jurisdictions are already beginning many jurisdictions are
the full potential of such an initiative. and modelling purposes. to use data analytics in their assessment already beginning to use
Composed of a cross-functional team of tax of transfer pricing. The emergence of
and advisory professionals, transfer pricing
• Country by country reporting (CbCR):
country by country reporting disclosures data analytics in their
end-to-end solution to comply, analyse,
analytics is a unique approach currently
and prescribe change in the CbCR
will only create more data to potentially assessment of transfer
unmatched in the market. It can be viewed be analysed. Therefore, we will lead this
as a stand-alone service offering, an ad-hoc
environment, from data extraction to
trend by bringing innovative and client- pricing. The emergence
dynamic visualisation.
value-add contribution, or as an innovative customised solutions to the market in order of country by country
way of delivering work product, as well • Margin analyser: dynamic data to harness the computing power available
as a cross-functional discipline aimed at visualisation solution to review, monitor, to businesses. reporting disclosures will
facilitating the collaboration between and correct operating margins for legal only create more data to
tax and business stakeholders to produce entity to SKU-related profitability levels
unique and valuable insights. Currently, based on third-party benchmarks. Authors potentially be analysed.
every sub-specialty in our transfer pricing
• Scenario analysis: data computation Horacio Pena
global service offering is impacted by
engine and dynamic modelling output
transfer pricing analytics (i.e., the data PwC US
solution for realtime comparison of
gathering process can be expanded and
planning scenario. +1 646 471 1957
analysed) and may benefit from transfer
pricing analytics. For example, data can be • Financial transaction / 385: end-to- horacio.pena@us.pwc.com
properly mined and analysed to leverage end solution for treasury departments
predictive analytics in the context of a with respect to intercompany financing Brian T. Burt
transfer pricing dispute resolution. Clearly, transaction in the Prop. Regs. Section
PwC US
transfer pricing analytics is at the core 385 context.
of today’s transfer pricing challenges +1 646 471 8386
and opportunities, and the variety of Our global Transfer Pricing Analytics
brian.burt@us.pwc.com
solutions delivered to clients to date further initiative comprises a core team of
reinforces this statement. In fact, we have professionals in the United States and
Laurent Bellay
already developed highly performing tools key regions around the world. In addition
in the following areas (and continues to to transfer pricing experience, the team PwC US
create innovative tools for re-shaping the has expertise in statistics, data science, +1 646 471 3906
transfer pricing service offering): programming, and artificial intelligence.
The exploitation of Big Data to enhance laurent.bellay@us.pwc.com
the depth of our transfer pricing services

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Transfer Pricing Perspectives: The new normal: full TransParency

The post BEPS world in

the automotive industry

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Transfer Pricing Perspectives: The new normal: full TransParency

The post BEPS world in the automotive industry

The automotive industry has followed a that tax and customs authorities spend their often struggle in tax audits with the
global footprint strategy since many years utmost attention on arm’s length transfer economic qualification of their plants,
and it represents now the industry with prices of OEMs and their suppliers. i.e. plants which contractually operate
the highest cross border intercompany as license manufacturers are requalified
transaction volume. In 2015 the seven 1. Current tax audit environment to be contract manufacturers as the core
largest original equipment manufacturers intellectual property (IP), application
Given the high volume of intercompany
(OEMs) had turnovers of more than 1,000 engineering and sales functions are
transactions, tax audits are mostly focused
billion Euro. The OEMs have factories not controlled by the plant. The major
on classical transfer pricing topics, i.e. the
around the world and suppliers have challenges in tax audits are presented in
arm’s length profit for distributors and for
expanded their global presence to be close the table below.
manufacturing operations. The suppliers
to these factories. Thus it is not a surprise

TP audit challenges in the automotive industry

Contract License Research and

Distribution Services
manufacturing manufacturing development

•Benchmarking challenges •Profit level indicator •Substance of license •Arm’s length •Documentation of benefit
(retail vs. wholesale) (C+, Berry Ratio, manufacturer (vs. mark-up for contract •Duplicative services
•Profit level indicator RoA, RoNA) contract manufacturer) R&D
(RoS vs. C+) •Location savings •Arm’s length royalties •Attribution of intangible
•Aggregation vs. •Start-up /extension costs for trademark and/ related return
separation of financial or technology to contract R&D
•Benchmarking challenges
services •Limitations in royalty
•Attribution of risks
•Marketing intangibles rates in BRIC countries
and joint ventures
•Location specific
advantages

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The post BEPS world in the automotive industry

Substance requirements The parent company grants a royalty to its

A major challenge is the compensation subsidiary and, according to the example,
of the intangibles and the question of takes central control in project execution.
“who should bear the major risk in a The OECD concludes that a license
transaction?” In most cases the producing agreement is not in line with the actual
entity compensates the entity generating transaction. In an earlier version of the
the core IP (product core design) final OECD guidelines it indicates that the
through a royalty and through a separate factory does in fact provide a service to the
compensation for application engineering parent company, which would have meant
(which is sometimes included in the license that the factory would have been required
for core IP). As the royalty is often a fixed to invoice the parent company instead of
percentage of net sales, factories often bear the customer. The OECD is now silent on
contractually the major risk of the projects. the consequences if the factory continues to
This raises concerns of the tax authorities in invoice the customer.
the involved countries. If the factory is loss
making, the tax authority in that country Location specific advantages
highlights that economically the factory has The countries of the emerging markets
only limited control of volume and price strongly encourage the concept of location
risks and should be treated as a contract specific advantages. China is now the
manufacturer. Thus, the factory should most important automotive market and
receive a stable C+ return. Vice versa, if puts a high emphasis that location specific
the factory is making high profits the tax advantages must be considered when
authority in the country of the IP owner has the arm’s length principle is applied. The
challenged the license fees and requires a OECD is very unclear on the treatment of
higher royalty. The issue of lack of control location specific advantages and provides
and substance is now emphasised in note little practical guidance. If the treatment
1.48 of the OECD guidelines. The OECD of such advantages cannot be derived
describes a situation which has a certain from third party data, the OECD suggests
similarity to the set up in the automotive to share such advantages. However, the
The parent company grants a royalty to its subsidiary supplier industry. In the example the parent OECD is silent on the question “how a
and, according to the example, takes central control in company negotiates contracts on behalf
of its subsidiary and provides technical
split should be performed.” The industry
countries view the established brands and
project execution. support services which enables the technology as a core value driver, whereas
subsidiary to fulfil its customer contracts. countries like China claim their share

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The post BEPS world in the automotive industry

for the local consumer preferences, their discount – if it were a third party – would • IP landscape and research and • Service transactions: These must be
cheap and qualified labour on top of the ask for a compensation from the benefiting development (R&D) functions: The carefully considered and structured.
functional return of the local operations. entity. Some suppliers have introduced OECD now requires in the Masterfile to It should become clear that there’s no
The issue becomes even more challenging balancing payments to neutralise the draw a clear landscape of the group’s double charging and the compensation
as competent authority cases with China effects of a quick saving, thus the benefiting IP. Many automotive multinationals must observe local withholding taxes
are complex – if successful at all. entity compensates the effected entity. have followed a centralised IP strategy, and VAT issues.
Such balancing payments can then be however at the same time OEMs and
• Permanent establishments: OEMs and
Service transaction easily challenged as often there is only very suppliers follow a global footprint
suppliers are faced with many potential
A global supplier operates a network of poor evidence available to substantiate strategy for their R&D functions
permanent establishment (PE) risks.
factories and often provides comprehensive the effects of quick savings, i.e. the nexus and outsourced R&D functions are
In many cases plants are supported by
technical and managerial assistance, between the current project and the new compensated based on a C+ method. To
central engineering teams and provide
while the plant is focused on operational awarded contract is not agreed in writing maintain a centralised IP strategy it is
on ground support. The OECD will
execution. From the perspective of the with the OEM but informally agreed. a must to document and ensure control
lower the threshold for the duration
country of the plant, the taxpayers are over outsourced R&D functions. It is
to create a fixed place of business
burdened with high and complex charges 2. What to do in the post-BEPS world? easy to predict that tax authorities in
which will create more PE challenges.
which might be separate for core IP (i.e. the countries of the service provider will
It is yet not fully clear how the new OECD Moreover, agency PE issues are and will
license transactions), project specific carefully scrutinise whether the R&D
rules will be applied, but already there are be a major issue for the suppliers as, by
application engineering, technical services, is controlled by the foreign principal or
many challenges for automotive companies: the nature of their business, customer
global and regional services etc. Tax alternatively they will require to receive
contracts are negotiated by a legal entity
authorities are inclined to challenge the part of the intangible related return.
• Review of the business model: As in one country but executed by a legal
benefit and require a high documentation to
explained above, factories often operate • Marketing intangibles: The OEMs entity in a different country.
evidence the local benefit.
as license manufacturers and bear should carefully review their marketing
• Documentation: In many cases
significant risk. Companies must review strategy and review how far it is
Quick savings OEMs and suppliers have very similar
the substance and ensure that either centrally controlled. The OECD has
Another complex issue relates to quick functional and risk profiles for certain
the substance is sufficient or business strengthened its concept of marketing
savings. If the supplier is awarded with a activities such as distribution and
models might need to be redesigned. intangibles and countries will carefully
new project the OEM sometimes requires manufacturing and should be able to
Some companies have introduced profit review how far local distribution
that one time or ongoing price reductions leverage from a global documentation
oriented license systems to ensure that companies or regional hubs take control
are realised on ongoing projects. As the approach. It is now an imperative
the profit is in line with the limited in local marketing.
business is global, the OEM might receive a to review and fine-tune the existing
functional and risk profile of factories.
discount by a factory in a country whereas documentation processes.
the benefit of a new project is awarded to
a factory in a different country. Obviously
this might artificially move income across
border whereas the entity which grants a

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The post BEPS world in the automotive industry

3. Outlook
The room for discussion within the concept
of the arm’s length principle becomes
wider for tax authorities and the legal
uncertainty for multinationals further
increases. Given the high volume of
intercompany transactions and the history
of tax audits in the industry legal certainty
will become a high value asset. Thus,
automotive companies are well advised to
establish a well-defined risk management
process. Even if risks are closely monitored,
substantial risk will remain as the views
of tax authorities are yet not aligned in
practice. Thus, utmost attention must
be spend on emerging markets and the
expansion of the use of advance pricing
agreements (APAs) must be considered.

Authors
Axel Eigelshoven
The parent company grants a royalty to its subsidiary PwC Germany
and, according to the example, takes central control in +49 211 981 1144
project execution. axel.eigelshoven@de.pwc.com

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Global transfer pricing

documentation strategies

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Global transfer pricing documentation strategies

Where are we today? • The US issued final regulations for special issues file that local taxpayers MNEs are realising that the approach taken
The new Chapter V of the OECD’s Transfer filing the CbC report for US-parented need to prepare; Japan introduced a group for documentation going forward is likely
Pricing Guidelines covers three tiers of MNE groups. threshold for the MF and contemporaneous to change significantly as compared to their
transfer pricing documentation: (1) the preparation of the LF and Australia historical approach, and the adaptation to
• The Australian Taxation Office finalised
Master File (MF), which provides a detailed introduced a form based approach for the this new environment needs to be made
its design of the LF requirements under
representation of the global operations of LF. These nuances on a country by country quickly to ensure the new compliance
the Australian CbC reporting laws.
the multinational enterprise (MNE); (2) basis are challenging MNEs to define a requirements in the post Base Erosion and
the Local File (LF), which contains detailed • Luxembourg has proposed CbC more comprehensive strategy for preparing Profit Shifting (BEPS) world are met.
information on an MNE’s intercompany reporting obligations transfer pricing documentation which
transactions in a particular jurisdiction, and meets all the relevant requirements around
(3) the country-by-country (CbC) report. In addition to the three tiers mentioned the world.
above, over the last year, countries that
Over the last year since the Chapter V final have historically required the filing of
report was published in 2015, many local local forms detailing various aspects
tax administrations have been taking steps of intercompany transactions (i.e.,
towards introducing, to different extents, information returns), have confirmed that
new transfer pricing requirements into their such requirements will continue, thereby
domestic legislation. For example, within creating a fourth tier to the transfer pricing
the last 6 months: documentation burden.

• Canada has issued proposed legislation As more and more countries release
on CbC reporting. or update their local documentation
requirements, it is clear that while the
• Uruguay has submitted a tax bill to
OECD’s aim was to introduce “coherence in
Congress, which includes the adoption
the domestic rules that affect cross-border
of the CbC report and the MF approach.
activities”, the practical evidence shows
• Austria has introduced mandatory that such coherence is not happening.
documentation requirements requiring For example, some countries, including
companies to prepare a MF, LF and the US, only introduced CbC report Over the last year since the Chapter V final report was
CbC report. requirements, while not changing the local
documentation requirements, whereas
published in 2015, many local tax administrations
• Germany has published a draft bill
intended to implement the three-tiered
others countries, while introducing the MF/ have been taking steps towards introducing, to different
documentation approach recommended
LF concept, did not align their requirements
with the OECD Guidelines. Some examples
extents, new transfer pricing requirements into their
by the OECD.
include China where they introduced the domestic legislation.
MF/LF requirements, but also adding a

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Global transfer pricing documentation strategies

New approach to documentation documentation differently and plan for a business lines’ information in one MF. Under are met. Understandably, this approach
In the past, as a result of the ad hoc more comprehensive and deliberate review this approach, only the relevant modules requires expanding or reassigning transfer
development of transfer pricing in order to determine the approach for can then be used as part of each local pricing resources to meet these new, more
documentation requirements globally, MNEs compliance and obtain the information company’s documentation set, jointly with onerous documentation requirements, or
have faced a myriad of different regulations, required, as well as ensure a smooth a LF that is tailored to the local operations. alternatively looking to outsource some
formats, and levels of prescription. The transition. It is key for MNEs to consider However, when taking this approach the portion of the process, typically from
traditional approach adopted by many how the transfer pricing documentation OECD clarifies that the entire MF consisting assistance with the MF/LF strategy to
MNEs in preparing their transfer pricing presents their global business to the outside of all business lines should be available to preparation of the relevant documents.
documentation has typically been world, as well as which documents exist each country. Another alternative could be
designed to ensure compliance with local that impact their transfer pricing policies or summarising the business information in the Throughout these changes in landscape,
documentation requirements and penalty practices (such as intercompany agreements, MF, limiting the information included in this we expect that technology will play a larger
protection, where feasible, while minimising information on their company website, etc.). document, while providing more detailed role for the coordination and preparation
the efforts required. This approach typically Furthermore, even if there are currently no information in the LFs to meet the local of transfer pricing documentation.
resulted in MNEs focusing on preparing requirements to publish any of the tiers of documentation requirements. From centrally gathering the data, to
transfer pricing documentation for higher documentation, there is pressure, mostly managing the timeline for compliance and
risk affiliates located in key countries. in Europe, to make certain information Consistency is a critical area of focus. The documentation process, to issuing final
Some of the most often used criteria (such as the CbC report) available to the written words in the MF/LF should provide reports, technological tools are likely to have
included jurisdictions with prescriptive public. As such, in planning the future the background to the data in the CbC report a positive impact in the execution of the
local requirements or aggressive tax approach to transfer pricing documentation, and should be consistent with other relevant documentation strategy and the efforts and
authorities, affiliates where the most the nature and sensitivity of the business documents, such as local information resources required to achieve it. With this
material transactions took place, or other information to be disclosed needs to be returns. This should be carefully considered factor in mind, we have developed various
similar factors. carefully considered. throughout the planning process, as any tools to assist our clients with the different
changes in future documentation are likely elements of the transfer pricing compliance
The new Chapter V requires a much more In terms of preparing the MF/LF, based on to be scrutinised by tax authorities. process under the new environment,
global approach to documentation, which the Chapter V guidelines, there appears to including project management tools like
represents a significant change and will be some flexibility in how to provide the With this burden in mind, from gathering Tax Engagement Center (TEC) and report
require MNEs to reassess how they approach mandated information. In this sense, when relevant information to producing the final writing tools like GCD Reporter.
transfer pricing compliance. In PwC’s view, planning the documentation approach, documentation, it appears as though MNEs
the traditional approach to documentation MNEs could consider different approaches are taking a more holistic approach to We believe there is no one-size-fits-all
is a thing of the past, and the preparation depending on the facts and strategy. For collecting information and consolidating the solution when it comes to transfer pricing
of transfer pricing documentation example, for certain businesses a modular process in order to have central visibility and documentation strategy. There are numerous
will shift from a compliance to a more approach may be considered appropriate, control of the transfer pricing compliance approaches and it is up to MNEs to take
strategic exercise. where the content of the MF is split between process, although the involvement of advantage of the flexibility and determine
a main MF and separate business line the local affiliates is key to ensure that a game plan that fits their business facts,
In this new environment of transparency, MFs with only the relevant business line the local operations are accurately resources, and overall objectives.
MNEs need to look at transfer pricing information, versus having all the different represented and the local requirements

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Transfer Pricing Perspectives: The new normal: full TransParency

Global transfer pricing documentation strategies

Key takeaways
The last few years have seen a sustained Authors
increase in transfer pricing requirements
around the world, a trend that is expected to Matias Pedevilla
continue based on the OECD’s new Chapter PwC US
V. This constantly changing environment,
along with the increased transparency +1 305 347 3544
requirements have resulted in a heightened matias.l.pedevilla@us.pwc.com
need for MNEs to disclose more information
and rethink their transfer pricing Annabel Realf
documentation approach. In addition, MNEs
PwC US
not only need to closely monitor worldwide
developments to ensure compliance with the +1 617 530 7110
evolving local obligations, but they need to
annabel.l.realf@us.pwc.com
act now as the rules apply to financial years
which end in less than three months’ time.
Mariana Isturiz
The new rules are currently in place in PwC US
many countries, so now is time to formulate +1 305 375 6319
a plan. MNEs need a global strategy, along
with underlying systems and processes mariana.isturiz@us.pwc.com
to enable them to deliver consistent and
robust transfer pricing documentation
across all their affiliates in line with
statutory deadlines. As the requirements
continue to get more onerous it will become
even more critical for MNEs to rely on
technology to help gather the data, prepare
the documentation and project manage the
process on an annual basis.

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Transfer Pricing Perspectives: The
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A truly global Transfer Pricing network

With over 3,000 dedicated professionals in over 110 countries, PwC’s leading transfer pricing network is well positioned to advise you on a strategy that can help advance your goals
within the ever-shifting compliance landscape.

Global Leader Isabel Verlinden +32 2 710 4422 isabel.verlinden@be.pwc.com

Albania Loreta Peci +355 42290720 loreta.peci@al.pwc.com
Argentina Juan Carlos Ferreiro +54 11 4850 6712 juan.carlos.ferreiro@ar.pwc.com
Armenia Nerses Nersisyan +374 10592166 nerses.nersisyan@am.pwc.com
Australia Nick Houseman +612 8266 4647 nick.p.houseman@pwc.com
Austria Herbert Greinecker +43 1 501 88 3300 herbert.greinecker@at.pwc.com
Azerbaijan Movlan Pashayev +994 124972515 m.pashayev@az.pwc.com
Bahrain Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Belgium Xavier Van Vlem +32 9 268 8311 xavier.van.vlem@be.pwc.com
Bosnia & Herzegovina Mubera Brkovic +387 33295336 mubera.brkovic@ba.pwc.com
Brazil Cyro Cunha +55 21 3232 6031 cyro.cunha@br.pwc.com
Bulgaria Irina Tsvetkova + 359 2 935 5126 irina.tsvetkova@bg.pwc.com
Cameroon Nadine Tinen +237 33 43 24 43 nadine.tinen@cm.pwc.com
Canada Gord Jans +416 815 5198 gordon.r.jans@ca.pwc.com
Chile Roberto Carlos Rivas +56 2 940 0000 roberto.carlos.rivas@cl.pwc.com
China Jeff Yuan +86 21 2323 3495 jeff.yuan@cn.pwc.com
Colombia Carlos Mario Lafaurie +57 1 6340555 404/327 carlos_mario.lafaurie@co.pwc.com
Costa Rica Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Cote d’Ivoire Dominique Taty +225 20 31 54 00 d.taty@ci.pwc.com
Croatia Lana Brlek +386 1 5836 058 lana.brlek@hr.pwc.com
Cyprus Ioanna Stylianidou +357 2255 5000 ioanna.stylianidou@cy.pwc.com
Czech Republic David Borkovec +420 2 5115 2561 david.borkovec@cz.pwc.com
Natalia Pryhoda +420 25115 2647 natalia.pryhoda@cz.pwc.com
Denmark Thomas Bjerre +43 3 945 3824 thomas.bjerre@dk.pwc.com
Dominican Republic Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Ecuador Pablo Aguirre +593 2 382 9350 361 pablo.aguirre@ec.pwc.com
Egypt Karim Emam +20 2 2759 7881 karim.emam@eg.pwc.com
El Salvador Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Equatorial Guinea Sébastien Lechêne +240 (09) 1434 sebastien.lechene@ga.pwc.com

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Estonia Hannes Lentsius +372 6141 800 hannes.lentsius@ee.pwc.com

Finland Sari Takalo +358 9 2280 1262 sari.takalo@fi.pwc.com
France Pierre Escaut +33 1 5657 4295 pierre.escaut@fr.landwellglobal.com
Georgia Robin McCone +995 32 250 80 50 robin.mccone@ge.pwc.com
Germany Lorenz Bernhardt +49 30 2636 5204 lorenz.bernhardt@de.pwc.com
Ghana George Kwatia +233 21 761 500 george.kwatia@gh.pwc.com
Greece Agis Moschovakos +30 210 6874544 agis.moschovakos@gr.pwc.com
Guatemala Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Honduras Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Hong Kong Cecilia SK Lee +85 22 289 5690 cecilia.sk.lee@hk.pwc.com
Hungary Anita Mekler +36 1 461 9372 mekler.anita@hu.pwc.com
Iceland Jon I Ingibergsson +354 550 5342 jon.i.ingibergsson@is.pwc.com
India Sanjay Tolia +91 22 6689 1322 sanjay.tolia@in.pwc.com
Indonesia Ay Tjhing Phan +62 21 5289 0658 ay.tjhing.phan@id.pwc.com
Iraq Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Ireland Gavan Ryle +353 1 792 8704 gavan.ryle@ie.pwc.com
Israel Vered Kirshner +972 3 7954510 vered.kirshner@il.pwc.com
Italy Gianni Colucci +39 02 9160 5500 gianni.colucci@it.pwc.com
Jamaica Brian J. Denning +1 876 932 8423 brian.denning@jm.pwc.com
Japan Daisuke Miyajima +81 03 5251 2552 daisuke.miyajima@jp.pwc.com
Jordan Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Kazakhstan Mike Ahern +7 727 330 3200 michael.ahern@kz.pwc.com
Kenya Titus Mukora +254 20 285 5395 titus.mukora@ke.pwc.com
Korea Henry An +82 2 3781 2594 henry.an@kr.pwc.com
Kuwait Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Latvia Pavel Sarghi +40 21 225 3250 pavel.x.sarghi@lv.pwc.com
Lebanon Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Libya Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Lithuania Nerijus Nedzinskas +370 5 239 2350 nerijus.nedzinskas@lt.pwc.com

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Luxembourg Loek de Preter +35 2 49 4848 2023 loek.de.preter@lu.pwc.com

Macedonia Miroslav Marchev +38 9 2314 0908 miroslav.marchev@mk.pwc.com
Madagascar Andriamisa Ravelomanana +261 20 22 217 63 andriamisa.ravelomanana@mg.pwc.com
Malaysia Jagdev Singh +60 3 2173146 jagdev.singh@my.pwc.com
Malta Neville Gatt +356 2124 7000 neville.gatt@mt.pwc.com
Mexico Raúl Angel Sicilia +52 33 3648 1014 raul.angel.sicilia@mx.pwc.com
Moldova Ionut Simion +40 2 1225 3702 ionut.simion@ro.pwc.com
Mongolia Tsendmaa Choijamts +976 70009089 tsendmaa.choijamts@mn.pwc.com
Morocco Mahat Chraibi +212 522 99 9800 mahat.chraibi@ma.pwc.com
Namibia Chantell Husselmann +264 61 284 1327 chantell.husselmann@na.pwc.com
Netherlands Gaby Bes +31 88 792 4144 gaby.bes@nl.pwc.com
New Zealand Erin L Venter +64 9 355 8862 erin.l.venter@nz.pwc.com
Nicaragua Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Nigeria Seun Adu +234 9 291 9302 seun.y.adu@ng.pwc.com
Norway Morten Beck +47 95 26 06 50 morten.beck@no.pwc.com
Oman Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Pakistan Asif Haroon + 92 21 3242 6682 5 asif.haroon@pk.pwc.com
Palestinian Territories Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Panama Ramon Ortega +1 809 567 7741 ramon.ortega@do.pwc.com
Peru Miguel Puga +51 1 211 6500 8006 miguel.puga@pe.pwc.com
Philippines Carlos Carado +63 2 459 2020 carlos.t.carado@ph.pwc.com
Poland Piotr Wiewiorka +48 22 746 4645 piotr.wiewiorka@pl.pwc.com
Portugal Leendert Verschoor +351 213 599 631 leendert.verschoor@pt.pwc.com
Qatar Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
Republic of Ireland Gavan Ryle +353 1 792 8704 gavan.ryle@ie.pwc.com
Romania Daniela Dinu +40 2 1225 3749 daniela.dinu@ro.pwc.com
Ionut Simion +40 21 225 3702 ionut.simion@ro.pwc.com
Russian Federation Andrey Kolchin +7 495 967 6197 andrey.kolchin@ru.pwc.com
Saudi Arabia Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com

54
Transfer Pricing Perspectives: The
Fit for
newthenormal:
Future full TransParency

Serbia Branka Rajicic +381 113302117 branka.rajicic@rs.pwc.com

Singapore Nicole Fung +65 6236 3618 nicole.fung@sg.pwc.com
Slovak Republic Christiana Serugova +421 2 59 350 614 christiana.serugova@sk.pwc.com
Slovenia Miroslav Marchev +389 2 3140 908 miroslav.marchev@mk.pwc.com
South Africa David Lermer +27 21 529 2364 david.lermer@za.pwc.com
South Korea Henry An +82 2 3781 2594 henry.an@kr.pwc.com
Spain Javier Gonzalez Carcedo +34 91 568 4542 javier.gonzalez.carcedo@es.pwc.com
Sri Lanka Hiranthi Ratnayake +94 11 4719838 hiranthi.c.ratnayake@lk.pwc.com
Sweden Pär Magnus Wiséen +46 8 55 533 295 paer.magnus.wiseen@se.pwc.com
Switzerland Benjamin Koch +41 58 792 4334 benjamin.koch@ch.pwc.com
Taiwan Lily Hsu +886 2 2729 6207 lily.hsu@tw.pwc.com
Tanzania Titus Mukora +254 20 285 5395 titus.mukora@ke.pwc.com
Thailand Peerapat Poshyanonda +66 2 344 1220 peerapat.poshyanonda@th.pwc.com
Tunisia Mabrouk Maalaoui +216 71 862 156 mabrouk.maalaoui@tn.pwc.com
Turkey Ozlem Guc Alioglu +90 212 326 64 62 ozlem.guc@tr.pwc.com
Turkmenistan Jamshid Juraev +998 71 120 6101 jamshid.juraev@uz.pwc.com
Uganda Francis Kamulegeya +256 414 236018 francis.kamulegeya@ug.pwc.com
Ukraine Olga Trifonova +380 44490 6777 olga.trifonova@ua.pwc.com
United Arab Emirates Mohamed Serokh +971 4 304 3956 mohamed.serokh@ae.pwc.com
United Kingdom Andrew Casley +44 207 213 3685 andrew.j.casley@uk.pwc.com
United States Horacio Pena +1 646 471 1957 horacio.pena@us.pwc.com
Uruguay Daniel Garcia +598 2 916 0463 garcia.daniel@uy.pwc.com
Uzbekistan Jamshid Juraev +998 71 120 6101 jamshid.juraev@uz.pwc.com
Venezuela Elys Aray +58 212 700 6627 elys.aray@ve.pwc.com
Vietnam Monika Mindszenti +84 8 3823 0796 monika.mindszenti@vn.pwc.com
Zambia Jyoti Mistry +260 97 7740641 jyoti.mistry@zm.pwc.com
Zimbabwe Manuel Lopes +263 4 33 8362-8 manuel.lopes@zw.pwc.com

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