Transfer pricing in a post-beps world pdf download

Compare With. Alternatively, if the U. Supreme Court's decision making is actually based on the quest for neutrality, revealing the misguided nature of such a quest facilitates the development of theories of constitutional interpretation.

Action Plan 9 seems to say that contracts are still first to be examined. Under Action 9, contractual allocations of risk are respected only when they are supported by actual decision-making and thus exercising control over these risks. Actions , Paragraphs 1. Rutger Hafkenscheid is also the thesis adviser.

However, in the end, this two-pronged analysis leads to different results comparing an affiliate within a corporate group and a stand- alone company. In those cases, the U. Tax Court decided to first look at the contractual arrangements, and then examine whether they conform to economic reality. The first set of revisions focuses on policing contractual allocations of risks.

But these contractual allocations of responsibilities, risks, and anticipated outcomes must reflect economic reality—which requires consideration of the functions performed by the parties, considering the assets used and risks assumed; the characteristics of the property transferred or services provided; the economic circumstances of the parties and the relevant market in which they operate; and the parties' business strategies. Under the Final Transfer Pricing Report, the key to deserving a return from ownership of an asset is actual control and decision-making ability.

Thus, if a party is contractually allocated a risk, the party must have not only the financial capacity to assume the risk, but also the functional ability to control the risk— which means that the party must have the actual ability to make decisions with respect to the risk. But if the entity is a Charles E.

Transfer Pricing approach for risk allocation is that the U. Tax Court— the intention to look at the contracts—and then see if they conform to economic reality.

Thus, on the one hand, with respect to a contract between two parties, even though there remain obligations to be performed, the Service can determine that the economic reality underlying the transaction is such that the income is deemed received by a party which the Service wishes to tax.

The first deals specifically with the changes of BEPS relating to risk allocation. The second deals with the concept of the functions, assets, and risk analysis changes in BEPS. Summary of Section A. These changes, and the greater BEPS package came as a political response21 to the problems inherent in the international tax system and the increased public attention to multinationals using tax structuring22 and arbitrage23 to avoid higher tax bills.

In the aftermath of the economic turbulence, politicians have turned their attention to the twin problems of individual tax evasion and corporate tax avoidance.

The source of the conflict suggests that its resolution lies not with the definition of insurance, but with the policies behind general tax doctrines, such as protection of federal tax revenues, promotion of certainty in tax planning, and encouragement of legitimate business transactions. Because the conflict involves fundamental principles, it allows for no precise or uncontroversial resolution.

BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis[,] and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide. The measures [presented in the action reports] represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective.

Land, Treaty Consistency, 66 Tax Law. Lest the reader become alarmed, it is important to note that double taxation is the exception and not the rule. In the vast majority of cases involving both foreign and domestic income, provisions built into national tax laws mitigate or eliminate double taxation. See Julie A. The most common methods for alleviating double taxation are the tax exemption, whereby a country exempts foreign-source income from its cumulative tax base, and the tax credit, which permits a taxpayer to subtract income taxes paid in a foreign country from its domestic tax liability.

Roin, supra, at A potential third method for alleviating double taxation would be to permit the taxpayer a deduction from profits subject to tax in its country of domicile. Following this, the concept of risk management is elucidated.

Having this basis of what risk is, the section continues by showing the changes to risk analysis that have been brought about through BEPS. The essential change is that BEPS Action 9 looks to actual activity and trumps the contracts and intercompany agreements of multinationals.

This is done by looking to where economically significant risks have been allocated. Having an understanding of risk and the changes with BEPS in terms of risk, the section summarizes how risk allocation affects intangibles for taxation purposes.

Thus, the years following the regulations provided a definitive practical test of a system of enforcement based on comparables. Therefore, to achieve comparability, the markets in which the independent and associated enterprises operate must be comparable. To ensure comparability, any differences in the markets should not have a material effect on price unless appropriate adjustments can be made to account for such differences.

One economic condition that could pose interesting issues when comparing data from one area to another is relative inflation conditions in the markets. United States. Transfer Pricing Rep. Rather, the Guidelines tend to emphasize the importance of economic ownership over legal ownership, particularly in situations involving marketing intangibles. In that event, the allocation of income attributable to intangibles based on the principles of economic ownership under the OECD Guidelines seems more appropriate than allocation based on legal title.

Mason L. Again, this is not the focus of this thesis, but should be delineated as what will not be discussed in detail—but is a large part of the BEPS report on risk allocation. It is a legal fiction. In economic reality, there are not two independent parties in a transaction, but rather a unified group of wholly owned or majority owned subsidiaries conducting transactions amongst themselves.

Historically, transfer pricing has proved effective and efficient for helping prevent double taxation. In terms of functional comparability, a reseller's gross profit provides compensation for performing resale functions related to the product, including an operating profit in return for the reseller's investment of capital and assumption of risks.

Thus, comparability under the resale price method is particularly dependent on similarity of functions performed, risks borne, contractual terms, and adjustments to account for the effects of any such differences. Tax'n Ex. This parable depicts the open market. Jesus basically took the side of the U. Transfer pricing adjustment, at income allocation, is the means by which national tax authorities assign market prices to related-party transactions in order to clarify the income attributable to each segment of a multinational corporation, thereby performing the role reserved to the free market in transactions among unrelated parties.

When unmitigated double taxation occurs, the taxpayer ordinarily has recourse only to obtain agreement on its behalf between the two countries' tax authorities. It is the chances taken by key decision makers for an expected return. See Professor Roberts discussing international investment treaties in relation to moral hazard. Graetz, Retroactivity Revisited, 98 Harv. Generally, the more risk involved the higher the expected return will be.

A share represents a claim on the future cash flows of the company--precisely what DCF is intended to measure. Therefore, DCF is the conceptually correct measure for valuing minority shares in an appraisal proceeding. There are two problems with this choice that make DCF valuation both inequitable and inefficient.

First, the method includes the benefits of interest tax shields in the discount rate, which requires a forecasted capital structure for the company. When multinationals abuse48 the transfer pricing methods, they create distortions in the tax revenue of host countries.

To combat artificial contractual re-allocation of risk, the BEPS Report determines50 when risks are contractually assumed by a party which the weights are the relative amounts of debt and equity in the combined, post-merger company.

Most courts have assumed a constant WACC in calculating the present value of cash flows, but this simplifying assumption is correct only when the capital structure of the company is stable over time. If capital structure fluctuates over time, a single WACC is an inaccurate representation of the cost of capital. Tax'n 17, 17, WL , 1. Indeed, one of the main homeless income and BEPS problems is the concept of transfer pricing and how it can be abused.

In an era of heightened volatility, more valuation teams are employing tools such as tornado diagrams or Monte Carlo simulations. Tornado diagrams, for example, are a means of analyzing the potential volatility of individual variables such as oil prices, exchange rates, or finished goods or services selling prices. A tornado analysis considers one such factor at a time across a range of scenarios. In this way, the process is useful in identifying the discrete issues most likely to have an impact, positive or negative, on performance and, therefore, valuation.

However, in the end, this two-pronged analysis leads to different results comparing an affiliate within a corporate group and a stand-alone company.

Paragraph 1. This analysis looks at how variables interact with one another across a swath of randomly generated values and scenarios. Because the analysis looks at correlations between variables and introduces less likely but still possible scenarios, the tool is remarkably useful in helping a company better understand the risk associated with any investment. The meaning of assuming risk is further defined according to Paragraph 1.

Conclusions and Summary of Chapter II. This section summarizes the transfer pricing allocation of risk and the changes inherent in BEPS. It also provided some theoretical background of risk and risk allocation. The key policy objective that BEPS purportedly still wants transfer pricing risk analysis to look at contracts and then focus on the actual activity.

Compare with. As will be seen in the summary of the Medtronic case, this is not what the U. Court does.

Introduction to Chapter IV There have been critiques of whether or not the Action 9 approach to risk allocation will work. This includes Rutger Hafkenscheid who argues Action 9 is impractical. Then, the second section will discuss several examples showing the changes to risk analysis under BEPS Action 9 and the agency implications for risk allocation.

Ultimately, the problems of Action 9 will likely lead to it not being implemented. Moreover, the U. There are diagrams to help in this analysis as well. It has long been known that base erosion and profit shifting has caused problems for revenue agencies of countries to amass money for government expenditures.

Whether and how the government is to gather these collected monies is another debate. However, what is certain is that the rule of law dictates Charles E. Corporations for years have taken advantage of loopholes to effectively and legally pay lower taxes. This is against the spirit of the laws, despite not being against the letter of the law. It could be argued that the laws should be written better. But, the purpose was not to have extremely low effective tax rates when the said rates were meant to be at a higher percentage—indeed, the envisioned possible deductions are not likely below half the indicated tax bracket rate.

Regardless of the veracity in these claims, the G7 called on the OECD to come up with action plans to deal with erosions of taxable bases and profit shifting that would effectively lower taxes. Congress would effectively negate any prospect of the U. Therefore, the BEPS initiatives— including the changed rules on transfer pricing—do not expect the United States to change its laws or tax rules.

But, the question could be, What is the ALS, and why did the Treasury seek to defend it in these terms? The problem for which the ALS attempts to provide the solution may be illustrated by a simple example.

Suppose that a product e. In this common situation, the taxable profit of the subsidiary is determined by three factors: 1 the price at which it resells the computers to the unrelated customers, 2 its expenses other than cost of goods sold, and 3 the price which it pays its parent corporation for the computers. The first two of these factors are governed by market forces outside the control of the parent or the subsidiary. Accordingly, the potential for abuse arises because the related parties will seek to increase after-tax profits by manipulating the transfer price.

If the effective tax rate in the manufacturer's country is higher, the price will be set as low as possible so as to channel all taxable profit to the reseller. Conversely, if the effective tax rate in the reseller's jurisdiction is higher, the transfer price will be as high as possible, so as to eliminate any taxable profit of the reseller 54 A unique question is why the OECD and the BEPS project would want the U.

Tax Court to rule differently? But for tax considerations, the affiliated parties do not care what the transfer price is, since it merely re-allocates profits within the affiliated group. In describing the role of transfer pricing in MNEs and the associated risk of income distortion, the Guidelines set out an important assumption about the nature of intra-firm prices.

International Taxation, 15 Va. The Guidelines suggest that the structure of MNEs distorts natural prices, even if inadvertently, and that ALS corrects that distortion. The second stated justification for ALS is closely related to the first.

According to the Guidelines, the two scenarios have the same economic reality, but with the potential for different tax consequences, a distortion that ALS corrects. The Guidelines recognize that taxation of MNEs is a global problem requiring collective action.

The OECD itself represents collective movement away from tax competition and towards coordination. It is especially useful for avoiding double taxation, which is the central objective of bilateral tax treaties. When one taxing authority makes an Charles E. For these reasons, along with the stated theoretical justifications, the Guidelines express a firm stay-the-course attitude with respect to ALS. Again, if actual conduct—actual conduct being the actual economic activity— deviates from the contractual arrangements, then BEPS states that the conduct trumps the contracts.

As an example, BEPS tries to help countries re-write the old taxing rules to provide more uniformity—especially in the aftermath of the world financial crisis starting in —to counter the old arrangements of tax planning. An example of the changes in BEPS can be examined by comparing a stand-alone company and a subsidiary in a corporate group.

For example, a company based in Luxembourg— where people functions, such as management exist; and assets, such as movable capital exist—this company also has a London based parent whereby financial and investing services are provided for in exchange of the Luxembourg assets.

The risk prior to BEPS be considered to exist in Luxembourg, because the Luxembourg company must make the decision of eventual investment. Tax Court would take this approach as well. However, with the new BEPS regime, the risk is assumed to exist in London, because the people functions—beispielsweise, the financiers are individuals making decisions in London.

Tax Court jurisprudence. The next step is to interpret the information and determine whether the contractual assumption of risk is consistent with the conduct of the associated enterprises and other facts of the case by analysing i whether the associated enterprises follow the contractual terms under the principles of Section D. Hafkenscheid points to Paragraph 1. Hafkenscheid shows how the answers to both questions as to who contractually bears the risk and who has the financial capacity to risk lead to the functionality analysis.

Note: each corporate entity is run by persons. This will be discussed below. In this situation, an individual contributes her portfolio investments to a wholly-owned company. She controls all the decisions, plans, etc. These simple diagrams below illustrate the problem. First, there is an individual managing a bag of money—assets.

The individual will be taxed. This is the case for most stand-alone companies. Third, there is a manager acting out of a company managing assets in a corporate entity, such as in corporate groups with asset managers and investment funds.

Tax Court—the location especially in the international context of the assets themselves were taxed—the jurisdiction of the assets is where the assets were taxed. This was because risk is contractually allocated to the jurisdiction of the assets. This will cause a fissure—with a possibility of tax loopholes— assets could be placed outside the U.

The country where the asset is located will grant taxing rights to the U. In this case; there could be a situation of double non- taxation—the opposite of what was intended under BEPS. For tax purposes, she is not seen at all, and the company is taxed entirely. Rutger Hafkenscheid points out that the problem with this approach is that: Charles E. The separate-legal-entity approach attributes the results of human action to the company as if the company itself had performed these actions.

The question is whether the action of the person can be considered to represent the company, i. In fact, the representation itself forms the functionality. It remains completely unclear as to why other forms of representation would have a different result… functionality is indeed relevant for determining where the company resides or where it has a taxable presence through a permanent establishment, but the concept is useless for determining transfer prices in related situations.

This, however, is in contradiction to economic reality: modern capitalism is built on principal agency relationships in which the capacity to fund investments and manage the risks of those investments is separated. Examples of these principal-agency relationships include investment funds, private-equity funds and listed companies. The separation between risk management and risk assumption is the basis of these relationships.

The investment manager has the functionality to control the risks on behalf of and for the account of the investor, but does not assume the risks. It is by definition the legal form of the principal-agency relationship that determines the tax consequences of that relationship.

If the relationship takes the legal form of an individual asset management assignment, the assets and associated risks are attributed to the investor. If, however, the agency relationship is structured as a fund with legal personality, the assets and associated risks are attributed to the fund entity. Whatever the legal form of the relationship, however individual asset management assignment or fund , the asset manager managing the risks never receives the risk premium that is the remuneration for assuming the risks, whereas this is what the OECD claims that is happening between unrelated parties.

That risk premium is either received by the fund and taxed at the fund level or by the investor and taxed at the investor level. Investment 68R. Usually, risk premium means that for example a person will not be for small proportion gains but only larger proportion gains, so they may still be acting based on that desire for and reservations about a premium.

In other words, a risk premium is not the same as a commission. Analogously, corporations in a corporate group should operate as unrelated parties, not romantic lovers. Ben J. Terra, Peter J. In truth, this definition and name origin is rather bizarre. Is there an implication here about secrecy that is not being stated? Constitutional Basis and Framework of the United States: Mixed Monist and Dualist System in the United States Regarding International Law and National Law Generally speaking, there are two schools of thoughts for interpreting the value of international law in Constitutional frameworks: the dualist and monist approaches.

Theoretically, in a monistic system, it is even possible for international sources to override a direct statutory mandate. It says little, however, about customary international law. It does not declare expressly whether, and if so how, customary international law is part of our law,66 it says nothing about how such law relates to the Constitution and to our political institutions; whether customary international law is federal or state law; whether it is supreme over state law; or whether the federal courts have jurisdiction over cases or controversies arising under international law.

Wesleyan L. Maine, U. Curtiss-Wright Export Corp. For my purposes it does not matter whether between and we were thirteen nations or one nation with thirteen parts; all were bound by international law. There being no federal or confederated judiciary, only state courts were available to decide questions of international law.

See e. De Longchamps, 1 Dall. Georgia, 2 U. Hylton, 3 U. I, ch. Draft No. It provides no explicit direction to the courts as to what law should govern a case involving an act of Congress or an action of the President that is inconsistent with a provision in a treaty or with a principle of international law.

Nor does it expressly declare that the President is obligated to respect treaties or customary law and to take care that they be faithfully executed. Greene, U. Robertson, U. Tax Court, it is important to see the policy of the Treasury—that brings the tax cases against taxpayers before the U.

S Tax Court. US: Treasury Dept. The present author disagrees. Under Treasury Regulation sec. If the foreign income is subsequently distributed by the foreign entity to the US parent, the United States will indeed tax these dividends again and give credit for the foreign tax attributable to the foreign profit from which those dividends are paid. The mere fact that the United States grants a credit for foreign tax under scores the fact that the royalties are foreign, not US.

Allocation of profits according to contractual allocation of risks, however, may lead to profit allocations that do not correspond with the activities multinational group entities actually carry out. Where necessary, evidence of the parties' actual conduct should supplement the terms of any contract. This document can also be found on the Joint Committee on Taxation website at www. Treasury and acts as the revenue collection agency. Every change in the law affecting international trade means added regulations, further tax rulings, more tax audits and ultimately more litigation, with a corresponding increase in the costs of preparing documentation to demonstrate compliance with the regulations.

Marshall L. For an interesting and detailed account of the history of S , see Jerome R. For a typical transfer pricing transaction, the Treasury regulations produce a range of results; if the taxpayer can demonstrate its price falls within the permitted range, it can avoid an IRS transfer pricing adjustment.

Nevertheless, to the extent that [the arm's length standard] is inadequate to the task it is implemented to fulfill-the allocation of the corporate tax base of MNEs--[the arm's length standard] is a failed doctrine.

Policy of the U. The policy behind the U. Tax Court is that it simply has refused to use extra judicial or international non-binding legal documents to come to a solution.

It is as if the Court is applying a textualist approach to interpreting U. Indeed, the Court seems to follow the basic concept in common law of stare decisis—established through the use of binding legal Sienna C.

Saphire, Enough About Originalism, 15 N. Internal Revenue Code and the Treasury code that is based on the ordinary meaning of the legal text—and not using secondary sources or international non-binding law for comparison.

Explanation of the U. The concept has its roots in Roman Law and was later carried out by English courts since Anglo Saxon times. Constitution, 43 J. United States IRS v. Osborne In re Osborne , 76 F. Magna Corp. However, the article itself notes that very few cases were recorded during the Anglo Saxon period. Supreme Court several times as the preferred method of deciding decisions.

Although U. Millions of people are satisfied with this service, update every day. The aim of this article is to analyse the status of the OECD Transfer Pricing Guidelines in international and Polish domestic law, as well as current practice of their application. This action plan, created in response to a request by the G20, identifies a set of domestic and international actions to address the problems of base erosion and profit sharing.

This report examines the links between inequality and other major global trends or megatrends , with a focus on technological change, climate change, urbanization and international migration.

The analysis pays particular attention to poverty and labour market trends, as they mediate the distributional impacts of the major trends selected.

It also provides policy recommendations to manage these megatrends in an equitable manner and considers the policy implications, so as to reduce inequalities and support their implementation. The publication reviews provisions covering related party transactions and the protection of minority shareholder rights in 31 jurisdictions, both OECD and non-OECD.

In addition, the regulatory and legal systems that have beeen developed in five jurisdictions are reviewed in detail. Business tax strategy is at its most challenging when success ushers in the promise of major growth. These issues can be summarized in two words: transfer pricing.