Transfer princing report

H I G H L I G H T S

Indian Companies Face Threat of Recharacterization, Compliance HurdlesIndia’s new general anti-avoidance rule gives auditors extensive new powersto recharacterize ‘‘impermissible avoidance arrangements,’’ including related-party transactions, a practitioner says. . . . Meanwhile, changes to India’sCompanies Act require a special resolution from the board of directors beforea company conducts related-party transactions that cannot be proven to beroutine and at arm’s length. Page 749, Text, Page 759; Page 750

Canada Completes Record 24 APAs; Official Notes Recent Staff IncreasesA Canadian official says recent staff increases and a new requirement for tax-payers to submit much of the information needed for their APAs at the begin-ning of the process facilitated the record-breaking 24 advance pricing agree-ments completed in the latest fiscal year. Page 743; Text, Page 765

Practitioner Sees China Looking to ‘Self Adjustments’ for RevenueChinese tax authorities increasingly are asking taxpayers to do transfer pric-ing ‘‘self adjustments’’ as a quick-revenue alternative to formal audits, accord-ing to Cheng Chi, a partner at KPMG in Shanghai. Page 752

Unilateral BEPS Actions Could Lead to Double Tax, Business Tells OECDUnilateral tax and transfer pricing measures recently proposed or adopted bysome jurisdictions to address base erosion and profit shifting could jeopardizethe coherence of international work on BEPS before it even gets off theground, practitioners tell the Organization for Economic Cooperation and De-velopment. . . . Separately, the OECD seeks input on how to draft a workabletemplate for country-by-country reporting. Page 755; Page 757

P R A C T I T I O N E R A N A LY S I S

Analysis of a Formulary System, Part IV: Choosing a Tax BaseContributing editor Michael Durst, whose earlier articles advocated a formu-lary approach to transfer pricing, examines a limited type of apportionmentthat would apply formulas to separate measures of the taxpayer’s combinedincome from particular business activities. This activity-by-activity approach,he says, would offer some, but not all, of the administrative benefits of the full-fledged, combined-income formulary approach. Perspective, Page 771

Financial Regulatory Reform and End-to-End Transfer Pricing ExecutionAdam Katz, David Nickson and Monica Winters of PricewaterhouseCoopersin New York urge financial institutions to integrate their transfer pricing ex-ecution and reporting with the implementation of modified processes arisingfrom recent regulatory changes, noting the greater need for regulated entitiesto prove out and consider intercompany transactions from all angles and pro-vide arm’s-length support for each participant’s results. Analysis, Page 776

A L S O I N T H E N E W S

IRELAND: The Irish governmentsays it plans to enact legislationbanning ‘‘stateless’’ companies—multinational entities that areincorporated in Ireland, but donot have a tax residence any-where on the globe. Page 746

MEXICO: Mexico considers soft-ening proposed changes to thecountry’s transfer pricing regimein response to heavy lobbyingefforts, a practitioner says.Page 744

OECD: The scope of the work onpermanent establishments setforth in the OECD’s BEPS actionplan is likely to expand, aWashington, D.C. practitionersays. Page 754

EUROPEAN UNION: Competentauthority requests involvingEuropean Union members eli-gible for arbitration underthe EU Arbitration Conventionshow a significant increase overlevels in 2008. Page 746

S E C T I O N I N D E X

Americas...............................743

Europe..................................746

Asia/Pacific Rim .....................749

OECD/UN...............................754

Text .....................................759

Perspective ...........................771

Analysis ................................776

Journal .................................782

Directory...............................784

VOL. 22, NO. 12 OCTOBER 17, 2013

Copyright � 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. ISSN 1063-2069

Tax Management

Transfer Pricing Report™

T O P I C A L S U M M A R Y

CANADACanada completes record 24 APAs; official notes

recent staff increases ....................................... 743

CHINAPractitioner sees Chinese tax authorities looking

to ‘‘self adjustments’’ for revenue ...................... 752

EUROPEAN UNIONEU competent authority inventory more than

triples between 2008, 2012 ............................... 746

INDIAGAAR gives broad new powers to rewrite

transactions, New Delhi practitioner says ........... 749Practitioner says new Indian act requires board

approval of related-party transactions ................ 750

INTERNATIONALAnalysis of a formulary system, part IV: Choosing

a tax base ...................................................... 771

IRELANDIreland plans to ban ‘‘stateless’’ companies;

potential effect on Apple, others unclear ............. 746

MEXICOMexico may soften transfer pricing items in tax

overhaul in response to opposition .................... 744

NORWAYNorway’s new limit on interest deductions seen

affecting internal pricing structures ................... 747

OECDOECD seeks feedback from businesses on

country-by-country reporting proposal ............... 757Practitioner predicts BEPS work on PEs will

expand beyond Action 7 parameters .................. 754Unilateral BEPS actions could lead to double

taxation, business tells OECD ........................... 755

UNITED NATIONSUnited Nations tax committee to review Article 9

commentary at annual meeting ......................... 757

UNITED STATESEmployee morale, productivity is casualty of

federal shutdown, APMA director says ............... 744Regulatory reform in the financial industry and

end-to-end transfer pricing execution ................. 776

T E X T

Canada Revenue Agency’s annual APA report for2012-13 ......................................................... 765

India’s revised general anti-avoidance rule ............. 759OECD memorandum on country-by-country

pricing documentation ..................................... 762

R E S O U R C E S

JOURNALUpcoming conferences ........................................ 782

DIRECTORYPrivate sector sources ......................................... 784Government sources ........................................... 784

742 (Vol. 22, No. 12)

10-17-13 Copyright � 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TMTR ISSN 1063-2069

Tax Management Transfer Pricing Report (ISSN 1063-2069) is published bi-weekly by Tax Management Inc., 1801 S Bell St, Arlington, VA 22202-4501. Editorialinquiries may be directed to the editors at (703) 341-5914. For customer service, call (800) 372-1033. Outside the U.S., call BNA International in London at(+44) 171-559-4821.

Copyright Policy: Authorization to photocopy selected pages for internal or personal use is granted provided that appropriate fees are paid to Copyright Clear-ance Center (978) 750-8400, http://www.copyright.com. For authorization of other uses, contact the TM Reprint Permission Coordinator at (703) 341-5937, orsend a written request via fax (703) 341-1624, or e-mail [email protected]. For more information, see http://www.bna.com/corp/copyright.

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Darren McKewenGROUP PUBLISHER

George R. Farrah, EXECUTIVE EDITORBruce Reynolds, MANAGING EDITOR—INTERNATIONAL

Molly Moses, MANAGING EDITOR;Kevin A. Bell, Dolores W. Gregory, Alex M. Parker, STAFF WRITERS/EDITORS;Tamu N. Wright, Rita McWilliams, Alison Bennett, CONTRIBUTING EDITORS;Marji Cohen, DIRECTOR, INDEXING SERVICES; Robert Creeden, INDEX EDITOR

InThis Issue

AmericasCanada

Canada Completes Record 24 APAs;Official Notes Recent Staff Increases

T he Canada Revenue Agency in the latest fiscalyear, ended March 31, 2013, completed 24 advancepricing agreements—the highest number on record

for any year since the government began providing forthe agreements in 1990, according to the latest report,released Sept. 18, and prior reports.

Sue Murray, director of the CRA’s Competent Au-thority Services Division, attributed the high number ofcompletions to both a recent increase in CASD staff anda new requirement for taxpayers to submit much of theinformation needed for their APAs at the beginning ofthe process.

Staff in the division increased by about 20 percentover the last two years, Murray told Bloomberg BNA.This increase, she said, allowed the division to gain con-trol of inventory for both APAs and mutual agreementprocedure cases, which take priority over APAs.

Currently, CASD has 28 analysts and 12 economistsworking on both MAP and APA cases.

In another recent change, taxpayers are now re-quired to submit a ‘‘pre-file package’’ to the CRA priorto being granted a pre-filing meeting. This package con-tains significantly detailed information about the com-pany’s financial statements, business operations and in-dustry.

‘‘It should be emphasised that this information isgenerally similar, if not the same, to that which taxpay-ers have historically been asked to provide during laterstages of the APA process,’’ said the report, which ap-pears in the Text section of this issue.

Murray said having this information up front has al-lowed the APA process to be more efficient.

Accepted Cases. The CRA accepted 21 APAs in thelatest fiscal year—more than were accepted in each ofthe two previous years.

The report noted that 35 applications were underconsideration at the close of the most recent fiscal year,which suggests that as many as 35 new cases might beaccepted into the program in fiscal year 2013-14.

Record-Breaking Completions. The 24 APAs completedin 2012-13 represent an increase of more than 40 per-cent over the CRA’s previous high of 17 completedAPAs, achieved in both 2003-04 and 2004-05 (16 Trans-fer Pricing Report 450, 10/4/07).

All but three of the 24 APAs completed in the latestfiscal year were bilateral, the CRA said.

The high number of completions in the latest year isnot surprising given the high number of pre-filing con-ferences conducted in the prior year—34 (21 TransferPricing Report 931, 1/24/13).

By contrast, 24 pre-filing meetings occurred in 2012-13, and historically, the CRA has averaged 26 suchmeetings per year, the latest report said.

Average Times. More time was needed on average tocomplete APAs in the latest year than in the previousfour years. The average number of months from anAPA’s acceptance to its completion was 51.5, comparedwith 44 months in 2011-12.

Murray said she expects these times to drop in thenext APA report. The CRA in 2012-13 concentrated onclosing many of its old cases, and the longer times arethe result of ‘‘dealing with a backlog.’’ The report saidthat some of the older cases were complex and involvedsubstantial differences between the CRA and the for-eign tax authority.

In resolving the 24 APAs, the report said, the CRA re-quired on average:

s 27.9 months to complete its due diligence andanalysis of the covered transactions,

s 11.6 months for negotiations with the correspond-ing foreign tax administration and

s 12 months to draft and finalize the bilateral anddomestic agreements.

Countries Involved. APAs involving the United Statesrepresented 61 percent of pending and completedagreements at the end of the 2012-13 year, the reportsaid. This figure compares with 71 percent in the prioryear.

Murray attributed the lower percentage of U.S. APAsto the fact that Canada is ‘‘dealing with a lot more coun-tries now’’ rather than to a drop in the actual number ofU.S. cases.

The report said the CRA is actively engaged in bilat-eral negotiations with taxpayers from 15 differentcountries—Japan, the United Kingdom, Australia,South Korea, Switzerland, France, Austria, Singapore,Sweden, Germany, Ireland, Denmark, the Netherlands,and New Zealand, in addition to the United States.

Transaction Types, Methods. Of all APAs in process, 47percent involve tangible property, 31 percent involve in-tangible property, 21 percent involve intragroup ser-vices, and no agreements involve financing.

The transactional net margin method is being usedas the transfer pricing method in 53 of the 99 APAs inprocess. Cost plus is being used in 14 of the cases, thecomparable uncontrolled price method in 13, profit splitin another 13, and resale price in six.

Net inventory of APAs declined slightly from 2011-12, to 99 from 102 pending agreements.

BY MOLLY MOSES

To contact the reporter on this story: Molly Moses inWashington at [email protected]

To contact the editor responsible for this story:Cheryl Saenz at [email protected]

(Vol. 22, No. 12) 743

TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 10-17-13

mailto:[email protected]


� Canada’s latest APA report is available from theCRA Website at http://www.cra-arc.gc.ca/tx/nnrsdnts/cmp/p_mp-eng.html.

Mexico

Mexico May Soften Transfer Pricing ItemsIn Tax Overhaul in Response to Opposition

A s lobbying against Mexico’s tax bill reaches newheights, the government is considering softeningthe initiative’s proposed changes on the country’s

transfer pricing regime, a practitioner heading a com-mission against them told Bloomberg BNA Oct. 11.

‘‘We have presented an alternative reform that’s bet-ter for transfer pricing, which is now under consider-ation,’’ said Arturo Vela of Deloitte, president of thetransfer pricing commission at the Mexican Institute ofPublic Accountants.

In a big win for the group, made up of top transferpricing law and accounting firms, Congress has agreedto lower the bar on the bill’s call for related-party pay-ments to become nondeductible. ‘‘This was one of thethings we are most concerned about because they werebasically throwing away all payments’ deductibilitywhen clearly some should be deductible,’’ Vela ex-plained. ‘‘They [congressional deputies reviewing theoverhaul] have said they will consider changing the billso that certain operations are included and the oneswhere they [the tax authorities] have found tax evasionare not.’’

Vela was unable to provide more details on what spe-cific payments will be affected. A spokeswoman forMexico’s Public Finance and Credit Secretariat, whichdrafted the tax bill, would not comment other than tosay Congress is now in charge of voting on the pro-posal.

The initiative, launched by President Enrique PenaNieto Sept. 8, aims to bolster flagging economic growthin Latin America’s second-largest economy by raisingfiscal proceeds, currently at the lower end of the Orga-nization for Economic Cooperation and Development’srecommendations (22 Transfer Pricing Report 716,10/3/13).

The package has been harshly criticized by opposi-tion political parties, a handful of industry associationsand think thanks that have repudiated up to 90 percentof its tenets. In light the overwhelming pressure, Mexi-co’s leading Institutional Revolutionary Party Oct. 9said it will consider making adjustments to the bill toensure it gets Congress’ nod by the newly set deadlineof Oct. 20.

One change that seemed to positively affect thetransfer pricing community was the elimination of theso-called dictamen fiscal or statutory report—transferpricing information that companies are required to filein addition to the annual tax return and transfer pricingstudy. Vela expressed agreement with views that theproposal won’t necessarily make companies’ liveseasier because the government is considering requiringan alternative ‘‘informative statement.’’

Still, he said Mexico’s tax authority, the Servicio deAdministracion Tributaria, has benefited from the dic-tamen because the additional information submittedhas enabled it to step up audits. Therefore, Vela said

Congress is considering leaving the dictamen as ‘‘op-tional’’ and that it probably won’t be removed.

Pro Rata Expenses Form Core of Debate. More crucialis the commission’s request that the government allowthe deduction of pro rata expenses, something it hasbanned companies from doing since the 1960s, practi-tioners said.

Agustin Espino of Dunamis Consulting in MexicoCity said the non-deduction of pro rata expenses hasbeen a thorn in the side of companies looking to lowertheir tax burden.

Firms have resorted to different tactics to have thesedeductions allowed for years, including using interna-tional tax treaties, but their efforts have generated ahandful of disputes with the authorities.

Because pro rata expenses must be accounted for inthe transfer pricing study, Vela said, ‘‘we are saying,‘Why can’t you allow them if you can see they are prop-erly and thoroughly documented in the study?’ ’’

Still, Vela said it is unlikely the government will ap-prove the deductions. ‘‘The authorities don’t like the is-sue because it involved foreign expenses which theydon’t have enough vision and control over,’’ he said. ‘‘Idon’t think they will grant this.’’

In other requests, Vela said the commission hasasked for transfer pricing adjustments on market valuesto be allowed, for the transfer pricing study require-ments for domestic and foreign related-party transac-tions to be simplified and unified, and for the analysismethods for intangible operations in transfer pricingmatters to be permitted.

BY IVAN CASTANO

To contact the reporter on this story: Ivan Castano inMexico City at [email protected]

To contact the editor responsible for this story: MollyMoses at [email protected]

United States

Employee Morale, Productivity Is CasualtyOf Federal Shutdown, APMA Director Says

T he worst impact of the federal government’s shut-down will be the bite it takes out of employee mo-rale once the standoff ends, the director of the Ad-

vance Pricing and Mutual Agreement program toldBloomberg BNA Oct. 15.

‘‘It is going to take a while to get people up and run-ning again,’’ said APMA Director Richard McAlonan.‘‘It’s just human nature.’’

Employees already demoralized by the unpaid fur-loughs and the uncertainty of not knowing when theymight be called back to work cannot be expected to hitthe ground running once the work resumes, McAlonansaid.

‘‘It’s a big machine and it’ll take a while to get up tospeed again,’’ he said.

The shutdown triggered a furlough for some 90 per-cent of Internal Revenue Service employees, includingthose in the APMA program and transfer pricing opera-tions. Some 9.3 percent—8,752 IRS employeesnationwide—have been excepted from furlough.

That group includes McAlonan and 138 other em-ployees in the Large Business & International Division,

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who are excepted on an as-needed basis, to be calledback to deal with ‘‘an imminent statutory deadline orthreat to government property,’’ according to an IRScontingency plan posted Sept 26.

However, McAlonan said, he has not been called onto return to work and he was not aware of anyone elsein LB&I being asked to return.

‘‘There might be one employee working on arbitra-tion issues on a part-time basis,’’ he said.

Extended Deadlines. For taxpayers, the principal ef-fect of the shutdown will be to extend IRS deadlines,said John M. Peterson Jr. of Baker & McKenzie in PaloAlto, Calif.

‘‘Everything from exam case development to APMAto PLRs [private letter rulings] or new regulations is justgetting pushed back a couple weeks,’’ he said.

However, the delay in funding the 2014 fiscal yearbudget for the IRS means delays in scheduling meetingsinvolving travel, he noted.

‘‘Any resulting delays there could be much morethan the two weeks the government will end up havingbeen shut down,’’ Peterson said.

Though the U.S. Tax Court has been closed duringthe shutdown, taxpayers that have already received de-ficiency notices can still file petitions if they do so byregular mail. Cases scheduled for trial this fall face de-lays.

According to a notice on the tax court Website, be-cause of the lack of appropriations, the court canceledtrial sessions scheduled to start on Oct. 7 in Baltimore,Chicago, Dallas, Detroit, Miami, and New Orleans aswell as sessions scheduled to start Oct. 8 in Pittsburghand Washington, D.C.; Oct. 15 in Los Angeles; and Oct.16 in New York and Washington, D.C.

BY DOLORES W. GREGORY

To contact the reporter on this story: Dolores W.Gregory in Washington at [email protected]


AMERICAS (Vol. 22, No. 12) 745




EuropeIreland

Ireland Plans to Ban ‘Stateless’ Companies;Potential Effect on Apple, Others Unclear

T he Irish government says it plans to enact legisla-tion banning ‘‘stateless’’ companies—multinationalentities that are incorporated in Ireland, but do not

have a tax residence anywhere on the globe.Michael Noonan, Ireland’s Minister of Finance, said

the provision would be included with the finance bill,expected to accompany the annual budget later thisyear, but gave few details on how it would work.

‘‘I want Ireland to play fair—as we have alwaysdone—and I want Ireland to play to win,’’ Noonan saidin a statement Oct. 15.

The proposal comes after months of high-profile leg-islative inquiries into tax planning by multinationals, inEurope and the United States, which often have por-trayed Ireland as a tax-favorable jurisdiction.

A dramatic May hearing by the U.S. Senate Perma-nent Subcommittee on Investigations focused on AppleInc. in particular, including claims that the company ex-ploited differences in U.S. and Irish law to shelter bil-lions of dollars from taxation in either country (22Transfer Pricing Report 116, 5/30/13).

The plan appears to target multinationals that exploitdiffering definitions of tax residency to allocate incometo no-tax jurisdictions. While Ireland largely uses amanagement and control test to determine tax resi-dency, many other countries—including the UnitedStates—base tax residency on incorporation. The mis-match allows companies to avoid being a tax resident ineither country, and it has become a crucial cog in theso-called double Irish tax plan.

The Finance Department’s proposal would aim to‘‘eliminate mismatches—that can exist between taxtreaty partners in certain circumstances—being used toallow companies to be ‘stateless’ in terms of their placeof tax residence.’’

No Major Impact Predicted. While there were no fur-ther details available about the proposal, observers andpractitioners interpreted the legislation to mean thatany multinational company incorporated in Irelandwithout a tax residency would be treated as if its taxresidency were in Ireland.

‘‘I don’t believe it will have a major impact,’’ saidConor O’Brien, head of tax and legal services at KPMGin Ireland. ‘‘As long as you’re a resident somewhere, Ithink you’ll comply with the rules.’’

The crucial detail may be whether the new law wouldallow companies to establish a tax residence in coun-tries with little or no tax.

Ian Roxan, a senior lecturer at the London School ofEconomics Department of Law, and director of its taxprogram, said it is possible the law would require mul-tinationals to either be taxed in Ireland or a country

with a tax treaty with Ireland—which would create ahigher bar for multinationals to cross.

‘‘Clearly, Ireland wants to be seen as a player in thecurrent movement against corporate tax avoidance,’’Roxan said. ‘‘They want to avoid being the villain, butthey still want to do the business.’’

Aside from the political pressure associated withbase erosion and profit shifting—including the Organi-zation for Economic Cooperation and Development’sBEPS project—Ireland also faces pressure from the In-ternational Monetary Fund and the European Union toenact austerity measures, which could include crackingdown on perceived tax avoidance.

In an Oct. 13 speech, Irish Prime Minister EdnaKenny said the country was ‘‘on track’’ to become thefirst Euro-zone country to exit the IMF/EU bailout byDec. 15.

‘‘If they show that they’re willing to crack down onmore aggressive types of avoidance, that will help thempreserve their 12.5 percent [corporate tax] rate,’’ Roxansaid.

BY ALEX M. PARKER

To contact the reporter on this story: Alex M. Parkerin Washington at [email protected]


� The Minister of Finance’s statement is availableat http://budget.gov.ie/Budgets/2014/Financial-Statement.aspx. The Department of Finance’s plan-ning statement, ‘‘Ireland’s International Tax Strat-egy,’’ is available at http://www.finance.gov.ie/viewdoc.asp?DocID=7857. Prime Minister EdnaKenny’s speech regarding the IMF/EU bailout isavailable at http://www.finegael.ie/latest-news/2013/speech-by-an-taoiseach-en-2/index.xml?

European Union

EU Competent Authority InventoryMore Than Triples Between 2008, 2012

C ompetent authority requests involving Europeanmembers eligible for arbitration under the Euro-pean Union Arbitration Convention increased sig-

nificantly in the four years leading up to 2013, totaling738 cases on Dec. 31, 2012, compared with 201 cases onDec. 31, 2008, according to a recent EU Joint TransferPricing Forum report.

An EU JTPF update, dated August 2013, reportedthat the nation with the largest inventory of such caseson Dec. 31, 2012, was Germany, with 229 cases repre-senting 31 percent of the 738 pending cases.

The August update gave statistics on the inventory ofmutual agreement procedure cases as of Dec. 31, 2012,representing competent authority disputes that couldbe brought under the EU Arbitration Convention, whichmeans they involve a transfer pricing dispute and are

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eligible for arbitration if they are not resolved in twoyears.

In an earlier update, the EU JTPF reported a rangeof between 196 and 201 cases on Dec. 31, 2008, becausecases considered closed on Dec. 31 by one member maynot be formally closed by the other member (18 Trans-fer Pricing Report 1101, 2/25/10).

Meanwhile, the Organization for Economic Coopera-tion and Development member countries recently re-ported 4,061 open MAP cases at the end of 2012 (22Transfer Pricing Report 548, 9/5/13).

EU MAP Cases. According to the EU JTPF’s Auguststatistics, Germany’s opening inventory of MAP caseseligible for arbitration under the EU Arbitration Con-vention stood at 192 cases on Jan. 1, 2012, with 77 newcases initiated during the year and 40 cases completed,leaving an ending inventory of 229 cases on Dec. 31,2012.

Germany had an inventory of 98 cases on Dec. 31,2012.

France’s opening inventory of EU MAP cases eligiblefor arbitration under the EU Arbitration Conventionstood at 174 on Jan. 1, 2012, with 30 new cases initiatedduring the year and 47 cases completed, leaving an end-ing inventory of 157 cases on Dec. 31, 2012.

France had an inventory of 102 cases on Dec. 31,2008.

Meanwhile, the United Kingdom started 2012 withan inventory of 63 cases, initiated 16 new cases, com-pleted 22 cases, and ended the year with an inventoryof 57 cases. The United Kingdom had an inventory of 44cases on Dec. 31, 2008.

German Caveat. The August statistics include a noteby Germany explaining limitations on the ability tocompare the German 2012 figures with German statis-tics prior to 2011 and statistics provided by other coun-tries.

According to Germany, its competent authority cur-rently can provide statistics based only on ‘‘initiated’’and ‘‘completed’’ dates used for internal purposes, andGermany’s definition of those terms differs from theOECD and EU JTPF definitions. ‘‘While for earlier re-porting periods (up to 2010) considerable efforts weremade to specifically prepare separate statistics forOECD purposes, the need for a streamlining of re-sources is currently not permitting [us] to produce ad-ditional statistics based on OECD definitions.’’

Under the German definitions, a case is treated asopen as soon as the German competent authority re-ceives a request—regardless of whether the requestcontains the necessary minimum information—which isearlier than under the OECD and EU JTPF definitionsof ‘‘initiated.’’

Further, Germany defines a case as being open untilimplementation of an agreement is reported back to thecompetent authority, which is later than that providedfor under the OECD and EU JTPF definitions of ‘‘com-pleted.’’

Thus, the German definitions ‘‘result in a larger MAPcase inventory and make cases appear older than underOECD/JTPF definitions.’’

Pending More than Two Years. According to the Auguststatistics, on Dec. 31, 2012, there were 307 EU MAPcases that had been pending for more than two years af-ter the cases were initiated. Of those cases:

s in 6 percent, the two-year point was not reachedunder the EU Code of Conduct;

s 16 percent were pending before the court;s in 26 percent, the competent authorities had

waived the time limit;s 1 percent were to be sent to arbitration;s 1 percent were already in arbitration;s 15 percent had a settlement agreed in principle

and were awaiting the exchange of closing letters; ands 37 percent were pending for ‘‘other reasons.’’

Arbitration? On Dec. 31, 2012, Germany had 91 casesstill pending after two years, seven of which had notreached the two-year point under the EU Code of Con-duct. Thirteen cases were pending before the court, thetwo-year time limit was waived in four cases, and asettlement in principle had occurred in 23 cases, leav-ing 44 cases pending for ‘‘other reasons.’’

Of those 44, the German competent authority had re-quested additional information in 10 cases, and settle-ment appeared imminent at the end of 2012 in six casesand was in fact reached before May 2013.

In most of the remaining 28 cases, Germany said that‘‘sending them to arbitration did not appear meaningfulbecause there had not been an exchange of position pa-pers yet.’’ In roughly half of the 28 cases, the Germancompetent authority was either still waiting for the firstposition paper of the competent authority of the coun-try where the primary adjustment had been made, orhad received the first position paper only very recently.And in the other cases, the German competent author-ity, or its local or regional office, ‘‘appeared mainly orpartly responsible for the delay, generally due to re-sources issues.’’

BY KEVIN A. BELL

To contact the reporter on this story: Kevin A. Bell inWashington at [email protected]


� The EU JTPF August 2013 statistics may befound at http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2013/jtpf_012_2013_en.pdf.

Norway

Norway’s New Limit on Interest DeductionsSeen Affecting Internal Pricing Structures

A new legal amendment limiting interest deductionsfor related-party loans will have a ‘‘significant im-pact’’ on foreign multinationals doing business in

Norway, an Oslo-based transfer pricing practitionertold Bloomberg BNA Oct 4.

Hans Olav Hemnes of the firm BDO warned that pri-vate equity structures in particular would be affected bythe new rules, which are due to take effect Jan. 1, 2014.The measure is expected to go forward despite the fact

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that the former leftist government was replaced by anew center-right government Sept. 9, he said.

Hemnes’ comments follow BDO’s Sept. 24 publica-tion of a new report on transfer pricing in Norway,which states that the tax authority’s increased scrutinymeans that foreign corporations doing business in Nor-way face a ‘‘number of challenges with regard to ensur-ing that they meet Norwegian regulations.’’ Income ad-justments are expected to increase, the firm said. Com-panies’ transfer pricing structures should be ‘‘takenseriously from the beginning,’’ as miscalculations are‘‘not always as easy to repair afterwards,’’ BDO said.

Designed to bring Norway into line with its Scandi-navian neighbors, the plan to limit interest deductionsfor loans from related parties would ‘‘reduce the incen-tives for multinationals to place acquisition debts inNorway and thereby reduce Norwegian taxation,’’ BDOsaid. Under the new rules, deductions for interest pay-ments to related parties exceeding 25 percent of a com-pany’s taxable income, plus net interest and deprecia-tions, would be disallowed. Currently, all arm’s-lengthinterest expenses are deductible. Under the new rules,the denied amount could be carried forward for thenext five years.

The rules were proposed in June and accompaniedprovisions easing intercompany loan rules (22 TransferPricing Report 226, 6/27/13).

Corporations, partnerships and controlled foreigncorporations all would be affected by the rules, aswould transactions such as external loans includingback-to-back arrangements, cash pools and loans in-volving commissions from external lenders. ‘‘Compa-nies with a high degree of debt to a related party shouldmake an analysis of the proposal and what effects it willhave for the group,’’ BDO said. ‘‘Companies with acomplicated financial structure may need time toadapt.’’

Passage Considered Likely. Hemnes said the new limi-tations on interest deductions ‘‘will definitely have asignificant impact on foreign groups and for private eq-uity structures in particular.’’ For larger corporatestructures with complex financing, he said, it oftentakes time to make amendments. ‘‘Accordingly, plan-ning should be done this year. Even with a new govern-ment it is most likely that the proposed rules will passParliament, possibly with minor amendments.’’

In general, Hemnes continued, foreign groups needto pay attention to ensure that centrally developedtransfer pricing policies do not conflict with local factsand business models. ‘‘In particular, it is important to

be able to demonstrate and document that chargesmade to local entities have the necessary value for theentity. We have experienced a number of cases wherethis has been attacked by the tax authorities,’’ he said.

The Norwegian tax authorities have increased theirresources and sophistication, Hemnes added. ‘‘Over thelast few years we have already experienced an increasein transfer pricing audits. Companies have been pickedout on a case-by-case case basis, but also based on sec-tors and business lines, such as distributors and com-mission agents. Increased transfer reporting require-ments have also made it possible to pick out companiesautomatically based on statistics from the tax returns.’’

Regarding advance pricing agreements, the Norwe-gian system ‘‘is not very well developed,’’ Hemnes said.‘‘You deliver your tax return and you get it assessed. Toask for an APA is not straightforward. However, in ourexperience it is possible to agree an APAs if the tax au-thorities are correctly approached.’’

Landmark Rulings Examined. The BDO report, whichincludes an English language summary, also examinestwo recent landmark rulings in the area of transfer pric-ing: the December 2011 Dell AS ruling, which hingedon the definition of ‘‘permanent establishment,’’ and theVingcard/Elsafe ruling from June 2012, which alloweduse of the transactional net margin method, with cer-tain reservations, for intragroup adjustments. An over-view of current documentation rules also is provided.

In Dell’s case, Norway’s Supreme Court, reversingthe ruling by the Bogarting Court of Appeal, found thetax arrangements made a Norwegian arm of the com-puter giant did not constitute a PE under the Norway-Ireland tax treaty (20 Transfer Pricing Report 642,12/15/11).

BY MARCUS HOY

To contact the reporter responsible for this story:Marcus Hoy in Copenhagen at [email protected]


� The BDO report, with an English-language sum-mary from page 45, can be found at http://www.bdo.no/Documents/Andre%20publikasjoner/BDO_INNSIKT_Transferpricing2013_screen.pdf. In-formation provided by the Finance Ministry on thenew interest deduction limits can be found at http://www.regjeringen.no/nb/dep/fin/aktuelt/nyheter/2013/horing—begrense-fradrag-for-gjeldsrente.html?id=722641.

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Asia/PacificRimIndia

India’s GAAR Gives Broad New PowersTo Rewrite Transactions, Practitioner Says

I ndia’s new general anti-avoidance rule (GAAR) givesassessing officers extensive new powers to recharac-terize ‘‘impermissible avoidance arrangements,’’ in-

cluding related-party transactions, according to a NewDelhi practitioner.

Rohan K. Phatarphekar of KPMG India Pvt. Ltd. toldBloomberg BNA Oct. 15 that the GAAR empowers thetax administration to treat such an avoidance arrange-ment as if ‘‘it had not been entered into or carried out,but also to disregard, combine or recharacterize anystep in, or a part or whole of, the impermissible avoid-ance arrangement.’’

Regarding related-party transactions, Phatarphekarsaid the GAAR permits the tax administration, in an ar-rangement involving multiple parties, to ‘‘redetermine’’the transaction by disregarding any accommodatingparty, or by treating any accommodating party and anyother party as one and the same person.

Alternatively, Phatarphekar said, the tax administra-tion may deem connected persons to be one and thesame person for purposes of determining tax treatmentof any amount, or reallocate among the parties to thearrangement any accrual, or receipt, of a capital or rev-enue nature, or any expenditure, deduction, relief or re-bate.

However, Manisha Gupta of Deloitte Haskins & Sellsin Mumbai said when part of an arrangement is de-clared to constitute an impermissible avoidance ar-rangement, ‘‘the tax consequences under GAAR shallbe determined with reference to such part only and notthe entire arrangement.’’

Under the GAAR, which will apply to the tax year be-ginning April 2015 and subsequent years, when the as-sessing officer is of the view that there is an ‘‘impermis-sible avoidance arrangement,’’ he or she must issue anotice to the taxpayer detailing the avoidance. The rulesapply if the tax benefit arising to all of the parties to thearrangement in the relevant assessment year is 30 mil-lion rupees ($485,000) or greater.

A Sept. 26 notice from the Central of Board of DirectTaxes, published in the Text section of this issue, de-tails the procedure that tax auditors are required to fol-low when they identify an impermissible avoidance ar-rangement.

The Sept. 26 guidance requires the assessing officerto issue a notice in writing to the taxpayer, before mak-ing a reference to the Commissioner, containing an ex-planation of why the main purpose of the arrangementis to obtain a tax benefit and why it constitutes imper-missible avoidance.

Arm’s-Length Principle. Phatarphekar said that underSection 144BA of the Income Tax Act, if the assessingofficer at any stage of the assessment, after reviewingthe material and evidence available, considers it neces-sary to declare an arrangement an impermissible avoid-ance arrangement, then he or she may refer the matterto the Commissioner.

The Commissioner, on receipt of the reference, if heor she is of the opinion that GAAR provisions shouldapply, will issue a show cause notice to the taxpayer.

Gaurav Shah of MZSK & Associates, a Mumbai char-tered accounting firm, said normally the assessing offi-cer would start the GAAR proceedings.

Shah said that while the Sept. 26 notice does not spe-cifically address the precise role of the assessing officerand the transfer pricing officer, it would appear that theassessing officer may refer the computation of thearm’s-length price to the transfer pricing officer, sincethe assessing officer has wide powers under the GAARprovisions.

Phatarphekar said although the current regulationsdo not require the assessing officer to seek the views ofthe transfer pricing officer, ‘‘it seems that the tax officerwill take the help of the arm’s-length principle to makethe reallocation.’’

Business Reasoning. Shah said the GAAR permits theassessing officer to venture into the taxpayer’s commer-cial or business reasoning for entering into a related-party transaction in a particular manner.

The GAAR also give wide powers to the assessing of-ficer in cases where the rule is invoked, he said. ‘‘So,unlike [in] a majority of the other tax provisions, thescope available to the AO for making adjustments is vir-tually unlimited.’’

Under the Sept. 26 notice, a tax officer may assertthat there has been an ‘‘impermissible avoidance ar-rangement’’ on the grounds that the arrangement:

s creates rights or obligations not ordinarily createdbetween persons dealing at arm’s length;

s results, directly or indirectly, in the misuse orabuse of the provisions of the Income Tax Act;

s lacks commercial substance or is deemed to lackcommercial substance, in whole or in part; or

s is entered into or carried out by means or in amanner not ordinarily employed for bona fide purposes.

Shah clarified that in order to invoke the GAAR, theassessing officer also needs to prove that obtaining atax benefit is the main purpose of the impermissibleavoidance agreement. He pointed out that there no de-tailed guidance currently exists on what constitutescommercial substance.

Guidance. Phatarphekar said because there is not acomprehensive list of arrangements that indicate taxavoidance, it is often hard to distinguish between genu-ine commercial ventures and tax avoidance arrange-ments.

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The only guidance currently available on applyingthe GAAR, Phatarphekar said, is a report published bythe government-appointed expert committee chaired byDr. Parthasarthi Shome.

Shome’s Jan. 14, 2012, report includes 27 examples,some relating to transfer pricing, illustrating how theGAAR provisions would apply.

In Example 20 of the report, company S transfers itsactionable claim against company T to connected con-cern U for 10 percent of the value of the claim. U thentransfers the claim to company V, and company V giftsthe claim to company W, another connected concern ofS. Upon redemption of the actionable claim, ‘‘W showsit as a capital receipt and claims exemption as not be-ing in the nature of revenue receipt.’’

According to the Shome report, on these facts, theRevenue would be entitled to invoke the GAAR becausethe transfer of actionable claims ‘‘appears to be dubiousin nature if the same is not at arm’s-length price,’’ andtherefore the income belongs to S.

However, in Example 8, the report said the Revenuecould not invoke the GAAR to challenge a markup inthe cost of services because specific anti-avoidancetransfer pricing regulations address that issue. In Ex-ample 8, a large corporate group created a service com-pany to manage all of its non core activities with theservice company charging each company for the ser-vices rendered on a cost plus basis.

Entry Into Force. Phatarphekar said the GAAR will en-ter into force on April 1, 2015.

Gupta said the GAAR will apply to all tax benefits ob-tained from the arrangement on or after April 1, 2015,irrespective of the date of arrangement.

Gupta said the GAAR does not apply to:s an arrangement in which the aggregate tax benefit

arising to all parties in the relevant assessment yeardoes not exceed 30 million rupees ($488,000);

s a foreign institutional investor that does not claimany benefit under a tax treaty and has invested in secu-rities with the prior permission of the competent au-thority;

s an investment made by a nonresident by way ofoffshore derivative instruments; and

s any income deemed to be received by any personfrom the transfer of investments made before Aug. 30,2010.

Thin Cap. Phatarphekar said investments made afterAug. 30, 2010, are covered by the GAAR.

The GAAR, he said, empowers the tax administrationto deal with instances of creative accounting by provid-ing that in instances of impermissible avoidance ar-rangements:

s any equity may be treated as debt, or vice versa,s any accrual or receipt of capital may be treated as

revenue or vice versa ands any expenditure, deduction, relief or rebate may

be recharacterized.In Example 6 of the Shome report, Indco incorpo-

rates Subco in a zero-tax jurisdiction with equity of$100. Subco has no reserves and it makes a loan of $100to Indco at the rate of 10 percent per annum, which loanIndco uses for business purposes. Indco claims a deduc-tion of the interest it has paid to Subco from Indco’sprofits. There is no other activity in Subco.

The report said the Revenue could invoke the GAARon these facts because the main purpose of the arrange-ment is to obtain an interest deduction in the hands ofIndco and thereby a tax benefit, and there is no com-mercial substance in establishing Subco. Consequently,in the case of Indco, the interest payment would be dis-allowed by disregarding Subco and no correspondingrelief would be allowed to Subco through refund oftaxes withheld, if any.

Impact. Phatarphekar said the proliferation of India’santi-avoidance rules has amplified the pressure thattaxpayers already feel as they operate in an intenselyuncertain tax jurisdiction.

Shah said most taxpayers are wary of using artificialstructures to obtain a tax benefit. ‘‘In my view, the pri-mary impact under the GAAR regime would be thatstructures internationally considered workable wouldnow be required to be evaluated against the touchstoneof the Indian GAAR provisions.’’

Phatarphekar and Shah said they hope the CBDTwill issue further guidance on the situations to whichthe GAAR applies, including related-party transactions,and defining commercial substance.

BY KEVIN A. BELL



� The 135-page Shome report may be found athttp://finmin.nic.in/reports/report_gaar_itact1961.pdf.

Practitioner Says New Indian Act RequiresBoard Approval of Related-Party Transactions

I ndia’s recent overhaul of its 57-year-old CompaniesAct includes a requirement for companies to get aspecial resolution from the board of directors before

conducting related-party transactions that cannot beproven to be routine and at arm’s length, according toHemal Zobalia of KPMG in Mumbai.

The Indian government on Aug. 30 published text ofthe Companies Act 2013, a comprehensive law aimed atestablishing rules that are clearer and easier to under-stand than those contained in the similarly named 1956business law that have been hurting the country’s im-age with international investors, said Zobalia.

A key focus of the new law is to require more ‘‘trans-parency’’ and ‘‘responsibility’’ from companies. Fortransfer pricing, that includes a new definition of ‘‘re-lated party’’ as well as tighter restrictions on howrelated-party transactions must be approved within acompany.

The overall law is set to take effect April 1, 2014, butthe provision on related-party transactions came intoforce Sept. 12. ‘‘Whatever we have been doing untilnow needs to be looked at in light of this new act. Also,there were certain precedents under the old law, thatmay or may not apply under the new law,’’ he said.

Zobalia initially made his comments at a Sept. 26conference on transfer pricing in China and India,hosted in Paris by France’s biggest law firm, Fidal Di-rection Internationale, and also spoke to BloombergBNA by telephone Oct. 16. In addition to the Companies

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Act, the attorney’s presentation covered Indian transferpricing adjustment statistics, new domestic transferpricing rules and the country’s fledging advanced pric-ing agreement program.

More ‘Stringent’ Requirements. Zobalia said that underIndia’s existing rules, companies are able to get centralgovernment approval for related-party transactions‘‘fairly easily,’’ but the new Companies Act introduces‘‘more stringent’’ requirements to improve transpar-ency and internal controls.

Section 188 of the law requires companies to obtainconsent from the board of directors through a specialresolution before they ‘‘enter into any contract or ar-rangement with a related party,’’ and it lists such trans-actions as the sale, purchase, supply or leasing of goodsor materials or property, as well as the ‘‘availing or ren-dering of services,’’ and the underwriting of subscrip-tion of securities or derivatives, as well as appointingagents to conduct such transactions.

The board must disclose every such contract or ar-rangement in its report to shareholders, ‘‘along with thejustification for entering into such contract or arrange-ment,’’ according to the law.

The law contains an exception for ‘‘any transactionsentered into by the company in its ordinary course ofbusiness’’ other than those not occurring on an arm’s-length basis, but it is not clear how much relief that pro-vision offers.

‘‘The problem is that now you are expected to dem-onstrate that a transaction is arm’s-length or routine.Transfer pricing is not an exact science, so the chal-lenge will be to have the proper documentation,’’ Zoba-lia said. Second, loans and investments by a relatedparty won’t be considered routine if the party can’tprove that it regularly makes such loans and invest-ments, he said.

The law’s definition of ‘‘related party’’ includes an‘‘associate company,’’ which it further defines as a com-pany that controls 20 percent of share capital and itsays that this also includes a joint venture company.

‘‘The idea is to make related-party structures, evenwithin group structures, clearer,’’ Zobalia said.

‘Subjective’ Law, ‘Aggressive’ Enforcement. Zobaliasaid Indian transfer pricing law remains ‘‘very subjec-tive’’ and authorities are ‘‘very aggressive’’ in enforcingit, attacking one out of two cases to make adjustments.‘‘At that ratio, if you have not yet been attacked on yourtransfer pricing, consider yourself very, very lucky. Butthat luck will probably run out soon rather than later.’’

He said Indian transfer pricing authorities made 10billion euros ($13.49 billion) in transfer pricing adjust-ments for the 2012-13 fiscal year, ending March 31.

Domestic Transfer Pricing Rules. Moreover, adjust-ments could grow due to ‘‘wide but limited’’ domestictransfer pricing rules that apply beginning with the fis-cal year that ended March 31 for transactions betweengroup entities inside India, he said.

Under the rules, the authorities can use a transferpricing analysis to decide payments that one group en-tity makes to another group entity are excessive.

The new rules apply to directors’ remuneration, pur-chase of property, reimbursements, guarantee fees andgroup restructuring. Zobalia said that ‘‘if there is a capi-

tal account payment, we have been taking the view thatthat is something that is not covered currently.’’

The authorities also may bar a company from ben-efiting from a ‘‘tax holiday’’ or incentive if they deemthat it has inflated the profit of one domestic entity toincrease its benefit.

Zobalia noted that the domestic provisions use thesame methods, documentation rules and noncompli-ance penalties that apply to international transactions.

Advance Pricing Agreements. He said the governmenthas become aware of the risk that foreign multination-als could face double tax issues if an Indian transferpricing audit restricts an Indian subsidiary’s deductionfor a service fee payment while the home country taxesat the full amount the payment that the parent companyreceived.

Zobalia suggested companies consider pursuing ad-vance pricing agreements to obtain certainty for suchtransactions, as the agreements are binding on the In-dian tax authority for five years. Companies are notbound to accept an agreement that doesn’t benefitthem, Zobalia said.

By contrast, once a company initiates an advanceruling process in India it is stuck with the result, even ifit goes against it, he said.

‘‘Our experience on APAs is that we have seen au-thorities being more proactive and open to them, be-cause they realize that transfer pricing adjustments areharming India’s image,’’ he said.

Some 165 multinationals have asked for informalpre-filing consultations for APAs, which can also bedone an anonymous basis, the practitioner said. About150 of these had filed formal applications by March, al-though no APAs have yet been signed in India, henoted.

Unilateral APAs Preferred. Zobalia noted that Indiadoes not offer bilateral APAs to French multinationals,because the India-France bilateral treaty does not in-clude Article 9.2, on taxation of associated enterprises,from the Organization for Economic Cooperation andDevelopment’s Model Tax Convention on Income andon Capital.

However, even though India’s bilateral treaty withthe United States includes the Article 9.2 language,‘‘most of our U.S. clients are still going unilateral any-way. Anything bilateral involves much more time. Sothe idea is to first get a unilateral APA and solve the In-dia problem and then, if we need to, we can always puta bilateral APA on top of the unilateral APA,’’ he said.

‘‘India’s experience on bilateral arrangements, espe-cially on mutual assessment procedures, has not beenvery encouraging,’’ Zobalia added.

Penalty. Zobalia urged companies not to take Indiancompliance rules ‘‘lightly,’’ warning of costly conse-quences. For example, a company that fails to disclosea related-party transaction can be assessed a penalty of2 percent of the transaction’s value, even if it paid taxeson the transaction and even it was at arm’s length.

‘‘Many companies don’t know about that nondisclo-sure penalty,’’ he said.

The attorney also noted increased awareness in Indiaabout using anti-abuse provisions because of theOECD’s recent work for the Group of 20 countries on a

ASIA/PACIFIC RIM (Vol. 22, No. 12) 751


action plan to fight base erosion and profit shifting. Inthis context, although the government’s proposed gen-eral anti-avoidance rules have been postponed untilApril 2015, ‘‘there has been so much talk about themthat some tax officers are not waiting for provisions andare already trying to enforce them.’’

He added, ‘‘In some loose sense, they do have thepowers to do that, even under the current law.’’

By Rick MitchellTo contact the reporter on this story: Rick Mitchell in

Paris at [email protected] contact the editor responsible for this story: Molly

Moses at [email protected]

� India’s Companies Act, 2013, is available athttp://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.

China

Practitioner Sees Chinese Tax AuthoritiesLooking to ‘Self Adjustments’ for Revenue

C hinese tax authorities increasingly are asking tax-payers to do transfer pricing ‘‘self adjustments’’ asa quick-revenue alternative to formal audits, ac-

cording to Cheng Chi, a partner at KPMG in Shanghai.Chi made his comments at a Sept. 26 conference on

transfer pricing in China and India, hosted in Paris byFrance’s biggest law firm, Fidal Direction Internation-ale.

His presentation, among other things, looked at Chi-na’s State Administration of Taxation’s recent recordon formal transfer pricing audits and advance pricingagreements.

He said Chinese authorities have been ‘‘very aggres-sive and very innovative’’ in their transfer pricing ad-ministration, in particular in their decisions on so-calledlocation-specific advantages. They are also ‘‘keenly in-terested’’ in the Organization for Economic Coopera-tion and Development’s action plan on base erosion andprofit shifting and already have started to apply some ofits ideas, he said.

Practitioners in Shanghai and Hong Kong said re-cently in examining the SAT’s attitude toward the BEPSproject that the tax authority shares the OECD’s desirefor greater transparency and its view that returns do notaccrue to an entity solely because it has contractuallyassumed risk or provided capital (22 Transfer PricingReport 735, 10/3/13).

Adjustments Nearly Double. The attorney said the over-all number of formal transfer pricing audits concludedby Chinese tax authorities declined to 175 in 2012, from207 in 2011, but the total amount of adjustments nearlydoubled to 4.6 billion yuan renminbi ($752 million), soaverage adjustments rose sharply.

‘‘An important message from this is that the age ofadjustments of 1 million yuan renminbi is gone. Nowyou are looking at 20 million yuan renminbi ($3.27 mil-lion) to 30 million yuan renminbi ($4.9 million), at mini-mum, before the case is closed,’’ Chi said.

The bigger the company’s Chinese operations, themore likely to it is to be audited, he said.

But Chi said the SAT generally considers its transferpricing administration to manage avoidance, especially

for smaller operations, and in this context has recentlyshifted its focus from formal audits to taking preventivemeasures to strengthen annual tax filing and reviewingcontemporaneous documentation.

In 2012, Chinese tax authorities took in 28.3 billionyuan renminbi ($4.63 billion) in incremental self-adjustment tax payments, up from the previous year’s20.8 billion yuan renminbi ($3.4 billion), and almost sixtimes the amount they took in through formal transferpricing audits in 2012, he said.

These are adjustments to current tax years, not pre-vious years, Chi said. Tax authorities ‘‘really see this asa growth area where they can talk to the taxpayer,quickly get some money and then move on.’’

‘Easier, But Risky.’ Chi said the self-adjustment ap-proach can be easier for the taxpayer. For example, in-stead of initiating a formal transfer pricing audit, au-thorities will tell a taxpayer ‘‘we’ll tell you what youhave done wrong,’’ and then ask the taxpayer to volun-tarily do a tax return adjustment for the current fiscalyear.

He said provinces have taken varying approaches.For Shanghai authorities, the self-adjustment mecha-nism is a very formal process, almost like an audit, butit avoids the need to go through the SAT. Formal auditsalways have to be approved by the SAT, and so can re-quire long negotiations to settle on a final adjustmentamount.

Other provinces are more informal about self-adjustments. ‘‘I think the key is that they are looking ateasier rules compared to a formal transfer pricing au-dit,’’ Chi said.

The mechanism also poses risks for companies, be-cause double tax issues linked to self-adjustments cur-rently can’t be addressed under competent authorityproceedings. Therefore, he recommended companiesagree to self-adjustments ‘‘cautiously.’’

Chi said the SAT is considering extending mutualagreement procedures to self-adjustments, but has notyet done so.

Advance Pricing Agreements. Chi noted that China’sAPA program in 2012 concluded three unilateral cases,down from eight in 2011, and nine bilateral cases, upfrom four (22 Transfer Pricing Report 544, 9/5/13).

In existence since 2005, the program is popular be-cause taxpayers that enter into APAs tend to be treatedbetter than those undergoing audits, and bilateral APAshelp avoid double taxation. Getting on a waiting list tobe considered for an APA is also a way to defer an au-dit, he suggested.

However, APAs are difficult to obtain because fewChinese tax officials are qualified to handle the agree-ments. Cases also can take ‘‘very long’’ to conclude, Chisaid.

What is more, Chinese tax authorities, without for-mally stating so, tend to ignore requests for APAs thatmight result in tax reductions and favor those that willresult in a company ‘‘improving its taxable margin fromthe Chinese perspective,’’ he said. ‘‘So you have to verycareful when considering an APA.’’

‘Aggressive and Innovative.’ Chi said that in a ‘‘classic’’transfer pricing policy, the headquarters has controlover the brand, supply chain and other management, as

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well as research and development, while China con-ducts distribution and some other routine activities.

‘‘The problem is China doesn’t see it that way,’’ hesaid. Chinese authorities are asking big foreign compa-nies to adapt their transfer pricing policies so that moreprofit can be taxed in China, to account for the coun-try’s so-called location-specific advantages and marketpremiums.

‘‘They say these companies use China’s natural re-sources and add to its pollution and that Chinese peopleare willing to pay more for luxury products. The argu-ment is that with all these benefits, companies shouldpay more tax in China,’’ Chi said.

The current scenario is that Chinese transfer pricingauthorities will challenge foreign multinationals to seewhether there should be some changes in the compa-ny’s global transfer pricing policy, and these changescan lead to double tax. ‘‘In a lot of the APA and MAPsituations that we are currently dealing with, Europeanand U.S. authorities will disagree with location-specificadvantages’’ claimed by China, he said.

Base Erosion and Profit Shifting. Chi noted that theOECD’s BEPS initiative grew out of concerns in the ma-jor advanced countries that they are losing tax revenuesbecause some big multinational companies are takingadvantage of gaps in international tax rules to movetheir profits to low-tax jurisdictions.

But China, which is not an OECD member, has foundthat some ideas coming out of the BEPS project alreadyare useful, and Chinese authorities are taking a closerlook at whether a company’s overall transfer pricingpolicy makes sense and demanding more transparency,he said.

With BEPS in mind, the authorities are challengingcompanies that have endured long-term losses withoutasking for compensation and also are looking closely attheir transfer pricing documentation, he said.

BY RICK MITCHELL

To contact the reporter on this story: Rick Mitchell inParis at [email protected]


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OECD/UNOECD

Practitioner Predicts BEPS Work on PEsWill Expand Beyond Action 7 Parameters

T he scope of the work on permanent establishmentsset forth in the Organization for Economic Coop-eration and Development’s action plan to combat

base erosion and profit shifting (BEPS) is likely to ex-pand, according to a Washington, D.C., practitioner.

Steve Nauheim of PricewaterhouseCoopers said Oct.8 that the work of Action 7 of the BEPS plan, whichcalls for changes to Article 5 of the OECD Model TaxTreaty, is likely to be expanded beyond commission-aires.

Action 7 tasks the OECD with deciding whether totreat commissionaires as dependent agents that bindtheir principals, which would create a PE of the princi-pal in the jurisdiction where the commissionaire oper-ates.

Speaking on his firm’s Webcast, Nauheim said thework under Action 7 probably will be expanded beyondcommissionaires to include limited-risk distributorsthat are involved in back-to-back sales transactionswhere the distributor simultaneously buys from the par-ent company and sells to others.

Richard Collier of PwC in London said that based onthe tenor of the OECD’s Oct. 1 consultation on theBEPS project, it is clear that the Action 7 PE work willextend to back-to-back sales and to the ‘‘fixed place ofbusiness’’ test and dependent agent rules under Article5.

However, Collier said, some countries are nervousabout expanding source state taxing rights.

Action 7 of the BEPS Action Plan tasks the OECDwith changing the Article 5 PE definition ‘‘to preventthe artificial avoidance of PE status through the use ofcommissionaire arrangements and the specific activityexemptions’’ (22 Transfer Pricing Report 365, 7/25/13).

Commissionaires. According to Action 7, in manycountries, the interpretation of the treaty rules onagency PE allows contracts for the sale of goods be-longing to a foreign enterprise to be negotiated andconcluded in a country by the sales force of a local sub-sidiary of that foreign enterprise, without the profitsfrom these sales being taxable to the same extent theywould be if the sales were made by a distributor.

In many cases, the OECD said, this has led enter-prises to replace arrangements under which the localsubsidiary traditionally acted as a distributor with com-missionaire arrangements, resulting in a movement ofprofits out of the country where the sales take placewithout a substantive change in the functions per-formed in that country.

Fragmentation. Action 7 also says that the current PErules permit multinationals to artificially fragment theiroperations among multiple group entities in order toqualify for the exceptions to PE status for preparatoryand auxiliary activities.

Nauheim said he was initially perplexed by Action7’s discussion of fragmentation because he is unawareof taxpayers that are actively fragmenting their activi-ties in order to stay within the exceptions to PE status.

Although it is unclear what type of case Action 7 isaimed at, Nauheim said the OECD may be concernedabout a situation where although the PE rules treat thelocal agent as an independent agent there is an addi-tional presence. Thus, the OECD will be looking intothe nature of auxiliary activities.

Profit Attribution. Action 7 also states that the BEPSproject will address ‘‘profit attribution issues’’ related toPEs.

If a company has a PE in the host country, Article 7of the OECD Model Tax Treaty governs which profitsshould be attributed to the PE. Under the authorizedOECD approach (AOA), the two steps required for at-tributing profits to a PE are:

s first, determine the activities and conditions of thePE based on a functional and factual analysis, includingthe attribution of assets, risks and free capital as well asthe identification of dealings to be recognized betweenthe PE and the home office; and

s second, determine the profits of the PE based on acomparability analysis and application of transfer pric-ing methods premised on the allocation of risks, assetsand other attributes undertaken in the first step.

Nauheim raised the question of whether it matters ifthe taxpayer is deemed to have created a PE. Wouldthere be a significant difference, he asked, in the tax-able profit left in the hands of a parent company underan AOA analysis compared to an Article 9 transfer pric-ing analysis that rewards functions, assets, and risks?

Collier, however, said that a significant difference inprofit often would result from the two approaches.

The BEPS action plan calls for changes to Article 5of the OECD Model Tax Treaty by September 2015.

BY KEVIN A. BELL



754 (Vol. 22, No. 12)




OECD

Unilateral BEPS Actions Could LeadTo Double Taxation, Business Tells OECD

B usiness is concerned that unilateral tax and trans-fer pricing measures recently proposed or ad-opted by some jurisdictions to address base ero-

sion and profit shifting could jeopardize the coherenceof international work on BEPS before it even gets offthe ground, practitioners told Bloomberg BNA follow-ing the Organization for Economic Cooperation and De-velopment’s Oct. 1 consultation on the project.

Pascal Saint-Amans, the OECD’s top tax official, saidthe organization gave members of its Business and In-dustry Advisory Committee a detailed presentation ofthe plan submitted to Group of 20 country leaders inSeptember. The plan contains 15 action items aimed atcurbing what the OECD has called practices that allowmultinationals to use ‘‘aggressive tax planning’’ andtransfer pricing schemes to shift profits from jurisdic-tions in which they are earned to low- or no-tax juris-dictions (22 Transfer Pricing Report 365, 7/25/13; 22Transfer Pricing Report 379, 7/25/13).

The organization has begun work to develop fleshed-out actions for the plan and will begin releasing sepa-rate consultation drafts of each action beginning in Sep-tember 2014, he said.

David Ernick of PricewaterhouseCoopers in Wash-ington, D.C., who attended the meeting, said businessmade clear its concerns to the OECD that some coun-tries already have proposed unilateral measures onBEPS and that these might undermine OECD work andcreate new risks of double taxation.

Carol Doran Klein, vice president and internationaltax counsel for the United States Council of Interna-tional Business, said business also expressed concernsabout the recent OECD draft on transfer pricing issueslinked to intangible assets and its white paper on trans-fer pricing documentation, issued in July (22 TransferPricing Report 435, 8/8/13).

Business also raised the issue of tax treatment of theso-called digital economy, she said.

‘Potential Plus’ for Business. In its February report onBEPS, the OECD argued that its Model Tax Conventionon Income and on Capital, which has served as a blue-print for a web of some 3,000 bilateral tax treatiesworldwide, needs updating to close gaps in rules andstandards that have allowed certain multinational com-panies, in particular big Internet companies and thosethat primarily exploit intangible assets, to pay ex-tremely low effective tax rates (21 Transfer Pricing Re-port 1025, 2/21/13).

William Morris, head of BIAC’s tax committee, said,‘‘One of the biggest potential pluses for business in theBEPS project is the possibility of new, internationallyagreed rules that satisfy not only the OECD memberstates, but also the BRICS and other emerging econo-mies.’’

G-20 members account for about 85 percent of theworld’s economy. The OECD has said the BRICS—Brazil, Russia, India, China, and South Africa—as G-20members are participating on an equal footing in BEPS(22 Transfer Pricing Report 690, 9/19/13).

Morris said the new BEPS rules, when they finallycome out, could result in the return of a stable interna-tional tax system, but if ‘‘countries start to break awayand jump the gun,’’ the necessary critical mass may notbe achieved. ‘‘The result may be a new set of uncoordi-nated rules or parallel tax systems which result ingreater double taxation,’’ said Morris.

He said BIAC is working to keep everyone at thetable in the BEPS project, and ‘‘that is what I encour-aged all OECD governments to help us with by avoid-ing unilateral action.’’

‘Global Tax Chaos.’ Doran Klein said that, beginningwith 2012’s televised hearings in the United Kingdomand the United States focused on issues of transfer pric-ing schemes and so-called double non-taxation, ‘‘therehas been enormous political pressure on countries totake unilateral action.’’ That, she said, ‘‘is a danger ofthis project.’’

Chapter 2 of the 40-page action plan released in Julyurges policy makers to act boldly and promptly to de-velop effective solutions to BEPS, warning of ‘‘globaltax chaos’’ if they fail. ‘‘Some countries may be per-suaded to take unilateral action for protecting their taxbase, resulting in avoidable uncertainty and unrelieveddouble taxation,’’ while some countries could lose cor-porate tax revenues, it said.

But Saint-Amans said that as the OECD begins tech-nical work on the plan’s actions, ‘‘we are in a transitionperiod and some countries are taking unilateral mea-sures.’’ The OECD ‘‘fully acknowledges that the busi-ness community is concerned about unilateral actions,’’he said, adding, ‘‘So am I.’’

Unilateral Measures. Ernick, Saint-Amans and otherscited some of the unilateral actions already imple-mented. For example, the French government Sept. 25released a draft budget that, among other things, in-cludes a BEPS-inspired measure that would tightly limitcompanies’ ability to deduct interest charges linked toso-called hybrid instruments and entities (22 TransferPricing Report 721, 10/3/13).

Other unilateral BEPS measures have been imple-mented in Australia and Mexico, Saint-Amans noted.

Ernick noted that Oscar Molina, head of the largetaxpayer section of Mexico’s Servicio de Administra-cion Tributaria (SAT), announced recently that Mexicohad identified hundreds of possible BEPS targets for au-dit activities. Ernick noted that Mexico plans to estab-lish a special unit to specifically focus on BEPS audits,using a team of experts (22 Transfer Pricing Report 155,6/13/13).

Ernick said Australia recently enacted new transferpricing rules and announced new stricter debt fundingrules and general anti-avoidance rules. The Australiangovernment released a Treasury discussion paper pro-posing disclosure by the Australian Taxation Office ofthe total income, taxable income and income tax pay-able of large corporate entities with total income of$100 million Australian dollars ($94.1 million) or more,with a proposed start date of the 2013-14 financial year(22 Transfer Pricing Report 431, 8/8/13).

The government has since set up a BEPS task forcewithin the ATO to investigate multinationals doing busi-ness in Australia, and more than A$100 million in fund-ing was allocated to the ATO in the recent federal bud-

OECD/UN (Vol. 22, No. 12) 755


get to enable it to increase its compliance activity in re-lation to multinationals, he said.

Ernick also said New Zealand recently issued a re-port describing possible reforms to address BEPS is-sues, including proposed broadening of its thin capital-ization rules, proposed tightening of the rules allowingfor interest deductions, and proposals to ensure that in-come earned in New Zealand is subject to ‘‘appropri-ate’’ levels of source taxation, including withholdingtaxes.

In addition, he said, a new legal amendment in Nor-way would limit interest deductions for related-partyloans. (See the related article in this issue.)

Coordination Seen as Goal. While expressing concernabout unilateral measures, Saint-Amans asserted thatmost of the unilateral actions to date have been in linewith the ‘‘sense of direction’’ that the organization hasestablished for the BEPS action plan. This, he said,shows that the plan probably has had an impact alreadyin terms of ‘‘channeling’’ the unilateral actions so far.

‘‘That shows that we need to progress the BEPS re-port and action plan so that the countries behave andcoordinate their efforts,’’ he said. ‘‘Members that havetaken unilateral measures will probably have to revisethem as necessary, and there is convergence there,’’Saint-Amans said.

The OECD official said ‘‘it’s hard to speculate’’whether the final BEPS actions will contain binding lan-guage requiring countries to modify their unilateralmeasures to coordinate them with the plan.

‘‘That is the message that the countries gave to thebusiness community. We will see. But countries wouldnot have put money into the BEPS project if they in-tended to do it unilaterally without consulting the oth-ers,’’ he said.

Concerns About New OECD Drafts. Doran Klein saidbusiness’s biggest concern regarding BEPS is the possi-bility that it will end up creating unrelieved double taxa-tion, either because of uncoordinated unilateral actionsor multilateral actions that go awry.

‘‘In many industries margins are small,’’ she said. ‘‘Ifyou have unrelieved double taxation, you can wipe out100 percent of your profits and your business may nolonger be viable. We don’t want international tax rulesthat distort decisions regarding trade.’’

In this context, she said practitioners at the consulta-tion with BIAC raised concerns about the latest revisedintangibles discussion draft, released in July.

The organization plans a Nov. 12-13 consultation onthe draft, aimed at revising Chapter 6 of the OECDtransfer pricing guidelines, which, along with Chapter9, explains how to apply the existing Chapters 1-3 to in-tangible assets. The consultation also will consider theOECD white paper on transfer pricing documentation,released with the intangibles draft in July, as well astransfer pricing issues related to BEPS.

‘Conflicting Positions.’ Ernick said there are concernsthat the latest drafts on intangibles and the documenta-tion white paper indicate the OECD is moving awayfrom the arm’s-length standard toward a formulary ap-portionment system. He noted that Saint-Amans re-cently declared that the project will require moving ‘‘be-yond the arm’s-length standard.’’

Some have argued that the profit split method is akind of formulary apportionment already in use.

Doran Klein said business told the OECD and mem-ber governments about concerns that ‘‘the latest intan-gibles draft is susceptible to multiple interpretations, al-lowing countries to take conflicting positions.’’

Governments, she said, ‘‘generally don’t like bright-line rules, because they think taxpayers will go right upto the edges and abuse those rules. But business wantsclarity, not fuzzy rules that could allow two differentcountries to assert the right to tax the same income.’’

Special Rules Needed? Benjamin Shreck, tax counselat Tax Executives Institute in Washington, D.C., saidthat in the BEPS action plan and intangibles draft theOECD does not seem to be backing away from thearm’s-length standard for transfer pricing purposes‘‘but questioning whether it is the right answer in allcases.’’

For example, ‘‘actions 8, 9 and 10 reference specialmeasures in transfer pricing of intangibles and thatthere might need to be some sort of rule that they havenot yet specified that is not the arm’s-length standardfor pricing those transactions. That is of concern to ourmembers,’’ said Shreck, who noted that he did not at-tend the BIAC meeting.

Doran Klein said there is a sense in the businesscommunity that governments may think the digitaleconomy is something that can be isolated and sub-jected to a particular set of rules. ‘‘I think that is actu-ally very difficult to do. Even the most brick-and-mortarcompanies have digital aspects these days. It’s very dif-ficult to carve out separate rules that would apply in theso-called digital economy,’’ she said.

‘‘If somebody thinks a transaction is a digital andsubject to special rules and somebody else says no,that’s not a digital economy transaction, it’s not clearwhere the lines are, and that again creates uncertaintyas to how transactions would be taxed,’’ she said.

‘Complex But Clear’ Project. Saint-Amans rejected the‘‘theoretical debate’’ over whether the OECD is aban-doning the arm’s-length standard. ‘‘What we are tryingto do is complex but clear. There are deficiencies andwe are trying to fix them. All of the countries are en-gaged in reconciling the location of right to tax and thelocation of the activities,’’ he said.

‘‘In the area of intangibles, where there are no com-parables, the arm’s-length principle may not be imple-mented properly with the current guidance,’’ he said.‘‘We are just saying that we are working under existingtreaties and the existing Article 9, not trying to changeit but just fix it.’’

Digital Economy Task Force in October. Shreck saidthere is some concern among TEI members about whenthe OECD plans to ask for comments on BEPS actions,as it has done for the intangibles project.

Saint-Amans said the OECD plans to get business in-put on all the work streams it has underway to developthe 15 BEPS action documents, involving differentdeadlines, processes, and ways of consulting business.

The organization will convene a digital economy taskforce group in late October, in which businesses willpresent their business models, he said. There may beother forms of consultation on hybrid mismatches.

756 (Vol. 22, No. 12) OECD/UN


‘‘There will be plenty of consultations and this willbecome clearer as all the groups meet and we put a cal-endar in place,’’ Saint-Amans said.

BY RICK MITCHELL

To contact the reporter on this story: Rick Mitchell inParis at [email protected]


� The New Zealand report describing possiblemeasures to address BEPS is available at http://taxpolicy.ird.govt.nz/publications/2013-other-taxation-multinational-companies/taxation-multinational-companies

United Nations

United Nations Tax Committee to ReviewArticle 9 Commentary at Annual Meeting

T he United Nations Committee of Experts on Inter-national Cooperation in Tax Matters is scheduledto decide whether to revise the Commentary to Ar-

ticle 9 of the UN Model Tax Convention referring to Or-ganization for Economic Cooperation and Developmenttransfer pricing principles at its annual meeting in Ge-neva Oct. 21-25.

According to an Aug. 9 paper published by the com-mittee’s secretariat, the committee during its annualmeeting also will consider changes to the Commentaryon the permanent establishment concept in Article 5 ofthe UN model and the ‘‘force of attraction’’ principle inArticle 7.

A UN official said in February that the committee’stask of deciding how the Commentary to the UN mod-el’s Article 9 should refer to the OECD transfer pricingguidelines is likely to result in a difficult and tense de-bate (21 Transfer Pricing Report 1034, 2/21/13).

At the heart of that debate is whether the UN modelneeds to adhere to the arm’s-length principle, the cor-nerstone of the OECD transfer pricing guidelines. Crit-ics of the OECD, whose 34 member countries includethe world’s advanced economies, have faulted the orga-nization for failing to adequately consider the needs ofdeveloping countries. In March of 2012, an Indian offi-cial said his country is ‘‘particularly concerned’’ withparagraph 3 of the proposed UN model’s Commentaryon Article 9, which he said legitimizes the assertions‘‘that all countries, including developing countries,must follow the OECD transfer pricing guidelines andthey represent internationally agreed principles’’ (20Transfer Pricing Report 1070, 3/22/12).

In addition to the next update of the UN model, thecommittee will work on the next update of its PracticalManual on Transfer Pricing for Developing Countries,which will include a new chapter on intangibles.

Paragraph 3. The Aug. 9 paper said paragraph 3 ofthe 2001 version of the Article 9 Commentary is the keyissue that will be debated at the October meeting.

Paragraph 3 recommends countries follow the prin-ciples set out in the OECD transfer pricing guidelines inapplying the arm’s-length principle to determine thecorrect prices for the transfer pricing of goods, technol-ogy, trademarks and services between associated enter-

prises and the methods that may be applied. ‘‘Theseconclusions represent internationally agreed principlesand the Group of Experts recommend[s] that the Guide-lines should be followed for the application of thearm’s-length principle which underlies the article,’’ theparagraph currently states.

The Aug. 9 paper said that although the committee atits annual meeting in 2011 agreed to retain paragraph3, some committee members questioned whether theparagraph is too broad in its application and suggestedthat the OECD guidelines should be used instead for‘‘guidance’’ in applying the arm’s-length principle. Themembers from Brazil, China and India specifically saidthey had reservations on the views expressed in para-graph 3.

According to the Aug. 9 paper, the committee alsowill decide at its general meeting whether to confine itsreview to paragraph 3 or to expand the review to the en-tire Article 9 Commentary.

New Committee. The UN in June appointed a newCommittee of Experts whose term expires on June 30,2017.

The 25-member committee includes China’s Liao Ti-zhong, the Deputy Director General of Tax Treaties atthe State Administration of Taxation, and India’sPragya Saksena, the Joint Secretary, Tax Policy andLegislation, at the Central Board of Direct Taxes.

The new committee will elect a chair and officers atthe start of its annual meeting and will establish sub-committees.

BY KEVIN A. BELL



� Information regarding the Oct. 21-25 annualmeeting, including the Aug. 9 paper and the list ofnew committee members, may be found at http://www.un.org/esa/ffd/tax/ninthsession/index.htm.

OECD

OECD Seeks Feedback from BusinessesOn Country-by-Country Reporting Proposal

T he Organization for Economic Cooperation andDevelopment has asked the business communityfor input on how to draft a workable country-by-

country reporting template that would require compa-nies to report their income in each country in whichthey operate.

In a Memorandum on Transfer Pricing Documenta-tion and Country by Country Reporting, issued Oct. 3,the OECD said taxpayers should be prepared to discuss‘‘which approaches to the reporting of income would bemost useful to governments and most readily availablefrom existing accounting records’’ at the organization’sNov. 12-13 consultation in Paris.

The OECD said its July 19 action plan to combat baseerosion and profit shifting (BEPS) makes it clear that‘‘country-by-country reporting to governments will bean essential element of transfer pricing documentation

OECD/UN (Vol. 22, No. 12) 757




http://taxpolicy.ird.govt.nz/publications/2013-other-taxation-multinational-companies/taxation-multinational-companies






http://www.un.org/esa/ffd/tax/ninthsession/index.htm

http://www.un.org/esa/ffd/tax/ninthsession/index.htm

proposals’’ developed by Working Party No. 6, thetransfer pricing working party.

Action 13 of the BEPS action plan calls on the OECDto develop requirements for taxpayers to report income,taxes paid, and indicators of economic activity to gov-ernments according to a common template.

The OECD said it looks forward to a productive dis-cussion with the business community at the Novemberconsultation on its July 30 white paper on transfer pric-ing documentation, of which country-by-country re-porting is a part.

The memorandum appears in the Text section of thisissue.

A former U.S. Treasury official said in August that ifcountry-by-country reporting were adopted, govern-ments would not gain a useful transfer pricing risk-assessment tool, but instead tax examiners would beable to compare in which jurisdictions a multinationalreports its income and pays taxes in relation to where itearns the bulk of its revenue, or where its employees orassets are located, leading to the spectre of formularyapportionment (22 Transfer Pricing Report 548, 9/5/13).

Numerous Approaches. In its Oct. 3 memorandum, theOECD outlined four possible ways a template could re-quire companies to report income in each country inwhich they operate, including:

s requiring each legal entity in a multinationalgroup to report its net income before tax with the num-bers to be drawn from individual entity statutory finan-cial statements;

s basing income reported in the template on taxableincome as reflected on tax returns filed in a jurisdiction;

s requiring a segregation of consolidated multina-tional group income among countries calculated by ref-erence to accounting segment reporting rules; or

s requiring reporting of data taken from the compa-ny’s internal consolidating income statements relatingto each company’s contribution to consolidated incomeafter eliminations.

Financial Statements. The OECD explained these fourapproaches, as well as their drawbacks, in the Oct. 3memorandum.

Regarding the first possible approach, involving indi-vidual entity statutory financial statements, the OECDsaid legal entities could be grouped by country accord-ing to their country of organization or their place ofmanagement and control.

‘‘For those countries that require preparation ofstatutory financials, such an approach would provide arelatively simple and straight-forward mechanism foraggregating data on the basis of existing information,’’the OECD said.

However, the OECD said such an approach wouldhave a number of drawbacks.

First, grouping companies either by place of organi-zation or by location of management would not neces-sarily indicate where the income of such companies isgenerated or where that income is subject to tax. ‘‘Asone of many possible examples, reporting by place oforganization would not distinguish between residentand non-resident companies in a country which basesresidence on place of management.’’

Second, the OECD said a workable substitute wouldhave to be identified for legal entities in countries thatdo not require statutory financial statements for everygroup company organized or managed in that country.

And third, the sum of income reported in statutory fi-nancial statements likely would not add up to the totalconsolidated income of the group ‘‘as the sum of finan-cial statement income numbers may not fully reflectconsolidating eliminations.’’

BY KEVIN A. BELL



758 (Vol. 22, No. 12) OECD/UN




TextIndian’s Revised General Anti-Avoidance Rule, 9/23/13

[TO BE PUBLISHED IN THE GAZETTE OF INDIAEXTRAORDINARY, PART II,

SECTION 3, SUB-SECTION (ii)]

GOVERNMENT OF INDIAMINISTRY OF FINANCE

DEPARTMENT OF REVENUE[CENTRAL BOARD OF DIRECT TAXES]

NotificationNew Delhi, the 23rd day of September, 2013

INCOME-TAXS.O. 2887(E).- In exercise of the powers conferred by

sections 101 and144BA read with section 295 of theIncome-tax Act, 1961 (43 of 1961), the Central Board ofDirect Taxes hereby makes the following rules furtherto amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (17th

Amendment) Rules, 2013.(2) They shall come into force on the 1 st day of

April, 2016.2. In the Income-tax Rules, 1962, –

(a) after rule 10T, the following rules shall be in-serted, namely: -

‘‘ DA. Application of General Anti Avoidance Rule

Chapter X-A not to apply in certain cases10U. (1) The provisions of Chapter X-A shall not ap-

ply to -(a) an arrangement where the tax benefit in the

relevant assessment year arising, in aggregate,to all the parties to the arrangement does notexceed a sum of rupees three crore;

(b) a Foreign Institutional Investor, –(i) who is an assessee under the Act;(ii) who has not taken benefit of an agreement

referred to in section 90 or section 90A as thecase may be; and

(iii) who has invested in listed securities, or un-listed securities, with the prior permission ofthe competent authority, in accordance withthe Securities and Exchange Board of India(Foreign Institutional Investor) Regulations,1995 and such other regulations as may beapplicable, in relation to such investments;

(c) a person, being a non-resident, in relation to in-vestment made by him by way of offshore de-rivative instruments or otherwise, directly or in-directly , in a Foreign Institutional Investor;

(d) any income accruing or arising to, or deemedto accrue or arise to, or received or deemed tobe received by, any person from transfer of in-vestments made before the 30th day of August,2010 by such person.

(2) Without prejudice to the provisions of clause (d)of sub-rule (1), the provisions of Chapter X-Ashall apply to any arrangement, irrespective ofthe date on which it has been entered into, in re-

spect of the tax benefit obtained from the ar-rangement on or after the 1st. day of April, 2015.

(3) For the purposes of this rule, -(i) ‘‘Foreign Institutional Investor’’ shall have the

same meaning as assigned to it in the Explana-tion to section 115AD;

(ii) ‘‘off shore derivative instrument’’ shall have thesame meaning as assigned to it in the Securi-ties and Exchange Board of India ( Foreign In-stitutional Investor) Regulations, 1995 issuedunder Securities and Exchange Board of IndiaAct, 1992 (15 of 1992) ;

(iii) ‘‘Securities and Exchange Board of India’’shall have the same meaning as assigned to itin clause (a) of sub-section (1) of section 2 ofthe Securities and Exchange Board of IndiaAct, 1992 (15 of 1992);

(iv) ‘‘tax benefit’’ as defined in clause (10) of sec-tion 102 and computed in accordance withChapter X-A shall be with reference to-

(a) sub-clauses (a) to (e) of the said clause , theamount of tax; and

(b) sub-clause (f) of the said clause, the tax thatwould have been chargeable had the increasein loss referred to therein been the total in-come.

Determination of consequences of impermissibleavoidance arrangement.

10UA . For the purposes of sub-section (1) of section98, where a part of an arrangement is declared to be animpermissible avoidance arrangement, the conse-quences in relation to tax shall be determined with ref-erence to such part only.

Notice, Forms for reference under section 144BA10UB. (1)For the purposes of sub-section (1) of sec-

tion 144BA, the Assessing Officer shall, before makinga reference to the Commissioner, issue a notice in writ-ing to the assessee seeking objections, if any, to the ap-plicability of provisions of Chapter X-A in his case.

(2) The notice referred to in sub-rule (1) shall containthe following: -

(i) details of the arrangement to which the provi-sions of Chapter X-A are proposed to be ap-plied;

(ii) the tax benefit arising under the arrangement;(iii) the basis and reason for considering that the

main purpose of the identified arrangement isto obtain tax benefit;

(iv) the basis and the reasons why the arrangementsatisfies the condition provided in clause (a),(b), (c) or (d) of sub-section (1) of section 96;and

(v) the list of documents and evidence relied uponin respect of (iii) and (iv) above.

(3) The reference by the Assessing Officer to theCommissioner under sub-section (1) of section 144BAshall be in Form No.3CEG.

(Vol. 22, No. 12) 759


(4) Where the Commissioner is satisfied that the pro-visions of Chapter X-A are not required to be invokedwith reference to an arrangement after considering –

(i) the reference received from the Assessing Offi-cer under sub-section (1) of section 144BA; or

(ii) the reply of the assessee in response to the no-tice issued under sub-section (2) of section144BA,

he shall issue directions to the Assessing Officer inForm No. 3CEH.

(5) Before a reference is made by the Commissionerto the Approving Panel under sub-section (4) of section144BA, he shall record his satisfaction regarding the ap-plicability of the provisions of Chapter X-A in Form No.3CEI and enclose the same with the reference.

Time limits.10UC. (1)For the purposes of section 144BA,–

(i) no directions under sub-section (3) of section144BA shall be issued by the Commissioner af-ter the expiry of one month from the end of themonth in which the date of compliance of the

notice issued under sub-section (2) of section144BA falls;

(ii) no reference shall be made by the Commis-sioner to the Approving Panel under sub-section (4) of section 144BA after the expiry oftwo months from the end of the month in whichthe final submission of the assessee in responseto the notice issued under the sub-section(2) ofsection 144BA is received;

(iii) the Commissioner shall issue directions to theassessing officer in Form No.3CEH, -

(a) in the case referred to in clause (i) of sub-rule(4) of rule 10UB, within a period of onemonth from the end of month in which thereference is received by him; and

(b) in the case referred to in clause (ii) of sub-rule (4) of rule 10UB, within a period of twomonths from the end of month in which thefinal submission of the assessee in responseto the notice issued under sub-section (2) ofsection 144BA is received by him.’’;

(b) in Appendix-II, after Form No. 3CEF, the follow-ing Forms shall be inserted, namely:-

‘‘FORM NO. 3CEG

[See sub-rule (3) of rule 10UB]

Form for making the reference to the Commissioner by the Assessing Officer

u/s 144BA(1)

1 Name and address of the assessee2 PAN3 Status ( Individual/ Company etc)4 Residential status5 Assessment year(s) in respect of which the

proceedings under section 144BA are proposed to beinvoked :(a) Assessment years for which proceedings arepending(b) Other assessment years proposed to be covered

6 Factual matrix of the arrangement entered into by theassessee including details of other parties.

7 Details of tax benefit (assessment year wise) arisingunder the arrangement: -(i) to the assessee(ii) to all parties to the arrangement

8 Brief facts in respect of computation of tax benefit9 Whether obtaining the tax benefit is the main purpose

of the arrangement or part of the arrangement?10 Whether notice under sub-rule (1) of rule 10UB has

been served on the assessee , if yes date of service ofthe notice .

11 Summary of the reply of the assessee in response tothe notice.

760 (Vol. 22, No. 12) TEXT


12 Indicate which of the following conditions is satisfiedby the arrangement (along with basis of suchconclusion).(a) creates rights, or obligations, which are notordinarily created between persons dealing at arm’slength;(b) results, directly or indirectly, in the misuse, orabuse, of the provisions of this Act;rcial substance oris deemed to lack commercial substance under section97, in whole or in part; or(c) lacks commercial substance or is deemed to lackcommercial substance under section 97, in whole or inpart; or(d) is entered into, or carried out, by means, or inmanner, which are not ordinarily employed for bonafidepurposes.

13 Brief reasons for seeking declaration of thearrangement as impermissible avoidance arrangement.

14 Consequences in relation to tax likely to arise if thearrangement is declared as an impermissible avoidancearrangement

15 The last date for completion of assessment orreassessment proceedings.

Date: Name and DesignationPlace: Assessing Officer

1. Commissioner of Income tax

FORM NO.3CEH


Form for returning the reference made under section 144BA


proceedings under section 144BA were proposed to beinvoked.

6 Date of receipt of reference in Form No. 3CEG from theAssessing Officer.

7 The basis of finding that Chapter X-A is not applicablefor assessment year (s).

Date: Name & Designation ofPlace: Commissioner

1. Assessing Officer2. Assessee

FORM NO.3CEI


Form for recording the satisfaction by the Commissioner before making areference to the Approving Panel under sub-section (4) of section 144BA


proceedings under section 144BA are proposed to beinvoked :(a) Assessment years for which proceedings arepending(b) Other assessment years proposed to be covered

TEXT (Vol. 22, No. 12) 761


6 Date of receipt of Form No.3CEG from the AssessingOfficer.

7 Date of issuance of notice, setting out reasons, by theCIT to the assessee under sub-section (2) of section144BA (copy thereof to be enclosed)

8 Date of receipt of final submission from the assesseeand dates of hearing provided to the assessee (copy offinal submission of the assessee to be enclosed).

9 Factual matrix of the arrangement in respect of whichthe reference is being made.

10 Details of tax benefit (assessment year wise) arisingunder the arrangement: – (i) to the assessee(ii) to allparties to the arrangement

11 Brief facts in respect of computation of tax benefit12 Whether obtaining the tax benefit is the main purpose

of the arrangement or the part of the arrangement?13 Indicate which of the following conditions is satisfied

by the arrangement (along with basis of suchconclusion).(a) creates rights, or obligations, which are notordinarily created between persons dealing at arm’slength;(b) results, directly or indirectly, in the misuse, orabuse, of the provisions of this Act;(c) lacks commercial substance or is deemed to lackcommercial substance under section 97, in whole or inpart; or(d) is entered into, or carried out, by means, or inmanner, which are not ordinarily employed for bonafidepurposes.

14 Has the assessee been given an opportunity of beingheard with regard to the findings given in columns 11,12 and 13 ? If yes, provide the gist of the replyfurnished by the assessee.

15 Detailed reasons for being satisfied that thearrangement is an impermissible avoidancearrangement.

16 Consequences in relation to tax likely to arise ifarrangement is declared as an impermissible avoidancearrangement.

17 The last date for completion of assessment orreassessment proceedings.

Date: Name and Designation ofPlace: Commissioner ’’ .

[Notification No. 75/2013/ F.No.142/19/2013-TPL](Amit Katoch)

Under Secretary to the Government of IndiaNote. - The principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii)

vide notification number S.O. 969 (E), dated the 26th March, 1962 and last amended by Income-tax (16th Amendment)Rules, 2013 vide notification number S.O. 2810 (E) dated 18-09-2013.

OECD Memorandum on Country-by-Country Pricing Documentation, 10/3/13

Action 13 in the BEPS Action Plan calls on the OECDto develop requirements for taxpayers to report income,taxes paid, and indicators of economic activity to gov-ernment according to a common template. The lan-guage of the BEPS Action Plan makes it clear that suchcountry-by-country reporting to governments will be anessential element of transfer pricing documentationproposals developed by WP6. On 12 – 13 November, theOECD will hold a public consultation on various mat-ters including its 30 July White Paper on Transfer Pric-ing Documentation and associated issues includingcountry by country reporting under the BEPS ActionPlan.

There are, however, a number of important imple-mentation issues to be addressed in developing a cred-ible proposal regarding country-by-country reporting.In order to facilitate a more meaningful consultation,we summarise below some of the questions that are rel-evant to the development of a country-by-country re-porting template.

1.What information should be required?An initial question is what information should be re-

quired to be reported in the country-by-country report-ing template the Working Party is obliged to develop. Inanswering that question, a balance needs to be sought

762 (Vol. 22, No. 12) TEXT


between the usefulness of the data to tax administra-tions for risk assessment and other purposes, and thecompliance burdens placed on taxpayers. The firstquestion is what information of a country-by-countrynature governments require to perform effective riskassessment and enforce transfer pricing rules. Severalpotential items that might be reported are discussed be-low. Compliance burdens must also be considered.There would be compliance related advantages if itwere possible to limit the required information to datareadily available to corporate management so that com-panies will not need to go through a time consumingand expensive process of constructing new data. Bal-ancing of various interests will be required.

The most critical item of required information will bea report of income earned in a country. Several differ-ent approaches to reporting such information might bepossible.

s Requiring reporting of net income before tax foreach legal entity in the MNE Group, with num-bers to be drawn from individual entity statutoryfinancial statements. Legal entities could begrouped by country according to the country oforganisation and / or place of management andcontrol of the legal entities. For those countriesthat require preparation of statutory financials,such an approach would provide a relativelysimple and straight-forward mechanism for ag-gregating data on the basis of existing informa-tion. Such an approach would have a number ofdrawbacks, however. These would include atleast the following: (i) Grouping companies ei-ther by place of organisation or by location ofmanagement would not necessarily indicatewhere the income of such companies is gener-ated or where that income is subject to tax. Asone of many possible examples, reporting byplace of organisation would not distinguish be-tween resident and non-resident companies in acountry which bases residence on place of man-agement. It should be noted that resident andnon-resident companies might face very differ-ent tax regimes in some countries. Those differ-ences have been highlighted in much of the pub-lic reporting on BEPS. (ii) Some countries do notrequire statutory financials for every group com-pany organised or managed in the country sothat a workable substitute would have to be iden-tified for at least some legal entities; (iii) Thesum of income reported in statutory financialslikely would not add up to the total consolidatedincome of the group as the sum of financial state-ment income numbers may not fully reflect con-solidating eliminations.

s Income reported in the template could be basedon taxable income as reflected on tax returnsfiled in a jurisdiction. Again, tax return datashould be readily available within the MNEGroup so the reporting burden should not be ex-cessive. The difficulty with such an approach isthat some companies in an MNE Group may notbe obliged to file a tax return in any country andmay not be obliged to report some portion or allof their financial statement income on a tax re-turn in any country. Thus, reporting on the basisof tax return data would run a serious risk of ex-cluding a portion of the MNE group’s incomefrom the reporting obligation. One could arguethat the mere existence of a difference betweenthe total of income reported in tax returns andconsolidated income would itself be a strong in-

dicator of transfer pricing risk, but it might bedifficult to identify in which situations that riskarises, particularly if some countries exempt cer-tain income from tax. Use of tax return datawould also likely result in large differences be-tween the total of tax return based income andconsolidated financial statement income becauseof tax / book differences under the law in manycountries, the existence of tax exemptions forsome types of income, and other reasons. Re-quiring explanations of such differences may beuseful but could be a difficult compliance exer-cise in some cases depending on the level of de-tail required in an explanation.

s The template could require a segregation of con-solidated MNE group income among countriescalculated by reference to accounting segmentreporting rules. While this might eliminate dis-tortions arising from eliminations, it would un-doubtedly require production of data that manycompanies would not keep in the ordinarycourse. Segment reporting rules do not requirereporting income on country-by-country basis.Moreover, such reporting would require determi-nations of separate country income, particularlyinformation regarding the source of income andexpense by country which might not be neces-sary either for tax or accounting purposes. Thisapproach would therefore impose a significantcompliance burden on businesses and, to the ex-tent it would require devising a common set ofsource and expense allocation rules, could re-quire a great deal of OECD work as well.

s The template could require reporting data takenfrom the company’s internal consolidating in-come statements relating to each company’s con-tribution to consolidated income after elimina-tions. It would be necessary whether such infor-mation is readily available and to evaluate howmeaningful it would be for transfer pricing riskassessment purposes. The fact that such infor-mation would in all likelihood exclude elimi-nated income from related party transactionsmay mean that such income is not of significantuse in evaluating transfer pricing risk.

s There are undoubtedly numerous other possibleapproaches.

s Business is requested to be prepared to discussat the November consultation which approachesto the reporting of income would be most usefulto governments and most readily available fromexisting accounting records.

A second important element of the data to be re-ported includes taxes paid by country. In this regard anumber of questions will need to be resolved.

s Should taxes be reported on a cash or accrualbasis? Governments would ordinarily be most in-terested in cash taxes paid in a given year, or al-ternatively cash taxes paid with respect to the in-come reported in a given year, for risk assess-ment purposes. While tax accruals wouldperhaps align better with accrual based financialstatement income (assuming income from statu-tory financials is ultimately what is reported),there could be a question as to whether reportingtax accruals as opposed to cash tax paid wouldintroduce distortions related to deferred tax ac-counting, tax provisions and other accrual ac-counting issues. Advice is sought at the consulta-tion as to whether reporting cash tax paid or taxaccruals is more useful and more practical.

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s Should tax reporting be limited to national levelincome taxes or should reporting of incometaxes paid to other levels of government (states,provinces, cantons, municipalities, etc.) be re-quired. If sub-national level taxes are reported,should they be segregated from national level in-come taxes?

s Is there any reason to require reporting of taxesother than income taxes? Such reporting wouldoften seem to be largely irrelevant to transferpricing risk assessment, e.g. property taxes, em-ployment taxes, VAT collections etc. are not par-ticularly helpful for transfer pricing risk assess-ment. There is also a question as to whether thetemplate should require reporting of gross basiswithholding taxes imposed as a substitute for anet income based tax. Consideration should begiven to whether withholding tax is best reportedby the payor or by the recipient of the paymentthat is subject to withholding tax.

The project will need to consider whether thecountry-by-country reporting template should includedata on measures of economic activity other than in-come and taxes. WP6 will consider which of the follow-ing items should be reported on a per legal entity and /or per country basis. Some may argue that inclusion ofsuch information in the template would encourage un-warranted reliance on formula - based income alloca-tions. Others might argue that such information is use-ful for discerning the location of economic activity andwhether there are discrepancies between the location ofeconomic activity and the geographic location where in-come is reported. There is also a question as to whethersuch measures should be reported by the geographic lo-cation of the item (e.g. where an employee resides) orby the place of organization or place of management ofthe employer.

s Revenues by location of customers – some mightargue that such information is not maintained ornot readily available. The geographical source ofrevenue likely says very little about whetherthere should be an associated income tax liabil-ity. However, it may be a useful measure of eco-nomic activity leading countries to make furtherinquiries when revenues from a country are highbut taxes paid in the country are not.

s Tangible assets by locations Employment, either by number of employees, to-

tal payroll or boths Research expenditures by company / countrys Marketing expenditures by company / countrys Location of intangibles by countrys Location of senior management (e.g. the geo-

graphic location of the 25 or 50 most highly com-pensated employees of the MNE group)

s OtherA key question in connection with all these items is

whether their reporting will provide any meaningfulguidance for risk assessment purposes about the loca-tion of real economic activity. Business is requested tobe prepared to discuss these issues at the consultation.

It will be necessary to consider currencies in whichinformation should be presented in the country bycountry template. Should information be reported infunctional currencies of each individual entity, shouldinformation be translated to a single consistently used

currency (functional currency of the ultimate parent),or some combination. Governments should considerwhich approach would be most useful to them and busi-ness should be prepared to discuss which approachshould be adopted.

Consideration should also be given to whether aggre-gate information on certain types of income and ex-pense. Is information readily available on a company bycompany or country by country basis with regard to re-lated party royalties paid, related party royalties re-ceived, interest paid and received from related persons,management and other service fees paid to and re-ceived from related entities, etc.

2What mechanisms should be developed for reportingand sharing country-by-country data?

In addition to defining the information that should bereported in the country-by-country template, consider-ation will need to be given to the administrative mecha-nisms by which such information can be made availableto relevant countries. Consideration in this regardshould be given to what the OECD can accomplishthrough guidance and what recommendations shouldbe made for implementation through local country leg-islation. Following are some of the approaches thatmight be possible.

s It could be suggested that the required templatebe completed by the parent company in its homejurisdiction (place of incorporation / place ofmanagement) and then shared with other coun-tries under treaty exchange of informationmechanisms, including potentially automatic ex-change. This would raise questions about whatone should do about countries that, for one rea-son or another, do not modify their own report-ing rules to require production of the template bylocally based multinationals. This could be oneexample of the reference to non-cooperativecountries in the G8 communique. Considerationshould also be given to whether such a systemwould give developing countries a basis to ac-quire the information in the template if they donot have extensive treaty or TIEA networks.

s Consideration should be given to whether the in-formation sharing system should be structuredin a way that excludes delivery of information tocountries where adequate provisions do not existto protect the confidentiality of competitivelysensitive data and how this might be accom-plished.

s It could be suggested that the template be madeavailable as part of the global master file to ev-ery country in which the MNE has an affiliatesubject to tax and could further be suggestedthat local countries modify their domestic docu-mentation and reporting rules to require any lo-cal affiliate of an MNE group to deliver the tem-plate.

s Business is invited to suggest other possible ap-proaches.

The OECD looks forward to a productive discussionof these issues at the consultation on 12 – 13 Novemberand requests business input into the resolution of thesequestions and any other questions business may believeto be relevant to the development of a workable coun-try by country reporting template.

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Canada Revenue Agency’s Annual APA Report for 2012-13

Advance Pricing Arrangement - Program report -2012-2013

s Executive summarys Introductions Backgrounds APA Program: 2012-13

s Applicationss Production and Inventorys Table 1: APA Program Application and Inven-

tory Statisticss Intergovernmental Statuss Completion Timess Table 2: APA Program Completion Time Sta-

tisticss Intercompany Transactionss Table 3: APA Program Transaction Type Sta-

tisticss Transfer Pricing Methodologiess Table 4: APA Program Transfer Pricing Meth-

odology Statisticss Participation by Industrial Sectors Participation by Countrys Participation by Canadian Province

s Closing Remarkss How to Contact

Executive summaryThe Canada Revenue Agency’s (CRA) Advance Pric-

ing Arrangement (APA) program is administeredthrough the CRA’s Competent Authority Services Divi-sion (CASD), which is part of the International andLarge Business Directorate (ILBD), Compliance Pro-grams Branch (CPB).

The APA program is a proactive service offered by theCRA to assist taxpayers in resolving transfer pricingdisputes that may arise in future tax years. The primaryobjective of the program is to provide increased cer-tainty with respect to future transfer pricing issues in amanner consistent with the Income Tax Act (ITA), andguidance delivered through the CRA’s information cir-culars (IC) and by the Organisation for Economic Co-operation and Development (OECD).

In each of the past twelve years the CRA has pub-lished an annual report on its APA program. A sum-mary of the key findings presented in this year’s reportis provided below:

s Measured on the basis of the number of pre-filemeetings conducted with taxpayers over thecourse of the fiscal year 2012-13, the CRA had 24applicants to the program this past year.

s The fiscal year opened with an active case inven-tory of 102 APAs. Twenty one new cases wereaccepted into the program while 24 APAs werecompleted, resulting in a closing inventory of 99at the end of the period.

s Over 90% of all cases currently in process in-volve taxpayers seeking an APA on a bilateral ormultilateral basis, as opposed to less than 10% oftaxpayers seeking an APA on a unilateral basis.

s The average time to conclude a bilateral APAfrom acceptance into the program to completionwas 51.5 months. This includes 28 months forthe CRA to undertake its due diligence, carry outa transfer pricing analysis, and to prepare a posi-tion paper. On average, nearly one year wasneeded to successfully negotiate bilateral APAswith foreign tax administrations. An additional

one year was needed to draft and sign the corre-sponding APA agreements. The increase in timeperiod is mainly because of completion of morenumber of long outstanding cases this year asthe CRA dealt with such cases on priority basis.We believe that this would result in decreasedtime period in the future years as some of thelong outstanding cases are now out of the inven-tory.

s Cases involving transfers of tangible propertyconstituted little over one-half of APAs in pro-cess (55%). Cases involving intangible propertyand intra-group services represented 20% and21% of cases, respectively.

s The transactional net margin method (TNMM)continued to be the most frequently employedtransfer pricing methodology. A TNMM was pro-posed in 53% of all in-process APAs. The costplus was the next most popular method beingproposed in 15% of cases. The comparable un-controlled price (CUP), profit split, and resaleprice methodologies were proposed in 14%, 13%,and 6% of cases, respectively.

s APAs involving taxpayers with operations in au-tomobile and other transportation equipmentrepresented 18% of in-process APAs at the endof the period. APAs pertaining to the computersand electronics sector were the second mostprevalent representing 14% of cases.

s The composition of bilateral and multilateralAPAs continued to reflect the significant flow ofgoods and services exchanged between Canadaand the United States. Although lower than theproportion historically observed, APAs involvingthe United States represented 61% of all APAs inprocess and completed APAs.

s APAs with Canadian corporations headquar-tered in the Province of Ontario continue to rep-resent over one-half of all APAs completed andin process.

IntroductionThis year’s APA report is the twelfth of its kind issued

by the CRA on the APA program. The report is targetedto taxpayers, tax representatives, and international taxadministrations. The key objectives of the report in-clude:

s Enhancing awareness of the CRA’s APA pro-gram;

s Notifying readers of changes to the APA pro-gram;

s Providing an operational status update; and,s Identifying issues that may impact the APA pro-

gram in future yearsMaintaining the approach of previous publications,

and following the last year pattern, this year’s reportcontinues to place a heavy emphasis on statisticalanalysis and quantitative data with a particular aim ofproviding insight to the approaches taken by the CRAand its treaty partners on difficult transfer pricing is-sues.

BackgroundThe APA program is delivered through the CRA’s

Competent Authority Services Division (CASD), whichis part of the International and Large Business Director-ate (ILBD), Compliance Programs Branch (CPB).

TEXT (Vol. 22, No. 12) 765


The program is a service offered by the CRA to assisttaxpayers in proactively resolving prospective transferpricing disputes. The primary objective of the programis to provide increased certainty with respect to transferpricing methodologies to be applied to future intercom-pany transfer pricing transactions in a manner consis-tent with the Income Tax Act (ITA), and guidance deliv-ered through the CRA’s information circulars (IC) andby the Organisation for Economic Co-operation and De-velopment (OECD).

The APA process is based on cooperation and trans-parency with the free flow of information. It differsfrom the CRA’s audit process in that it focuses on pro-spective or future tax years rather than tax years thathave already elapsed. In essence, an APA is an arrange-ment between a taxpayer and a tax administration thatsets out an appropriate transfer pricing methodology, tobe used on a prospective basis, for establishing a trans-fer price which is arm’s length for the transactions be-tween related parties. The establishment of a transferprice embodies the arm’s length principle as describedby the OECD’s Transfer Pricing Guidelines for Multina-tional Enterprises and Tax Administrations 2010 andthe CRA’s current version of IC 87-2 InternationalTransfer Pricing.

The APA process is initiated by Canadian taxpayersthrough contact with the CASD. For further informa-tion on the CRA’s APA program, please refer to the cur-rent version of IC 94-4 International Transfer Pricing:Advance Pricing Arrangements (APAs).

APA Program: 2012-13The following section provides an operational over-

view of the APA program along with current trends, is-sues, and changes to the program. Specific topics thatwill be examined in greater detail include:

s Applications;s Production and program inventory;s Intergovernmental status;s Completion times;s Intercompany transactions;s Transfer pricing methodologies;s Participation by industrial sector;s Participation by country; and,s Participation by Canadian province.

ApplicationsTaxpayers interested in obtaining an APA must first

submit a pre-file package in order to request an APApre-file meeting. Pre-file meetings, which take place be-tween a taxpayer and the CRA, provide an opportunityfor the taxpayer to learn more about the APA programand for the CRA to obtain clarification on the taxpayer’sbusiness, industry, and most importantly, the requestedcovered transaction(s). The primary objective of themeeting is to explore the suitability of the taxpayer andthe proposed covered transaction(s) for the APA pro-gram.

After considering the nature of the request, the avail-ability information, and the taxpayer’s willingness toaddress potential issues identified during or after thepre-file meeting, a decision is then taken as to whetheror not a taxpayer will be permitted to the next stage ofthe APA process. Those taxpayers invited to continueon in the process are subsequently required to preparea detailed APA submission outlining the specifics of thecovered transaction(s) including a detailed transferpricing analysis and all pertinent information necessaryfor the CRA to review and complete its own transferpricing analysis. Only after the CRA has received andreviewed a taxpayer’s APA submission for complete-

ness, a decision is taken to accept or reject a taxpayer’srequest for an APA.

Although a taxpayer’s acceptance into the APA pro-gram is not determined at the pre-file stage, the numberof pre-file meetings held in a given period can provide apreliminary forecast of future years’ inventory. It canalso be used to gauge the current level of interest in theCRA’s APA program. Historically, the CRA has aver-aged 26 pre-file meetings annually when computed overthe past decade. In fiscal year 2012-13, the CRA con-ducted a total of 24 pre-file meetings.

A cursory review of the program’s applicants indicatethat the rise in pre-file meetings over the past decadecan be attributed in part to taxpayers that had previ-ously been involved in the APA program and are nowreturning for an APA renewal or for additional cover-age. The balance of the interest arises from new taxpay-ers seeking prospective certainty with respect to theirintercompany transfer pricing.

Withdrawals from the APA process can occur duringthe application stage or after an acceptance has beengranted to the program. By definition, an applicationwithdrawal occurs when a taxpayer formally engagesthe CRA in an APA pre-file meeting but either chooseson its own accord not to pursue an APA or is informedby the CRA that the proposed covered transaction(s) isnot well suited for the APA program. An APA with-drawal occurs where a taxpayer has formally requestedand been accepted into the program, but is subse-quently unable to continue on in the APA process.

In an effort to maintain transparency in the programand to ensure applicants are able to meet the demandsof an APA, the CRA continues to be proactive at ensur-ing that taxpayers are well-equipped with the necessaryfeedback on their proposed transfer pricing methodolo-gies and covered transactions. Based on this feedback,some taxpayers opt not to pursue an APA, while in afew other instances, the CRA may conclude that itwould not be appropriate to accept or pursue an APAwith a taxpayer. If the CRA declines an APA request, orchooses not to pursue an APA, taxpayers are providedwith an explanation for the CRA’s decision. As an ex-ample, the CRA may decline an APA request when thecentral issue involves a matter that is before the courts.In most cases, however, taxpayers are given an oppor-tunity to make further representations on any outstand-ing issues that are precluding their acceptance into theprogram.

In recent years, there has been an increase in thenumber of APA requests pertaining to transactions thatare not well suited to the APA program. APAs are bestsuited for current transactions that will likely continueon into the future with little to no change to the trans-actions themselves, and where the underlying assump-tions that form the basis of an APA transfer pricingmethodology (TPM) do not change over the duration ofboth the immediate pre-APA period and the APA perioditself. Transactions involving one-time events, such ascorporate restructurings of a significant nature, gener-ally reside outside of the intended scope of the APA pro-gram. Apart from a refusal by the CRA, other reasonswhy a taxpayer may not pursue an APA include: finan-cial constraints, significant changes in operations suchas a business restructurings, and changes in personnel.

In fiscal year 2012-13, there were three withdrawalsfrom the APA process, all of which occurred during theapplication stage. From an efficiency standpoint, thewithdrawal of a taxpayer during the application stageinstead of during the post-acceptance stage can repre-sent a significant saving of resources for both taxpayersand tax administrations.

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At the close of the most recent fiscal year, 35 applica-tions were still under consideration for acceptance tothe program (that is, instances where a pre-file meetinghas occurred between the CRA and a taxpayer, but ataxpayer’s acceptance to the program had yet to begranted by the close of the fiscal year). This figurealone, without any consideration of pre-file meetingsthat may take place in the coming year suggests thatthere could be as many as 35 new cases accepted intothe program in fiscal year 2013-14.

Production and InventoryThe APA program experienced good growth in fiscal

year 2012-13. Overall, 21 new cases were accepted tothe program. These new cases are in addition to thosecases already reflected as part of inventory from accep-tances issued in years past. Outgoing inventory, whichincludes APAs completed, unresolved, and withdrawnfrom the program, totalled 24 cases. The composition ofoutgoing cases this year includes only completed cases.Closing inventory at the end of the fiscal year was 99cases.

Table 1: APA Program Application and Inventory Statistics

FiscalYear

Pre-FileMeetings

ApplicationWithdrawals

ApplicationsPending

OpeningAPA

Balance *

APAsAccepted

*

APAsCompleted

APAsUnresolved

APAWithdrawals

ClosingAPA

Balance*

Change InInventory

FromPrevious

Year2012-13 24 3 35 102 21 24 0 0 99 -32011-12 34 4 35 96 17 10 0 1 102 62010-11 25 6 22 97 19 16 0 4 96 -12009-10 31 11 22 86 29 16 0 2 97 112008-09 33 2 31 63 34 10 1 0 86 23

Intergovernmental StatusOf the 24 completed APAs in fiscal year 2012-13, all

but three were bilateral agreements with foreign tax ad-ministrations. Since the program’s inception, the vastmajority of APAs have been bilateral APAs. Includingmultilateral APAs, 82% (or 157cases) of the 192 suc-cessfully concluded cases have involved at least oneother foreign tax administration. For APAs still in pro-cess, 95 of the 99 cases, or 96%, are bilateral or multi-lateral. It can reasonably be concluded that the CRAand applicants to the APA program continue to be fo-cused on bilateral (or multilateral) arrangements in or-der to eliminate double-taxation and secure the highestdegree of tax certainty.

Completion TimesIt is the scope and complexity of a case and not the

size of the covered transaction(s) or companies in-volved, along with other factors such as a taxpayer’s co-operation and the availability of necessary quality infor-mation, that determine the length of time required tocomplete an APA. In some instances, cases require asubstantially greater investment in the CRA’s time andresources because they cover a particularly complextransaction or transactions, or because the necessaryinformation needed to complete a transfer pricinganalysis is limited in scope. In this respect, readersshould be aware that given relatively small number ofcases used in the computation of the CRA’s APAcompletion time statistics, the figures presented in thefollowing section may be susceptible to biases resultingfrom the presence of extreme outliers.

Once a case has been accepted into the program, theprocess that ensues generally requires a substantial in-vestment in time and resources from all stakeholders.Bringing an APA from start to finish is broken downinto three distinct stages. These stages are historicallydescribed as due diligence, negotiations, and post-negotiations stages.

The due diligence stage begins once a candidate hasbeen accepted into the program and finishes with the

completion of a position paper outlining the CRA’sviews on the covered transactions. Due diligence in-cludes reviewing materials presented by the taxpayer,undertaking site-visits, issuing additional queriesand/or information requests to permit the CRA to re-view the APA submission and complete a thorough fi-nancial and transfer pricing analysis, and concludeswith the formalization of a position for competent au-thority negotiations.

In the second stage (for bilateral and multilateralAPAs only), the CRA engages in government-to-government negotiations with the corresponding for-eign tax administration in order to establish an agree-ment on the approach and transfer pricing methodol-ogy to be employed over the course of the APA term.This can often require additional analysis, research,and fact-finding in order to help resolve differences be-tween the CRA’s and a foreign tax administration’stransfer pricing positions.

And finally, the third stage pertains to the documen-tation and signing of a bilateral/ multilateral under-standing between the CRA and a foreign tax adminis-tration, and similarly the signing of a corresponding do-mestic APA between the CRA and the Canadiantaxpayer. Depending on the complexity of the transferpricing methodology agreed to during negotiations, thetime required to finalize an APA can vary from case tocase.

Focusing on the 24 bilateral APAs closed in fiscal year2012-13, the CRA required on average 27.9 months tocomplete its due diligence and an analysis on the cov-ered transactions. An additional 11.6 months wereneeded for negotiations with the corresponding foreigntax administration. And finally, 12 months were neededon average to draft and finalize the bilateral and domes-tic APA agreements. Overall, for cases completed thispast fiscal year, 51.5 months were required on averageto proceed from acceptance to completion. The averagetime periods for due diligence and negotiations are rela-tively elevated this year comparing to the previous year.It is important to the readers to note that it is mainly be-

TEXT (Vol. 22, No. 12) 767


cause the CRA, this year, had focussed its efforts to re-solve some of the outstanding cases which were in theinventory for long period as they were complex andthere were substantial difference between the CRA andother tax authorities as to the appropriate way to getthe resolution. Completion of relatively more of thesetypes of cases this year is reflected in the increasedcompletion time period. We believe that this will resultin decreased time period in the future years as some ofthe long outstanding cases are out of the inventory.

Readers should be aware that the total time to com-plete an APA does not necessarily equate to the sum of

the due diligence, negotiations, and post-negotiationsstages. In some instances, cases have been put into sus-pense while the CRA awaits additional informationfrom a taxpayer. Instances of this nature generally oc-cur when a taxpayer is reconsidering their suitabilityfor the APA program or is unable to provide the neces-sary information needed for the CRA to undertake athorough financial and transfer pricing analysis. Inother instances, delays are due to the fact that the APAprogram requires the simultaneous exchange of posi-tion papers between tax administrations prior to com-mencing negotiations.

Table 2: APA Program Completion Time Statistics

FiscalYear

Type Number ofCases

Due Diligence(Months)

Negotiations(Months)

Post-Negotiations* (Months)

Average Time:Acceptance to

Completion(Months)

Median Time:Acceptance to

Completion(Months)

2012-13 Bilateral/Multilateral 21 27.9 11.6 12.0 51.5 56.82011-12 Bilateral/Multilateral 9 22.1 5.7 12.0 44.0 47.32010-11 Bilateral/Multilateral 14 24.6 7.1 13.7 50.3 49.62009-10 Bilateral/Multilateral 11 17.4 9.7 13.2 48.8 45.82008-09 Bilateral/Multilateral 9 15.1 9.2 11.6 42.2 35.6WeightedAverage

22.8 9.1 12.5 48.4 49.0

2012-13 Unilateral 3 30.6 — 5.3 35.9 26.82011-12 Unilateral 1 63.7 — 26.8 90.5 90.52010-11 Unilateral 2 8.1 — 20.2 28.4 28.42009-10 Unilateral 5 9.8 — 8.7 18.5 16.62008-09 Unilateral 2 26.7 — 13.6 40.3 40.3WeightedAverage

21.1 — 11.8 32.9 30.1

*For unilateral APAs, this column represents the time required to finalize an APA once a CRA transfer pricing position has beenestablished.

Intercompany TransactionsIntercompany transactions can broadly be classified

into four categories: the transfer of tangible property;the transfer of rights associated with intangible prop-erty; intra-group services; and financing.

Although less than the historical norm (as measuredby cases completed to date), the majority of APAs con-tinue to relate to the cross-border transfer of tangibleproperty. At the close of the fiscal year, 48% of APAs in

process related to transfers of tangible property. Casesinvolving intangible property were the second mostcommon type of transaction in the APA program, rep-resenting 31% of all cases in process. Transactions re-lating to intra-group services accounted for the remain-ing 21% of cases. There are currently no APAs in pro-cess involving intercompany financing as the primarycovered transaction. >

Table 3: APA Program Transaction Type Statistics (since program inception)

Transaction Type Completed % of total In Process % of total Combined % of total

Tangible Property 106 55% 47 48% 153 53%Intangible Property 39 20% 31 31% 70 24%Intra-Group Services 41 21% 21 21% 62 21%Financing 6 3% 0 0% 6 2%Total 192 100% 99 100% 291 100%

768 (Vol. 22, No. 12) TEXT


Transfer Pricing MethodologiesThe transactional net margin method (TNMM) con-

tinues to be the predominant methodology employed inAPAs – both completed (44% of all cases completed)and in process (53% of cases in process). At the end offiscal year 2012-13, the TNMM in conjunction with anoperating margin profit level indicator (PLI) repre-sented 36% of all cases currently in process in the APAprogram. The total cost plus, return on assets, and berryratio profitability indicators are represented in 14%, 2%and 2% of all cases using the TNMM, respectively.

The profit split methodology, which is commonly uti-lized when intangible assets factor into the transferpricing equation, is currently in use in 13% of APAs inprocess and in 21% of completed cases. The use of theprofit split methodology in a significant number ofcases reflects the CRA’s perspective that where bothparties to the transaction are contributing to above nor-mal profits (residual profits), a profit split will often pro-vide a result that is more in keeping with the arm’slength principle. The profit split methodology is also of-

ten used when the operational characteristics of twonon-arm’s length parties are highly integrated, makingit difficult to clearly identify functions performed, risksundertaken and assets owned by each respective party.Additionally, where it is appropriate and possible, allcovered transactions involving the licensing of intan-gible property are initially analysed utilizing the profitsplit methodology.

The cost plus, comparable uncontrolled price / trans-action, and resale price methodologies were repre-sented in 15%, 14%, and 6% of APAs currently in pro-cess at the close of fiscal year 2012-13.

It should be noted, that where an APA is still in pro-cess and the CRA has yet to finalize its position paper,the methodology reported is methodology that is pro-posed by the taxpayer. Following the development ofthe CRA’s position, where an alternative methodologyhas been selected by the CRA, the alternative approachmay be that which is reflected in the statistics. Addition-ally, statistics reported for the cost plus method includeservice transactions and cost sharing arrangements.

Table 4: APA Program Transfer Pricing Methodology Statistics (since program inception)

Transfer Pricing Methodology Completed % of total In Process % of total Combined % of total

Comparable Uncontrolled Price / Transaction 26 14% 13 14% 39 14%Cost Plus 29 15% 14 15% 43 15%Resale Price 13 7% 6 6% 19 6%Transactional Net Margin Method (TNMM) -Total *

84 44% 53 53% 137 47%

PLI - Berry Ratio 7 4% 2 2% 9 3%PLI - Operating Margin 48 25% 36 36% 84 29%PLI - Return on Assets 5 3% 2 2% 7 2%PLI - Total Cost Plus 24 13% 13 14% 37 13%Profit Split 40 21% 13 13% 52 18%Total * 192 100% 99 100% 291 100%

* Totals may not sum due to rounding.

Participation by Industrial SectorParticipation in the APA program by industrial sector

generally reflects the pattern of Canadian trade. Casesinvolving taxpayers with operations residing within theautomobile and other transportation equipment, com-puters and electronics, retail trade, health, and metalsand minerals sectors continue to represent over one-half of all in-process cases in the CRA’s APA program.

Since the inception of the APA program, there havebeen 71 cases related to the automobile and other trans-portation equipment sector, of which 18 are currentlystill in process. Cases with taxpayers operating in therealm of the computer and electronics sector have rep-resented 34 cases in total, 13 of which are still in pro-cess.

Participation by CountryThe breakdown of bilateral and multilateral APAs by

country continues to reflect the significant flow ofgoods and services exchanged between Canada and theUnited States. Since the program’s inception, the CRAhas completed 118 APAs involving the United States ona bilateral basis. At the close of fiscal year 2012-13,

there were 61 cases still in process involving the UnitedStates. Currently, APAs involving the United States rep-resent approximately 61% of all cases in the APA pro-gram, which is 10% less than the previous year.

Currently, the CRA is actively engaged in bilateral ormultilateral APA processes involving taxpayers from 15different countries. After the United States, these othercountries are Japan, United Kingdom, Australia, SouthKorea, Switzerland, France, Austria, Singapore, Swe-den, Germany, Ireland, Denmark, the Netherlands, andNew Zealand.

Participation by Canadian ProvinceThe distribution of APAs across Canada broadly re-

flects the allocation of Canadian corporate headquar-ters within the country. Taxpayers located in Ontariorepresent over one-half of all APAs currently in processwith 55 cases or 55% of in-process APAs. There are cur-rently 20 cases involving taxpayers headquartered inthe Province of Quebec or 20% of APAs. Representationfrom Western Canada (the Provinces of British Colum-bia, Alberta, Saskatchewan and Manitoba) totalled 22APAs or 22% of cases. And finally, there are currently

TEXT (Vol. 22, No. 12) 769


three APAs or approximately 2% of all in-process APAsinvolving taxpayers located in the Atlantic Provinces.

Closing RemarksSince its inception in 1990, the APA program has

evolved to become a key compliance tool for the CRA.The program, which fosters a collaborative and coop-erative relationship between taxpayers and other taxadministrations, has demonstrated that through com-munication, transparency, and compromise it is pos-sible to reach mutually agreeable solutions to complextransfer pricing issues on a proactive basis. Not onlydoes the program provide an opportunity for taxpayersto openly discuss the challenges they face in attemptingto comply with the tax laws of multiple jurisdictions, theprospective tax certainty provided through the programhelps to reduce barriers to trade and contributes to thefree flow of capital.

The continued popularity of the APA program doescreate specific challenges pertaining to the overall man-ageability of the program, on both an immediate andlong-term basis. To overcome these challenges, taxpay-ers are now being asked to provide the pre-file packageprior to being granted a pre-file meeting. Applicants arerequired to provide to the CRA, on good faith, signifi-cantly detailed information pertaining to their financialstatements, business operations, and industry, duringthe application phase of the APA process. It should beemphasised that this information is generally similar, ifnot the same, to that which taxpayers have historicallybeen asked to provide during later stages of the APAprocess.

The CRA is optimistic that increased rigor in the ear-liest phases of the APA process significantly reduce thetime required to complete its due diligence and negoti-ate successful bilateral APAs with Canada’s tax treatypartners in future years. The CRA also believes that thisfocus will help ensure that only taxpayers that are will-ing to openly work with the CRA on a transparent basiswill be permitted access to the APA program.

The changes, which were preliminarily introduced infiscal year 2010-11, fully complement a series of recentprogram objectives aimed at expediting the rate atwhich it takes to successfully conclude an APA from ac-ceptance into the program to a signed APA agreement.These objectives include establishing mutually agreedupon targets and timelines with our foreign tax admin-istrative counterparts and the identification of prioritycases. In this regard, the CRA is confident that over thecourse of the year 2013-14 there will have been again animprovement in the number cases completed.

How to Contact UsIf you have any comments or questions about this re-

port or the services offered by the Competent AuthorityServices Division, contact us by telephone at 613-941-2768, send us a facsimile at 613-990-7370, email us [email protected], or write tous at the following addresses:

For delivery by mail:Canada Revenue AgencyDirector, Competent Authority Services DivisionInternational and Large Business DirectorateCompliance Programs Branch5th Floor, Canada Building344 Slater StreetOttawa, Ontario, CanadaK1A 0L5

For delivery by courier:Canada Revenue AgencyDirector, Competent Authority Services DivisionInternational and Large Business DirectorateCompliance Programs Branch5th Floor, Enterprise Building427 Laurier Avenue WestOttawa, Ontario, CanadaK1A 0L5

770 (Vol. 22, No. 12) TEXT


PerspectiveAnalysis of a Formulary System, Part IV: Choosing a Tax Base

The author, whose earlier articles advocated formulary apportionment over an arm’s-

length approach to transfer pricing, examines a limited type of apportionment that would

apply formulas not to a taxpayer’s global combined income, but to separate measures of

the taxpayer’s combined income from particular business activities. This activity-by-activity

approach, he says, would offer some, but not all, of the administrative benefits of the full-

fledged, combined-income formulary approach.

BY MICHAEL C. DURST, CONTRIBUTING EDITOR

A mong the most central questions in designing aworkable system of formulary apportionment isthe choice of a tax base to which the formula is to

be applied. Consider, for example, country A, which de-sires to adopt an apportionment regime using a single-factor formula based on sales revenues.1 In order toimplement this apportionment, country A’s tax admin-istration will need to multiply the taxpayer’s apportion-ment percentage—the percentage of the taxpayer’ssales revenue that arises in country A—by a measure ofthe taxpayer’s combined net income arising in all thecountries in which the taxpayer conducts business. Thequestion to be resolved is how the taxpayer’s combinednet income from all countries, to which the apportion-ment formula is to be applied, should be defined andmeasured.

Deciding on an income base for use in formulary ap-portionment raises important practical questions. The

root of these questions is found in the fact that multina-tional groups compile and maintain their financial re-cords using different systems of accounting. First, forpurposes of financial accounting—the kind of account-ing used by companies in compiling their audited finan-cial statements, which are used for securities law disclo-sures and other regulatory purposes—different coun-tries typically specify that companies use one of twodifferent financial reporting systems: generally ac-cepted accounting principles (GAAP) or internationalfinancial reporting standards (IFRS). These two ac-counting systems are similar but not identical.

Moreover, critical to understanding formulary ap-portionment is the fact that countries do not base tax li-ability on a company’s financial statement income asmeasured by GAAP or IFRS. Rather, each country ap-plies its unique set of tax accounting rules for convert-ing GAAP or IFRS income, known as book income, intotaxable income. As will be discussed further below, thetax accounting rules of different countries differ frombook accounting rules in a number of important re-spects, and there is great variety among the tax ac-counting rules that different countries have adopted.2

The goal of formulary apportionment as applied byany particular country is to determine the properamount of taxable income, not book income, that isproperly apportioned to that country. This means, as amatter of arithmetic, that under a system in which dif-ferent countries seek to apportion to themselves appro-priate percentages of a taxpayer’s global income, it isnecessary for each country, before applying the appor-tionment formula, to translate the taxpayer’s global fi-nancial income into taxable income using the particularcountry’s tax accounting rules. Further, if multiplecountries are to apply apportionment rules simultane-ously, formulary apportionment can require a taxpayer

1 This example uses single-factor apportionment only forpurposes of simplification. No inference is intended thatsingle-factor apportionment is optimal for purposes of the de-sign of an actual apportionment system. The author will ad-dress the topic of choosing among different possible appor-tionment formulas later in this series of articles.

2 For a general discussion of this topic, see Michelle Han-lon and Terry Shevlin, ‘‘Book-Tax Conformity for CorporateIncome: An Introduction to the Issues,’’ in James M. Poterba,ed., Tax Policy and the Economy, vol. 19 (2005). This topic isaddressed in more detail below.

Michael C. Durst has been a practitioner,author, and speaker in the field of interna-tional tax and transfer pricing for more than20 years and served as director of the InternalRevenue Service’s Advance Pricing AgreementProgram from 1994 to 1997. His most recentwork has focused on base erosion andother issues facing developing countries’ taxadministrations. The author is grateful to theInternational Centre for Tax and Develop-ment, University of Sussex, U.K., for researchsupport that is helping to make these articlespossible.

(Vol. 22, No. 12) 771


to translate its global income into taxable income usingthe tax accounting rules of many different countries.

It is clear, therefore, that formulary apportionmentcan raise, for taxpayers and tax authorities alike, ac-counting demands that are substantial in terms of bothscope and complexity. The extent to which these ac-counting demands can be satisfactorily addressed is rel-evant not only to the particular way in which a systemof formulary apportionment might be structured, butalso whether such as system is feasible as a generalmatter. Given its importance, this question will be ad-dressed at length below.

First, this article will address a relatively limited typeof formulary apportionment that, while not offering allof the administrative enforcement benefits of a full-fledged approach, would offer some of them without theneed for multiple translations of a taxpayer’s globalcombined book income into taxable income. This alter-native approach—formulary apportionment on anactivity-by-activity basis—would involve applying ap-portionment formulas not to a taxpayer’s global com-bined income, but instead to separate measures of thetaxpayer’s combined income from particular businessactivities.

This article first describes formulary apportionmenton an activity-by-activity as opposed to a combined-income basis. The article to follow will explore the prac-tical feasibility of surmounting the accounting chal-lenges of implementing formulary apportionment on acombined-income basis and will conclude with com-parative observations relating to the relative desirabilityof the two approaches.

Activity-by-Activity ApproachUnder an activity-by-activity approach, apportion-

ment formulas would be applied to a taxpayer’s globalincome derived from particular segments of its businessactivities.3 The applicable rules presumably would pro-vide that the division of a taxpayer’s total activities intosegments would be based on:

s the degree of functional differentiation among dif-ferent segments of the taxpayer’s operations, and

s the availability of reliably segmented financialdata for the particular taxpayer.

As a relatively simple example, consider a multina-tional group that organizes its operations into two busi-ness segments. Passenger automobiles, light trucks andparts make up one segment, and heavy trucks and partsmake up the other. These two divisions employ differ-ent manufacturing plants around the world, employlargely separate engineering staffs, and sell their prod-ucts through separate networks of distributors anddealers.

The different divisions typically enjoy widely varyingmarket shares in particular countries. For example, insome countries, automobiles and light trucks enjoylarge market shares while heavy trucks have only asmall market share, and in other countries the oppositerelationship prevails. In some countries only one of thetwo divisions has an active business presence. More-

over, for many years, the multinational group has main-tained segmented global accounts in which results forthe two divisions are determined separately, and inwhich necessary apportionments of group-wide ex-penses and other items between to the two groups havebeen determined without any apparent bias in favor ofeither group. Under these circumstances, under a re-gime that applies its apportionment formula on anactivity-by-activity basis, it would make sense to applythe apportionment separately to the taxpayer’s globalcombined incomes from the two divisions.

Advantages of the Activity-by-ActivityApproach

The activity-by-activity approach has the apparentadvantage, over a combined-income approach, of pro-viding more precise estimates of a taxpayer’s economicincomes in the different countries in which the taxpayerconducts business. For example, under the hypotheticalfacts outlined above, the taxpayer’s two operating divi-sions may have substantially different operating resultsin a number of different countries. Therefore, applyingan apportionment formula to the separate incomes ofthe two divisions, rather than applying the formula to asingle homogenized measure of the taxpayer’s income,is likely to produce more realistic estimates of theamounts of income derived by the taxpayer from eachparticular country, and also might be perceived to yieldresults that are fairer than the results achieved from ap-portionment on a combined-income basis.

Similar to Profit Split

The activity-by-activity approach to formulary appor-tionment also has the important advantage offamiliarity—in many respects it is similar in operationto the profit split methods many countries apply to theincome of integrated businesses under current arm’s-length transfer pricing rules. Adopting formulary ap-portionment on an activity-by-activity basis thereforemight be perceived as only an incremental change fromcurrent practices rather than a fundamental paradigmshift. In this connection, the Organization for EconomicCooperation and Development’s recent action plan tocombat base erosion and profit shifting4 generally rec-ommends that countries employ profit split methodsmore extensively in order to prevent the shifting of in-come to jurisdictions where taxpayers conduct rela-tively little business activity. It is not difficult to imaginea sequence of events, over time, in which differentcountries gradually ramp up the prominence of profitsplit methods under their transfer pricing enforcementpractices; the result could be the gradual evolution of asystem that amounts to formulary apportionment on anactivity-by-activity basis.

One should not overstate the similarity between for-mulary apportionment on an activity-by-activity basis,at least as envisioned in this article, and profit splitmethods as described today under the OECD guidelines(and, presumably, as envisioned under the OECD’sBEPS report). The OECD guidelines make clear thatprofit split methods are to be crafted on a case-by-casebasis, according to the perceived facts and circum-stances of a particular set of activities as conducted by

3 For a detailed description of one possible activity-by-activity approach, see Reuven Avi-Yonah, Kimberly Clausingand Michael Durst, ‘‘Allocating Business Profits for Tax Pur-poses: A Proposal to Adopt a Formulary Profit Split,’’ 9 FloridaTax Rev. 497 (2009). 4 22 Transfer Pricing Report 379, 7/25/13.

772 (Vol. 22, No. 12) PERSPECTIVE


the particular taxpayer group. Formulary apportion-ment on an activity-by-activity basis, as conceived forpurposes of the current discussion, would attempt toachieve administrative simplification, enhance enforce-ability, and avoid disputes by making use of a singleand admittedly approximate formula, or perhaps asmall number of different formulas for different catego-ries of companies (as will be discussed further in futurearticles in this series).

Thus, formulary apportionment on an activity-by-activity basis, as envisioned in this article, would in-volve a marked departure from the typical insistence,under current transfer pricing rules and guidelines, thatprofit split formulas be constructed individually for par-ticular cross-border activities conducted by particulartaxpayers. Nevertheless, by retaining the principle ofapportionment of a taxpayer’s income from specificallyidentified, related activities performed by a taxpayergroup, rather than moving to apportionment of thegroup’s combined global income as a whole, formularyapportionment on an activity-by-activity basis would re-semble profit-split practice under today’s rules muchmore closely than would apportionment on a combined-income basis.

Curtailing Base Erosion

Despite its relatively large degree of resemblance tocurrent practices, however, formulary apportionmenton an activity-by-activity basis has the potential to ame-liorate what is probably the largest difficulty associatedwith arm’s-length transfer pricing rules as they are cur-rently applied—namely, the problem of base erosionand profit shifting (BEPS). BEPS arises from the abilityof taxpayers, under current law, to use contractual ar-rangements to assign income to low- and zero-tax affili-ates that perform little or no observable business activ-ity. Provided (and this is a key proviso) that an appor-tionment formula contains only factors reflectingobservable business activity performed within a juris-diction and does not allow income to be apportioned toan affiliate because the affiliate has used cash to fundactivities that are performed outside its jurisdiction, theapportionment should leave no opportunity for incomeassociated with the particular activities to be assignedto a low- or zero-tax jurisdiction, other than in reason-able proportion to economic activities that occur withinthat jurisdiction.

Activity-by-activity apportionment would not, how-ever, eliminate all opportunities for base erosion andprofit shifting. BEPS transactions typically involve de-ductible payments by group members engaged in busi-ness operations to affiliates located in zero- or low-taxcountries. The result is tax arbitrage—tax reductionsfor the entity making payments that are not counterbal-anced by taxes imposed on the related party that re-ceives the payments. To the extent that base erosion in-volves related-party payments that are plainly associ-ated with identifiable business activities of the taxpayergroup, activity-by-activity apportionment should re-move the opportunity for tax avoidance, since deduc-tions would not be allowed for the intragroup pay-ments; they would be eliminated in consolidating the in-come of the activity that is subject to apportionment.Base erosion payments to related parties for royaltiesand for intragoup services, which typically are associ-ated plainly with particular businesses, therefore could

be addressed effectively by activity-by-activity appor-tionment.

As for related-party interest payments, which todaygive rise to substantial base erosion, activity-by-activityapportionment would not be effective in curtailingavoidance. Instead, taxpayers are likely to argue that in-terest payments are not integral to any particular busi-ness activity for which income is subject to apportion-ment, but instead are incurred in support of the debtorentity as a whole. Thus, the payments would be deduct-ible on a free-standing basis. Countries using activity-by-activity apportionment therefore would need toadopt special measures, such as full or partial denials ofdeductions for interest paid to related parties, to pre-vent base erosion.

Reducing Subjectivity

Formulary apportionment on an activity-by-activitybasis also would eliminate some—but not all—of thesubjectivity and unpredictability of arm’s-length trans-fer pricing as it has traditionally been conceived. Underactivity-by-activity formulary apportionment, only onetransfer pricing method, a profit split, would be permit-ted. Thus, the subjective task of determining the mostappropriate transfer pricing method would be elimi-nated. The need to identify uncontrolled comparables—perhaps the biggest Achilles’ heel of arm’s-lengthpricing—also would be eliminated. In addition, one-sided transfer pricing methods such as cost plus, resaleminus, and the comparable profits method (CPM) ortransactional net margin method (TNMM), would nolonger be used. Those methods can be used either to ap-portion arguably inadequate income to some entities(such as ‘‘limited risk’’ distributors and manufacturers),and also can have the effect of apportioning anoma-lously large amounts of income to entities in times ofsystem-wide economic distress. For all these reasons,formulary apportionment on an activity-by-activity ap-proach would eliminate many of the most importantshortcomings that today are inherent in applying arm’s-length transfer pricing rules.

Nevertheless, the need to identify, and separately ap-portion the income from, particular business activitiesof the taxpayer would mean that a substantial amountof troublesome subjectivity would remain in administer-ing apportionment on an activity-by-activity basis. Asdiscussed further below, this subjectivity is likely togenerate serious difficulties similar to those that ariseunder both U.S. state apportionment rules, which re-quire separate apportionment of the income from dif-ferent ‘‘unitary businesses’’ of the taxpayer, and arm’s-length transfer pricing rules around the world, whichrequire tax administrations and taxpayers to applytransfer pricing methods separately to different busi-ness activities of the taxpayer.

Flexibility

Apportioning income on an activity-by-activity basisalso leaves available, to legislatures and tax administra-tions, the option of prescribing different apportionmentformulas for different kinds of businesses. Arguably, asingle apportionment formula is not likely to apply wellto different businesses of widely varying apparentcharacteristics—for example, heavy manufacturing andbanking—that a diversified multinational group mightconduct. While the author would argue, as will be dis-

PERSPECTIVE (Vol. 22, No. 12) 773


cussed in future articles in this series, that any addi-tional accuracy in measurement from using multipleformulas is unlikely to justify the additional complexityand uncertainty, views on this point are likely to differ.Therefore, the possibility of applying different appor-tionment formulas to different components of a singlegroup’s income may be counted as a potential advan-tage of the activity-by-activity approach.

Avoiding the Need for Full-Scale Book-to-TaxConversions

Most importantly, an activity-by-activity approach toformulary apportionment will avoid the need to trans-late a taxpayer group’s combined financial statementincome into combined taxable income under a particu-lar country’s rules. Instead, as is the practice underprofit split methods today, the taxpayer or tax authoritywill construct, relatively informally, an estimate of thetaxpayer’s system-wide book income from the particu-lar set of activities to which the profit split formula is tobe applied.

To the extent that translations from book to tax ac-counting must be made for particular items on the tax-payer’s profit and loss statement such as, for example,depreciation or the timing of recognizing certain kindsof revenues, the taxpayer or tax authority will make thetranslations on an ad-hoc basis. That process may in-volve (as it does under the profit split today) a good dealof hands-on examination of the relevant national finan-cial statements; in addition, there might be a need toperform various international currency translations (asthere is in implementing many transfer pricing methodstoday). The overall process might end up being fairlycumbersome, but nevertheless, under the activity-by-activity approach, the need to translate a taxpayer’scombined global book income into taxable income un-der the tax accounting rules of many different countrieswould be avoided.

Conformity with Tax Treaties

Applying formulary apportionment on an activity-by-activity, as opposed to combined-income, basis alsoshould reduce or eliminate conflicts with the provisionsof today’s bilateral income tax treaties. Income tax trea-ties based on the OECD or United Nations models gen-erally grant a country jurisdiction to tax either:

s income of those legal entities that are resident fortax purposes in the country, or

s income of a nonresident legal entity that is attrib-utable to a permanent establishment—generally definedas a physical place of business—of the entity within thecountry.

If formulary apportionment is applied to a multina-tional group’s combined global income, a given countrymight well end up asserting the right to tax shares of anonresident taxpayer’s income that is not attributableto a PE within the country. For example, consider amultinational group that is engaged in some countriesin an insurance business, and in other countries in themanufacture of heavy equipment. Under a system ofcombined-income formulary apportionment, countriesthat are host to the insurance business will also, in eco-nomic effect, acquire a claim to tax some of the incomeof equipment manufacturing business, and vice versa.

If, however, formulary apportionment is applied onan activity-by-activity basis, countries will be applying

apportionment formulas only to businesses that have afactual nexus to the particular country—just as is thecase under the profit split method as applied underarm’s-length transfer pricing rules.

In addition, if applied on an activity-by-activity basis,formulary apportionment should not pose a conflictwith the ‘‘associated enterprises’’ provisions of today’sincome tax treaties, found in Article 9 of the OECD andUN models. Those provisions generally require that ap-portionment be based on the results that would obtainbetween separate entities transacting with one anotherat arm’s length. Currently, it appears well-acceptedaround the world that profit split methods can be seenas approximating the terms on which unrelated partiesmight agree to conduct business as joint venturers, andtherefore that profit split methods generally are accept-able under treaties.

Formulary apportionment on an activity-by-activitybasis therefore would appear to fit reasonably comfort-ably within the bounds of the associated enterprise pro-visions of today’s treaties. As will discussed in the nextarticle in this series, however, it is more difficult to ar-gue that a split of a multinational group’s entire com-bined global income, which might include income frommultiple and perhaps very dissimilar lines of business,coincides with the kind of arrangement that might bemade among independent businesses transacting withone another at arm’s length. In sum, therefore, appor-tionment on an activity-by-activity basis is likely to beseen as more consistent with the terms of today’s taxtreaties than is apportionment on a combined-incomebasis.

In addition, because of its similarity to current arm’s-length transfer pricing practices, an activity-by-activityapproach to formulary apportionment should lend itselfrelatively well to dispute resolution by competent au-thorities under the mutual agreement provisions of to-day’s income tax treaties (established under Article 25in both the UN and OECD models). Conceptually,double taxation under activity-by-activity apportion-ment would be similar to double taxation arising underarm’s-length rules, in that the double taxation wouldarise as a result of different tax administrations apply-ing conflicting transfer pricing methods to the samebusiness activities of a taxpayer.

Indeed, the mutual agreement process might wellwork more smoothly under activity-by-activity formu-lary apportionment than it does under current arm’s-length rules. Under formulary apportionment, even ifdifferent countries choose to adopt and employ differ-ent and inconsistent formulas, there should be greaterconsistency than there is today as to the method thatany one country would apply. Therefore, over time,there should be greater uniformity of negotiation andresolution in cases involving particular pairs of coun-tries.

Disadvantages of the Activity-by-ActivityApproach

Need for Complex Accounting Segmentation

Applying formulary apportionment on an activity-by-activity basis leaves unresolved a central administrativeproblem that has caused serious difficulties both underarm’s-length transfer pricing rules and under formularyapportionment as it has been applied in the United

774 (Vol. 22, No. 12) PERSPECTIVE


States. Historically under arm’s-length rules, one of themost difficult problems has been determining the par-ticular subcomponent of a taxpayer’s business activitiesto which a particular transfer pricing method should beapplied. All of the arm’s-length methods require the useof accounting estimates to segment a taxpayer’s totalcombined income in one form or another. In particular,segmentation techniques are needed to isolate the netincome attributable to the particular set of a taxpayer’stransactions to which any of the following are to be ap-plied:

s the comparable uncontrolled transaction method;s benchmarking under the cost plus, resale price, or

CPM or TNMM; ors a profit split method.

The income segmentation that is needed in order to ap-ply arm’s-length transfer pricing methods can be highlyapproximate and subjective, particularly because of theneed to apportion group-wide expenses, such as over-head, among the different activities to which separatetransfer pricing methods may be applied. The results ofa transfer pricing analysis can vary greatly dependingon how expenses are segmented. In practice, from thetaxpayer’s standpoint, determining the most advanta-geous segmentation method can constitute a major ele-ment of transfer pricing planning—and from an en-forcement standpoint, reviewing the taxpayer’s seg-mentation can require expending significant resourcesand engender serious controversy.

The need for segmenting a taxpayer’s income hasbeen highly problematic not only under arm’s-lengthtransfer pricing, but also, as described in detail in anearlier article in this series,10 under multistate formu-lary apportionment in the United States. The need un-der U.S. constitutional law to distinguish business fromnonbusiness income, and also to segment the taxpay-er’s operations into different ‘‘unitary businesses,’’ hascreated substantial administrative difficulty and contro-versy under U.S. state apportionment practice.

Sometimes, defenders of arm’s-length transfer pric-ing rules characterize these difficulties as being particu-larly problematic under formulary apportionment. Thiscontention is incorrect; as just described, the problemsassociated with segmentation under U.S. state formu-lary apportionment are at least as severe under arm’s-length transfer pricing practices. Nevertheless, experi-ence under U.S. multistate apportionment indicatesthat so long as formulary apportionment is applied onan activity-by-activity as opposed to combined-incomebasis, the difficulties of segmentation that are endemicto both current U.S. state apportionment and arm’s-length transfer pricing rules will continue to have seri-ous adverse effects. Thus, the requirement of account-ing segmentation under an activity-by-activity approachto apportionment must be recognized as a seriousdrawback relative to the combined-income approach.

Need to Isolate Investment, Business Income

Another, and related, drawback is that an activity-by-activity approach makes inevitable the treatment ofnonbusiness income—which consists largely of invest-ment income—separately from a taxpayer’s active busi-ness income. The need for this disparity arises from thefact that to serve its function, an apportionment formula

must be based on an assumed cause-and-effect relation-ship between observable measures of a taxpayer’s busi-ness activities and the generation of income that theformula is to apportion. Investment income, however,does not result directly from activities that can be re-flected in the factors of an apportionment formula; it re-sults from the passive devotion of funds by the taxpayerto particular kinds of investment.

Under an activity-by-activity approach to apportion-ment, therefore, a taxpayer’s investment income mustbe isolated from its income from active sources, andmust, as under U.S. multistate practice, be apportionedor allocated by means other than applying a formula.Experience in the United States has shown that theseparate treatment of investment income leaves the ap-portionment system vulnerable to significant problemsof definition and also to substantial tax avoidance astaxpayers place investment assets in affiliates located inlow- and zero-tax jurisdictions.11 The likely retention ofthese kinds of difficulties should be counted as a disad-vantage of the activity-by-activity approach to appor-tionment.

Summary ObservationsFormulary apportionment, applied on an activity-by-

activity basis, could offer important advantages over di-viding income using arm’s-length transfer pricing meth-ods. Advantages that would be available under activity-by-activity apportionment include:

s reduced income-shifting opportunities,s the simplification to be afforded through limiting

the number of available transfer pricing methods, ands elimination of the economic anomalies that arise

from the use of one-sided transfer pricing methods,s avoidance of the need to translate a taxpayer’s

global book income into taxable income under a par-ticular country’s rules, and

s the avoidance of conflict with the provisions of bi-lateral income tax treaties.At the same time, applying an activity-by-activity ap-proach leaves unresolved a problem that, today, seri-ously interferes with the administration of both arm’s-length transfer pricing and U.S. multistate formularyapportionment: namely, the need to segment a taxpay-er’s income into subcomponents along functional lines,a process that inherently involves a great deal of subjec-tivity and that historically has led to serious problems oftax avoidance.

The next step in the current analysis is to considerthe relative advantages and disadvantages of the alter-native approach to apportionment on an activity-by-activity basis, namely apportionment of a taxpayergroup’s combined income from all sources. It is hopedthat the results of that analysis will permit identificationof the most promising approaches to determination ofthe tax base under rules for the international apportion-ment of taxable income.

10 22 Transfer Pricing Report 270, 6/27/13.

11 Similar difficulties with respect to investment incomearise under arm’s-length transfer pricing rules. In arm’s-lengthpractice, investment income is almost always subject to trans-fer pricing methods separate from those applied to active busi-ness income—and the separate treatment of investment in-come often results in steering the income to low- and zero-taxjurisdictions, thus resulting in base erosion.

PERSPECTIVE (Vol. 22, No. 12) 775


AnalysisRegulatory Reform in the Financial IndustryAnd End-to-End Transfer Pricing Execution

The authors urge financial institutions to integrate their transfer pricing execution and

reporting with the implementation of modified financial reporting processes arising from

recent regulatory changes, noting the greater need for regulated entities to prove out and

consider intercompany transactions from all angles and provide arm’s-length support for

each participant’s results.

BY ADAM KATZ, DAVID NICKSON AND MONICA

WINTERS, PRICEWATERHOUSECOOPERS

T he recent financial crisis made clear to the worldthat the current operative regulatory rules andoversight were ill-suited to the way financial mar-

kets have evolved. And that reform was long overdue.Undoubtedly regulatory reform is a global agenda ad-dressing multiple fronts. Countries active in the globalfinancial markets have been taking measures to im-prove the controls governing the capital markets, withthe immediate objective of protecting their owneconomy and fiscal health. These measures include im-proving transparency in securities trading among mar-ket participants and individual investors as well astightening legal entity accounting and valuation proto-cols within a global institution. The U.S. has certainlybeen the most assertive and prescriptive in pushing leg-islation around these measures.

How will regulations affect banks’ globalcapital usage and other operations?

When the Dodd-Frank Wall Street Reform and Con-sumer Protection Act was signed into law in 2010,banks as well as non-bank financial institutions bracedthemselves and started to devote significant resourcesto preparing for the significant fundamental changes totheir compliance, reporting and operational structures.The U.S. was the first to adopt such broad regulatory re-form into law, but other countries are fast on its heels,with provisions regarding capital requirements, ring-

fencing and other measures. Whether these separatecountry initiatives will converge into a consistent andcommon regulatory landscape in application is undeter-mined. Regulatory capital requirements will be uni-formly increasing under Basel III and some countrieswill be going beyond Basel III requirements.1 However,local regulatory definitions of types of capital that meetthe various tiers or the risk-weighting of assets are stillin flux with potential inconsistencies that banks nowneed to consider in optimizing their global capital us-age.

One thing that is evident is that institutions need totighten up on controls, process and execution of theirgovernance policies, not least of which relates to theirintercompany arrangements and dealings.

One of the chief impacts of these measures in theemerging regulatory environment is the requirement ofinstitutions to reliably and accurately produce separatelegal entity reporting of their financial positions on anongoing basis. The ability to generate stand-alone legalentity financial statements is the cornerstone of an in-stitution’s ability to comply with the various regulatorychanges around the world. But this is an area in whichmany financial institutions have considerable processand system challenges. Many have seen acquisitions asa means to achieve their growth strategies, which haveled to managing different types of legacy systems—whether at source data level or reporting platforms—without having properly and fundamentally reconciledthese disparate systems. Global financial institutionshave highly integrated operational structures heavilyreliant on shared technology, operations, managementand other critical infrastructure across multiple legalentities. Historically, they have not always applied the

1 In addition to risk-based capital requirements, U.S. regu-lators are proposing a higher leverage ratio for the eight larg-est U.S. bank holding companies that have been identified asglobal systemically important banks and their FDIC-insuredbank subsidiaries at 5 percent and 6 percent, respectively. SeeCrittendon, Michael, ‘‘Plan Reins In Biggest Banks: ProposalRequiring Extra Capital Would Force Firms to Be More Con-servative or Shrink,’’ Wall Street Journal, July 9, 2013.

Adam Katz is a tax partner, David Nickson isa tax principal and Monica Winters is a taxdirector in the transfer pricing practice ofPricewaterhouseCoopers LLP. All are based inNew York. The authors wish to thank MikeGaffney, Yvonne Golby and James Wileyin PwC’s New York office, and Gary Welsh inthe firm’s Washington, D.C. office.

776 (Vol. 22, No. 12)


same level of diligence in accurately processing their in-tercompany arrangements as they do for third-partytransactions, despite the fact that for many overseassubsidiaries of U.S. financial institutions intercompanytransactions represent the greater part of their income.

Regulatory reform’s impact on intercompanyarrangements

The clearest manifestation of regulatory reform’s im-pact on intercompany arrangements originated in theU.S. through specific provisions of Dodd-Frank. TheU.K. has also recently enacted a rule requiring a nomi-nated ‘‘senior accounting officer’’ to verify that financialstatements reflect appropriate tax accounting arrange-ments. As other countries continue their own localagendas, a closer examination of these recent laws ismandatory in evaluating whether an institution is ca-pable of reporting under these new standards.

This analysis begins with a review of the specific keyprovisions under Dodd-Frank for which successfulcompliance with the new regulatory requirements isacutely affected by the institution’s operational execu-tion of intercompany and affiliate transaction pricingpolicies. Often transfer pricing policies have beenviewed in isolation as a cross-border tax matter with anoccasional nod to its U.S. regulatory equivalent—theFederal Reserve’s Regulation W implementing Sections23A and 23B of the Federal Reserve Act.2 However,there is now wider recognition that the tax and regula-tory governance of intercompany arrangements needsto be reconciled, both from a policy as well as an execu-tion perspective.

Impact of Dodd-FrankAt the heart of Dodd-Frank is the need to ensure that

a regulated institution is adequately capitalized and thatit is sufficiently protected from risk that is created orborne by affiliates. All roads therefore lead to the fol-lowing fundamental question regarding separate-entityreporting of the affected regulated entities and the op-erational framework: Are the assets, liabilities, rev-enues and expenses reported by the regulated entitycomplete, appropriately valued and appropriately clas-sified?

For third-party dealings, the general accountingrules and regulations tend to ensure appropriatelytransparent accounting and operational processes as ageneral matter. However, the strict processes, proce-dures and discipline around external market transac-tion accounting and disclosures have often not beencarried through to intercompany and affiliate dealings.An extreme scenario, which is not uncommon amongsome of the largest and most complex institutions, isone in which all intercompany transactions are cap-tured and accounted for on a net basis through a singlebelow-the-line intercompany settlement account irre-spective of the nature of the intercompanyarrangement—often with poor audit trails back to thesource. Not least of the distortions created by this sim-plified accounting is that on a gross basis, a firm’s as-sets, liabilities, revenues or costs are understated. This

has immediate implications on the same inputs thatdrive capital requirement calculations.

A few factors have created the more lax operationalenvironment around intercompany transactions ascompared to external transactions:

s The increasing centralization of operations withinmost multinationals has created a less direct accountinglink between the costs incurred by the firm and the ulti-mate end-user business unit or legal entity that mightrely either directly or indirectly on these centralized re-sources. In turn, there has been a vast increase in costcenters that require active mapping and profit or rev-enue center allocations. Further, various entities mightserve as this operational or management hub, andtherefore an end-user of one service is a provider of an-other.

s Many firms are measured more on managementreporting that is legal-entity neutral (that is, based on aregion or a business segment) than on separate legalentity results. This has deemphasised the need to un-derstand legal entity relationships and to ensure thattransactions are fully recogniszed and recorded at thelocal statutory levels.

s To date, statutory audit and accounting gover-nance has focused on controversial accounting methodssuch as Repo 1053 rather than on intercompany trans-actions with the proviso that they should completelyeliminate at top-level consolidations, notwithstandingthat local statutory financial statements would reflecttheir side of the offsetting accounts.

As a result, as firms try to align their operational,governance and control infrastructure to comply withDodd-Frank and other regulatory requirements, the sta-tus of an institution’s intercompany and transfer pricingpolicy execution framework has become one of the pri-mary areas of focus.

There are a few key initiatives and provisions withinDodd-Frank in particular for which the level of inter-company and transfer pricing operational framework ismost visible. The initiatives to be discussed in this ar-ticle are:

s capital requirements,s resolution and recovery plans ands swaps and derivatives push-out rules.

Bank capital requirements

Adequate capitalization of a legal entity is based onthe riskiness of the assets and liabilities on—and insome cases, off—its balance sheet and the stability ofthe revenues it derives and costs it bears to drive itsprofitability. For a regulated entity that relies signifi-cantly on its affiliates for revenue, services and balancesheet usage, the accurate execution of the intercom-pany dealings is essential to the question of the re-quired level of capital for that entity if valued on a pure,stand-alone arm’s-length basis in which all the supportprovided by its affiliates (or that it is providing to otheraffiliates) are appropriately measured and reported onthe balance sheet and income statement.

2 These provisions govern transactions by a U.S. bank withits affiliates.

3 Under Repo 105, a short-term deposit is classified as asale, and the resulting cash is used to pay down debt. This al-lows the company to appear to reduce its leverage for purposesbalance sheet reporting. After the reports are published, thecompany borrows cash and repurchases its original assets.

ANALYSIS (Vol. 22, No. 12) 777


Resolution and recovery planning

Resolution planning requires that large U.S. bankingorganizations and certain designated systemically im-portant non-bank financial companies submit to theregulators on an annual basis a resolution plan for theirmarket-facing regulated entities under a hypotheticalfailure scenario. Usually the plans include courses ofaction for recapitalization, disposals or bankruptcy. Inany of these scenarios, being able to provide accurateseparate-entity financial positions is critical to the effi-cacy of the plan. Given that most regulated entities gen-erally rely heavily on resources not directly within thecontrol or sponsorship of that entity, a significant ele-ment of their financial position is driven by its inter-company dealings—including the need to capture ser-vice fees and cost allocations due to services being pro-vided by an affiliate. Therefore, it is essential that theintercompany policies in place are implemented and ex-ecuted correctly.

The execution includes ensuring not only that thecorrect costs and revenues are included in the calcula-tions, but that the legal agreements are explicit aboutthe nature of the services or goods being made availablealong with the risks. The exercise of preparing a resolu-tion plan starts with a hypothetical scenario of being cutoff completely from the support of affiliates. What arethe operational, financial and management supportfunctions that must now be provided by an externalparty—and at what price would the regulated entity becharged? Once these dependencies are identified, theexisting intercompany transactions should naturally al-ready be priced and settled at arm’s length and properlyreflected on a stand-alone basis today.

Swaps and derivatives push-out rule

Under the swaps push-out rule of Dodd-Frank, U.S.banks are required to push out certain swaps and de-rivative activities to non-bank affiliates subject to Regu-lation W requirements.

This raises two scenarios regarding intercompanyarrangements:

s a one-time intercompany transfer of the associ-ated business or assets and

s potentially new or revised intercompany arrange-ments.

The question of a one-time intercompany transfer ofa business or assets requires appropriate valuation ofthe related business or assets. As most assets, especiallyfinancial instruments, are generally accounted for on amark-to-market basis, this should not be a significantissue. However, if there is a transfer of a broader busi-ness, then one must consider a more holistic valuationof the business itself, which includes identifying theprojected cash flows that account for prospective inter-company services expected to be performed. Generally,projections rely on past and current actual levels ofcosts and revenues, and therefore it is important to en-sure that current execution of transfer pricing policieshave resulted in accurate charges and service fees sothat the projections built on historic figures are reliableand not distortive to the overall valuation.

Similarly, when a segment or business is transferredfrom one legal entity to another, new intercompany ar-rangements may be created due to the fact that some ofthe activities in support of the swap business that for-merly were carried out by the same legal entity will not

or cannot migrate with the swap trading activities.Therefore, these new intercompany services will needto be identified, priced and ultimately executed appro-priately to ensure that the separate-entity reporting ofthe business is accurate and complies with regulatoryrequirements.

Arm’s-Length Pricing: ‘Reg W,’ Section 482There has always been a natural overlap between the

regulatory oversight of bank transactions with affiliatesand the rules governing related-party pricing for taxpurposes. The tax world has regulations under InternalRevenue Code Section 482, while the U.S. bankingregulatory world has Regulation W implementing Sec-tions 23A and 23B of the Federal Reserve Act. There area few nominal but real differences between the two intheir respective historic applications, the most notablebeing that the Section 482 regulations generally providea multi-party evaluation of the arm’s-length pricingfrom the perspective of all participants to the transac-tion, whereas Section 23B is usually one-sided, from theperspective of the regulated entity only. That is, thebank transaction is on pricing terms that are at marketrates or better, irrespective of results to the non-bankaffiliate.

A brief background and history of each would behelpful to understanding why this coincidence andoverlap has evolved into an outright convergence ofprinciples and governance across the two regimes sinceDodd-Frank.

Sections 23A and 23B make clear that the primaryconcern of regulators is to ensure that an entity is not,by virtue of its dealings with its affiliates, inadvertentlyexposed to its affiliates’ financial and operational risks.Section 23A has a long history and is basically intendedto ensure that banks are not unduly exposed to creditrisks arising from transactions with affiliates. Section23B has a much shorter history and is intended to en-sure that a bank’s service and other transactions withaffiliates are on market terms and conditions. The pur-pose of Section 23B is to ensure a bank is not using ser-vice contracts as a way to unfairly shift costs of opera-tions to the bank, which can be financially damaging tothe bank and a means for non-bank affiliates to pricemore aggressively than their competitors. Much of Sec-tions 23A and 23B focus on enumerating financial andsecurities dealings with affiliates as greater concerns ofthe regulators.

With Dodd-Frank as the catalyst, affiliate servicetransactions have become much more prominent as en-tities work on provisions such as resolution planning.Resolution planning forces regulated entities to imaginebeing completely cut off from affiliates. What manage-ment, operational, administrative, infrastructure andother types of support would they now need to contractwith third parties under third-party terms and condi-tions? In this context, it is then expected that marketprices and terms should already be reflected in theprices and terms for all of the affiliated service transac-tions and relationships in place today. Further, as anentity regulated under the one regulatory body such asthe Federal Reserve may be transacting with anotherentity that is regulated under another agency such asthe Financial Industry Regulatory Authority or theCommodity Futures Trading Commission with similarexpectations of market pricing in affiliate transactions,the axiom of ‘‘market price or better’’ is compressed

778 (Vol. 22, No. 12) ANALYSIS


into ‘‘market prices,’’ with less bandwidth for a one-sided evaluation. Similarly, other bank regulatory bod-ies such as the Office of the Comptroller of the Cur-rency and the Federal Deposit Insurance Corporationhave an expanded role under Dodd-Frank to interpretand apply Sections 23A and 23B to arm’s-length trans-actions between banks and non-bank affiliates.

A bank’s transfer pricing compliance process on itscross-border related-party transactions is the obviousand ready platform for regulatory compliance on affili-ate transactions. For starters, the Section 482 regula-tions are vastly more rigorous than Reg W, Section 23Bin the requirements to substantiate the arm’s-length na-ture of related-party transactions. The Section 482regulations provide for specific methods that can be ap-plied in evaluating these transactions and require thatthe taxpayer consider the appropriateness of eachmethod before selecting the best method to apply.

Section 23B does not elaborate further than the re-quirement that affiliate pricing should be comparable tomarket prices. How exactly a bank can go about sub-stantiating the market value of its affiliate pricing ar-rangements is not addressed. As a result, banks’ his-toric experiences with regulators on this issue, accord-ing to anecdotal evidence, have been inconsistent andunpredictable. Banks’ more recent experience speaksto more proactive scrutiny of affiliate service transac-tions with a dramatic uptick in requests for supportingdocumentation and analyses. No longer are regulatorssatisfied that some charge has been made and that theresults are not unfavorable to the bank. They want theassertive analysis that the value of the charge is compa-rable to what would occur in a third-party arrangementand have started to more fully align, intentionally or un-intentionally, with the provisions and standards of theSection 482 regulations.

Therefore, a bank’s existing transfer pricing policiesand governance process to address cross-border trans-actions is the natural starting point to see how these canbe extended and applied to affiliate transactions involv-ing regulated entities, whether domestic or cross-border. And even more critical to regulatory compli-ance is the execution framework once transfer pricingpolicies have been established.

U.K. senior accounting officer provisionsIn 2009, the U.K. introduced senior accounting offi-

cer (SAO) rules that require qualifying companies tonominate an SAO that is personally responsible for tak-ing ‘‘reasonable steps to ensure the qualifying companyestablishes and maintains appropriate tax accountingarrangements.’’ Within the rules, tax accounting ar-rangements are described as the end-to-end process‘‘from the initial data input into accounting systems toarriving at the numbers which form the basis forcompletion of the tax return.’’

In 2012, following revisions to the original rules,banks were brought within scope of the SAO rules suchthat today, banks with sizable U.K. operations are likelyto qualify and be required to certify compliance with theSAO rules each year.

Many banking institutions will have transfer pricingpolicies that cover material cross-border transactionflows. The implementation of these transactions may in-volve tax accounting arrangements that span multiplejurisdictions and require data from several informationsources. The complexity of these arrangements mean

transfer pricing execution is becoming increasingly im-portant for banks operating in the U.K. that are re-quired to comply with SAO rules.

Transfer pricing execution frameworkIt is therefore growing increasingly important for fi-

nancial institutions to be able to ‘‘prove out’’ the imple-mentation or execution of the policy in their books andrecords. This step is an integral part of the end-to-endprocesses and data flows that take a transfer pricingstrategy all the way through to local financial state-ments and tax returns. This end-to-end execution iseven more important for regulated entities in their re-porting for intercompany transactions.

The increasing importance of legal entity gover-nance continues to put transfer pricing executionhigher on the agenda of executives and controllers.Where a unilateral focus was historically allowed, insti-tutions are now faced with the requirement to look attransactions from all angles and provide arm’s-lengthsupport for each participant. Add to this the lack of un-derlying execution groundwork and systems support,and financial institutions are faced with an extremelychallenging time with significant constraints.

In some instances the issue may be even moreacute—for example, in locations where the majority ofthe activity is intercompany, with little third-party activ-ity. This results in jurisdictions where the impact of in-accuracies in transfer pricing execution for one transac-tion may result in material errors and restatements. Thedifficulty in managing this level of vulnerability can af-fect a company’s effective tax rate.

Execution risks

Large financial institutions in particular have built upconstraints and obstacles over time due to the highlycomplex nature of their operations. These transfer pric-ing execution challenges often have not reached an au-dience outside of the tax department. The various finan-cial reporting systems used for controllership purposesare often not adequately or optimally designed tosource and aggregate the types of data required to iden-tify and process intercompany transactions. Since mostfirms are more concerned with accuracy of financial re-porting at the consolidated level, governance on sepa-rate legal entity accounting for the various intercom-pany transactions often is lax or nonexistent, resultingin journal entities and accounting treatment for the re-sulting flows. Intercompany balances may or may notbe properly settled on a timely basis, which can distortbalance sheets through semipermanent receivables andpayables balances.

Improper governance around intercompany flowspresents a variety of execution risks. To illustrate howthis risk can play out and potentially snowball, considerthe impact from local affiliate perspectives. Local prof-itability in some locations of the firm may be highly orexclusively dependent on intercompany relationships,the proper execution of policies, and the appropriate re-porting of revenue and expenses on local statutorybooks and records. Along those lines, if transfer pricingpolicies are otherwise designed to properly allocateprofits and losses to affiliates operating in multiplecountries with different tax rates, improper executionleaves incorrect local taxable income bases and there-



fore can affect a firm’s global effective tax rate. This canalso affect deferred tax assets.

Symptoms of transfer pricing executionchallenges

Transfer pricing execution difficulties stem from anumber of sources. When multiple difficulties are pres-ent in one instance, the uphill battle to execute transferpricing policies can be exhausting and frustrating. Asoutlined earlier in this article, the picture is similar forlarge financial institutions trying to ensure their inter-company and affiliate pricing is executed accurately.

Some typical symptoms of intercompany executionchallenges include:

s ‘‘hero dependency’’—the overreliance on keyindividuals—in tax and accounting or controllership;

s a patchwork of data sources and Excel spread-sheets, and concern that enterprise and resource plan-ning system do not provide sufficient functionality toadequately maintain and monitor the transfer pricingresults;

s undocumented interpretations of ambiguousterms in intercompany agreements;

s informal process hand-offs relying on goodwilland personal relationships, which create multiplemanual processes;

s quarterly or annual close processes creating frus-trations for tax, controllership and information technol-ogy;

s transfer pricing results themselves that are notconsistent from period to period and cannot be easilyexplained, which mean that effective tax rate forecastsare hampered by lack of information at the entity orcountry level; and

s ‘‘near misses’’ and concern about the Sarbanes-Oxley controls position.

Where to begin

Companies can establish a more strategic approachto managing intercompany processes that moves be-yond typical ad hoc activities and manual data collec-tion and also aligns all relevant control groups to moreeffectively monitor and implement intercompany poli-cies and procedures. Successful companies focus on thepeople, process, and technology aspects to bring theirorganizations into alignment around the relevant trans-actions and processes.

For banks and other regulated institutions, thismeans a renewed focus on developing a transparentand collaborative team that works towards the samegoal while achieving personal goals along the way.

The value to be realized

The more efficient and aligned the functions involvedin executing intercompany pricing that feed into localstatutory accounting, the more value can be realized.Examples of value typically observed include:

s statutory and regulatory requirements that aremet in a more timely and efficient manner,

s reduced audit risks,s better internal tax controls,s a faster close process,s automated and standardized data collection pro-

cesses and transfer pricing calculations,s rationalized IT and systems investment,

s decreased costs of audit defense,s improved cash tax management,s a completed transfer pricing scenario analysis,

ands reduced indirect tax compliance costs.

ConclusionToday’s financial institutions operate in a highly in-

tegrated manner across multiple regions and functionalgroups, and ultimately across the branches and legalentity subsidiaries in which they operate. This has re-sulted in greater reliance on one another amongbranches and separate legal entity subsidiaries for capi-tal, infrastructure and operational support. Not least ofthe affects of banking reform is the heightened need forend-to-end processes that are complete, reliable andsustainable to ensure accurate and complete executionof intercompany pricing policies. Therefore, as a finan-cial institution navigates through the ongoing changesin the regulatory landscape, in developing strategy andplanning for regulatory compliance and optimizingcapital usage across the globe, all control groups withinthe institution—legal, regulatory, treasury, finance andcontrollership as well as tax—require an active seat atthe table.

So what does this mean for the financial institutions’current efforts?

One immediate opportunity is to get more out ofwhat you are already doing. For starters, financial insti-tutions have already been doing a lot since the earlywinds of regulatory reforms were felt post-2008. Theseefforts have included, among others:

s legal entity rationalizations,s business unit realignments and migration,s diagnostics of systems capabilities and constraints

ands modification or new builds of financial systems in-

cluding revised or new reporting hierarchies and im-proved integrity of source data flows.Given how highly dependent regulatory compliancemight rest on accurate and efficient execution and re-porting of intercompany transactions, proactively con-sidering and implementing intercompany as well asthird-party transactions in the existing work streams isboth necessary and highly beneficial. In addition, suchactivity might involve only incremental supplementingof the existing resources and expenses relative to thesize of the overall investments.

Below are just a few examples of how includingtransfer pricing as an important stakeholder and spon-sor in aspects of regulatory reform initiatives can opti-mize the results from the large investments currentlybeing made in the way of internal resources, costs in-curred for infrastructure changes and use of externaladvisers:

s Identifying opportunities to improve accuracy andefficiency in intercompany pricing data sourcing, calcu-lations and reporting. This may include transfer pricinginput into the definition of profit and cost center attri-butes, mapping or hierarchies by legal entities at thesource data level.

s Expanding, modifying or designing reporting ca-pabilities to improve transparency of intercompanytransactions. This may include trying to automate asmuch as possible the aggregation of certain data, calcu-lations processed directly in the system and providinganalytics for more efficient and flexible sensitivity

780 (Vol. 22, No. 12) ANALYSIS


analyses to monitor intercompany transactions and im-pacts on each legal entity.

s Expanding, modifying or designing the overallpolicies and processes governing intercompany pricingcalculations, journal postings and reporting. Theseshould include unambiguous sets of policies, roles andresponsibilities across all the relevant control groupssuch as tax, business unit and legal entity controller-ships, regulatory, treasury and legal departments. Con-tinued governance in the development of segmented le-gal entity reporting and implementing appropriate pro-cedures around this process ensures that the value ofthe initial investment and control level are realized andoptimized over the long run.

In this regard, the authors suggest that the institutionformally include transfer pricing policy execution andaccounting as an objective of regulatory reform project

plans due to the natural synergies mentioned above.Tax, transfer pricing and intercompany accounting con-trol teams should be involved at the appropriate stagesthroughout the life cycle of these projects to assist indefining data and reporting requirements, and ongoingprocess and governance procedures.

The authors have assisted with and witnessed theshort-term and long-term benefits of strategic align-ment of resources, budgets and objectives on infra-structure to meet multiple objectives. As advisers ac-tively working with institutions in their respective re-sponse to regulatory reform and compliance efforts, theauthors view the work currently being undertaken on fi-nancial reporting institution reporting as a natural andcritical opportunity to embed the data, reporting andcontrol requirements around intercompany transac-tions.



JournalCONFERENCES, HEARINGS, AND MEETINGS

Oct. 21-22 Annual U.S.-Canada Cross-BorderConference

Toronto Bloomberg BNA; visit http://www.bna.com/annual-uscanada-cross-l17179875868/.

Dec. 12-13 26th Annual Institute on Current Issues inInternational Taxation

Washington,D.C.

George Washington University-IRS; [email protected].

Jan. 23-25 2014 Midyear Meeting Phoenix American Bar Association Section of Taxation; visithttp://www.americanbar.org/groups/taxation.html.

Jan. 30-31 Fourth Annual Institute East Palo Alto,Calif.

Pacific Rim Tax Institute; visitwww.pacificrimtaxinstitute.org or [email protected].

March 31-April 1 Second Annual Global Transfer PricingConference

Paris Bloomberg BNA and Baker & McKenzie; for moreinformation, e-mail Aisling O’Connor, [email protected].

782 (Vol. 22, No. 12)


http://www.bna.com/annual-uscanada-cross-l17179875868/

http://www.bna.com/annual-uscanada-cross-l17179875868/


http://www.americanbar.org/groups/taxation.html

www.pacificrimtaxinstitute.org




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(Vol. 22, No. 12) 783


DirectoryPrivate Sector Sources

Richard CollierPricewaterhouseCoopersLondon44 20 7212 [email protected]

Carol Doran KleinVice President and International Tax

CounselUnited States Council for

International BusinessWashington, D.C.(202) [email protected]

Michael DurstWashington, D.C.(240) [email protected]

David ErnickPricewaterhouseCoopers LLPWashington, D.C.(202) [email protected]

Agustin EspinoDunamis ConsultingMexico City52 55 [email protected]

Manisha GuptaDeloitte Haskins & SellsMumbai(91) 22 6619-875

[email protected]

Olav HemnesBDOOslo47 23 11 91 [email protected]

Adam KatzDavid NicksonMonica WintersPricewaterhouseCoopersNew York(646) 471-3215 (Katz)(646) 471-6814 (Nickson)(646) 471-9064 (Winters)[email protected]@[email protected]

William MorrisDirector of European Tax PolicyGeneral ElectricLondon44 (0) 20 [email protected]

Steve NauheimPricewaterhouseCoopersWashington, [email protected](202) 414-1524

John PetersonBaker & McKenziePalo Alto, Calif.(650) [email protected]

Rohan K. PhatarphekarHemal ZobaliaKPMG India Pvt. Ltd.Mumbai91 (22) [email protected] ShahMZSK & AssociatesMumbai91 222 [email protected] R. ShreckTax Counsel, Tax Executives InstituteWashington, D.C.(202) [email protected]

Government SourcesRichard McAlonanDirectorAdvance Pricing and Mutual

Agreement ProgramLarge Business & International

DivisionInternal Revenue ServiceWashington, D.C.(202) [email protected] Saint-AmansOrganization for Economic

Cooperation and DevelopmentParis(33) (1) [email protected]

784 (Vol. 22, No. 12)


Transfer princing report

Documents

Transcript of Transfer princing report