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1 Transfer Pricing Transfer Pricing • Introduction. Introduction. • OECD Model Convention. OECD Model Convention. • Why is TP a problem. Why is TP a problem. • Main methods. Main methods. • Cost contribution Agreements. Cost contribution Agreements. • Advanced pricing agreements Advanced pricing agreements • etc etc • etc etc • etc etc

1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Page 1: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

11

Transfer PricingTransfer Pricing

• Introduction. Introduction. • OECD Model Convention.OECD Model Convention.• Why is TP a problem.Why is TP a problem.• Main methods. Main methods. • Cost contribution Agreements.Cost contribution Agreements.• Advanced pricing agreementsAdvanced pricing agreements• etcetc• etcetc• etcetc

Page 2: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

OECD Model ConventionOECD Model Convention No specific articleNo specific article No specific prohibitions in domestic lawNo specific prohibitions in domestic law Article 9 Model Convention Article 9 Model Convention

Associated EnterprisesAssociated Enterprises Article 24 Model ConventionArticle 24 Model Convention

Non DiscriminationNon Discrimination

Page 3: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricingmine

Source country Operating Co.

Source Country Parent Co.

Australian Holding Co.

AUSTRALIAN PUBLIC COMPANY

dividends

dividends

Australian Shareholders

dividends

Foreign Shareholder

s

Page 4: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

44

Transfer PricingTransfer Pricing

Risk to source countryRisk to source country Manipulation of revenue / sale price Manipulation of revenue / sale price manipulation of expensesmanipulation of expenses

essential imput costsessential imput costs management servicesmanagement services use of tangible property; leasinguse of tangible property; leasing use of intangible property; IPuse of intangible property; IP

Cost contribution agreementsCost contribution agreements Research & developmentResearch & development but NO royalty incomebut NO royalty income

Page 5: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

LabourLabour Technical Technical

Assistance FinanceAssistance Finance Essential inputs Essential inputs explorationexploration

CapitalCapital activities Research andactivities Research and

equipmentequipment developmentdevelopment

mine

Source country Operating Co.

Source country Parent Co.

PROFIT TRAP TAX HAVEN: Hong Kong.

Australian group

Page 6: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

66

Transfer PricingTransfer Pricing

Conventional Result

Transfer Pricing, Thin capitalisation,Leasing, capital allowances.

Difference

Revenue 100 75 (25)

Expenses (50) (75) 25

Net Profit Before Tax

50 NIL (50)

Tax at 50% (25) NIL (25)

Net Cash 25 50 2525

Page 7: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

The problem parent controls source The problem parent controls source county subsidiary. Not acting at arms county subsidiary. Not acting at arms length, manipluation of prices WILL occurlength, manipluation of prices WILL occur

Traditional methodsTraditional methods comparable uncontrolled price (cup)comparable uncontrolled price (cup) resale price methodsresale price methods cost pluscost plus

Profit splitProfit split Comparable profitsComparable profits Profit split methodProfit split method

Page 8: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

Which methodWhich methodChoice based on degree of comparability.

Completeness and accuracy of data.

Reliability of assumptionsSensitivity of results to data deficiencies

Page 9: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing Target industriesTarget industries

PetrochemicalsPharmaceuticalsMotor tradeFinancial servicesComputers, consumer electronicsBranded consumer goodsMedia

Page 10: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

1010

Transfer PricingTransfer Pricing (1) Inflated (1) Inflated expenses direct Parent co transactionexpenses direct Parent co transaction

Sale $100 Revenue

Sale $90 Expense

Third Party Source

Source SubParent

ResidentSource Market

Sale $50

 

Source subThird Party Parent Difference Solution

Revenue 100 100 - 100

Expenses (50) (90) (40) (50)

NPBT 50 10 (40) 50

Tax 50% (25) (5) (20) (25)

Page 11: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

1111

Transfer PricingTransfer Pricing (2) Inflated (2) Inflated expenses indirect third party sells first to expenses indirect third party sells first to

parent co parent co

Sale $90 expenses

Third Party Source

Source Sub

ParentResident

Source Market

Sale $50

Sale $100 revenue

Sale $50

Source sub Third Party Parent Difference Solution

Revenue 100 100 - 100

Expenses (50) (90) (40) (50)

NPBT 50 10 (40) 50

Tax 50% (25) (5) (20) (25)

Page 12: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing : (3) reduced : (3) reduced revenue revenue

Sale $60$100

$100

Market ParentResident

Source Sub

Costs

Third Party Source

Sale $100

$50

$50

Source sub Third Party Parent Difference Solution

Revenue 100 60 - 100

Expenses (50) (50) (40) (50)

NPBT 50 10 (40) 50

Tax 50% (25) (5) (20) (25)

Page 13: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

Sale $75Sale $75

Comparable Uncontrolled price: cupComparable Uncontrolled price: cup

Unrelated Party

Sub Co.Parent Co.

Unrelated Party

Sale $100

Sale $75

Page 14: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

The problem of comparabilityThe problem of comparability Suitability. Degree of comparability. Lack of comparable prices. Problem areas:

quantity quality level of the market Intangibles Foreign exchange Business strategies

Burden of proof

Page 15: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing Resale price method: (resale Resale price method: (resale

minus)minus) Distributors: work back from sale price Price earned by the controlled entity

from third party sales LESS, Arms length GROSS margin for a

comparable uncontrolled transaction EQUALS,

Arms length price for transaction with related party.

Emphasis is on functional comparability NOT product comparability.

Page 16: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing Cost plus methodCost plus method

Similar to RSPM but works back from the other end ie the sale price is suspect not the imput

Start with cost of the product or service ADD,

Arms length gross profit mark up EQUALS,

Arms length sale price to related party.

Focus on functional comparability.

Page 17: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

Comparable profitsComparable profits Based on comparable ratios

ROI ROE GP Berry ratio.

Suitability. Advantages cf to transactional

methods. Disadvantages.

Page 18: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing

The problem of The problem of comparabilitycomparabilityCharacteristics of the property / service.

Characteristic of the intangible Contractual termsEconomic circumstancesBusiness strategies

Page 19: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

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Transfer PricingTransfer Pricing Advanced Pricing Agreements

Advantages Certainty, Non adversarial, Development of actual policies.

Disadvantages Disclosure, Prior years Inflexible Overseas associates

Page 20: 1 Transfer Pricing Introduction. Introduction. OECD Model Convention. OECD Model Convention. Why is TP a problem. Why is TP a problem. Main methods. Main

2020

Transfer PricingTransfer Pricing

Scrap value $5

OldAsset

Improvements“New”Asset

MNC Related Party MNC

SourceSub

Sale $25

Sale$50

Cost $5 $10 Market value

Source Sub Third Party MNC Difference

Revenue $100 $100 -

Capital Allowances (10) (50) (40)

NPBT 90 50 (40)

Tax 50% 45 25 (20)


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