5-c. Case Study - Overview of issues

TRANSFER PRICING CASE STUDIES

WORKSHOP

SAN JOSE

31 MARCH - 4 APRIL 2014

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GM Group sets up IP Holding company in Genovia

Action –subsidiary set up in GenoviaWhy? • to take advantage of tax treatment

such as amortisation of intangible assets

• to take advantage of treaty network (so that interest and royalty payments into Global Medical IP Holdings attract no, or reduced rate, withholding tax)

2

GM IP Holdings’ Board Meetings

Action - Global Medical IP Holdings Board members are not resident in Genovia, but they travel there in order to hold their quarterly Board meetings.

Why? – this may be to decrease the risk of Global Medical IP Holdings being treated as tax resident elsewhere.

3

Risk stripping

Action - commercial risks associated with R&D are shifted to Global Medical IP Holdings – which meets the costs of the R&D programme.

Why? – this may be to shift profit away from Country A to a low tax jurisdiction – attempting to make Global Medical (A)’s R&D function “low risk” and thus benchmarkable.

4

Intellectual Property (IP) planning

Actions:• Legal title to intangibles assigned to Global

Medical IP Holdings

• Global Medical IP Holdings to meet costs of developing future IP by funding the R&D (thus bearing the financial risk of developing IP.)

• Why? - To allow any income arising from IP, or any increase in value of IP, to be recognised in a low tax jurisdiction.

5

Maintaining ownership of existing product IP in CE Corporation

Action - Global Medical IP Holdings will take ownership of newly created product IP (such as patents), but existing product IP was not transferred.

Why? - This is likely to be to avoid a tax liability (either capital or income) in Global Medical (A) arising from the disposal of IP to Global Medical IP Holdings.

6

Additional borrowing by Global Medical (A)

Action – Global Medical (A) takes on new bank debt.

Why? • This may be to allow deductions for

interest paid to be relievable against Global Medical (A)’s profit

7

Use of preference shares to capitalise GM Finance

Action –Global Medical (A) capitalises GM Finance with preference shares

Why? This may allow distributions made by GM Finance to be treated as payments of interest (and thus deductible) and distributions received by CE Corporation to be treated as dividends (and may not be taxable).

If so – this is a hybrid instrument. 8

Purchase of Ordinary Shares in GM Insurance

Action – Global Medical (A) borrows from a third party bank and purchases equity capital in a tax haven subsidiary, which deposits the funds in a third party bank.

Why? – Interest deduction obtained in Global Medical (A); but there is no corresponding taxable receipt until dividends are received (which may in any case be exempt).

- Interest received by the tax haven country from funds deposited in the bank will be subject to no or low tax.

Setting up a captive insurance company in Cayman Islands

Action –group company set up in a low tax regime to provide insurance to Global Medical group members

Why? – may be to shift profit from Global Medical group members in normal-rate countries to low-rate countries. Deductions for premiums will be paid by group companies in higher-tax countries (such as Country A) and receipts will be received in a low-tax regime.

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Step 5

Negotiation

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Role play

This step is in two parts.

In the first part, you are asked to form groups each representing the Country A auditors examining the 2011 accounts of Global Medical (A).

In the second part, one of the auditors from each group will meet with the tax managers/advisors to tell them of any concerns they have and to make proposals for dealing with those concerns.

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Country A tax auditors

You should decide:• On which issues you would challenge Global Medical (A) and

seek an adjustment to its 2011 taxable profits?• What taxation measures would you take to mount any

challenges and what arguments would you raise?• What do you consider are the strengths and weaknesses of

your case?• What do you expect the taxpayer’s response to be to your

proposals and how you might deal with those responses. After discussion, you will be meeting the tax manager of Global

Medical (A) and his/her advisors. You should appoint one representative who, at that meeting, should:

• Inform Global Medical (A) which issues concern you, and why. • Propose how you intend to deal with these issues, specifying

the proposed approach you intend to pursue and, where possible, the next step you propose.

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