Transfer Pricing Newsletter

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Transfer Pricing News

Welcome to the first editionof Grant Thorntons

Transfer Pricing News.

Transfer Pricing News No. 1: April 2012 1

Welcome Argentina Australia Canada China India Italy Japan Mexico Netherlands Poland Russia SouthAfrica

Spain UnitedKingdom

Whoswho

Go to page

2 Argentina

3 Australia

5 Canada

8 China

9 India

11 Italy

13 Japan

14 Mexico

16 Netherlands

17 Poland

18 Russia

22 South Africa

23 Spain

24 United Kingdom

26 Whos who

This issue contains transfer pricing

updates from a number of countries

across the globe a necessity in the

global economy we all now inhabit. So ifyou want to know about new

developments in transfer pricing around

the world this is the place to look.

To find out more about the topics

featured in Transfer Pricing News do not

hesitate to get in touch with the Grant

Thornton transfer pricing team. The

contact details are included on the last

page of this newsletter.

This information has been provided by member firms within

Grant Thornton International Ltd, and is for informational

purposes only. Neither the respective member firm nor

Grant Thornton International Ltd can guarantee the

accuracy, timeliness or completeness of the data contained

herein. As such, you should not act on the information

without first seeking professional tax advice.


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Argentina

Recent changes

The Argentinean tax

authorities recently

introduced new

information reporting requirements. The

new annual transfer pricing information

return form (F.969), extends theinformation required by the original F.743

form, that will remain in place. The new

annual form must be filed within 15 days

of the income tax returns due date and is

effective retrospectively for tax years

ending on or after 31 December 2010.

The new annual form will require a

detailed account of all transfer pricing

related information in respect of exports,

imports and other transactions. The

information included in any of these

transfer pricing reports that is not in

Spanish must be accompanied by a signedtranslation performed by a sworn and

registered Argentinian translator.

Fernando Fucci

Grant Thornton Argentina

E [email protected]


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Australia

2012 is expected to be a watershed

for Australian transfer pricing

In recent years, the

Australian Taxation

Office (ATO) has focused

heavily on the enforcement of Australias

transfer pricing rules. This focus isexpected to intensify in 2012 as a result of

two major developments:

1. The initiative of the federal

government to reform Australias

transfer pricing rules for multinational

companies

2. The introduction by the ATO of a

new International Dealings Schedule

(IDS) that will replace Schedule 25A

and the Thin Capitalisation Schedule

(TCS).

The introduction of the new IDS and the

proposed changes to the transfer pricing

rules represent a big step towards the

ATOs aim of implementing a more

sophisticated risk assessment and

mitigation framework.

Proposed changes to Australias

transfer pricing rules

The government initiative is a response to

the federal courts recent finding against

the ATOs approach to transfer pricing

cases. The federal court rejected the

ATOs use of the transactional net margin

method in favour of the taxpayers

comparable third party transaction

information.

The court highlighted discrepancies

between Australias transfer pricing

legislation and the ATOs application of

the arms length principle, which favours

using traditional transaction transfer

pricing methods to price intercompany

dealings.

Included among the proposed

changes to Australias transfer pricing

regulatory framework are the endorsing

and regulating of the OECD guidelines;

incorporating the arms length principle

into law; and limiting the existing

discretionary powers of the taxcommissioner to determine the arms

length outcome for intercompany

dealings.

Also proposed are legislative and

treaty amendments for moving to a

functionally separate entity for the

attribution of profits to a permanent

establishment.

In addition, taxpayers with certain

volumes of intercompany dealings will

have a statutory obligation to prepare

contemporaneous documentation, and

establish processes to set and review their

transfer prices.

The governments intention to

endorse profit allocation rules as part of

the new transfer pricing regulatory

framework in Australia has been of

particular interest to the taxpayers as it

will limit the erosion of the Australian tax

base. This is in contrast with guidanceprovided by the OECD that recommends

the application of the arms length

principle to ensure that the terms and

conditions of intercompany dealings are

the same as those expected to be agreed

between non-related parties.

At the moment it is a case of watch

this space with draft legislation expected

to be released soon.


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New international dealings disclosure

requirements

The introduction of a new income tax

schedule for international dealings

establishes the framework for the ATOs

strategy of closely monitoring taxpayers

international dealings.When completing the new IDS,

taxpayers should expect to provide

greater levels of detail in disclosures

concerning international dealings (as

opposed to previous Schedule 25A and

TCS), and consequently, an increase in the

resources and time invested in preparing

this schedule. In addition, the new IDS

form is reflective of the ATOs greater

emphasis on the responsibility of a

companys public officer to ensure that

international dealing disclosures are

completed accurately and are supported

by bona fide information.

On the other hand, taxpayers should

expect that with the introduction of the

new IDS the ATO will be able to apply a

more systematic and analytical approach

to review a taxpayers international

dealings. As a result, a proliferation of

targeted transfer pricing reviews andaudits initiated by the ATO is

anticipated.

Conclusion

The message is clear the ATO is looking

closely at a taxpayers international related

party dealings, supported by greater

disclosure requirements, more

sophisticated scrutiny tools and the

adoption of a transfer pricing regulatoryframework that is in line with

international best practice.

Although greater consistency with

trading partners in the international

dealings arena will be viewed as a positive

development for Australia, taxpayers are

advised to be prepared for the new

international dealings environment and

review their policies and practices, as wellas ensuring that the appropriate

documentation and support are in place.

Jason Casas

Grant Thornton Australia

[email protected]


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Canada

Straight from the source Canadas

first supreme court transfer pricing

case

On 13 January 2012,

arguments were heard by

the supreme court of

Canada in the matter of Her Majesty theQueen v. GlaxoSmithKline Inc. The case

involves the pricing of intercompany

transactions between Glaxo Canada, a

Canadian corporation, and related

corporations in the United Kingdom

and Switzerland, Glaxo Group Ltd.

(Glaxo Group) and Adechsa S.A.

(Adechsa), respectively, during the 1990

to 1993 tax years.

As this is the first international

transfer pricing matter to be considered

by Canadas highest court, we find it

instructive to consider the issues and

questions on which the Justices seemed

to focus during the hearing. Such an

analysis may be useful in shedding lighton the possible future of the arms length

principle in Canada.

Background

In 1972, Glaxo Canada entered into a

consultancy agreement with Glaxo

Group which granted Glaxo Canada

access to various services and

intangibles, including the right to

manufacture, use trademarks of and sell

certain Glaxo Group drugs. Glaxo

Canada, in turn, paid a 5% royalty for

these rights.

In 1976, Glaxo Group discovered

ranitidine, the active pharmaceutical

ingredient used in the manufacture of

the branded compound Zantac, a drug

used for the treatment of stomach ulcers.

In 1988, the consultancy agreement

was replaced with a licensingagreement to explicitly include the

provision for services and intangibles

related to Zantac. In return for these

services and intangibles, Glaxo Canada

paid a 6% royalty on net sales.

In 1987 and 1989, two independent

drug companies Apotex Inc. (Apotex)

and Novopharm Ltd. (Novopharm)

began selling generic ranitidine products

in Canada.

Both Apotex and Novopharm

purchased their ranitidine from

unrelated manufacturers at significantly

lower prices (approximately 80% less)

than the prices charged by Adechsa. The

unrelated manufacturers did not hold

any patents and were not Glaxo-approved sources of ranitidine.

In 1993, Glaxo Canada was audited,

and in 1996 the minister reassessed

Glaxo Canada for the taxation years in

question and increased Glaxo Canadas

taxable income for each of the years

pursuant to subsection 69(2) of the

Income Tax Act (the Act). The

reassessment pertained to the supply

agreement only.


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In 1998, Glaxo Canada appealed to

the tax court of Canada (TCC) and the

dispute proceeded to trial.

Subsection 69(2) was in effect in the

taxation years at issue, though the

statute has since been repealed and

replaced by Section 247.

TCC decision

In the TCCs judgment on 30 May 2008,

the presiding Justice Rip agreed with the

crown courts approach and concluded

that Glaxo Canada had overpaid

Adechsa for ranitidine. He determined

that the prices Glaxo Canada had paid to

Adechsa were not reasonable in the

circumstances, as Glaxo Canada could

have obtained ranitidine from generic

manufacturers at substantially lower

prices.

Glaxo Canada appealed the decision

of the TCC to the federal court of

appeal (FCA).

FCA decision

In the FCAs judgment on 26 July 2010,

the presiding justices determined Justice

Rip had erred in his interpretation of the

phrase reasonable in the circumstances

in subsection 69(2) and that all relevant

circumstances which an arms-lengthpurchaser would have had to consider

must be taken into account. The FCAs

approach differed from that of the TCC

by employing a reasonable business

person test to determine whether an

arms length party in Glaxo Canadas

position would have been willing to pay

the same price Glaxo Canada paid to

Adechsa. The FCA allowed the appeal

and sent the matter back to the TCC for

reconsideration based on assessing what

an arms length distributor of Zantac

would have been willing to pay, rather

than what a generic arms length

distributor of ranitidine drugs would

have been willing to pay.

Supreme court of Canada (SCC)

hearing

The crown continued to take the

position that the only relevant issue was

whether the pricing of ranitidine was at

arms length and reiterated that no other

circumstances should be considered.The crown argued that subsection 69(2)

of the Act, and more specifically the

statement reasonable in the

circumstances, precluded the notion of

asking whether a distributor could sell

Zantac if it purchased ranitidine from a

generic manufacturer.

While a number of the justices

questioned the parties regarding the

facts and circumstances, hypotheticals,

implications of tax-planning strategies,

and possible legislative interpretations, it

is worth noting that the bulk of the

questioning seemed to be driving atwhich circumstances should be rightly

considered in determining the

reasonable amount under subsection

69(2).


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Issues

According to our observations, the

primary issues of interest to the SCC

justices, and thus the most likely points

to be addressed in the forthcoming

decision, could be stated as follows:

1. What is the correct interpretation ofreasonable in these circumstances?

Should it take into consideration all

relevant circumstances surrounding

the transaction? Specifically in the

Glaxo case, should consideration be

given to the fact Glaxo Canada

purchased ranitidine for the purpose

of marketing and selling Zantac (a

branded pharmaceutical) rather than

selling a generic drug?

2. The interpretation of paragraph

1.42-1.44 of the 1995 OECD

guidelines. For transactions that

are closely connected, when is it

reasonable for the transactions to

be evaluated as a package and when

is it reasonable for the transactions

to be evaluated separately?

Specifically, for the sale of goods,

when is it reasonable for product

pricing to include certain services

and intellectual property?

3. Is the arms length principle satisfied

by packaged transactions that would

have been agreed to by unrelatedparties, or might the Canada revenue

agency retain the power to reassess

specific terms of such agreements

where it deems them (when viewed

on their own) to not conform to the

arms length principle?

These questions require some

clarification, and multinational

enterprises with Canadian operations, as

well as Canadian transfer pricing

practitioners, have reason to be

optimistic that the SCCs forthcoming

decision will provide some level of

guidance and clarity to these challenging

issues.

The full article, which includes a

more detailed discussion of the TCC

decision, FCA decision and the SCC

hearing is available to download from

www.grantthornton.ca/insights/articles

Michael PeggsGrant Thornton Canada

[email protected]


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mailto:[email protected]:[email protected]:[email protected]


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Standardising and streamlining

transfer pricing investigation

processes

The China State

Administration of

Taxation (SAT) will issue

two internal circulars, named theInternal Working Procedure (Trial) of

Special Taxation Adjustment and Joint

Assessment Procedure (Trial) for Key

Cases of Special Taxation Adjustment.

These two circulars aim to standardise

and streamline the transfer pricing

investigation processes adopted by the

tax authorities across the country.

As background, China has been

viewed as one of the most aggressive tax

regimes in the Asia Pacific region when

it comes to transfer pricing assessment,

and this trend is unlikely to change in

the near future. In 2011, each transfer

pricing investigation case by the SAT

ended up with an average assessment

amount of 15 million Renminbi (RMB)

(approximately 2.5 million US Dollars

(USD)).

As time progresses, Chinese tax

officials are also becoming more

sophisticated in the transfer pricing

arena, exploring new frontiers such as

intangible licensing, equity transfer, thin

capitalisation and location saving, to

name just a few.

Rose Zhou

Grant Thornton China

E [email protected]

China


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1. Update on safe harbours

During the past months,

there has been significant

movement on safe

harbours, with the last meeting of the

Safe Harbour Executive Committee

convened on 29 July 2010.Included below are some high level

recommendations that the committee

has received from industry associations

and consultants:

only limit the benefit of safe

harbours in respect of non-integral

or economically insignificant

activities

prescribe a threshold limit for

availing the benefit of a safe harbour

deny the benefit of safe harbours in

cases where internal comparables

are available

limit the misuse of safe harbours by

setting out scrutiny norms, based on

a randomised selection of cases.

Our recommendation at this stage

would be for taxpayers to adopt a wait

and see policy. The norms that will

ultimately be prescribed could be very

different and may in most probability be

accompanied by stringent compliance

measures.

2. Update on the Dispute Resolution

Panel (DRP) proceedings for the

annual year (AY) 2006-07 and AY

2007-08

The DRPs across the country have

provided their instructions to the

Assessing Officer (AO), in most of thecases for AY 2006-07 and before. For

AY 2007-08, the Transfer Pricing

Officers (TPOs) have released their

orders which shall be incorporated by

the AOs in their draft orders to be

issued to the taxpayers. The time limit

for AOs to complete this process for AY

2007-08 was 31 December 2010.

Although in the majority of cases the

orders of the TPOs have been upheld,

contrary to the general apprehension,

the DRPs have also actually ruled in

favour of the assessees.

In a recent Mumbai conference

discussion, it was commented that

based on first year experiences, the

Department of Revenue is looking at

internally making some changes in the

DRP mechanism to help the taxpayer

achieve its objective of minimisingconflicts.

The discussion also revealed that in

approximately 24% of the cases, relief

was given under the DRP option. Also

in a few recent income tax appellate

tribunal decisions the cases were

referred back to the DRP for their

decisions.

India


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3. TPOs Information technology (IT)

Information technology enabled

services (ITES) benchmark sets for

AY 2007-08

TPOs are in the process of working out

their comparable sets for the IT-ITES

industry segments for AY 2007-08. Theyhave firmed up their mark-ups for the

IT segment at about 25-26% and for the

ITES segment at about 33%.

As in the past, the TPOs in a few

locations are proactively allowing the

taxpayers to adjust the comparable

mark-up for differences in the working

capital employed by the taxpayer as

compared to the comparables.

Normally, captive IT-ITES

companies in India work on advances

and this always has the effect of

reducing the mean mark-up expected by

the TPOs.

TPOs in some other locations are

granting working capital adjustments ifthese are claimed by the taxpayer. As

with past audits, TPOs have not granted

any relief on account of the differences

in the risk profiles of the captives

compared to the risk-bearing

entrepreneurial companies selected in

the benchmark set.

Karishma Phatarphekar

Grant Thornton India

E [email protected]


Spain UnitedKingdom

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Domestic transfer pricing

documentation

A new measure from the

revenue agency director

has incentivised Italian

companies involved in cross-border

transactions to prepare adequate transferpricing documentation, thus complying

with the OECD guidelines and the EU

code of conduct recommendations. If

the above companies indicate in their

annual tax return (2011 being the first

year of application) that they have

transfer pricing documentation

compliant with the structure and

content provided by the above measure,

they can benefit from a penalty

exemption in the case of a tax audit on

transfer pricing issues.

This provision is particularly

relevant since current penalties may vary

from 100% to 200% of the assessed

taxable base.

As a consequence, many companies

involved in cross-border transactions

have currently prepared their transfer

pricing documentation for past years

and are preparing reports for the current

year. The measure deals essentially with

the correctness of the transfer pricingreport content and structure.

Nevertheless, tax litigation cases on the

truthfulness and reliability of

comparability have started. Some issues

would still need some clarification

(among others the lack of materiality

threshold of transactions is to be

analysed in the documentation).

Advanced price agreements

(APAs) international rulings

The number of unilateral APAs has been

growing in recent years. Current

available official data (valid for the

period from 2004-2009) shows 52

proposed rulings, 19 of them havingbeen signed already. Although a few

unilateral APAs have been signed in a

few months, the average length of the

procedure is about twenty months, due

to the complexity of the issues analysed.

This average length is however in line

with similar cases in other EU countries.

Despite new official data to be

available in April 2012, local tax

authorities confirmed unofficially that

the total number of proposed rulings has

grown further to approximately 70 at

the end of 2011.

The most significant news is not

only the increased number of APAs, but

also that the Italian tax authorities have

started to negotiate bilateral APAs, with

eight cases already registered.

The Italian tax administration started

to negotiate bilateral APAs within the

framework of the mutual agreement

procedure provided by Article 25 of

the OECD Model Tax Convention.

Differently from unilateral APAs, there

is no domestic law regulating thisprocedure. The introduction of the

transfer pricing documentation with a

penalty protection system and the APA

procedures with the extension to

bilateral APAs will enhance the

relationship between taxpayers and the

tax administration, based on a

transparent and proactive approach.

Furthermore, in recent years the Italian

tax authorities have increased their

cooperative attitude with other EU and

non-EU tax administrations.

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Criminal relevance of tax avoidance

behaviour connected to business

restructuring

The criminal relevance of certain

business restructuring operations

suspected to have a tax avoidance

purpose is one of the most importantissues arising from a recent domestic

case law.

In this respect, a new decision by the

Italian supreme court deals with the case

of a pan-EU business restructuring

implying the transfer of assets and

functions outside the national territory.

The court argued that the whole

transaction was performed essentially

for tax avoidance purposes. In particular,

although an exit tax consideration had

been paid, the tax authorities

disregarded the business soundness of

the operation and also assessed a

different arms length value of the asset

transferred.

The general principle set out by the

court is that tax avoidance behaviours

set out by a taxpayer (among them, a

missing or untruthful tax return) are

likely to be subject to criminal sanctions

in addition to the administrative

sanctions usually applied. The basis forthis is that it is possible for the taxpayer

to obtain an advance ruling from the tax

authorities, and if the taxpayer does not

make a request then they might be

charged with criminal sanctions in the

case of a tax audit.

Paolo Besio

Grant Thornton Bernoni & Partners

E [email protected]


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Japans response to the 2010

revisions to the OECD transfer pricing

guidelines for multinational

enterprises and tax administrations

Japan has adopted a

most appropriate

method rule that iseffective for fiscal years starting on or

after 1 October 2011. To date, the three

traditional transaction-based methods

comparable uncontrolled price, resale

price, and cost plus have been the

preferred methods of the national tax

agency and have had preference in

Japans transfer pricing regulations.

The reforms which are effective from

2011 expressly allow for the application

of three types of profit split methods

comparable, residual, and a contribution

approach whereby the arms length price

is determined according to the value of

the contribution made by each taxpayerto the combined operating profit or loss.

To date this has been included in the

special taxation measures law circular.

In addition, the concept of a range of

acceptable arms length prices has been

adopted in the reforms. The price would

then be acceptable if it fell within the

stated and appropriate arms length

range. Current rules do not expressly

allow for a range of arms length prices.

Toshiya Kimura

Grant Thornton Japan

E [email protected]

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Risk profiles

In Mexico, the Tax

Administration Service

(SAT) is in the process of

creating a taxpayers risk profile, in order

to identify those taxpayers who are not

properly complying with their taxobligations or are implementing

aggressive tax strategies. This has

allowed the SAT to focus their auditing

efforts on these specific taxpayers.

Transfer pricing audits

In the case of transfer pricing audits, the

SAT has focused on business

restructurings, service transactions, and

the pharmaceutical and hotel industries.

When the recipient of the service is a

Mexican taxpayer, it must be verified

that the service is needed and that

through the supporting documentation

it was actually provided; the taxpayer

must then prove to be compliant with

the arms length principle.

SAT is in the process of modifying

the format of the informative return on

related party transactions, which is

intended to include more detailed

information, as well as information on

domestic related party transactions.

Court cases related to transfer

pricing

As audit activity increases, the court

activity also increases. There have been

some new resolutions from the tax

court, as detailed below.

One of these resolutions is in

connection with a distributor who

acquired products from a related party

abroad. In its transfer pricing study, the

taxpayer analysed this transaction using

the resale price margin (RPM) and it

concluded that the transaction was

carried out at arms length.

As a result of an audit performed by

the SAT, they concluded that the RPM

was the appropriate method and also

included three additional comparable

companies to the analysis. In the

replying documentation, the taxpayer

included the additional comparablecompanies and also used the

transactional net margin method as a

sanity check or secondary method. In

the analysis, the company performed the

following adjustments: Accounts

receivable, inventories and a unique

adjustment due to operating expenses

intensity. It also considered three fiscal

years for its financial data versus the

three years of financial information from

the comparable companies.

The final statement from the SAT

stated that the controlled transaction

was not carried out at arms length,

arguing that the adjustment due to

operating expenses intensity was not

reasonable. Finally, the SAT claimed that

the financial information that should beused in the analysis is the fiscal year for

the tested party, compared to a three

year cycle for the comparable

companies.

The case was filed for a trial between

the taxpayer and the SAT and the court

issued a favourable resolution to the

taxpayer.

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The basis of the resolution was that

Mexican income tax law states that

reasonable adjustments should be made

and that, in order to stabilise the

economic cycle, the taxpayer can use its

information from several years. Despite

this, regulations are set in order toimprove the comparability of the

independent parties information and the

law does not state the number of years

of an economic cycle or the adjustments

that should be performed.

The second case is related to the

import of certain active ingredients

made by a pharmaceutical company. The

SAT used secret comparable information

and product information gathered by

the Mexican customs office, which

considered the price of the active

ingredients imported.

According to the Mexican tax

officers, this information source would

only be considered when it is absolutely

clear that the transactions between the

related parties were not carried out at

arms length. The resolution in this case

was in favour of the SAT.

Ricardo Suarez

Grant Thornton Mexico

E [email protected]


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Transfer pricing developments:

Permanent establishment decree

A new decree was

introduced regarding the

allocation of profits to a

permanent establishment (PE) on 27

January 2011. This decree endorses theconclusions of the OECD report on the

attribution of profits to PEs and

provides details on the Dutch position.

Court cases

There are three court cases that are

significant to mention in 2011, including

a landmark case with respect to non-

arms length loan transactions.

1. Non-arms length loan

In the supreme court case of 25

November 2011, the taxpayer claimed a

deduction of a non-recoverable loan in

its tax return taking into account the

borrowers negative financial situation.

The supreme court considered theamount as non-deductible since the tax

payer assumed the credit risk under

non-arms length conditions and

circumstances. No third party would

have accepted such a credit risk under

the same facts and circumstances.

Therefore, the supreme court ruled that

the loan was provided in a capacity of a

shareholder not as a creditor.

Furthermore, the court ruled that the

interest rate for a non-arms length loan

can be based on what the borrower

would need to pay to a third party for

such a loan with a guarantee under the

same conditions.

This case has a large impact on the

structuring of financial transactions by

determining under what circumstances

loans can be regarded as non-arms

length. It may also give some planning

opportunities.

2. Correction of transfer prices

In the court of Breda case dated 9

February 2011, a large breeding

company in its appeal to a preliminary

tax assessment, recalculated the transfer

prices used in its transactions with its

related party.

The court later ruled that the

recalculation would not occur at arms

length and therefore there were no

grounds for lowering the Dutch

companys taxable income.

This court case illustrates the

importance of having solid transfer

pricing documentation. When a

company prepares solid transfer pricing

documentation, the burden of proof

with respect to the arms length nature

of transfer prices remains with the

Dutch tax authorities.

3. Correction of reinsurance profit

(captive case)

In the court of the Hague case of 7 July

2011, the taxpayer is engaged in

operating bungalow parks and providing

related services including the provision

of insurances.The tax inspector increased the

taxable profit in the Netherlands by

disregarding the activities of its captive

insurance related company in Ireland.

The court did not agree with the tax

inspector in its position and ruled that

the taxpayer had a business reason to

restructure and establish a captive

insurance company in Ireland.

This is the first such case since the

Dutch tax authorities restarted actively

auditing captive insurance structures.

Michiel van den Berg

Grant Thornton Netherlands

[email protected]

Netherlands


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Poland is one of the few

European countries

where transfer pricing

documentation is not required (but in

practice there are some doubts about it)

to prove the correctness of prices.

Conducting an analysis of whether thepricing of a transaction is at market level

is not an obligatory part of the tax

documentation.

In 2010, a project to change the rules

on transfer pricing documentation and

the clarification of this issue was

proposed. The draft guidelines included

a proposal for the tax documentation to

present the comparable market data

justifying that arms length conditions

applied in the transaction.

However, the project was abandoned

in the course of further legislative work.

We can expect a return of the concept in

the future.

The increasing number of tax audits

Tax control offices examine issues

related to transfer pricing. This is a

consequence of the minister of finances

annual instructions. Since 2010, the

minister of finance imposed a special

emphasis on transfer pricingdocumentation with related parties. This

year will largely be a continuation of

these activities.

Inspections by the tax authorities are

not limited to formal assessments of the

correct transfer pricing documentation

preparation but more often are aimed at

the verification of whether the

conditions between related party

transactions are in line with the arms

length principle.

The Polish tax authorities have

begun creating special departments

dedicated to transfer pricing related

issues. Over the past three years,

penalties of approximately 140 million

Polish zloty (PLN) increased the

amount of income taxes additionally

levied by the tax authorities for

companies contravening transfer pricing

rules and in transactions between related

parties.

Advance pricing agreements (APA)

The Polish minister of finance may issuea decision as to whether he finds a given

method of determining the transfer price

between related parties acceptable.

Under the law, the decision will be

binding upon the tax authorities in the

case of other tax procedures (such as tax

audits and tax-legal proceedings).

The ministry of finance imposes a

charge for the APA application. This is

equal to a 1% value of the transaction

that is subject to APA application

(minimum 5,000 PLN, maximum

200,000 PLN). Entities who decide to

draw up an APA have to prepare

documentation containing detailed

information about realised transactions,

especially the method used to calculate

transaction values and information

about all the costs connected with the

transaction. Entities will bear the

additional cost of professional

consultants who have the know how to

prepare the appropriate documents.

Recent statistics on APAs show very

little interest in this form of riskelimination in Poland.

Since 2006, the ministry of finance

has issued just 26 decisions in this regard

(up to 10 October 2011). Taxpayers

rarely decide to conclude an APA

because of the long duration (average 19

months) and high cost of proceedings.

Agnieszka Staniszewska

Grant Thornton Poland

[email protected]

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New rules 2012

Transfer pricing is

becoming a hot topic in

Russia these days.

Although the current legislation

contains relevant provisions, they have

not worked efficiently since theirimplementation in 1999.

However, new Federal Law (#227-

FZ) of 18 July 2011 (the Law) enacted

comprehensive transfer pricing rules

coming into force starting 1 January

2012.

According to the Law, companies

that fall under the scope of transfer

pricing rules will be obligated to disclose

related party transactions and provide

tax authorities with a transfer pricing

study documenting the intercompany

prices used.

This article gives companies a

general overview of the new transfer

pricing rules effective from 2012,

enabling companies to identify if they

are subject to them.

If your business is likely to be

affected by the new rules we will be

happy to assist you in developing an

action plan and a transfer pricing policy

in order to be compliant with the new

legislation.

Key changes

The ownership ratio necessary to declare

parties related has increased from 20-

25%. The new rules provide for being

related through participation via a chain

of ownership of more than 50% each.

Starting in 2012 sister companies are

also within the scope.

Companies can also be treated as

related parties due to control on the

board of directors, provided that:

more than 50% of the directors of

these companies are the same

individuals

not less than 50% of the directors

are appointed/ chosen by the same

individual.

Similarly, courts will have the right to

declare the parties as related if the

relationship between them may have an

impact on the conditions and outcome

of the transaction performed by these

parties or the results of their economic

activity.

Controlled transactions

The Law provides for the following list

of controlled transactions:

related parties cross-border

transactions (no volume threshold is

defined).

foreign trade transactions with

commodities that have a total

income exceeding 60 million Russian

Rubles (RUR)(approximately two

million USD) per calendar year.

transactions with companies

incorporated or residing in offshore

jurisdictions (including non-related

parties). This list established by the

Russian Ministry of Finance includes

territories with beneficial tax regimes

and non-transparent fiscal bodies. Athreshold of 60 million RUR per

calendar year has been established

for such transactions.

transactions between related

parties carried out via unrelated

intermediary companies, provided

such companies do not perform any

additional functions, assume any

risks or employ any assets.

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domestic transactions between

related parties will be subject to

control in the following three cases:

1. If the amount of such

transactions exceeds three billion

RUR (approximately 105 million

USD) in 2012, two billion RUR(approximately 70 million USD)

in 2013 or one billion RUR

(approximately 35 million USD)

from 2014.

Transactions between

profitable Russian companies

registered in the same

administrative region are exempt

from transfer pricing control,

provided they do not have any

subdivisions in other

administrative regions within

Russia or abroad.

2. Certain types of transactions that

qualify for at least one of the

following conditions and where

the aggregate income exceeds 60

million RUR per calendar year

(approximately two million

USD): if one party to a transaction is

subject to the mineral

extraction tax and the goods

are subject to the above tax at

a percentage rate

if one party to a transaction is

exempt from profits tax or

applies a 0% tax rate, while

the other party is a profits tax

taxpayer in Russia and does

not apply a 0% tax rate

if one party to a transaction is

resident in a special economic

zone, while the other is not

resident in that special

economic zone (effective

from 1 January 2014).

3. Transactions where one party

applies the unified agricultural

tax or a unified imputed income

tax, while the other party pays

tax under the general rules. This

type of transaction is recognised

as controlled starting from 1January 2014 if the aggregate

income exceeds 100 million RUR

per calendar year (approximately

3.5 million USD).

Transfer pricing methods

The Law sets five methods for

determining the transaction price:

1. Comparable uncontrolled price

(CUP) method

2. Resale price method

3. Cost plus method

4. Transactional net margin method

5. Profit split method.

The CUP method is named as a

preferred method. However, if it is not

applicable a company may use the most

appropriate method. If the above

mentioned methods do not accurately

define the price of an individual

transaction it can be determined throughan independent valuation.


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Sources of data

The Law provides a list of information

sources that can be used to determine

prices of comparable transactions and

margin levels.

According to the Law comparables

from the Russian financial statementsshould be used. Foreign comparables are

applicable only if Russian ones do not

exist.

Thus, even if the group of companies

has a global or regional transfer pricing

study based on foreign comparables, it

might be necessary to carry out

benchmarking using Russian

comparables.

Transfer pricing reporting

According to the Law, companies will

have to notify the tax authorities of the

controlled transactions that occurred

during the previous year by 20 May.

These notifications shall be limited in

scope, such as subject, parties and totalamount of the transaction.

Transfer pricing documentation terms

Transfer pricing documentation

supporting the arms length nature of

prices applied and the method used may

be requested by tax authorities not

earlier than 1 June of the year following

the calendar year when the controlled

transactions took place.

Once it is requested the company

has 30 days to present transfer pricingdocumentation for the tax authoritys

review.

The transitional period allows

companies with controlled transactions

under 100 million RUR (approximately

3.5 million USD) for the year 2012 and

80 million RUR (approximately 2.8

million USD) for the year 2013 to enjoy

an exemption from filing notificationand preparing transfer pricing

documentation. However, starting in

2014, the thresholds will be abolished.

Transfer pricing documentation

content

The documentation shall include the

following information:

description of the controlled

transaction, its parties and

conditions, including the description

of the pricing method (if any) and

other information on the transaction

information on each parties

functions (if a functional analysis is

carried out by the taxpayer), assets

employed (related to the controlled

transaction) and commercial risks.

If a taxpayer uses methods establishedby the tax code, the following

information should also be provided:

the grounds for the choice and

applicability of the method used

the sources of data

calculation of the market prices

interval (profitability interval) used

for the benchmarking

the grounds for the choice and

applicability of comparables

information about other facts, which

had influence on the controlled

transaction price (margin) etc.


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Advance pricing agreements

Taxpayers may be entitled to apply for

an APA. However, this is only possible

for Russian companies registered as the

largest taxpayers.

To conclude an APA a taxpayer

should prepare an application with adescription of methods, sources of

information, etc. and pay a state duty of

1.5 million RUR (approximately 50,000

USD).

APAs protect the company from

potential tax assessments, penalties and

late payment interest.

Transfer pricing audits

Transfer prices will be audited by the tax

authorities in the course of a separate

transfer pricing audit with certain

transitional provisions prescribed by the

Law.

In particular, an audit for the year2012 may only be initiated before 31

December 2013, while a 2013 audit may

only be initiated before 31 December

2015. After the above provisions expire,

a transfer pricing audit may cover three

years preceding the year when the audit

is initiated.

Transfer pricing penalties

The Law exempts any transactions that

occur during the years 2012 and 2013

from transfer pricing penalties. A

penalty of 20% will apply to

transactions occurring during the period

2014-2016. Starting from 1 January2017, a 40% penalty will be imposed in

cases where a transfer pricing

adjustment was applied. The submission

of transfer pricing documentation

protects a taxpayer from penalties even

if an adjustment is made. In contrast to

APAs no exemption is established in

relation to the amount of tax assessment

and late payment interest.

Mirror adjustments

In cases where tax authorities have made

a tax assessment for one party of the

transaction, the other party has the right

to mirror the adjustment. This

adjustment can only be made after the

tax assessment is settled. Mirroradjustments are only allowed in respect

to transactions within the Russian

Federation.

Nadya Zubkova

Grant Thornton Russia

[email protected]


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Recent South African developments

Section 31 of the Income

Tax Act No.58 of 1962

(the Act) contains the

main legislative provisions relating to

transfer pricing. The South African

transfer pricing rules essentially requirethat an arms length/market related price

be paid/charged in respect of the cross-

border supply of goods or services

between connected persons.

Should the commissioner for the

South African revenue service (SARS) be

of the opinion that an arms length price

has not been paid or charged, he is

entitled to adjust the consideration for

the transaction in order for it to reflect

an arms length price, resulting in a

potentially higher tax liability for thetaxpayer.

The old section 31 has recently been

substituted with a new section 31 in

terms of the Taxation Laws Amendment

Act No. 7 of 2010. This change was

implemented due to the wording of the

old section causing structural problems

and uncertainty as it placed excessiveemphasis on isolated transactions rather

than overall arrangements.

Undue emphasis was also placed on

the comparable uncontrolled price

method rather than other more practical

transfer pricing methodologies. In

addition, SARS was of the opinion that

the wording should focus on profits

rather than price as this is more

consistent with the wording of the

double tax treaties concluded by South

Africa.

The new wording focuses on the

economic substance of transactions and

is more in line with the OECD

guidelines. The new section will

essentially apply to any transaction,

operation, scheme, agreement or

understanding directly or indirectlyentered into between cross-border

connected parties where:

any term or condition of that

transaction, operation, scheme,

agreement or understanding that

deviated from any term or condition

that would have existed between

those parties dealing at arms-length

the transaction, operation, scheme,

agreement or understanding results

or will result in a tax benefit being

derived by either party.

There has also been major discussion

surrounding the thin capitalisation rules

and whether the 3:1 debt equity ratio

safe-harbour applied in the case of

financial assistance has in effect fallen

away. The safe harbour is contained in a

separate practice note and it is not clearwhether this has in fact been withdrawn

by SARS. This amendment would result

in taxpayers being required to establish

what amounts they would have been able

to borrow in the open market, on what

terms and conditions and at what rate.

This has stirred debate as to whether or

not the amendment is plausible and thus,

SARS is to issue guidance in this respect.

In line with most countries, SARS has

acknowledged transfer pricing as a main

income source and focus has been placedon this area with audits now being

conducted across all industries by the

transfer pricing unit, a specialist unit at

the large business centre in Johannesburg.

AJ Jansen van Nieuwenhuizen

Grant Thornton South Africa

[email protected]

South Africa


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Spainish supreme court decision:

Swiss principal has Spanish

permanent establishment through its

subsidiary in Spain

Roche Vitamins is the

Spanish subsidiary of

Roche Vitamins Europe(based in Switzerland), that restructured

its business in 1999. The subsidiary

previoulsy performed the functions of

manufacturing, importing and

distributing goods, as a full risk

entrepreneur.

After the restructuring, the

subsidiary concluded two contracts with

its related party Roche Vitamins Europe.

The Spanish subsidiary became a

contract manufacturer and sales agent,

whose profits were considerably lowerthan those received by a full risk

entrepreneur.

It should be noted that the

subsidiary had no capacity to contract or

negotiate for the parent company, and

the products were sold and the prices

were fixed by the Swiss company.

The progression through the courts

has taken more than nine years, and therecent ruling by the Spanish supreme

court on 12 January supports the tax

authorities position and the national

high court in that the Spanish company

is a dependent agent of the Swiss

principal.

The national high court argued that

the dependent agent clause in the Swiss-

Spanish treaty was to be interpreted

broadly and applied not only to

situations where the agent has authority

to conclude agreements on behalf of theprincipal, but also when, in the nature of

its activity, an entity has involvement in

the business activities at the national

level.

Although the subsidiary had no

capacity to contract or negotiate for the

parent company, this did not prevent the

application of the dependent agency

clause in the Swiss-Spanish tax treaty.

The agency contract obligated the

subsidiary to promote the goods sold bythe parent, which the court felt

constituted a greater involvement in the

Spanish market and showed that the

subsidiary did not only process purchase

orders issued by its parent. So finally, it

was held that the subsidiary company

constituted a permanent establishment

based on article 5.1 of the tax treaty and

article 5.4 because all the activity of the

subsidiary was directed, organised and

managed by its parent, and therefore

assumed more risks with the economicactivity in Spain.

Another important issue that the

supreme court considered was that the

Spanish entity had only one client (the

Swiss company), and that the

manufacturing prices were merely a

refund of cost which is not truly a

market price.As a result the profits derived from

manufacturing and distribution have

been attributed to the permanent

establishment in Spain.

The ruling goes against the French

Zimmer case and the Norwegian Dell

Case with the interpretation of article

5.4 of the dependent agency clause of the

tax treaty, because it did not focus on the

literal meaning of the clause, that the

agent has the authority to conclude

binding contracts for the parent.

Gabriel Yakimovsky

Grant Thornton Spain

[email protected]

Spain


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24/26


Controlled Foreign Companies (CFCs)

Draft legislation has been

released introducing new

rules for CFCs. The new

measures are intended to more

accurately target artificially diverted UK

profits and keep the compliance burdento a minimum, although it is debatable

how far this objective has been achieved.

In some cases (e.g. where the

management and control of the CFCs

and assets are entirely outside the UK)

there will be no CFC change. In other

cases it will be necessary to consider

whether any significant people

functions (SPFs as described in the

OECD report on attribution of profits

to a permanent establishment) are based

within the UK.The final CFC legislation is being

published as part of the Finance Bill

2012.

Branch exemption

A company has been able to elect

the profits of its foreign permanent

establishments to be exempt from UK

corporation tax since March 2011.

Conversely any losses made by the PE

will not attract relief in the UK. As theelection is irrevocable, and applies to all

existing and future permanent

establishments of the company, the

decision to make an election is not one

to be taken lightly.

Where the UK has a full treaty in

place with the permanent establishment

jurisdiction, the attribution is to be made

in accordance with that treaty.

If there is no full treaty in place, the

exempt profits are those that would be

attributed to the permanentestablishment if an OECD treaty

was in place. In addition, a number

of exclusions are provided and an

anti-diversion rule applies.

Patent box

The introduction of this new regime will

apply a 10% corporate tax rate for all

profits attributable to qualifying

intellectual property (IP) from 1 April

2013. Qualifying IP includes patents

granted within the UK and Europeanpatent offices.

The UK regime goes further than

many countries in allowing profit from

products which include a patented item

and from patented processes.

It is intended to encourage

companies to locate high-value jobs and

activities associated with the

development, manufacture and

exploitation of patents in the UK.

The patent box will apply to existing

as well as new IP, and to acquired IPprovided that the group has further

developed it. This should potentially

benefit a wide range of companies which

receive patent royalties, sell patented

products, or use patented processes as

part of their business.

Thin capitalisation

Advanced thin capitalisation agreements

(ATCAs) are formal binding agreements

under the APA legislation and the

process is designed to help resolve

financial transfer pricing issues which

have a significant commercial impact onan enterprises results, where the issues

would be unlikely to be regarded as low

risk by Her Majestys Revenue and

Customs (HMRC), or where the arms

length provision is a matter of doubt.

The biggest advantage of having an

ATCA in place is the high level of

certainty that it provides.

The ATCA process represents a

pro-active way of managing UK tax

exposures on UK connected party debt.

A new draft ATCA has beenpublished as part of a new statement of

practice (SOP). This replacement

updates the legislative references and

reflects HMRCs current practice.

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The SOP includes a model ATCA to

ensure greater consistency between

agreements and hopefully shorten the

period of time it takes to reach an

agreement.

HMRCs recent statistics indicate the

median time to reach an ATCAagreement once submitted is currently

around seven months, i.e. 50% are

agreed within seven months.

More transfer pricing statistics

Delays in the resolution of transfer

pricing issues have in the past been a

major concern to large business

customers, but HMRC has been seeking

to improve this.

For the year 2010/11 the mediantime to resolve transfer pricing enquires

was just over 12 months and 50% of

APAs are agreed within 14 months. For

Mutual Agreement procedures the

median time to resolve cases is 19

months.

Wendy Nicholls

Grant Thornton UK

E [email protected]

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Whos who

ContributorsFernando Fucci

Grant Thornton Argentina

E [email protected]

Jason Casas

Grant Thornton Australia

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Michael Peggs

Grant Thornton Canada

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Rose Zhou

Grant Thornton China

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Karishma Phatarphekar

Grant Thornton India

E [email protected]

Paolo Besio

Grant Thornton Bernoni & Partners

E [email protected]

Toshiya Kimura

Grant Thornton Japan

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Ricardo Suarez

Grant Thornton Mexico

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Michiel van den Berg

Grant Thornton Netherlands

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Agnieszka Staniszewska

Grant Thornton Poland

E [email protected]

Nadya Zubkova

Grant Thornton Russia

E [email protected]

AJ Jansen van Nieuwenhuizen

Grant Thornton South Africa

E [email protected]

Gabriel Yakimovsky

Grant Thornton Spain

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Wendy Nicholls

Grant Thornton UK

E [email protected]

2012 Grant Thornton

International Ltd. All rights

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International Ltd, and is

for informational purposes

only. Neither the respectivemember firm nor Grant

Thornton International

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