icing2015/16An easy to usereference guidecovering a rangeof transferpricing issuesin nearly 100territoriesworldwide.
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All information in this book, unless otherwise stated, is up to date as of 28 April 2015.This content is for general information purposes only, and should not be used as a substitute for consultation withprofessional advisors. 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is aseparate legal entity. Please see www.pwc.com/structure for further details.
PrefaceIsabel VerlindenIt is my pleasure to present the 2015/16edition of our International TransferPricing book. There have continued tobe significant changes in the area oftransfer pricing since our prior edition,with several new countries implementingeither formal or informal transferpricing documentation requirementsand significant regulatory changes inmany other countries over the pasttwelve months. Most significantly, thedeliverables released as part of theOECD’s Base Erosion & Profit Shifting(BEPS) Action Plan have resulted inthe need for enterprises to reevaluateand reconsider their transfer pricingstrategies in light of the proposednew guidance.Part 1 of the book provides a generaloverview of the global approachto transfer pricing issues. Part 2 isdevoted to a summary survey of specificrequirements of the key countries withtransfer pricing rules.We anticipate that this will be anothereventful year during which the subjectof transfer pricing will continue to beat the centre of continuing controversyin corridors of power and newspapereditor’s offices around the world. Acombination of public debates on theethics of tax planning, political andeconomic pressures, and increasinglywell trained tax examiners will allcontribute to a continuing rise in thenumber of transfer pricing disputesglobally especially as a growing numberof tax authorities attempt to enforce theirtransfer pricing rules more aggressively.It is PwC’s1 view that strategic disputemanagement (such as through disputeavoidance or alternative resolutiontechniques) on a global basis will becomeincreasingly crucial in companies’ effortsto sustain their global transfer pricingstrategies and to maximise efficienciesenabled by a constructive atmospherewith tax authorities.We look forward to working with you in2015 and beyond.Isabel VerlindenGlobal Transfer Pricing LeaderPwC Belgium 32 2 710 [email protected] my profile on Linkedin1 PwC refers to the PwC network and/or one or more of itsmember firms, each of which is a separate legal entity.www.pwc.com/internationaltpiii
PrefaceNick RabyThis book provides you with generalguidance on a range of transfer pricingissues. Technical material is updated witheach new edition and this book is correctas of 30 April 2015. This 2015 edition isthe latest development of a work begunover two decades ago and is now in its15th iteration.In addition to this reference book, manyof you will also require real-time access tocurrent information. Readers wishing toreceive e-newsalerts on current transferpricing can register for our Tax Insightsfrom Transfer Pricing. Given the numberof disputes and controversy issuesinvolving transfer pricing matters readersmay also be interested in a separate PwCservice Tax Insights from Tax Controversyand Dispute Resolution.The challenges facing multinationalenterprises in preparing documentationto demonstrate compliance withtransfer pricing rules across the globein accordance with the expectationsof each jurisdiction continues to grow.Most countries/territories have nowestablished documentation rules thatrequire companies to state clearly andwith supporting evidence why theirtransfer pricing policies comply with thearm’s‑length standard.ivA large number of jurisdictions havealso implemented strict penalty regimesto encourage taxpayers’ compliancewith these new procedures. Perhapsthe biggest practical difficulty facingtaxpayers in their efforts to abide by theserequirements, are the subtle differencesin transfer pricing documentationexpected across the various taxjurisdictions. These conflicting pressuresneed to be reviewed and managed verycarefully, both to meet the burden ofcompliance and to avoid costly penalties.Many of the world’s major taxjurisdictions have established aggressiveaudit teams to review compliance withthese documentation requirements andare exhibiting a new found willingnessto pursue transfer pricing adjustmentsthrough administrative appealsprocedures and even to litigation.Non‑compliance now comes with asignificant risk of being assessed withmaterial adjustments and penalties. Formany years, companies accepted nominaladjustments as a small price to be paid toget rid of the tax auditor. In the currentenvironment, however, adjustmentshave now become potentially so materialthat companies cannot simply write offassessed adjustments without recourse.These developments are reflected inthe increasing use of mutual agreementprocedures under bilateral doubletaxation agreements, or the ArbitrationConvention within the European Union,in order to seek relief from doubletaxation and unsustainable proposedadjustments. This, in turn, necessitates amore controlled and organised approachby companies to handle the audits asthey take place, to ensure the process isconducted efficiently and that any areaswhere the transfer pricing system isdeficient are corrected rapidly.International Transfer Pricing 2015/16
If these challenges were not enough, thesubject of transfer pricing has becomethe centre of a new public controversyon the issue of whether the current rulespermit multinational entities to pay lessthan their ‘fair share’ of the overall taxburden in some of the territories in whichthey operate. In addition to compliancewith a very technical and complex setof statutes, case law, regulations andguidelines, taxpayers may now needto evaluate the potential impact ofdecisions related to transfer pricing inmore subjective areas such as corporatereputation and public perceptionInthis book, my fellow authors and Idemonstrate that transfer pricing is amatter that is of fundamental importanceto multinational enterprises. It is vitalfor every company to have a coherentand defensible transfer pricing policy,which is responsive to the very realclimate of change in which companiesare operating. A sound transfer pricingpolicy must be developed within areasonable timescale and be investedin by both company management andprofessional advisers. It needs to be reexamined regularly to allow for changesin the business, perhaps as the result ofacquisitions or divestments of part of thegroup. Today, a properly coordinateddefence strategy is a basic necessityrather than an expensive luxury.We have tried to provide practicaladvice wherever possible on a subjectwhere the right amount of effort canproduce significant returns in theform of a competitive and stable taxburden, coupled with the ability todefend a company against tax auditorexamination. Naturally, no work of thisnature can substitute for a specialist’sdetailed professional advice on thespecific facts relevant to a particulartransfer pricing issue. However, ourhope is that, with the assistance of thisbook, you, the reader can approachinter-company pricing issues withgreater confidence.Nick Raby*PwC US 1 213 356 [email protected] my profile on Linkedin* Nick Raby is the principal in charge of transfer pricing services for PwCin the Western Region of the United States, and has extensive experiencein advising on transfer pricing and tax planning for multinationalcompanies. His international experience includes six years in London,and three in Brussels and Amsterdam.The author would like to thank the many transfer pricing specialists fromthe PwC international network who have contributed to this book. Specialthanks also go to the editorial team, Liz Sweigart and Dana Hart.www.pwc.com/internationaltpv
Table of contentsPart 1: Developing defensibletransfer pricing policiesIntroduction. 3Categories of inter-company transfer. 9The work of the OECD. 25Establishing a transfer pricing policy– practical considerations. 47Specific issues in transfer pricing. 71Managing changes to a transferpricing policy.101Dealing with an audit of transferpricing by a tax authority.115Financial services.121Transfer pricing and indirect taxes. 139Procedures for achieving anoffsetting adjustment.157The OECD's BEPS Action Plan.165viPart 2: Country-specific issues .183Argentina. 185Australia. 203Austria.219Azerbaijan. 231Bahrain. 237Belgium. 239Brazil. 259Bulgaria. 275Cameroon, Republic of. 281Canada. 287Chile. 303China.313Colombia. 333Congo, Democratic Republic of. 347Congo, Republic of. 351Costa Rica. 355Croatia.361Czech Republic. 367Denmark.375Dominican Republic. 389Ecuador. 395Egypt. 403El Salvador. 407Equatorial Guinea.411Estonia.415Finland. 421France. 433Georgia.461Germany. 467Ghana. 481Greece. 487Guatemala. 499Hong Kong. 503Hungary.511International Transfer Pricing 2015/16
Iceland. 521India. 525Indonesia. 551Iraq. 563Ireland. 567Israel. 583Italy. 589Ivory Coast (Côte d’Ivoire).613Japan.617Jordan. 631Kazakhstan, Republic of. 635Kenya.641Korea, Republic of. 647Kuwait. mbourg. 683Madagascar. 689Malaysia. 695Mexico. 709Moldova. 729Mongolia. 733Namibia. 739Netherlands.743New Zealand.761Nigeria. 775Norway. 785Oman, The Sultanate of.815Palestinian Territories.819Peru. 821Philippines. 833Poland. 843Portugal. 853www.pwc.com/internationaltpQatar. 863Romania. 867Russian Federation. 875Saudi Arabia, Kingdom of. 885Singapore. 889Slovak Republic. 903Slovenia. 909South Africa.915Spain. 927Sri Lanka. 939Sweden. 953Switzerland.961Taiwan. 969Tanzania. 977Thailand. 985Turkey. 993Turkmenistan.1007Uganda.1011Ukraine.1015United Arab Emirates.1025United Kingdom.1027United States.1055Uruguay.1091Uzbekistan, Republic of.1107Venezuela. 1111Vietnam. 1119Zambia.1131Zimbabwe.1139Contacts.1143vii
GlossaryAdvance pricing agreements(APAs): Binding advance agreementsbetween the tax authorities and thetaxpayer, which set out the method fordetermining transfer pricing for intercompany transactions.Arm’s-length principle: Thearm’s‑length principle requires thattransfer prices charged between relatedparties are equivalent to those that wouldhave been charged between independentparties in the same circumstances.OECD’s Base Erosion and ProfitShifting (BEPS) Action Plan: Aprogramme introduced by the OECD inJuly 2013, that established 15 actionsrelated to harmonising and coordinatinginternational tax and transfer pricingrules across jurisdictions.Berry ratio: A ratio sometimes used intransfer pricing analyses, equal to grossmargin divided by operating expenses.Comparable profits method (CPM):A transfer pricing method based onthe comparison of the operating profitderived from related party transactionswith the operating profit earned bythird parties undertaking similarbusiness activities.Comparable uncontrolled price (CUP)method: A method of pricing based onthe price charged between unrelatedentities in respect of a comparabletransaction in comparable circumstances.viiiCompetent authority procedure: Aprocedure under which different taxauthorities may consult each otherto reach a mutual agreement on ataxpayer’s position.Cost plus method: A method of pricingbased on the costs incurred plus apercentage of those costs.Double taxation treaty: A treaty madebetween two countries agreeing on thetax treatment of residents of one countryunder the other country’s tax system.Functional analysis: The analysis of abusiness by reference to the location offunctions, risks and intangible assets.GATT: General Agreement on Tradeand Tariffs.Inland Revenue: The UK tax authority.Intangible property: Property thatis not tangible, e.g. patents, knowhow, trademarks, brands, goodwill,customer lists.Internal Revenue Service (IRS): The UStax authority.OECD: The Organisation for EconomicCooperation and Development.OECD Guidelines: Report by the OECDon transfer pricing entitled ‘TransferPricing Guidelines for MultinationalEnterprises and Tax Administrations’,published in July 1995, with additionalchapters subsequently issued.International Transfer Pricing 2015/16
Patent: Legal protection of a productor process invented or developed by theholder of the patent.Trade name: A name or logo associatedwith a particular company or groupof companies.Permanent establishment (PE): Ataxable business unit. Exact definitionsvary in different countries and accordingto different double taxation treaties.Transactional net margin method(TNMM): A transfer pricing methodbased on an analysis of the operatingprofit derived by a business from aparticular related party transaction orgroup of transactions.Profit split method (PSM): A methodof pricing where the profit or loss ofa multinational enterprise is dividedin a way that would be expected ofindependent enterprises in a jointventure relationship.Resale price method (RPM): A methodof pricing based on the price at which aproduct is resold less a percentage of theresale price.Royalty: A payment (often periodic) inrespect of property (often intangible),e.g. a sum paid for the use ofpatented technology.Tangible property: Physical property,e.g. inventory, plant, machineryand factories.Thin capitalisation: A situation in whicha company has a high level of borrowingrelative to its equity base. The term isusually used when the high levels of debtare derived from related companies.Trademark: A name or logo associatedwith a particular product.www.pwc.com/internationaltpix
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1.IntroductionAt the eye of the ‘perfect storm’Globalisation and the rapid growth of international trade has made inter-companypricing an everyday necessity for the vast majority of businesses. However, the growthof national treasury deficits and the frequent use of the phrase ‘transfer pricing’ in thesame sentence as ‘tax shelters’ and ‘tax evasion’ on the business pages of newspapersaround the world have left multinational enterprises at the centre of a storm ofcontroversy. Tax authorities have made the regulation and enforcement of the arm’slength standard a top priority (see Chapter 7, Introduction for commentary on the auditapproach to pricing matters in a number of countries). A key incentive for challengingtaxpayers on their transfer prices is that the authorities see transfer pricing as a softtarget with the potential to produce very large increases in tax revenues. Since there isno absolute rule for determining the right transfer price for any kind of internationaltransaction with associated enterprises, whether it involves tangibles, intangibles,services, financing or cost allocation/sharing arrangements, there is huge potential fordisagreement as to whether the correct amount of taxable income has been reported ina particular jurisdiction. While the existence of tax treaties between most of the world’smajor trading nations might lead the casual observer to conclude that internationaltransfer pricing is a ‘zero sum game’ where an adjustment in one jurisdiction will bematched by the granting of corresponding relief at the other end of the transactio