Transfer pricing perspectives: Winds of Change - PwC

What does the shift in perceptionof limited risk entities undera centre‐led model meanfor taxpayers?To help mitigate potential claw‐back ofprofits to, or retention of profits by, limitedrisk entities under a principal model, athorough assessment of value drivers atthe local entity level and in the principalis required:• What has caused local entities’ results tobe outside an arm’s-length range?• Is it the result of local orprincipal‐led decisions?Taxpayers should supplement value‐driverassessments with a critical analysis of theirtransfer pricing model:• Is a profit/loss-sharing mechanismbeyond the typical ‘low risk’ positiveprofit range appropriate?• Can it be evidenced back toarm’s-length arrangements andcontractual agreement?In such circumstances, certainty of risk andthe profit outcomes of limited risk entitiesunder a business model may be obtainablethrough Advance Pricing Arrangements(APAs). APAs can give taxpayers certaintyunder a principal model and managepotential double‐tax exposures fornon‐treaty jurisdictions (e.g. Singaporeand the US).Exit charges… still evolvingIn some cases the transition by localbusiness units to a fixed return, limitedrisk model following VCT, is resulting inlong‐term reduction of local operatingreturns. Increasingly, the issue is a keyfocus of tax controversies in relation tobusiness restructurings arising fromVCT. It has led some revenue authoritiesto deem exit charges on restructures asa mechanism to claw back the loss ofpotential future earnings.In this regard, more than ever before,guidance to MNCs and revenue authoritiesnow exists as to how to consider andanalyse exit issues in the context ofVCT‐based restructures. In particular:• OECD Guidelines reflect a strongattempt to highlight the issues andprovide a framework with whichrevenue authorities should operate• Country-specific guidelines (e.g.Australia) and prescriptive approacheshave emerged (e.g. Germany).With the growing focus on exit charges,several new issues are gaining momentumthat will require specific focus by taxpayersimplementing principal‐based structures:• Are intra‐country exit chargesare applicable?• Is an employee an organisation-ownedasset – can an employee transfer createan exit charge?• Is simply deviating from the existingtrading model enough to trigger anexit charge?• What are the expectations of the partiesand does the transaction have realeconomic substance?Taxpayers should supplement value‐driverassessments with a critical analysis of theirtransfer pricing model20 Transfer Pricing Perspectives. October 2011