Transfer pricing perspectives: Winds of Change - PwC

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As MNCs look to Asia to drive theirglobal revenue and profits, countriessuch as China and India are mindful ofthe importance of their markets and willseek to attribute more profits to theirjurisdiction. As emerging markets, they willseek to challenge and to develop new andinnovative means to achieve this outcome,for example, expansion of permanentestablishment concepts and locationsavings. Revenue authorities in headquarterlocations such as Singapore will alsoseek to build substance in their countryand will zealously guard any attempt toallocate or transfer profits out through theuse of purely tax driven structures to taxhaven countries.In order to manage the increasinguncertainty in transfer pricing across theAPAC region and to strive for known taxtreatment of complex business structuresor changes, MNCs are once again looking toengage with tax authorities prospectivelywith the greater use of Advance PricingArrangements (APAs). APAs are bindingadvance agreements between the taxauthorities and the taxpayers that set outthe method for determining transfer pricingfor specified inter-company transactionsunder specified conditions.In the past, transfer pricing documentationprovided MNCs with a front line of defenceshould the tax authorities come knockingon their doors. Increasing levels of scrutinyand disclosure requirements globally arenow challenging MNCs to manage their taxrisk more proactively. The ever evolvingand increasingly complex tax environmentand uncertain tax disclosure requirements,is forcing global tax directors to thinkbeyond the traditional transfer pricingdocumentation and to consider how tomanage their tax and transfer pricing riskswith greater certainty.Revenue authorities are increasinglyfocused on scrutinising operatingstructures perceived to lack “economicsubstance”, and the new chapter inOrganisation for Economic Corporationand Development (OECD) guidelines fortransfer pricing on business restructuring(Chapter IX) has given tax authoritiesclear guidelines on how to approach suchissues. Tax authorities in the APAC regionare applying these principles in testingwhether MNCs are implementing businesstransactions which are operationallydriven, not merely tax driven. Japan,China, and Singapore tax authoritieshave clearly stated these requirements inbilateral APA cases. In short, the messageto MNCs is not to rely just on traditionaltransfer pricing documentation butalso to ensure that there is evidence ofthe operational changes/benefit thatunderlie any tax benefits associated withbusiness change. This is the test that taxauthorities in these countries are using innegotiating APAs.The remaining discussion in thisarticle provides a snapshot of the APAdevelopments in APAC countries wherewe assess the countries in terms of thecomplexity of their local transfer pricingenvironment and their relative experienceon bilateral/multilateral APAs. Thediscussion also includes a statisticalrepresentation of the total bilateral/multilateral APAs concluded by therespective countries. 1Revenue authorities are increasinglyfocused on scrutinising operatingstructures perceived to lack“economic substance”1Statistics provided up to 2009 based on information published by revenue authorities in the region.58 Transfer Pricing Perspectives. October 2011
As can be observed from the diagramopposite . tax authorities in the APAC regionhave varying degrees of experience in APAnegotiations and outcomes. However, thatdoes not necessarily coincide with the levelof attention and scrutiny given to intercompanyarrangements by the revenueauthorities. This potentially presents achallenge to many MNCs considering APAsas a strategy to manage their tax risk in theAPAC region.Considering this snapshot of issues andthe overview provided above of APAs inthe APAC region, a number of questionsmay arise for MNCs. If a company hasundertaken business restructuring forits APAC operations for example, howshould APAs be utilised strategically tomanage associated tax risks? What aboutMNCs who have not undertaken businessrestructuring but have a stable businessand transfer pricing model though areprone to challenge by the tax authorities– is an APA an option for them? Would itmean that taxpayers in countries whichhave significant experience in negotiatingbilateral APAs, will experience fewer issueswhen approaching the tax authorities for anAPA? For countries that are still in the earlystages of developing an APA programme,should taxpayers still be looking at APAsas a way to manage tax/transfer pricingrisks? Fundamentally, given the disparityin the APA experience and approach ofdifferent APAC tax authorities, can taxdirectors in the region use APAs effectivelyas a cornerstone to support their transferpricing policy?There are no easy answers to the questionsabove. However, it is interesting to notethat many MNCs have navigated the abovechallenges to their advantage to managethe risk proactively by strategically usingthe APA regime.It is a known fact that many MNCs haveset up regional headquarters or tradingoperations in Singapore and that incometax rates in Singapore are predominantlylower than the income tax rates of themajority of Singapore’s primary tradingpartners. Despite this, the Inland RevenueAuthority of Singapore (IRAS) is increasingits focus on transfer pricing issues. Thetreaty provisions and the domesticprovisions enable the IRAS to acceptrequests from taxpayers to enter APAs.What does this mean for MNCs who useSingapore as regional headquarter locationand in many cases restructure theirbusiness operations to use Singapore as ahub for inter-company trading activities?Figure 1Overview of APAC APA landscape7006005004003002001000 8 13 0India (NA) 3Singapore (2006)China (2002)Indonesia (2010)127Total number of bilateral/multi-lateral APA cases concluded by 2009 - bycountry (start year of APA programme)Australia (1991)685Japan (1997)2The statistics are based on certain published information and some other information which comes, to the best of our knowle.g. from our interaction with the tax authorities.3N.A. refers to not applicable.Transfer Pricing Perspectives. October 201159
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2 Transfer Pricing Perspectives. Oc
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Russia adopts new transfer pricing
Page 9: Starting in 2014, domestic related-
Page 15 and 16: The trend of centralisation in mult
Page 17 and 18: The new frontier - centre-led model
Page 19 and 20: Limited risk entities and true‐up
Page 21 and 22: Is it possible to mount an argument
Page 23 and 24: Value Chain Transformation -beyond
Page 25 and 26: Governments around the globe are fo
Page 27 and 28: ProcessesTransfer pricing managemen
Page 29 and 30: TPi - Data ManagementMost multinati
Page 31 and 32: ConclusionTPi changes the historic
Page 33 and 34: The question of who takes risky dec
Page 35 and 36: Why cost plus might be the wrongpol
Page 37 and 38: It is not easy to deal with risk in
Page 39 and 40: ConclusionIt will not always be the
Page 41 and 42: Perspectives on risk from GermanyIn
Page 43 and 44: Perspectives on risk from IndiaThe
Page 45 and 46: In 2008, we published an article en
Page 47 and 48: The taxpayer will also want to unde
Page 49 and 50: Proactive preparationTransfer prici
Page 51 and 52: Dealing with risk assessmentsMuch o
Page 53 and 54: Once a taxpayer has identified its
Page 55 and 56: ConclusionAlthough it goes without
Page 57: The Asia Pacific (APAC) region is i
Page 61 and 62: As more transactions involve Singap
Page 63 and 64: AuthorsSpencer ChongPartner, PwC Ch
Page 65 and 66: Conceptualising the challengeIntra
Page 67 and 68: During the course of recent transfe
Page 69 and 70: Passive associationIn performing a
Page 71 and 72: ConclusionsTransfer pricing for fin
Page 73 and 74: Let’s talk business realities!Whi
Page 75 and 76: The appropriateness of using a trad
Page 77 and 78: Following the completion of the rev
Page 79 and 80: Finally, another concern raised rel
Page 81 and 82: Transfer Pricing developments in th
Page 83 and 84: Transfer Pricing Perspectives. Octo
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