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Update on germany’s “relocation of functions” rules, sept2012

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Se slides fra Deloittes seminar om transfer pricing og international skat, september 2012.

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  • 1. Invitation Seminar on transfer pricing and international taxSeminar on Wednesday, 12 september 2012
  • 2. Update on German Developments Arm„s Length License RatesStephan Rasch, Deloitte Munich
  • 3. Arm‟s Length License Rates3 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 4. Arm’s Length License Rates Related Parties Licensee License Fee Licensor Discussion TP Methods • CUP/ CUT • C+ • Rules of Thumb • TNMM • Profit Split • Planning Data • Hypothetical Arm‟s Length Test4 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 5. Approach 1: Cost Plus ApproachConcept: License rate should allow the licensor to earn a fair return on its investment Year 1 Year 2 Year 3 Mark-up Mark-up Mark-up R&D R&D R&D = Royalty RateNumerical Example:Cost Plus Approach Year 1 Year 2 Year 3R&D Costs 10.00 10.00 10.00C+ Margin 10% 1.00 1.00 1.00Total 11.00 11.00 11.00License Base 200.0 200.0 200.0Royalty Rate 5.5% 5.5% 5.5%Critical Assumptions/ Comments• Value of IP does not have to relate to historic costs• May be more appropriate for an IP portfolio• Critical assumption of steady-state situation• How to deal if more than one licensee?5 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 6. Approach 2: CUP ApproachConcept: Internal or external comparable royalty rates are known. Year 1 Year 2 Year 3 3rd party 3rd party 3rd party 3rd party rate rate rate rate = Royalty RateNumerical Example:CUT Approach Year 1 Year 2 Year 33rd Party Royalty Rate 6.0% 6.0% 6.0%Royalty Rate 6.0% 6.0% 6.0%Critical Assumptions/ Comments• To find comparable licensing contracts could be regarded as difficult• Does not take into account the specific situation of the licensee and/ or licensor6 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 7. Approach 3: Acquisition Price/ Market Cap. MethodConcept: Market value of the IP licensed is available or can be deducted from an acquisition/ market.capitalization Year 1 Year 2 Year 3 Market Value of IP License Fee License Fee License Fee = Royalty RateNumerical Example:Acquisition Price Method Year 0 Year 1 Year 2 Year 3Acquisition Value of IP 30.00Useful Life of IP 3 YearsLicense Base 200.00 200.00 200.00Royalty Rate 6.1% 6.1% 6.1%License Fee 12.21 12.21 12.21Present Value Factor (discount rate=10%) 0.91 0.80 0.75PV License Fee 11.10 9.73 9.17NPV License Fees 30.00Critical Assumptions/ Comments• How does future R&D costs enhance the IP value• Useful life of IP critical assumption7 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 8. Approach 4: TNMM Based ApproachConcept: Licensee should earn arm‟s length profits based on benchmarking after license fees. Year 1 Year 2 Year 3 IP IP IP = Royalty Rate Routine Routine RoutineNumerical Example: TNMM Based Approach Year 1 Year 2 Year 3 EBIT Licensee before Royalty 10.00 10.00 10.00 Routine Remuneration 4.00 4.00 4.00 Residual Profit = License Fee 6.00 6.00 6.00 License Base 100.00 100.00 100.00 Royalty Rate 6.0% 6.0% 6.0%Critical Assumptions/ Comments:• Arm‟s length profits of the licensee can be reasonable determined through benchmarking• IP is the only non-routine value driver8 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 9. Approach 5: Residual Profit Split Based ApproachConcept: Profits are explained through routine functions performed, IP No. 1, and IP No. 2. Year 1 Year 2 Year 3 IP No. 1 IP No. 1 IP No. 1 IP IP No. 2 IP No. 2 IP No. 2 No.2 = Royalty Rate Routine Routine RoutineNumerical Example:Profit Split Approach Year 1 Year 2 Year 3EBIT Licensee before Royalty 10.00 10.00 10.00Routine Remuneration 4.00 4.00 4.00Residual Profit 6.00 6.00 6.00Allocabel to IP No. 1 25% 25% 25%Allocabel to IP No. 2 75% 75% 75%License Fee 4.50 4.50 4.50License Base 100.00 100.00 100.00Royalty Rate 4.5% 4.5% 4.5%Critical Assumptions/ Comments:• Routine profits of the licensee can be reasonable determined through benchmarking• IP considered is the only value driver• Gross profit split vs. net profit split (steady-state assumption)• Reliable determination of the allocation key9 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 10. Use of Databases and IntangiblesLimitation to be expected in Germany? (1)Problem:• German tax authorities challenge that the determination of an arm„s length remuneration for high-value and unique intangibles can be based on a CUT- related analysis from a database• German tax authorites argue that remuneration for intangibles needs to be determined based on the so-called hypothetical arm„s length test • Administrative Guidance on Relocation of functions, dated 13 October 2010 – IV B 5 S 1341/98/10003, German Federal Ministry of Finance: Section 69: Even if the prerequisities of an escape clause are fulfilled, „in case of high-value and unique intangible assets and benefits, the hypothetical arm‘s length test will have to be applied“. Section 65: […] „However, this does not suggest that under the hypothetical arm‘s length test license rates may be derived from data bases.“10 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 11. Use of Databases and IntangiblesLimitation to be expected in Germany? (2)• Administrative Guidance is binding for tax authorities only• It is currently under discussion whether this limitation will be transferred into law• It needs to be distinguished between the ultimate transfer of intangible assets (application of the hypothetical arm‟s length test) and the “pure” right of use that is granted to the transferee or licensee• Federal Ministry of Finance is currently drafting a decree law: transfer of intangibles and the appropriate method shall be determined – legally binding – for both taxpayers and tax authorities – expected to come in effect as of 1 January 2013 (timing not final)11 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 12. Update on Germany‟s “Relocation of Functions”- Rules12 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 13. Relocation of Business FunctionsOverview – Definition Tangibles: • Machinery • Stock, etcIntangibles: Function: Other advantages:• Product • Chances to be determined based• Process • Risks on profit potential• Marketing • Other advantages calculation  Residual Services: performed associated with function13 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 14. Business RestructuringOverview – Transfer Package Approach (1) Sum of individual Residual transfer prices Profit potential of “Goodwill” function as a associated with whole function = Transfer Services Package Intangibles Tangibles14 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 15. Business RestructuringOverview – Transfer Package Approach (2) Relocating Company Profit Potential Receiving Company Forecasted profit after tax (including dispensed Forecasted profit after tax (including received function) function) ./. Forecasted profit after tax (without dispensed ./. Forecasted profit after tax (without received function) function) = Difference = Difference x Capitalization rate x Capitalization rate = Purchase price claim = Willingness to pay (Minimum price of the provider) (Maximum price of the receiving company) Minimum price Mid price Maximum price 10 15 20 Range of possible agreement Sec.1 para. 3 sentence 7 FTC15 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 16. German Regulations on Business RestructuringsCalculation of Exit Charges – Single Asset Approach versusTransfer Package Approach  Do we have a relocation of Application of single asset functions under the legal valuation approach, § 1 Abs. 3 S. definitions, taking into account 1-8 AStG exemptions?    Does third party data for the „Escape-Clauses“ of § 1 Abs. 3 S. business transaction as a whole 10 AStG, related to transfer of exist which is unlimited/ limited significant intangibles, applicable? comparable?  Application of § 1 Abs. 3 S. 1-4  AStG as business transaction as a Valuation of Transfer Package with whole Hypothetical Arm‟s Length Test Result: Agreement on this price  Can a price be found within the Result: Agreement on Midpoint  price range which complies with the arm‟s length standard?16 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 17. Business RestructuringAllocation of risk - Trend in German tax audits• Determining whether the allocation of risks in a controlled transaction is arm‟s length – OECD perspective taken up in German tax audits The risk allocation in the controlled transaction is arm`s length Relevant, although not determinative factors: Is there reliable evidence Yes • Which party has of a similar allocation of Is the allocation of risk greater control over risk? risks in comparable uncontrolled No one that might be • Is the risk allocated to a transactions? expected to have been party which has the agreed between financial capacity to independent parties in assume it? comparable circumstances? Lacking such evidence, determine whether the riskSearch evidence of the actual allocation is one that would have been agreed betweenconduct of independent parties independent parties in comparable circumstances17 Update on German Developments © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 18. Ny juridisk dokumentations- vejledning18 © 2012 Deloitte
  • 19. Ny juridisk dokumentationsvejledning• Offentliggjort d. 16. juli 2012• Vejledningen fra 2006 (Transfer pricing; Kontrollerede transaktioner; Dokumentationspligt) er omskrevet og flyttet til Den juridiske vejledning (afsnit C.D.11)• Formålet med Den juridiske vejledning er at give en beskrivelse af og vejledning i de krav, som er fastsat i dokumentations- bekendtgørelsen• Den juridiske vejledning 2012-2 er en netbaseret udgave, som kan findes på www.skat.dk (Juridisk Information > Juridiske vejledninger)19 © 2012 Deloitte
  • 20. Ny juridisk dokumentationsvejledning• Indholdet i Den juridiske vejledning er i høj grad det samme som i vejledningen fra 2006• Baseret på SKATs erfaringer og de senere års udvikling på transfer pricing-området i Danmark, er visse formuleringer blevet præciseret, uddybet eller afkortet• Nye væsentlige bidrag til fortolkning og anvendelse af armslængdeprincippet i den nye 2010 udgave af OECD‟s Transfer Pricing Guidelines har også gjort det nødvendigt at opdatere og omskrive vejledningen fra 2006: − Nyt kapitel om ”business restructurings” (OECD Transfer Pricing Guidelines, Chapter 9) − ”Mest egnede” transfer pricing-metode fremfor hierarkisk model − 9-trins proces ved bedømmelse af transaktioners sammenlignelighed Impact for taxpayer20 Ikke mere konkret afklaring for skatteyder! © 2012 Deloitte
  • 21. Ny juridisk dokumentationsvejledningEksempler på omskrevne afsnit i dokumentationsvejledningen: C.D.11.4.2.5 Forklaring på eventuelle underskud C.D.11.4.10 Frist for at indsende ”…Beskrivelsen skal også indeholde dokumentation: en præcis og specificeret angivelse af ”Dokumentationen skal kunne underskuddets/tabets størrelse samt indsendes inden 60 dage. På en oversigt over resultater eller selvangivelsestidspunktet skal der avancer/tab i øvrige relevante således altid være udarbejdet en koncernenheder. Det skal fremgå af dokumentation, der gør dette muligt. oversigten eller en tilhørende I dokumentationsreglerne er det redegørelse, om virksomheden bærer forudsat, at dokumentationen underskud eller tab på aktiviteter eller udarbejdes løbende. På transaktioner, som andre selvangivelsestidspunktet skal virksomheder i samme koncern har dokumentationen således under alle overskud eller gevinst på”. omstændigheder være opdateret for det pågældende indkomstår”.21 © 2012 Deloitte
  • 22. Ny juridisk dokumentationsvejledningNyt APA afsnit i C.D. 11.7.3• Hvad er en APA og hvorfor anmode om det?• APA processen• Hvilke transaktioner kan dækkes af en APA?• Kan en APA fortrydes?• Hvor længe gælder en APA og kan den have bagudrettet virkning?22 © 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft
  • 23. International update23 © 2012 Deloitte
  • 24. OECD releases discussion draft on intangibles• The discussion draft contains proposed revisions to Chapter VI of Transfer Pricing Guidelines, “Transfer Pricing Considerations for Intangibles”• Effective retroactively from 1 January 2009• The discussion draft is organized into four sections: - Definition of intangibles; - Identification of parties entitled to intangible-related returns; - Defining transactions involving the use or transfer of intangibles; - Determining arm‟s length conditions or prices in cases involving intangibles. Impact for Transfer Pricing Due to its broad scope, the discussion draft could increase compliance costs,controversy and uncertainty regarding the allocation of intangible returns between multinational enterprises.24 © 2012 Deloitte
  • 25. Malaysia issues revised transfer pricing rules and new APA guidelines • Transfer pricing rules: − The rules are effective retroactively from 1 January 2009 − Apply equally to the transfer of tangible and intangible property, intragroup services, and financial assistance arrangements, such as loans and guarantees − Traditional transaction methods (CUP, Cost Plus and RPM) preferred to transactional profit methods (Profit split and TNMM) • Advance Pricing Arrangement (APA): − The APA rules are effective retroactively from 1 January 2009 − The minimum term of an APA will be three years, and the maximum term is five years Impact for Transfer PricingThe new rule sets reaffirm the IRB‟s increasing focus on intragroup transactions and 25 its pricing policies and is moreover broadening its area of assessment. © 2012 Deloitte
  • 26. Australia - Hearing on proposed retrospective transfer pricing law Australia‟s Parliament recently introduced a bill proposing reform of the country‟s transfer pricing rules: • Australia‟s government announced reforms to the country‟s transfer pricing rules last November, and has now introduced legislation to enact those reforms • The bill seeks to ensure retroactively that Australia‟s tax treaties can be applied (from 1 July 2004) to make transfer pricing adjustments independently of Australia‟s domestic transfer pricing laws • Also under consideration is a proposal to bring Australias transfer pricing rules fully into line with the current OECD- endorsed approach. Impact for Transfer PricingIn a future transfer pricing context, a practical impact for Australian multinationals willbe requiring OECD transfer pricing guidance to be used in framing intragroup pricing policies and documentation. 26 © 2012 Deloitte
  • 27. Advance Pricing Agreements in India:• Effective at 1 July 2012 in the Finance Act 2012• Transfer pricing audits in India are becoming increasingly aggressive, and it is estimated that in the latest (seventh) year of audits transfer pricing adjustments were made in more than 50 percent of the cases audited, with adjustments totaling approximately USD 9 billion• APA‟s to counteract the uncertainty caused by transfer pricing litigation• For multinationals in India, APAs can be an effective mechanism for obtaining certainty of tax positions in advance and avoiding protracted litigation resulting from transfer pricing audits Impact for Transfer PricingConsidering the uncertainty caused by transfer pricing litigation, the introduction of APAs is a step in the right direction.27 © 2012 Deloitte
  • 28. Norway – Annual Transfer pricing report Transfer Pricing Adjustments in 2011: • In 2011 there were fewer but more detailed and comprehensive transfer pricing audits in Norway • Although the number of audits decreased, the proceeds from adjustments in 2011 were double compared to 2010 • It is expected that this trend will continue and that multinationals will face far more aggressive tax authorities Key Focus Areas for 2012: • Focus on consistent loss-making enterprises; • Focus on PE‟s of banks; • Focus on cash-pooling arrangements; and • Focus on intragroup sales of „dry gas‟. Impact for Transfer PricingContinuing the trend of 2011, adjustments for transfer pricing audits are likely to further increase. This trend will confront multinationals with far more aggressive tax authorities. 28 © 2012 Deloitte
  • 29. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separateand independent entity. Please see www.deloitte.com/about or www.deloitte.com/de/UeberUns for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limitedand its member firms.Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms inmore than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex businesschallenges. Deloittes approximately 182,000 professionals are committed to becoming the standard of excellence.This presentation contains general information only, and none of Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft or Deloitte Touche Tohmatsu Limited (“DTTL”), any ofDTTL‟s member firms, or any of the foregoing‟s affiliates (collectively the “Deloitte Network”) are, by means of this presentation, renderingaccounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, norshould it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your financesor your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person whorelies on this presentation.© 2012 Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft