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Transfer Pricing WorkshopExperience in the wake of the Italian transfer pricing documentation requirements implemented in2...
Speakers  Milan      Michele Ghiringhelli – michele.ghiringhelli@crowehorwath.it      Gaetano Pizzitola – gaetano.pizzitol...
Agenda  TP: Corporate governance, tax risk management and tax planning       Intercompany transactions – the burden of tax...
Part OneTP: Corporate governance, tax risk management and tax planning
TP: Corporate governance, tax risk management and tax planning   Intercompany transactions – the burden of tax documentati...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AS A MEAN OF CORPORATE GOVERNANCE   Busines...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AS A MEAN OF CORPORATE GOVERNANCE   Transfe...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING – FUNCTIONS INVOLVED IN THE ANALYSIS       ...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING – INCOME TAXATION VS OTHER TAXES   Customs ...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND RISK MANAGEMENT   Corporate Governance:...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND RISK MANAGEMENT: AUSTRALIAN PRACTICE   ...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND RISK MANAGEMENT: AUSTRALIAN PRACTICE   ...
TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSEntities having a ...
TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSItalian Civil Code...
TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSInternational Acco...
TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONS   Italian Civil C...
TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONS   IAS 24: interco...
TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSItalian Civil Code...
TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND TAX PLANNING   Importance of the manage...
Part TwoCritical review of past experience
Critical review of past experience   Experience in the preparation of the documentation until FY 2010   Experience in tax ...
Critical review of past experiencesCRITICAL TRANSACTIONS   Management Fees  preliminary inherence and back up documentati...
Critical review of past experiencesFURTHER CRITICAL ASPECTS   TNMM  base costs, statutory vs fiscal        Italian tax pr...
Critical review of past experiencesEXPERIENCE IN TAX AUDITSPenalty protection          Adopted method                    ...
Critical review of past experiencesCASE LAW – Recently published cases            Sentence                               S...
Critical review of past experiencesCASE LAW   Tax Court decisions favorable to taxpayers in past years        Non sufficie...
Critical review of past experiencesEVALUATION OF THE TRANSFER PRICING DOCUMENTATION FROM A CRIMINAL TAX LAWSTANDPOINTTwofo...
Critical review of past experiencesTRANSFER PRICING DOCUMENTATION IN CASE OF BUSINESS RESTRUCTURING, BLACKLIST, ABUSE OF L...
Part ThreeTP Management: ex post documentary compliance and APA
TP Management: ex post documentary compliance and APA   The burden of (documentary) proof in Italy and in other Countries ...
TP Management: ex post documentary compliance and APAThe burden of (documentary) proof in Italy and in other Countries – c...
TP Management: ex post documentary compliance and APAPROS/CONS OF THE DIFFERENT APPROACHES                         Scenari...
TP Management: ex post documentary compliance and APA            Documentation - Pros                                  Doc...
TP Management: ex post documentary compliance and APAINTERNATIONAL TAX RULING – APA   Unilateral international tax ruling ...
TP Management: ex post documentary compliance and APA          INTERNATIONAL RULING                                     TP...
Conclusions
Conclusions  Impact of the new tax law  The transfer pricing dogmas and their limitations  Case by case evaluation pros/co...
Thank-YouFor participating and for Your contributions to the discussion - See you soon!Roundtables in the pipeline   May 2...
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Transfer pricing workshop March April 2012 - eng version

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Slide of our tax workshop on Italian transfer pricing developments and experience - March-April 2012

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Transfer pricing workshop March April 2012 - eng version

  1. 1. Transfer Pricing WorkshopExperience in the wake of the Italian transfer pricing documentation requirements implemented in2010 in view of the preparation of the financial statements and TP documentation for FY 2011 andbeyondMilan, March 15 and April 17, 2012Rome, March 21 and April 18, 2012
  2. 2. Speakers Milan Michele Ghiringhelli – michele.ghiringhelli@crowehorwath.it Gaetano Pizzitola – gaetano.pizzitola@crowehorwath.it Patrizia Occhiuto – patrizia.occhiuto@crowehorwath.it with the participation of Giusi Lamicela, Stefano Luvisutti and Antonio Sgroi Rome Gaetano Pizzitola Michele Ghiringhelli Daniele Sabatini – daniele.sabatini@crowehorwath.it Fabio Zampini – fabio.zampini@crowehorwath.it Francescomaria Serao – francescomaria.serao@crowehorwath.it with the participation of Giusi Lamicela, Luca Gasparrini, Marianna Delle Foglie and Marta Selicato Transfer Pricing Workshop - March-April 2012 2
  3. 3. Agenda TP: Corporate governance, tax risk management and tax planning Intercompany transactions – the burden of tax documentation and other corporate and regulatory compliance Interaction between tax functions and other business functions in the drafting of the group policy documentation Best practices in the implementation of a common strategy by both corporate tax functions and external tax consultants Critical review of past experience Experience in the preparation of the documentation until FY 2010 Experience in tax audits Case Law Evaluation of the TP documentation from a criminal tax law standpoint TP documentation in case of business restructuring, black list, abuse of law, and PE claims TP Management: ex post documentary compliance and APA The burden of (documentary) proof in Italy and in other Countries – consistent approach vs Country by Country approach? Pros and Cons of the different approaches Conclusions Transfer Pricing Workshop - March-April 2012 3
  4. 4. Part OneTP: Corporate governance, tax risk management and tax planning
  5. 5. TP: Corporate governance, tax risk management and tax planning Intercompany transactions – the burden of tax documentation and other corporate and regulatory compliance Interaction between tax functions and other business functions in the drafting of the group policy documentation Best practices in the implementation of a common strategy by both corporate tax functions and external tax consultants Transfer Pricing Workshop - March-April 2012 5
  6. 6. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AS A MEAN OF CORPORATE GOVERNANCE Business strategies Management and functional control Business value Market and shareholder minority expectations Directors’ Liability Transfer Pricing Workshop - March-April 2012 6
  7. 7. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AS A MEAN OF CORPORATE GOVERNANCE Transfer Pricing as a mean of coordination of business procedures Multilateral standpoint (parties participating to the transactions) and global standpoint (the company in its whole) TP Analysis only from a tax standpoint One-sided (one Country) and restricted to one business area only Transfer Pricing Workshop - March-April 2012 7
  8. 8. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING – FUNCTIONS INVOLVED IN THE ANALYSIS Finance HR Accounting Tax Legal IT Customs and VAT Operations External counselors Transfer Pricing Workshop - March-April 2012 8
  9. 9. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING – INCOME TAXATION VS OTHER TAXES Customs – arm’s length value and opposite aims with respect to corporate income taxation The concept of arm’s length value going towards international harmonization VAT and TP VAT Pro-rata Financial activity as a complementary or main activity Secondment and individual taxation Permanent establishment and VAT issues VAT-exempt activities Transfer Pricing Workshop - March-April 2012 9
  10. 10. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND RISK MANAGEMENT Corporate Governance: BoD’s tax liability Different forms of transparency towards shareholders (employees, Tax Authorities, external auditors, BoD) Transparency in TP policies Means used: Fin48, TP documentation (Master file e Country file), TP (self) risk assessment Transfer Pricing Workshop - March-April 2012 10
  11. 11. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND RISK MANAGEMENT: AUSTRALIAN PRACTICE Transfer Pricing Workshop - March-April 2012 11
  12. 12. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND RISK MANAGEMENT: AUSTRALIAN PRACTICE Transfer Pricing Workshop - March-April 2012 12
  13. 13. TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSEntities having a direct or indirect influence on the company so that the decision-making processis altered Protection of business assets Protection of market and shareholder interest Transparency and integrity of conduct Internal control rules aiming at the correct management of the company Transfer Pricing Workshop - March-April 2012 13
  14. 14. TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSItalian Civil Code: ensure business asset integrity for the protection of minority shareholders and ofthird party creditors Directors’ interests Intercompany transactions Content of the explanatory notes to the financial statementDirection and coordination Liability Advertising Reasons underlying the decisions Transfer Pricing Workshop - March-April 2012 14
  15. 15. TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSInternational Accounting Standard 24 – ensure that the financial statements are inclusive of thesupplementary information that show that its assets and financial situation together with itseconomic result may have been affected by the existence of related parties and of intercompanytransactions Information on intercompany transactionsCONSOB Regulation no. 17221 dated March 12, 2010 for companies listed in the stock marketand CONSOB Code of Conduct Transparency and substantial/procedural consistency of the transactions from which conflicts may arise Transfer Pricing Workshop - March-April 2012 15
  16. 16. TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONS Italian Civil Code: no fair value definition provided CONSOB Regulation no. 17221 (and amendments that followed), article 3, adopted as per article 2391-bis of the Italian Civil Code: “for equivalent conditions to market or standard ones” such as the “same conditions to those usually adopted with third parties for transactions of corresponding nature, size or risk, or based on prescribed rates or prices or those adopted on entities with which the issuer is obliged by law to contract at a certain price” Transfer Pricing Workshop - March-April 2012 16
  17. 17. TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONS IAS 24: intercompany transactions carried out at same conditions to those adopted in transactions between independent parties OIC 12: “arm’s length conditions” are not the quantitative conditions related to the price. Explanatory Report to the Decree: “arm’s length conditions” should not be considered only those related to the “price” of the transaction and to the related elements, but also the reasons that have led to the decision of closing the transaction with related parties as opposed to independent ones Transfer Pricing Workshop - March-April 2012 17
  18. 18. TP: Corporate governance, tax risk management and tax planningINTERCOMPANY TRANSFER PRICING TRANSACTIONSItalian Civil Code: no information concerning the kind of documentation that needs to be preparedwith reference to intercompany transactions is providedAs per article 5 of the CONSOB Regulation no. 17221 (and amendments that followed), “withreference to major transactions the companies prepare a document that provides relevantinformation and that is drafted in compliance to appendix no. 4” Transfer Pricing Workshop - March-April 2012 18
  19. 19. TP: Corporate governance, tax risk management and tax planningTRANSFER PRICING AND TAX PLANNING Importance of the management model Centralization Decentralization Impact of the globalization Importance of the FAR (Functions, Assets and Risks) Transfer pricing and business restructuring Consistency between contractual schemes and economic substance Transfer pricing as a mean of defense for the organizational structure of the group Transfer Pricing Workshop - March-April 2012 19
  20. 20. Part TwoCritical review of past experience
  21. 21. Critical review of past experience Experience in the preparation of the documentation until FY 2010 Experience in tax audits Case Law Evaluation of the TP documentation from a criminal tax law standpoint TP documentation in case of business restructuring, black list, abuse of law, or PE claims Transfer Pricing Workshop - March-April 2012 21
  22. 22. Critical review of past experiencesCRITICAL TRANSACTIONS Management Fees  preliminary inherence and back up documentation Royalties  determination of the arm’s length value Safe harbor’s limits Financial Transactions group’s rating and warranties Secondment  functional analysis OECD draft on Permanent Establishment (Art.5) OECD Commentary art. 15 Transfer Pricing Workshop - March-April 2012 22
  23. 23. Critical review of past experiencesFURTHER CRITICAL ASPECTS TNMM  base costs, statutory vs fiscal Italian tax principles, IAS, US GAAP, management reporting? Budget, Standard or Actual Cost? Gross margins functional compatibility and availability of financial data Comparables inclusion of companies subject to tax sector studies or simplified budget Comparables searches  pan- European vs domestic searches and reference period Transfer Pricing Workshop - March-April 2012 23
  24. 24. Critical review of past experiencesEXPERIENCE IN TAX AUDITSPenalty protection  Adopted method  Formal or substantial mistakes or omissions  Search selections’ criteria  Incoherence of the comparables functional profile  Lack of adequate informationPenalty application  Missing information on instrumental assets used  Incomplete documentation or incorrect informationImportance of an advanced cross examination: particular complexity/inadequacy reasonably notaccepted by the taxpayer/adjustment for an amount higher than € 10 million Transfer Pricing Workshop - March-April 2012 24
  25. 25. Critical review of past experiencesCASE LAW – Recently published cases Sentence Subject Outcome Regionale Lombardia 11/10 Functional profile Taxpayer Provinciale Reggio Emilia 134/11 Burden of proof / taxation levels Taxpayer Regionale Lombardia 69/11 Comparability Taxpayer Economic relevance / taxation Regionale Lombardia 63/11 Taxpayer levels Method and comparables’ Regionale Lazio 580/11 Taxpayer selection Regionale Lombardia 129/11 Method Taxpayer Cassazione 7343/11 Intercompany discounts Tax Authority Cassazione 2845/12 Burden of proof/Ius novorum Tax Authority Transfer Pricing Workshop - March-April 2012 25
  26. 26. Critical review of past experiencesCASE LAW Tax Court decisions favorable to taxpayers in past years Non sufficiently motivated and detailed tax audits Solid defenses based on substance Most TP judgments with analysis on factual elements Importance of a detailed defense based on facts Limited number of case law decisions Tax amnesty effect Adhesion and conciliations Unpublished cases? Recent Supreme Court judgments against taxpayers fully motivated on a factual/legal standpoint Corroboration of Court decisions based on a factual approach Inadequate factual defense by the Judge of Merits Is it realistic to expect such a favorable trend in the future? Transfer Pricing Workshop - March-April 2012 26
  27. 27. Critical review of past experiencesEVALUATION OF THE TRANSFER PRICING DOCUMENTATION FROM A CRIMINAL TAX LAWSTANDPOINTTwofold profile Transactions not justified by any economic reason Fraudulent misrepresentation Coincidence between factual reality and documentation content Quantification problems both in excess or in deficiency – exclusion as per article 4 of Legislative Decree 74/2000Relevance of the explanatory notes on intercompany transactions and lack of criminal intentaimed at tax evasionExplanatory Report to Legislative Decree 74/2000: taxpayer’s good conduct affects the evaluationon penalties in presence of specified criteria Transfer Pricing Workshop - March-April 2012 27
  28. 28. Critical review of past experiencesTRANSFER PRICING DOCUMENTATION IN CASE OF BUSINESS RESTRUCTURING, BLACKLIST, ABUSE OF LAW OR HIDDEN PE CLAIMS Transfer pricing documentation and economic substance of business restructuring transactions Transfer pricing documentation to prove black list exemptions Transfer pricing documentation and problems concerning the reclassification of PEs Transfer Pricing Workshop - March-April 2012 28
  29. 29. Part ThreeTP Management: ex post documentary compliance and APA
  30. 30. TP Management: ex post documentary compliance and APA The burden of (documentary) proof in Italy and in other Countries – consistent approach vs Country by Country approach? Pros and Cons of the different approaches Transfer Pricing Workshop - March-April 2012 30
  31. 31. TP Management: ex post documentary compliance and APAThe burden of (documentary) proof in Italy and in other Countries – consistent approach vsCountry by Country approach? Country by Country approach: obstacle to the free movement of people & capitals Country by Country approach: different compliance is anti-economic OECD: Chapter V of the 2010 Guidelines: “reasonable efforts” UE: Code of conduct of 2006 PATA: Documentation package of 2003 ICC: Sample Documentation Package of 2008 Transfer Pricing Workshop - March-April 2012 31
  32. 32. TP Management: ex post documentary compliance and APAPROS/CONS OF THE DIFFERENT APPROACHES Scenarios SanctionsAdequate documentation + communication NOAdequate documentation YES*Group’s documentation YES*No adequate documentation YESNo documentation YES Penalties – Tax Authorities tend to evaluate on a case by case basis “Acceptance” of the Tax Assessment Report vs invitation to the cross examination Tax settlement Conciliation Doubts on the compliance with the proportionality principle with respect to penalties* Transfer Pricing Workshop - March-April 2012 32
  33. 33. TP Management: ex post documentary compliance and APA Documentation - Pros Documentation - Cons Penalty protection Elimination of double taxation Misunderstandings from disclosure (MAP/Arbitration) Tax compliance positive impact on taxpayers’ Documentation compliance does not preclude risk assessment profile the risk of paying higher taxes (unlike APAs) Identification of the variables that have Costs and burdens for a regular information impacted on the determination of the transfer exchange within the group, dedicated prices (staff turnover etc.) functions, etc. Review of transfer pricing policy from a Further tax issues (eg.: hidden PEs, abuse of substantial and formal standpoint (contracts, DTTs) governance, etc.) Opportunity of counteracting specific issues Risks of penalties if documentation is deemed (eg.: deductibility of service charges, black- as not compliant list, CFCs) Case by case evaluation Transfer Pricing Workshop - March-April 2012 33
  34. 34. TP Management: ex post documentary compliance and APAINTERNATIONAL TAX RULING – APA Unilateral international tax ruling Bilateral APA in application of DTTs Transfer Pricing Workshop - March-April 2012 34
  35. 35. TP Management: ex post documentary compliance and APA INTERNATIONAL RULING TP DOCUMENTATION No risk of penalties – Certainty of the relationship between Tax Authority and Risks of penalties taxpayer Uncertainty of penalties due the Office’s Penalty Protection discretionary authority Validity: 3 years Validity: 1 year Selectivity transactions Generality of transactions No tax audit on transfer pricing Tax audit exposure Criminal risk prevention Criminal risk Case by case evaluation Transfer Pricing Workshop - March-April 2012 35
  36. 36. Conclusions
  37. 37. Conclusions Impact of the new tax law The transfer pricing dogmas and their limitations Case by case evaluation pros/cons submission of documentation Prospective approach to the TP documentation Review of the documentation prepared for the years up to 2010 Timing constraints and uncertainties because of detailed compliance rules Risk of Copy & Paste approach Master/Local vs Monster File Consistency of the TP methods adopted taking into account the company’s facts Impact of the economic recession and crisis Impact of the overall group policy Different approaches used by taxpayers and consultants during tax audits Defensive Preventive Pros of a robust defense during tax audit rather than after Transfer Pricing Workshop - March-April 2012 37
  38. 38. Thank-YouFor participating and for Your contributions to the discussion - See you soon!Roundtables in the pipeline May 2012: Monti Government Tax Reform Bill – Impact on multinationals June 2012: Business Restructurings under the OECD TP Guidelines, Chapter IX – Italian practice and experience (business purpose, permanent establishment, exit tax, black list and … transfer pricing - Best practice for tax risk management purposes)Crowe Horwath – Cross-Border Tax & Transfer Pricing Services – Milan – Rome Gaetano Pizzitola Michele Ghiringhelli Transfer Pricing Workshop - March-April 2012 38

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