The document is a comprehensive introduction to transfer pricing, outlining its significance, U.S. regulations, and key concepts such as the arm's length standard and various testing methods. It discusses recent developments and hot topics related to transfer pricing, including audit triggers and best practices for compliance. Presented by Ed Morris from Clifton Gunderson, the document emphasizes the importance of thorough documentation and proactive planning in managing transfer pricing risks.

1. Transfer Pricing - Introduction Presented by: Ed Morris ASA, CBA, BVAL, CPA/ABV/CFF

2. About Clifton Gunderson One of the nation’s largest certified public accounting firms Founded in 1960 More than 1,900 professionals serving clients from 46 offices across the country

3. International Resources HLB International Clifton Gunderson is the largest HLB member firm HLB was founded in 1969 HLB is one of largest network of independent firms in the world Firms in over 100 countries Most firms ranked by fees as among the top 12 in its country More than 13,500 professionals in over 450 offices. Insures quality service via peer reviews

4. What Makes Us Different Growth of our people. Growth of our clients. All else follows…

5. Presenter Ed Morris Ed is a senior manager in Clifton Gunderson’s Valuation and Forensic Services Group and is located in Oak Brook, Illinois He has been providing national and international transfer pricing and valuation services for over 25 years Ed is a certified public accountant and a former small-business owner Earned accreditations from American Society of Appraisers of Accredited Senior Appraiser (ASA) Institute of Business Appraisers of Certified Business Appraiser (CBA) Business Valuator Accredited in Litigation (BVAL) American Institute of Certified Public Accountants of Accredited in Business Valuation (ABV) Certified in Financial Forensics (CFF)

6. Overview Overview of transfer pricing U.S. Transfer Pricing Regulations Transfer Pricing Hot Topics Recent Developments FIN 48 (ASC 740-10 ) and Transfer Pricing Audit Triggers Companies at Risk Best Practices Questions

7. Overview of Transfer Pricing

8. What is Transfer Pricing? Establishing the price charged for transactions between related entities Tangible property Intangible property Controlled services Financing arrangements

9. Why is Transfer Pricing Important?

10. Why is Transfer Pricing Important?

11. Countries with Transfer Pricing Rules

12. U.S. Transfer Pricing Regulations

13. U.S. Transfer Pricing Regulations §1.482-1 general guidelines for applying arm’s length standard; factors to be considered when determining comparability §1.482-2 establishes rules for determining taxable income for specific situations (loans & advances, services) §1.482-3 rules on tangible property transfers §1.482-4 rules on intangible property transfers §1.482-5 rules on comparable profits method §1.482-6 rules on profit split method § 1.482-7T rules on cost sharing agreements §1.482-8 examples of best method rule §1.482-9 rules on services

14. U.S. Transfer Pricing Regulations Key concepts Arm’s length standard - § 1.482-1(b) Best Method Rule - § 1.482-1(c) Comparability - § 1.482-1(d) Arm’s length range - § 1.482-1(e)

15. Transfer Pricing Testing Methods Transactional Comparable Uncontrolled Price Method (CUP) – Tangible property (TP) Comparable Uncontrolled Transaction Method (CUT) – Intangible property (IP) Resale Price Method (RPM) – TP Cost Plus Method (CP method) – TP Results Profit Split Method (PSM) – TP & IP Comparable Profits Method (CPM) – TP & IP

16. Transfer Pricing Testing Methods Controlled Services Services Cost Method (SCM) Comparable Uncontrolled Services Price Method (CUSP) Gross Services Margin Method (GSM) Cost of Services Plus Method (CP Method) Comparable Profits Method (CPM) Profit Split Method (PSM) Unspecified Methods

17. Transfer Pricing Reports Full transfer pricing studies Compliance transfer pricing studies Updates to full or compliance transfer pricing studies

18. Transfer Pricing International Standards Organization for Economic Co-Operation & Development (OECD) 30 member nations and 9 observer countries U.S. is a member nation No requirement to follow OECD guidelines Even if the country follows the OECD guidelines there is a lot of latitude for “customization” by each country

19. U.S. vs. OECD Primary differences U.S. uses Best Method concept OECD uses hierarchy to rank methods (may change based on Sept. 2009 proposed changes) U.S. penalties are defined but OECD leaves penalties to individual countries U.S. is rules based whereas OECD is principles based

20. Transfer Pricing Canada Canada Regulations Canada Revenue Agency (“CRA”) s.247 of Income Tax Act (“ITA”) Info. Circular (IC) 87-2 dated February 27, 1987 Methods used to test are the same except CPM referred to as “transactional net margin method” (“TNMM”) Application of methods can differ from U.S.

21. Transfer Pricing Canada Canada Uses OECD hierarchy – preference for transactions vs. results methods Often unbundles transactions (GlaxoSmithKline case) Usually year by year vs. multi-year average Use full range of comparable company data Commensurate with income concept

22. Transfer Pricing Canada Will U.S. report meet CRA requirements? Yes and No Generally yes but report must take into consideration differences such as: Year by year vs. multi-year Point within range vs. interquartile range Transaction vs. results perspective Treatment of stock options, stewardship and commensurate with income concept

23. Transfer Pricing Hot Topics

24. Transfer Pricing Hot Topics U.S. Sub of foreign parent Pricing of tangible goods Intangible royalties Interest rates on loans Extended terms on intercompany transactions Implications of tough economy

25. Transfer Pricing Hot Topics U.S. parent with foreign subs Controlled services Intangible asset pricing – buy-ins Loan guarantees and related fees Implications of tough economy

26. Recent Developments

27. Recent Developments United States President Obama’s FY 2011 budget includes changes to “taxation of multinationals” meaning increasing taxes and increased enforcement (audits). January 2010 – IRS Announcement 2010-9 revealed its intent to require certain large tax payers to disclose “uncertain tax positions” consistent with FIN 48 . July 2009 – Final controlled services regulations (Section 1.482-9) January 2009 – New Cost Sharing Agreement regulations (Section 1.482-7T)

28. Recent Developments International Ireland – February 2010 Irish Finance Bill requires taxpayers to develop transfer pricing documentation based on OECD guidelines with exemption for small companies. Hong Kong - December 2009 introduced transfer pricing framework generally following OECD guidelines. Austria – September 2009 new rules generally consistent with OECD. Greece – July 2009 enacted new transfer pricing documentation rules. Russia – April 2009 draft legislation on new transfer pricing rules and documentation. Each of above have January 2010 effective dates.

29. Recent Developments Court Cases March 2010 – US Court of Appeals issues new opinion in favor of Xilinx. December 2009 -Tax Court of Canada vacated assessment by CRA regarding guarantee fees paid to parent by GE Canada December 2009 – US Tax Court rules in favor of Veritas – key issue was buy-in cost in cost sharing agreement

30. FIN 48 ( ASC 740-10 ) and Transfer Pricing

31. ASC 740-10 and Transfer Pricing I have a Transfer Pricing Study (“TPS”) so I’ve met More Likely Than Not (MLTN) requirements. Yes or No?

32. It depends but probably NOT Most TPS demonstrate if taxpayer’s results are consistent with the “arm’s length standard” for penalty avoidance purposes. They do not meet the MLTN as they do not conclude on the likelihood of sustaining a position under audit. ASC 740-10 and Transfer Pricing

33. To meet the MLTN standard: Traditional TPS should be expanded to contain a conclusion that “transfer prices (policy) are sustainable on their merits if questioned by the taxing authority.” Additional review procedures for: Quality of documentation; Existence of intercompany agreements, advance pricing agreements (APA), etc.; Specifics of internal policies and procedures; Intercompany invoices, overall entity profitability; and Testing to determine whether actual charges or economic returns fall within the range of arm’s length results. ASC 740-10 and Transfer Pricing

34. Audit Triggers

35. Audit Triggers Audit Triggers – U.S. Lack of transfer pricing documentation Large dollar transactions with affiliates Royalty and/or payments for intangibles Intercompany services transactions Operating loss (especially multi-year losses) Large year-to-year shifts in the level operating profits or losses Transactions with companies/subsidiaries located in tax havens, or low tax countries such as Switzerland and Ireland.

36. Audit Triggers Audit Triggers - Canada Statements in Form T106 (statement with respect to transfer pricing documentation) Restructurings Consistent losses or low profits Management fees from foreign parent Services charges from foreign parent High intercompany royalty rates Affiliate located in country considered a tax haven

37. Companies at Risk Subsidiaries of foreign companies Companies with international operations Companies with operations in different states In short, any company with cross-border transactions

38. How to Address Risk Perform a Risk Diagnostic Review major intercompany transactions Assess local country requirements Compare current documentation and support Prioritize planning initiative and documentation Can apply 80/20 rule but that doesn’t mean IRS or other tax authority will

39. Best Practices Document, Document, Document Even bad documentation is better than no documentation Documents should be signed by parent and sub Planning Make setting of transfer pricing part of budgeting process Too late after year end to find out you have a problem. Don’t assume you are too small to be audited Transactions of less than $500,000 are regularly audited No materiality when dealing IRS or foreign tax authority

40. Ed Morris Clifton Gunderson LLP Oak Brook, IL (630) 954-8151 Ed.Morris@cliftoncpa.com