Transfer Pricing Latest Updates

NIRAJA SRINIVASAN, DELL TECHNOLOGIES

CYNTHIA J. HOFFMAN, BLOOMIN’ BRANDS, INC.

SEPTEMBER 27, 2016

1

Transfer Pricing Highlights

Base Erosion & Profit Shifting (“BEPS”)

OECD Published 15 Actions/Guidelines

Proposed Treasury Regulations Under

Section 385

Related Party Financing Arrangements

2

Base Erosion & Profit Shifting (“BEPS”)

Broadly Aimed at Aligning Taxable Income with Value Creation

4 Actions Related Specifically to Transfer Pricing

Action 13 – Transfer Pricing Documentation & Country by Country

Reporting

o Aimed at Reporting Transparency

Action 8 – Intangible Asset Structuring

Action 9 – Risk and Capital

Action 10 – High Risk Transactions

o Actions 8-10 Aimed at setting Standards for Substance

3

BEPS Action 13 Guidance

Action 13 focuses on Transfer Pricing Documentation and Includes the

Country-by-Country Report (CbCR).

Three-tier framework

providing information on

global allocation of income,

economic activity and

intercompany pricing across

a company’s global

operations.

Applies to all multinational

enterprises (MNEs) with

aggregate annual revenue

in excess of $900m.

Tier One: Master File

Overview of Business and Tax/TP Model, IP, Key Drivers of Profit – by Product Line and Geography

Tier Two: Local File

Tier Three: Country by Country (“CBCR”)

4

Summary of Financial + HR Data to Calculate Allocation of Income by Jurisdiction

Legal Entity TP Report, Tying LE Pre-Tax Income to its Operations and Risk Profile

Country by Country Reporting

In General:

Tables 1 and 2 can be publicly disclosed (UK Proposal, Sept 2016)

Voluntary Disclosure May Push Submission timeline to early 2017 (FYE and

country dependent)

Disclosure formats and info sharing mechanism still not clear

Required to reconcile with regulatory and statutory reporting

Build Tools to assist with reconciling

Timing of statutory financial statements may be too late to comply

Tie all together with 5471 & Transfer pricing documentation and reports,

legal documentation and accounting

5

Country by Country Reporting

IRS issued final regulations, effective for US MNE parent with tax

year beginning on or after June 30, 2016

IRS issued draft Form 8975 in August 2016

For tax years beginning before June 30, 2016, US ultimate parent can voluntarily file

Required to reconcile with 5471, statutory F/S filings, and

Regulatory Filings

Building Tools to map US GAAP or Local Stat accounts to CBCR

fields

Timing of CBCR submission and statutory financial statements may

be too late to comply

Standing up X-functional Teams for multiple CBCR prep each year

6

What are companies

doing now?

Country by Country Reporting

Assessing Audit Risk/Defense

Ratio Comparisons

Formulary Apportionment scenarios

Anticipating questions that will come

from tax authorities

Drafting responses and TP

documentation

7

What are companies

doing now?

BEPS – What’s Next?

Actions 8, 9, 10 Substance

Transfer Pricing Outcomes and Value Creation

Action 8 - Intangibles

New definition of intangibles

New guidance on HTV

intangibles

Action 9 – Risk & Capital

Control over risk

Capacity & functionality to manage risks

Action 10 – High-risk Transactions

Intra-group Services

Low-tax Jurisdictions

8

US 482 Regs vs. OECD BEPS Positions on IP

482-7 – Cost Sharing based on Reasonably Anticipated Benefits

482-9 – Cost Plus Remuneration for R&D Service Providers; Legal & Economic Ownership separation is respected

OECD BEPS

Focus on Value Creation

Economic Ownership asserted over Legal Ownership

Value-creating entities across the supply chain are entitled to share of profit

US 482 and OECD BEPS A Balancing Act

9

Monitoring BEPS … What’s Hot, What Not (Yet)

•       Action 1 –  Address tax challenges of the digital economy 

•       Action 2 –  Neutralize effects of hybrid mismatch arrangements 

•       Action 3 –  Design effective controlled foreign company rules 

•       Action 4 –  Limit base erosion via interest deductions and other financial payments 

•       Action 5 –  Counter harmful tax practices more effectively, taking into account transparency and substance  

•       Action 6 –  Prevent granting of treaty benefits in inappropriate circumstances 

•       Action 7 –  Prevent artificial avoidance of permanent establishment status 

•       Actions 8, 9, 10 –  Align transfer pricing outcomes with value creation 

o   Action 8 –  Intangibles 

o   Action 9 – Risks and capital

o   Action 10 – Other high- risk transactions

•       Action 11 –  Measure and Monitor BEPS 

•       Action 12 –  Mandatory Disclosure Rules 

• Action 13 – Transfer Pricing Documentation and Country by Country Reporting

•       Action 14 –  Make dispute resolution mechanisms more effective 

•       Action 15 –  Develop a multilateral instrument to modify bilateral tax treaties

Action 1 Taxation of Digital Economy

Action 2 Hybrid Mismatches

Action 3 CFC Rules

Action 4 Interest Deductions

Action 5 Counter Harmful Tax Practices

Action 6 Abusing Treaty Benefits

Action 7 Artificial Avoidance of PE

Action 8 Intangible Asset Structures

Action 9 Risk and Capital

Action 10 Other High Risk Transactions

10

Monitoring BEPS … What’s Hot, What Not (Yet)

Action 13 TP Documentation and CbCR

Action 14 Dispute Resolution Mechanisms

Action 15 Multilateral Instrument

Action 11 Measuring BEPS compliance

Action 12 Mandatory Disclosure Rules

11

Transfer Pricing Highlights

Base Erosion & Profit Shifting (“BEPS”)

OECD Published 15 Actions/Guidelines

Proposed Treasury Regulations Under

Section 385

Related Party Financing Arrangements

12

Proposed Treasury Regulations – Section 385

Contemporaneous documentation requirement (Prop. Reg. Sec. 1.385-2)

Applies to “large expanded groups to “expanded group indebtedness” (“EGI”)

Effective for debt instruments issued on or after date finalized regulations are issued

Documentation prepared within 30 days after issue date (or date becomes EGI)

Penalty for failure is recharacterization of debt as equity

Identify WHO performs documentation

Satisfaction of document requirements does not ensure debt treatment (it is a minimum standard)

“Significant Modification” – deemed new debt issuance

Issued April 4, 2016 Application to Related Party Financing

13

“Expanded Group Indebtedness”

Add Other Entities, including held indirectly

Foreign

Tax Exempt

Affiliated Group (1504(a))

Ownership of 80% vote, OR

Ownership of 80% value

14

“Expanded Group Indebtedness”

US Parent

US Sub

Foreign Sub

US Sub

US Partnership

Foreign Sub

15

Loan USD

Documentation Requirements –1.385-2(b)(2)

Legally binding obligation

Creditor’s right to enforce terms

Evidence of ability to repay at

issuance & annually

Timely interest & principal payments

with default provisions

Four categories of

documents required for

related party financing

instruments to be

respected as debt

16

Documentation Requirements -1.385-2(b)(2)

Special Documentation Required – Revolvers & Cash Pools

Enabling and governing documents and agreements must be maintained

• BOD resolutions, credit agreements, etc.

• On-going operations of the arrangement or services

Trade Payables? Open Accounts?

How much documentation is enough?

Controlled Partnerships (> 80% of capital and profits interest)

Treated as members of the expanded group

Treated as an partnership equity interest if debt treated as stock

17

Other Issues Facing TP

Intra-company Management fees

Non-Deductible Expenses (Brazil management fees)

Documentation Supporting Benefits (Mexico, India)

Local taxes (VAT) on IC charges can drive up real expenses

Withholding tax documentation

18

Questions? 19