ey - finalized tp documentation · pdf fileintroduction: snapshot of new tp documentation...

Finalized TP Documentation Framework

From policy to implementation – are you in control?

Agenda

1. Introduction: Snapshot of new TP documentation rules

2. Conversion: “BEPS proof” TP documentation in FY16

3. Focus items: CbC reporting and Transparency management

4. Practical issues and our experiences up to date

5. Take aways: key action points

Appendices

From policy to implementation – are you in control? 3 november 2015

1. Introduction Snapshot of new TP documentation rules


BEPS Action 13 Three-tiered approach laid down in OECD TP Guidelines chapter V

Master File High level information about group’s business, global TP

policies and agreements with tax authorities, available to

all tax authorities where the client has operations

Local File Detailed information about the local business, including

related party payments and receipts for products,

services, royalties, interest, etc

Country-by-Country Report High level information submitted annually about the

jurisdictional allocation of profits, revenues, employees

and assets

Implementation

Master / Local File: to be delivered or

maintained directly by the client to all tax

authorities in countries where it does

business

Filing: generally ultimate parent to file CbC

report in jurisdiction of residence

Timing: First set of CbC reports to be filed

by 31 December 2017 for fiscal years

beginning on 1 January 2016 or (in other

cases, the term for filing will be one year

from the close of the fiscal year)

Final BEPS deliverables: released on 5

October 2015

Dutch legislation: proposals issued on 15

September 2015

(Additional local compliance requirements may apply)


Transfer pricing process life cycle


?

3 november 2015

Application of Action 13 Frontrunners


More countries to follow…


2. Conversion “BEPS proof” TP documentation in FY16


Main changes Consistency and transparency


1 Description of full

global value chain and

global policies in the

Master File

Reconciliation of TP

methodology to local

annual accounts in the

local files

Coverage of ALL material

inter-company

transactions =>

Products, services, IP,

finance

Disclosure of unilateral

APA’s and other tax

rulings 2

3

4

Alignment between:

► Master file and local file

► Each individual local file

► Master file, local files and

CbCR

► Three tiered TP doc, TP

policies and contracts

3 november 2015

What do you think?

Do you have a complete

overview of all intercompany

transactions, including

financial transactions?


Full Action 13 cycle – EY Approach Global versus Regional / Local

Local compliance requirements

Cb

CR

L

oca

l F

ile

le

ve

l M

ast

er

File

le

ve

l

CbCR

Other Local Files

Other Local Files

TODAY TOMORROW

Additional BEPS

content

Local File for European HQ

European Master File

BEPS

Global policy considerations

Single point of contact / accountability

New Global Master File

Additional BEPS

content

Additional BEPS

content

New under BEPS

WHO?


TP documentation cycle Timing is everything


BEPS scan

CBCR risk assessment

Gap

analysis

Transition plan

Global master file

Today 31 Dec 2016

Implementing new documentation guidance

1 Jan 2016

Preparation phase

31 Dec 2017

First

CbCR filing

Local

files (incl. template)

Finalize

local file

Compliance and Reporting – automated?

Continuous Monitoring

3 november 2015

Suggested approach Step 1 : be prepared

► Large groups: consolidated revenue exceeds EUR 750 million CbCR

► Medium groups: consolidated revenue between EUR 50-750 million new

► Small groups: consolidated revenue below EUR 50 million old (8b CITA)

& & CbCR risk

assessment Gap

analysis BEPS scan

Transition plan

Optional Recommended Must have Must have


Practical tool: a local compliance requirements questionnaire covering all

countries you have presence in

3 november 2015

Preparation results in transition plan Including a heat-map and documentation strategy

► EY recommends to develop a heat-map to determine which countries require the most attention and

resources in view of the Local Country Files

Materiality Controversy

attitude

Local

regulations

Documentation requirements

Heat map – determine focus and priority for Local Country File documentation

Transfer pricing landscape Business landscape

Transfer pricing

complexity

Ongoing contro-versy

CbC Reporting risk profile

The CbCR assessment output

should be included in the heat-

map development to address any

potential “outliers” identified


TP

Ris

k

Materiality

3 november 2015

Step 2 = drafting documentation “new style” Full or “light” scenarios possible

Regulatory landscape

► Domestic legislation in place which differs

significantly from OECD TP Guidelines

Documentation landscape

► Documentation requirements in place

which significantly deviate from Action 13

► Documentation to be provided with tax

return / upon very short notice in audit

Controversy landscape

► High audit risk

► Strict penalty regime

Business landscape

► Significant presence in country

► High CbCR risk, based on assessment

OECD Master File only?*

Full Local File

Local File template + building

blocks


► No TP legislation, or in line with

OECD TP Guidelines


► No specific local documentation

requirements


► Low audit risk

► No / low penalty regime

Business landscape

► Limited / moderate presence in

country

► Low CbCR risk, based on

assessment


► TP legislation in line with OECD TP

Guidelines


► In line with Action 13 OECD standard

► Documentation to be provided with tax return

/ upon relative short notice in audit


► Moderate audit risk

► Low / moderate penalty regime

Business landscape

► Moderate / significant presence in country

► Moderate CbCR risk, based on assessment

1 2 3

* In countries where new Action 13 legislation is already announced / implemented, only a Master File is no longer sufficient


Step 3 = monitoring and transparency Pro’s and con’s of new style documentation

► Can be drafted in building blocks => easier to maintain

► Can be used to explain and tailor local deviations

► Provides insights and continuous monitoring tool => more control

► Can trigger disputes due to high level of detail and inconsistencies

► First time conversion takes considerate time and effort (2016)

► Benchmarks in Local files

► Decentralized tax process becomes more challenging

-

+


What do you think?

Do you think

conversion will take

much more of your

time?


3. Focus items CbC reporting and Transparency management


Action 13 - CbCR EY’s CbCR Methodology – Three Phases

Phases

Actions

Risk and

Readiness

Analysis

Compliance

and Reporting

Continuous

Monitoring

► CbC Reporting ‘dry run’ using most recent available data

► Identify anomalies and potential areas of controversy

► Define remediation strategy

► Implementing robust processes for data collection and reporting within current IT infrastructure

► Run different iterations of data analysis to decide on appropriate sources

► Reduce surprises by monitoring CbC Reporting position

► User and administrator guides and training manuals

► Feedback summary

► Develop overview of IT landscape for CbCR

► Identify challenges in the ‘real world’ for CbCR

► Early identification of system/data gaps

► Build overall CbCR data inventory

► Identify controls and processes for future state CbCR

► Propose solutions to address final data and process challenges

► Implement final data / system solution within the current IT infrastructure

► Configure CbCR Data repository for Tax

► Deliver CbC report, master and local file reports

An

aly

tic

s a

nd

c

om

pli

an

ce

Syste

ms a

nd

D

ata

TP & ITS TP & GCR & TPA

TP & GCR & TPA


Are you prepared for the outcome? Case study 1: Financing / holding companies

Brief scenario description

A multinational group operates through local OpCos

which pay interest and royalty to a central financing /

holding company (established in a low-tax jurisdiction

with minimal substance).

Scenario Illustration

Main focus area

The Tax Director of the group is aware that significant

income is routed through the holding jurisdiction.

But how will tax authorities see this in the future?

Financing / holding jurisdiction

Certain

holding/financing

jurisdiction (e.g. the

Netherlands) may have

high income entities.

Such high incomes may

be explained by

financing / royalty

structures in place.

Is it possible to

defended such

structures?

The graphs of the CbCR

tool allow for a quick

analysis which

countries may raise

attention and questions

from tax authorities


Are you prepared for the outcome? Case study 2: Significant branch income


A multinational group operates through local sales

support branches which are remunerated on a cost-plus

basis.


Main focus area

Regardless of the relatively low cost-plus remuneration,

significant revenue may be generated in the branch

countries. Can you use the CbCR for internal

monitoring and / or to determine TP strategy?

It is important to

focus on revenues in

branch countries.

Internal monitoring:

Head office may

‘hide’ behind branch

revenues

TP Strategy: Heat

map to determine the

focus on TP local

files.

Head office

Branch countries


Are you prepared for the outcome? Case study 3: Consistency of margins


A multinational group operates through limited risk

distributors in a number of jurisdictions. As per the TP

policy, all limited risk distributors should earn a 5%

operating margin.


Main focus area

The TP policy is just the ‘starting point’.

Is the TP policy correctly implemented?

The CbCR

assessment will

provide a clear

overview on

implementation.

Increased exposure

when a settlement is

made in a

controversy case –

for example for a 7%

operating margin.


Are you prepared for the outcome? Case study 4: Unexpected high ETR


A multinational group operates through limited risk

distributors in a number of jurisdictions.


Main focus area

The CbCR review shows that certain entities pay

significantly higher taxes than expected.

The CbCR review

may be used for

internal / business

review purposes.


4. Our experiences up to date


Master file Practical experience – questions from clients

► Should TP doc already be “BEPS proof” or not?

► How to deal with Netherlands already implementing Action13 guidance in their domestic law, but

HQ jurisdiction not yet

► European tax director: “it is the responsibility of HQ now, not (or no longer) mine”

► Consistency

► Are your (regional) master files telling a consistent story when one is compared to the other?

► Are you master files fully aligned with your local files?

► Exchange of information

► “I already have a master file today – what is so new about this?”

► Already having a pre-Action Point 13 master file in place is not the same as being prepared for proactive exchange

of that document

► Portfolio companies – Global HQ with several independently operating BUs

► “Do we need one master file?”

► One document vs cross references

► “I want to have a separate document for FS TP transactions”

► Does the concept of a regional / European Master File still exist?

► The content that used to be in the European master file will now be contained in the local file in the country

where the European HQ is located


Local file Practical experience – questions from clients


► “If you were me, would you prepare a full local file in every European country where I have

operations?”

► Is a template enough? Penalty protection vs more controversy ready

► Local files could meet minimum (local) requirements only, to avoid reversal of burden of proof and penalties, or

more robust local files could be prepared to be ready for controversy that will surely increase within Europe

► One-sided analysis no longer sufficient

► Describing a policy for HQ services is part of the master file; the detailed substantiation of the actual charges

(i.e. the implementation of that policy) is part of the local file

► What will really change? - Consistency & transparency

► Consistency between different local files (i.e., more central coordination) becomes increasingly important

► Have you seen different behaviour from tax authorities? - Implementation

► Tax authorities are shifting their focus from TP policy to actual implementation of that policy

► Localized benchmark studies vs pan-European

► In TP audits, some local tax authorities are increasingly asking for local comparables

► My auditor asks my tax advisor to review the TP policy, is this sufficient for them to sign off?

3 november 2015

Questions and practical points on CbCR

Have you run a pilot program yet? And if so, how will you

address potential anomalies or risks in your model/data?

Did you think about automating the compliance process?

Have you designed a process to identify and manage the

various national implementations yet?

Would public dissemination of information potentially cause

risk or reputational damage?

Is it clear who will be responsible for CbCR – tax, finance,

tax accounting?

Are your internal policies/communication protocols

prepared for a push for global consistency of all the TP

docs?

Questions to ask

Accounting

standard

differences

Timing and

responsibility

Dealing with

PEs

Spikes or

outliers? Consistent

results?

Opportunity

to use

broader


What do you think?

What stage are you

currently at?


What stage are you at? End-to-end process

Actions

Phases

1

Risk assessment

Feasibility study

► CBCR risk

assessment (tax audit

simulation)

► Prioritization / heat

map

► Account / data

mapping

► Gap analysis

► Feasibility study

► Roadmap / business

case

2

Conversion

Implementation

► Conception of group

specific solution

► Design and

implementation of

related business

processes / workflows

► Design and

implementation of

data interfaces

► Definition of reporting

3

Sustainable

reporting

► Consistency among

master and local files

and CbC report

► Preparation and

maintenance of

reports incl. audit trail

► Reporting manual

► Compliance

management


5. Take aways: key action points


Which actions will you take tomorrow?

Prepare

• Include work in FY16 tax budget

• Large: CbCR risk assessment & policy

Convert

• Large and medium: GAP analysis

• Documentation strategy & execution

Monitor

• Strategy for transparency management and controversy, data gathering process


Appendices


Masterfile – what’s new? Information required

Organizational

structure Business description Intangibles

Intercompany

financial activities

Financial and

tax positions

Structure chart:

► Legal

ownership

► Geographic

location

Important drivers of business profit Overall strategy

description

Financing

arrangements for

(related and

unrelated) lenders

Annual consolidated

financial statements

Supply chain of:

► Five largest products/

services by turnover

► Products/services generating

more than 5% of sales

List of important

intangibles and legal

owners

Identification of

financing entities

List and description

of existing unilateral

APAs and other tax

rulings

Main geographic markets

of above products

List of important

intangible

agreements

Details of financial

transfer pricing

policies

List and brief description of

important service arrangements

R&D and intangible

transfer pricing

policies

Functional analysis of principal

contributions to value creation by

individual entities

Details of important

transfers

Business restructuring/

acquisitions/divestitures

during fiscal year


Local file – what’s new? Information required

Local file – information required Local entity Controlled transactions Financial information

► Management structure

► Local organization chart

► Details on individuals to

whom local management

reports

► Description of material controlled transactions and

context in which they take place

► Identification of associated enterprises party to

controlled transactions and relationship

► Functional analysis

► Transfer pricing methods used

► Comparables and details of methodology

Local entity financial statements

Description of business and

business strategy pursued

Amounts of intra-group payments and receipts for

controlled transactions (i.e., products, services,

royalties, interest, etc.)

Reconciliation to show how financial

data used in applying the transfer

pricing method ties to the financial

statements

Details of business

restructurings and/or intangible

transfers

Unilateral and bilateral/multilateral APAs and other tax

rulings related to the controlled transactions

Summary of relevant financial data

for comparables and sources from

which data was obtained

Key competitors R&D and intangible transfer pricing

policies

Details of important transfers


CbC reporting in three tables Table 1 template

Tax

jurisdiction

Revenues Profit (loss)

before

income tax

Cash tax paid

(CIT and

WHT)

Current year

tax accrual

Stated

capital

Accumulated

earnings

Tangible assets

other than cash

and cash

equivalents Number of

employees

Unrelated

party Related party Total

1.

2.

3.

4.

5.

6.

7.

Etc.

Notes: ► Aggregated rather than consolidated data

► Flexibility in data sources allowed

► Entity data aggregated on the basis of tax residence

► Revenue defined to include turnover, royalties, property, interest

► Revenue specifically excludes intercompany dividends

► Profit/loss before income tax includes extraordinary items

► Cash tax paid includes tax withheld by other parties on payments to the constituent entity

► Current year tax accrual is tax on current year operations only

► Number of employees may include external contractors


ey - finalized tp documentation · pdf fileintroduction: snapshot of new tp documentation...

Documents