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Managing Multiple Stakeholders in the New Economy

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Managing Multiple Stakeholders in the New Economy Transfer Pricing Perspectives/October 2013: A series of articles taking a broad look at the different transfer pricing requirements and unique challenges companies are facing all over the world. Managing multiple stakeholders in the new economy www.pwc.com/transferpricingperspectives Transfer pricing perspectives: Managing multiple stakeholders in the new economy Foreword In the current economic the number of interested The articles in this October environment, the continuing stakeholders is expanding. We now 2013 edition of Transfer Pricing priority for governments worldwide have to be prepared to manage Perspectives are designed to help you – and Western governments multiple stakeholders in this get the insights you need on transfer in particular – is for their tax new economy. pricing issues to equip yourself for systems to generate the level of the changes we’re sure to see. Garry Stone revenues they expect. Against this Add to this the impact on transfer background, the media, politicians pricing of OECD’s recently released Don’t forget our app, TP to Go to and NGOs worldwide have engaged Coordinated Action Plan on keep you up to date with the latest in a sometimes heated debate Base Erosion and Profit Shifting transfer pricing developments. about the ethics and legality of (BEPS), and it’s clear: The need for It’s available to download on most various multinationals’ tax policies, defensible transfer pricing policies devices. Search for it in your app often with significant impacts on is more important than ever. But store today. You can also sign up to the reputations of the companies it doesn’t end there. Not only do our PKN alerts and receive emails concerned. Our client conversations we need to ensure we are legally on the latest transfer pricing news. and 16th Annual Global CEO compliant, it is critically necessary Survey both confirm that tax has that we be perceived as doing I hope you enjoy this edition of moved up the agenda of business the right thing. The recent “tax Transfer Pricing Perspectives. leaders around the world. morality” debates taking place with respect to large US corporations Undoubtedly, the tax world will brought before government bodies continue to see a lot of change in are prime examples. No doubt, the next year – and for years after all these factors combine to make that. And as transfer pricing tops one thing clear: There will be Garry Stone more and more media headlines continuing changes in the transfer PwC (US) – and internationally coordinated pricing world for a long time Global Leader, Transfer Pricing efforts to aggressively collect taxes to come. [email protected] escalate even further – +1 312 298 2464 Transfer pricing perspectives: Managing multiple stakeholders in the new economy Contents Double jeopardy… Leading practices for South America: Dealing with local complexity managing double taxation risk in the oil and when applying global transfer pricing policies gas industry The impact of transfer pricing on real estate Global tax audits and disputes: New forces are funding – Mezzanine financing converging to form second wave The intersection of ERP systems and Industrial products transfer pricing Progress, but no guarantees for the consistent The politics of taxation treatment of intercompany financing transactions Transfer pricing symptoms of chronic Regulatory reform in the financial industry industry challenges and end-to-end transfer pricing execution Value chain transformation globalisation Russia’s new rules: Overview and maturity framework practical aspects Our transfer pricing territory contacts Transfer pricing perspectives: Managing multiple stakeholders in the new economy Leading practices for managing double taxation risk in the oil and gas industry Double jeopardy… Transfer pricing perspectives: Managing multiple stakeholders in the new economy Double jeopardy… Industry expansion leading direct benefit received by the local to greater costs Global oil and gas affiliate or disallow the deduction The significant expansion of expansion increases of the service fee for tax purposes oil and gas (O&G) companies need for industry player at the local level completely. In globally makes the need for alignment many cases, these decisions are industry players to align and made by the foreign tax authority coordinate local operations with unilaterally, not considering that corporate strategy greater than The OECD Guidelines provide for there may be potential implications ever. As a result, the majority of – and many countries, including under an existing income tax treaty. multinational energy companies the United States, require under incur significant general and their local transfer pricing rules – When this situation arises, a administrative expenses related charges for intercompany services company potentially could be to headquarters services rendered that provide or are intended required to pay tax twice on the on behalf of foreign affiliates. In to provide a benefit to related same income for the same period – addition to general management parties. Although specific rules in the local country which disallows and administrative activities in a jurisdiction may allow for the deduction and in the host including accounting, human certain expenses to be allocated country where the counterparty resources (HR), and information at cost, in some cases the services to the transaction must report the technology (IT) services, O&G are required to be charged with a income on its tax return and pay companies may also charge their mark-up. tax on that income. related parties for centralised quality, health, safety, and Tax authorities’ response to It is critical that corporate environmental (QHSE) support OECD charges finance personnel recognise that services, engineering and technical Many tax authorities are sceptical a disallowance of an otherwise services, and procurement of these charges – particularly those appropriate expense allocation or and logistics services – among including a mark-up – and impose charge has potentially far-reaching other functions – performed by local requirements mandating tax consequences and take action to corporate departments. documentation showing the remedy the situation. Transfer pricing perspectives: Managing multiple stakeholders in the new economy Double jeopardy… Certain disallowances can have significant tax consequences Many of the developing countries administrative, management, and • Sales and marketing, in which multinational O&G back office services. These shared including brand development companies operate do not have services may be executed through and management extensive treaty networks. As the parent company’s headquarters • Accounting, finance, and treasury such, remedies such as Competent or in one or more regional administration, including global Authority may not be available. service centres. cash management • Tax planning, reporting, Intercompany headquarters In addition to strategic compliance, and services management and corporate goal controversy support To capitalise on economies of setting, the services provided at the • Legal and general scale and remain cost competitive head office level may include but counsel functions in the global marketplace, O&G are not limited to: • Management information companies generally centralise systems and IT Transfer pricing perspectives: Managing multiple stakeholders in the new economy Double jeopardy… • HR, including expatriate activity. As a threshold matter, Issues raised by foreign personnel management, payroll, headquarters services must not tax authorities and benefits administration duplicate the activities performed Due to their heightened visibility, • Engineering and technical at the local level and be seen as O&G companies are on the radar support services providing a recognisable benefit to of tax authorities around the • QHSE programme development the recipient in order for a charge world. Increasingly, multinational and management to be made in most jurisdictions. enterprises are facing tax • Corporate structuring and authorities in many jurisdictions planning, including merger, – including member states of the divestiture and acquisition Services providing indirect OECD – taking aggressive positions planning and execution benefits to more than on audit to disallow the deduction • Purchasing, logistics, and one member often most of allocated headquarters services procurement, including asset and contentious charges. In the case of more materials management sophisticated tax authorities, the • Stakeholder relations, disallowance may be explained in a including investor, public and Services providing indirect well-reasoned manner. Conversely, media relations benefits to more than one in less advanced economies, no • Intellectual property member of a controlled group – justification may be offered at all. administration, including patent such as QHSE programmes and and trademark registrations company-wide asset management Historically, foreign tax authorities and defence activities – are often the most have challenged headquarters contentious as local tax authorities services charges on the basis of Broadly, headquarters activities are typically reluctant to accept lack of direct benefit received in can be bifurcated between those charges for activities which do not the local country, misallocation activities that provide a benefit appear to have a direct impact on of charges between affiliates, and to related parties and those the recipient. inappropriate
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