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Learn OECD guidance on business taxation in multiple countries A business that is not aware of all of its exposure to the tax policy of each country in which it does business may find itself paying more in taxes that the share of profit it generates. The Organisation for Economic Co-operation and Development (OECD) seeks to reduce the risk of business taxation in multiple countries. Transfer Pricing Handbook explores how countries can apply the OECD Guidelines to tax businesses that conduct their endeavors in more than one country. It is the ultimate comprehensive guide for companies doing business globally. * Helps companies properly price their goods and services for global markets * Provides defenses for transfer pricing audits * Provides standards for creating comparables that multijurisdictional tax administrations will accept * Guides documentation requirements and timing issues If you're doing business in more than one country, Transfer Pricing Handbook is a must-have, essential guide for simplifying OECD regulations for your global company.
Robert Feinschreiber (Key Biscayne, FL) is an attorney with Feinschreiber and Associates. He has had numerous career highlights (e.g., member of the litigation team for the first Asian transfer pricing case (Toyota)). In addition, he is a consultant with the United Nations (Brazil, China, and Russia). Feinschreiber is on the editorial board of Wolters Kluwer - CCH, and Thomson - RIA. He has written over 25 books and is the co-editor of Corporate Business Taxation Monthly (CCH). He speaks at numerous conferences in the United States and Asia. Margaret Kent (Key Biscayne, FL) is an attorney with Feinschreiber and Associates. She focuses on law and international taxation. She has been involved in a number of international transactions (i.e., structured the termination of the $2 billion per year aid from Russia to Cuba; structured transfer pricing in Latin America: Argentina, Chile, Colombia, Costa Rica, and Venezuela). Kent is also the co-editor of Corporate Business Taxation Monthly (CCH).
PART I: BASIC TRANSFER PRICING STANDARDS 1 Chapter 1: Introduction 3 Control 4 Tax Havens 5 Complexities 5 Chapter 2: Arm s Length Principle 7 General Explanation of the Arm s Length Principle 8 Formal Statement as to the Arm s Length Principle 10 Comparability Considerations 11 Rationale behind the Arm s Length Principle 11 Compensation Issues 12 Applying the Arm s Length Principle to Contribution Analysis 13 Oligopolistic Conditions 14 Transactions That Independent Enterprises Would Not Undertake 15 Administrative Burdens of the Arm s Length Principle 15 Maintaining the Arm s Length Principle as the International Consensus 16 Rejection of Alternative Transfer Pricing Approaches 17 Notes 18 Chapter 3: Arm s Length Range 19 Single-Figure Approach to the Arm s Length Range 19 Reliability Requirement 20 Comparability Considerations 20 Consequences of Applying More Than One Transfer Pricing Method 21 Selecting the Most Appropriate Point in the Range 22 Extreme Results: Comparability Considerations 23 Notes 24 Chapter 4: Safe Harbor Simplification 27 Safe Harbor Burdens and Benefits 28 Defining Safe Harbor 29 Scope of the Safe Harbor Provisions 30 How Arbitrary Are the Safe Harbor Provisions? 31 Factors Supporting the Use of Safe Harbors 31 Problems That Safe Harbors Present 33 Multiple Jurisdictions 39 Possibility of Opening Avenues for Tax Planning 40 Statistical Data and a Safe Harbor Example 40 Undertaxation 41 Safe Harbor Principles 41 Equity and Uniformity Issues 41 Recommendations as to the Use of Safe Harbors 42 Safe Harbors as Surrender of the Tax Administration s Discretionary Power 43 Flexible Practices 43 Country-Specific Practices 44 Comprehensive Example 44 Notes 45 Chapter 5: Modifying Safe Harbor Simplification 47 The Study 47 Eleven Specific Transfer Pricing Measures 48 Notes 55 Chapter 6: Global Formulary Apportionment 57 Profit Split Methodologies 58 Global Dealing 58 Attack on Global Formulary Apportionment 58 Impact of the Arm s Length Principle 59 Comparing Global Formulary Apportionment with the Arm s Length Principle 60 Double Taxation 60 Lack of a Common Accounting System 61 Factor Selection 62 Transitional Issues 62 Economic Issues 62 Impact of Exchange Rate Movements 63 Compliance Costs and Data Requirements 63 Valuation Difficulties 64 Separate Entity Approach versus Global Formulary Apportionment 64 Bilateral Tax Treaties 65 Members of the Multinational Group Excluded from Global Formulary Apportionment 65 OECD s Rejection of Non Arm s Length Methods 66 Safe Harbors 66 Notes 67 PART II: TRANSFER PRICING METHODOLOGIES 69 Chapter 7: Transactional Profit Split Measures 71 Transactional Profit Split Method Concepts 72 Strengths and Weaknesses of the Transactional Profit Split Method 73 Availability of Comparables in Applying the Transactional Profit Split Method 74 Importance of Functional Analysis in Applying Transactional Profit Split Methods 74 Transactional Profit Split Method Weaknesses 75 Applying Transactional Profit Split Methods 76 Guidelines Profit Splitting Approaches 77 Determining the Combined Profits to Be Split 79 Actual Profits versus Projected Profits 80 Different Profit Measures When Applying the Transactional Profit Split 81 How to Split the Combined Profits 82 Reliance on Comparable Uncontrolled Transactions Data 83 Allocation Keys 83 Reliance on Internal Data 86 Conclusions as to Transactional Profit Split Methods 88 Notes 89 Chapter 8: Profit Split Illustrations 91 Three Basic Assumptions 91 Three Residual Profit Split Alternatives 92 Commentary 96 Notes 97 Chapter 9: Residual Profit Split Examples 99 Presumptions and Preconditions 99 Essential Factual Pattern Conflict 100 Functional Activities 100 Selecting Transfer Pricing Approaches 101 Applying the Residual Profit Split Approach 101 Drafters Disclaimer 104 Contribution Approach 104 Notes 105 Chapter 10: Transactional Net Margin Method 107 Initial TNMM Considerations 107 How the Transactional Net Margin Method Works 108 TNMM Reliability 109 Strengths of the TNMM 110 Weaknesses of the TNMM 111 Applying the Comparability Standard to the TNMM 112 Database Issues: The Audio Player Example 114 Impact on the Arm s Length Range 114 Selecting the TNMM 115 Selecting the Net Profit Indicator 115 Exclusion and Measurability 120 Cases in Which Net Profits Are Weighted to Sales 120 Cases in Which Net Profits Are Weighted to Costs 121 Cases in Which Net Profits Are Weighted to Assets 123 Berry Ratios 124 Other Guidance 126 TNMM Examples 126 How the OECD Views the TNMM 128 Notes 128 Chapter 11: Selecting Profit Indicators 133 Illustration 1 134 Illustration 2 136 Illustration 3 138 Notes 139 Chapter 12: Selecting Transfer Pricing Methods 141 When Can a Business Apply a Multisided Transfer Pricing Method? 142 When Should a Business Not Apply a Multisided Transfer Pricing Method? 144 PART III: COMPARABILITY ANALYSIS 147 Chapter 13: How Comparability Analysis Works 149 Determining When Transactions Are Comparable 149 Factors and Comparability 152 Functional Analysis 155 Economic Circumstances 161 Business Strategies 162 Return on Investment 164 Recognizing the Actual Transactions Undertaken 165 Associated Enterprises and Independent Enterprises: In Contrast 167 Alternatively Structured Transactions 167 Losses 168 Multinational Enterprises 168 Implementing Business Strategies 169 Impact of Governmental Policies 170 Notes 173 Chapter 14: Comparability Techniques 177 General Comparability Guidance 177 Typical Comparability Processes 179 Broad-Based Analysis of the Taxpayer s Circumstances 181 Controlled Transaction and Choice of a Tested Party 181 Comparable Uncontrolled Transactions 188 Selecting or Rejecting Potential Comparables 193 Additive Approach 193 Comparability Adjustments 196 Arm s Length Range 199 Notes 202 Chapter 15: Timing and Comparability 205 Timing of Origin 206 Timing of Collection 206 Valuation That Is Highly Uncertain 207 Data from Years Following the Year of the Transaction 208 Multiple-Year Data 208 Compliance Tools 210 Notes 210 PART IV: ADMINISTRATIVE APPROACHES 213 Chapter 16: Transfer Pricing Audits 215 Transactional Profit Split Method 216 Simultaneous Tax Examinations and Transfer Pricing 216 Tax Arrangements 217 Potential Levels of Cooperation between Tax Administrations 218 Examples 220 Notes 224 Chapter 17: Monitoring the Guidelines 227 Understanding the Monitoring Process 228 Method Selection 228 Specific Monitoring Processes 229 Working Party No. 6 Peer Reviews 229 Three Peer Review Levels 230 Peer Review Selection Criteria 231 Difficult Case Paradigms 231 Biennial Members of Tax Examiners 232 Business Community Involvement 233 Business Industry Advisory Committee 233 Business s Role in Contributing to the OECD 235 Peer Reviews and the Business Community 235 Business Community s Updates on Legislation and Practice 236 Role of the U.S. Council for International Business 236 Notes 237 PART V: ADVANCED OECD ANALYSIS 239 Chapter 18: Documentation Requirements 241 Introductory Issues and Burden of Proof 241 Guidance on Documentation Rules and Procedures 242 Useful Information for Determining Transfer Pricing 244 Summary of Recommendations on Documentation 245 Notes 245 Chapter 19: Intangible Property 247 Basic OECD Intangible Property Provisions 247 Future Intangible Property Developments 248 Arm s Length Intangible Property Issues 249 OECD Intangible Property Developments 249 Soft Intangibles 250 Highly Uncertain Valuation Issues 250 Steps That an Independent Enterprise Might Undertake to Resolve Uncertainty 251 Tax Administrator s Response 253 Timing Considerations 254 OECD Highly Uncertain Valuation Examples 254 What the OECD Should Do Now 259 Notes 260 Chapter 20: Service Arrangements 263 Overview 263 Scope of Intragroup Arrangements 264 Shareholder Activities and Stewardship Activities 267 Adjusting to the Form of the Arm s Length Consideration 270 On Call Services 270 Evaluating On Call Services 271 Determining an Arm s Length Charge for the Intragroup Service 272 Including Service Costs in the Transfer of Goods 275 Double-Taxation Risks 276 Examining the Actual Use of the Services 276 Calculating the Arm s Length Consideration 276 Applying Transfer Pricing Methods 277 Functional Analysis 278 Business Strategies: Profits for the Service Provider 278 Applying the Cost-Plus Method for Intragroup Services 279 Cost-Benefit Issues and Safe Harbor 280 Intragroup Service Examples 281 Specialized Services 283 Multinational Service Enterprises 283 Specialized Service Industries 284 Applying the Transactional Profit Split Method to Services 284 Notes 285 Chapter 21: Cost Contribution Arrangements 289 Overview 289 Cost Contribution Arrangement Criteria 291 Mandatory CCA Arm s Length Requirements 296 Applying an Applicable Allocation Key 300 Tax Treatment of Contributions and Balancing Payments 302 Entry, Withdrawal, and Termination of a Cost Contribution Arrangement 306 Recommendations for Monitoring and Structuring Cost Contribution Arrangements 309 Documentation 310 Notes 312 Chapter 22: Business Restructuring 315 Special Risk Considerations 316 Compensation for Undertaking the Restructuring 318 Postrestructuring Remuneration 321 Recognition of the Actual Transactions Undertaken 323 Notes 325 PART VI: PUTTING THE GUIDELINES TO WORK 327 Chapter 23: Malaysia-Singapore Allocation Keys 329 Importance of Allocation Keys 329 When the Transactional Profit Split Method Is the Most Applicable Transfer Pricing Method 330 Specialized Services 331 Applying the Transactional Profit Split Method 332 Four Allocation Key Categories 333 Key Functions 333 Selecting Potential Allocation Keys 334 Selecting among Allocation Keys 336 Strong Correlation Standard 337 Allocation Keys 337 Transfer Pricing Strategies 342 Notes 343 Chapter 24: China-Taiwan Trade 345 Taiwan and China: A History Lesson 345 Tax Considerations 348 Transactional Profit Split Method Criteria 352 APA Process 355 Notes 356 Chapter 25: Reverse Engineering the Transfer Pricing Process 357 Transactional Profit Split 358 Simultaneous Tax Examinations and Transfer Pricing 358 Tax Arrangements 359 How the Reverse Engineering Transfer Pricing Process Works 367 Functional Analysis Considerations 369 Transactional Profit Split Method 370 Success Parameters to the Reverse Engineering Process 370 Synergistic Activities 371 Undertaking Multijurisdictional Production Processes 372 Engaging in Extensive R&D Activities 373 Dealing in Unique Intangibles 374 Participating in a Cost Contribution Arrangement 374 Creating or Providing Specialized Services 375 Distributions of Generic Goods or Standardized Goods 376 Contract Manufacturers and Contract Service Activities 377 Planning 377 International LP Gas Companies Face Multinational Tax Claims 377 Multinational Service Enterprises 379 Notes 380 PART VII: CONNECTING TRANSFER PRICING AND PERMANENT ESTABLISHMENT 383 Chapter 26: Permanent Establishment Parameters 385 OECD s Permanent Establishment Provisions 386 Overall Tax Considerations 388 OECD Approach to Determine Permanent Establishment 389 Hong Kong Applies the OECD Permanent Establishment Provisions 389 Common Law Permanent Establishment Criteria 391 Declining Businesses 394 Preparatory to and Auxiliary from Exemptions 395 Will the OECD Approach Prevail? 395 Notes 396 Chapter 27: Focus on Permanent Establishment 397 Background Considerations 398 Twenty-five Proposed Changes 398 Notes 413 About the Authors 415 Index 417
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