Transfer pricing workshop March April 2012 - eng version

Transfer Pricing Workshop
Experience in the wake of the Italian transfer pricing documentation requirements implemented in
2010 in view of the preparation of the financial statements and TP documentation for FY 2011 and
beyond

Milan, March 15 and April 17, 2012
Rome, March 21 and April 18, 2012

Speakers

Milan
Michele Ghiringhelli – michele.ghiringhelli@crowehorwath.it
Gaetano Pizzitola – gaetano.pizzitola@crowehorwath.it
Patrizia Occhiuto – patrizia.occhiuto@crowehorwath.it
with the participation of Giusi Lamicela, Stefano Luvisutti and Antonio Sgroi

Rome
Gaetano Pizzitola
Michele Ghiringhelli
Daniele Sabatini – daniele.sabatini@crowehorwath.it
Fabio Zampini – fabio.zampini@crowehorwath.it
Francescomaria Serao – francescomaria.serao@crowehorwath.it
with the participation of Giusi Lamicela, Luca Gasparrini, Marianna Delle Foglie and Marta Selicato

Transfer Pricing Workshop - March-April 2012
2

Agenda
TP: Corporate governance, tax risk management and tax planning
Intercompany transactions – the burden of tax documentation and other corporate and regulatory
compliance
Interaction between tax functions and other business functions in the drafting of the group policy
documentation
Best practices in the implementation of a common strategy by both corporate tax functions and
external tax consultants
Critical review of past experience
Experience in the preparation of the documentation until FY 2010
Experience in tax audits
Case Law
Evaluation of the TP documentation from a criminal tax law standpoint
TP documentation in case of business restructuring, black list, abuse of law, and PE claims
TP Management: ex post documentary compliance and APA
The burden of (documentary) proof in Italy and in other Countries – consistent approach vs Country by
Country approach?
Pros and Cons of the different approaches
Conclusions
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Part One



Intercompany transactions – the burden of tax documentation and other corporate and
regulatory compliance
Interaction between tax functions and other business functions in the drafting of the group
policy documentation
Best practices in the implementation of a common strategy by both corporate tax functions
and external tax consultants

5


TRANSFER PRICING AS A MEAN OF CORPORATE GOVERNANCE
Business strategies
Management and functional control
Business value
Market and shareholder minority expectations
Directors’ Liability

6


TRANSFER PRICING AS A MEAN OF CORPORATE GOVERNANCE
Transfer Pricing as a mean of coordination of business procedures

Multilateral standpoint (parties participating to the transactions) and global standpoint (the
company in its whole)

TP Analysis only from a tax standpoint

One-sided (one Country) and restricted to one business area only

7


TRANSFER PRICING – FUNCTIONS INVOLVED IN THE ANALYSIS

Finance
HR
Accounting
Tax Legal
IT
Customs and VAT
Operations
External counselors

8


TRANSFER PRICING – INCOME TAXATION VS OTHER TAXES
Customs – arm’s length value and opposite aims with respect to corporate income taxation
The concept of arm’s length value going towards international harmonization
VAT and TP
VAT Pro-rata
Financial activity as a complementary or main activity
Secondment and individual taxation
Permanent establishment and VAT issues
VAT-exempt activities

9


TRANSFER PRICING AND RISK MANAGEMENT
Corporate Governance: BoD’s tax liability
Different forms of transparency towards shareholders (employees, Tax Authorities, external
auditors, BoD)
Transparency in TP policies
Means used: Fin48, TP documentation (Master file e Country file), TP (self) risk assessment

10

TRANSFER PRICING AND RISK MANAGEMENT: AUSTRALIAN PRACTICE

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TRANSFER PRICING AND RISK MANAGEMENT: AUSTRALIAN PRACTICE

12


INTERCOMPANY TRANSFER PRICING TRANSACTIONS
Entities having a direct or indirect influence on the company so that the decision-making process
is altered
Protection of business assets
Protection of market and shareholder interest
Transparency and integrity of conduct

Internal control rules aiming at the correct management of the company

13


Italian Civil Code: ensure business asset integrity for the protection of minority shareholders and of
third party creditors
Directors’ interests
Intercompany transactions
Content of the explanatory notes to the financial statement

Direction and coordination
Liability
Advertising
Reasons underlying the decisions

14


International Accounting Standard 24 – ensure that the financial statements are inclusive of the
supplementary information that show that its assets and financial situation together with its
economic result may have been affected by the existence of related parties and of intercompany
transactions
Information on intercompany transactions

CONSOB Regulation no. 17221 dated March 12, 2010 for companies listed in the stock market
and CONSOB Code of Conduct
Transparency and substantial/procedural consistency of the transactions from which conflicts
may arise

15


Italian Civil Code: no fair value definition provided
CONSOB Regulation no. 17221 (and amendments that followed), article 3, adopted as per
article 2391-bis of the Italian Civil Code: “for equivalent conditions to market or standard ones”
such as the “same conditions to those usually adopted with third parties for transactions of
corresponding nature, size or risk, or based on prescribed rates or prices or those adopted on
entities with which the issuer is obliged by law to contract at a certain price”

16


IAS 24: intercompany transactions carried out at same conditions to those adopted in
transactions between independent parties
OIC 12: “arm’s length conditions” are not the quantitative conditions related to the price.
Explanatory Report to the Decree: “arm’s length conditions” should not be considered only
those related to the “price” of the transaction and to the related elements, but also the reasons
that have led to the decision of closing the transaction with related parties as opposed to
independent ones

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Italian Civil Code: no information concerning the kind of documentation that needs to be prepared
with reference to intercompany transactions is provided

As per article 5 of the CONSOB Regulation no. 17221 (and amendments that followed), “with
reference to major transactions the companies prepare a document that provides relevant
information and that is drafted in compliance to appendix no. 4”

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TRANSFER PRICING AND TAX PLANNING
Importance of the management model
Centralization
Decentralization
Impact of the globalization
Importance of the FAR (Functions, Assets and Risks)
Transfer pricing and business restructuring
Consistency between contractual schemes and economic substance
Transfer pricing as a mean of defense for the organizational structure of the group

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Part Two



Experience in the preparation of the documentation until FY 2010
Experience in tax audits
Case Law
Evaluation of the TP documentation from a criminal tax law standpoint
TP documentation in case of business restructuring, black list, abuse of law, or PE claims

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Critical review of past experiences

CRITICAL TRANSACTIONS
Management Fees  preliminary inherence and back up documentation
Royalties  determination of the arm’s length value
Safe harbor’s limits
Financial Transactions group’s rating and warranties
Secondment  functional analysis
OECD draft on Permanent Establishment (Art.5)
OECD Commentary art. 15

22


FURTHER CRITICAL ASPECTS
TNMM  base costs, statutory vs fiscal
Italian tax principles, IAS, US GAAP, management reporting?
Budget, Standard or Actual Cost?
Gross margins functional compatibility and availability of financial data
Comparables inclusion of companies subject to tax sector studies or simplified budget
Comparables searches  pan- European vs domestic searches and reference period

23


EXPERIENCE IN TAX AUDITS
Penalty protection  Adopted method
 Formal or substantial mistakes or omissions
 Search selections’ criteria
 Incoherence of the comparables functional profile
 Lack of adequate information

Penalty application  Missing information on instrumental assets used
 Incomplete documentation or incorrect information

Importance of an advanced cross examination: particular complexity/inadequacy reasonably not
accepted by the taxpayer/adjustment for an amount higher than € 10 million

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CASE LAW – Recently published cases

Sentence Subject Outcome

Regionale Lombardia 11/10 Functional profile Taxpayer

Provinciale Reggio Emilia 134/11 Burden of proof / taxation levels Taxpayer

Regionale Lombardia 69/11 Comparability Taxpayer

Economic relevance / taxation
Regionale Lombardia 63/11 Taxpayer
levels
Method and comparables’
Regionale Lazio 580/11 Taxpayer
selection

Regionale Lombardia 129/11 Method Taxpayer

Cassazione 7343/11 Intercompany discounts Tax Authority

Cassazione 2845/12 Burden of proof/Ius novorum Tax Authority
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CASE LAW
Tax Court decisions favorable to taxpayers in past years
Non sufficiently motivated and detailed tax audits
Solid defenses based on substance
Most TP judgments with analysis on factual elements
Importance of a detailed defense based on facts
Limited number of case law decisions
Tax amnesty effect
Adhesion and conciliations
Unpublished cases?
Recent Supreme Court judgments against taxpayers fully motivated on a factual/legal
standpoint
Corroboration of Court decisions based on a factual approach
Inadequate factual defense by the Judge of Merits
Is it realistic to expect such a favorable trend in the future?

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EVALUATION OF THE TRANSFER PRICING DOCUMENTATION FROM A CRIMINAL TAX LAW
STANDPOINT
Twofold profile
Transactions not justified by any economic reason
Fraudulent misrepresentation
Coincidence between factual reality and documentation content
Quantification problems both in excess or in deficiency – exclusion as per article 4 of
Legislative Decree 74/2000

Relevance of the explanatory notes on intercompany transactions and lack of criminal intent
aimed at tax evasion
Explanatory Report to Legislative Decree 74/2000: taxpayer’s good conduct affects the evaluation
on penalties in presence of specified criteria

27

TRANSFER PRICING DOCUMENTATION IN CASE OF BUSINESS RESTRUCTURING, BLACK
LIST, ABUSE OF LAW OR HIDDEN PE CLAIMS

Transfer pricing documentation and economic substance of business restructuring
transactions
Transfer pricing documentation to prove black list exemptions
Transfer pricing documentation and problems concerning the reclassification of PEs

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Part Three



The burden of (documentary) proof in Italy and in other Countries – consistent approach vs
Country by Country approach?
Pros and Cons of the different approaches

30


The burden of (documentary) proof in Italy and in other Countries – consistent approach vs
Country by Country approach?

Country by Country approach: obstacle to the free movement of people & capitals
Country by Country approach: different compliance is anti-economic
OECD: Chapter V of the 2010 Guidelines: “reasonable efforts”
UE: Code of conduct of 2006
PATA: Documentation package of 2003
ICC: Sample Documentation Package of 2008

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PROS/CONS OF THE DIFFERENT APPROACHES

Scenarios Sanctions

Adequate documentation + communication NO

Adequate documentation YES*

Group’s documentation YES*

No adequate documentation YES
No documentation YES
Penalties – Tax Authorities tend to evaluate on a case by case basis
“Acceptance” of the Tax Assessment Report vs invitation to the cross examination
Tax settlement
Conciliation
Doubts on the compliance with the proportionality principle with respect to penalties*
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Documentation - Pros Documentation - Cons
Penalty protection
Elimination of double taxation Misunderstandings from disclosure
(MAP/Arbitration)
Tax compliance positive impact on taxpayers’ Documentation compliance does not preclude
risk assessment profile the risk of paying higher taxes (unlike APAs)
Identification of the variables that have Costs and burdens for a regular information
impacted on the determination of the transfer exchange within the group, dedicated
prices (staff turnover etc.) functions, etc.
Review of transfer pricing policy from a
Further tax issues (eg.: hidden PEs, abuse of
substantial and formal standpoint (contracts,
DTTs)
governance, etc.)
Opportunity of counteracting specific issues
Risks of penalties if documentation is deemed
(eg.: deductibility of service charges, black-
as not compliant
list, CFCs)
Case by case evaluation

33


INTERNATIONAL TAX RULING – APA
Unilateral international tax ruling
Bilateral APA in application of DTTs

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INTERNATIONAL RULING TP DOCUMENTATION
No risk of penalties – Certainty of the
relationship between Tax Authority and Risks of penalties
taxpayer
Uncertainty of penalties due the Office’s
Penalty Protection
discretionary authority
Validity: 3 years Validity: 1 year
Selectivity transactions Generality of transactions
No tax audit on transfer pricing Tax audit exposure
Criminal risk prevention Criminal risk

Case by case evaluation

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Conclusions
Impact of the new tax law
The transfer pricing dogmas and their limitations
Case by case evaluation pros/cons submission of documentation
Prospective approach to the TP documentation
Review of the documentation prepared for the years up to 2010
Timing constraints and uncertainties because of detailed compliance rules
Risk of Copy & Paste approach
Master/Local vs Monster File
Consistency of the TP methods adopted taking into account the company’s facts
Impact of the economic recession and crisis
Impact of the overall group policy
Different approaches used by taxpayers and consultants during tax audits
Defensive
Preventive
Pros of a robust defense during tax audit rather than after

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Thank-You

For participating and for Your contributions to the discussion - See you soon!

Roundtables in the pipeline
May 2012: Monti Government Tax Reform Bill – Impact on multinationals
June 2012: Business Restructurings under the OECD TP Guidelines, Chapter IX – Italian
practice and experience (business purpose, permanent establishment, exit tax, black list and
… transfer pricing - Best practice for tax risk management purposes)

Crowe Horwath – Cross-Border Tax & Transfer Pricing Services – Milan – Rome

Gaetano Pizzitola Michele Ghiringhelli

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