Summary of the two day International Transfer Pricing Summit in London, 29 and 30 March 2011
06 May 2011
Posted by: Author: Prof. Daniel Erasmus
Summary Of The Two Day International Transfer Pricing Summit in London, 29 and 30 March 2011
Day one of the conference
Melissa Tatton of HMRC Transfer Pricing desk was the first person to present at the conference.It is clear that multi-national co-operation between the various OECD and observer countries is high on the agenda, with the UK leading the initiative. This follows the clear involvement of HMRC Transfer Pricing desk in training African countries on TP audits.The problem is that these African countries are cherry picking issues that suit them in collecting more money, but they are not acting in a consistent and fair manner in executing their TP mandates.Examples include the recent announcement by SARS in South Africa that they will be removing the thin capitalisation safe harbour, expecting associated companies to show comparatives in proving that their interest charge, or lack thereof, is objectively arm’s length.
The problem is that there is no commercial database to benchmark and draw comparisons applicable to Africa.Greater uncertainty is created, leading to greater potential for conflict and controversy.Mention was made by other speakers that advance pricing agreements (APA) should be used as a means to move away from controversy, as they successfully do in the US.African countries tend to shy away from APAs.South Africa is a clear example. So the opportunity to create certainty in a very uncertain TP world in Africa is lost.
Disturbing trends are also being copied by African TP desks without the sophisticated checks and balances that tend to exist in some of the OECD First World countries.Targets with incentives are created for tax assessors.In any common law jurisdiction, this will immediately show that a strong possibility of bias exists, affecting the validity of any ensuing tax authority decision to raise additional assessments.The further problem is that TP advisers from accounting backgrounds, not trained in administrative law, are oblivious to the fact they could advise their clients to challenge the unlawful procedures followed by the tax authorities – resulting in a quick review of the additional assessment being set aside – instead of following a long protracted tax court dispute that could take many years to finalise (e.g. up to eight years in some African countries).
Bombardier Transportation, in-house TP specialist, shared with delegates the frustrations of dealing with the Indian tax authorities. They simply expect taxpayers to justify any TP question they raise, ignore the answer in order to raise additional assessments, and force taxpayers to take the matter to the next level. India is a common law jurisdiction with review procedures that would entitle taxpayers to take on review any such unlawful procedures followed by the tax authorities.However, in-house tax advisers there are loath to challenge the tax authorities in any manner at the assessor level.
They are concerned with the reputational risks and the possibility of escalated audits.There are very basic solutions to these bullying tactics.The majority of TP advisers seem not to be aware of these. More details on these solutions can be gleaned from www.taxriskmanagement.com and through discussions with Prof. Daniel N Erasmus.
Recent case summaries – mainly around thin capitalisation rules which is a hot topic internationally. In most instances, taxpayers were unable to justify an arm’s length approach except in one instance in India where they convinced the court that the loan was quasi-equity.In a US case, a twist of events took place where a judgment against the taxpayer was reversed when the judges realised on a further petition from the taxpayers that the regulations from the IRS were in fact confusing.Lessons for SA – thin capitalisation rules are changing in October 2011.Taxpayers will have to show why their thin capitalisation arrangements are arm’s length, so some of these cases will be very relevant in South Africa and in Africa.
Day two of the conference
The main challenge for TP specialists remains trying to negotiate quick settlements because management tends to want quick certainty.This results in double taxation to a degree in many TP audits as TP specialists are compelled to settle quickly with revenue authorities.Revenue authorities know this and exploit this through more complex and layered TP audits.The ultimate result is that too much is given away in the interest of creating certainty – no corporation wants to live with surprises.I wonder how shareholders would feel if they knew to what extent settlements are being pushed.
APAs and mutual agreement procedures under a double tax treaty (MAP) are comforting to a small degree, but tend to take too long – so are often not used.The average time is about three years, by which time the tax uncertainty has been reported and pushed by management to settle more quickly.So over 30% of these approaches to revenue authorities are withdrawn; surprising when statistics show that recently only 1% of MAPs were turned down.Again there are time constraints in the DTAs and the length with which some revenue authorities take to finalise audits causes problems.
There appears to be a general lack of understanding and knowledge around the domestic specific legal interpretations to TP in the various countries, and its integration with procedural law.Clearer understanding in this arena will result in more ‘wins’ for taxpayers at an early stage as most tax authorities make many mistakes in leading to concluding the audit.These mistakes result in the audit result being unlawful.But as most TP specialists are not schooled lawyers, these opportunities are lost.
The lack of understanding is written off to the fact that they don’t want to be too aggressive.But are these TP specialists doing their jobs properly? If management doesn’t know that these opportunities exist, TP specialists may question whether to develop techniques in this regard.Much schooling and education needs to be spent in this area now that many countries have developed administrative law relief provisions.Many accountants and economists (who make up the bulk of TP specialists) do not know this.
Finally, IP is being given a broad brush meaning, and will cause many problems going forward; especially where brand development takes place through extensive marketing in a new territory.The OECD developments in this area are taking too long, and are not keeping pace with fast moving IP development globally.Watch this space.Revenue authorities will exploit this to their advantage.
In addition to the above, we include an interesting extract from a LinkedIn Group discussion on transfer pricing and the knowledge of TP specialists in procedural law: LinkedIn Groups
Group: Transfer pricing specialists
Discussion: As a TP specialist, do you believe you know enough about procedural law as it affects interactions with various tax authorities? YES or NO
I used to work in the transfer pricing policy and investigation unit at HM Revenue and Customs and was constantly surprised at how often tax administrations fail to follow procedural law.It is definitely worth checking that the law has been adhered to if you are dealing with a transfer pricing audit. I have seen examples where very large transfer pricing adjustments have had to be relinquished by administrations because they have not followed the rules.While I have experience in a number of jurisdictions, in my experience there is nothing like working together with a local specialist.
Source: By Prof. Daniel Erasmus (TaxTALK)