Tax Services

Transfer Pricing Planning

Aligning tax strategy with your business imperatives and market developments plays a vital role in managing your overall tax burden. We can help you develop and implement strategies that:

• Align tax planning objectives with business operations
• Identify transfer pricing re-design options
• Address the tax implications of supply chain restructuring
• Contribute to the management of effective tax rates
• Mitigate business change impact on a company’s transfer pricing risk profile
• Identify strengths to deal with potential transfer pricing controversy
• Control risk of transfer pricing adjustments and associated interest and penalties

As you contemplate business transformation and how to gain competitive advantage, we can help you redesign business functions, implement new structures and re-engineer flows of goods and services, embedding tax considerations into the business change process.

Intercompany transactions and cost-sharing arrangements of intangible property

To reach new markets and reduce costs, you may decide to expand operations globally. This expansion may require licensing or transferring intangible property to your affiliates.

Increasing globalization fundamentally transforms the way you conduct business. Have you considered effective tax and transfer pricing planning as an important element of your business strategy?

Many intangibles are subject to constant modification and innovation in order to stay relevant in the marketplace. Dynamic businesses keep abreast of such changing market conditions and actively create and enhance intangibles on a global basis to sustain their competitive advantage.

With the heightened focus on transfer pricing, you should expect taxing authorities to challenge the original value of your intercompany intangible property transactions and cost-sharing arrangements.

Increased global scrutiny

The United States Internal Revenue Service (IRS) elevated its review of cost-sharing and the transfer of offshore intangibles to a Tier 1 issue, which automatically mandates audit and examination. The IRS’ increased scrutiny was further demonstrated when it issued a directive to IRS personnel to use previously unspecified methods (such as the income method, acquisition price method, and market capitalization method) in examining the transfer of intangibles.

Tax authorities in many other countries have placed transfer of intangibles high on their agendas. For instance, with its draft discussion paper on business restructuring the Australian Tax Office (ATO) has indicated strongly that it will examine the substance related to any business restructuring including transfer of intangibles offshore. In particular, the ATO will be looking closely at structures where intangibles are transferred to a location that does not “actively manage” these intangibles.

Another example is in Germany, where new regulations introduced the concept of a “transfer package,” which includes functions, assets, and intangibles, as well as opportunities, risks and advantages. The regulations also permit German tax authorities to make retroactive transfer pricing adjustments using a broad interpretation of the commensurate with income standard for the transfer of intangibles.

Complying with the US services regulations finalized in July 2009

The US intercompany services regulations could increase both your compliance burden and the potential for controversy. The rules make it advisable for every multinational corporation with operations in the United States to perform a transfer pricing services study.

The Sarbanes-Oxley Act of 2002, dealing with your responsibility for your financial control (§404) requires you to comply with these rules. FIN 48 turns these regulations into one of the largest focus areas in transfer pricing audits by establishing potential liability for non-compliance. And finally, a 2003 IRS compliance directive indicates that authorities will be seeking this transfer pricing documentation on audits.

Analyzing the value and benefit of intercompany services provided to your affiliates can be time consuming and challenging. Like many large multinationals, your resources are limited and you may have put off doing a comprehensive services study. We encourage you to make it a priority, and Ernst & Young’s transfer pricing professionals can help you overcome the obstacles.

Shared Services Analyzer©

Our proprietary tools and methods, including our exclusive Shared Services Analyzer©, streamline data gathering to simplify the update and reporting process and standardize your information reporting. We can quickly determine the appropriate model to use to allocate costs to your affiliates for intercompany services, providing relief from the time-intensive and arduous documentation exercise.

The Shared Services Analyzer processes large volumes of data quickly and generates detailed reports for quarterly and annual charges for intercompany services to affiliates. Moreover, it provides complete computation detail for each allocation, by department, country and entity.

Shared Services Analyzer:

• Considers time-based allocations and indirect drivers
• Incorporates custom mark-ups by department or cost base
• Reconciliation reports for local country audits
• Allocation tables for transfer pricing documentation compliance purposes
• Itemized invoice summaries with detail for each service
• Tax impact reports, including withholding rates
• An intangible property module that applies royalties or license fees, including customized step royalties where appropriate

How we can help

Whether your company is changing foreign manufacturing and sales activities or conducting worldwide research and development, we are ready to help you navigate this dynamic and risky international tax landscape. Our transfer pricing planning approach and Shared Services Analyzer can help you better manage your services allocations and comply with the current service regulations.

Documenting transfer pricing policies and practices

Revenue authorities are focusing more widely and intensely on transfer pricing issues. More and more countries require companies to substantiate and document their transfer pricing practices. And more than ever before, tax authorities are scrutinizing business activities, supply chain operations and transfer pricing strategies.

Appropriately pricing and documenting your intercompany transactions to comply with various countries' rules and legislation is imperative in managing tax risk.

Transfer pricing applies to more situations than you might think. If you have operations in different tax jurisdictions, you will benefit from taking a robust approach to pricing and documenting your intercompany transactions, to make sure that you comply with various countries’ rules and legislations.

Consider the following key questions:

• Have you recently changed your operating structure, introducing different intercompany transactions?
• Are you directing your transfer pricing compliance efforts to the right transactions, in the right jurisdictions?
• Brands and technology are very mobile and help exploit opportunities in new markets, while management services pass on essential knowledge and skills. Are you aware that you should be charging for and documenting the charges for these services and intangibles?
• If the ownership of intangibles (marketing, trade, technical, networks, processes, etc.) has changed, have you critically evaluated and documented the business purpose and economic substance of the transaction?
• Have you identified all of the cross-border services and the benefits received?
• Are your intercompany finance transactions (e.g., loans, guarantees, foreign exchange, debt instruments, centralized treasury transactions, etc.) appropriately analyzed and documented?
• Do your transfer pricing practices match your transfer pricing policies?

Documenting intercompany transactions is the first line of defense when your transfer pricing practices are challenged

Whether you choose to apply a globally centralized approach to your documentation needs or a decentralized approach, you need to understand the rigorous transfer pricing scrutiny in the countries where you operate so that you meet the local requirements, particularly where there is heightened risk. This risk-based approach allows you to align your company’s business and tax strategies with your risk profile.

How we can help

Located across the globe, our teams of experienced transfer pricing professionals have in-depth and broad knowledge of local and regional issues that can help interpret the intent of tax authorities in the countries where you currently operate or are planning to operate. As part of an integrated and extensive global network, our teams work seamlessly together from offices around the world, responding quickly to your global and local needs.

Managing transfer pricing controversy

As more countries implement transfer pricing legislation and regulations, transfer pricing continues to be the most significant issue for tax administrators around the world. Tax authorities are increasingly sophisticated in the way they operate, and are focusing more closely on your business, supply chain and transfer pricing activities.

What’s more, the increasing number of players in the transfer pricing realm increases the chance of disagreements about facts, and the way rules are applied.

Tax authorities worldwide are focusing more closely on your business supply chain and targeting your transfer pricing activities.

In this environment, you should assume that controversy will happen and be ready to respond with a team that is committed to helping you manage this aspect of your business.

• Do you seek greater tax treatment certainty in the tax jurisdictions in which you operate?
• Do you know your risks of double taxation regarding a transfer pricing adjustment?
• Are you concerned that you may be at risk of a transfer pricing audit?
• Have you negotiated Advance Pricing Agreements (APAs) and considered competent authority treatment, where applicable, in the countries in which you operate?
• Have you planned for how you would manage an audit, arbitration, litigation and other controversy-related activities?

How we can help

While considering the risk tolerance of your company, our transfer pricing professionals can help you develop a global strategy to help you identify and weigh the options you might have for dealing with local country transfer pricing conditions and terms. In doing this, we take the risk tolerance of your company fully into account. The areas in which we can work with you include:

• Advanced Pricing Agreements (APAs)
• Competent authority relief
• Arbitration procedures
• Audit defense and litigation support

As more countries adopt APAs, our teams can help you use this process to resolve your transfer pricing disputes, where possible. We can also help you negotiate and employ APAs as you seek greater tax treatment certainty; improve time and cost savings through a transfer pricing examination; and seek freedom from penalty exposure.

Tax effective supply chain management – business change enhancement

Multinational corporations are evolving from traditional country-based supply chains to integrated enterprise-wide global or regional supply chains to networked real-time value webs. Movement along this continuum creates opportunities. Where is your company on this spectrum?

Our tax-efficient supply chain management (TESCM) team helps multinational organizations identify, analyze, prioritize, co-develop and implement international tax planning strategies.

The goal? To optimize a company’s tax position while aligning it to their overall business strategy.

A multinational’s operations – present and future – are reviewed with the objective of developing and implementing strategies that:

• Align and optimize the tax and legal structure with the company’s operating vision and business strategies
• Manage our worldwide (and country specific) effective tax rates
• Reduce transfer pricing risk and cross-border double taxation
• Boost current and long-term international operating performance
• Enhance current and long-term international cash flow
• Improve capital structure and funding of operations
• Simplify overall tax planning

How we can help

Our TESCM team is a multidisciplinary business approach incorporating accounting, corporate income tax, customs, human resources, information systems, legal, management consulting, transfer pricing, treasury and VAT/GST. Our business solutions cover multiple jurisdictions and can be tailored to meet individual clients’ needs.

Transfer pricing financial services

Ernst & Young has transfer pricing professionals based throughout the world who operate as a team dedicated to serving financial services institutions (FSTP team). It is fully globally integrated with our financial services income and value-added tax professionals and includes multidisciplinary personnel with advanced degrees in economics, tax, and law, and substantial professional experience with tax administrations and in the financial services industry.

Our FSTP team has worked with tax administrations to develop innovative transfer pricing solutions to problems unique to financial services institutions and has even been invited to provide the OECD with guidance concerning financial services transfer pricing issues generally.

We operate on a globally integrated basis with over 550 transfer pricing professionals around the world, focusing on providing pragmatic and efficient services. The FSTP team has worked with the world’s largest financial institutions in providing the following:

• Transfer pricing policy design and implementation
• Documentation support
• Tax audit and controversy support

How we can help

Our global network of professionals specializes both in advising clients on the economics and taxation of financial instruments and in treasury and risk management. Our analytical approaches and documentation standards were repeatedly tested and accepted by tax authorities around the world.

Our analytics and methodology are based on the financial industry’s best practices and standards. We are able to tailor the scope and detail of our analyses to suit the scale and complexity of a client’s financial transactions. We offer many services with respect to the transfer pricing issues related to debt and treasury.

Diagnostic review

We assist clients in determining whether their arrangements satisfy the tax compliance requirements in all relevant jurisdictions. This can be achieved efficiently by performing a structured and efficient diagnostic review that can consider the following questions:

• What is the general level of credit risk of the internal borrowers? Is this supported by a credit rating analysis?
• What are the specific terms of the internal debt? Is the size of the intercompany debt consistent with what could be achieved on the open capital markets (to satisfy arm’s length Thin capitalization requirements)?
• Do intermediate companies in a chain of financing arrangements bear credit risk? If so, do they have appropriate resources to bear and manage this risk and are they appropriately compensated for bearing this risk?
• Do any internal or external debt issues involve guarantees, and if so, is an appropriate guarantee fee paid?
• Do the financing transactions raise foreign exchange or any other treasury issues that must be considered?
• Are the issues outlined above supported by appropriate economic analysis and transfer pricing documentation?

Financial markets analysis

We offer financial markets analysis to clients who need to bolster their documentation for compliance purposes, or who wish to explore the range of financial instruments that might be used for internal financing. The four main services that make up our financial markets analysis offerings include:

• Credit rating – Our approach to credit rating analysis combines state-of-the-art commercial credit rating software with our experience performing the necessary preparatory analysis and interpreting and applying the results. Interest rate determination – We determine and support market interest rates by direct reference to capital markets data. Guarantee pricing – The correct pricing of guarantees is a complex analytical challenge. Our approach is based on the use of a number of methods, depending on the facts and circumstances in each case. Treasury transfer pricing review – Review of the centralized treasury function and the pricing of treasury services within the company to minimize tax risk and assure compliance with tax regulations in different jurisdictions.

Thin Capitalization

We use several analytical techniques to assess and document the arm’s length nature of a company’s thin capitalization position. Our approach is based on the capital structure of comparable companies and determination of maximum leverage.

When necessary, we use statistical techniques to predict the market limitations on capital structure.

Transfer pricing and customs

The convergence of transfer pricing and customs

Undertaking a customs valuation analysis in conjunction with a transfer pricing study can be both time- and cost-effective.

We work with taxpayers to build on the analysis done for transfer pricing to prepare appropriate customs documentation in order to manage both tax and customs risk with the most efficient use of resources.

How we can help

Consider involving both an Ernst & Young customs professional and an Ernst & Young transfer pricing professional whenever there is an opportunity to address customs issues along with transfer pricing. Contact any of our transfer pricing professionals today.

Effectively managing state and local transfer pricing

A state’s expanded discretionary powers may require companies to document their transfer pricing in order to fend off potential “distortion” adjustments. Recently, states have started hiring outside contingent fee contractors to identify potential transfer pricing adjustments.

These adjustments can have a greater impact than merely changing a transaction’s price. Tax departments are under increasing pressure to manage transfer pricing risk with greater precision in response to these more aggressive state enforcement tactics.

The challenge, however, is not only to manage transfer pricing as a potential risk, but also to view transfer pricing as an opportunity to effectively address every aspect of the tax lifecycle — planning, compliance and controversy.

Planning

Sustainable structures and transactions must be business-aligned. Transfer pricing lays the foundation by analyzing a company’s functions, risks and intangibles and identifies their respective contribution to the company’s overall profit.

This initial analysis allows us to develop tax strategies in response to the company’s business imperatives instead of the other way around.

Compliance

Significant intercompany charges should be supported by documentation. Undocumented charges will place tax departments in a defensive position on audit and often will shift the burden to taxpayers in order to overcome a “distortion” adjustment.

Documentation prepared in response to an audit often results in greater risk that increased taxes, penalties and interest will be sustained and may require a disproportionate amount of increased resources to counter the potential adjustments and shifted burden of proof.

Controversy

Proper documentation establishes the basis to support and defend tax positions, shifting the burden of proof to the taxing authority. In addition, integration with international transfer pricing controversy management strategies (e.g., APAs and competent authority) may result in favorable retroactive and prospective state tax benefits.

Furthermore, unsupported transfer pricing may represent an uncertain tax position that needs to be disclosed.

Who can benefit?

Companies that have not conducted domestic transfer pricing analyses incorporating the current transfer pricing rules for intercompany services may not be using the “best method.” These companies may be overlooking a nonstructural resolution in managing their state tax burdens.

In addition, any company that has not performed a functional analysis of its current business operations may not be in the most favorable position to identify the best business-aligned structure or transactions in which to manage its state tax liability going forward.

Finally, any company that has a global transfer pricing controversy should consider the benefits of incorporating favorable prospective — and potentially, retroactive — state tax adjustments in the final settlement process.

How we can help

Our experienced multidisciplinary team, made up of state tax and transfer pricing professionals, helps clients develop transfer pricing strategies, tax effective resolutions and controversy management approaches that best fit their objectives. Many of our professionals have previously held key business and state government positions and have a thorough understanding of transfer pricing in the context of state taxes.

Transfer Pricing University

Ernst & Young Transfer Pricing University courses are taught by our leading national and local office transfer pricing professionals. Continuing professional education (CPE) credit is earned for each module completed. The full program consists of three modules, plus one module specifically for financial services professionals. The following courses are offered in Ernst & Young offices around the US throughout the year.

• Transfer Pricing 101 - The basics of transfer pricing
• Transfer Pricing 201 - Intermediate transfer pricing
• Transfer Pricing 301 - Advanced transfer pricing

Financial Services Transfer Pricing – A course specific to the financial services industry.

All courses are complimentary; there is no registration fee or materials cost. Contact your local Ernst & Young Transfer Pricing professional or ITS.Marketing@ey.com for course schedules and program details. Let us help your in-house team achieve its potential.