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Exclusive Q&A On Transfer Pricing With Luis Carrillo

Posted: 15th June 2015 08:45
1. What benefits does a firm receive in hiring a transfer pricing specialist?
The benefits of hiring a transfer pricing specialist include greater collaboration with external advisors; greater independence in regards to risk assessment, planning and compliance; and greater cost control over transfer pricing risk.  However, these benefits are only realized when the volume and risk of a company’s intra-group flows are high.
Most corporate tax departments (including those that manage transfer pricing “in-house”) rely on a corporate tax professional or an international tax specialist to manage transfer pricing risk and compliance.
2.Have there been any recent regulatory changes or interesting developments?
The OECD’s project on BEPS is approaching completion, and this has been the most important development in transfer pricing in years.  It will be interesting to see in the coming year or two how and to what degree governments will implement the OECD’s recommendations from the BEPS project; and to what degree governments will detract from the OECD’s recommendations and implement their own frameworks (i.e., Australia, UK).
3. How is the growing importance of intangibles in today’s business transactions affecting the way in which transfer pricing is calculated?
Intangibles come into play in calculating transfer prices in the following situations:

-  The intra-group sale or transfer of an intangible asset,
-  The intra-group licensing of the right to use (but not own) an intangible asset,
-   Intra-group transfers of tangible goods where the entities involved in the intra-group transaction contribute to the development and/or own the intangibles associated with the products being transferred.
-   Intra-group provision of services where the entities involved contribute to the development and/or own the intangibles associated with the services being rendered.
-   As comparability criteria for identifying independent comparables to establish an arm’s length price.
Intangibles are what differentiate companies from their competitors – be it in terms of service/product offerings, or lower costs.  Any differentiation or competitive advantages should translate into profits that go above and beyond the profits attributable to routine activities (like distribution, sales and support, etc).  Any “excess” or “non-routine” profits are therefore attributable to any intangibles present. 
Tax authorities have shifted their focus onto intangibles because whoever owns the intangibles that give rise to non-routine profits also owns the non-routine profits on which taxes are paid. 
Intangibles affect the way transfer pricing policies are set if (a) there are, in fact, intangibles present, (b) they are identifiable, and (c) they are responsible for generating non-routine profits.  Transfer pricing policies are further affected by the legal and economic ownership of any such intangibles.  The current focus on intangibles is potentially dangerous because the definition of what is an intangible is expanding to include intangibles that are not necessarily valuable or intrinsic to the generation of non-routine profits.  It’s also dangerous because tax authorities in certain emerging markets are increasingly using the topic of intangibles to attribute a greater share of profits to their jurisdictions, without taking into consideration the Arm’s Length Principle.
4. How does the arm’s length principle apply to business restructurings involving the cross-border redeployment of operations by a multinational enterprise?
In arm’s length situations, companies seek to maximize profits by capitalizing on location savings, growing markets, skilled labour, etc.  One of the biggest misconceptions in transfer pricing is that business restructuring is driven by MNEs’ tax departments.  The reality is that MNEs, in a global economy, restructure their operations in response to new revenue or cost-saving opportunities wherever they arise, in line with their corporate strategy.
For example, a UK-based IT company determines that the cost of providing support/training services to its customers is too expensive to maintain in the UK.  The company identifies India as a suitable country for providing the same support services to its customers, but at a much lower cost.  The company has the choice of working with an unrelated third-party service provider, or setting up its own subsidiary to provide these outsourced services to its customers.
In an arm’s length situation, the unrelated third party would charge an arm’s length fee that provides it with an acceptable level of profit, taking into account its own internal cost structure.  Thus, in an arm’s length situation, if the UK IT company chooses to set up its own subsidiary, the transfer pricing policy should be on the basis of providing its Indian subsidiary with an arm’s length level of profit.  To increase the Indian subsidiary’s profitability beyond the routine profit attributable to the rendering of services on the basis of “location savings” (for example) would not be reflective of the arm’s length principle.
5. What can a multinational corporation do to minimise the risk of double taxation?
The best approach for MNEs to minimize the risk of double taxation is to be proactive in maintaining documentation, but most importantly to benchmark the arm’s length nature of their TP policies.  Ultimately, the economic analysis is what determines what is an arm’s length standard.  In the absence of economic analyses supporting your transfer pricing policies, you open the door for tax authorities to impose what they believe to be an arm’s length standard, which will likely result in double taxation.
The new Country-by-Country (CbC) reporting recommendations from the OECD’s BEPS project are likely to increase the level of scrutiny and the number of enquiries from tax authorities around the world.  Being proactive about quantifying the arm’s length nature of your transfer pricing policies is more important in this new environment than it ever was before.
6. What needs to be included in transfer pricing documentation?
The report on Action 13 of the OECD’s BEPS project outlines what should be included in a company’s master file (to be submitted to the tax authority of where you are headquartered), a local file (to be submitted to the local tax authorities of your operating subsidiaries), and the CbC reports.
Broadly speaking, not much has changed in terms of what should be included in one’s transfer pricing documentation.  The more obvious items that should always be included are a thorough overview of the business as a whole and the industry in which the business operates, an overview of the legal entities transacting with one another, an overview of the intra-group transactions with a functional analysis, and an economic analysis substantiating the arm’s length nature of the results.  Among the less obvious or often overlooked items that should be included are an overview of the business value-chain, any intra-group agreements between the transacting entities, and documentation relating to any intangibles present.
7. In an ideal world what would you like to see implemented or changed?
In an ideal world, the transfer pricing rhetoric would move back to the importance of upholding the Arm’s Length Principle, and away from populist-driven agendas about profit shifting that ignore the realities of how rational (i.e., profit-maximizing) businesses operate, or that seek to ignore or undermine the Arm’s Length Principle.  The Arm’s Length Principle is the best way to minimize the risk of double taxation and, since it’s based on observable market data, it is more likely to yield results that properly compensate for activities or intra-group transactions undertaken across international borders.  It is less subjective than the alternatives.  This is why the economic analysis portion of transfer pricing is so important.  It is in essence what establishes what arm’s length is.  Much of today’s rhetoric about using profit splits or safe harbors ignore the fact that these can be highly subjective and likely result in greater double taxation for MNEs.

As business information specialists, Bureau van Dijk  has been a leading provider of arm’s length data for transfer pricing analysis.  Over the past decade, we have seen the volume of available data for transfer pricing analysis triple, as more countries enact and enforce financial data disclosure requirements on private companies across the world.  We see this trend continuing, making the universe of data for arm’s length analysis much greater.  The focus should shift back to the importance of a robust economic analysis (based on a thorough functional analysis within the context of a solid understanding of the business and the industry as a whole) as the best way to achieve arm’s length policies that properly compensate all legal entities involved in intra-group transactions within a MNE.

Luis Carrillo is a transfer pricing specialist with 15 years of advisory experience, including Big Four and Software Industries. He's the director of Tax and Transfer Pricing Solutions at Bureau van Dijk (BvD) and is responsible for guiding BvD's value proposition in the tax and transfer pricing market, which includes tax authorities, advisory firms and multinational corporations.  He also conducts transfer pricing trainings with numerous tax authorities on the use of BvD’s tools and transfer pricing best practices.  Mr. Carrillo is often a speaker at world-renowned transfer pricing seminars and has appeared in business publications relating to transfer pricing.

Prior to BvD, Mr. Carrillo worked as a transfer pricing advisor at KPMG, Arthur Andersen and Ernst & Young, focusing on transfer pricing planning and compliance, and intangible property valuations and projects relating to cost sharing arrangements, supply-chain transformations and mergers-and-acquisitions integrations.  Mr. Carrillo holds a Bachelor’s degree in Economics from the University of California, Santa Cruz.

Luis can be contacted on +44 (0) 20 7549 5000 or by email at

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