BEPS: Automotive Transfer Pricing compliance Update and

A discussion of the new approach to transfer pricing
and its effect on the automotive industry.
BEPS: Automotive Transfer
Pricing compliance
Update and
considerations
http://www.pwc.com/us/transfer-pricing
Introduction
Introduction
BEPS: Automotive Transfer Pricing compliance
update and considerations
Since 1996, when the IRS adopted ten principle documents
for transfer pricing documentation compliance and started
a 70-nation cascade of documentation requirements, Tax
Departments in Automotive Multinational Enterprises (MNEs)
have stressed the importance of cost-effective, multi-purposed
transfer pricing exercises.
The increased transparency that businesses are forced to
operate under through various regulatory bodies has now
extended to income taxes. Under the banner of tax fairness
waved by the Organization for Economic Co-operation and
Development (OECD) comes its Base Erosion and Profit
Shifting (BEPS) project.
Whether BEPS is right or wrong, it is here, and Automotive
MNEs around the world will be well advised to begin planning
their transfer pricing positions and approach for responding
to data requirements. The recommendations put forth by the
OECD in Action 13, call for a Country-by-Country Report
(CBCR), a Master File and a Local File. The CBCR aspects of
BEPS,1 may prove especially difficult for Automotive MNEs.
The remainder of this article discusses why this new approach
to transfer pricing may be more cumbersome for MNEs in the
automotive industry than for MNEs in other industries, the
requirements and complications of the Master File and CBCR,
and the advised steps for Automotive MNEs.
1 The other tier, Local file, is generally consistent with the current country transfer pricing
documentation requirements that companies have to prepare. For this reason, we have focused
on the tiers that require Automotive MNEs to do something different than they are required to
today.
BEPS: Automotive Transfer Pricing compliance Update and considerations 1 I. Automotive
industry complexity
The US State Department recognizes 195 independent
countries in the world. A quick examination of the publicly
filed annual reporting documents of three of the largest
Automotive MNEs reveals an incredibly complex value
chain within each company. On average they produce
vehicles in 36 countries and sell vehicles in over 140
countries around the world. Though a great number of
subsidiaries are in their home countries, they also have on
average over 500 consolidated affiliates globally. Beyond
the largest OEMs, the breadth of the Tier I and Tier II
affiliated supply chain can be just as expansive, as these
suppliers have global manufacturing foot prints that reflect
those of the OEMs they service.
The transfer pricing value chain of a typical Automotive
MNE includes manufacturing, research and development,
distribution, dealer management, and logistics. Layered
throughout these elements are functions such as
procurement, purchasing, sales, marketing, human
resource management, strategic management, and
the like. The demands of preparing and maintaining a
Master file and CBCR as recommended by the OECD
will be difficult for tax managers due to the breadth and
complexity of an Automotive MNE’s supply chain.
2 BEPS: Automotive Transfer Pricing compliance Update and considerations
The transfer pricing value chain of a typical
Automotive MNE includes manufacturing,
research and development, distribution,
dealer management, and logistics.
II. Master file and CBCR
a. Today’s global policy documents are
not sufficient
In some form or another, many Automotive MNEs maintain
documents that provide an overview of their global
transfer pricing policies. These documents however,
are typically used for internal purposes only and not
updated unless the MNE undertakes significant business
changes. This practice of periodic “refreshing” is a thing
of the past. In furtherance of its goals to ensure taxpayers
give appropriate consideration to transfer pricing
requirements and assist tax administrators in evaluating
the presence of significant transfer pricing risk, the OECD
is recommending that taxpayers prepare a Master file to
be shared with every tax authority in which the taxpayer
does business, globally. This Master file goes substantially
beyond the global transfer pricing policy documents
Automotive MNEs currently maintain and will require
tax departments to spend time not only drafting the
document, but also strategizing about the level of detail
and disclosures they will include within it.
The Master file will ask for the disclosure of some
commercially sensitive information. A few of the most
critical items that taxpayers will be required to disclose
within the Master file include:
• Important drivers of business profit;
• Description/chart/diagram outlining the supply chain
for material (top 5 and any others that amount to >
5% of group turnover), products, and services;
• List and brief description outlining important service
arrangements between members of the multinational
group and the transfer pricing policies with respect to
these services;
• Functional analysis describing the principal
contributions to value creation by individual entities
within the group (i.e., key functions performed,
important risks assumed, and important assets used);
• Description of important business restructuring
transactions, acquisitions, and divestitures occurring
during the fiscal year;
• List and description of the group’s unilateral
APAs; and
• List and description of other relevant tax rulings
related to the allocation of income among countries.
The items above are in addition to requirements for
detailed disclosures about the taxpayer’s intangible
property, financing structures, and the transfer pricing
policies regarding these matters.
b. CBCR – The Transfer Pricing tax return
While some Automotive MNEs may already have portions
of the Master file prepared, it is safe to assume that none
of them currently maintains anything resembling the
Country-by-Country report (CBCR). The first table of
the CBCR requires taxpayers to annually report for each
tax jurisdiction in which they do business the amount of
revenue, profit before income tax, income tax paid and
accrued, as well as total employment, capital, retained
earnings, and tangible assets in each of those jurisdictions.
The second table of the CBCR then asks taxpayers to
identify each entity within those jurisdictions and to
provide an indication of each entity’s business activities.
At first this may evoke the common reaction of being just
another compliance exercise, albeit a large one for most
Automotive MNEs, but the flexibility offered by the OECD
in its guidance will require tax departments to spend a
significant amount of time deciding upon an approach
before filling out the report.
The primary area of flexibility offered by the OECD relates
to the source of the data that can be used to populate the
CBCR. Taxpayers are permitted to select the source of data
for the CBCR. A taxpayer may choose to use data from its
consolidation reporting packages, statutory financials,
regulatory financial statements, or internal management
BEPS: Automotive Transfer Pricing compliance Update and considerations 3 A taxpayer may choose to use data from its
consolidation reporting packages,
statutory financials, regulatory financial
statements, or internal management
accounts.
accounts. The only requirement is that the taxpayer be
consistent in its source of information from year to year,
and if a change is made, the taxpayer should explain the
reasons for this change. In isolation, source selection
may not seem like a significant decision. In the context
of the other tiers of documentation, in particular the
information included in the local files, taxpayers should
be strategic in their decision. The primary considerations
include efficiency of gathering the information,
reconciliation with the information included in the local
files, and transparency. The weighting of these and other
factors will vary amongst Automotive MNEs, but the time
and analysis necessary to make that determination will be
required of all MNEs.
Once an Automotive MNE has settled on a source, it
then has to fill out the CBCR. Reverting to our example
Automotive MNE (operating in 140 countries with 500
entities), this compliance exercise is substantial. The first
CBCR table could require the example Automotive MNE
to fill out a minimum of 140 rows of information.1 The
example Automotive MNE could have multiple entities
within each jurisdiction; thus depending upon the data
source, filling each row could also include an aggregation
exercise. Further, additional diligence may be required
to separate unrelated and related party revenue and
ensure that it includes all revenue associated with sales
of inventory and properties, services, royalties, interest,
and premiums which may be listed in an Other Income
account balance. Finally, Automotive MNEs will have to
give careful consideration to specifying the total number
of employees within each jurisdiction as the CBCR
permits not only employees of the taxpayer, but also full
time equivalents, including contractors.
1 Taxpayers are required to report permanent establishment (PE) information
provided the PE prepares a separate income statement for regulatory
purposes, financial reporting, internal management or tax purposes.
4 BEPS: Automotive Transfer Pricing compliance Update and considerations
The second table is designed to provide a tax examiner
with the ability to link the financial information from the
first table to the functional activities of the entities within
those jurisdictions. The list of business activities that can
be selected for each entity includes:
• Research and development;
• Holding or managing intellectual property;
• Purchasing or procurement;
• Manufacturing or production;
• Sales, marketing, or distribution;
• Administrative, management, or support services;
• Provision of services to unrelated parties;
• Internal group finance;
• Regulated financial services;
• Insurance;
• Holding shares or other equity instruments;
• Dormant; or
• Other, in which case the taxpayer is required to
specify the nature of the entity’s activity in an
additional information form.
The second CBCR table requires individual rows for
all entities. Therefore, our example Automotive MNE
could have as many as 500 functional determinations to
consider. An entity could have one or multiple tick marks
under those business activity columns. In completing
this table, Automotive MNEs will have to consider the
disclosures specified with the other tiers of documentation
(i.e., Master and Local files) to ensure not only consistency,
but corroboration with their transfer pricing policies and
CBCR tables.
III. Where to begin?
Automotive MNEs are finding CBCR compliance to be a
difficult and time-consuming process. Even MNEs with
efficient system retrieval processes are taking between
three to four months to gather the data to perform CBCR
beta test analyses. Similarly, Automotive MNEs that have
begun to draft the Master file are finding this to be a
much more strategic initiative that requires some internal
messaging. In both the Master file and CBCR initiatives,
a best practice is to create a task force that includes
representatives from other departments, such as legal,
IT, HR, Investor Relations, and Finance. Needless to say,
CBCR compliance is much more than filling out a few
tables and the Master file is more than your Annual Report
“and some”.
While more information on the implementation timeline
and information sharing procedures will be released in
February 2015, Automotive MNEs should begin developing
a plan with clear objectives and milestones during the
remainder of 2014. Automotive MNEs should consider:
• How well your CBCR will align with your stated
corporate and tax strategies as well as existing
transfer pricing documentation.
• Where your system’s processes and controls are
now, where they need to be, and what remedial
steps are required.
• Ensuring all internal stakeholders are collaborating
and coordinating on the CBCR/Master file initiatives.
CBCR with every tax authority for every country where
it does business, or if the Master file and CBCR would be
shared by the taxpayer’s Home Country Tax Authority via a
treaty mechanism.
Perhaps history will repeat itself and twenty years after the
implementation of this three-tier system of transfer pricing
documentation Automotive MNEs will have developed
processes and gained audit experience that significantly
reduce their transfer pricing documentation burden.
Unfortunately for Automotive MNEs, it will take significant
upfront time and effort to begin heading down the right
path. With the right plan and approach, Automotive MNEs
may be able to spend less time educating tax examiners
on their business and transfer pricing structure in the
future than they do today. Without appropriate upfront
consideration of these issues, there is no doubt that
Automotive MNEs could end up spending an inordinate
amount of time answering tax examiner questions about
the information contained in each tier of their transfer
pricing documentation.
With the right plan and approach,
Automotive MNEs may be able to spend less
time educating tax examiners on their
business and transfer pricing structure in
the future than they do today.
The OECD has indicated that they anticipate that most
countries will implement Action 13 in 2016. The CBCR
guidance states that a best practice would be for tax
authorities to require the filing of the Master file and Local
file with the tax return (in this case in 2017, with your 2016
tax return). The CBCR would be filed by the end of 2017,
for calendar year-end taxpayers. It has yet to be resolved
whether a taxpayer would then file the Master file and
BEPS: Automotive Transfer Pricing compliance Update and considerations 5 Contacts
Automotive Leadership Contacts
Authors
Richard Hanna
Global & US Automotive Leader
Mobile: (313) 878 8754
[email protected]
Bill F Hahn
Office: (313) 394 6544 | Mobile: (248) 766 7387
[email protected]
Amy J. Solek
US Automotive Tax Leader
Office: (313) 394 6767 | Mobile: (248) 459 9664
[email protected]
Brian D. Decker
US Automotive Advisory Leader
Office: (313) 394 6263 | Mobile: (313) 510 7534
[email protected]
Kathryn O’Brien
Office: (202) 414 4402 | Mobile: (202) 340 0416
[email protected]
Kevin Daly
Office: (313) 394 3531 | Mobile: (248) 996 2647
[email protected]
Sharad Jain
US Automotive Assurance Leader
Office: (313) 594 3018 | Mobile: (313) 401 9005
[email protected]
www.pwc.com/us/transfer-pricing
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