CS1 - 2011 Delegates Folder

IOTA CASE STUDY WORKSHOP
Auditing Multinational Enterprises -

Transfer Pricing Issues

27 29 APRIL 2011
ROME, ITALY

INDEX

1. AGENDA
BACKGROUND NOTE
PRACTICAL INFORMATION
LIST OF PARTICIPANTS
COMPOSITION OF WORK GROUPS

2. PRESENTATIONS

3. CASE STUDIES

CS1_2011
Auditing MNEs - Transfer Pricing Issues
Case Study Workshop AGENDA

- 1 -
IOTA Case Study Workshop
Auditing Multinational Enterprises - Transfer Pricing Issues

Rome, Italy
27-29 April 2011

AGENDA

DAY 1 27 APRIL 2011
0900 - 0930 Introduction to IOTA Setting the scene
IOTA TAC
0930 - 0950 Recent Developments in the Field of
Transfer Pricing in Italy
Mr. Luigi Magistro, Italian Revenue Agency
0950 - 1030 Application of the Revised 2010 Transfer
Pricing Guidelines
Mr. Wolfgang Bttner, OECD
Plenary Discussion
1030 1100 Coffee Break

1100 - 1230 Case Study 1 Italy
Mr. Antongiulio Buffardo & Ms. Rosanna D'Ettorre
1230 - 1400 Lunch

1400 - 1600 Case Study 2 Belgium
Incl. Coffee Break Mr. Willem Raes & Mr. Bauduin Frogneux

1630 Social Event
Cultural visit at the museum
Dinner

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DAY 2 28 APRIL 2011
0900 - 0910 Introduction Day Two
IOTA TAC
0910 - 1040 Case Study 3 - Slovakia
Ms. Dalila Kutisova Luknarova

1100 - 1230 Case Study 4 - Germany
Ms. Anke Schwengel
1230 - 1400 Lunch

1400 - 1530 Case Study 5 - Switzerland
Mr. Thomas Brunner & Mr. Jan Edelmann

1600 - 1730 Case Study 6 - France
Ms. Stphane Lesage

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DAY 3 29 APRIL 2011
0900 - 0910 Introduction Day Three
IOTA TAC
0910 - 1040 Case Study 7 - Finland
Ms. Minna Wilander & Mr. Sami Koskinen

1110 - 1200 Summary, Evaluation and Close

1200 Lunch

ADDITIONAL CASES:
Case Study 8 - Germany
Mr. Uwe Schmitt
Case Study 9 - Poland
Mr. Pawe Parzych
Case Study 10 - Sweden
Mr. Henrik Karlsson & Ms. sa Olsson

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Case Study Workshop BACKGROUND NOTE

1

Rome, Italy
27-29 April 2011

BACKGROUND NOTE

Background
Globalisation and technological advances are changing the shape of the world
economy. More than two-thirds of the global trading business community
involves multinational enterprises. Well over 50% of global trading consists of
associated party transactions which are subject to transfer pricing for taxation
purposes.
With the increase in international transactions in a globalised world, a
potential for tension and conflict among countries arises when it comes to the
question of which country has the rights to taxation in respect of certain cross-
border transactions. Transfer pricing issues therefore remain as important as
ever in terms of the international taxation scene.
As the transfer pricing of goods and services across borders is fundamental to
the taxing rights of different countries, it is currently receiving increased
attention, especially in light of the fact that most tax administrations across
Europe struggle to maintain their desired levels of revenue.
To maintain a fair share of the multinational tax pie tax administrations are
implementing and updating their rules and regulations on international
transactions as well as increasing their audit activities.
In July 2010, the OECD released a revision to Chapters I-III of the Transfer
Pricing Guidelines: those chapters that deal with the arms length principle,
transfer pricing methods and comparability analysis, as well as the introduction
of a new Chapter IX addressing how transfer pricing principles and
corresponding treaty rules should apply to business restructuring. The
document provides the principles and recommendations used for transfer
pricing analysis in many countries throughout the world.
It is entirely reasonable that a tax administration wants to have confidence
that any performance of transactions are in alignment with the OECD
guidelines, all appropriate costs are included, inappropriate costs excluded and
an arm's length price applied. The level of confidence required and how it is
acquired can be achieved in various ways depending on the particular
circumstances of the case and a tax administration's overall approach to
transfer pricing audits.
In this context the way tax authorities deal with multinational enterprises is of
fundamental importance. The emphasis of the event, therefore, is on how most
expediently and efficiently tax auditors may conclude that the arm's length
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2
principle as well as other relevant methods has been applied by multinational
enterprises in carrying out of certain transactions.
Objectives
This is a popular event on the IOTA timetable during which it is intended to
explore the specific compliance and international audit issues that auditors of
transfer pricing cases face when dealing with multinational enterprises; and to
exchange knowledge and experiences through a series of participative group
work sessions.
By the use of cases, carefully selected by Transfer Pricing experts from the
examples provided by delegates, it is the intention of this workshop to:
Examine the implications of the new OECD Guidelines for Multinational
Enterprises and Tax Administrations, in particular Chapters I-III, on
transfer pricing; including the practical application of the comparability
method and profit method (transactional net margin method and profit
split method) in auditing multinational enterprises, using examples;
Allow delegates, in small groups, to review the problems, issues and
aspects raised by the cases in order to compare approaches to the
relevant transfer pricing methods adopted by IOTA tax administrations;
Examine the good practice approaches that are adopted to deal with
multinational enterprises by IOTA members participating in the workshop
and disseminate information learned;
Build and develop a network of contacts between delegates to aid in the
understanding and equitable application of transfer pricing throughout
IOTA tax administrations.

Expected Outputs
By the end of this workshop the participants should be able to demonstrate a
better understanding of transfer pricing aspects in auditing multinational
enterprises. Participants should also be better aware of the the special
challenges transfer pricing can present to the audit practices with regards to
applying the relevant methodology for establishing arms length transfer
pricing and to suggest possible approaches to improve the conduct of transfer
pricing examinations in multinational enterprises. Participants should be able
to share this knowledge with other tax auditors working in this field.

Target Audience
Participants should ideally be senior tax administrators involved in auditing
multinational enterprises. They should have a combined experience of both
practical audit and in dealing with transfer pricing cases.
Please note that it is not possible to provide any interpretation facilities at this
event and IOTA expects that all participants will have sufficient language skills
to deliver the case and defend their position in the discussions in English.

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Methodology
The workshop will be totally practical in nature, combining presentations of
selected case studies with the opportunity for all participants to share their
own views and opinions on the approach to resolving the transfer pricing issues
raised in each case study.
The aim will therefore be to focus the workshop around a series of selected
case studies and highlighted issues in the area of transfer pricing and to
provide the opportunity for the participants to work together in smaller groups
to discuss approaches and solutions to these individual cases and issues.
The groups will finally bring their ideas and suggestions into the plenary
sessions when the various suggested approaches and solutions can be debated
by the wider group.
Requested Input
It is a requirement that each member administration submits a case study
or transfer pricing issue from the work experience of the participant(s) as
a condition of their participation.
A number of these case studies and issues will be selected for use in the group
work sessions during the workshop. Those delegates whose case studies or
transfer pricing issues are selected will be required to present their cases and
issues and act as a resource and facilitator during the session when their case
studies are being discussed, answering any additional questions that are asked
by the other participants and preparing a brief summary for publication in the
post-event report.
To facilitate the discussions and the group work sessions the submitted case
study/problem will need to be structured and presented in the following way:
1. Description of the case or the transfer pricing issue. It is crucial to point
out why and in what way the companies are associated. For clarity
reasons it is advisable to focus on only one transfer pricing problem.
2. Details of the approach to the audit and the specific/standard transfer
pricing method applied during the audit. This should include a short
presentation of the case, including an overview of the transactions, the
chosen method and the reasons why it was selected for the purpose of
the particular case or problem under discussion.
3. Proposed Solution based on the audit results or expected outcome.
Please note that all case studies should be made anonymous to ensure the
confidentiality of taxpayers data.
Please make sure that your case study is submitted at the latest by 30
th
March 2011 by email (mail to: technicalactivities@iota.hu). E-registration
form is to be submitted by the same date. As the number of participants is
limited to 48 persons, entries of delegates will be accepted on a first
registered first in basis.
Eugenijus Soldatkovas
Jerry Taylor
IOTA Technical Advisory Committee
IOTA
1

INTRA-EUROPEAN ORGANISATION OF TAX ADMINISTRATIONS

AUDITING MULTINATIONAL ENTERPRISES - TRANSFER PRICING ISSUES

Rome, Italy, 27-29 April 2011

PRACTICAL INFORMATION

CONTACT PERSONS
Intra-European Organisation
of Tax Administrations (IOTA)
1075 Budapest, Rumbach Sebestyn u. 14.
Hungary
Website: www.iota-tax.org

Contact person for technical aspects
Mr. Eugenijus Soldatkovas
Tel.: (+36 1) 478 3035
E-mail: EugenijusSoldatkovas@iota.hu

For logistical aspects
Ms. Borbla Farkas
Tel.: (36 1) 478 3036
Fax: (36 1) 341 5177
E-mail: BorbalaFarkas@iota.hu
Hosting administration:
Italian Revenue Agency
Via C. Colombo 426
00145 Rome
Italy

Contact person for administrative aspects:
Ms. Maria Paola Mastroeni
Tel: (39 06) 5054 5335
Fax: (39 06) 5054 5336
E-mail:
mariapaola.mastroeni@agenziaentrate.it
Contact person for logistical aspects:
Ms. Valeria Sperandeo
Tel: (39 06) 5054 5077
E-mail: valeria.sperandeo@agenziaentrate.it

Mr. Alessandro Lentini
Tel: (39 06) 5054 5987
E-mail: alessandro.lentini@agenziaentrate.it

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ARRIVALS AND DEPARTURES
Delegates are kindly requested to organise and cover their transport from airport/train/bus
stations to the hotel and back.

Airport arrivals:

Leonardo Da Vinci Airport (Fiumicino)
International Airport of Fiumicino (http://www.adr.it/home/fiumicino_en.htm), is situated
approximately 30 km west of the city centre. ATM machines are located in the Arrivals Hall.
When arriving at Fiumicino airport you may take a taxi or use public transport. The cheapest way to
reach the city is by using train or bus shuttle.

Taxi
In correspondence of the Terminals 1,2, 3 and 5 of Fiumicino airport a taxi service is available. The
cost of a ride to the hotel is 40 EUR (fixed fee, included luggage).
The cars for the taxi service of the City of Rome are white and can be recognized by the sign "TAXI"
on the top and by the identifying license number on the doors, on the back and inside the car.

Train
Ferrovie dello Stato (FS) set up a direct connection to/from Termini railway station and a
connection by metro. The Leonardo Express departs from/to Termini every 30 minutes and takes
about 30 minutes without intermediate stops. The cost is 14 EUR;
Timetable can be found on the website of Ferrovie delle Stato.
(http://www.ferroviedellostato.it/homepage_en.html)

Bus shuttle
Daily connections between the airport and Termini station are guaranteed by a shuttle bus
operated by SIT. The buses are parked in front of Terminal 3. For information about bus times,
routes and fares go to: www.sitbusshuttle.it

In order to get to the hotel from Termini railway station, see below (Arrival by train).

Giovan Battista Pastine Airport (Ciampino)
International airport of Ciampino (http://www.adr.it/home/ciampino_en.htm), situated
approximately 15 km south of the city centre. ATM machines are located in the Arrivals Hall.
When arriving at Ciampino airport you may take a taxi or a bus shuttle.
The cheapest way to reach the city is by using bus shuttle.

Taxi
At Ciampino airport, in correspondence of the exit, a taxi service is available. The cost of a ride to
the hotel is around 30 EUR (fixed fee, included luggage).
The cars for the taxi service of the City of Rome are white and can be recognized by the sign "TAXI"
on the top and by the identifying licence number on the doors, on the back and inside the car.

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Bus shuttle
Daily connections between the airport and FS Roma Termini station are guaranteed by the bus
services operated by SIT and TERRAVISION. The buses are parked in dedicated bus bays opposite
International Departures. For information about bus times, routes and fares go to:
www.sitbusshuttle.it and www.terravision.eu

In order to get to the hotel, from Termini railway station, see below (Arrival by train)
Please note that the hotel can arrange for you a pick-up service. Contact directly the hotel for any
further information.

Arrivals by train
From the Piazza dei Cinquecento in front of the Termini Station, take B underground train in
direction Laurentina and get off at the Cavour stop.

Please note that each IOTA member administration is responsible for supplying their delegates
with travel and health insurance for the duration of any IOTA Event.

VISAS

In the event visas are required for entry into Italy by nationals of a country, each participant is
responsible for obtaining it prior to travelling to Rome. Information about countries whose
citizens do not require visas to enter the Republic of Italy can be found on the website of the Italian
Ministry of Foreign Affairs (http://www.esteri.it). Upon request, IOTA will send individual
invitations to be used for that purpose.

ACCOMMODATION AND VENUE
Delegates will be accommodated in:
Grand Hotel Palatino
Via Cavour, 213/M
00184 Roma, Italia
Ph. +39 06 4814927
Fax +39 06 4740726
info@hotelpalatino.com
http://www.fhhotelgroup.it/eng/grand_hotel_palatino/grand_hotel_palatino.htm

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The Grand Hotel Palatino is located in the heart of ancient Rome, only a short walk from the
Colosseum and from the Fori Imperiali (Imperial Forums). It is also very near to the most
fashionable Roman shopping area, and not far from the Termini railway station and the
underground station. The hotel position is ideal for those who arrive by plane as well as by train.
Please note that, due to Easter holidays (24 April) and the beatification of Pope Giovanni Paolo
II (1 May), it is not possible to stay longer than the duration of the meeting in this hotel. For
the same reason, it is not possible to host more than 50 delegates.

VENUE
The meeting will be held in the Grand Hotel Grand Hotel Palatino, in the room Cesarini in the
basement.

FINANCIAL ARRANGEMENTS
For delegates from Full and Associate Member Tax Administrations (up to two delegate per
Administration) and for speakers invited by IOTA, IOTA will cover the cost of accommodation up
to three nights and meals starting with the dinner on 26
th
April and closing with the lunch on 29
th

April 2011.
The Members are tax administrations of: Albania, Armenia, Austria, Azerbaijan, Belgium,
Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Cyprus, Denmark, Estonia,
Finland, the Former Yugoslav Republic of Macedonia, France, Georgia, Germany, Greece, Hungary,
Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Moldova, Montenegro, the
Netherlands, Norway, Poland, Portugal, Republic of Srpska (Bosnia and Herzegovina), Romania,
Russian Federation, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Ukraine, United
Kingdom.
The Associate member is the Tax Committee of the Ministry of Finance of the Republic of
Kazakhstan.

IOTA will book hotel accommodation only for the duration of the event. Any extension beyond
these days requires an individual contact with a hotel. IOTA is not responsible for any
modifications, cancellations or damages related to this booking of the delegate. In case of
cancellation after the given deadline of a planned journey to an event, for which the participant
has already been registered, the member administration will be held responsible for the costs
resulting from such cancellation. If the journey or event is cancelled because of the fault of the
organiser these costs are borne by the organiser.
For your information the negotiated price for accommodation (including breakfast and VAT) is 155
EUR per night for a double room single use, the cost of the double room is 196 EUR per night. A
newly introduced city tax of 3 euro has to be added to the cost per night.

MEALS
IOTA will cover all meals for all participants, starting with the dinner on 26
th
April and closing with
the lunch on 29
th
April 2011.

SOCIAL EVENTS
Upon arrival on 26
th
April 2011 a welcome cocktail will be available at the hotel from 19:00. On 27
th

April 2011 a social event (cultural visit + dinner) will be organised by the Italian Revenue Agency.
Further details will be provided during the first day of the meeting.

MONEY
The Italian currency is the EURO. In the centre of Rome there are many opportunities to change
your money. Banks in Rome provide complete foreign exchange and banking services. Currency
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exchanges are to be found all over town. Banks are usually open from 9.00 till 16.00. You can also
withdraw money using a credit card at a number of "Bancomat" that can be found outside most
banks. Credit cards such as VISA, Mastercard/Eurocard, and American Express are usually accepted
in hotels, restaurants and shops in Rome.
LOCAL TIME
GMT+1 HOUR.

OTHER
LOCAL WEATHER
To check the current local weather you may visit the following webpage:
http://www.accuweather.com/en-gb/it/lazio/rome/quick-look.aspx

WE LOOK FORWARD TO MEETING YOU AND WE HOPE THAT YOU ENJOY YOUR STAY IN ROME!

CASE STUDY WORKSHOP
AUDITING MULTINATIONAL ENTERPRISES TRANSFER
PRICING ISSUES

27-29 APRIL 2011
ROME, ITALY

LIST OF PARTICIPANTS

Albania
Giomela Gjini
Director of Tax Procedures Department
General Taxation Directorate
Tel: 355 4 2276812
E-mail: giomela.gjini@tatime.gov.al

Albania
Enkelejda Brahaj
Head of Indirect Tax Unit
General Taxation Directorate
Tel: 355 4 2276812
E-mail: enkeleida.pipa@tatime.gov.al

Armenia
Samvel Yeghikyan
Chief Tax Inspector
State devenue Committee
Tel: 374 91 40 22 35
E-mail: samvel_yeghikyan@taxservice.am

Austria
Doris Hack
Legal Consultant
Large Taxpayer Audit Division
Tel: 43 664 854 26 70
E-mail: doris.hack@bmf.gv.at

Austria
Horst Rinnhofer
Auditor
Large Trader Auditing
Tel: 436648542645
E-mail: horst.rinnhofer@bmf.gv.at

Azerbaijan
Dayanat Huseynzada
Chief State Tax Inspector
Ministry of Taxes
Tel: 99412 4038821
E-mail: riyad.alekperov@gmail.com

Azerbaijan
Yavar Ahmadov
Head of Audit Division
Ministry of Taxes
Tel: 99412 4038821
E-mail: riyad.alekperov@gmail.com

Belgium
Willem Raes
inspector principal of fiscal administration
Service public federal Finance
Tel: 32 2 5764107
E-mail: willem.raes@minfin.fed.be

Belgium
Bauduin Frogneux
inspecteur principal d'administration fiscale
spf finance
Tel: 32 2 57 71631
E-mail: bauduin.frogneux@minfin.fed.be

Bulgaria
Dessislava Yordanova
chief revenue expert
NRA
Tel: 359298593401
E-mail: d.yordanova@ro29.nra.bg

Croatia
Marija Pocrnic
Tax officer in Large Taxpayers Unit
Ministry of Finance - Tax Administration
Tel: 38516501517
E-mail: marija.pocrnic@porezna-uprava.hr

Croatia
Bozo Jaksic
Senior Tax Advisor in department for Tax and Contributions Assesment
Tel: 38516501447
E-mail: bozo.jaksic2@porezna-uprava.hr

Czech Republic
Jakub Charbulk
Transfer Pricing Specialist
General Financial Directorate
Tel: 420 257 043 424
E-mail: jakub.charbulak@ds.mfcr.cz

Estonia
Signe Uustal
senior tax auditor
Estonian Tax and Customs Board
Tel: 372 676 4064
E-mail: signe.uustal@emta.ee

Finland
Minna Wilander
Senior Advisor
Finnish Tax Administration
Tel: 358 408210765
E-mail: minna.wilander@vero.fi

Finland
Sami Koskinen
Tax Expert
The Finnish Tax Administration
Tel: 358 9 7311 4926
E-mail: sami.koskinen@vero.fi

France
Stphane LESAGE
Head of a tax audit team specialized in luxury goods
DGFiP
Tel: 33 1 55 93 51 96
E-mail: stephane.lesage@dgfip.finances.gouv.fr

Georgia
George Machavariani
Head of Second Division of Main Inspection Division of Audit Department
Revenue Service
Tel: 995 99 40 26 16
E-mail: gmachavariani@rs.ge

Germany
Uwe Schmitt
Tax auditor for foreign tax issues
Zentrales Konzernprfungsamt Stuttgart
Tel: 496212921289
E-mail: uwe.schmitt@zbp-stuttgart.bwl.de

Germany
Anke Schwengel
Tax auditor
Revenue office for the auditing of large scale enterprises Detmold
Tel: 57413342467
E-mail: Anke.Schwengel@FA-5373.fin-nrw.de

Germany
Gnther Boelmann
Auditor
Federal Central Tax Unit
Tel: 49 177 535 7601
E-mail: gboelmann@web.de, boelmann@arcor.de

Germany
Markus Volkmann
Federal Central Tax Unit
Tel: 49 172 2436049
E-mail: Markus.Volkmann@bzst.bund.de

Hungary
gnes Fotiadi
Head of Unit
National Tax and Customs Administration, Tax Directorate General for Priority
Cases and Large Taxpayers
Tel: 36 1 461 3589
E-mail: fotiadi.agnes@nav.gov.hu

Hungary
Zoltn RAPP, dr.
Senior Analyst
National Tax and Customs Administration, Tax Directorate General for Priority
Cases and Large Taxpayers
Tel: 36 1 461 3484
E-mail: rapp.zoltan@nav.gov.hu

Italy
Rosanna D'Ettorre
Tax officer - APA Team
revenue agency
Tel: 39 0650542004
E-mail: rosanna.dettorre@agenziaentrate.it

Italy
Antongiulio Buffardo
Tax officer - APA Team
Revenue Agency
Tel: 39 0650542006
E-mail: antongiulio.buffardo@agenziaentrate.it

Latvia
Zane Smutova
Chief Tax Inspector
State Revenue Service
Tel: 371 67097515
E-mail: Zane.Smutova@vid.gov.lv

Latvia
Liene Moiseja
Chief Tax Inspector
State Revenue Service
Tel: 371 67097501
E-mail: Liene.Moiseja@vid.gov.lv

Kazakhstan
Yertole Tulegenov
Head of Division
The Tax Committee of the Ministry of Finance of Republic of Kazakhstan
Tel: 7 7172 717072
E-mail: etulegenov@mgd.kz

Kazakhstan
Aliya Jetibayeva
Head of Legal Division
The Tax Committee of the Ministry of Finance of Republic of Kazakhstan
Tel: 7 7172 717938
E-mail: adzhetibaeva@mgd.kz

Lithuania
Lukas Krupaviius
Chef specialist of International Transaction Control Division of Large Taxpayers
Monitoring and Consulting Department
State Tax Inspectorate under the Ministry of Finance of the Republic of
Lithuania
Tel: 3702687879
E-mail: l.krupavicius@vmi.lt

Netherlands
Aarnout Hamelink
Senior Expert Transfer Pricing
Netherlands Tax ans Customs administration
Tel: 31102905830
E-mail: aj.hamelink@belastingdienst.nl

Norway
Guro Runestad
senior advicer
Norwegian tax administration
Tel: 47 934 11 735
E-mail: guro.runestad@skatteetaten.no

Norway
Siv-Olaug Berge Walde
Senior Adviser
Norwegian Tax Administration
Tel: 4740479696
E-mail: siv-olaug.walde@skatteetaten.no

Poland
Bogumil Kowal
senior tax inspector
Fiscal Control Office
Tel: 48 22 207 96 21
E-mail: bogumil.kowal@mz.mofnet.gov.pl

Poland
Boena Dbrowska
Ministry of Finance
Tel: 48 22 694 31 70
E-mail: bozena.dabrowska@mofnet.gov.pl

Romania
Alina Sirzea
Inspector, General Directorate for the Administration of Large Taxpayers
National Agency for Fiscal Administration
Tel: 40748197534
E-mail: alina.sirzea@mfinante.ro

Romania
Madalina Oita
Inspector, General Directorate for the Administration of Large Taxpayers
National Agency for Fiscal Administration
Tel: 40757384916
E-mail: madalina.oita@mfinante.ro

Russian Federation
Svetlana Bondarchuk
head of the directorate
Federal Service of Russia
Tel: 8 495 913 03 79
E-mail: mns10108@nalog.ru

Russian Federation
Vladimir Golishevsky
Deputy Head of the Division for the Analysis of the International Taxation,
Analytical Directorate.
Fedral Tax Service of Russia
Tel: 8 495 913 03 79
E-mail: mns10108@nalog.ru

Serbia
Zoran Vasic
Assistant Director - Education and Communication Sector
Tel: 381 113950 680
E-mail: zoran.vasic@poreskauprava.gov.rs

Serbia
Tijana Martinovic
Tax Advisor - Contact Centre
Tel: 381 11 3310091
E-mail: tijana.martinovic@poreskauprava.gov.rs

Slovakia
Dalila Kutisova Luknarova
Head of International Taxation Auditing Department
Tax Office for Selected Taxpayers
Tel: 421 2 5737 8752
E-mail: dalila.kutisova.luknarova@ba.drsr.sk

Spain
Ignacio del Ro
Head of Regional Tax Auditing Unit
Spanish Tax Agency
Tel: 34 91 582 72 57
E-mail: ignaciodel.rio@correo.aeat.es

Sweden
Henrik Karlsson
Swedish Tax Agency
Tel: 46 105735083
E-mail: henrik.karlsson@skatteverket.se

Sweden
sa Olsson
Swedish Tax Agency
Tel: 46 105736699
E-mail: asa.olsson@skatteverket.se

Switzerland
Thomas Brunner
Tax Expert
Federal Tax Administration, Audit Department
Tel: 41 31 322 79 09
E-mail: thomas.brunner@estv.admin.ch

Switzerland
Jan Edelmann
Tax Expert
Federal Tax Administration, Audit Department
Tel: 41 31 322 72 21
E-mail: Jan.Edelmann@estv.admin.ch

The former Yugoslav Republic of Macedonia
Slavica Kiroska
Deputy Head of the General Tax Inspectorate
Public Revenue Office
Tel: 389 2 3299 592
E-mail: slavica.kiroska@ujp.gov.mk

OECD
Wolfgang Bttner
Senior Advisor
Tax Treaty, Transfer Pricing and Financial Transactions Division
CTP/TTP
Tel: 33 1 45 24 9648
E-mail: wolfgang.buettner@oecd.org

IOTA
IOTA
Eugenijus Soldatkovas
Technical Taxation Advisor
IOTA Secreteriat
Tel: 3614783035
Fax: 3613415177
E-mail: eugenijussoldatkovas@iota.hu

IOTA
Jerry Taylor
Technical Taxation Advisor
IOTA Secreteriat
Tel: 3614783039
Fax: 3613415177
E-mail: jerrytaylor@iota.hu

CS1_2011
Case Study Workshop WORK GROUPS


Rome, Italy
27-29 April 2011
COMPOSITION OF WORK GROUPS

Group 1
Chairperson - Mr. Horst Rinnhofer
1. Ms. Giomela Gjini, Albania
2. Mr. Dayanat Huseynzada, Azerbaijan
3. Mr. Willem Raes, Belgium
4. Mr. Bozo Jaksic, Croatia
5. Mr. Zoltn Rapp, dr., Hungary
6. Ms. Rosanna D'Ettorre, Italy
7. Ms. Zane Smutova, Latvia
8. Ms. Siv-Olaug Berge Walde, Norway
9. Mr. Bogumil Kowal, Poland
10. Ms. Madalina Oita, Romania
11. Ms. Tijana Martinovic, Serbia
12. Ms. sa Olsson, Sweden

Group 2
Chairperson - Mr. Wolfgang Bttner
1. Ms. Doris Hack, Austria
2. Ms. Marija Pocrnic, Croatia
3. Mr. Sami Koskinen, Finland
4. Mr. George Machavariani, Georgia
5. Ms. Anke Schwengel, Germany
6. Mr. Yertole Tulegenov, Kazakhstan
7. Ms. Aliya Jetibayeva, Kazakhstan
8. Ms. Slavica Kiroska, FYR Macedonia
9. Mr. Aarnout Hamelink, Netherlands
10. Ms. Guro Runestad, Norway
11. Ms. Dalila Kutisova Luknarova,
Slovakia

Group 3
Chairperson - Mr. Gnther Boelmann
1. Ms. Enkelejda Brahaj, Albania
2. Mr. Yavar Ahmadov, Azerbaijan
3. Mr. Jakub Charbulk, Czech Republic
4. Ms. Signe Uustal, Estonia
5. Mr. Uwe Schmitt, Germany
6. Mr. Antongiulio Buffardo, Italy
7. Ms. Liene Moiseja, Latvia
8. Ms. Boena Dbrowska, Poland
9. Ms. Svetlana Bondarchuk, Russian
Federation
10. Mr. Vladimir Golishevsky, Russian
Federation
11. Mr. Ignacio del Ro, Spain
12. Mr. Thomas Brunner, Switzerland

Group 4
Chairperson - Mr. Markus Volkmann
1. Mr. Samvel Yeghikyan, Armenia
2. Mr. Bauduin Frogneux, Belgium
3. Ms. Dessislava Yordanova, Bulgaria
4. Ms. Minna Wilander, Finland
5. Mr. Stphane Lesage, France
6. Ms. gnes Fotiadi, Hungary
7. Mr. Lukas Krupaviius, Lithuania
8. Ms. Alina Sirzea, Romania
9. Mr. Zoran Vasic, Serbia
10. Mr. Henrik Karlsson, Sweden
11. Mr. Jan Edelmann, Switzerland

Presentations
1
IOTA
CASE STUDY WORKSHOP
Auditing Multinational Enterprises
Transfer Pricing Issues
Rome, Italy 27-29 April 2011
2
INTRODUCTION
Increasing awareness of the Italian tax
authorities to transfer pricing issues
audits
applications for APAs
recent developments in the tax system
2
AGENDA
Structure of Italy Revenue Agency
The Transfer Pricing Activities
Audits
APAs
Recent developments in the tax system
Conclusion
3
31 August 2010 4
REVENUE AGENCY STRUCTURE
Central Level
DIRECTOR
OF THE
REVENUE AGENCY
Attilio Befera
SERVICES
TO
TAXPAYERS
Aldo Polito
TAX
ASSESSMENT
Luigi Magistro
TAX
LEGISLATION
Arturo Betunio
LEGAL
AFFAIRS
AND
LITIGATIONS
Vincenzo Busa
PERSONNEL
Girolamo Pastorello
AUDIT
AND
SECURITY
Stefano Crociata
ADMINISTRATION
PLANNING
AND
REPORTING
Marco Di Capua
3
5
DIRECTORATE FOR TAX ASSESSMENT -
STRUCTURE
DIRECTOR FOR
TAX ASSESSMENT
ANALYSIS and STRATEGIES
DIVISION
INTERNATIONAL DIVISION
EXCHANGE OF INFORMATION
UNIT
ON FIELD COOPERATION
UNIT
INTERNATIONAL RULING
UNIT
ASSESSMENT GOVERNANCE
DIVISION
LARGE TAXPAYERS
DIVISION
INTERNATIONAL
TAX OFFENCES
ANTI-FRAUD UNIT
SECRETARY
UNIT
INTERNATIONAL DIVISION - STRUCTURE
The International Division is structured in 3 Units:
Exchange of Information: in charge of
administrative cooperation under Directive 77/799/EEC, EC
Regulation 1798/2003;
mutual agreement procedures under Double Tax Treaties;
On Field Cooperation: in charge of
international cooperation for the recovery of credits under
Directive 2008/55/EC and Tax Treaties;
maintenance of the VAT Information Exchange System;
International Tax Ruling: in charge of
unilateral, bilateral and multilateral Advance Pricing
Agreements.
6
4
INTERNATIONAL RULING UNIT
7
International Ruling Unit in charge of
receiving and processing the applications for APAs.
It operates via 2 teams under the coordination
of the Head of the Unit:
in Milan for the companies having their tax domicile or
their permanent establishment in northern Regions.
in Rome for the companies having their tax domicile or
their permanent establishment in central and southern Regions.
8
INTERNATIONAL RULING UNIT
THE APA MECHANISM
APAs:
introduced into Italian law by Article 8 of Legislative Decree no. 269 of 30
September 2003, effective as of February 2005
Key Objectives:
improving tax compliance through the cooperation between taxpayers
and the tax authorities
allowing the Tax Administration to conclude with the taxpayer an
agreement which is binding for both parties
giving certainty on the tax treatment of the transactions at issue
5
9
APA Regime: from Unilateral to Bilateral and
Multilateral Agreements
Bilateral and multilateral APAs prevent from:
double taxation on income accrued to associated enterprises from
transactions included within the scope of the agreement
disputes between Tax Administrations and tax administrations and
taxpayers
Approach consistent with Chapter IV the OECD TP Guidelines and with
the European Commission Communication of 26 February 2007 on
APA regime.
Italy follows the international trend: by the end of 2010 the Revenue
Agency is authorized to conclude bilateral and multilateral APAs based
on Article 25, paragraph 3 of the OECD Model tax convention.
APA REGIME: TIMELINE
2003
Introduction of the APA Regime
2005
Creation of the Ruling Unit: Unilateral APAs
2010
Bilateral and Multilateral APAs: Beginning
10
6
11
AUDIT ACTIVITY
Audits are carried out by local structures:
Provincial Directorates in charge of for SMEs
Regional Directorates in charge of for large sized enterprises, with
the support of the Large taxpayers Division.
Tax auditors can ask for technical support to the central Units.
Development of a peoples network with appropriate knowledge and
operational skills able to interact with the Central Assessment
Directorate.
12
RECENT DEVELOPMENTS:
ITALIAN TP DOCUMENTATION REGIME
Article 26 of Law-Decree 78/2010
Regulation by the Italian Revenue Agency Commissioner (September
2010)
Administrative Circular Letter 58/E (December 2010)
Consistency with:
OECD 2010 Version of the TPG
Code of Conduct on TP documentation for MNEs in the European
Union
Principles of good faith and fair cooperation between taxpayers and the
Tax Administration (Italian Taxpayer Charter)
7
13
TP DOCUMENTATION REGIME:
UNDERLYING RATIONALE
System based on the concept of burden rather than obligation
Obligation = person required to adopt a specific behaviour, whose
execution can be obtained through enforcement
Burden = person required to adopt a specific behaviour in his
own interest, otherwise:
a favourable provision would not apply; or
a negative provision would apply.
14
TP DOCUMENTATION REGIME: LEGISLATION
If an upward transfer pricing adjustment is made, penalties provided
for by law for unfaithful tax return - 100200 % of the additional tax or
minor credit - do not apply if the following conditions are met:
1. The taxpayer submits in the course of the visit/examination/audit to
the Tax Administration proper documentation compliant with the
Regulation of the Director of the Revenue Agency; and
2. The taxpayer holds the aforesaid documentation shall notify their
option to the Tax Administration in their annual tax return
8
15
CONTENTS OF TP DOCUMENTATION
MASTER FILE & COUNTRY FILE
Concept of appropriate documentation
3 CATEGORIES
Holding
Sub-Holding
Controlled Enterprises
Master File: general description of the multinational group (sub-
group)
Country File: specific information on the resident company and on
the transfer pricing policy adopted
16
BENEFITS
A. FOR THE TAX ADMINISTRATION
identifying the relevant inter-company transactions
determining if the taxpayers transfer pricing policy is in accordance
with the arms length principle
B. FOR THE TAXPAYER
providing protection from related administrative penalties in the event
of a subsequent upward income adjustment
minor risk level to be targeted for tax audits
9
17
USEFULNESS OF STANDARDIZED
DOCUMENTATION
Audit purposes:
effective assessment of the major risks in the taxpayers
transfer pricing policy
hint of lower risk
Prevention purposes:
entering into an APA
www.agenziaentrate.it
MANY THANKS!
Luigi.Magistro@agenziaentrate.it
18
OECD
1
Centre for Tax Policy and Administration
Organisation for Economic Co-operation and Development
Overview of the 2010 Revision of the
OECD Transfer Pricing Guidelines
Auditing Multinational Enterprises
- Transfer Pricing Issues
Rome
2729 April 2011
Wolfgang Bttner
OECD
www.oecd.org/ctp/tp/cpm
Comparability and Profit Methods
(revised Chapters I-III)
Transfer Pricing Aspects of
Business Restructurings
- New Chapter IX -
2010 Revision of the
OECD Transfer Pricing Guidelines
www.oecd.org/ctp/tp/br
OECD
2
Comparability and Profit Methods
New guidance on
the selection of the most appropriate transfer pricing
method to the circumstances of the case
comparability analysis
how to apply transactional profit methods (TNMM and
profit split) in practice
3
Which Method to Select?
The most appropriate method to the circumstances of
the case
Selection criteria, in particular:
Respective strengths and weaknesses of each method;
Nature of the controlled transaction (determined in particular
by functional analysis);
Availability and reliability of information (in particular on
uncontrolled comparables);
Preference for traditional methods if equally reliable
4
Selection of the Most Appropriate Method
to the Circumstances of the Case
OECD
3
Comparable Uncontrolled Price Method (CUP)
5
OECD Transfer Pricing Methods:
Strengths and Weaknesses of Each Method
Strengths Weaknesses Best applied to
Most direct and reliable
way to apply the arms
length principle
High degree of product
comparability required
In practice, often difficult to
find uncontrolled
transactions similar enough
that no differences have
material effect on the price
Transactions where the
same product is sold to the
associated enterprise and
independent enterprise(s)
(internal comparable)
Transactions where an
independent enterprise sells
the same product as the
associated enterprises
(external comparable)
In particular commodities
and interest rates
Cost Plus Method
6
Product differences are less
significant, i.e. are less likely to
have material effect on profit
margins than on price.
Less product comparability
required compared with CUP
method.
Fewer comparability
adjustments needed compared
with the CUP method to
account for product
differences, because focus is on
functions performed.
In practice, often difficult to
determine appropriate cost
basis
Costs incurred may not
always be determinant of
profit level
Not always discernible link
between level of costs
incurred and a market price
Accounting consistency
important for comparability
purposes
(Contract)
Manufacturer, in
particular of semi-
finished goods
(Contract) R&D
Service Provider
OECD
4
Resale Price Method
7
Product differences are
less significant, i.e. are
less likely to have
material effect on
profit margins than on
price.
Fewer comparability
adjustments needed
compared with the CUP
method to account for
product differences,
because focus is on
functions performed.
Gross profit margins may be affected by
management efficiency etc. which may
have an impact on profitability but not
on the price of the goods or services.
Accounting consistency important for
comparability purposes.
Resale price method difficult to use
when (i) goods are further processed
before resale, or (ii) reseller contributes
substantially to creation or maintenance
of intangible associated with the
product (e.g. trademarks, tradenames).
Marketing
operations
(distributor not
adding significant
value to the
product)
TNMM
8
Net profit indicators (e.g.
return on assets, operating
profit to sales, etc.) are less
affected by transactional
differences than price.
Net profit indicators are more
tolerant to some functional
differences between controlled
and uncontrolled transactions.
Net profit indicators avoid
problem in some countries of
lack of clarity in public data as
regards the classification of
expenses in the gross or
operating profits.
Net profit indicator can be
influenced by factors that
would not have a significant
effect on price or gross
margins, making accurate
and reliable determinations
of arms length net profit
indicators difficult.
Taxpayers may not have
access to enough specific
information on the net
profits attributable to
comparable uncontrolled
transactions.
Cost Plus Analogue:
(Contract) Manufacturer
Service Provider not
adding significant unique
intangibles
Resale Price Analogue:
Distributor not adding
significant value to the
product
Asset Based TNMM:
Manufacturer if
reasonably reliable
comparables for Cost Plus
or cost based TNNM
unavailable
OECD
5
Profit Split (1)
9
Offers flexibility by
taking into account
specific, possibly
unique, facts and
circumstances of the
associated enterprises
that are not present in
independent
enterprises.
Tends to rely less on
information about
independent
enterprises
Often difficult to have access to
information from foreign affiliates,
especially where the foreign affiliate is
the parent company or a sister
company rather than a subsidiary of
the taxpayer
Difficult to measure combined revenue
and costs for all the associated
enterprises participating in the
controlled transactions, which would
require stating books and records on a
common basis and making
adjustments in accounting practices
and currencies.
Residual Profit Split
(Residual Analysis):
Highly integrated
transactions, e.g. global
trading of financial
instruments
Transactions where
both parties make
unique and valuable
contributions (e.g.
intangibles) to the
transaction
Profit Split (2)
10
Less likely that either party to
the controlled transaction is
left with an extreme and
improbable profit result, since
both parties to the
transaction are evaluated.
Two-sided approach may also
be used to achieve a division
of the profits from economies
of scale or other joint
efficiencies that satisfies both
the taxpayer and tax
administrations.
When applied to operating
profit, it may be difficult to
identify the appropriate
operating expenses associated
with the transactions and to
allocate costs between the
transactions and the
associated enterprises' other
activities.
Residual Profit Split
(Residual Analysis):
Highly integrated
transactions, e.g. global
trading of financial
instruments
Transactions where both
parties make unique and
valuable contributions
(e.g. intangibles) to the
transaction
OECD
6
Profit split for cases where both parties to the
controlled transaction make significant, unique
contributions (e.g. intangibles); highly integrated
activities
Difficulties in finding or adjusting comparables not
sufficient to select profit split if this method is not
appropriate given the functional analysis of the
transaction
Note: a one-sided method can be seen as a residual profit
split whereby 100% of the residual is attributed to the non-
tested party
11
Selection of the Most Appropriate Method
to the Circumstances of the Case
Objective: find the most reliable comparables
No requirement for an exhaustive search of all possible
sources of comparables
Acknowledge limitations in availability of information and
compliance costs
Reasonably reliable comparables: defined as the most
reliable comparables in the circumstances of the case,
keeping in mind the above limitations
Typical (non-compulsory) 10-step process to be followed
to perform a comparability analysis
Comparability Analysis
OECD
7
New guidance on the choice of the tested party;
Use of databases;
Internal/external comparables;
Secret comparables;
Foreign comparables;
Loss-making comparables;
Difficulties in finding comparables;
Comparability adjustments
Comparability Analysis
Lack of comparables does not mean that the taxpayers
controlled transaction is not arms length
Lacking evidence of what independent parties have done
in comparable circumstances...
... need to determine whether the conditions of the
taxpayers controlled transaction are comparable to what
independent parties would have agreed
Lack of comparables
14
Lack of Comparables
OECD
8
1) Due to uniqueness of the controlled transaction?
2) Due to lack of comparable independent enterprises
(vertically integrated industry; small market)?
3) Due to limitation on publicly available information on
potential comparables?
In the first case: profit split, especially if valuable,
unique intangibles contributed by both parties
In the two other cases: is the risk of error greater with
a one-sided method applied with imperfect
comparables or with a profit split applied with no
comparables?
Lack of comparables
15
Lack of Comparables
Traditional transaction methods (CUP, Cost Plus,
Resale Price)
unchanged
Transactional Profit Methods (TNMM and Profit Split):
Further guidance on practical application
TNMM: selection and determination of the net profit margin
indicator
Profit Split: determination of profit to be split and of splitting
factors
Berry ratios
Transfer Pricing Methods
OECD
9
New Guidance on the Use of Profit Split
How to split the combined profits in a profit split method?
Preference for objective allocation keys, e.g. based on
costs, assets or other relevant contributions of the parties
to the transaction
The allocation key must reflect the parties contribution to
the creation of value in the particular case
OECD reluctant to accept completely subjective keys
(such as value chain analysis)
No fixed allocations keys that would not account for the
facts and circumstances of the case
17
Case Studies
CS1_2011 J0 |arch 2011
AudItIng |NEs Transfer PrIcIng ssues
Case Study Workshop - FACTS E 0UESTDNS

1
IDTA Case Study Workshop
AudItIng huItInatIonaI EnterprIses - Transfer PrIcIng Issues

Pome, ItaIy
27-2 AprII 2011
Case Study - Facts E 0uestIons
Prepared by: hr. AntongIuIIo uffardo and hrs. Posanna 0'Ettorre
Country: taIy
ACKCPDUN0 - 0escrIptIon of the case: hanufacturIng and dIstrIbutIon of
househoId appIIances

8ETA Croup Is a multInatIonal IndustrIal group, engaged In the development,
manufacturIng and dIstrIbutIon of household applIances, operatIng In Europe
and South AmerIca. The headquarter Is In SpaIn and the subsIdIarIes are
resIdent In taly and In 8razIl.

ETA SA Is the parent company of 8ETA group and Is actIng as a prIncIpal
company engaged In the development and manufacturIng of a full lIne of
household applIances In the European "whIte goods" Industry. The company
has 5 manufacturIng facIlItIes located In SpaIn and has been constantly
focusIng on the product and process InnovatIon, developIng InnovatIve
products, In order to maIntaIn Its posItIon In the marketplace. The company
has the ownershIp of drafts, desIgns and IndustrIal models used for the
productIon of the goods and also owns the global brand of the group. 8ETA SA
sells Its products exclusIvely to Its subsIdIarIes operatIng In theIr respectIve
geographIcal sales areas Europe and South AmerIca . Hence, the parent
company does not sell Its products to unrelated thIrd partIes.

CS1_2011 J0 |arch 2011

2

The Croup has a strongly dIversIfIed busIness portfolIo. t operates through
four busIness segments: washIng, coolIng, cookIng and servIces. ServIces
segment Includes varIous servIces, such as postsales assIstance for customers,
sale of extended warrantIes and transport .
ALPHA SpA Is the talIan subsIdIary of 8ETA SA. t Is engaged In the
manufacturIng of specIal models of household applIances, called "top cookIng
lIne", characterIsed by a specIfIc trademark owned by parent company.
Furthermore, Alpha SpA dIstrIbutes In taly and Western Europe the "top
cookIng lIne" It manufactures and the entIre lIne of products made by the
parent company 8ETA SA.
Camma SA, the 8razIlIan company, can be defIned as a commIssIonaIre,
Involved exclusIvely In the dIstrIbutIon In South AmerIca of the Croup's
products manufactured by parent company.

Alpha SpA Is:

a fullfledged dIstrIbutor, as It Is Involved In the strategIc defInItIon
and practIcal ImplementatIon of group marketIng polIcy, contrIbutIng
to support brand Image;
a manufacturer, as It produces a specIal "top cookIng lIne", whIch Is
supposed to be sold exclusIvely wIthIn Its sales area;

The audIt
talIan Tax AdmInIstratIon audIted ALPHA SpA for fIscal year 2007 and the
audItors InvestIgated the transactIon between ALPHA SpA and the parent
company 8ETA SA.
The audIted transactIon Is the purchase by ALPHA SpA of household applIances
and components manufactured by the parent company, as It follows :

Full lIne of utIlItIes (washIng, coolIng, cookIng);

Some components, used In the manufacturIng process of the
"top cookIng lIne".

The Transfer prIcIng study exhIbIted by the taxpayer stressed out that ALPHA
SpA Is a mere dIstrIbutor wIth a low rIsk profIle performIng ordInary functIons.
WIth reference to manufacturIng actIvItIes, the TP study hIghlIghts that Alpha

CS1_2011 J0 |arch 2011

J

Spa functIons are lImIted to assemblIng components. No specIfIc remuneratIon
was IdentIfIed by the taxpayer for manufacturIng functIons.

The taxpayer applIed TN|| as transfer prIcIng method because of the nature
of the busIness and the content of avaIlable comparable data.

AccordIng to the audItors, the functIonal and rIsk analysIs of ALPHA SpA was
Incomplete and not exhaustIve. ndeed, the audItors examIned the process
performed by ALPHA SpA and verIfIed It performs, as a dIstrIbutor, more
complex functIons than the ones descrIbed In TP documentatIon.
|oreover, the taxpayer Is also Involved In manufacturIng process, IncludIng
varIous actIvItIes, as It follows:

desIgnIng several "top cookIng lIne models";
manufacturIng complementary elements to be added to components
purchased by 8eta SA;
assemblIng purchased components and manufactured complementary
elements In order to realIze the specIal hIghdesIgn models that complete
the group's cookIng lIne.

Consequently, tax audItors carrIed out a new functIonal and rIsk analysIs and
came to a dIfferent transfer prIcIng solutIon.
HereIn, you can fInd a short brIef about functIons performed and rIsks
assumed by ALPHA SpA.

ALPHA SpA performs the followIng functIons:

- 0IstrIbutIon:

0IstrIbutIon In Its own geographIcal sales area
Process of 0ualIty control
|anagement of brand and product advertIsIng, sales promotIon
0efInItIon of prIcIng polIcy In Its own geographIcal sales area
Cash dIscount and sales IncentIves management
ProvIdIng postsales servIces
CommercIal and contractual guarantees
0evelopment, management and traInIng of the dealer network

- hanufacturIng:

|anufacturIng of "top cookIng lIne"
Fesearch E development (focused on product and process InnovatIon)
0ualIty control
nventory and logIstIcs
WarrantIes for manufacturIng defects

ALPHA SpA assumes the followIng rIsks:

CS1_2011 J0 |arch 2011

4
0IstrIbutor:

A) Product rIsks:

Warranty for product lIabIlIty
nventory (obsolete stocks)
Supply rIsks

8) |arket rIsks:

8rand posItIonIng and Image promotIon
CreatIon and management of dealer network
PrIcIng polIcy

C) CredIt rIsks

NoncollectIon of receIvables
Terms of payment of payables

hanufacturer:

A) |anufacturIng rIsks:

Supply rIsks
nventory rIsks (I.e. deterIoratIon of goods, rIsk of loss of goods In
transIt)

8) |arket rIsks:

FIsks related to changes In market demand

C) Product lIabIlIty rIsks:

Costs arIsIng from a recall of products

ALPHA SpA owns the followIng IntangIble assets:

A) |arketIng IntangIbles:

ClIent portfolIo In Its local sales area
|anagement of dealer network
PromotIonal campaIgns and fInancIal strategIes

8) Trade ntangIbles:
DwnershIp of drafts, desIgns and IndustrIal models related to "top

cookIng lIne"

CS1_2011 J0 |arch 2011

5

DUESTIDNS
1. n your opInIon, Is a tradItIonal transactIonal method applIcable to the
case:
2. s the taxpayer solutIon (TN||) suItable to the case:
J. ConsIderIng ALPHA SpA functIonal and rIsk profIle, what would your
approach be:

CS1_2011
Case Study - Slovakia FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

CASE STUDY FACTS & QUESTIONS
Prepared by: Dalila Kutiov Luknrov
Country: Slovak Republic

BACKGROUND Description of the case
Alfa Germany is a private car manufacturer. From 2000, Alfa Germany
began producing private cars in its subsidiary Alfa SK in the Slovak
Republic.
Beta Germany is a sub-supplier of Alfa Germany it manufactures the
bumpers for private cars produced in Alfa Germany. Beta Germany
manufactures bumpers according to the customers design on request.
After gaining customer approval of the design, Beta Germany determines
the technical, engineering and design of the bumpers. Beta Germany is
owner of the know-how required for manufacturing the bumpers.
Alfa Germany and Beta Germany are non-related parties.
In 2000, Alfa Germany decided that the sub-supplier (bumpers
manufacturer) for its subsidiary Alfa SK (private car manufacturer in the
Slovak Republic) had to be located close to Alfa SK at a maximum
distance of 50 km from car manufacturer Alfa SK.
So as not to lose a part of its contracts, Beta Germany incorporated its
subsidiary Beta SK in the Slovak Republic.
Alfa Germany concluded a long-term general agreement with Beta
Germany (for 15 years) for supplies of bumpers manufactured in the Slovak
Republic by Alfa SK and subsequently repudiated its contract with its
subsidiary Beta SK.
Beta Germany approves the selling price for each series of the bumpers.
The orders for each series of bumpers are forwarded directly by Alfa SK to
Beta SK. In accordance with the specifications in the requests sent by Alfa
SK, Beta SK secures the material inputs, required projects technology and
manufacturing process, provides logistics, calculations and controls the
quality of the products.
CS1_2011
Case Study - Slovakia FACTS & QUESTIONS

2
Beta SK packs and supplies the completed orders to the customer Alfa
SK. Beta SK invoices the customer and the customer pays it direct to Beta
SK.
The result of this is that any profit/loss remains in the Slovak Republic in
Beta SK.
Throughout the period of the long-term contract with Alfa SK, for its
repudiation of the contract with Beta Germany, Beta SK pays Beta
Germany a commission of 4 % of its annual turnover on an annual basis.
In addition, on an annual basis, Beta SK has to pay to the parent company,
Beta Germany, the difference from the created profit arising in the past
year between the material costs actually expended on the specific order
increased by 5 %, other costs increased by 10 % and sales achieved from
the specific order. The material costs represent 75 % of production costs.

QUESTIONS
1. Is this kind of practice correct? Would an independent company accept
a price calculated on such a cost-plus basis for the performance of
comparable activities under comparable conditions?
2. Would an independent company under the same conditions agree to
payment of the additional fee a commission on annual turnover?
3. Can the contract repudiation be regarded as business restructuring
pursuant to Chapter IX of OECD Guidelines on Transfer Pricing?

CS1_2011
Case Study Germany (II) FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

Prepared by: Anke Schwengel
Country: Germany


1. Information about the company
The parent company (P), a large scale enterprise, is a German legal entity.
Company P develops and produces electronic articles in Germany and
distributes its products all over the world.
In the end of 2007 the 100 % subsidiary S, a Hungarian legal entity, was
founded, because the customer of one special product is located in Hungary
and this customer had insisted on a subsidiary in Hungary. The activities of
company S began in 2008 and are concentrated in assembly, painting and
printing on components of the special product.
The Key Account Management, the Pre-/After Sales Support and the Marketing
are still completely in Ps responsibility. Company P develops and produces
the components of the product in Germany and then sells the semi-finished
products to company S. Company S finishes the products (by assembling the
components, painting and printed on) and then sells them to the Hungarian
customer. The Logistic concerning the finished products (inclusive
Storekeeping, Transport and Factura) is in the responsibility of company S.
The owner of the essential intangible assets (the process and product know-
how and the connection to the customer) is still company P.
In January 2008 companies P and S signed a Manufacturing License and
Distribution Agreement, this agreement regulates the remuneration for the
benefit of being allowed to use the intangible assets.
In December 2009 (21/12/2009) companies P and S signed a further
agreement, which regulates the remuneration in a little bit different way.
CS1_2011
Case Study - Germany (II) FACTS & QUESTIONS

2

2. Transfer Pricing Method
The company P uses a two-steps transfer pricing method.

a) First step: Cost plus method
The price for the routine function production of the semi-finished products
is based on the cost plus method (all costs plus a mark up of 5 %).

b) Second step: Transactional profit method
The price for using the intangible assets is regulated in the Manufactoring
License and Distribution Agreement. The remuneration is calculated on basis
of the whole profit margin concerning the product. The difference between
the profit margin for the routine function production and the whole profit
margin in principle shall be distributed (allocated) to companies P and S
according to the companys calculations and analysis (here not further
explained because of its complexity and irrelevance in this case).
The agreement stipulates further, that company S must have a minimum
profit (EBIT) of 5 %, because company S has to be considered as a low risk
enterprise.
If company S doesnt reach an EBIT of more than 5 %, there is no payment of
royalties. Quite the opposite: if the EBIT is less 5 %, company P has to pay
compensation!

In the later agreement (dated 21/12/2009) is regulated, that company P in
principle has to pay a compensation for launching costs, if companys S EBIT is
less 5 %. But when company S produces bad quality or delivers damaged
products and if the percentage of the returned sales is more than 5 % higher
than usual, company P is not obliged to pay any compensation.

3. Problems
Because of the regulations in the Manufactoring License and Distribution
Agreement in 2008 company P had to pay a compensation of 6.900.000 Euros
().
Without the compensation payment company S would have made a loss of
4.300.000 , after consideration of the compensation payment, the profit and
loss account for 2008 shows a surplus of 2.600.000 . Now the guideline of
companys S minimum profit margin (5 %) is exactly fulfilled.
The payment of 6.900.000 has reduced companys P profit 2008 and is
described in the bookkeeping as a benefit payment for the introduction on the
market (for launching costs). The percentage of the returned sales in 2008 is
unknown.

In 2009 the EBIT was far less 5 %, but company P didnt pay any
CS1_2011
Case Study - Germany (II) FACTS & QUESTIONS

3
compensation, because the company had established that
the percentage of the returned sales was more than 10 % higher than it was
normally in comparable enterprises.
In both years (2008 and 2009) company S didnt pay any remuneration for
using the intangible assets.
The company states that the guarantee of 5 % EBIT for company S is necessary
and determined by market forces. Company S only buys the components and
finishes the products when the Hungarian customer has already ordered and
therefore must be considered as a low risk enterprise. Company S is founded
to work exclusively for the parent company P and because of this P has to pay
for the launching costs. Company S is merely responsible for rejects (bad
quality, returned sales) and delays in delivery, there were no other risks.

QUESTIONS
1. Would you accept the transfer pricing method (two-steps and a guarantee
of the 5 %-EBIT for company S, no remuneration for using the intangible
assets)?

2. Is this transfer pricing method applied in accordance with the Arms Length
Principle and the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations, and in particular:
a) Company S buys the semi-finished products and sells the finished products
in its own name. This is different from doing only industrial services for
company P. Is the cost-plus method (first step) the correct transfer pricing
method?
b) Who has to bear the launching costs usually?
c) Is an EBIT of minimum 5 % appropriate to the functions and risks of
company S (as a low risk producer)? What do you think would be the maximum
margin?

CS1_2011
Case Study - Switzerland FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

Prepared by: Thomas Brunner, Jan Edelmann
Country: Switzerland

A group develops and manufactures beauty products and is selling them on
the US and Canada Market. With its recent entrance into the European
market, the group is building up a principal in Switzerland. The principials
focus is on building up the vendor market, the European distribution center
and the procurement for the whole group. By increase the principal should
take more and more charge of marketing activities. The success of the group
is based on direct selling system, similar to Tupperware Parties.

The principal is directly hold by a holding based in Luxembourg and the
Luxembourg holding is directly hold by a privately hold US-LLC.

Its planned that the Swiss principal holds a Chinese representation or legal
entity with purpose of procurement and quality control. The remuneration is
not yet defined and is not a question on this case study.

The company asked for a tax ruling (means APA) to confirm arms length
ranges for the following intercompany transactions:

Low risk distributors: Cost plus, mark up 5 %

US Holder of IP: Franchise fee of 7 % (decreasing over some years)

Swiss principal for group procurement: Cost plus on Swiss costs, mark up 2,6
%

CS1_2011
Case Study - Switzerland FACTS & QUESTIONS

2

QUESTIONS
1. Are the used methods adequate?
2. Can we assume the proposed rates are at arms length and if not, what
rate is maybe not correct and why?
3. How would you improve the rates? What would you ask to improve
them?
4. Are there actually any real possibilities to save group taxes or income
taxes of the beneficial owners?

CS1_2011
Case Study -France FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

Prepared by: Stphane Lesage
Country: France


Case: commission agent and high quality standards

Facts

Description of the case
Polo France is a French company and has been part of a multinational
group, Polo Group, since 2007. The ultimate owner, Polo Incorporated, is
registered in USA. The group (Polo Group) is engaged in the business of
manufacturing, selling and promoting high quality apparel and has sales
activities all over the world.
Polo France, whole-owned by Polo Inc., is the sales company located in
France.
The trademark Polo is associated with a company known for high standards
and excellence.
Polo Inc.:
- holds the right and interest in the trademark Polo but doesnt charge
any license fee for the Polo brand,
- wished to maintain the image of the trademark throughout the world
and to promote the Polo products.
Polo France operates a flagship store and has to maintain to the
exacting high quality standards demanded by Polo Inc. to promote the
image of the Polo Group.
The locations of the Polo Frances stores are imposed by Polo Inc. in
famous addresses in Paris.
So, to respect the high quality standards of the Polo Group, the French
company bears important costs of implantation (like expensive rents,
works, the design and decoration).
CS1_2011
Case Study - France FACTS & QUESTIONS

2

Description of the transfer pricing policy
Polo France signed a commissionaire agreement on July 2008 with Polo
Ltd, a company 100% owned by Polo Inc. and incorporated in England.
The French company, set up since 2007, became a commission agent since
the Financial Year 2009.

100%

100% Polo products (2009)

The transfer pricing method used by the Group is the resale price method
which allows a gross margin (54,5%) to Polo France.
The Group specified that the rate should be adjusted if the parties agree.

But the taxpayer didnt prove that the prices are in arms length
transaction range.

Polo Frances financing structure and profit levels are as follows. Polo
France sales/turnover increased from 0 in 2007 and 2008 to 7 millions
in 2010.

Financial Year 2007 2008 2009
Turn-over 0 0 3 920 680
Marketing contribution 0 0 1 473 000
COGS 0 0 1 783 909
Rent 1 739 502 4 087 808 4 409 404
Salary 0 0 522 974
Depreciation 785 764 181 557 819 748
Gross margin NS NS 54,5%
Operating margin -2 709 116 -4 327 134 -2 142 355

Unlike French company, the consolidated Polo Groups results are very
profitable (operating margin > 10% by FY throughout the period 2007-
2009).

During Financial Year 2009, Polo France received a marketing contribution
paid by Polo Inc. to counterbalance the expensive rents compared with the
Polo Inc. (USA)
Trademark owner
Polo Ltd.
(GB)
Polo France
since 2007
CS1_2011
Case Study - France FACTS & QUESTIONS

3
others stores of the Group in France which are not located in so prestigious
locations.

In conclusion, the Polo Group considered that:
- the French company became a commission agent since the Financial
Year 2009 only,
- this method respects the arms length principles and is compliant with
the OECD guidelines.

QUESTIONS
1. When really began the activity of Polo France? During the Financial
Year 2007 (setting-up) or Financial Year 2009 (commissionaire
agreement)?
2. Should the tax authorities accept a market penetration scheme for the
French company?
3. Is it acceptable to admit the method of transfer pricing without
adjustment? And how should an adjustment be calculated?
4. Or are there any alternative methods that could be used instead of, or
in addition to, the method suggested by the Group?
20.4.2011
1
Value Added Reseller -
Case Study
Rome, Italy 27 - 29 April 2011
Sami Koskinen & Minna Wilander, Finland
20.4.2011
2
A Group - Background
A Oyj, a Finnish parent company of multinational A Group,
has been subject to tax audit
A Group is specialised in electronics manufacturing
business
A Group has distributors in Europe, Asia, Australia and
North America
Product portfolio includes both mass products sold to end
users / distributors and customized equipment for
electronics manufacturers
20.4.2011
2
20.4.2011
3
A Oyj - Functional analysis
Functions of A Oyj
manufacturing, R&D, sourcing, brand management, most of the
marketing functions
A Oyj bears
business risk, sales strategy risk, currency risk and the risks
related to its above mentioned functions
A Oyj owns
patents, customer lists, trademarks and software
A Group: the value added is generated in sales,
distribution and after-sales services
20.4.2011
4
VAR - Functional analysis
Group distributors
sales and marketing of products
bear customer, market, price and warehousing risks
A Group classifies its distributors as VARs (value added
resellers)
TP documentation; VAR is a company that adds some feature to
an existing product and sells it. The value can come from
professional services such as integrating, customizing, consulting,
training and implementation. The value can also be by developing
a specific application for the product designed for customers
needs which is then resold as a new package.
20.4.2011
3
20.4.2011
5
A Group - TP Method Used
The major intra-group transactions are the sales of
finished or semi-finished products from A Oyj to the
VARs
Setting the prices of intra-group sales transactions
A Group uses market price -based gross price list for both VARs
and external customers (with a variable coefficient)
A Oyj did not diclose the list
A Group has applied Resale Price Method, RPM in testing
the transfer prices
comparables weighted average interquartile range of gross
margins was between 19,9 % and 34,1 %, median was 27,5 %
VARs gross margins varied between 21,4 % - 30,8 %, with an
average gross margin of 25,4 %
20.4.2011
6
Tax Auditors - On applicability of RPM
Resale Price Method is not applicable
VARs add value to the goods by customizing and offering related
services before the resale
Comparability factors: requires reasonably high level of similarity
of functions, risks and assets as well as the characteristics of
goods to ascertain comparability
Accounting standards, similarity of costs included - > A Oyj has
used material costs information instead of lacking COGS to
calculate GM for some of the comparables
TNMM should be applied instead, PLI = EBIT margin
Require lesser degree of comparability of functions, risks and
goods sold than RPM
Facts and circumstances
20.4.2011
4
20.4.2011
7
A Group - On applicability of RPM (1)
RPM is most suitable
OECD: should in principal be applied to distributors
VARs are risk-bearing distributors and therefore no certain level
of EBIT margin can be guaranteed
Price setting is based on a gross price list wich is used also both
for internal and external transactions
Most of the revenue accrues and value generates from services
Only 10 % of the products are customized
TNMM is not suitable
Other facts than functions or characteristics of products affect the
EBIT margins - > A Oyj cannot affect the EBIT margins of VARs
Application of TNMM would in fact characterize the VARs as
LRDs
20.4.2011
8
A Group - On applicability of RPM (2)
Tax payer has a better understanding of the most suitable
method
Reliability in RPM can be added by qualitative search
steps
Using the same method when setting the price and testing
the arms length nature is more reliable
A Oyjs EBIT margins for internal transactions have been
higher than top quartile EBIT margins
20.4.2011
5
20.4.2011
9
A Group - Questions
What kind of guidance of application do OECD Guidelines
provide for testing the arms length nature of transactions
with a related party distributor?
What kind of factors affect the selection of the most
applicable method in this case?
What would be your solution?
CS1_2011
Case Study - Finland FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

Prepared by: Minna Wilander / Sami Koskinen
Country: Finland

The Audit
A Oyj has been subject to tax audit covering the fiscal years 2006-2008. The
main issue was to audit the arms length nature of the intra-group prices of
sales operations. In the audit, Groups transfer pricing documentation,
including functional and economical analyses regarding manufacturing
functions of A Oyj and distribution functions of Groups sales companies, was
analyzed.
Transfer Pricing Documentation of Group A
In the documentation, the operations of the Group were presented as follows
(documentation text intended):
A Oyj, established in 1995, is the head office of a global, full-service
electronic appliances supplier Group A. A Oyj is focused entirely on
producing, developing, selling and marketing the appliances. A Oyjs
products are sold in more than 100 countries. In addition to direct
sales, A Oyj also supplies products to distributors, machine and
equipment manufacturers and brand label customers. Group A has own
sales subsidiaries in Sweden, Norway, Germany, the Netherlands,
Belgium, France, Great Britain, Austria, Italy, Spain, Russia, India and
Australia.
The main intra-group transaction flows were the electronics sales to group
sales companies. According to Groups A transfer pricing documentation, the
sales companies are comparable to a value added reseller (VAR). Group A has
classified VAR as follows:
A value-added reseller is a company that adds some feature to an
existing product and sells it. The value can come from professional
services such as integrating, customizing, consulting, training and
implementation. The value can also be by developing a specific
CS1_2011
Case Study -Finland FACTS & QUESTIONS

2
application for the product designed for the customers needs which is
then resold as a new package.
Transfer pricing in Group A is based on external market prices of the similar
products. A Oyj has developed a synthetic gross price list. The gross prices,
however, are not applied as such. For each subsidiary a coefficient is defined
and the product prices are received by multiplying the gross price with the
coefficient. For start-up phase sales offices in new market areas the
coefficient is slightly lower during the first years. Also for specific subsidiary
end customers (often OEM customers) rebates or lower coefficient are
defined. In addition, there are also order-specific rebates (for example
important references or big project). However, the list was not enclosed for
the auditors.

The value- added is defined according to the documentation:
The most important value added functions of Group A are sales,
distribution and after sales services in the parent company and
subsidiary and R&D functions at the parent company.
The functional analysis of the Group A is as follows:
A Oyj is manufacturing the products and carries therefore all the risks
related to the production. A Oyj is also responsible for all the R&D
functions, component sourcing, testing, production planning and
logistics of the products. A Oyj carries the warranty risks and risks
related to design quality and IPR.
A Oyj and the subsidiaries are all performing contract negotiations and
concluding frame and sales agreements, however, the emphasis being
at parents side. Market analysis, customer segmentation and analysis
is done both in A Oyj and in the sales subsidiaries. A Oyj and sales
subsidiaries have the customer contacts, and offers are prepared and
negotiated in both units. All units also give after sales services, but
mostly the sales subsidiaries.
The risks are also carried according to the functions, e.g. A Oyj carries
risks related to currency, sales strategy and business risk, whereas the
sales subsidiaries carry customer risks, market and price risks. As the
sales subsidiaries are most responsible for the after sales services, they
also carry most the capacity risks related to this function.
The intangible assets of the Group A are customer lists, patents,
trademarks and software (applications and IT tools). The patents,
trademarks and software are owned by A Oyj. Customer lists are owned
by respective unit.
The choice of transfer pricing method
The documentation describes the different transfer pricing methods under
OECD Guidelines:

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3
The RPM is ordinarily used in distributor situations involving the
purchase and resale of tangible property in which the distributor has
not added substantial value to the goods by altering them before
resale either physically or by the use of intangible property. Although
all of the comparability factors discussed above must be considered,
comparability under the resale price method is particularly dependent
upon the similarity of functions performed, risks borne and contractual
terms.

Group A has justified the choice and application of resale price method as
follows:

The role of the sales company in the Groups A value chain is to
operate as a buy and sell -distributor of the appliances with value
added services for third-party clients. When a company is purchasing
tangible products from a related company in order to sell the products
as such without adding value to the products to a third party, the
Resale Price Method (RPM) is typically used to determine the price
between the companies.
Economic Analysis
A Oyj had prepared an economic analysis of the arms length resale prices of
European external distributors. A Oyj had found eleven companies as
comparable companies from ORBIS database. Comparables weighted average
inter-quartile range of gross margins 2006-2008 was between 19,9 % and 34,1
% and the median was 27,5 %. However, four of the companies had not filed
the following financial information to the database: cost of goods sold, gross
profit and other operating expenses. Therefore, A Oyj had calculated gross
margin by replacing the needed COGS by material costs data.

The gross margins of the group distributors varied between 21,4 % - 30,8 %.
The average was 25,4 %.
Tax Auditors Proposition
The auditors claimed that under the OECD Transfer Pricing Guidelines (2010),
chapters 2.21 and 2.29, the resale price method can be applied to distributors
that do not add substantially to the value of the product. According to the
auditors, besides the sales and distribution functions, the distributors offer
e.g. implementation and integration services and customization which
relevantly add value to the sold products.

In addition, on the auditors viewpoint, application of the RPM requires
relatively high level of comparability for both the functions and risks of the
companies, the products sold, markets and so forth. One great weakness is
the difference of the accounting standards; how the gross margins are
calculated, as well as the insufficient information about the actual cost
structure of the comparables.
CS1_2011

4

Therefore, the auditors rejected the use of RPM and instead, the weighted
average EBIT margin of the same set of comparables was calculated. The EBIT
margins of the comparables varied between 0,44 % and 11,03 %. The inter-
quartile range was 1,50 % - 7,33 % and the median 5,25 %. However, Group
A European distributors 2006-2008 annual EBIT margins varied between -
20,24 % and 15,06 % (whereas A Oyjs EBIT margin has been 9,85 % in 2008,
9,87 % % in 2007 and 11,17 % in 2006).
The arms length principle is incorporated in the Section 31 of the Finnish Tax
Assessment Procedure Act. According to the provision, if a Finnish taxpayer
company has failed to comply with the arms length principle, the tax
authorities may adjust the taxable profit of the company to correspond the
taxable profit that would have been yielded if the pricing of the companys
transactions were at arms length. In other words, profits that are not
included in companys profits because of non-arms length situation could be
included in the taxable profits of that company afterwards and taxed
accordingly. Under the provision, the auditors added the part of the European
distributors EBIT margins exceeding the 5,25 % median to the taxable
income of A Oyj.

QUESTIONS
1. What kind of guidance of application do OECD Guidelines provide for
testing the arms length nature of transactions with a related party
distributor?
2. What kind of factors affect the selection of the most applicable method
in this case?
3. What would be your solution?

CS1_2011
Case Study Germany (I) FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

Prepared by: Uwe Schmitt
Country: Germany

Associated enterprises
The German company (Lion GmbH, incorporation) is one of the world's
largest manufacturers of Process Automation equipment.
The Singapore subsidiary (Fox Pte Ltd) supplies mainly special printed
circuit boards (PCB) as a contractual producer to its German parent company
and its U.S. sister company.
Under an agreement with the tax audit (for the period 1999 - 2003) the
reasonable cost-plus was established by 2008 with 8.5% to full costs.
All transfer prices are calculated in November/December to budget full-cost
basis for the next year. The determined transfer prices are usually valid for
one year and are adjusted only for major changes in the environment (such as
soaring commodity prices).
Due to the calculation of transfer pricing to budget costs at year-end results,
the subsidiary will not have an exact profit margin of 8.5%.
According to the agreement with the previous tax audit, there will only be a
correction of the transfer prices during the current tax auditing period (2004
2007), if the profit of the subsidiary should be outside the range.
Summary of the financial results of the subsidiary and the benchmark
analysis:
2004 2005 2006 2007
Sales revenue 98.948 112.295 124.676 151.026
EBIT 11.666 7.973 10.610 14.710
EBIT in % 11,79 % 7,10 % 8,51 % 9,74 %
Range
Lower quartile 3,30% 2,40% 2,30% 2,70%
Median 9,20% 8,80% 8,50% 9,20%
Upper Quartile 10,90% 10,50% 10,40% 10,80%
Outside range ? yes no no no
CS1_2011
Case Study Germany (I) FACTS & QUESTIONS

2

The inter-quartile range represents the middle 50 % of returns observed
among the comparable companies. As it is not unreasonable to have slight
differences in the products and functions between the tested party and the
comparable companies, the use of this range increases reliability of results of
the benchmark analysis.
As shown in the table above, there should be a correction of the transfer
prices for the year 2004.
The audited company does not share this view, relying on the OECD Transfer
Pricing guidelines.
Chapter I of the OECD guidelines (1.49 1.51) discusses the appropriateness of
using multiple year data when comparing financial results. The guidelines
suggest that the use of multiple year data is appropriate in order to reduce
the potential distortion caused by business and product life cycles.
As a result of this approach, the company concludes that a correction of the
transfer prices of the year 2004 in the light of a multi-year review is not
required, see the following table.

2004 2005 2006 2007 Total
Sales revenue 98.948 112.295 124.676 151.026 486.945
EBIT 11.666 7.973 10.610 14.710 44.959
EBIT in % 11,79 % 7,10 % 8,51 % 9,74 % 9,23 %
Range
Lower quartile 3,30% 2,40% 2,30% 2,70% 2,80%
Median 9,20% 8,80% 8,50% 9,20% 8,95%
Upper Quartile 10,90% 10,50% 10,40% 10,80% 10,85%
Outside range ? no

QUESTIONS
1. Do you agree with the opinion of the company, that the consideration
of a longer time (resp. multiple year data use) is necessary for the
determination of the range?
2. If so, what period should be considered?

CS1_2011
Case Study - Poland (II) FACTS & QUESTIONS

1

Rome, Italy
27-29 April 2011

Prepared by: Pawe Parzych
Country: Poland

I. Facts
Company A with registered seat in Poland is associated with company B with
registered seat in country X.
The company B owns 100% of shares in company C which owns 100% of shares
in company A.
The business activity of company A concerns production and distribution of
plastic products for building industry, especially PVC window profiles.
Company A supplemented its range of products (i.e. locally produced
products) by products purchased from company B and sold them on the Polish
market to independent entities.
According to agreement between companies A and B:
- discount from basic price was 50%,
- goods were to be delivered to the warehouses of company A,
- payments are made within 90 days, in PLN,
- the agreement does not include the method of calculation of the price for
product.
The company A buys profiles only from company B which were then resold to
unrelated parties.
II. Tax audit
It was stipulated that:
1. The company A sold products bought form the company B at the price
lower 14,7% cheaper than the company A pay for them.
2. Company B imposed the highest production margin on the Polish company-
60% (a margin adopted for other companies in the group was in the range of
13-42%),
CS1_2011

2

3. The group transfer pricing policy is based on cost plus margin method, in
order to calculate the price, the ABC (Activity Based Costing) method was
adopted, following costs were taken into consideration: material costs, direct
labor costs, direct machine costs, tooling costs, manufacturing-related
overheads. Then the following costs (which are excluded from the ABC
method) were added: i.e. logistic costs, customer service-related costs,
transportation costs. Then adequate gross margin was added.
The company A strategy was targeted on production capacity increase so as to
gradually replace the more expensive merchandise bought from company B.
The strategy was not realized since the sales of this merchandise increased
dramatically in comparison to the previous years.
III. Company A explanations
Purchase from company B was necessary so as to keep continuous supply
reaction on expectations and needs of customers.
IV. Adjustment
Adjustment was made by adopting resale price method. Justification:
- It was impossible to adopt CUP method since company A bought merchandise
only from company B,
- Company A sales merchandise to independent entities,
- Company A is the only importer of merchandise X delivered by associated
companies,
- Merchandise is not processed by company A but only resold,
- Company A did not provide necessary documents so as to justify adopted
cost plus method as well as price calculation,
- Lack of internal comparable transactions.
The average margin which was adopted by independent entities in comparable
transactions on Polish market was stipulated.
Stipulation was made by using publicly available information (balance sheet,
internet, report of branch association).
All comparable entities achieved profits in the controlled tax period. Return
on sales achieved by these entities was in the range of 11,32% - 31,53% (i.e.
11,32%, 17,79%, 19,66%, 22,5%, 31,53%). Return of sales achieved by company
A was () 15,48%.
Publicly available data allowed to stipulate only margin on sale (including
general and administrative costs). In order to stipulate gross margin on sale
the tax audit office asked comparable entities to submit necessary
information. Anonymous data were used company A did not receive
information about the source of that data.

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3

Tax audit office performed functional analysis of 4 entities. Based on
information submitted by these entities, the gross margin on sale of 7,8%,
14,8%,13,9% and 9% was stipulated. Company A achieved gross margin of
()14%.
The lack of available data on one of abovementioned entities resulted in
excluding it from average gross margin calculation. Average margin for
remaining entities was stipulated on 12,2%.
Company did not submit reservations to the tax audit protocol (dated on
30.07.2007) however it requested for MAP procedure under Arbitration
Convention (29.03.2010).
V. Company A position
In absence of any comparable transactions (the Company A claims that all
entities used by tax auditors a part of some groups) and because company A
has routine function and risk profile TNMM has been chosen by company A to
review if transaction between company A and company B is consistent with
the arms length. Tested party is company A as less complex then company B.
The company A claimed that years 2004-2009 shall be revised, as typical
business cycle occurs every 5-7 years and this respect changes in organization
structure in the group.
The weight average operating profits (Amadeus search) in years 2002-2006 for
distribution activity was in the range of 1,87% - 26,98%, with median 4,60%.
The company A agrees that adjustment was justified because without
adjustment operating margin calculated by company A would be 0,69% instead
of 1,49%.

QUESTIONS
1. Lack of proper TP documentation can this be a justification of not
accepting taxpayers method.
2. Use of anonymous data the company A has an access to all
information except identification data of comparable entities.
3. Business cycle and reorganization of group structure shall it be taken
into consideration in MAP procedure initiated two years after finished
tax audit?

1
1
Case Study
Downturn Economy
Henrik Karlsson och sa Olsson
Large Tax Payers Office
2
Automotive industry
Before economic downturn
Profitability problems
Production costs are pressed down from
OEM to subcontractors
Decreases in number of subcontractors
2
3
The Group
The group was formed by private equity
in 2006 by combining two European
subcontractors/suppliers with former
significant financial problems
The group has
Operational centre in Germany
21 manufacturing facilities across Europe
4
The Group
Germany
Headoffice
Key entrepreneurial functions
Most risks
Owns all IP
Manufacturing companies
Limited functions and risks
Earn a guaranteed return
3
5
The Group
Sweden
5 manufacturing facilities (limited function
manufacturers)
Perform some contract R&D for Germany
Perform some services for Germany
Manufacturing approx. 97 % of the
turnover
6
Agreements
Entrepreneurial Agreements and
Addendum
(TNMM, NCP 1% (net cost plus))
NCP=Operating Profit/(Turnover-Operating Profit)
R&D Services Agreement
(TNMM, NCP 11,5%)
Services Agreement
(cost plus 5%)
4
7
Entrepreneurial Agreement
2006-12-21 Agreement 1 NCP 1%, 2006-2007
2008-07-22 Addendum NCP 1%, 2008
2008-11-20 Agreement 2 NCP 1%, 2008
Restructuring cost 08/09 excluded
Certain bad debt loss excluded
2009-02-23 Addendum* NCP 0,7%, 2008
NCP 0,35-0,7 %, 2009
Plant closure cost 08/09 excluded
* which has already verbally been reached in 2008 in the
context of the global financial crisis and economic downturn
8
Other terms of the Agreement
Duration: From the effective Date and continuing
Determination of Compensation (NCP): For 2008
the parties will agree the compensation before
31/12 of the preceding year (same for 2009 &
2010)
Termination: Either party may terminate the
Agreement on not less than three months notice,
such notice to take effect as at 31/12 in any year
5
9
Restructuring Costs
Booked Restructuring costs (incl. closing down
of manufacturing facilities) in the Swedish
company;
FY 2006 109 mSEK
FY 2007 0 mSEK
FY 2008 109 mSEK
FY 2009 8 mSEK
Deductions in tax returns made later years
10
EBIT
Germany EBIT
FY 2006: - 7,1% - 7 887 t
FY 2007: 2,0% 5 003 t
FY 2008: - 6,1% - 14 528 t
Sweden
FY 2006: - 7,3% - 9 935 t
FY 2007: 0,8% 3 752 t
FY 2008: - 2,5% - 7 835 t
6
11
Summary
Sweden
No changes in the functions
Reduced compensation for manufacturing
activities
No compensation for all costs (restructuring and
plant closure cost)
More risks (bad debt losses)
No new benchmarking analysis
New agreements are not temporary
12
Discuss
Question 1
Is it acceptable to lower the compensation for this limited
function manufacturer?
Question 2
a) Under which circumstances could it be acceptable
to let a limited function manufacturer get less
compensation or bear losses?
b) Do you need to change the risk profile of the
manufacturers if they should get less compensation
or bear losses?

CS1 - 2011 Delegates Folder

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