Asia-Pacific Transfer Pricing Handbook

Robert Feinschreiber, Margaret Kent

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118359372
• eBook ISBN: 9781118359402
• Edition: 1
• Topic: Business
• Subtopic: Taxation
• Index: Business

An overarching look at transfer pricing regimes in Asia-Pacific countries and what they mean for foreign businesses

A comprehensive guide for companies doing business globally, Asia-Pacific Transfer Pricing Handbook explains the policies and practices that Asia-Pacific countries employ with regards to taxing foreign businesses. The only book that analyzes and guides companies through the often complex transfer pricing rules in place in Asian-Pacific nations, the book explains how authorities in fifteen countries, including ASEAN, India, New Zealand, Japan, and South Korea, tax any company doing business within their borders.

Helping foreign companies to properly price their goods and services for global markets, providing defenses for transfer pricing audits, explaining standards for creating comparables that multijurisdictional tax administrations will accept, explaining documentation requirements and timing issues, and creating awareness about inadvertently becoming a permanent establishment, Asia-Pacific Transfer Pricing Handbook is an essential resource for doing business abroad.

• Provides comprehensive, accessible information on transfer pricing in Asia-Pacific countries
• Covers fifteen Asia-Pacific countries, including all ASEAN countries, giving readers unparalleled exposure to the different transfer pricing arrangements across the region
• Explains how companies doing business abroad should price their goods and services for global markets to remain in accordance with the law

A complete and comprehensive guide to transfer pricing and its implications for firms and accountants operating in the Asia-Pacific region, Asia-Pacific Transfer Pricing Handbook explains everything foreign companies need to know about doing business abroad.

Part One

Country-by-Country Analysis

Chapter One

Introduction

Transfer Pricing is a central ingredient to trade and commerce, to financing and accounting, and to law and economics. We have selected 15 countries in Asia and the Pacific where these transfer pricing components have grown in importance.

We have divided the Asia-Pacific Transfer Pricing Handbook into two parts: Part One: Country-by-Country Analysis and Part Two: Advanced Applications—complex transfer pricing issues.

PART ONE: COUNTRY-BY-COUNTRY ANALYSIS

For the convenience of the reader, we provide alphabetical country-by-country analysis. We examine these countries in the Asia-Pacific region:

Australia

China

Hong Kong

India

Indonesia

Japan

Korea

Malaysia

New Zealand

Philippines

Singapore

Sri Lanka

Taiwan

Thailand

Vietnam

PART TWO: ADVANCED APPLICATIONS

The Asia-Pacific Transfer Pricing Handbook then examines transfer pricing issues that take place across borders:

• Hong Kong and Singapore
• India and Hong Kong
• Australia, Canada, Japan, and the United States
• Singapore and the United States
• Japan and South Korea
• China and Taiwan
• Malaysia and Singapore
• Hong Kong and India

Multinational institutions play a major role in the transfer pricing context. These organizations include the Organisation for Economic Co-operation and Development (OECD) and the Association of Southeast Asian Nations (ASEAN), including ASEAN + three. At this time, the OECD has 34 members, only 4 of which are in the Asia-Pacific region: Australia, Japan, New Zealand, and South Korea. Nevertheless, the broader Asia-Pacific group of 15 countries, which are the subject of this analysis, follow OECD principles. Most of the nonmember countries are already on track to become OECD members.

Today the ASEAN pact, including ASEAN + three, have moved slowly in addressing transfer pricing issues. In part, the ASEAN pact and ASEAN + three are reticent because some members do not have their own transfer pricing regimes.

Each country stands on its own, despite the impact of the OECD. In particular, these six developments are notable:

1. Japan took the lead in profit split techniques, and the OECD follows these techniques.

2. China and Vietnam address control issues, which the OECD fails to address.

3. Singapore is applying important techniques for the treatment of services in the transfer pricing context.

4. Hong Kong has developed anti–tax haven techniques and put these rules with its transfer pricing guidelines.

5. India is far ahead in case law developments, leaving the United States behind.

6. Australia is far ahead in developing pre-audit techniques for midsize businesses.

Chapter Two

Australia’s Risk Assessment Transfer Pricing Approach

The Australian Government, through its Australian Tax Office (ATO), issued in March 2005 an international transfer pricing document entitled “A Simplified Approach to Documentation and Risk Assessment for Small to Medium Businesses.” As tax practitioners working in the field of international transfer pricing, it is our position that the ATO’s document is neither simplified nor designed for small and medium businesses. The ATO, in response to this comment, increased the small business threshold. Nevertheless, despite these shortcomings, this document provides multinational taxpayers with a worthwhile risk assessment approach toward transfer pricing issues.

The U.S. taxpayer is cautioned that the ATO transfer pricing review and audit process involves two essentially separate procedures:

1. The ATO pervasively applies the transfer pricing review process, evaluating the business and its transfer pricing activities as an intermediate audit-related step. Many companies can find themselves as being on the ATO’s watch list, but few companies face transfer pricing audits.

2. The ATO rarely audits business for transfer pricing issues, which suggests that a company facing a transfer pricing audit likely can be subject to transfer pricing adjustments and penalties.

INTRODUCTORY ISSUES

The ATO’s transfer pricing simplified approach applies to businesses with an annual turnover of less than A$100 million, which the ATO defines as small to medium businesses. The threshold is based on total transactions, not just on international transactions. Thus, a business having domestic Australian sales of A$5 million and international sales of A$90 million would be within the confines of the small- to medium-businesses parameters. In contrast, a business having domestic sales of A$100 million and international sales of A$5 million would be outside the confines of those parameters. Earlier we suggested that the ATO would be well advised to base the small- to medium-businesses parameter on international transactions standing alone. However, the ATO increased the parameters in 2009, thus alleviating some of the objections that we previously had made.

The ATO overrides the A$100 limitation for small to medium businesses in two respects:

1. The enterprise is part of a multinational group that is listed on any stock exchange. The term “any stock exchange” might possibly include stock exchanges outside Australia.

2. The enterprise is part of a private group with any international subsidiary or other offshore related party that “has the resources” to deal with global transfer pricing issues. The ATO provides no guidance to access the parameters that would constitute “having the resources.”

The small- to medium-businesses guide seeks to explain:

• The transfer pricing review process
• The ATO’s methodology in selecting businesses for review
• The “simplified” transfer pricing documentation that the ATO suggests businesses maintain
• A four-step process for setting up related party pricing and reviewing the transfer pricing outcome
• The mechanism under which the ATO scores the business reality of the business’s profit and the quality of the company’s transfer pricing records to determine the ATO’s further response
• The outcomes of the transfer pricing review or audit

TRANSFER PRICING REVIEWS

The ATO views the prices in the transfer pricing mechanism as reflecting a fair return for activities carried out by or for an Australian business based on:

• What is done
• What assets are used
• Who bears the risk in carrying out the activities

Australian transfer pricing addresses related party international dealings. These dealings cover the sale, purchase, finance, or asset transactions to or from an Australian taxpayer and an overseas company or other overseas business entity or non-Australian resident person who is related to the taxpayer by common ownership or by family ties. These transfer pricing provisions do not pertain to all-Australian transactions. The dealings cover goods, services, services, and intangibles.

The small to medium business in Australia must complete and lodge a Schedule 25A with the annual income tax return if the total value of related cross-border transactions is more than A$1 million. Thus, the taxpayer having transactions less than A$1 million has nothing to report; the taxpayer having transactions between A$1 million and A$100 million might be able to come within the so-called simplified approach to small to medium businesses.

The ATO looks to two specific facets of the business’s tax return to determine its response, if any:

1. The bottom-line profitability of the business

2. How the taxpayer answers Schedule 25A

The business may face from the ATO:

• A transfer pricing review
• A transfer pricing tax audit and subsequent adjustment and penalties if the business scored a high risk as a result of the review

The ATO field audit teams conduct a risk review process covering all areas of tax risk. Transfer pricing issues are a part of this wider review process. If the ATO judges transfer pricing as an area of concern for a business, it will conduct a transfer pricing review as a prelude to an audit action. The process is mandatory in Australia regardless of the size of the business.

The ATO, in selecting businesses for a transfer pricing review, considers factors such as:

• The number and value of related party cross-border transactions
• The performance of the business over time (i.e., whether the business makes commercial profits or incurs consistent losses or low profits)

These categories of businesses in Australia are at the greatest risk of a review and a possible follow-up audit:

• Businesses with significant cross-border transactions
• Businesses having year-on-year Australian losses
• Businesses having consistent low profits
• Businesses having noncommercial profits

The transfer pricing review involves the ATO’s review of transfer pricing documentation, coupled with interviews of a business through desk and fieldwork. The ATO’s aim is to assess the quality of the processes and documentation on hand and with the commercial realism of the outcomes of the business’s dealing with related parties. In this regard, the ATO uses economists and data from public databases that the business and its tax advisor can access. Small to medium businesses do not have to create documents beyond the minimum necessary to arrive at an arm’s length outcome in the context of their business.

The ATO applies a scoring process to the business, evaluating:

• The quality of the business’s processes
• The quality of the business’s records
• Commercial outcome arising from related party cross-border transactions

After the ATO undertakes the scoring process, it evaluates whether a transfer pricing review shows that there is a risk to the revenue associated with a business’s related cross-border transactions. The business may face an ATO audit if the risk occurs.

DOCUMENTATION REQUIREMENTS

The ATO expects significantly less transfer pricing documentation for a small to medium business than for a large business. The extent of the documentation the ATO requires increases as the significance and complexity of the transactions increase. For example, the ATO would expect a business having A$48 million in related party cross-border transactions to have more extensive documentation than a business having A$8 million in related party cross-border transactions.

Small businesses having relatively low levels of cross-border transactions need not create documents beyond the minimum necessary to arrive at arm’s length outcomes in the context of their business. A less detailed functional analysis, coupled with an assessment of any external data available about price and/or performance, provides a greater degree of certainty and a reduced risk of tax adjustments.

Business managers might want to consider the next issues regarding the documentation that would satisfy the requirement that the taxpayer has applied the arm’s length principle:

• Is the cross-border transaction that deals with a related party significant in terms of dollar value compared with the turnover of the business?
• Is the cross-border dealing unusual, and not part of similar activities, enabling a group t...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Preface
• Part One: Country-By-Country Analysis
• Part Two: Advanced Applications
• About the Authors
• Index