Transfer Pricing PDF

Advisory
Transfer Pricing
Framework and SAP Scenarios
20 March 2014
Transfer Pricing
 Transfer pricing is becoming ever more important as

even numerous mid sized companies have producing
and sales entities across several countries.
 The legal requirements for determining transfer prices
are as crucial as is the transparency of profitability for
all steps of the value chain.
 In addition to legal transfer prices, management
transfer prices are used to set objectives.
Transfer Pricing • Framework and SAP Scenarios 20 March 2014

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2
What we will Cover in this Session
 Outline the legal requirements, the related processes

and risks and how to deal with them.
 Learn in detail how SAP allows to you to track the
profitability for all steps of the value chain for both
legal and management transfer prices based on an
example for manufactured goods using the cross-
company/cross-plant costing solution.
 Compare the features of the solution with the material
ledger solution.

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Agenda
1 Basic Principles
2 Legal Framework
3 Processes
3.1 Business Models
3.2 Price Determination
4 Functional Analysis
5 Risks
6 SAP Scenarios for Profit and Cost Reporting
6.1 Legal vs Management Aspects of Transfer Pricing
6.2 Scenario for Cross Plant/Cross Company Costing
6.3 Transfer Pricing Using the Material Ledger
6.4 Comparison of Methods

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Section 1
Basic Principles

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Section 1 – Basic Principles
What is Transfer Pricing all About?

Transactions between Affiliated Companies
 Only Cross-border transactions between affiliated companies are relevant for

transfer pricing
 Difficulty: Transfer of tax relevant profits
 The preponderant part of worldwide transactions does not take place with third parties
but within the group
Affiliated companies
IC transactions
Company A Company B
Tax relevant profits
CH Abroad

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Basic Principles
Facts (1/3)
 Not all transactions between companies of a group are relevant for transfer
pricing, only tax relevant cross-border transactions.
 For determining transfer prices, local law is decisive. Statements and guidelines
of supra-national organisations (e.g. OECD, EU JTPF*) also play a central role.
 The number and complexity of transfer pricing regulations has significantly
increased during the last years.
 Companies have to be characterised based on their function from a transfer
pricing point of view. In addition to the function, particularly the risks born and
the commodities used are relevant.
 The correct application transfer pricing methods is not sufficient in order to
satisfy the needs of the arm’s length principle. The determined transfer price has
to meet the standards of comparison with transactions with third parties.
* EU Joint Transfer Pricing Forum)

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Basic Principles
Facts (2/3)
 A comprehensive transfer pricing concept does not only cover cross-border flows
of merchandise, but also has to take into account services, immaterial
commodities and financing.
 An optimised transfer pricing concepts does not lead to the fact that all the local
profits can be attributed to a principal, but only the transferable part. A basic
profit has to remain with the de-central companies.
 In order to guarantee the fulfilment of the arm`s length principle, not only
external transactions between third parties have to be taken into account but also
internal transactions between the tax payer and third parties.
 In Switzerland, a transfer pricing documentation only has to be submitted to the
tax authorities on demand.

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Basic Principles
Facts (3/3)
 Depending on the individual case, there is the possibility to negotiate a deal on

the acceptance of transfer prices with one or several tax authorities (Advance
Pricing Agreements).
 Aggravation of regulatory rules and tax audits due to the economic crisis.
 Increasing pressure on transfer prices and more restrictive requirements
regarding the application and proof of the arm’s length principle.
 Potential increase of so called “uncertain tax positions” due to the above
described tendencies.

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Section 2
Legal Framework

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Section 2 – Legal Framework
OECD Guidelines versus Local Law

These 2 Frameworks are Relevant for Transfer Pricing
OECD Guidelines Local regulations
• Arm’s length principle • Country specific

• Transfer pricing methods regulations
• Disputes • Rules for the
• Burden of proof/ documentation of
Documentation functional analyses and
• Special topics: Intangible benchmarking
assets, group services etc.

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The Arm’s Length Principle

OECD Guidelines
OECD Transfer Pricing Guidelines, paragraph 1.33:

“Application of the arm’s length principle is generally based on a comparison
of the conditions in a controlled transaction with the conditions in
transactions between independent enterprises.”
 Economically relevant characteristics of a comparable situation

must be sufficiently comparable
 Target: Application and proof of the arm’s length principle
 Comparable means
• that there is no discrepancy significantly influencing the
relevant parameters (e.g. price or margin)
• that appropriate measures have been taken in order to balance
existing discrepancies

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The Arm’s Length Principle

Overview Influence Factors
Land A Land B
Transactions
• Real assets
• Intangible assets
• Services
• Financing Market price?
Price?
Company Y Company Z
• Characteristics
• Functional analysis
• Contractual conditions
• Economic situation
• Business strategies
Company A Company A1

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The Arm`s Length Principle

Questions to be Answered
 Transactions between legal units (or operating site) of the group?

 What is the volume and the type of the transactions?
 Does the actual determination of transfer prices lead to a profit allocation
according to the arm’s length principles?
 Which financial data are relevant to judge the transfer prices?

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Section 3
Processes

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Section 3 – Processes
Processes
Recurring Processes on a Yearly Basis
Definition Business Price Determination

Model
Management Budget
Operating Units Monitoring/Controlling
Value drivers/risks Price adaptations
Price Determination
“Core”/local documentation
Defence of contracts, etc.

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Section 3.1
Business Models

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Section 3.1 – Business Models
Processes
Business Models (1/2)
 Two parties (third or affiliated) are basically free to determine their

way of collaboration within the limits of legal requirements
Possible exchange of merchandise:
Scenario 1
Buys as much merchandise
Distribution
Entrepreneur as is needed or as can be sold
partner
with a positive margin
Scenario 2
Importer searches for a
Wholesale commodity, buys lot sizes
Provider from the provider and bears
dealer/importer
the sales risk himself

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Section 3.1 – Business Models
Processes
Business Models (2/2)
 There are as many business models as there are companies and relationships
between companies.
 In order to fully understand the business relationship and the value chain, a
Functional Analysis has to be established.

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Section 3.2
Price Determination

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Section 3.2 – Price Determination
Overview of Methods Defined by the OECD

Based on Turnover, Gross Margin and EBIT
Turnover
Comparable Uncontrolled Price Method
(COGS)
Gross Margin Resale Price

Cost Plus Method
(OPEX) Method
Profit Split
Method
EBIT Comparable Profits Method

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Comparable Uncontrolled Price Method (CUP)

Preferential Use in Case Comparison Prices Exist
 Comparison with the price of a similar product for a relation between internal
partners (P1) for third parties.
TP: Transfer price

P1: Internal AA X
comparison price But:
P2: External • Quantity
comparison price TP: 800 P1: 850 P2: 900 • Market
• Point in time
must be comparable!
AB Y
Client Client

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Resale Price Method RPM

Applied for Sales Companies if there is no CUP
 Sufficient third party financial information must be available for comparison.
Comparison gross margin of AB

AA XXX (1000–800 = 200) on products from AA
with the gross margin on products
comparable in the widest sense
TP: 800 (e.g. same industry)
or
AB between independent third parties
YYY
(value 1–value 2) and also functional
and risk profile comparable with AB.
SP: 1000
Purchasing price from a third party

Client Client
Client
Client Sales price to a third party

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Cost Plus Method

Primarily Used for Services
 Service used in the context of production, R&D and management fees.
• Basis: full costs of the company

• Appropriate percentage surcharge on effective costs for the margin
• The transfer price equals the total of full costs plus profit margin
The percentage surcharge must be in line with the Arm‘s

Length principle depending on functions, risks and used
resources

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Comparable Profits Method

In Case Primary Methods are not Useful or Reliable
 Alternatively used to support findings brought up by a different transfer pricing method.
AA XXX
Turnover 600’000.– TP: 800 Profit margin of

comparable companies
EBIT 24’000.–
Band with e.g.
AB YYY
Profit margin 4% Lower Quartile 3%
Median 6%
Upper Quartile 12 %
Client Client
Client
Client
Possible reference figures for the EBIT (depending situation): Turnover, OPEX, assets, equity

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Transaction Based Profit Method

Similar to Comparable Profits Method
 This method is based on the comparison of divisions within a company.
AA 1 AA 2 XXX
Turnover 600’000.– TP: 800 TP: 500 Profit margin of

comparable companies
EBIT 24’000.–
Band with e.g.
AB 1 AB 2
Profit margin 4% YYY Lower Quartile 3%
Median 6%
Upper Quartile 12 %
Client Client Client

Client
Client

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Profit Split Method

Profit is Split Based on Defined Rules
 Split of the total profit of the value chain
or
 of the residual profit (the profit remaining after attributing the routine profit)
of the companies involved in a transaction.
 The profit of the involved group companies that has been achieved due to inter-
company prices is compared to the profit that would have been made if
the total profit was split to each participating individual company
based on the individual contribution of the company, using a
functional and risk analysis.

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Section 4
Functional Analysis

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Section 4 – Functional Analysis
Definition of the Functional and Risk Analysis

Criteria for High Quality
A functional and risk analysis of high quality

 Contains the description of transactions to be documented and of the involved
parties
 Is supported by facts (e.g. interviews), contracts and financial data
An analysis of economically relevant facts for all transactions examined:

 Functions
 Risks
 Assets (material and immaterial)
 The functional and risk analysis is the basis in order to determine the “appropriate
(at arm’s length) price for a transaction”

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Contents of a Functional and Risk Analysis

Overview of Relevant Elements
Risks
Transactions Functions
Companies Activities
Contracts/
Products Elements Conditions
Markets/
Financial results
Competitions
Organisation/
Business Processes
Persons
Forecast/ Business
Plans

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Results of a Functional and Risk Analysis

Results
Business Internal ly
Understanding Comparable Values
Identification of tax Basis for Benchmark

potentials/ risks Studies
Results
Basis Transfer
Planning Options
Pricing Doc.
Characterising Transfer Pricing

Group Companies Methods

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Section 5
Risks

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Section 5 – Risks
Risks
Minimising by Application of Correct Charges
 Charge without effective transaction

 Effective transaction without charge • Significant risk of correction
by the tax authorities
 Effective transaction with charge as
usually NOT applied to third parties
 Effective transaction with charge as • Weakened position against

usually applied to third parties without tax authorities
documentation (burden of proof) • Penalties

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Section 6
SAP Scenarios for Profit and Cost
Reporting

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Section 6.1
Legal vs Management Aspects of
Transfer Pricing

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Section 6.1 – Legal vs Management Aspects of Transfer Pricing
Legal vs Management Aspect of Transfer Pricing

Different Price According to Reporting Targets
 Transfer prices determine the allocation of margins, and thus profits, along the value
chain of an enterprise and across production and sales plants and legal entities
Legal aspect Management aspect
Externally oriented view – authorities Internally oriented view – management

The aim of legal transfer prices is to Incentive setting for various entities of an
allocate profits between legal entities in enterprise, legal or non legal, in order to
order to minimise taxes on a national get decisions that maximise the benefit of
and/or international level. the entire organisation.
The legal aspect is only relevant when selling across legal entities. The
management aspect is also relevant when transferring goods within a legal
entity, e.g., across production plants.

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Management Aspects of Transfer Pricing

Decision Support from a Business Point of View
In order to support decision making in an efficient way:

 Cost transparency needs to be given on all steps of the value chain within an
enterprise
 The structure of the costs (material, personal, overhead, freight, etc.) and the
internal profit must be available for reporting for all production/delivery plants
and legal entities
 Example decision making: Set lower internal transfer prices in order to fully use
the capacity of a production plant of a group when the buying entity also has the
right to purchase the same product/service from a third party

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Handling of Transfer Prices in SAP

Possible SAP Scenarios
SAP offers the possibility to handle and report both legal- and management-oriented transfer
prices and related margins
 The legal view and the management view are available in Product Costing (CO-PC) and
Profitability Analysis (CO-PA)
 In the FI leading ledger, only the legal view is available.
All company codes and plants must be assigned to the same controlling area!
 There are two technical options to handle transfer prices to show the margin across all
entities of a group:
Cross-company code/cross-plant Valuation in the material ledger

costing (without using the material
ledger)
Supports management and legal view from a Supports the legal view from a
• group perspective • group perspective
and and
• a local perspective • a local perspective

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Section 6.2
Scenario for Cross Plant/Cross
Company Costing

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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Scenario for Cross-Plant/Cross-Company Costing

Required Settings in SAP
The cross-plant costing/cross-company code without using the material ledger will be
shown in the following scenario using legal transfer price only:
 A material is produced in plant CH01 of a legal entity, and transferred to plant
CH02 of a different legal entity where it is used to manufacture another material
that will be sold to a third legal entity within the same group
 Intercompany profit will be generated in both transfer steps

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The Scenario will be Shown Based on an Example
The cross-plant costing/cross-company code without using the material ledger will
be shown in the following scenario using legal transfer price only:
 A material is produced in plant CH01 of a legal entity, and transferred to plant
CH02 of a different legal entity where it is used to manufacture another material
that will be sold to a third legal entity within the same group
 Intercompany profit will be generated in both transfer steps

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Graphical Overview of the Scenario
Producing Producing Selling

Legal Entity 1 Legal Entity 2 Legal Entity 1
Plant CH01 Plant CH02 Plant CH03

Production of Production of material Sells material 11 to
material 7 11, using material 7 3rd party
Material 11 Material 11
Material 7 Material 7
= intercompany sale with profit = sale to 3rd party

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Step 1 Transfer Between Producing Legal Entities
Producing Legal Entity 1 Producing Legal Entity 2

Plant CH01 Plant CH02
Material 11 1.750.–
Assembly
Material 1.200.–
Labour 200.– Cost element
view
Overhead 350.–
Material 7 1.000.– Material 7 1.200.–
Material 500.– Material 500.– Material 500.–
Labour 300.– Labour 300.– Labour 500.–
200.– Cost
Overhead 200.– Overhead Overhead 550.– component
Freight 100.– Freight 100.– view
IC-Profit 100.– IC-Profit 100.–
Freight = 100.–
Revenue 1.100.– IC-Profit = 100.– Revenue 1.925.–
COGS 1.000.– COGS 1.750.–
Legal entity 1 sells for 1.100,- to legal entity 2. Freight costs of 100.– paid by legal entity 2.
Legal entity 2 uses 1 PC of material 7 to build 1 PC of material 11. Labour costs of 200 .–, overhead of 350 .–

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Base Material 7, Sending Plant CH01, Cost Element View
 Transaction CK11N:
Cost element
view

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Base Material 7, Sending Plant CH01, Cost Component View
 Transaction CK11N:
Cost component
view

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Material 7 in Receiving Plant CH02, Cost Element View
 Cost estimate transferred from plant CH01 – Cost element view including additive costs
for freight and profit – Transaction CK11N:
Cost element
view

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Material 7 in Receiving Plant CH02, Cost Component View
 Cost estimate transferred from plant CH01 – Cost component view including additive
costs for freight and profit – Transaction CK11N:
Cost component
view

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Material 11 in Plant CH02, Cost Element View
 Assembled using material 7 – Transaction CK11N:
Cost element
view

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Material 11 in Plant CH02, Cost Component View
 Assembled using material 7 – Transaction CK11N:
Cost component
view

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Procurement Key, Freight and Profit
 The cost estimate of material 7 is transferred from Plant CH01 to Plant CH02
• In order to do this, the special procurement key in the material master of
material 7 in the receiving plant needs to indicate that the cost estimate should
be transferred from plant CH01
 Plant CH01 and plant CH02 belong to different legal entities
 The freight and profit will be added to the transferred cost estimate as additive cost
elements
• In order to have this automated, the dependencies and rules of the freight
calculation need to be defined in customer-specific tables, and an add-on
program needs to be created reading these tables and updating the additive costs

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Costing Views and Stock Values
 The cost component view and the cost element view are identical for material 7.
They are related to a costing variant.
 In plant CH02, material 7 is used to manufacture material 11
 Stock value
Plant CH01: Material 7 1.000.–
Plant CH02: Material 7 1.200.– Material 11 1.750 .–

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Step 2: Transfer Between Plants of Different Legal Entities, with
Profit
Producing Legal Entity 2 Selling Legal Entity
Plant CH02 Plant CH03
Material 11 1.750.– Material 11 1.975.–
Material 1.200.– Material 1.750.–

Cost element Labour 200.– Freight 50.– Cost element
view view
Overhead 350.– IC-Profit 175.–
Material 500.– Material 500.–

Cost Labour 500.– Labour 500.– Cost
component Overhead 550.– Overhead 550.– component
view Freight 100.– Freight 150.– view
Revenue 1.925.–
COGS 1.750.– Freight = 50.– Revenue 2.200.–
IC-Profit 175.– IC-Profit = 175.– COGS 1.750.–
Legal entity 2 uses 1 PC of material 7 to build 1 PC of material 11. Labour costs of 200,-, overhead of 350,-

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Material 11 in Plant CH03, Cost Estimate Transferred from Plant
CH02, Cost Element View
 Including additive costs for freight and profit -Transaction CK11N:
Cost element
view

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Material 11 in Plant CH03, Cost Estimate Transferred from Plant
CH02, Cost Component View
 Including additive costs for freight and profit – Transaction CK11N:
Cost component
view

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Procurement Key, Freight and Profit
 The cost estimate of material 11 is transferred from

Plant CH02 to plant CH03
• In order to do this, the special procurement key in the material master of
material 11 in the receiving plant needs to indicate that the cost estimate should
be transferred from plant CH02
 Plant CH02 and plant CH03 belong to different legal entities
 The freight and profit will be added to the transferred cost estimate as an additive
cost elements
• In order to have this automated, the dependencies and rules of the freight
calculation need to be defined in customer-specific tables, and an add-on
program needs to be created reading these tables and updating the additive costs

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Costing Views and Stock Values
 In this case, the cost component view and the cost element view for material 11 are
different, as the cost element view treats all components of material 7 as material
costs
 They are related to a costing variant
 Stock value

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Mixed Costing
 If there are procurement alternatives for a material, such as multiple vendors or

deliveries from multiple production plants, a mixed cost estimate can be created
 For this purpose, the mixing ratio has to be defined
 The cost estimate based on this information will be transferred to the standard price of
the product in the material master
Example: 100 PC of 11 costed, based on 50:50 PC procurement ratio from plant X and Y
Plant X Material 11
Plant Z
Standard cost = 80.–
(80.– x 50 PC) + (70.– x 50 PC)
Plant Y Material 11
100

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Margin Reporting
 The components of the cost component split can be assigned to different value fields in CO-PA
 Thus, reporting from the perspective of the plant/company code is possible as well as from a
group view
Material 11 in Plant CH02 Material 11 in Plant CH03
Cost. Comp. Value Cost. Comp. Value

view fields view fields
Material 500.– Material 500.– Material 500.– Material 500.–
Labour 500.– Labour 500.– Labour 500.– Labour 500.–
Overhead 550.– Overhead 550.– Overhead 550.– Overhead 550.–
Freight 100.– Freight 100.– Freight 150.– Freight 150.–
IC-Profit 100.– IC-Profit 100.– IC-Profit 275.– IC-Profit 275.–
COGS 1.750.– COGS 1975.–
 From a group view, the overall COGS are 1.650.− in plant CH02 / 1.700.− in plant CH03.
 From a legal entity point of view, the COGS are 1.750.− in plant CH02 / 1.975 .− in plant CH03.

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Authorisation for Different Views
 In addition to the basic costing variant allowing cross-plant/cross-company code transfers, an

additional costing variant can be created on the level of a plant or legal entity, showing only the
total cost of the material purchased within the group*
Material 11 in Plant CH02 Material 11 in Plant CH03
Group costing Local costing Group costing Local costing

variant variant variant variant
Material 500.– Material 1.200.– Material 500.– Material 1.975.–
Labour 500.– Labour 200.– Labour 500.–
Overhead 550.– Overhead 350.– Overhead 550.–
Freight 100.– Freight 150.–
 Via access control, group controllers can, e.g., see both costing variants; local controllers can
only see the additional costing variant
* Freight costs could be shown separately if desired.

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Group View and Local View
 Cost component views (cost element views same as in group costing)

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Overview of Functionalities
 The cost component view enables the reporting of intercompany margins for all steps of the
value chain, i.e., for every plant and every legal entity within the group
• In the example, the profit for the legal view is shown
• It is also possible to show IC profit based on management- determined transfer prices in
addition to the legal view
• This can be done by using an additional cost component for management IC profit
• In the reporting for CO-PA, the cost components can be selected to calculate margins from
a local point of view as well as from a group view, based on legal or management margins
 In case the single plant or single legal entity should not have the transparency on the
intercompany margin and the detailed cost structure of the sending plant, an additional
costing variant can be created, showing only the total purchasing value in cost estimates
 In case of a more complex account determination setup, an alternative cost component split
might be needed, using the primary cost component split.

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Section 6.3
Transfer Pricing Using the Material
Ledger

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Section 6.3 – Transfer Pricing Using the Material Ledger
Transfer Pricing Using the Material Ledger

Standard Costs and Actual Costs
 Using the material ledger, transfer prices can be calculated using either the legal
valuation view or the group valuation view, based on either standard costs or
actual costs
 Both scenarios are based on a cross-company code stock transfer, using valuated
stock in transit and require the activation of business function LOG_MM_SIT

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Legal Valuation and Group Valuation
 Overview of the approach using the legal and the group valuation
Legal valuation Group valuation
• Difference between the valuation price • Separate valuation and currency profile
of the sender and the procurement price in addition to the legal valuation,
(purchase order price) is shown as showing the inter-company profit
intercompany profit in the cost • Electronic Data Interchange (EDI)
component view of the actual cost scenario between the sender and receiver
component split company code for sending invoices
• No additional group validation needed.
The calculation is based on the actual price of the sender using Business Add-In (BadI)
Control of Cross-Company Code Transfers (CKML_CROSS_COMPANY), the usage of the
actual price can be suppressed and the standard price can be used instead.

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Prerequisites for Using the Material Ledger
Legal Group
valuation valuation
Activate actual costing with actual cost component
split
 
A new cost component needs to be created for the cost
component structure in use to store the delta profit
for group costing
 
Electronic Data Interchange (EDI) scenario between
the sender and receiver company code for sending
invoices
 
Separate valuation and currency profile
 
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Features of the Material Ledger
Legal Group
valuation valuation
Take into account freight costs for intercompany
profit
 
Actual cost component split passed to receiving legal
entity
 
Roll-up of multi-level valuation differences from the
sender to the receiver
 
Reporting of variances according to responsibility of
each legal entity
 
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Enhancements of the Material Ledger
 Business Add-In (BadI) Control of Cross-Company Code Transfers

(CKML_CROSS_COMPANY) offers several enhancement options to adapt the SAP
standard functionality
 The most important features relevant for intercompany profit calculation and
reporting:
• Cost component split can also be transferred in the legal view
• Intercompany profit is based on standard costs of the sender instead of actual
costs
• Define intercompany profit calculation based on a customer-specific algorithm

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Profit Center View
 The material ledger also offers the possibility of a third valuation view, the profit
center view
 In the profit center valuation view, cross-company code transfer processes are not
mapped multilevel
 This means for cross-company code profit centers that no price differences are
rolled up and no cost component split is passed on
 Moreover, with cross-profit center transactions, no intercompany profit ever
appears in the profit center valuation view

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Summary
 Material ledger offers the option to show intercompany profits both from a legal
and a management perspective
 However, for each of the views, a separate valuation view and costing variant are
necessary
 The configuration is more complex than the cost component- based solution,
which can deal with both views using a single costing variant
 The material ledger should be the preferred solution when actual costs are relevant
and when the company code currency and the controlling area currency are not
sufficient

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Section 6.4
Comparison of Methods

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Cross-Plant/Cross-Company Costing versus Material Ledger
Cross-company/cross- Material ledger Material ledger

plant costing Legal view Group view
• Lower implementation • Actual costs possible as well as standard costs

effort • BAdI for adaptations available
• Easy config and handling
• Full transparency on
margins legal and • Variance roll-up possible
management oriented
• Plant and legal entity
• Enhancement needed for • Freight costs are not integrated, enhancement

IC profit and freight • Config and handling of high complexity
• No third currency, only • Profit only when transferring between legal entities, not
company code and between plants of the same legal entity
controlling area currency • No management oriented view
• Only legal oriented

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Section 6.4 – Comparison of Methods
Decision on Choice of Method
 The choice of the appropriate method to calculate and report transfer prices –
using the material ledger legal and/or group view or not using the material ledger
– depends on how the responsibility is divided within a group and which decision
authorization is granted to the plants and/or legal entities
 Furthermore, it depends on whether standard costs should be used to determine
the intercompany/inter-plant profit, or actual costs, which currencies are relevant
and only if legal or internal transfer prices should be used
 Hence, a decision on the detailed setup for an enterprise depends on legal
requirements as well as on the business requirements of the group and the single
entities

PwC 69
72
Section 6.4 – Comparison of Methods
Questions and Contact
 How to contact me:  Questions?
Robert Kremlacsek
robert.kremlacsek@ch.pwc.com

PwC 70
73

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Advisory

 Transfer pricing is becoming ever more important as

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

 Outline the legal requirements, the related processes

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

What is Transfer Pricing all About?

 Only Cross-border transactions between affiliated companies are relevant for

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

* EU Joint Transfer Pricing Forum)

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

 Depending on the individual case, there is the possibility to negotiate a deal on

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

OECD Guidelines versus Local Law

OECD Guidelines Local regulations

• Arm’s length principle • Country specific

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

The Arm’s Length Principle

OECD Transfer Pricing Guidelines, paragraph 1.33:

 Economically relevant characteristics of a comparable situation

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

The Arm’s Length Principle

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

The Arm`s Length Principle

 Transactions between legal units (or operating site) of the group?

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Definition Business Price Determination

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

 Two parties (third or affiliated) are basically free to determine their

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Overview of Methods Defined by the OECD

Gross Margin Resale Price

EBIT Comparable Profits Method

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Comparable Uncontrolled Price Method (CUP)

TP: Transfer price

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Resale Price Method RPM

 Sufficient third party financial information must be available for comparison.

Comparison gross margin of AB

Purchasing price from a third party

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Cost Plus Method

 Service used in the context of production, R&D and management fees.

• Basis: full costs of the company

The percentage surcharge must be in line with the Arm‘s

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Comparable Profits Method

 Alternatively used to support findings brought up by a different transfer pricing method.

Turnover 600’000.– TP: 800 Profit margin of

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Transaction Based Profit Method

 This method is based on the comparison of divisions within a company.

Turnover 600’000.– TP: 800 TP: 500 Profit margin of

Client Client Client

Transfer Pricing • Framework and SAP Scenarios 20 March 2014

Profit Split Method