1 1-Petruzzi

Day 1, Session 1
Introduction to Transfer
Pricing
Dr. Raffaele Petruzzi, LL.M.

Managing Director, WU Transfer Pricing Center
CEO, L&P Global
Of Counsel, Ludovici Piccone & Partner
Exploitation rights:
The right to access this presentation is limited to participants of the
Advanced Transfer Pricing Course on June 29-July 3, 2020 only. The use
of this presentation is no longer permitted after July 13, 2020.
Adv. Transfer Pricing Course (General Topics), June 29-July 3, 2020

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
Agenda
I. The importance of transfer pricing

II. What is transfer pricing?
III. Different approaches to transfer pricing
IV. The arm’s length principle
V. The legal framework to the arm’s length principle
VI. The application of the arm’s length principle
Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 2

© WU Transfer Pricing Center; Right to access limited to participants of the Advanced Transfer Pricing Course on June 29-July 3, 2020, until July 13, 2020
Section I
The importance of
transfer pricing

Some statistics
Most important tax issues for tax Highest priorities in transfer pricing strategy (2013)
directors (2010)
Transfer pricing policy examined Examinations resulting in an Penalties were imposed on the
by a tax authority (2009-2013) adjustment (2009-2013) adjustment (2009-2013)
Sources: 2010 and 2013 EY Global Transfer Pricing Surveys

BEPS and transfer pricing
Coherence Substance Transparency

Hybrid Mismatch Preventing Tax Methodologies and
Arrangements (2) Treaty Abuse (6) Data Analysis (11)
Avoidance of
Interest PE Status (7) Disclosure
Deductions (4) Rules (12)
TP Aspects of
Intangibles (8)
CFC Rules (3) TP Documentation
TP/Risk and (13)
Capital (9)
Harmful Tax Dispute
TP/High Risk
Practices (5) Resolution (14)
Transactions (10)
Digital Economy (1)

Multilateral Instrument (15)
Linked to TP
Is transfer pricing “only” a tax problem?
 2012: Starbucks, Amazon and Google accused to be “immoral” by UK

https://www.youtube.com/watch?v=3TeZlt3dRig
 2013: BEPS project

http://www.oecd.org/ctp/beps.htm
 2014: LuxLeaks
http://www.parliamentlive.tv/Event/Index/121850ef-001a-44af-9037-
582f616ede41
“Margaret Hodge, who chairs the parliamentary committee, told the BBC that
she thought it was right for customers to boycott the three companies”.

Section II
What is “transfer
pricing”?

What is transfer pricing?
Transfer pricing Transfer pricing legislation
Price charged by individual entities for Particular skill sets in tax that
goods or services supplied to one determine the income allocation for
another in multi-department, multi- tax and other purposes between the
office, or multinational firms. respective entities of multinational
corporate group.

What is transfer pricing?
Manufacturer Distributor
20€ 100€ 400€

Profit Manufacturer Profit Distributor
100€ - 20€ = 80€ 400€ - 100€ = 300€
Profit Group: 80€ + 300€ = 380€
Section III
Different approaches to
transfer pricing

Approaches to solve transfer pricing issues
on an international level
Global
Arm’s length
formulary
principle
apportionment

Global formulary apportionment
20€ 100€ 400€

100€ - 20€ = 80€ 400€ - 100€ = 300€
Profit Group: 80€ + 300€ = 380€
20€ 100€
Allocation based on a globally agreed formula 400€
(e.g. revenues, assets, human
Profit Manufacturer Profitcapital)
Distributor
100€ - 20€ = 80€ 400€ - 100€ = 300€
Profit Group: 80€ + 300€ = 380€
Advantages Disadvantages
 Difficulties in reaching a general agreement on the
 (Perceived) administrative profits and formula to be used
convenience and certainty to  Inflexibility in accounting for specific characteristics of
single entities
taxpayers  Difficulties in granting an efficient implementation
 (Perceived) closer representation of  High political and administrative complexity

 Subjectivity in defining the global formula
the economic reality  Negative distortions deriving from exchange rate
movements
 (Perceived) reduction of compliance  High compliance costs and data requirements
costs for taxpayers  Substantive valuation issues related to all relevant
factors to allocate taxable base within the MNE group
(especially in phase-in)
 Questions about the relevance of imposing withholding
taxes on cross-border payments
 Difficulties in administrating the relationships between
group members included in the formulary apportionment
and group members excluded from the formulary
apportionment

Section IV
The arm’s length

principle

Art. 9(1) OECD Model Convention
Where
a) an enterprise of a Contracting State participates directly or indirectly in
the management, control or capital of an enterprise of the other
Contracting State, or
b) the same persons participate directly or indirectly in the management,
control or capital of an enterprise of a Contracting State and an enterprise
of the other Contracting State,
and in either case conditions are made or imposed between the two
enterprises in their commercial or financial relations which differ from
those which would be made between independent enterprises, then any
profits which would, but for those conditions, have accrued to one of the
enterprises, but, by reason of those conditions, have not so accrued, may be
included in the profits of that enterprise and taxed accordingly.

The arm’s length principle
20€ 100€ 400€

100€ - 20€ = 80€ 400€ - 100€ = 300€
Profit Group: 80€ + 300€ = 380€
20€ 100€ 400€

Profit Manufacturer 200€ Profit Distributor
200€ - 20€ = 180€ 400€ - 100€ = 300€
Profit Group: 180€ + 300€ = 480€
Adjustments
(Art. 9(2) OECD Model Convention)
Where a Contracting State includes in the profits of an enterprise of that

State – and taxes accordingly – profits on which an enterprise of the other
Contracting State has been charged to tax in that other State and the
profits so included are profits which would have accrued to the enterprise
of the first-mentioned State if the conditions made between the two
enterprises had been those which would have been made between
independent enterprises, then that other State shall make an
appropriate adjustment to the amount of the tax charged therein on
those profits. In determining such adjustment, due regard shall be had to
the other provisions of this Convention and the competent authorities of
the Contracting States shall if necessary consult each other.

Adjustments
(Art. 9(2) OECD Model Convention)
20€ 100€ 400€

Profit Manufacturer 200€ Profit Distributor
200€ - 20€ = 180€ 400€ - 200€ = 200€
Profit Group: 180€ + 200€ = 380€
Advantages Disadvantages
 Equal treatment of related and unrelated transactions
 Allowance commercial flexibility for specific business
 Difficulties in its implementation
circumstances
 Separate entity approach
 Prevention of phenomena of tax avoidance and/or
aggressive tax planning  Comparability analysis
 Avoidance of double taxation and of less-than-single
taxation  Administrative burden
 Fair and balanced allocation of taxing powers between
different states  Lack of information
 Stability and certainty of law
 Overcome issues related to cross-border transactions
 Compatibility with tax treaties
 Compatibility with EU law
 Enforceability
 Allowance of a coordinated approach
 Avoidance of conflicts between different kinds of rules

Adjustments
 Primary adjustments (Adjustments vs.

Corresponding adjustments)
 Primary adjustments vs. Secondary adjustments

Secondary adjustments
 Before primary adjustment Profit/ Profit/

Cash 80 Cash 300
(actual transaction) Equity 80 Equity 300
 After primary adjustment Profit/ Profit/

Cash 180 Cash 200
Equity 180 Equity 200

Profit distribution Capital contribution

100€ 100€
20€ 100€ 400€

100€ - 20€ = 80€ 400€ - 100€ = 300€
Profit Group: 80€ + 300€ = 380€

Cash 80 Cash 300

Cash 180 Cash 200
Profit/ Profit/
Cash 80 Cash 300

Payable
100€ Manufacturer Distributor Receivable
100€
20€ 100€ 400€

100€ - 20€ = 80€ 400€ - 100€ = 300€
Profit Group: 80€ + 300€ = 380€

Cash 80 Cash 300

Cash 180 Cash 200
Profit/ Receiv.
Profit/
Equity 80 100
Equity 300
Pay. 100

Section V
The legal framework to

the arm’s length principle

Elements of the arm’s length principle
 Subjective scope: Related enterprises

 Objective scope: Profits
 3 Pillars:
 Separate entity approach (vs. market approach)
 Contractual arrangements (vs. substance of the transaction)
 Comparability analysis (vs. use of proxies)
 Methods: Most appropriate method

 Basic understanding: In general, the more
functions/assets/risks, the more profit or loss potential

The legal basis for transfer pricing
adjustments
 OECD/UN Model Tax Conventions and Tax treaties

 Art. 9 limits the amount of the adjustments (but does not create
taxing rights)
 Domestic law
 Is the legal basis for the adjustments
 Applicable rules
 hidden profit distribution (“constructive dividend”)
 hidden contribution (“informal capital”)
 sometimes specific TP rules exist (e.g. § 1 ASTG in Germany, US
IRC Section 482)
 Potential differences compared to Art. 9 and OECD TPG

The OECD Transfer Pricing Guidelines
 Provide guidance for applying the arm’s length

principle
 Based on the 1979 Report
 First issued in 1995 and adopted by the OECD
Council
 Last update: July 2017 (approved on 23 May
2016)
 http://www.oecd.org/tax/transfer-pricing/oecd-
transfer-pricing-guidelines-for-multinational-
enterprises-and-tax-administrations-
20769717.htm

The OECD Transfer Pricing Guidelines
I. The arm’s length principle

II. Transfer pricing methods
III. Comparability analysis
IV. Administrative approaches
V. Documentation
VI. Intangible property (incl. HTVI)
VII. Intra-group services (incl. LVSA and financial
transactions)
VIII. Cost Contribution Arrangements
IX. Transfer pricing of business restructurings
X. Financial transactions
Annexes: Guidelines for Advance Pricing Agreements (...)
2010 updates
2016-20 BEPS updates
Under current development

Importance of OECD Transfer Pricing
Guidelines
 Interpretation of Art. 9 MC
 Approved by Committee on Fiscal Affairs
 Recommended by OECD Council
 Legally not binding – OECD TPG have “soft law” character (“recommendations”)
 Relevance: Vienna Convention on the Law of Treaties (Art. 31-33)
 Give guidance to taxpayers & tax administration on how to determine the arm’s
length price
 Significant practical importance
 Use in court cases? Court can make reference but must apply local law
 Relevance for non-OECD Countries?

The UN Transfer Pricing Manual
 Provide guidance for applying the arm’s length

principle
 Issued in 2013
 Revised in 2017
 http://www.un.org/esa/ffd/wp-
content/uploads/2017/04/Manual-TP-2017.pdf

The UN Transfer Pricing Manual
A.1. Introduction C.1. Establishing and Updating

A.2. Theory of the Firm and Transfer Pricing Regimes
Development of Multinational
Enterprises C.2. Documentation
A.3. Legal Structure C.3. Audits and Risk Assessment
A.4. Managing the Transfer Pricing C.4. Dispute Avoidance and Resolution
Function in a Multinational Enterprise
B.1. Introduction to transfer pricing C.5. Establishing Transfer Pricing
Capability in Developing Countries
B.2. Comparability Analysis
D.1. Brazil Country Practices
B.3. Methods
B.4. Intra-Group Services D.2. China Country Practices
B.5. Transfer Pricing Considerations on D.3. India Country Practices
Intangible Property
D.4. Mexico Country Practices
B.6. Cost Contribution Arrangements
D.5. South Africa Country Practices
B.7. Transfer Pricing Aspects of
Business Restructurings
B.8 General Legal Environment
2017 updates

Section VI
The application of the

arm’s length principle

The process to apply the arm’s length
principle
Day
1. Identification of the commercial or financial relations 1
Day
2. Recognition of the accurately delineated transaction
1
3. Selection of the most appropriate transfer pricing method Day

2
4. Application of the most appropriate transfer pricing method Day

2

Other critical aspects
 Administrative approaches to avoiding transfer pricing disputes

 Simultaneous tax examinations
Day
 Safe harbours
3
 Rulings
 Advance pricing arrangements (APAs)
 Administrative approaches to resolving transfer pricing disputes Day

 Mutual agreement procedures (MAPs) 3
 Arbitrations (EU Convention, New EU Directive, MLI)
Day
4
 Transfer pricing risk management and compliance
 Transfer pricing issues related to specific transactions Day

5

Contact details
Dr. Raffaele Petruzzi, LL.M.
Department of Public Law and Tax

Law
Institute for Austrian and International
Tax Law
Welthandelsplatz 1, Building D3, 1020
Vienna, Austria
T +43-1-313 36-5065
raffaele.petruzzi@wu.ac.at
www.wu.ac.at/taxlaw, www.wu.ac.at/dibt


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Day 1, Session 1

Dr. Raffaele Petruzzi, LL.M.

Adv. Transfer Pricing Course (General Topics), June 29-July 3, 2020

I. The importance of transfer pricing

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 2

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw

Sources: 2010 and 2013 EY Global Transfer Pricing Surveys

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 4

Coherence Substance Transparency

Digital Economy (1)

 2012: Starbucks, Amazon and Google accused to be “immoral” by UK

 2013: BEPS project

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 6

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw

Transfer pricing Transfer pricing legislation

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 8

20€ 100€ 400€

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 11

20€ 100€ 400€

 (Perceived) closer representation of  High political and administrative complexity

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 14

The arm’s length

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 16

20€ 100€ 400€

20€ 100€ 400€

Where a Contracting State includes in the profits of an enterprise of that

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 19

20€ 100€ 400€

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 21

 Primary adjustments (Adjustments vs.

 Primary adjustments vs. Secondary adjustments

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 22

 Before primary adjustment Profit/ Profit/

 After primary adjustment Profit/ Profit/

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 23

Profit distribution Capital contribution

20€ 100€ 400€

 Before primary adjustment Profit/ Profit/

 After primary adjustment Profit/ Profit/

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 25

20€ 100€ 400€

 Before primary adjustment Profit/ Profit/

 After primary adjustment Profit/ Profit/

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 27

The legal framework to

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw

 Subjective scope: Related enterprises

 Methods: Most appropriate method

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 29

 OECD/UN Model Tax Conventions and Tax treaties

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 30

 Provide guidance for applying the arm’s length

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 31

I. The arm’s length principle

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 32

 Approved by Committee on Fiscal Affairs

 Recommended by OECD Council

 Relevance: Vienna Convention on the Law of Treaties (Art. 31-33)

 Significant practical importance

 Relevance for non-OECD Countries?

Institute for Austrian and International Tax Law  www.wu.ac.at/taxlaw 33