A discussion of the latest trends in the field of tax risk for international businesses.

1. International Tax Risk Including Transfer Pricing and Other Matters

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3. Current State of Play Global recession – tax revenues down G20 April 2009 – increasing focus on tax OECD expanding their role Proliferation of TIEAs (tax information exchange agreements) Headline tax rates politically sensitive Net result = tax compliance is becoming tighter

4. Tighter Compliance – Common Issues Share transactions between non residents now being attacked Stricter application of permanent establishment rules Closer monitoring and audit of cross border movement of staff Transfer pricing / thin capitalisation

5. Examples Vodafone (UK) sold shares in Hutchison Whampoa (a Hong Kong entity) to a third party. HW held underlying Indian trading assets and so the Indian tax authorities have pursued Vodafone for CGT of £1.6bn (c.US$2.6bn) TPG (US private equity group) sold underlying Australian assets, and the Australian Tax Office have contested this was an income receipt rather than capital – bringing it into the charge to Australian tax (US$450m)

6. Transfer Pricing “The diversion of profits from a high tax to low tax jurisdiction using the mechanisms available to entities under common ownership and control”

7. Why Is Transfer Pricing An Issue ? GlaxoSmithKline settled a UK/US transfer pricing dispute for US$3.1bn The IRS had been looking at a tax liability of US$11.5bn

8. GSK – What Happened ? The IRS determined that intra group pricing was incorrect and additional GSK profits should have been taxed in the US The UK and US tax authorities could not agree on a mutually acceptable pricing policy The IRS sought to recover US$ 11.5bn of tax US and UK not compelled to reach an agreement by tax treaty – merely ‘best endeavours’ Final settlement reached for US$3.1bn

9. Tax Treaties Where two jurisdictions both want to tax the same profits the taxpayer can refer the matter to the mutual agreement process (MAP) MAP is provided for in most double tax agreements (DTA) and allows the two jurisdictions to reach an agreement on an acceptable transfer price The DTA will usually require both jurisdictions to use only their best endeavours to reach a conclusion Arbitration is not compulsory, but is a concept that is gaining favour as DTAs are renewed

10. UK Regime Strongly centred on OECD principles Applies to ‘large’ companies only (unless counterparty in a ‘bad’ jurisdiction) ‘Large’ is defined by EU legislation More than 250 employees (plus a turnover / balance sheet test) Documentation requirements Little case law exists as matters generally settled

11. Types of Transaction Intra-group trading Management charges HoldingCo / Stewardship costs Interest / thin capitalisation issues Royalties Joint venture scenarios

12. Managing Risk Documentation to support the pricing must be kept – contemporaneous paperwork is more compelling Ensure that regular reviews of the policy are undertaken Adopt a common sense approach to determining the pricing policy, with reference to the OECD methods For large transactions consider a bilateral Advance Pricing Agreement (APA) with the relevant tax authorities Ensure your transfer pricing arrangements are flexible such that end dates for pricing structures can be used

13. Consider Opportunities Can stranded losses now be accessed ? Does the old policy no longer reflect arms length ? Stock prepayment and extended trading terms Review interest rates on inter-group financing Consider financial guarantee fees Ensure appropriate charges for intra-group services Review margins earned by group entities Review business models from a TP perspective

14. International Tax Risk Checklist Permanent establishment Payroll obligations Thin capitalisation Transfer pricing Territorial versus credit method Withholding taxes Import duties Local GST / VAT Controlled Foreign Companies Residency tests Entity classification

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16. Stuart Rogers Corporate Tax Consultant A Chartered Tax Adviser and a commerce graduate from The University of Birmingham, Stuart is a tax consultant who specialises in international tax matters and advising complex corporate entities. Stuart trained with KPMG in London and Bristol, passing the ATT and CTA examinations and gaining invaluable experience with large foreign owned subsidiaries and listed businesses. In 2002 he joined Target Consulting, a specialist tax firm in Bath as a corporate tax consultant. Whilst at Target he subsequently developed a senior advisory role across the South of England, latterly based in the firm’s London offices. He was involved in a wide spectrum of work, ranging from advising start ups and niche businesses, through to leading complex projects for clients such as Mulberry Group Plc and Crabtree & Evelyn Group. In May 2011 Stuart joined Francis Clark as a tax consultant specialising in corporate and international tax matters with a cross-group brief. In early 2011 he also attained the Institute of Indirect Taxation’s VAT Compliance Diploma (IIT Dip), and is currently studying towards the prestigious Advance Diploma of International Taxation (ADIT) in which he will focus on US tax matters. He also has experience in complex leasing tax matters, share schemes and employment related securities, due diligence and vendor tax planning, de-mergers and corporate reconstructions, capital allowances, R&D tax claims, VAT and other corporate tax matters.

17. Stuart Rogers sar@francisclark.co.uk 0044 7730220138