Month: February 2009

Mr Longarte, what does it mean for your firm to 
have been selected as the best and most innovative transfer pricing team in Spain?
It means everything, considering that the prize is granted by analysing the feedback of the clients and also that the selection panel is composed of people with high technical knowledge and wide experience, and who really understand what the clients answers are.

The selection criteria are normally very closely related to depth of practice, size of firm, international links, reputation, size of projects but in this case, attending to the information we received, in this case the clients also valued excellence in the service, and moreover, our capacity to innovate. That is the most important part for me. Being first or second in something is always hard to differentiate, but having received feedback from the clients that shows appreciation to our innovation capacity and efforts is something that made me feel proud of the team because of the principles and spirit we want to transmit on a daily basis, not only to our clients, but to the team internally.

It is not enough to do our work very well, we always have to be one step ahead in new approaches and innovation.

The tax and transfer pricing business has been here for a long time, and we tend to see the same things all the time. What other examples of innovation can you provide customers? What is your strategy here?
Habitually, when people think about innovation in the tax arena, they think about aggressive tax planning schemes. But that is not how we work. We use innovative means to develop different ways to support the arm’s length nature of our client’s transactions, in a way that can provide further reliability using all the information that is out there nowadays, thanks to globalisation and technology. We canalise that information in ways we never thought was possible before. I think that part of our role as advisors is being up front in this R&D effort so we can add value to our clients and in some cases trace the way for the tax administrations that do not always have all the required resources at a glance.

Building on this, we always want to understand the key economic value drives of our clients, and identify more efficient alternatives to organise their functions, assets and risks in order to enhance the after tax treatment of their value chain. We are very much a “business consultant” in this area of work. Tax nowadays is one more critical component of business costs and the fundamental philosopher’s stone that affects the company world tax position is transfer pricing, at least in the early twenty-first century because in the international and cross border arena it is placing infinite challenges for the companies when becoming global.

The interesting point of our role as transfer pricing advisors is providing a balance between risk control and value.

Risk equals transfer pricing and double taxation contingencies with tax exposures, including potential penalties and impact to the company in its trade name.

Risk can be material in intercompany transactions, as nowadays between 63 percent and 67 percent of the total international cash flows are between parties of the same group and can add up to many millions every year, with sometimes very repetitive transactions and high figures at play.

Considering value, we are at perfect capacity to get to know the multinational company business model, sometimes even much better than the client’s own management if they work in vertical organisations through different business lines. This provides a huge capacity to propose better ways of reorganising the value chain of the group in the way that being more appended to the business model provides the best global after tax return.

I think part of the function of the key financial and tax executives in every multinational organisation in 2008 was to make sure that the balance between “transfer pricing risk control” and “transfer pricing value” is at the very least inclined toward the “value” side. That is part of our roles as “experts”, in the same way that the global logistics manager will be measured not only by making sure the products arrive safely but at the most efficient economic conditions and in the most business aligned way (ie, if the value proposition that the client receives the online order in 48 hours, that can’t fail). Our vision is to help our clients achieve that result.

Part of the “time capacity” of the team is devoted to investigate the future directions of transfer pricing approaches, and to link with our Deloitte Consulting folks, about which business model and management trends are envisaged to be here in some years from now. Having transfer pricing and tax people working with other practice areas like consulting is not an easy deal, because we tend to speak very different technical languages, but is the one that will return the most for our clients and the firm and sometimes we are looking for the same, but from different angles.

Let me finish this part with another example. We have just developed software in Deloitte Spain that helps global multinationals in approaching their transfer pricing efforts in a very flexible and adaptable way, being a tool that can be used and understood by many parts of the client’s organisation. We are not technology developers, but we recognise that in our specific way of delivering value to our clients, even in the tax consulting arena, technology plays an important role, sometimes auxiliary, and some others much more important.

This software is called D-TEMPLAR, which is an acronym of Transfer Pricing Electronic Masterfile Planner, but which also recognises the fact that the templars were the first organisation that was some centuries ago recognised to have multinational management and organisation capacity, and which some have pointed out as the first version of the multinational company. Curiosities aside, this software is state of the art in our view, with the sole aim to deliver high quality and different value to our clients.

We have also presented work to the client in a multimedia format, or in digital forms allowing them to save time, go to the relevant pieces, and listen or watch the report on a plane. We tend to work for tax directors of global multinationals that have very little time and travel constantly.

Are there any technical aspects relevant only to Spain?
Well, for a whole year we have been waiting for the approval of the draft royal decree passing the detailed transfer pricing documentation rules. It seems that the legal text is finally coming towards the end of the year.

Before that, it is relevant to mention that the OCDE 
has finally published last July the TP guidelines for attributing profits to Permanent Establishments. This is particularly important because the Spanish Tax inspectors were particularly virulent in the first half of 2008 on trying to determine permanent establishments in Spain of foreign companies, requesting additional profits to be left in the nation.

Also, on September 19, the OECD issued a discussion draft on the transfer pricing aspects of business restructurings, considering as such any cross-border redeployment or reorganisation of the multinational enterprise functions, risks or assets profile and therefore potentially a reallocation of their expected profits.

Therefore, if you have reorganised your business, affecting your Spanish subsidiary, you need to analyse whether it is necessary or not an arm’s length compensation due to the relocation of functions, for instance, from full fledge distributor to commissionaire, or from full fledge manufacturer to a contract manufacturer.

Attention must be paid to the following factors when doing that analysis:
If there have been changes in the entity’s functions profile that could justify a variation in the tax treatment;
If there was developed any local intangible previous to the relocation of functions, assets or risks.

One of the most sensitive issues in these cases is if there has to be any compensation for goodwill or a pre-existing Spanish local intangible (ie customer base), and if this is the case, how to value it, considering or not the loss of profit potential.

The post-structuring transfer pricing is also relevant, as well as analysing if the new structure or value chain creates any potential permanent establishment exposure for any of the non resident entities participating in the business restructuring. Remember that there have been relevant Spanish economic court announcements in respect to this, originated by the tax inspector assessment determining an EP and requesting additional profit after specific business restructurings involving principal entities in Netherlands and Switzerland.

Business reorganisations are absolutely frequent today considering that many multinationals are nowadays trying to capture the benefits of globalisation and technology by intensively reorganising its value chain.

Therefore, maximum attention must be rendered to this draft, and you need to incorporate transfer pricing and tax considerations in the decision making process, together with the standard business aspects when you reorganise your Spanish value chain.

Mr Crespo, how do you envisage the evolution of Transfer Pricing practice in Spain?
The area of transfer pricing is a line of service that, like all, has its own peculiarities. Nevertheless, concerning its evolution, it is not an area that presents different characteristics to other areas. It is evident that nowadays in Spain it meets all the characteristics of an emerging line, whose development has been produced at an abrupt way covered by the new regulation on the matter. Just like a newborn baby whose behaviour has to will be recognised with time, transfer pricing practice is a great stranger whose contents are still not well understood in many cases.

It is a question of time and training for businesses to become aware of the importance involved in their transfer pricing policies in many fields. We talk about tax, but it also means to quantify how the value of a variety of functions and divisions of a group of businesses contributes to the group as a whole, with the impact that this involves when the value chain of a group is designed and rewarded.

In the course of time, this specialty will reach a greater degree of maturity. This will mean that the services that are now taking place will evolve. They will develop into new products with more value and different to the ones that are now provided. It is important to highlight that the rhythm of the development and the evolution to more sophisticated and more complex products in the field of tax depends to a large extent on the own evolution of the tax administration. As their mechanisms of action are improved, the clients will feel the need to implement policies which perhaps are not currently considered to be necessary or, at least, do not represent a priority, and they will demand advice of a greater added value.

In short, I believe that it still remains a long way to go for us, and that we are living an embryonic phase in the development of a very technically complex specialty, but that will eventually, and with the logical maturing, evolve radically different from what we may initially think about the development phase in which we find ourselves at present time in our country.

www.deloitte.es

In the past five years, and including 2008, the Ministry of Finance in Finland has launched many packs of patchwork on tax laws and the systemic tax reform has been much awaited. Now the Ministry has appointed a new working group to consider the Finnish tax regime as a whole. Not a task to be accomplished in few weeks: the deadline is to issue the report by the end of 2010.

Tax regimes are generally reconstructed in pieces. This piece-meal approach may have a negative impact on decisions by companies and households. Corporations make long term plans and consistent tax system and practice is an important element in planning. This holds true also in investment plans of private individuals. When the tax system is evaluated as a  whole, it is possible to estimate how the tax system influences the economy, the society and consider desired targets.

In international tax, competition countries have selected different approaches. Many countries have decreased their statutory corporate tax rates. As the rate race continues, a global reduction of economic activity and demand for government spending put more emphasis on indirect taxation. In the global economy companies and their profits are mobile whereas it is difficult to avoid tax on consumption. In Europe many jurisdictions are fueling growth and innovation through R&D tax credits, and various tax incentives for financing activities are still popular.

The Ministry of Finance wants to have a holistic view. When nominating the working group in September it was clearly stated that changes in the environment have to be observed. Four key transformation items were mentioned. Firstly, the population is getting older which increases the need to be more efficient in the private and public sector. Secondly, growth in productivity and profitability is more and more focused on know how and intangible property. The third element is that challenges in respect of sustainable development are bigger than ever and fourthly, the economic environment is more open than before.

What would the focus areas be for the new Finnish tax regime? The Ministry asked the group to consider especially the following:

• structural changes in the tax regime in light of favourable growth in profitability, high employment and entrepreneurship
• sustainable tax burden within healthy public sector
• encouraging balance between social security programs and work
• changes in corporate taxation and capital income taxation that support productivity and employment observing international development, especially in the EU
• competitiveness of the tax regime.

Excellent targets, and certainly a motivating agenda. It is guaranteed that the pending work will get a lot of attention from corporations and private individuals in Finland and elsewhere.

Setting the standard on transfer pricing documentation
Finland launched transfer pricing documentation requirements in 2006 and now the tax authorities are reviewing the first documentation packs.

One of the leading transfer pricing experts of the Finnish tax authorities recently stated that the tax authorities have been somewhat surprised with the level of documentations they have received. On one hand, a lot of the documentation packages reviewed have been very good at meeting the required content structure. On the other hand, however, the economic analysis is, in many cases, either lacking completely or very thin.

Not surprisingly, the Tax Office for Large Tax Payers (“LTO”) in Finland has announced that they will select some 20 multinationals for a transfer pricing documentation review within the next 12 months. The selection process is random, though the companies selected will be from the customer base of the LTO.  If a company is selected for a review, it will be asked to submit its transfer pricing documentation to the LTO. After the review the tax payer will be informed on whether or not the transfer pricing documentation is deemed adequate. If this is the case, the tax authorities have stated that this should give the tax payer some level of comfort and that a specific transfer pricing audit should not be launched at least for the year(s) under review. If the case is the opposite, ie the documentation is deemed essentially incomplete or inaccurate a transfer pricing audit will be initiated.

Withholding taxes may be claimed back
Shareholders residing in the European Economic Area should take a look at withholding taxes they have paid on Finnish source dividends since 1995. The Central Board of Taxation has recently issued a ruling (CBT 27/2008) and the Supreme Administrative Court (SAC 2008:23) has given a decision, coupled with ECJ Stauffer case (C-386/04), which is likely good news for international investors. The Central Board of Taxation stated in its decision that the dividend paid by a non-listed Finnish corporation to a Swedish corporate shareholder is exempt from withholding tax. This is because dividends between Finnish companies would have been tax exempt under the same facts and circumstances. The exemption requires that the non-resident shareholder is located within the European Economic Area, there is an agreement on exchange of information in force and the tax withheld at source cannot fully be credited in the home state.

The SAC ruled in its decision that a UK resident individual receiving dividends from Finnish corporations cannot be heavier taxed on dividend income than a Finnish resident under same circumstances. Resulting from these decisions and the Stauffer case, the government has issued a proposal which changes the Finnish withholding taxation.  It may well be worth looking back and assessing whether there is an opportunity to claim back previously paid taxes.

For further information tel: +358 207 555 314; 
email: outi.ukkola@deloitte.fi; www.deloitte.fi