Balancing risk and credit in Spain

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

On your marks… get set… go

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

Technology Awards 2010

Cleantech Award Winners

Best Cleantech Company of the Year North America
Tesla Motors

Best Cleantech Company of the Year Latin America
Vale

Best Cleantech Innovation Company of the Year, Western Europe
Lemnis Lighting

Best Cleantech Company of the Year Eastern Europe
General Electric

Best Cleantech Company of the Year Middle East
Suntrof Mulk Energy Group

Best Cleantech Company of the Year, Asia
Sparton Resources Inc.

Best Cleantech Company of the Year Australasia
Veolia

Best Cleantech Company of the Year Africa
Macquaire

Finance Technology Award Winners

Best Finance Technology Company of the Year, North America
Oracle

Best Finance Technology Company of the Year, Latin America
Itautec S.A.

Best Finance Technology Company of the Year, Western Europe
Telovia

Best Finance Technology Company of the Year, Eastern Europe
Intracom

Best Finance Technology Company of the Year, Middle East
Mubasher Financial Group

Best Finance Technology Company of the Year, Asia
Pennant Technologies

Best Financial Technology Company of the Year, Australasia
New Edge Group

Best Finance Technology Company of the Year, Africa
Safaricom

I.T. Award Winners

Best IT Company of the Year North America
Fortinet

Best IT Innovation of the Year Latin America
InvestChile – CORFO

Best IT Innovation Company of the Year Western Europe
Ai-One Inc.

Best IT Company of the Year, Eastern Europe
Ciklum

Best IT Company of the Year, Middle East
Sybase

Best IT Company of the Year, Asia
QAI

Best IT Company of the Year, Australasia
RDA Group

Best IT Company of the Year, Africa
Business Connexion

Trading Platform Award Winners

Best Trading Platform, North America
Deutche Bank

Best Trading Platform, Latin America
Citi

Best Trading Platform, Western Europe
Deutsche Bank

Best Trading Platform, Eastern Europe
Unicredit

Best Trading Platform, Middle East
Ahli United

Best Trading Platform, Asia
RBS Hong Kong

Best Trading Platform, Australasia
Commonwealth Bank of Australia

Best Trading Platform, Africa
Standard Chartered

Biotech/Medical Award Winners

Best Biotech/Medical Company of the Year, North America
Siemens IT Solutions & Services

Best Biotech/Medical Company of the Year, Latin America
Syngenta AG

Best Biotechnology Innovation Company of the Year, Western Europe
Amgen

Best Biotech/Medical Company of the Year, Eastern Europe
Thalesnano

Best Biotech/Medical Company of the Year, Middle East
Maquet Middle East

Best Biotech/Medical Company of the Year, Asia
Bharat Biotech International

Best Biotech/Medical Company of the Year, Australasia
3M

Best Biotech/Medical Company of the Year, Africa
La Gray Chemical Company

Leading family firms

In order to extend their legacy of success to future generations, leaders must devise a strategic plan, not only for driving business growth, but also for effectively managing the intricate and constantly-evolving personal relationships that define

their company, and indeed their lives.

The Stanford Graduate School of Business Office of Executive Education is launching a new program entitled Leading Family Firms, that seeks to provide leaders of independent firms with the skills they need to rise to the challenges posed by the modern business environment. In essence the course explains how to manage future growth while overcoming the challenges and conflicts that threaten the legacy of their firms. In doing so, participants learn to apply a higher level of strategic thinking to all of the obstacles that they must overcome in turning a currently successful family firm into a future global business champion.

Challenges
The main objective of any business is to grow, but there are many considerations that a leader must face in order to achieve this.

One of the initial and principal challenges that faces a family business is the organisational structure of the company. It is imperative that the business has in place the correct management team, one that is well-equipped to drive the company forward and in the correct direction. Furthermore, from the outset, the leader of a family business must take a long-term view, and the key consideration in this is succession planning. A strong management team can provide the cornerstone when the time comes to begin thinking about a change in ownership.

Professor Hayagreeva Rao is a Director of Stanford’s Centre for Leadership Development and Research, and one of the new program’s instructors. “From the beginnings of the company’s life, certain structures and systems need to be in place in order to help nurture family talent. Education is a key attribute, as potential future business leaders need to be equipped with the right skills to manage a business,” he says.

“In addition to this, it is vital that family members learn the ‘nuts and bolts’ of the company, so that they understand every aspect and every component of the business,” says Professor Rao. In this way it is vital that the family puts in place adequate provisions to ensure the development of potential successors, as this will also ensure the continued development of the business itself.

Another key challenge, inextricably linked to the growth of a business, is that of innovation. Here, a methodical approach needs to be adopted. There is a strong call for a clear strategy when it comes to product development, as substantial time and resources can easily be spent producing a limited discernible outcome.

“A growing business is in many ways similar to a venture capital firm,” says Professor Rao, “as it is an environment where new ideas and products are fostered. When it comes to product innovation, products that are in the pipeline need to be tested internally, using the venture capital model. Testing of products needs to be undertaken over different stages of development, with capital only applied to the product once it has successfully completed each round of testing.”

And when it comes to raising capital, the leader of a family business also needs to be prepared. “Raising funds can be a tricky period for the family business, whether it involves assuming debt, a venture capital investment or a listing on the public markets,” says Professor Rao.

Different leaders have different attitudes towards risk, so loan funding may not always be attractive, whereas the loss of control of a large proportion of their business may deter many from taking on venture funding. And the prospect of an IPO may instil fears of a loss of family identity.

“Raising capital is very much a question of psychology and finance,” says Professor Rao, “and it is important to maintain a balance between family and business; it is vital that neither the business nor the family position is weakened at the expense of the other.”

Sometimes this requires innovative solutions. “I know of one Dallas-based media firm that split into two distinct parts; one part was kept under family ownership, and the other was made public. It is vital to consider what is best for each individual business, and no two firms are the same.”

Globalisation also poses considerable challenges. On the one hand, often the leader of a family business relishes the prospect of expanding his firm – of establishing a global footprint. On the other hand, however, in doing so he faces the real possibility of diluting the family’s identity, and this is an emotional decision to take.

Furthermore, the question of where to globalise is critical, and to what extent. “It is really a question of scaling,” says Professor Rao, “if the business over-scales it is liable to over-stretch itself and weaken, but if it doesn’t stretch far enough there is the threat that someone else will take advantage of your shortfalls.”

To address these challenges the program closely examines case studies of companies that have globalised successfully, as well as those that have failed. It also offers the opportunity to meet the leaders of these companies.

“Smart companies make change look very simple,” says Professor Rao, “and they keep globalisation simple.”

Who should apply?
The program is aimed at companies meeting three criteria; those in which members of one family are significant shareholders, those in which at least one family member is active in top management or the board, and those that have substantial assets and/or widely distributed operations.

Application to the program is open to family members involved in any aspect of the firm, including board members, top executives, future company leaders, significant shareholders, family foundation managers, and spouses of key decision makers. Furthermore, senior executives and board members from outside the family who actively participate in the business are also invited to apply.

Participants of the program have diverse backgrounds; representing a wide array of businesses across many sectors, and originating from many global locations. In this way program participants are able to bring to the forum the various issues that affect businesses the world over. Participants are invited to use the program as a ‘mirror and a window’; the mirror enables them to observe themselves and the way they run their business, and the window enables them to look out at other people and see their issues and solutions.

During the four-month break between classroom modules, participants take part in a unique experience that challenges them to put their newly acquired knowledge into action. Based on their learnings during the first module, participants work with program faculty to design a structured leadership project to implement during the break. In addition to discussing status reports with program faculty, participants share their experiences and solicit feedback from fellow participants along the way, bridging the gap between classroom theory and practical application.

Is it for you?
This is a program that challenges the leaders of family firms to confront the often latent tensions underlying the inevitable decisions that lay ahead, whether they involve strategic direction, family control, outsider involvement, tradition versus change, succession planning, or philanthropy. By taking part in an innovative curriculum that includes an intensive personal leadership project, participants learn to apply a higher level of strategic thinking to all of the obstacles that they must overcome in turning a currently successful family firm into a future global business champion. n

For further information www.leadingfamilyfirms.com