Arnas Laurynas of Quantera Global UK recently attended an IBA Finance and Capital Markets Tax Conference that focused on the current international tax issues in cross-border corporate finance and capital markets. Amongst many topics, there was increased attention on Transfer Pricing in the Financial sector. A number of speakers talked about Transfer Pricing developments in Finance in their jurisdictions. The panel of speakers in the Transfer Pricing session covered current challenges in the field of Finance.
Brian Lebowitz focused on the recent OECD Discussion Draft on Profit Splits. He explained that the profit split method is the most appropriate when entities use intangibles, are highly integrated and share economically significant risks. There are two types of profit splits:
- In the contribution analysis, profits are split based on parties’ contribution to the transaction.
- In the residual analysis, first profit is allocated to the routine functions with the residual profit is allocated based on the parties’ contribution to the transaction.
The choice among factors in the analysis should reflect the importance of the functions, assets and risks to the value added by the parties. Attention should be paid to contributions of unique and valuable intangibles and the assumption of significant risks. There are also contrasting views whether TPSM (the transactional profit split method) should be made a default method or a method of last resort.
Benchmarking intercompany debts
Murrey Clayson talked about the benchmarking features of intercompany debt. A question was raised whether it is justifiable for a parent to keep costs of debt low for a subsidiary with low creditworthiness. Murrey Clayson also touched upon the active use of Diverted Profit Tax by HMRC, the enforcement procedures and other related issues, such as unusual upfront tax payment and potential double taxation (diverted profit tax and corporate tax) in the same jurisdiction in case of unrevised Transfer Pricing.
Audits by Italian tax authorities
Raul-Angelo Papotti presented the focus in Transfer Pricing audits done by the Italian Tax authority, including attempts to reclassify the subordinated related-party debt into equity. He raised the question whether it is still possible to requalify loan into equity with the new concept of commercial rationality instead of substance over form. Other focus areas of the Italian tax authority were discussed, including the focus on data comparability, functional analysis, reclassification of a Transfer Pricing case to a royalty case and recognition and recharacterization of zero interest related-party debt .
Consequences of non-compliance in Switzerland
Finally, Pascal Hinny talked about the Swiss penal aspects of Transfer Pricing. Here, non-compliance in Transfer Pricing can lead to criminal proceedings. In Switzerland, stakeholders (including shareholders, contractors and tax advisors) may become liable in case a certain tax planning structure is deemed to be tax evasion. In case of an involvement in tax evasion, criminal charges may be brought against these stakeholders as well. In fact, when the tax payer is insolvent, the tax must be paid by liable stakeholders.