Transfer Pricing in Latin America

In a recent discussion, PricewaterhouseCoopers' John Salerno joined the editors of Practical Latin American Tax Strategies to talk with ADM's Robert Frable and Sony's Marc Lewis about their tax operations in Latin America, their new procedures for dealing with FIN 48 and transfer pricing procedures. Following is and excerpt from the interview with Marc Lewis, the second in a series of excerpts from that exclusive interview:

Strategies: You had mentioned earlier some of the benefits of taking a regional approach to managing the Latin American tax burden. Is there anything specifically that you have been doing within your company to regionalize the approach to tax planning?

Lewis: Transfer pricing is probably a good way to illustrate a regional approach. It is important for a company to be consistent about its transfer pricing both regionally and globally, and I think it is important for many reasons. A regional approach is a good approach for transfer pricing because it forces you to look at things on a 50,000 foot level in the Americas, for instance. There are requirements now in pretty much every country, and you ask yourself, if I’ve got limited resources in my department, how am I going to tackle this kind of project.

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Implementation Regulations for the New Enterprise Income Tax Law of China

Excerpt from Practical China Tax and Finance Strategies by Fuli Cao (Jones Day)


In December, the long-awaited new Enterprise Income Tax (EIT) Regulations were finally released. They define resident enterprise, reduce the tax rate and eliminate taxes on certain kinds of dividends. Many uncertainties still remain.


The EIT Law and the New EIT Regulations made major changes and clarifications, including the following:

• Defined “resident enterprise” as an enterprise either established under the law of China or effectively managed in China.


• Confirmed transfer pricing rules.


• Introduced controlled foreign corporation rules.


• Introduced thin capitalization rules.


• Reduced the regular income tax rate from 33 percent to 25 percent.


• Introduced a 20 percent tax rate for small-scale enterprises earning small profit.

More changes and clarifications:

Retrospective Adjustments of Intercompany Prices for Goods Sold into Russia

Excerpt from Russia Eurasia Executive Guide by Kurban Nepesov and Natalia Volkovskaya (KPMG)

In general, transfer pricing in Russia is not particularly complex, although for those importing goods from a related party, the balancing act between Russian customs and their local tax inspectorate can be challenging -- the two authorities are driven by opposing fiscal interests. For example, an increase of intercompany prices at which the Russian subsidiary purchases goods from its foreign affiliate should in principle lead to an increase of customs duty and import VAT and, therefore, to a decrease of its Russian profits tax liabilities (as the increased expense erodes the margin) for the importer. Thus, adjustments to established intercompany prices can lead to disputes with either the Russian customs or tax authorities -- or both!

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Managing Tax Risk in Latin America

In a recent discussion, PricewaterhouseCoopers' John Salerno joined the editors of Tax Strategies to talk with ADM's Robert Frable and Sony's Marc Lewis about their tax operations in Latin America, their new procedures for dealing with FIN 48, and transfer pricing procedures. This excerpt from that interview takes a look at their strategies surrounding FIN 48:

Strategies: What has your overall experience been in managing the implementation of FIN 48 in the region?

Lewis: It is hard to say that the Latin American region presents something that is unique within FIN 48 implementation versus some of the other regions but I think one thing to consider is how much reliance a taxpayer can place on the availability of Competent Authority or APA relief. To a certain extent, it is dependent upon how active the Competent Authority is between different countries and how active the APA programs are between different countries. Latin America, Mexico and probably some others have pretty robust activities. However, in other countries, it is just building up, so I do not think you are at the same level as you see in some of the countries in Europe, Japan and other places where you can rely upon a Competent Authority or APAs in the assessment of uncertain tax positions.

Frable: FIN 48 was an interesting experience with this being the implementation year. I think everybody was surprised at how much time they ended up spending on the implementation. It took away from your day-today responsibilities. I think it is going to get better; tax departments, controllers and even outside auditors had to work through a learning curve.

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IRS Won't Challenge Credits against US Income Tax for Payments of Mexico's New Flat Tax

by Scott Studebaker (WorldTrade Executive, Inc.)


Mexico’s new flat tax, the IETU, will go into effect on January 1, 2008. The new tax has caused anxiety among U.S. investors over the tax implications. Investors and tax professionals have worried that the new tax might not qualify as an income tax under Article 24 of the U.S.-Mexico tax treaty. This, in turn, would mean that U.S. investors would not be able to receive a credit against their U.S. income taxes for the IETU paid in Mexico—a classic case of double taxation.

But the IRS has stepped in with a welcome, if provisional, clarification. On December 10, the IRS issued Notice 2008-3, in which it said that it, too, had not determined whether the IETU qualified as an income tax under Article 24(1) of the Treaty, and that the agency was going to study the new tax in order to make a determination.


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Setting Up an Entity in India

Excerpt from Practical Asian Tax Strategies
article by Jon Eichelberger, Brendan Kelly, Eugene Lim & Beng Ti Tan (Baker & McKenzie, Beijing)

While the U.S. is the oldest, India is the biggest democracy in the world. India has a large pool of educated human resources and a well-developed legal and banking system, and English is the business language, making the country a favored destination for foreign investment.

An offshore entity interested in establishing a presence in India should first determine short- and long-term objectives. This includes the mission of the entity in India, the type of operations to be conducted and the timelines for site selection, hiring personnel, etc. Based on the initial analysis, the next important step is to determine the type of entity that should be set up. The new entity can be a Liaison office (LO), Project office (PO), Branch office (BO), or an incorporated company, public or private (Company). If the objective is short-term, a foreign entity can also post a representative in India to carry out its activities.

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Managing Transfer Pricing Risk in Brazil

Brazil, the ninth largest economy in the world, has developed a unique set of transfer pricing rules that differ from the Organization for Economic Cooperation and Development (OECD) based approach adopted by most countries around the world. As result of this uniqueness, multinational corporations (MNCs) face a number of transfer pricing difficulties which may range from an increased burden on compliance activities to double taxation. Further, Brazilhas signed several Tax Information Exchange Agreements with foreign tax authorities (including one recently with the U.S.) that increase the exposure of MNCs to transfer pricing issues.

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Recent Developments to China’s Export VAT Refund Regime

The latest VAT adjustments have caused significant concern for many enterprises operating in China, as well as for companies overseas that source materials and products from China. One of the major concerns stems from the lack of notice given for the latest change which was published June 19, 2007 with an effective date of July 1, 2007. For some foreign investors, the changes have resulted in a significant increase in the cost of procuring and producing goods in China for export. In some cases, these cost increases potentially frustrate the business and economic objectives of moving global sourcing and production activities to China by not allowing ample time for adjustments to their operations to cope with these changes.

There are some planning techniques to mitigate the VAT impact on business sourcing and exporting.

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Canada-US Tax Protocol Will Impact Transfer Pricing Disputes

One of the most important and novel changes made by the new Protocol to amend the US-Canada tax treaty is the mandatory arbitration procedure. The provision is called “mandatory” in the sense that it is binding on the tax authorities of the United States and Canada. Taxpayers will have an opportunity to decide whether invoking the arbitration procedure is in their best interests.

Under the Protocol and diplomatic notes, intercompany transfer pricing issues are among those that can be submitted for arbitration. In addition, both competent authority cases already under consideration of competent authorities at the time of the Protocol entering into force and new cases, submitted after the Protocol enters into force, will qualify for submission to the arbitration (provided certain requirements are met).

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FIN 48: What Kind of Documentation Do You Need and How Do You Protect It

FIN 48, recently issued by the FASB, sets forth standards for recognizing any position taken on an income tax return that impacts the amount of income tax reported on a taxpayer's financials. As firms move to comply with this rule, they will need to know what documentation is necessary and whether the documents will be protected.

The disclosures and calculations necessitated by FIN 48 require the taxpayer to engage in extensive analysis of its tax risk from current and past transactions in preparing its annual and interim financials. This analysis may take memoranda. Although tax opinions are not required by FIN 48, “[FASB] believes that a tax opinion can be external evidence” supporting a taxpayer’s tax-risk analysis. Depending on the materiality and/or complexity of a given tax position, a taxpayer ’s preparation of supporting documentation or its engagement of outside counsel for the preparation of legal opinions or memoranda may assist in meeting the MLTN threshold for recognition or in increasing the measurement of the benefit to be recognized.

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