Transfer Pricing In International Discussion

Ed: Assoc.Prof. Dr. Funda BAŞARAN YAVAŞLAR

This book as an example of international cooperation aims', first, to present important points of issue involving both theory and application, and second, to examine comprehesively some problems specific to transfer pricing. The first chapter of the book has a mainly juricidal perspective, examining transfer pricing, the function of hidden profit distribution, legal characteristics and issues, and transfer pricing systems, considering their application in Japan, Germany, Luxemburg and Turkey. İn the second chapter of the book, important subjects of transfer pricing such as transfer prices for intangible property, documentation ments, legal protection of taxpayer, audit methods, databases, and APAs are discussed in detail from a critical perspective. Each section is written by a different outstanding scholarprofessional from Germany, Japan, Luxemburg and Turkey.

TABLE OF CONTENTS

Table of Contents   1

Abbreviations          13

Opening Statements               17

FIRST CHAPTER System of Transfer Pricing

Understanding of the Institution of “Transfer Pricing”                25

Prof. Dr. Mustafa AKKAYA Tl

Disguised Profit Distribution through Transfer Pricing - Function, Legal Characteristics, Issues      27

1. I.                     Introduction             27
2. II.                   “Arm’s Length” Principle          28
3. II.                   Scope of the Principle and Issues          28
4. II.                   Arm’s Length Principle as an Conclusive Presumption          31
5. II.                   Applicabilty of Article 3 of The Tax Procedural Code in Transfer Pricing              32
6. III.                  Povvers Assigned to Council of Ministers and Ministry of Finance        34
7. III.                  Povvers Assigned to Council of Ministers               34
8. III.                  Povver Assigned to Ministry of Finance  34
9. IV.                  Conclusion              34

Regulations Concerning Transfer Pricing and Their Applications in International Comparison            37

Prof. Norihisa YOSHIMURA                39

Transfer Pricing in Japan: An Overvievv                39

1. I.                     Introduction             39
2. II.                   Basic Structures of the Japanese Law and Administration    40
3. III.                  Foreign-associated Corporations           41
4. IV.                  Transfer Pricing Methods and Their Problems      42
5. IV.                  Transfer Pricing Methods       42
6. IV.                  Application of Transfer Pricing Methods 43
7. IV.                  Arm’s Length Rage 43
8. V.                   Compliance Practices             44
9. V.                   Documentation       44
10. V.                   Special Obligations  44
11. V.                   Secret Comparables              45
12. VI.                  APAs       46
13. VII.                Mutual Agreements and Arbitration       47
14. VIII.               Conclusion              48

Dr. Stephan RASCH            49

Transfer Pricing in Germany  49

1. A.                   Introduction             49
2. B.                   IncomeAdjustment Clauses - The Arm’s Length Principle in GermanTax Law     50
3. B.                   Hidden Profıt Distribution According to Sentence 2 of Sec. 8 (3) of the Corporation Tax Code          50
4. B.                   Hidden Capital Contribution   53
5. B.                   Sec. 1 of the Foreign Tax Code             54
6. C.                   Methods of Establishing Arm’s Length Prices        55
7. C.                   Introduction             55
8. C.                   Resale Price Method              55

1. I.                     Cost-Plus Method   57
2. II.                   Profit-Split Method  58
3. III.                  Transactional Net Margin Method          60
4. IV.                  Comparable Profıt Method     62
5. A.                   Business Restructuring           62
6. A.                   General Introduction               62
7. A.                   Introduction to German Law on Business Relocation            63
8. A.                   Compliance with International Principles                64
9. A.                   Analysis of Decree-law           65
10. A.                   Defınition, Sec. 1 Decree-law 65
11. A.                   “Negative List”, Sec. 1 Para. 7 Decree-law            68
12. A.                   Provision on Application of Transfer Package, Sec. 2 Decree-law        70
13. A.                   Determination of Value of Transfer Package, Sec. 3-6 Decree-law     70
14. A.                   Calculation of Range of Acceptance, Sec. 7 Decree-law      71
15. A.                   Damage and Compensation Claims, Sec. 8 Decree-law      73
16. A.                   Possibilities of Subsequent Adjustment, Sec. 9 -11 Decree-law            73
17. B.                   Documentation Requirements               74
18. B.                   Introduction             74
19. B.                   Analysis   75
20. B.                   Three Types of Data              75
21. B.                   Acceptance of Profıt-Based Methods     76
22. B.                   Data from Related Parties      77
23. B.                   Best Method Rule   78
24. B.                   Transfer Pricing Guidelines    78
25. B.                   Contemporaneous Documentation        79
26. B.                   Materially Unusable Documentation       80
27. B.                   Extraordinary Transactions    80
28. B.                   Language               81
29. B.                   Mandatory Documents           82
30. B.                   APAs, Unilateral Rulings         83
31. B.                   Cost Allocation Agreements   83

1. I.                     Small Taxpayers   85
2. II.                   Requestfor Documentation 85

5.3. Conclusion    86

Peter MOONS/ Cecile HENLE        87

Regulations in Relation to Transfer Pricing and Their Application in Luxembourg 87

1. A.                   Legal Framevvork 87
2. A.                   Transfer Pricing Adjustments             87
3. A.                   Hidden Dividend Distributions           88
4. A.                   Hidden Capital Contributions             89
5. A.                   Substance Över Form          89
6. A.                   Formal Requirements          89
7. B.                   Administrative Application by Tax Authorities  90
8. C.                   The Intra-group Financing Circular   90
9. C.                   Background          90
10. C.                   The Arm’s Length Principle as Adopted by the OECD    91
11. C.                   Substance Requirements     93
12. C.                   Board Composition             93
13. C.                   ûualifications and Povvers of Board Members 94
14. C.                   Oualified Personnel             94
15. C.                   Key Decisions       94
16. C.                   Bank Account        95
17. C.                   Tax Compliance   95
18. C.                   Exclusion of Dual-resident Entities    95
19. C.                   Equity at Risk        95

3.4. APA Procedure              96

1. D.                   Binding Effect of the Circular and APAs            96
2. D.                   Binding Effect of the Circular              96
3. D.                   Binding Effect of APAs         98
4. E.                   Conclusion           98

Dr. Namık Kemal UYANIK              99

Turkish Transfer Pricing Regulations               99

' Introduction         99

2. Tax Regulations Concerning Hidden Profit Distribution by Transfer Pricing         101

1. I.                     İn General             101
2. II.                   Corporate Tax Law               103
3. III.                  Personal Tax Law 105

3 Statement of Purpose and Scope of Transfer Pricing Regulations and the Arm’s Lenght Principle     106

1. III.                  Statement of Purpose and Scope of Transfer Pricing Regulations               106
2. III.                  Turkish Transfer Pricing Regulations and the Arm’s Length Principle        107
3. A.                   Concept of Related Party    109
4. B.                   Comparability Analysis and the Arm’s Length Methods 110
5. B.                   Comparable Uncontrolled Price (the CUP)       111
6. B.                   Resale Price Method (the RPM)         111
7. B.                   Cost-Plus Method (the CPM)              112
8. B.                   Profit Split Method (the PSM)             113
9. B.                   Transactional Net Margin Method (the TNMM)                114
10. C.                   Transfer Pricing and Loss of Tax Revenue to the National Treasury           115
11. D.                   Intangibles            116
12. E.                   Cost Contribution Agreements           117
13. F.                   Intra-Group Services           117
14. G.                   Transfer Pricing And Documentation                118
15. H.                   Special Taxation Regime    122

İ.                     Special Sanctions And Special Penalty Sistem               124

1. J.                    Advance Pricing Agreements             125
2. J.                    General Information on Advance Pricing Agreements   125
3. J.                    Regulations Regarding Advance Pricing Agreements   125

SECOND CHAPTER Special Issues of Transfer Pricing and Suggestions for their Solution

A special Problem and Suggestions for its Solution regarding the Determining of the Arm’s-length Price      131

Dr. Xaver DITZ    133

Transfer Prices for Intangible Property           133

1. I.                     Importance of Intangible Property     133
2. II.                   Transfer of Rights to Use Intangible Property  133
3. II.                   Principle                133
4. II.                   Amount   134
5. II.                   Determining Factors            134
6. II.                   Traditional Approaches      135
7. II.                   Transactional Profit Approaches       136
8. II.                   Transfer of Intangible Property          136
9. II.                   Preliminary Remark              136
10. II.                   Appropriate Transfer Prices               137
11. III.                  Conclusions         138

Special Problems and Suggestions for their Solutions Regarding the Taxpayers. 139

Prof. Dr. Nurettin BİLİCİ   141

Types of Legal Protection Against Transfer Pricing Adjustment and the Problem of Proof 141

1. A.                   Introduction          141
2. B.                   Preliminary Information       142
3. B.                   Regulations on Transfer Pricing        142
4. B.                   Some Concepts about Transfer Pricing            143
5. B.                   Formal Obligations about Transfer Pricing      144

2.3.1. Filling in a“Transfer Pricing Form" and submitting it as an Attachment to the Tax Declaration (for ali payers of Corporate Tax)            144

1. I.                     Preparation of “Transfer Pricing Report” (forsome payers of corporate tax)        144
2. II.                   Keeping Data and Documents about Transactions with Related Parties (for payers of Corporate Tax and Income Tax)  145
3. A.                   The Transfer Pricing Issue and Customs Legislation            146
4. B.                   Transfer Pricing During Sale and Rent of Immaterial Economic Values (Copyright, Brand, Patent, and Softvvare Programs)          147
5. C.                   Gain Distribution via Transfer Pricing     147
6. A.                   Corporate Tax Law Regulation              147
7. B.                   Income Tax Law Regulation   148
8. B.                   Exposure to Taxation and Adjustment   148
9. B.                   Treasury Deficit      149
10. B.                   Taxpayers and Cash Pricing (for payers of Corporate Tax) 149
11. 1.                    Solution in Case of a Problem (Transfer Pricing Adjustment) and Burden Of Proof            150
12. 1.                    When does the Administration conduct a Transfer Pricing Inspection? 150
13. 1.                    The Meaning of Transfer Pricing Adjustment and Sanctions 150
14. 1.                    Administrative Solution for Transfer Pricing Adjustment        151
15. 1.                    Resorting to Jurisdiction because of Transfer Pricing Adjustment and Proof        151
16. 1.                    Does the Burden of Proof belong to the Taxpayer orTax Administration?           152
17. 1.                    “Secret Precedent” as a Means of Proof?              154
18. 1.                    Taxpayer’s Defense of Applied Price: Defense of Related Party Transaction Price’s Conformity to Art. 13/4 Corporate Tax Law    154
19. 1.                    “Comparable Price Method” has been applied       154
20. 1.                    Transaction concerns Intragroup Production and Distribution Process 155
21. 1.                    The Price According to the “Resale Price Method”                155
22. 1.                    A Special Method has been Applied for the Determination of the Price                155
23. 1.                    Reasons why the Related Party Price Differs from the Price Determined by the Administration         155
24. 2.                    Additional Solutions When Transfer Pricing Process Has International Dimensions             157

4.1. Regulations on Conventions to Prevent Double Taxation              158

1. I.                     One can benefit from Mutual Consent Method (MCM) due to Double Taxation Agreements     158
2. II.                   The Problem May be Solved through Arbitration             159
3. III.                  Solutions Concerning Transfer Pricing on the Example of EU (Arbitration Convention)         159
4. A.                   Preliminary Information       159
5. B.                   Taxation has been conducted on Transfer Pricing in a Member State         160
6. C.                   Related other Country Does Not Accept Adjustment       160
7. D.                   If Administrations and Taxpayer Do Not Agree vvithin MCM Process, the Arbitration Process begins   160

5. Conclusion       161

Prof. Dr. Roman SEER     165

Transfer Pricing Documentation with Affiliated Companies - Necessity of Limiting Obligations             165

1. A.                   Introduction          165
2. B.                   Obligatory Content of Transfer Pricing Documentation 166
3. C.                   Demand for Submission as a Measure of Field Audit      169
4. D.                   Legal Function of Evidence Rules for Documentation    170
5. E.                   Legal Consequences ofViolating Documentation Obligations      171
6. E.                   Reducing the Standard of Evidence to the Detriment of the Tax Payer        171
7. E.                   “Penalty Surcharge” pursuant to Sec. 162 Para. 4 GTC   173
8. F.                   Conclusion           175

Special Problems and Suggestions for their Solutions Regarding the Tax Administration      177

Adnan ERTÜRK/Muhittin ESEN    179

Audit Methods and Use of Databases in Transfer Pricing              179

1. 1.                    Introduction          179
2. 2.                    Transfer Pricing Compliance Practices in OECD Guideliness      179

1. I.                     Legislation and Administrative Procedures            179
2. II.                   Aspects of Transfer Pricing Compliance That Should Receive Special Consideration by Tax Administrations    179
3. A.                   Examination Practices            180
4. B.                   Burden of Proof      180
5. C.                   Penalties 181
6. A.                   Tax Loss Result from Transfer Pricing and The Importance of Transfer Pricing Examinations           182
7. A.                   The Importance of Transfer Pricing Examinations 182
8. A.                   Approximate Tax Loss Arising From Transfer Pricing in the VVorld and in Turkey              184
9. B.                   Selecting the Right Cases for Transfer Pricing Audits           185
10. B.                   Risk Identification    187
11. B.                   Information Sources for Risk Identification             187
12. B.                   Tax Returns, Accounts, Transfer Pricing Documentation and ûuestionnaires      187
13. B.                   Third Parties           187
14. B.                   Risk Indicators for Transfer Pricing        188
15. B.                   Selecting Transfer Pricing Cases in Turkey           191
16. B.                   Extending Risk Factors Identified in Routine Audits to Other Firms Operating in the Same Sector     191
17. B.                   The Use of Tax Returns, Financial Statements and Transfer Pricing Forms       191
18. B.                   Information from other Government Agencies       192
19. B.                   Different Country Examples with Respect to the Selection Criteria for Cases      192
20. B.                   United Kingdom      192
21. B.                   China      193
22. B.                   Conducting Transfer Pricing Audits in Turkey        193
23. B.                   Some Suggestions to Increase the Efficiency of Transfer Pricing Audits              194

4.5.1. An Efficient Risk Analysis System 194

1. I.                     The Importance of the Number of Comparable Firms      194
2. II.                   The Use of Mathematical Models to Determine Arm’s Length Price              194
3. III.                  Exchange of Information     194
4. IV.                  Specialization of Tax Auditors            195

5. Determination of External Comparables through Databases     195

1. IV.                  Difficulties in Determining External Comparables           195
2. IV.                  External Comparables and Databases According to OECD Guidelines       196
3. IV.                  International Databases       197
4. IV.                  Databases According to Turkish Tax Legislation            198
5. IV.                  The Advantages of Databases            198
6. IV.                  Taxpayers will have Access to Numerous External Comparables 199
7. IV.                  Databases will Allovv Mathematical Analysis   199
8. IV.                  Databases will Provide the Information That is Unavailable in Financial Statements 199

Assoc. Prof. Dr. Funda BAŞARAN YAVAŞLAR      201

Advance Pricing Arrangements and the Constitutional Limits on these Arrangements            201

1. A.                   Defınition, Justification and Legal Basis of APAs            201
2. B.                   The Legal Nature of APAs    205
3. C.                   Main Subject of APAs According to Turkish Law: A transfer pricing method which complies with the arm’s length principle            209
4. C.                   The Basic Objective in Determining the Applicable Method: Being applicable for the determination of the arm’s length price or the value                209
5. C.                   The Scope of Transactions VVhich Are Related to the Method    211
6. D.                   Procedure of Making APAs 212
7. D.                   Application            212
8. D.                   Persons Eligible to Apply for an APA                212
9. D.                   Application Form and Content           213
10. D.                   Paymentof Application Fee 215

4.2. Evaluation of Application and Reply          216

1. I.                     Acceptance of Application and the Signing of an APA          
2. II.                   Legal Consequences of APAs and Their Implementations
3. A.                   Amendment, Renevval and Cancellation of APAs                
4. B.                   The Unconstitutionality Issue of APAs   

Subject lndex         

Bibliography