Global Transfer Pricing Updates of Note:

India’s challenge of Marketing Intangibles:

Intangible property is often the most valuable component of a multinational enterprise (MNE). The identification and valuation of intangible property are key components in the determination and documentation of an MNE’s transfer pricing policy. Quite often, MNEs centralize the ownership of its intangible property in one of the members within the MNE group. One aspect that is often not considered or evaluated by MNE’s is the extent to which a member of an MNE develops intangible property within the local member’s region, generally referred to as marketing intangibles. The most common fact pattern occurs when a brand that is established and owned in a region of a member of an MNE and introduced or expanded into the region of another member of the MNE. The brand value may have little or no recognition prior to its introduction in the new region. However through the efforts of the local member, the brand may develop, over time, significant value in the new region.

India’s tax authority has challenged a number of foreign owned subsidiaries on the degree of expenditures incurred to increase brand values with their country. In the case of Ford India Pvt Ltd. (“Ford India”), the Indian Income Tax Appellate Tribunal (“ITAT”) recently confirmed the reassessment relating to marketing intangibles. In this case, Ford India expensed approximately 5.75% of their revenues on advertising, marketing and promotion. Ford India was required to use the name ‘Ford’ and the ITAT believed the marketing activities were benefiting the intangible property that was owned by Ford Motor Company, USA (“Ford US”). ITAT confirmed the reassessment that a transfer pricing adjustment of an amount to reduce Ford India’s marketing and promotion expense down to 2.58% marketing activities at the expense to Ford US. The 2.58% was based on benchmarking local Indian automotive manufacturers on their level of advertising marketing and promotion expenses.

Recently, India has made similar challenges and reassessments of taxable income of Sony and Reebok.

Australia Update:

The Countering Tax Avoidance and Multinational Profit Shifting Bill 2013 have recently been passed by the Australian Senate. This bill changes key parts of the transfer pricing rules and anti-avoidance regimes in the Tax Laws Amendment. A significant change that comes into effect (as of July 1, 2013) is the new reconstruction powers provided to the Commissioner of Taxation. A hypothetical transaction can be constructed by the Commissioner as a proxy for an actual related party transaction with the difference in valuation of the two transactions being the basis for the amount to be reassessed. The commissioner would have to assert that the parties would not have entered into the actual transaction if they were dealing at arm’s length. The taxpayer then has to disprove this hypothetical transaction. Without robust contemporaneous transfer pricing documentation, the taxpayer’s may not have the ability to reasonably argue their position.

Hungary’s New Transfer Pricing Rules:

Entered into force on June 21st, 2013, the new regulations can be used as the basis to prepare 2012 transfer pricing documentation. The key aspects of the new transfer pricing rules include:
• No transfer pricing documentation is required where the value of transactions do not exceed HUF 50 million;
• A list of specified low value intra-group services does not require a benchmarking study when profit margins range from 3% to 10% on the transferred services; and
• An amendment that required the use of the specific AMADEUS database was not included in the accepted and published transfer pricing documentation requirements.

France’s Proposal for Transfer Pricing Change:

New proposals were released in a June report by the Inspectorate-General of Finance aimed at increasing the administrative and compliance burden in respect of transfer pricing matters. These proposals are to be considered in a draft 2014 Budget Bill. One interesting proposal was to implement penalties for incomplete transfer pricing documentation based on the size of the transactions and not on the amount reassessed. Other proposals promote the use of the profit split method, reiterate that the basis for evaluating transfer prices is the arm’s length principle, and shift more burdens of proof on selected transactions to the taxpayer.