TAX Pub Global Transfer Pricing Survey Report 2009

2009 Global
transfer pricing survey

Tax authority insights:
perspectives, interpretations and
regulatory changes
September 2009
Contents 82 Europe, Middle East, India, Africa
(EMEIA)
83 Austria
87 Belgium
Foreword 01 91 Czech Republic
Glossary of terms 03 94 Denmark
Transfer pricing authorities respond to a 05 97 Egypt
changing world: Key findings and insights
99 Estonia
Americas 11
102 Finland
Argentina 12
105 France
Brazil 15
108 Germany
Canada 18
111 Hungary
Colombia 22
113 India
Ecuador 24
116 Israel
Mexico 27
119 Italy
Peru 31
124 Kazakhstan
United States 32
127 Kenya
Venezuela 37
130 Lithuania
Asia Pacific 40
133 Norway
Australia 41
137 Poland
China 45
141 Portugal
Indonesia 50
144 Romania
Japan 53
147 Russia
Korea 57
151 Slovak Republic
Malaysia 60
154 Slovenia
New Zealand 64
157 Spain
Singapore 68
160 Sweden
Taiwan 72
162 Switzerland
Thailand 75
164 The Netherlands
Vietnam 78
167 Turkey
169 United Kingdom
173 Ernst & Young‘s Global transfer pricing and
tax effective supply chain management
practice country contacts
Foreword
Since 1995 Ernst & Young has surveyed
multinational enterprises (MNEs) on a
range of international tax matters, with
special emphasis on what continues to be
the number one international tax issue of
interest to them — transfer pricing.
1 2009 Global transfer pricing survey

The increased scope of our biennial transfer pricing research reflects the intensely 1
In this report, the term “countries” is used to refer to tax
challenging economic climate. This trend is shown by the growing number of jurisdictions.
countries1 that are devoting attention to transfer pricing activities, the increase in the
jurisdictions that are introducing documentation requirements and penalty rules, and
the ever-increasing diversity of transfer pricing issues facing MNEs.
Amid the challenges of a global economic downturn, many governments are
sharpening their focus on compliance, enforcement and legislative approaches.
We trust that you will continue to find our 2009 Global transfer pricing survey, Tax
authority insights: perspectives, interpretations and regulatory changes a useful tool in
navigating this increasingly complex and challenging environment.
Thomas Borstell John Hobster

Global Director Head of Global
Transfer Pricing Accounts Transfer
Pricing
Countries that appear in this edition
Argentina Denmark Indonesia Mexico Slovak Republic United Kingdom

Australia Ecuador Israel New Zealand Slovenia United States
Austria Egypt Italy Norway Spain Venezuela
Belgium Estonia Japan Peru Sweden Vietnam
Brazil Finland Kazakhstan Poland Switzerland
Canada France Kenya Portugal Taiwan
China Germany Korea Romania Thailand
Colombia Hungary Lithuania Russia The Netherlands
Czech Republic India Malaysia Singapore Turkey
2009 Global transfer pricing survey 2

Glossary of
terms
APA (Advance Pricing Agreement)

An agreement between a tax authority and
an MNE about the determination of the
appropriate transfer pricing method to be
used for pricing intercompany transactions.
APAs may be unilateral, bilateral (two
governments) or multilateral (three or
more governments).
Arm’s Length Principle
The standard adopted by the OECD that
transactions between members of an MNE
should reflect conditions that would be
made between independent enterprises.
CFC (Controlled Foreign Corporation)
A subsidiary and member of an MNE group.
CPM (Comparable Profits Method)
Under the Comparable Profits Method of
Income Tax Regulations Section 1.482-5,
an arm’s length result is determined by
comparing the operating profit of the
“tested” party with the operating profit
of an uncontrolled party involved in
comparable transactions. Thus, the CPM
looks at profits rather than transactions.
Generally, the tested party’s profit is
measured in terms of PLIs such as rate of
return on capital employed or the ratio of
gross profit to operating expenses. The
regulations state that the tested party
should normally be the “least complex” of
the controlled entities. Income Tax Regs. §
1.482-5(b)(2).
CSA (Cost Sharing Arrangements)
CUP (Comparable Uncontrolled Price)
A transfer pricing method that compares
the price for property or services in a
controlled transaction to the price charged
for property or services transferred in a
comparable uncontrolled transaction in
comparable circumstances.

ETR (Effective Tax Rate) goods and services and the avoidance of cooperation between and the exchange
double taxation of income or profits. The of information among them. PATA has
EU (European Union)
OECD has developed guidelines and a published guidance on APAs, MAPs and
The European Union, currently consisting
model tax convention, see below. documentation requirements.
of 27 member states.
OECD Guidelines QCSA (Qualified Cost Sharing
EUJTPF (EU Joint Transfer Pricing
Transfer Pricing Guidelines for Arrangements)
Forum)
Multinational Enterprises and Tax
The EU Joint Transfer Pricing Forum, TNMM (Transactional Net Margin
Administrations, published by the OECD
consisting of representatives of Method)
between 1995 and 1998. The OECD
governments and the private sector who The transactional net margin method is
Guidelines endorse the arm’s length
advise and consult on transfer pricing a profits-based method that compares
principle and consist of a statement of
issues. the profitability of an MNE member
principle rather than a set of specific
to the profits of comparable entities
FTE (Full Time Equivalent) rules to be applied.
undertaking similar transactions. The
Used in this survey to indicate the
OECD Model Tax Convention CPM in the United States is similar to
number of resources employed by tax
Model Tax Convention on Income and TNMM.
authorities to undertake transfer pricing
Capital, last published by the OECD in
reviews in their jurisdiction.
July 2005. The Model Tax Convention
GAAP (Generally Accepted Accounting is to be used by member states in
Principles) negotiations of bilateral double tax
treaties. The OECD also provides
MNE (Multinational Enterprise)
commentary on the interpretation of the
A member of a related group that carries
Model Tax Convention and states that
on business directly or indirectly in two
member countries should follow this
or more countries.
commentary, subject to their expressed
MAP (Mutual Agreement Procedure) reservations thereon, when applying and
A dispute resolution process found interpreting their double tax treaties.
in Article 25 of the OECD Model Tax
MoU (Memorandum of Understanding)
Convention. MAP is a government-to-
government process of negotiation PLI (Profit Level Indicators)
to resolve matters of taxation not in Ratios that measure the relationship
accordance with the particular tax treaty between an entity’s profit and the
and to attempt to avoid double taxation. resources invested or costs incurred
to achieve those profits. Refer above
OECD (Organisation for Economic
to CPM for further discussion of their
Co-operation and Development)
application.
An intergovernmental organization,
based in Paris, formed to foster PATA (Pacific Association of Tax
international trade and economic Administrators)
development. The OECD has 30 member An association of the tax administrations
states. Among its many concerns is the of Australia, Canada, Japan and
removal of tax barriers to the free flow of the United States formed to foster

Transfer pricing
authorities
respond to a
changing world
Key findings and insights
We are delighted to introduce the latest

issue of our Transfer Pricing Survey, 2009
Global transfer pricing survey, Tax authority
insights: perspectives, interpretations and
regulatory changes, which examines the
approaches and attitudes of tax authorities
in 49 countries.1
Since we last issued this survey in
September 2006, the worldwide transfer
pricing environment has moved on rapidly.
More than ten additional countries have
introduced requirements for taxpayers
to create and maintain contemporaneous
documentation demonstrating the arm’s
length nature of their transfer pricing
arrangements (with China, the Slovak
Republic and Greece being three of the most
recent). Many countries have introduced
increasingly hard-hitting penalties in the
event of a transfer pricing adjustment, or for
failure to have documentation.
The information presented in this survey was gathered by Ernst & Young
transfer pricing professionals around the world. Where tax authorities
were prepared formally to discuss their approaches with us, we
conducted interviews with them; those interviews were supplemented
by the insights of our transfer pricing leaders in the relevant countries.
In other countries, our transfer pricing professionals provided insights
garnered from their experience of dealing with (and/or recently working
within) their local tax administrations.
1
In this report, the term “countries” is used to refer to tax
jurisdictions.

Moreover, the world has changed. The landscape, prioritize areas of focus to Countries that are relative newcomers to
credit crunch, a worldwide recession achieve and maintain leading standards transfer pricing enforcement are tending
and turmoil in the financial markets have of transfer pricing practice, and, as far as to gear up their capabilities quickly.
brought serious, and often unforeseen, is possible in an uncertain world, predict Finland — with a team of approximately 45
challenges to multinational enterprises the near-term challenges you will face. experts involved in transfer pricing with
(MNEs) in managing their transfer regulations in place for only two years — is
Key trends
pricing. Some have had to deal with an example of this trend. A number of
substantial losses, others with margin ►►Tax authorities are increasing their countries are moving towards setting up
compression with or without volatile dedicated transfer pricing resources specialist transfer pricing examination
results — all factors that render traditional and improving their specialist teams (e.g., Austria, Indonesia and
approaches to transfer pricing at best capabilities. Slovenia), with the aim of focusing their
difficult, and at worst impossible, to apply. efforts and resources. But many more
►►Countries seem to be gearing up not
countries are broadening capabilities,
The same economic factors have an simply for more audits but also for
increasing full-time equivalents (FTEs),
effect on governments and their fiscal more transfer pricing penalties and for
using external agencies to train and
approaches. Budget deficits, stimulus more disputes.
advise their people (e.g., Colombia),
packages and bailouts all have significant
►►Many companies have suffered a and increasing yields. This focus is not
costs. Raising revenues to cover these
reduction in profits or undergone surprising, given the pressure to raise
costs is front of mind. Raising additional
business restructuring as a result revenues in these turbulent times.
revenue through taxing MNEs’ profits
of the recession, both of which are
rather than letting someone else tax them The likely outcome of this deployment of
cited as the two most common audit
must be an attractive thought in such more specialists is that companies will
triggers. In addition, the industries
times. experience more audit activity and more
that have been most affected by the
cross-border disputes. Tax authorities
At the same time, MNEs need to meet downturn are the ones most actively
foresee that this will create further
their tax obligations, often with reduced targeted by many countries for
demand for transfer pricing resources
budgets and fewer resources, while transfer pricing audit.
to handle the higher volumes of dispute
coming under greater scrutiny. Tax
►►Transactions with tax haven countries resolution requirements. The authorities
administrations are adapting their audit
and/or major investor countries are also foresee that they will need
strategies and policies and developing
increasingly likely to be scrutinized, greater capability in the field of mutual
better tools, processes and capabilities.
and formal “watch lists” are becoming agreement procedures (MAPs), as well
They are also sharing more information
more common. as opening or extending their programs
and adopting leading practices,
for advance pricing agreements (APAs).
sharpening their enforcement focus and ►►Substantial differences remain in the
carrying out more sophisticated audits. practical application and enforcement Industry focus continues, but to
In no area of taxation is this trend more of what is supposed to be the what end?
prevalent than in transfer pricing. governing and commonly accepted
Of the 49 countries covered in this
mantra — the arm’s length principle.
In this environment, effective survey, 16 state that they target specific
management of transfer pricing issues Tax authorities are increasing industries, and 8 more are believed to
around the world is more important — but transfer pricing resources do so. The main targeted industries
more challenging — than ever before. This are automotive, consumer products,
In general, transfer pricing resources
survey is intended to help you as a tax or financial services, oil and gas, and
have increased or are increasing in most
transfer pricing professional assess your pharmaceuticals.
countries.
organization’s current transfer pricing

Japan also continues to pursue the taxpayers for transfer pricing scrutiny. Argentina, Kazakhstan and Russia, tend
medical devices and technology-related Developments in this area in the United to keep a close eye on transactions in
industries, and the more experienced States based on recent White House tangible goods. By contrast, in countries
and largest authorities are active in announcements are also being watched outside this group, the trend is firmly
transfer pricing audits of financial by many with interest. towards placing more emphasis on
institutions. service transactions and intangibles.
In practice, whether countries have
Indeed, intracompany services were
This list is not particularly surprising — enacted formal lists or not, transactions
the transactions most frequently cited
Ernst & Young has observed through its with perceived low-tax territories are a
by tax authorities as being a focus of
history of transfer pricing surveys that key focus of tax authorities in a majority
their transfer pricing reviews. More than
these industries have long been in the of countries. Of those tax authorities that
three-quarters of responding authorities
spotlight. But at the time of writing, the provided direct responses to the survey,
noted a focus on these service
automotive industry is in major decline, well over half flagged transactions with
transactions.
the banks and insurance companies have these “havens” as a trigger for greater
been announcing record losses, and focus on taxpayers’ activities. However, This trend is fully consistent with (and
consumer spending in many markets the mere fact of being headquartered in perhaps even driven by) regulatory
has declined heavily. Will tax authorities a specific location did not seem to be a changes in the United States2 and
really be able to increase their yield from factor in attracting audit attention. elsewhere that are highlighting the
these sectors? It will be fascinating in complexity of services with embedded
In addition, trading blocs and major intangibles and/or services of extremely
the next couple of years to observe how
trading partners are a focus for tax high intellectual value. Some countries
— and whether — tax authorities change
authorities from a transfer pricing also confirmed that they look with
their approach and bring other, possibly
perspective. Not surprisingly, the United suspicion at so-called reimportation
newer, industries under transfer pricing
States, the United Kingdom, Japan and transactions (e.g., items manufactured
scrutiny. in a country being sold overseas
Germany, as countries which represent
More countries formally listing significant markets for in-bound and bought back into the country of
havens investors, feature prominently in the “top manufacture at a later stage).
five” countries that come under scrutiny. Financial transactions were already
A clear focus emerged on transactions
Interestingly, despite its growing a focus for almost two-thirds of tax
with perceived tax havens and
importance as a destination for foreign authorities providing direct responses to
“blacklisted” countries, as well as an
investment, China has yet to appear on the survey, but, in the current economic
emphasis on high-volume transactions
these lists. climate, financial transactions could
with key trading partners. be expected to feature even more
All types of transactions are under frequently as a priority in transfer pricing
The number of countries that formally
scrutiny reviews.
identify “blacklisted” countries in their
tax legislation or administrative practices There is a clear divide between the Transfer pricing penalties are set to
continues to increase. Responses to the authorities surveyed in respect of rise
survey indicated that Brazil, Ecuador, the types of transactions that they
Peru, Poland, Slovenia and Indonesia choose to scrutinize. Countries that Not only is it anticipated that transfer
all have formal listings of countries have repositories of natural assets (oil, pricing audits will increase, it also seems
that drive the selection and focus of gas and minerals), such as Australia, likely that transfer pricing penalties will
increase. The overwhelming majority of
2
New final, temporary and proposed regulations related to services were issued on 31 July 2006. The new rules came into effect on 1 January 2007 and apply to tax years beginning after
31 December 2006. In conjunction with the new regulations, the Internal Revenue Service (IRS) also issued Announcement 2006-50, which contained a proposed list of “specified covered
services” that relate to a specific cost-based method. The new services regulations require stock-based compensation to be considered in total costs. On 20 December 2006, the IRS released
Notice 2007-5 and Revenue Procedure 2007-13, which extended the effective date of the Services Cost Method until 1 January 2008 and added to the list of “covered services.”

countries that have transfer profits,” with approximately three- valuation, with many companies
pricing-specific penalties anticipate that quarters of tax authorities directly also facing active coordination and
this will be the case. responding to the survey acknowledging communication between the authorities
their focus on taxpayers’ profitability. We managing these two areas of taxation.
This trend is consistent with the need
hope that this does not lead to wasted
for increased revenues. However, Italy, Comparable data still a country
effort through the inappropriate selection
which starts from a very high level of issue
of cases where a profit reduction is
penalty imposition, is thought to be
caused predominantly by the current A significant issue for debate in
considering reducing its current punitive
economic situation. Otherwise, it seems transfer pricing is whether data used
levels to encourage taxpayers to settle
inevitable that many more companies will to benchmark the performance of a
ongoing disputes. Up until now, most
be audited than in recent years. company, and therefore the arm’s
countries that do have penalty regimes
length nature of its transfer pricing,
do not impose them on all adjustments Around half of our respondents cited
should be specific to the country of the
nor do they always impose them to business restructuring as an audit
benchmarked party. The implications
the maximum extent. Where specific trigger. This comes at a time when the
of such an approach are clear — huge
details of penalties were provided by tax Organisation for Economic Co-operation
resource and expense commitments
authorities directly, approximately half of and Development (OECD) has issued a
for taxpayers. We tested the appetite
the respondents indicated that penalties discussion draft on the transfer pricing
of tax administrations to accept less
were imposed in less than 50% of cases. implications of business restructurings.2
narrow benchmarking, for example, in
However, it seems likely that this level will We confidently expect this factor to
the form of regional comparables. We
increase in the future. Some countries remain a front-of-mind selection trigger.
obtained a wide range of outcomes on
apply penalties more routinely than
Indirect tax challenges were also a this issue. Russia and India insist on
others; for example, Belgium, Hungary.
factor for respondents, though more country-specific data. Some countries
Portugal and Kazakhstan say that they
prevalent in the Americas and Europe (e.g., Portugal) are prepared to accept
apply penalties in 50% to 100% of the
than in Asia. Responses by authorities subregional data (Iberia); others will
cases where an adjustment is enforced.
to questions on indirect taxes and accept regional data (mainly Europe);
Audit triggers reflect economic transfer pricing highlight the challenges and, at the extremes, Kenya will accept
uncertainty that these two distinct, yet related, a global data set, presumably due to
areas of taxation pose for MNEs. insufficient local data. Global transfer
More countries than ever have moved to
Approximately half of all authorities pricing compliance, therefore, requires
a risk assessment-based case selection
identified coordination and information flexible and tailored solutions to this
methodology, and some have adopted
exchange between the organizations long-standing dilemma.
quite sophisticated scoring tools to
responsible for administering indirect
enable the structured selection of high-
and direct taxes in their countries. But
Transfer pricing methods
risk cases. The United Kingdom and
fewer than 20% of countries have a The divergent approaches taken by
Australia have been joined by a few other
firm requirement for consistent pricing different countries to establishing an
countries in taking this approach.
for both corporate tax and indirect tax arm’s length price is one of the most
We explored the most common reasons purposes. In the remaining countries, difficult issues facing MNEs in seeking to
why tax authorities take up cases for therefore, MNEs may face the potentially avoid transfer pricing disputes. However,
audit. The most frequently cited trigger conflicting obligations of corporate and this issue does not seem likely to be
was “a sudden reduction in taxable indirect taxes in the area of transaction resolved in the near future.
3
“Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment,”
Organisation for Economic Co-operation and Development (OECD), published 19 September 2008.

At the time of this survey, the is to be welcomed in these uncertain
environment relating to transfer pricing times. India indicated that it is currently
methods is one where we might expect investigating such programs, while
to see more use of methods that, up formal APA processes are expected to be
until now, have been methods of last introduced in Sweden shortly.
resort — that is, the transactional net
Countries with established APA
margin method (TNMM) and profit
programs are finding them
split. Several initiatives at the OECD
resource-intensive, and several
point in this direction. The exercise on
countries, including the Republic of
comparability,4 for example, seems to
Korea, intend to increase their resources
be lifting the bar on the need for very
in this field. The resource issue is also
high-quality benchmarks that in many
indicated by several countries observing
cases will not exist. The exercise on
that it takes longer to conclude an APA
methods5 also seems to be moving the
than in the past, which may dissuade
methods of last resort up to a similar
some potential applicants.
status as the traditional transactional
methods. The recent OECD Business Some authorities are also gearing up
Restructuring draft paper6 advocates a their competent authority capabilities
two-sided analysis (not just the simple to deal with the expected increase in
testing of one party’s activities) and cross-border transfer pricing disputes
evaluation of the contributions of all occasioned by their own investigation
parties. We might therefore expect to capabilities and/or challenges from other
see tax authorities leaning more towards authorities. It seems that many countries
the use of profit split methods. However, expect to devote a great deal of time to
if so, this inclination is slower and less MAPs and/or Arbitration processes in the
pervasive than we might expect, and near future. MNEs should also expect to
several countries indicate no appetite at do the same.
all for profit split methodologies.
We also observe examples in the survey
More commitment to APAs of the use of nonbinding agreements
or opinions in transfer pricing matters
With APAs seen as a useful tool in
(e.g., Austria, Russia and the Slovak
dispute management, approximately half
Republic). This may be an effort to give
of tax authorities responding directly
taxpayer certainty at some level, but it
to the survey indicated that a formal
is difficult to see the value of nonbinding
APA program was in place in their
agreements until, and unless, there
jurisdiction. The survey also indicates
is a history of the relevant authorities
that more countries are committing to
honoring these agreements.
the introduction of APA programs, which
4
See the release by the OECD of a proposed revision to Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations on 9 September 2009. This revision follows
from the activities of Working Party No. 6 of the OECD Committee on Fiscal Affairs; see “Comparability: Public Invitation to Comment on a Series of Draft Issues Notes,” initially issued 10 May 2006.
5
See the release by the OECD of a proposed revision to Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations on 9 September 2009. This revision follows
from the activities of Working Party No. 6 of the OECD Committee on Fiscal Affairs; see “Invitation to Comment on Transactional Profit Methods,” initially issued 25 January 2008.
6
“Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment,” OECD, published 19 September 2008.

Managing the trend: next steps for corporate transfer pricing functions
For many MNEs, the focus is — and may very well remain — minimizing potential
challenges to their transfer pricing policies from tax authorities and mitigating
penalties when these challenges arise. Given tax authorities’ likely intentions to
increase reviews and increase the use of penalties, this means a good deal of work for
most transfer pricing functions. It may also mean a more fundamental challenge to
help sustain businesses in times of depressed markets and diminished margins.
What should transfer pricing function leaders be doing now?

►►Map out the transfer pricing landscape for your organization based on your
local operations and your global strategy
►►Review your organization’s current business to better understand its value
drivers and the impact of the current economic climate on those value drivers
►►Identify likely transfer pricing hot spots, based on your organization’s
geographic profile, operations and transactions
►►Align your transfer pricing policies to keep pace with your business change
►►Actively monitor transfer pricing developments so you are ready to face
the inevitable challenges in a greater number of countries with disparate
approaches and areas of focus
►►Consider all available channels of controversy management, from robust
documentation through channels of appeal, and APAs
►►Take a risk management approach to transfer pricing processes, covering the
most valuable transactions and the most challenging countries first
In this environment, you cannot expect to avoid tax controversy. Rather, you should
assume controversy will happen and plan for it.
These trends make it even more important for your transfer pricing function to
engage with — and potentially help shape — your organizational and operational
structure.7 The corporate transfer pricing function will often have to engage more
frequently with the rest of the business to keep pace with change, identify and
preempt tax authority challenges and, most of all, convert risk into opportunity. A
proactive transfer pricing function will have a real opportunity right now to position
itself as a strategic partner to the business.
7
“Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment,” OECD, published 19 September 2008.
Surveyed
countries
Americas

Argentina*
Resources the taxing authority Types of transactions under *

Country chapter
is devoting to transfer pricing scrutiny completed based on the
insights of Ernst & Young
The Administración Federal de Ingresos The AFIP has specifically identified the professionals and publicly
available information only.
Públicos — Dirección General Impositiva following transactions currently as the
(the AFIP) administers taxes in focus of transfer pricing reviews:
Argentina.
• Tangible goods — export of
Within the AFIP, transfer pricing commodities
reviews are carried out by the External
• Tangible goods — imports in targeted
Examination Division (División de
industries
Fiscalización Externa) by dedicated
transfer pricing auditors. There are • Intra-group services
resources fully involved in transfer • Financial transactions (e.g., loans,
pricing examinations. other debt instruments), especially
those involving cash deposits abroad
Industry focus
• Intellectual property (IP)
Factors taken into account in identifying (e.g., royalties, licensing) in certain
specific industries for scrutiny include cases
whether the activities of the industry
are significant within the country and Transfer pricing penalties
the profitability of the industry. The
industries currently under focus by The AFIP has the power to impose
the AFIP are automotive, consumer transfer pricing penalties. Argentina
products, mining and metals, oil and has enacted legislation to ensure the
gas, and pharmaceuticals, as well as consistent application of its transfer
commodity exporters. pricing penalty provisions.
For unpaid taxes related to international

Geographic focus transactions, the taxpayer is fined 100%
The jurisdiction of the counterparty of to 400% of the unpaid tax. Late filing of
the transaction might be a determining transfer pricing returns; noncompliance
factor for targeting an audit. However, with the formal duties of furnishing
it is not perceived as the main one. information requested by the AFIP; and
Typically, transactions with low-tax failure to keep vouchers and evidence of
jurisdictions (especially transactions prices on available files and failure to file
by commodity exporters) are reviewed tax returns upon request are subject to
during audits. increased penalties. Other general tax
penalties are applicable (like penalties
for fraud and criminal tax law).

However, the imposition of penalties in between related parties. There is also no
Argentina is subject to the general tax requirement that the same transfer price
penalty reduction regime, as provided in be used for corporate (direct) tax and
the relevant legislation. indirect tax purposes.
According to the provisions of the

Moratorium regime established by Law
Comparable data
26,476, penalties (including transfer Since there is only a limited amount of
pricing ones) applicable to formal or local company information available, in
material obligations related to fiscal practice, regional or global (preferably
years ended not later than December North American or European)
2007 are forgiven, as long as the comparables may be used.
obligations are complied with no later
Generally, financial data for three
than 31 August 2009.
years needs to be used in preparing
It is anticipated that the assessment and presenting comparable data. The
of penalties will increase due to the inter-quartile range (with a particular
augmentation of transfer pricing audits calculation) is the mandatory method
in the next two years. for calculating the allowable arm’s length
range. There is a general preference for
Audit triggers the use of operating margin, mark-up on
total costs and return on assets as the
The selection of the taxpayer and the
profit-level indicator.
scope of the audit are typically driven by
factors such as: No formal guidance is provided about
adjustments to comparable data,
• The profitability of the taxpayer
although comparability differences need
• Revenues of the taxpayer to be adjusted. It is worth mentioning
that transfer pricing documentation,
• Issues arising in previous tax audits of
including comparable search process
the taxpayer
among other relevant information like
• The nature and volume of the chosen transfer pricing method, must
taxpayer’s related-party transactions be submitted with the Argentine tax
authorities annually.
Indirect and customs tax
The AFIP is an integrated Tax and Transfer pricing methods
Customs administration. As such, it Argentina does not set out any
is more than likely that both Tax and hierarchy of methods to be used in
Customs Directions share relevant determining arm’s length remuneration
information regarding transactions for controlled transactions. However,

the “best method” rule is followed. Likely trends in transfer pricing
The Argentinean transfer pricing rules activity
recognize the following methods:
comparable uncontrolled price, cost plus, It is believed that the AFIP expects
resale price, profit split and transactional compliance measures and yield targets
net margin method. In the case of (i.e., an increase in tax take based on
exports to related entities involving audit activity) to be areas of increased
goods with publicly known quotations focus over the next two years.
on transparent markets, in which an
international intermediary other than
the intended recipient of the goods is
involved, the best method would be the
use of the quotation price for the goods
on the transparent market on the last
day the merchandise is loaded, unless
the agreed-upon price is higher, in which
case the latter should be considered.
This method is not applicable when
the intermediary complies with the
requirements listed in Income Tax Law
Section 15, paragraph 8. Argentinean
law permits the Executive Power
to define any other transfer pricing
method in addition to those specifically
mentioned in the local rules. However, no
other methods have been defined.
Yield/performance of transfer
pricing reviews
The effectiveness of transfer pricing
review activities is measured in several
ways, including an increase in tax yield
and the percentage of review cases
involving an adjustment to the taxable
income of taxpayers.
Ernst & Young contact
Carlos Casanovas
carlos.casanovas@ar.ey.com
+54 11 4318 1619

Brazil
Resources the taxing authority industry are taken into account in

is devoting to transfer pricing identifying specific industries for
scrutiny. The DEAIN is currently
The Secretaria da Receita Federal do focusing on the following industries:
Brasil (RFB) administers taxes in Brazil. automotive, banking and capital markets,
The RFB has a specialized department biotechnology, consumer products, oil
called DEAIN (the Federal Tax and gas, pharmaceutical, technology and
Authority’s Department of International telecommunication.
Matters), which includes a centralized
team of specialists responsible for The selection of taxpayers to be
undertaking transfer pricing reviews. examined is dictated by the DEAIN’s
The DEAIN has national jurisdiction to Service of Programming, Evaluation and
act on transfer pricing issues, worldwide Fiscal Activity Controlling (SEPAC) and
income issues, customs valuation issues is held confidential.
and other issues involving international
operations. Geographic focus
There are approximately 12 full-time Legislative direction (such as a formal
equivalent (FTE) resources involved in blacklist of certain jurisdictions) drives
transfer pricing reviews centrally located the jurisdictions chosen for review.
at the DEAIN. This level of resourcing is Typically, transactions with low-tax
expected to increase two-fold in the next jurisdictions are reviewed during audits.
two years, although there has been a
slight decrease (from 15 to 12) in the Types of transactions under
last couple of years. scrutiny
In terms of background, the resources Transactions involving tangible goods
involved in transfer pricing reviews currently represent approximately 80%
consist of lawyers, engineers, of the DEAIN’s transfer pricing caseload,
economists and registered accountants. with financial transactions representing
All the transfer pricing auditors the remaining 20%.
within the DEAIN are transfer pricing
specialists, with a strong technical Transfer pricing penalties
background in transfer pricing issues.
Brazilian law does not provide for the
imposition of specific transfer pricing
Industry focus
penalties. The general penalties that
Factors such as whether the activities apply to infringements of the tax laws
of the industry are significant within also apply to transfer pricing cases.
Brazil and the profitability of the It should be noted that the DEAIN

is empowered to impose additional Indirect and customs tax
administrative and criminal penalties in
cases of flagrant fraud. Transfer pricing and customs matters
are handled by separate divisions within
Over the last two years, penalties have the DEAIN. As such, the work of transfer
been applied in over 75% of cases pricing enforcement resources is not
involving transfer pricing adjustments. integrated (e.g., in terms of sharing of
Where penalties are imposed, they information) with that of indirect tax
generally exceed 75%, and sometimes or customs specialists. There is also no
even 100%, of the additional tax. requirement that the same transfer price
Generally, all cases of transfer pricing be used for corporate (direct) tax and
adjustments are considered to be tax indirect tax purposes.
infringements and, as such, they are
subject to an administrative penalty Comparable data
of 75%. In cases that involve flagrant
fraud, the level of penalty is 150% Under Brazilian law, statutory margins
of the additional tax payable. It is are predetermined. Therefore,
not anticipated that this approach to the selection and presentation of
penalties will change in the next two comparable information does not apply
years. in the context of Brazilian transfer
pricing law.
Audit triggers
Transfer pricing audits are instigated
by the SEPAC, which is an autonomous Brazil does not specify any hierarchy
body. A variety of considerations are of methods to be used in determining
taken into account in determining which the arm’s length remuneration for
taxpayers should be the focus of audit controlled transactions. However, the
resources, in the context of Brazil’s “best method“ rule is followed. The
standard tax audit program. Factors Brazilian tax authorities consider the
include: profit split method (full profit split as
well as residual profit split), transactional
• The profitability of the local taxpayer net margin method (TNMM) and the
• Whether there is evidence of business comparable profit method (CPM) to be
restructurings inappropriate methods.
• The volume of related-party The Brazilian legislation requires the

transactions consistent application of any transaction-
based method by the taxpayer in its
• Issues identified during previous tax annual income tax return. As such, since
audits of the taxpayer statutory profit margins are set by law

for transaction-based methods, the
profit-based methods are effectively
redundant in the Brazilian context.
Advance Pricing Agreements

(APAs)
Brazil does not have a formal APA
program. The authorities consider that
the implementation of the statutory
margin system has helped minimize
subjective judgments in the auditing
phase and avoids the need for a complex
and expensive APA structure.
pricing reviews
review activities is measured based on
considerations such as the increase in
tax yield and the percentage of review
cases involving an adjustment to the
taxable income of taxpayers.
Likely trends in transfer pricing

activity
Over the next two years, the DEAIN
expects to place greater emphasis on
compliance measures and yield targets
(i.e., an increase in tax take based on
audit activity) from a transfer pricing
perspective.
Gil Mendes
gil.f.mendes@br.ey.com
+55 11 2112 5466
Daniel Perin
daniel.perin@br.ey.com
+55 11 2112 5723

Canada
Resources the taxing authority had a direct role in most high-profile or

is devoting to transfer pricing complex cases, and this trend continues
as more field auditors seek assistance
The Canada Revenue Agency (CRA) from ITD on their transfer pricing
administers taxes in Canada. Most of audits. The most recent trend is the
the CRA’s specialized transfer pricing specialization of resources in specific
resources are centrally located in the industry sectors such as financial
International Tax Division (ITD) of products and services and oil and gas.
the International and Large Business
Directorate in Ottawa. The CRA also Industry focus
has specific transfer pricing resources
dedicated to the resolution of double The CRA has Industry Coordinating
taxation through Competent Authority Offices focusing on the pharmaceutical,
Assistance and APAs within the Competent oil and gas, automotive and insurance
Authority Services Division (CASD), which industries. The role of these offices
is also centrally located in Ottawa. is to ensure consistency in audits of
corporations within these industries and
There are over 450 FTE resources will provide CRA auditors with industry
dedicated to transfer pricing reviews, awareness.
with 47 based centrally in Ottawa who
provide advisory and economic services While the CRA does not target specific
to the field audit teams and with the industries as such, factors including
remainder located in regional offices. whether the activities of the industry
A majority of the resources are located are significant within Canada (or
in economic centers such as Toronto, within certain parts of the country)
Montreal, Calgary and Vancouver. The and the profitability of the industry are
number of FTE resources has marginally nevertheless important. The industries
increased (by approximately 3%) over largely under transfer pricing audit by
the last two years. A majority of the the CRA are the automotive, banking
resources are specialists in international and capital markets, consumer products,
issues. However, some of the new hires or insurance, oil and gas, pharmaceuticals,
junior resources may require specialized technology, and power and utilities.
transfer pricing training or on-the-job Although the CRA does not officially
experience. Additionally, there are over communicate a list of priority industries
20 FTE resources within the CASD. to taxpayers, it does conduct outreach
programs through which general
In terms of background, almost 95% of comments on planning and resources
the resources are qualified accountants, is provided to the international tax
while the remainder are economists. community.
Since the late 1990s, economists have

Geographic focus Transfer pricing penalties
Geographic considerations are not The CRA has the power to impose
drivers for the selection of taxpayers transfer pricing documentation penalties.
for review. However, the CRA’s risk The CRA has set up an internal Transfer
assessment model typically involves Pricing Review Committee (TPRC) to
review of various factors, including the ensure the consistent application of
involvement of low-tax jurisdictions as transfer pricing documentation penalties.
counterparties to the taxpayer’s related- The TPRC makes a decision to apply
party transactions. penalties or not based upon whether a
taxpayer has made reasonable efforts to
In the current caseload of transfer
determine and use arm’s length prices or
pricing reviews, the top five most
allocations, as described under S. 247(4)
prevalent jurisdictions of the relevant
(a) of the Income Tax Act.
counterparties are:
Since the introduction of the transfer
• The United States
pricing penalties, penalties have been
• The United Kingdom applied in more than 50% of cases
where the transfer pricing adjustments
• Japan
breached a de minimus threshold of
• Barbados CDN$5 million or 10% of the taxpayer’s
gross revenue. Where penalties are
• France
imposed, they are applied at a rate
of 10% of the transfer pricing income
Types of transactions under
adjustment. It is anticipated that the
scrutiny number of transfer pricing penalties
Key transactions forming the current will reduce over the next two years,
caseload of transfer pricing reviews in as the CRA expects a decrease in the
Canada are: rate of noncompliance with Canadian
documentation rules, owing to an
• Tangible goods
increase in compliance efforts.
• IP (e.g., royalties, licensing)
Audit triggers
• Intra-group services
Selection of cases for transfer pricing
• Financial transactions (e.g., loans,
review is done by experienced Tax
other debt instruments)
Services Office (TSO) personnel, who
• Cost sharing or cost pooling follow guidelines developed by ITD.
arrangements

Taxpayers are chosen for review, There is no formal or mandatory
typically, based on a risk-based guidance provided regarding adjustments
assessment involving factors such as: to comparable data. Such adjustments
are optional and are likely to be accepted
• The level of profitability of the
by the CRA where they enhance the
taxpayer
comparability of the information with
• Whether there is evidence of business relation to the tested party.
restructurings
• The nature and volume of the Transfer pricing methods
taxpayer’s related-party transactions Canadian transfer pricing methods are
• Previous tax audits of the taxpayer aligned with the OECD Transfer Pricing
Guidelines. The traditional methods
• The outcomes of VAT, employment, (comparable uncontrolled price (CUP),
customs or other indirect tax reviews cost plus and resale) are to be applied
in preference to the transactional profit
Comparable data methods (residual profit split, profit split
Typically local comparables are and TNMM). This information is included
preferred; however, where local in Canadian Information Circular IC-87-
comparables are not available, regional 2R, along with guidance on usage of
comparables (i.e., comparables located other methods (where the specifically
on the same continent as the taxpayer) identified methods are not applicable,
may be used. such as qualifying cost contribution
arrangements). The CRA is of the
In preparing and presenting comparable view that, in many cases, the practical
data, financial data needs to be provided application of the CPM does not meet the
on a single-year basis, without the degree of comparability required by the
use of multiple-year data. The CRA OECD Guidelines for the application of
has a general preference for weighted the TNMM.
averages, medians, and specific points
within a range, depending on each Advance Pricing Agreements
individual case. The TNMM is used
(APAs)
in many cases, with the operating
margin or the total cost plus being Canada has a formal APA program. Most
the most commonly used profit level taxpayers with cross-border transactions
indicators (PLIs). There are no specific are permitted to apply to the program,
requirements or preferences with however, taxpayers must be accepted
regards to pooling or averaging of into the program by the CASD. Following
financial data. As such, either method an APA pre-file meeting with the CASD,
may be used, depending on the number taxpayers may make an application for
of available comparables.

an APA; taxpayers are only accepted into Transfer pricing disputes
the APA program following a review of
their submission. In the context of disputes, there are
approximately 129 ongoing cases in
There were 39 pre-filing meetings with MAP. Taxpayers seeking resolution in
the CASD during the year 2007-2008, these cases are mainly in sectors such
and 22 applicants were accepted into as automotive, transportation, computer
the APA program having initiated a pre- and electronics and natural resources.
filing meeting in prior years. Of the APA For the year 2007-2008, the treaty
requests received during the year 2007- partners involved in a majority of these
2008, 80% were bilateral APA requests, cases are the United States, Australia,
18% were unilateral APA requests and Japan and the United Kingdom.
2% were multilateral APA requests. The
average duration of the APA process is There has also been a small number
over two and a half years for bilateral of transfer pricing cases before the
APAs and up to one year for unilateral courts in the past years; however, the
APAs. Top treaty partners that have majority of disputes are resolved at the
concluded bilateral APAs with Canada are CRA’s audit, administrative appeals, or
the United States, Japan and the United Competent Authority levels.
Kingdom.
Current influences on transfer
Additionally, during the year 2007-
pricing
2008, 71 cases of double taxation were
accepted into the mutual agreement While some policy changes may be
procedure (MAP) program and 49 cases witnessed in the coming years, these
were resolved under MAP. The average changes are expected to be largely
duration of such proceedings is up to 21 consistent with OECD guidance.
months for requests related to CRA-
initiated adjustments and 38 months Likely trends in transfer pricing
for requests where foreign jurisdictions activity
initiated the adjustment. Approximately
8% of cases in the past year had The CRA expects to place greater
unresolved double taxation. emphasis on transfer pricing compliance
measures and dispute resolution over the
next two years.
pricing reviews
Ernst & Young contact The effectiveness of transfer pricing
review activities is measured based on
Greg Noble taxpayer compliance with the Income Tax
greg.noble@ca.ey.com Act and Canadian tax conventions, which
+1 604 891 8221 is the overall goal of the CRA.

Colombia
Resources the taxing authority The profitability of local taxpayers is

is devoting to transfer pricing the main factor driving the selection of
industries for particular focus.
The Dirección de Impuestos y Aduanas
Nacionales (DIAN) administers taxes The selection of industries under specific
in Colombia. Within the DIAN, transfer transfer pricing focus is not widely
pricing reviews are carried out by a communicated to taxpayers.
centralized unit that consists of 16 FTE Transactions involving taxpayers in the
resources currently involved in transfer mining industry currently represent
pricing examinations. There has been about 50% of the caseload of transfer
an increase in the number of resources pricing reviews.
involved in transfer pricing examinations,
from approximately 4 to 16 over the last Geographic focus
two years.
The DIAN does target companies in certain
In terms of background, the resources jurisdictions for transfer pricing reviews.
involved in transfer pricing reviews Typically, perceived low-tax jurisdictions
consist of (in order of prevalence) are reviewed in the scope of audit.
economists, lawyers and accountants,
while the other resources are business Practical considerations are the key
administrators by background. All drivers for certain jurisdictions being
of these resources are specialized in selected by the DIAN. In the current
transfer pricing. caseload of transfer pricing reviews,
the most prevalent jurisdictions of the
The DIAN is working together with relevant counterparties are:
two external advisors in order to
decentralize the audit process by next • Panama
year. A consultant from the United States • Cayman Islands
Internal Revenue Service (IRS) is also
working with the DIAN, giving technical • Anguilla
support to local tax administrations. This • Switzerland
arrangement is anticipated to last for the
next two years.
Industry focus Types of transactions under

scrutiny
Transfer pricing audits in Columbia
currently focus on taxpayers from the The following transactions are currently
mining and metals, oil and gas, and the focus of DIAN for transfer pricing
pharmaceuticals industries, as well as review: intra-group services, financial
those trading in other basic products. transactions (loans and financial

services from Colombia to related parties
abroad), pharmaceuticals distribution,
flower exports, coal exports and software
licensing.
Transfer pricing penalties

Colombia has a very strict transfer
pricing penalty regime, which includes
high penalties for noncompliance
with formal requirements. There are
processes in place to ensure consistent
application of transfer pricing penalties in
the jurisdiction. Over the last two years,
penalties were applied.
Gustavo Pardo
gustavo.pardo@co.ey.com
+1 571 651 2210

Ecuador
Resources the taxing authority The selection of industries under

is devoting to transfer pricing specific transfer pricing focus is widely
communicated to taxpayers. This list of
The Servicio de Rentas Internas (SRI) industries is reviewed annually.
administers taxes in Ecuador. Within the
SRI, transfer pricing reviews are carried Geographic focus
out by decentralized regional resources
under the direction of a national The SRI specifically targets companies
coordination team. There has been an located in certain jurisdictions. Typically,
increase in the number of FTE resources perceived low-tax jurisdictions are
involved in transfer pricing examinations, reviewed in the scope of the audit.
from approximately 9 to 22 over the last Legislative direction (i.e., a formal
two years. Four transfer pricing resources blacklist of specific jurisdictions) is the
are based in the central unit. The number key driver for certain jurisdictions being
of transfer pricing resources is expected selected by the SRI.
to increase to 27 over the next two years.
In terms of background, the resources
scrutiny
involved in transfer pricing reviews
consist of (in order of prevalence) The sale of tangible goods (representing
accountants (locally referred to as 80% of the current caseload) and intra-
“commerce engineers”), economists and group services (approximately 20% of
lawyers. Four out of the 22 resources the current caseload) are currently the
currently involved in transfer pricing focus of the Directorate of Taxes for
examinations are transfer pricing transfer pricing review.
specialists. The background of resources
currently involved in transfer pricing Transfer pricing penalties
reviews has changed in the recent years,
Ecuador has a specific transfer pricing
due to an increase in those with an
penalty regime. There are processes in
economics background.
place to ensure the consistent application
of transfer pricing penalties in the
Industry focus
jurisdiction. Over the last two years,
Transfer pricing audits in Ecuador penalties were applied in up to 25% of
currently focus on the pharmaceutical, cases where transfer pricing adjustments
primary agricultural products, fishing were issued.
and cardboard production industries. The
The transfer pricing penalty regime
factors driving the selection of industries
establishes a fixed penalty amount
for focus are significant business activity
for companies failing to comply
in Ecuador and repeated losses for
with documentation and reporting
several years.

requirements (e.g., not filing Comparable data
information, not meeting deadlines
or filing inaccurate information). This The SRI prefers local comparables but
penalty may be up to US $15,000. will accept regional comparables if they
are available and if the taxpayer is able
It is not anticipated that this approach to demonstrate that it represents a high
to penalties will change in the next two degree of comparability with the tested
years. party.
In preparing and presenting comparable

Audit triggers
data, there are no specific requirements
A transfer pricing audit is instigated in relation to the number of years of
by a central decision-making body. financial information, the use of simple
Various considerations are taken into versus weighted averages, pooling
account in determining which taxpayers or averaging of financial data, or the
to audit, including (ranked in order of method for determining the appropriate
importance): profit-level indicator. However, there are
strict requirements for the method for
• The outcome of a risk assessment by
calculating the allowable arm’s length
the SRI
range (in accordance with the local
• The nature of related-party legislation).
transactions undertaken by the
taxpayer Optional guidance is provided by the SRI
in relation to financial adjustments made
• The outcome of customs to the comparable data.
• Previous tax audits of the taxpayer
• The profitability of the local taxpayer
Ecuador follows a hierarchy of transfer
Indirect and customs tax pricing methods. Local regulations
establish that only the six methods
The transfer pricing enforcement established in the OECD Guidelines
resources work in an integrated way with are applicable. The CPM and full profit
indirect tax specialists as an integral split method are considered to be
risk concept is applied. However, there inappropriate methods by the SRI.
is no formal requirement that the same
transfer price be used for corporate Advance Pricing Agreements
(direct) tax and indirect tax purposes.
(APAs)
Ecuador has no formal APA program.
The local law outlines the possibility
of APA procedures and prescribes

that regulations will be issued by the Current influences on transfer
tax administration on the application pricing
process of APA. However, the relevant
regulations have not been issued. The transfer pricing environment in
Therefore, no taxpayers have started Ecuador is responsive to OECD initiatives.
consultation for an APA. Generally, The SRI expects best practices to be
the procedures require taxpayers applied.
to satisfy inquiries relating to the The SRI expects the global economic
previous two taxable years from the tax slowdown to have a deep impact on
administration, after which taxpayers the inter-quartile ranges of several
may propose, through consultation industries; thus, the slowdown renders
with the tax administration, applicable most operations incomparable if
prices for the APA Term. The APA comparison is based on previous (not
Term includes the year preceding the same) year data (based on dates where
APA application, the year of the APA filing is required). The administration
application and the two tax years may be open to proposals from taxpayers
following the application. to adjust methodologies.
Yield/performance of transfer Likely trends in transfer pricing

pricing reviews activity
The SRI measures the effectiveness of The SRI expects yield targets
the transfer pricing review activities it (i.e., an increase in tax take based on
undertakes by measuring the percentage audit activity), compliance measures
of review cases where an adjustment is and dispute resolution (ranked in order
sustained on appeal. of prevalence) to be areas of increased
focus over the next two years.
Transfer pricing disputes
In the context of disputes, there is one
ongoing case in litigation and three
pending cases undergoing domestic
appeals (preceding court action).
Tax havens are frequently involved
in disputes. Taxpayers from the Ernst & Young contact
pharmaceutical, agricultural products
Javier Salazar
and oilfield services industries are facing
javier.salazar@ec.ey.com
disputes with the SRI.
+593 (2) 255 55 53
Alexis Carrera
alexis.carrera@ec.ey.com
+593 (2) 255 55 53

Mexico*
*
Country chapter
Resources the taxing authority Geographic focus
completed based on the is devoting to transfer pricing Although all transactions with entities
professionals and publicly The Ministry of Finance, the Tax resident in low-tax jurisdictions are
Administration Service (SAT), the presumed to be with related parties and
Large Taxpayers Administration and the thus subject to particular transfer pricing
Transfer Pricing Central Administration scrutiny, the Mexican tax authorities do
are responsible for administering taxes not focus on specific jurisdictions for
in Mexico. Transfer pricing reviews are transfer pricing audits.
carried by the Transfer Pricing Central
Administration (TPCA), a unit within the Types of transactions under
SAT. The TPCA has autonomy to lead scrutiny
transfer pricing audit efforts. The TPCA
Tranfer pricing reviews by the TPCA
is also responsible for APAs and MAPs.
currently focus on business structuring
There has been a significant increase in transactions, IP transactions,
the number of FTE resources involved headquarter (prorated) charges,
in transfer pricing audits since 2008. financial transactions and cost sharing/
In terms of background, the resources cost pooling arrangements.
consist of economists, lawyers and Transfer pricing penalties
accountants, and they all specialize
in transfer pricing. The Mexican tax Mexico does not have a specific
authority anticipates an increase in the transfer pricing penalty regime. The
specialization and number of resources general penalty regime for income
over the next few years. misstatements is applied. However, the
penalties may be reduced if the taxpayer
complies with the transfer pricing
Industry focus
documentation obligations. Legislative
Although the SAT has specific programs and administrative requirements, as
to audit the chemical and pharmaceutical well as the Courts of Appeal, ensure the
industry and the automobile industry, the consistent application of transfer pricing
sectors that are currently experiencing penalties in Mexico.
the greatest number of transfer pricing
audits are the hospitality, distribution, Audit triggers
financial services, manufacturing
(maquiladora) and electronic products Transfer pricing audit targets are
industries. The amount of headquarter selected by the Large Taxpayers General
charges, profitability of the local Administration at the SAT. A variety
taxpayer and business restructuring of factors are taken into account in
activity are some of the factors driving
the selection of companies for review.

determining which taxpayers to audit, company data, with a marked preference
including: for local comparables. Since the markets
in Canada, the United States and Mexico
• The outcome of a risk-based
are considered similar, comparables from
assessment by the Large Taxpayers
these jurisdictions are preferred where
General Administration
local comparables are not available. In
• The profitability of the local taxpayer practice, US comparables are widely
accepted.
• Whether there is evidence of business
restructurings, prorated charges or IP The TPCA generally expects only one
migration year of financial data for the tested party.
• The volume of related-party However, multiple years of financial data
transactions undertaken by the consistent with the business cycle can
taxpayer be used for comparable transactions or
companies if a business cycle exists and
• The nature of related-party can be documented. The inter-quartile
transactions undertaken by the range is used for calculating the arm’s
taxpayer length range. The TPCA generally
• The outcome of value-added tax accepts the use of both simple averages
(VAT), employment, customs or other and weighted averages when analyzing
indirect tax reviews the financial data.
The TPCA typically accepts working

Indirect and customs tax capital adjustments to comparable data
Transfer pricing enforcement resources and would consider the applicability of
in Mexico collaborate with the indirect other financial adjustments if proper
tax specialists and there is a formal explanation on how such adjustments
requirement that the same transfer price improve comparability is provided and
be used for corporate (direct) tax and documented.
indirect tax purposes.
Comparable data The MITL establishes that in the analysis
The Mexican Income Tax Law (MITL) of related-party transactions, the
specifically states that transactional transfer pricing methods should be
comparables and traditional applied in the order mentioned in Article
transactional transfer pricing methods 216 as follows:
should be considered before any other • CUP
method. If transactional comparables
are not in existence, the Mexican tax • Cost plus
authorities would accept comparable

1 • Resale price This period may be longer under an
Transfer Pricing
Guidelines for International tax treaty (the period is
• Profit split
Multinational Companies ten years in cases involving the United
and Tax Administrations • Residual profit split States). APA applications are submitted
approved by the Board
of the Organization for to the same tax authority that reviews
• TNMM
Economic Cooperation taxpayer compliance with transfer pricing
and Development The CUP method described in Section I legislation. APA applications should be
in 1995, or those
substituting for said
of Article 216 shall be applied firstly, concluded in a maximum number of eight
Guides (to the extent and only when said method is not months. The decision of the tax authority
that they are congruent appropriate to determine whether the can be reviewed once by a superior tax
with the provisions
hereof and with treaties
operations were performed at arm’s authority before a Court of Appeal action
entered into by Mexico) length as indicated in the Transfer Pricing is launched.
shall be applicable for Guidelines for multinational enterprises
interpretation of the There are approximately 30 APA
provisions of this Chapter.
(MNEs) and Tax Administrations referred
applications in process currently. Most of
to in the final paragraph of Article 2151
them are bilateral with the United States.
shall the other methods described above
The average length of time required
be used.
to complete an APA process is eight
The MITL specifically states that OECD months. However, in practice, it might
Guidelines could be used to interpret the take up to two years.
transfer pricing provisions whenever the
guidelines do not contravene with what is Yield/performance of transfer
explicitly stated by the local law or in the pricing reviews
tax treaties signed by Mexico. As such,
other transfer pricing methodologies can The Mexican tax authorities measure the
be used if they are adequately supported effectiveness of transfer pricing review
by the OECD Guidelines. activities by the increased tax yield, the
percentage of review cases where an
Advance Pricing Agreements adjustment is made to taxpayer income,
the percentage of review cases where
(APAs)
an adjustment is sustained on appeal,
Mexico has a formal APA program. The the percentage of taxpayers assessed as
APA is an option applied to the taxpayer high risk and the percentage of taxpayers
in the Federal Tax Code (Código Fiscal in compliance with documentation
de la Federación, article 34(a)). A requirements.
unilateral APA applies for a maximum
period of five years, which includes Transfer pricing disputes
one year before the submission of the
APA and a further three additional Current disputes involve taxpayers in
years after the submission of the APA. the following industries: automotive,
pharmaceuticals, consumer products and
electronics.

pricing
The transfer pricing environment in
Mexico is responsive to OECD initiatives
and the implementation of centralized
business and tax models. The Mexican
tax authorities continuously exchange
information with the OECD authorities
to drive efforts in line with the best
international practices.

activity
It is believed that the Mexican tax
authorities expect compliance measures
and yield targets (i.e., an increase in tax
take based on audit activity) to be areas
of increased focus over the next two
years.
Jorge Castellon
jorge.castellon@ey.com
+1 55 5283 8671

Peru*
*
Country chapter
Resources the taxing authority Audit triggers
completed based on the is devoting to transfer pricing A transfer pricing audit is determined by
professionals and publicly The National Superintendence of Tax certain risk variables; however, selection
Administration (SUNAT) administers for audit is part of the SUNAT’s broader
taxes in Peru. Within the SUNAT, transfer strategy to focus on assessing the top
pricing reviews are carried out by two 10,000 taxpayers.
teams devoted to transfer pricing. One
team is located in the Main Taxpayers Comparable data
National Office, while the other belongs
The SUNAT does not impose legal
to the Lima Regional Office. In terms
limitations on the use of local, regional
of background, the transfer pricing
or global comparables. No guidance is
resources are mainly accountants.
available regarding the application of
financial adjustments to the comparable
Industry focus data.
SUNAT currently focuses on the banking
and capital markets, mining and metals, Transfer pricing methods
oil and gas, and telecommunication
There is no formal hierarchy between
industries for transfer pricing audits.
transfer pricing methods; rather, the
Significant business activity in Peru
local regulation supports the use of the
appears to be a key factor driving the
“best method” rule. The law supports
selection of an industry for particular
the following methods: CUP, resale
focus. The selection of industries under
price, cost plus, profit split, TNMM and
specific focus from a transfer pricing
residual profit split. No guidance on
perspective is not communicated to
the acceptability of other methods is
taxpayers.
provided.
Transfer pricing penalties Likely trends in transfer pricing

Peru does not have a specific transfer activity
pricing penalty regime, but penalties can
It is anticipated that compliance
be imposed on transfer pricing based
measures will be of increased focus for
on the existing general penalty regime
the SUNAT over the next two years.
contained in the Tax Code. Peru’s penalty
regime is based on objective criteria
and is defined in local regulations, which
Ernst & Young contact ensures that its application is consistent
throughout the country.
Marcial Garcia
marcial.garcia@pe.ey.com
+151 1 411 4424

United States
Resources the taxing authority 10 attorneys. The economists and

is devoting to transfer pricing attorneys are transfer pricing specialists.
The attorneys belong to the office of the
The IRS administers taxes in the Associate Chief Counsel (International)
United States. Generally, while some and additionally engage in providing
administrative and coordination functions advice to taxpayers and drafting
are centralized, IRS transfer pricing administrative guidance. Approximately
resources are largely decentralized. 33 specialist transfer pricing FTEs are
All international taxation matters, dedicated to the APA program, working
including transfer pricing, are primarily almost exclusively on resolving transfer
handled by International Examiners pricing issues, though generally not
(IEs), supported by economists at the examinations.
audit and examination level. All IEs work
for one of the five Industry Directors. While the number of IEs has remained
Industry Directors are responsible for largely consistent, the number of
the direction and assignment of the work economists has increased by 50% over
done by IEs. the last two years. The existing level of
resourcing is expected to grow in the
The IRS has established a Transfer Pricing next two years, subject to attrition due to
Council to collect information, drive retirement and the IRS’s ability to replace
consistency and recommend changes in such individuals. The APA program is also
transfer pricing regulations or legislation, expected to hire additional attorneys,
as necessary. The Transfer Pricing Council program analysts and economists. The
is composed of 10 representatives from IRS places emphasis on timely training
the Large and Mid-Size Business (LMSB) so current and incoming transfer pricing
Division and two members from Associate resources have a strong background in
Chief Counsel (International). This group all international issues, including transfer
is composed of IRS subject matter experts pricing.
and key IRS decision-makers to establish a
coordinated approach to transfer pricing Industry focus
enforcement strategies and policies. The
group evaluates the strategic decisions There is no formal program prioritizing
that the IRS has to make in transfer pricing the review of taxpayers in a particular
cases, what resources are available to industry or industries. Although the IRS
the IEs and how those resources can be does not scrutinize by industry, the IRS
aligned with the IRS’s needs. organizes its resources by reference to
industry groupings. The IRS is organized
As of March 2009, the IRS had under five broad industry groups.
approximately 475 IEs (mostly
accountants), supported by Recently, most transfer pricing audits
approximately 120 economists and arise within the following two of these

five groups: the communications, coordinated manner. The “tier issues”
technology and media industry group and are considered higher-risk transactions
the retailers, food, pharmaceutical and and issues that represent the LMSB
healthcare industry group. The IRS has Division’s highest compliance priorities
also made efforts that resources, such and expected focus of examinations. The
as IEs, focus on a particular industry so Tier I and II issues include the transfer of
individuals may attain greater expertise intangibles, cost sharing arrangements,
relevant to that industry. However, the mixed service costs and post-IRC § 936
IRS does widely communicate specific structures and transactions. IRC § 936
issues that the IRS has identified through relates to the Puerto Rico and possession
risk analyses, and the importance of IP in tax credit that was phased out in 2005,
the industry is a risk factor. Furthermore, resulting in numerous intangibles
the LMSB Division adopted an “Issue transactions as taxpayers undertake
Tiering” strategy in 2006 to ensure that restructuring. Additionally, financial
high-risk compliance issues are properly transactions and the inclusion of stock-
addressed and treated consistently based compensation as part of costs are
across the division for all LMSB taxpayers areas of interest for the IRS.
involved in the issue.
Geographic focus
US law provides for the imposition of
Geographic considerations are not specific transfer pricing penalties. IRC
drivers for the selection of taxpayers § 6662(e) and (h) provide for a 20%
for review. The top five jurisdictions (in addition-to-tax penalty for substantial
order of prevalence) of counterparties valuation misstatements and a 40%
in MAP cases pending before the US addition-to-tax penalty for gross
competent authority are: valuation misstatements, based on
certain objective criteria as defined in the
1) Canada
statute. The IRS has a Transfer Pricing
2) Japan
Penalty Oversight Committee, which is
3) Germany
an initiative across functional groups,
4) The United Kingdom
to assure consistent application of the
5) India
transfer pricing penalty provisions.
Types of transactions under There are also standard procedures in
scrutiny place, as documented in the Internal
Revenue Manual, so proposed penalties
Issue Tiering provides the LMSB Division go through a review process before
a consistent framework for identifying, being considered by the Transfer Pricing
prioritizing and addressing significant Penalty Oversight Committee.
compliance risks in a nationally

Over the last two years, penalties • The outcome of the IRS’ risk-based
have been applied in approximately assessment
20% to 40% of cases where transfer
• T
► he nature and volume of the
pricing adjustments were issued.
taxpayer’s related-party transactions
Where penalties are imposed, the US
law imposes a penalty of 20% or 40% • A
► standard audit cycle or program
of the underpayment of tax depending • Previous tax audits of the taxpayer
on the magnitude of the transfer
pricing adjustment. The IRS expects
the incidence of penalties to increase
in the next two years as a result of it The work of IRS transfer pricing
expanding the number of taxpayers being enforcement resources is not integrated
reviewed and conducting examinations with that of indirect tax specialists. As
where taxpayers may not have the same such, there is no requirement that the
level of experience or familiarity with same transfer price be used for corporate
the administrative guidance relevant (direct) tax and indirect tax purposes
to cross-border transactions. The IRS (except in the case of a taxpayer’s basis
expects to be able to conduct more or inventory cost for property imported
examinations as a result of electronically from related persons).
filed income tax forms, which will also
allow for better risk assessments. Comparable data
In applying the “best method” rule,
Audit triggers comparability and reliability are critical
Local field offices and trained IEs select factors that must be taken into account
taxpayers for international examinations when determining comparable data.
based on risk assessments. The IRS Typically, local country comparables
typically reviews the corporate income are preferred. However, if good local
tax return, or other returns filed by comparables are not available, regional
taxpayers pertaining to transactions comparables could also be used if they
with foreign corporations, for relevant provide reliable results. The IRS regulations
information that may trigger transfer provide guidance on various aspects
pricing audits. The IRS has a compliance relevant to preparation and presentation
initiative project to monitor certain of comparable data, such as the number
taxpayers continuously. The selection of years of financial data to be used, the
of taxpayers is based on various method for calculating the arm’s length
considerations such as: range and the method for determining the
appropriate profit level indicator.
• T
► he profitability or persistent losses of
the taxpayer
restructurings

1
See Announcement The number of years of financial data Advance Pricing Agreements
2009-28 (29 March to be used in preparing and presenting
2009), “Announcement (APAs)
and Report Concerning
comparable data varies depending on
Advance Pricing the method adopted for determination The United States has a formal APA
Agreements.” of the arm’s length range. For instance, program, accessible to all taxpayers,
2
U.S. Competent Authority subject to the taxing authority’s
statistics for 2004-08
in the case of transactional methods,
(released 10 December the default period is one year. For discretion.
2008 by the Internal profit-based methods, such as the CPM, The APA team received approximately
Revenue Service). 17
the default requirement is a multiyear 108 APA applications from taxpayers
Tax Mgmt. Trans. Pricing
Rep. 640 (18 December analysis, but the number of years annually in the past few years, and at the
2008). depends on each case. end of the year 2008, there were 272
In the context of pooling versus cases in the inventory, of which 161 were
averaging of financial data, it is in the active inventory at the following
appropriate to note that, in recent stages:1
years, the APA program issued training
APA applications
materials that suggest that the pooling
of financial data is appropriate in only Bilateral APAs at stage of 111
mutual agreement
limited circumstances. However, these
training materials are not official policy Bilateral APAs at due diligence 117
phase
or binding on the IRS or taxpayers.
Financial adjustments are not mandatory. Unilateral applications in 44
process
The regulations allow such adjustments,
provided they enhance the comparability The average duration of the APA process
and the reliability of the arm’s length during the year 2008 was 21.5 months
analysis, of which working capital for unilateral APAs and 38.1 months for
adjustments are the most common. bilateral APAs. On average, in the past
three years, approximately 47 bilateral
Transfer pricing methods APAs were concluded annually. Top
treaty partners that have concluded
US transfer pricing regulations follow
bilateral APAs with the US are Canada,
the “best method” rule, which requires
Japan and Germany.
taxpayers to adopt the transfer pricing
method that provides the most reliable Additionally, in the past three years,
arm’s length remuneration for controlled approximately 217 cases of double
transactions. The regulations do not taxation have been resolved annually
recognize any hierarchy of methods. under the competent authority
If the specified methods do not yield procedure. The average duration of such
reliable results, the taxpayer is allowed to proceedings (including bilateral APAs)
use an unspecified method to determine was up to 731 days during the year
an arm’s length remuneration. 2008.2

Approximately 578 applications were in Current influences on transfer 3
U.S. Competent Authority
progress as at the end of the year 2008.3 statistics for 2004-08,
pricing Section 1 (released 10
The case processing time was higher December 2008 by the
during the year 2008 primarily due to There have not been any changes yet Internal Revenue Service).
shortage of resources. in terms of policies or practices as 4
U.S. Competent Authority
a result of the economic downturn, statistics for 2004-08,
During the five years 2004 to 2008, particularly because the affected years
Section 3 (released 10
December 2008 by the
taxpayers received full relief in 90.26% are not yet under examination. The IRS is Internal Revenue Service).
of instances and partial relief in an considering whether additional guidance
5
Ibid.
6
additional 4.45% of instances.4 During is necessary relating to the impact of
“Transfer Pricing Cases
Pending in the US,” 17 Tax
that same period, from the perspective the downturn. The IRS APA program has Mgmt. Trans. Pricing Rep.
of whether competent authority relief an informal committee that considers 285 (31 July 2008).
was granted, only 5.36% of taxpayers methods that may be used consistently
received no relief and their cases were across taxpayers in similar factual
unresolved by competent authority.5 circumstances and may be reliably
applied for current and prospective APA-
Yield/performance of transfer covered tax years.
pricing reviews
The Treasury and the IRS are very active
The IRS does not have data on the in the OECD working party on transfer
yield or performance of transfer pricing. The Treasury regulations are also
pricing reviews. However, the IRS has aligned with the OECD Transfer Pricing
observed that taxpayers make good Guidelines.
efforts to have adequate transfer pricing
documentation. Likely trends in transfer pricing
activity
Over the next two years, the IRS expects
In the context of disputes, there were to place greater emphasis on transfer
approximately 10 transfer pricing related pricing compliance measures, with the
cases pending6 in litigation and 256 objective of developing automated risk
allocation cases and 183 APA cases assessment tools, and transfer pricing
pending in MAP during the end of the dispute resolution via the competent
year 2008. The treaty partners in most authority assistance route.
of these cases were Canada, Japan and
Germany. The United States recently Ernst & Young contact
entered into treaties with provisions for Purvez Captain
arbitration with Belgium, Canada and purvez.captain@ey.com
Germany. The process for arbitration +1 713 750 8341
is finalized for Germany and is being
finalized for the other countries, but Bob Ackerman
bob.ackerman@ey.com
there are no cases pending yet.
+1 202 327 5944

Venezuela*
*
Country chapter
Resources the taxing authority profitability are the factors driving the
completed based on the is devoting to transfer pricing selection of industries for particular
insights of Ernst & Young focus. The selection of industries under
professionals and publicly The Servicio Nacional Integrado de specific focus from a transfer pricing
Administración Tributaria y Aduanera perspective is widely communicated to
(SENIAT) administers taxes in taxpayers and has been part of the “Zero
Venezuela. Within the SENIAT, transfer Evasion Plan.”
pricing reviews are carried out by a
transfer pricing special unit which is part Types of transactions under
of the National Income Tax Direction.
scrutiny
This unit analyzes transfer pricing as part
of income tax audits and develops the Key transactions forming the current
transfer pricing strategy to be followed in caseload of transfer pricing reviews
the audits. (ranked in order of prevalence) are:
There has been an increase in the • Financial transactions (e.g., loans,

number of full time equivalent (FTE) other debt instruments)
resources involved in transfer pricing • Intra-group services
examinations, from approximately 5
to 15 over the last few years. All of the • Tangible goods
transfer pricing resources are located
at the central transfer pricing unit. The Transfer pricing penalties
number of transfer pricing resources is Venezuela does not have a specific transfer
expected to increase to 50 over the next pricing penalty regime. The general tax
five years. penalty regime is applied. The transfer
In terms of background, all 15 transfer pricing penalty system is not complex, and
pricing resources have a strong compliance is monitored by the SENIAT.
technical knowledge of transfer pricing The average penalty rate depends on
as they have received training in other the development of the transfer pricing
countries and from various international assessment. The penalty is 10%, if the
organizations. The SENIAT expects taxpayer accepts the assessment at the
to build more transfer pricing audit time it is notified. However, the penalty
experience in specific industries. level rises from 25% to 200% plus
late payment interest, if the taxpayer
Industry focus decides to contest this assessment and is
unsuccessful. The approximate median of
Venezuelan transfer pricing audits penalties applied by the SENIAT is 112.5%.
currently focus on the automotive, It is anticipated that the assessment
mining and metals, oil and gas, and of penalties will increase due to the
pharmaceuticals industries. Significant augmentation of transfer pricing audits in
business activity in Venezuela and the next two years.

Audit triggers Comparable data
Instigation of a transfer pricing audit is Venezuelan transfer pricing rules allow
undertaken by a central decision-making the use of local or regional comparable
body. A variety of considerations are information, although the SENIAT prefers
taken into account in determining which regional comparables rather than local
taxpayers to audit, including (ranked in comparables due to the lack of publicly
order of importance): available, local comparable data. The
main condition for using either local or
regional data is that the information is
assessment by the SENIAT
reliable and publicly available at the time
• Sudden changes on the profitability of of the transaction.
the local taxpayer from one fiscal year
to another fiscal year
• Previous tax audits of the taxpayer in relation to the number of years of
• The nature of related-party financial information required, the use of
transactions undertaken by the simple versus weighted averages, pooling
taxpayer or averaging of financial data, the
method for determining the appropriate
• Customs or other indirect tax reviews profit level indicator or the method for
Indirect and customs tax range. The SENIAT and taxpayers use the
The SENIAT is an integrated tax and OECD Transfer Pricing Guidelines in case
customs administration. As such, it of discrepancies on these issues.
is more than likely that both Income No guidance is provided by the SENIAT
Tax Direction and Customs Direction in relation to financial adjustments to be
share relevant information regarding made to the comparable data. Taxpayers
transactions between related parties. In may apply financial adjustments
fact, the SENIAT announced joint transfer to comparable data that improve
pricing and Customs Value reviews comparability. It is also mandatory to
this year. According to the Venezuelan explain comparability in the transfer
Customs Value and VAT rules, the pricing report.
transfer price has to be an arm’s length
price. As such, the same transfer price Transfer pricing methods
needs to be used for corporate (direct)
tax and indirect tax purposes. Venezuelan law sets out a hierarchy
of transfer pricing methods. The CUP
method is the preferred method and
is mandatory if it can be applied. The

other methods can be applied if it is not Likely trends in transfer pricing
possible to apply the CUP method. The activity
Venezuelan transfer pricing rules indicate
that the only acceptable methods are the The SENIAT expects an increase in tax
CUP method, the resale price method revenue based on transfer pricing audit
(RPM), the cost plus method, the TNMM, activities and the increase of joint audit
the profit split method and residual profit processes between customs and transfer
split method. pricing (income tax) to be areas of
increased focus over the next two years.
(APAs)
Venezuela has a formal APA program,
which was included in the Organic Tax
Code in 2000. Taxpayers have right of
access to APAs in Venezuela. However,
the SENIAT has not yet received any
APA applications. According to the
Venezuelan APA rules, the average
length of time required to complete an
APA process (both for bilateral and
unilateral APAs) is one year.

pricing
The transfer pricing environment
in Venezuela is responsive to OECD
initiatives. Transfer pricing policy changes
will be made in accordance with changes
to the OECD Transfer Pricing Guidelines
as they arise. A provision in Venezuela’s
transfer pricing rules indicates that if
the OECD changes its guidelines, the
Venezuelan rules will apply the new OECD
rules. The SENIAT does not anticipate
a change in policy or practice based on
any of the stimulus packages recently
Katherine Pinzon
announced in an attempt to combat the
katherine.pinzon@ve.ey.com global financial crisis.
+58 212 953 5222

Surveyed
countries
Asia Pacific

Australia
Resources the taxing authority on transfer pricing work to build their

is devoting to transfer pricing expertise in this area.
Within the Australian Taxation Office Industry focus

(ATO), coordination of the transfer
pricing program is the responsibility of There is no formal program for
the Transfer Pricing Practice (TPP). prioritizing any particular industry or
There are approximately 12-15 FTEs in industries for review, but in practice,
the TPP. The TPP takes the lead role in factors pertaining to the industry such
negotiating MAPs and bilateral APAs, in as whether the activities of the industry
representing Australia at Working Party are significant within the country, the
6 (Taxation of Multilateral Enterprises) profitability of the industry, and low-tax
at the OECD, in developing the ATO’s paying industries, are taken into account
view in respect of significant transfer in identifying taxpayers for scrutiny. The
pricing and profit reallocation issues industries the ATO is currently focusing
and in providing specialist input in and on include the automotive, banking and
strategic oversight of transfer pricing capital markets, consumer products,
litigation, audits, APAs and risk reviews. mining and metals, and pharmaceuticals
industries.
There are approximately 70 to 75 full
time equivalents (FTE) resources Geographic focus
supporting the TPP. These include
approximately 25 economists and 50 Geographic considerations are not
field officers; finally, the TPP is also generally drivers for the selection of
supported by a growing number of field taxpayers for review. Transactions
auditors that are receiving specialised between Australia and its major
training. Some expansion is likely over trading partners (such as Japan, the
the next two years. United States, the United Kingdom,
New Zealand and Korea) represent
In terms of background, approximately the majority of the current caseload
40% of the ATO’s transfer pricing of transfer pricing reviews. However,
resources are registered accountants, where transactions are with companies
30% are economists and 20% are in low-tax jurisdictions, this can be a
lawyers. Approximately 40% of the factor in whether the ATO reviews these
resources are transfer pricing specialists arrangements.
with a strong technical background
in transfer pricing issues. The field Types of transactions under
staff involved in transfer pricing have
scrutiny
been committed to a two-year training
program, and they are spending an The ATO has specifically identified the
increasing proportion of their time following transactions that are currently

the focus of transfer pricing reviews (in Audit triggers
order of prevalence as per the current
caseload of transfer pricing reviews): Transfer pricing audits are generally
instigated centrally and may initially
• Tangible goods involve either a Comprehensive Risk
• IP-related transactions (e.g., royalties, Review (CRR) or a Transfer Pricing
licensing) Record Review (TPRR). That is, a
transfer pricing audit generally involves
• Intra-group services a process. However, the selection
• Supply chain restructurings of the taxpayer to embark on such a
process and the scope of the transfer
• Financial transactions pricing audit that may result from this
The ATO has additionally identified process are typically driven by various
stock-based compensation as an area of considerations such as:
interest. • The profitability of the taxpayer
Transfer pricing penalties • Whether there is evidence of business

restructuring
The ATO has the power to impose
transfer pricing penalties. The ATO has • The outcome of a risk-based
put in place administrative requirements assessment by the ATO
and published rulings to ensure • The nature and volume of the
consistent application of the transfer taxpayer’s related-party transactions
pricing penalty provisions. The penalty
provisions do not apply in cases where The ATO relies on related-party
losses are reduced or eliminated and disclosures made by taxpayers, along
the assessment remains nontaxable. with the income tax return (Schedule
Taxpayers have objection and review 25A) supplemented by third-party data,
rights in relation to penalties. to identify particular transfer pricing
risks in the taxpayer population.
Over the last two years, penalties have
been applied in 25% to 50% of cases Indirect and customs tax
where transfer pricing adjustments were
assessed. Where penalties are imposed, The work of Australian transfer pricing
they generally range up to 25% of the enforcement resources is not integrated
additional tax, in addition to a general with that of indirect tax specialists.
interest charge of 12% to 14%. This As such, there is also no requirement
approach to penalties is not expected to that the same transfer price be used
change in the next two years. for corporate (direct) tax and indirect
tax purposes. Further, where the ATO
makes a transfer pricing adjustment to

reduce the cost of goods sold, there will Advance Pricing Agreements
not necessarily be an adjustment to the (APAs)
amount of customs duty paid.
Australia has a formal APA program,
Comparable data which is accessible to taxpayers subject
to the ATO’s discretion.
Typically, local country comparables
are preferred. Foreign comparables The APA team receives approximately 20
can be accepted only if they are from to 30 APA requests from taxpayers per
a comparable economy and reliable year, and approximately 65 applications
financial data is available. were in process as at 30 June 2008.
Bilateral or multilateral APAs represent
35% of the current caseload. The
data, generally, financial data for four
average duration of the APA process
years needs to be used. The use of the
is approximately 8 months in the case
inter-quartile range is dependent upon
of unilateral APAs and 16 months in
reliability of data. Weighted average is
the case of bilateral APAs. Top treaty
preferred to simple average. Operating
partners that have concluded bilateral
margin is the generally PLI. The pooling
APAs with Australia are Japan, the
method is acceptable in cases where
United States, the United Kingdom and
there is limited data or data is missing for
New Zealand.
some of the years.
Additionally, approximately six to eight
There is no formal or mandatory
cases of double taxation are resolved
guidance provided as to adjustments
annually under the competent authority
to comparable data. Such adjustments
procedure. The average duration of such
are optional and will likely be supported
proceedings could range up to two years.
by the ATO where they enhance the
comparability of the information with the During 2007, the ATO commissioned an
tested party. independent third party to review and
evaluate the ATO’s APA program and
Transfer pricing methods provide recommendations to improve
the effectiveness and efficiency of the
Australia does not identify any specific
program. The review involved seeking
hierarchy of transfer pricing methods. In
feedback from a variety of stakeholders,
addition to the methods outlined in the
including tax office personnel, taxpayers,
OECD Transfer Pricing Guidelines, the
advisors and industry groups, through
ATO also recognizes cost contribution
surveys, group forums, interviews and
arrangements and a 7.5% safe harbor
written submissions. The findings of the
return for non-core services.
review and recommendations received
are currently being evaluated by the ATO,

and a process for co-design of the APA
program with industry is underway.
pricing reviews
Taxpayers who have international
related-party transactions are required
to report them in a Schedule 25A,
together with their income tax returns.
The ATO has tracked the effective tax
rate of Schedule 25A lodgers to the
remaining population of taxpayers,
and the results suggest that the two
populations are starting to converge.
The ATO is exploring the possibility of co-
designing a balanced scorecard reporting
process to monitor the performance of
the APA program, as recommended in
the APA Review.

Two cases are in litigation.

pricing
The current global financial crisis and the
implementation of centralized business
and tax models have impacted the
Australian transfer pricing environment.
In particular, given the significant inbound
investment and corporate income tax
that is derived from foreign-based
multinationals, the ATO will be alert to Ernst & Young contact
transactions and arrangements that have
the potential to erode this tax base. Paul Balkus
paul.balkus@au.ey.com
+612 9248 4952
David Tracey
david.tracey@au.ey.com
+612 9248 4885

China*
*
Country chapter Resources the taxing authority Geographic focus
completed based on the
is devoting to transfer pricing The Administrative Measures of Special
professionals and publicly The Anti-Avoidance Division of the Tax Adjustments (Guoshuifa (2009)
available information No. 2) provide for a focus on entities
only, including the BNA International Tax Department at the
Interview: “Chinese State Administration of Taxation (SAT) that have transactions with low-tax
Official Discusses is responsible for the administration jurisdictions or tax havens.
New Transfer Pricing
Regulations," BNA Tax of transfer pricing issues in China. The Also, tax bureaus in the coastal provinces
Management Transfer anti-avoidance work, including the of China and the cities of Beijing and
Pricing Report (Vol 17, administration of contemporaneous Shanghai have been active in conducting
No. 20), pages 771-775.
documentation, is mostly carried out by transfer pricing audits.
all of the local tax bureaus.
The tax bureaus are increasing training Types of transactions under

for anti-avoidance tax professionals, scrutiny
including short-term training, medium-
We understand that royalties and fees
to long-term training, and domestic and
for labor services are key transactions
overseas training. In addition, the tax
under review from the transfer pricing
bureaus will recruit university graduates
perspective in China.
with relevant degrees to join the anti-
avoidance workforce. We understand In addition, the SAT objects to taxpayers
that in the next three years, the SAT who rely on the lower quartile of
plans to establish an anti-avoidance comparable ranges, especially those who
team with several hundred professionals rely on the lower quartile over a long
across China. period. The SAT used to accept the inter-
quartile range assuming that companies’
Further, the tax bureaus are
profits should be evenly distributed —
strengthening information technology
considering that some should achieve the
tools and databases to support anti-
upper quartile while some should achieve
avoidance work.
the lower quartile or that an enterprise
should have some years resulting near
Industry focus the upper quartile and years resulting
The tax bureaus continue to focus near the lower quartile.
on the apparel, electronics and It has been observed by the SAT that
telecommunications, food and the vast majority of companies have
beverage, retail, industrial, automotive, kept their profitability around the lower
pharmaceuticals, and service industries, quartile year after year; thus, the SAT
as well as on financing issues relating has found it necessary to focus on the
to infrastructure construction and on median when evaluating a company’s
companies with outbound investments. profit levels over time. The objective is to

promote a better balanced distribution of • The taxpayer may be treated as a key
profits achieved by companies in China. target for a transfer pricing inspection.
• The tax bureaus can exercise the right
Transfer pricing penalties to deem an amount of taxable income
There are two main aspects of transfer for the taxpayer and compute the tax
pricing penalties for noncompliance: due in accordance with Article 44 of
the Corporate Income Tax Law (CITL).
• Penalties under the Tax Collection and
Administration Law (TCAL) and its • Generally, any APA application made
detailed implementation regulations by the taxpayer is not accepted.
(TCALIR) apply to noncompliance
with the transfer pricing provisions. Audit triggers
• Interest on additional taxes owed Article 29 of Guoshuifa (2009) No. 2
on account of a transfer pricing outlines seven criteria used to determine
adjustments also applies, comprising targets for transfer pricing investigation.
two components: The three major audit triggers are:
• A base rate of interest equivalent to • A failure by the taxpayer to meet

the Yuan Renminbi (RMB) lending disclosure and documentation
rate of the People’s Bank of China requirements.
on 31 December of the year that
• The taxpayer has low profits or has
the tax was due, applicable to the
losses.
whole period for which the tax was
not paid • The taxpayer has a large volume
or large value of transactions with
• An additional 5% penalty interest
companies located in tax havens.
(although this penalty may
be waived if the taxpayer can In particular, the SAT concentrates on
provide the contemporaneous companies that, in addition to having
documentation due, or, if the low profits or losses, pay large amounts
taxpayer is exempted from in royalties to overseas related parties
preparing contemporaneous or have a large percentage of their main
documentation in accordance with business activities involving related-party
Article 15 of Guoshuifa (2009) transactions.
No. 2, it provides other relevant
materials requested by the tax Indirect and customs tax
authorities)
There is no formal interaction of
In addition, the unfavorable transfer pricing with indirect taxes.
consequences of noncompliance may However, Chapter 3 Article 15 of the
include the following: Guoshuifa (2009) No. 2 evaluates the

documentation threshold limit for toll Transfer pricing methods
manufacturers based on export and
import values declared in their customs According to Article 111 of the CITLIR,
records. the transfer pricing methods available
to taxpayers include the CUP method,
the RPM, the cost plus method, the
Comparable data
TNMM, profit split methods and other
The tax authority uses public information appropriate methods that comply with
to the greatest extent possible, the arm’s length principle.
considering the company and subsequent
The China transfer pricing regulatory
negotiation procedures. Only in the
framework does not state a preference
absence of public information, or if the
for the selection of a specific transfer
public information cannot provide a
pricing method.
sound assessment of the related-party
transactions, is nonpublic information
be used. Nevertheless, the SAT will not Advance Pricing Agreements
commit to limiting comparisons to public (APAs)
information only. Article 48 of Guoshuifa (2009) No. 2
According to Article 41 of Guoshuifa states that APAs are generally available
(2009) No. 2, if the profitability of an for companies that meet three criteria:
enterprise falls below the median of the 1) Their annual related-party
inter-quartile range, the profits should, transactions exceed RMB 40 million
in principle, be adjusted to the median. (inclusive).
However, the tax authority takes historic 2) They fulfil their obligation to report
conditions into consideration. If, for related-party transactions.
example, the profits of an enterprise 3) They prepare, maintain and provide
are higher than the median in one year contemporaneous documentation in
but lower in another year, provided the accordance with the rules.
profits are distributed normally, the
SAT would accept a single year’s results The threshold of RMB 40 million is
being lower than the median. The SAT not a strict rule, as a lower level of
encourages companies to achieve a transactions, for example, RMB 30
normal distribution of profit levels. million, may also qualify, depending on
the circumstances. However, applications
Article 38 of the Guoshuifa (2009) No.
from companies that are not compliant
2 requires specific approval from the SAT
with the documentation and annual
for performance of any working capital
reporting requirements are not accepted.
adjustment to comparables.

An APA covers the period of three MAP. At present, three corresponding
to five years following the year of transfer pricing adjustments are in the
application. At the company’s discretion, negotiation or review process.
the methodology agreed in the APA
In 2009, The SAT will continue its
can be rolled back to prior years. Any
corresponding adjustment and/or
additional tax payment as a result of the
bilateral APA negotiation efforts with
roll-back may not be viewed as special
competent tax authorities using the MAP
tax adjustment, and therefore, arguably,
provided in the relevant tax treaties. The
interest penalty may be avoided.
SAT proposes to negotiate 32 different
We understand that, in 2008, the cases, including MAPs and APAs with
SAT concluded a total of 2 bilateral competent tax authorities in Japan,
APAs (there have been 3 in total since Korea, the United States, Singapore and
introduction of the APA program in Denmark.
China) and 5 unilateral APAs. At present,
15 bilateral APAs and 2 unilateral APAs Current influences on transfer
are in the negotiation or review process. pricing
Three APAs have been concluded with One of the SAT’s major tasks is to ensure
the United States, Japan and Korea. national consistency in implementing
Guoshuifa (2009) No. 2. The SAT
Yield/performance of transfer monitors and manages anti-avoidance
pricing reviews investigations throughout the country.
Through monitoring and management
Although the method of performance
systems, the SAT can promote strict
measurement of transfer pricing reviews
enforcement of transfer pricing
by the SAT is not clear, we understand
investigations and, in turn, promote
that, over the years, the number of audit
consistent standards in conducting anti-
cases has been significantly reduced,
avoidance investigations.
while the amount of transfer pricing
adjustments has increased materially.
The SAT thus appears to have been
focusing on the comprehensiveness activity
and depth of audits rather than on the It is understood that the SAT’s work
number of audit cases. priorities for 2009 will continue to focus
on key industries such as the apparel,
Transfer pricing disputes electronics and telecommunications,
food and beverage, retail, industrial,
We understand that, in 2008, the SAT
automotive, pharmaceuticals, and
concluded four bilateral agreements on
service industries and on companies with
corresponding adjustments through the
outbound investments.

Intercompany transactions involving
royalty payments and labor services
continue to be areas of focus. Further, it
is expected that greater emphasis will be
placed on companies that constantly rely
on the lower quartile of the arm’s length
range to support their transfer pricing.
We also understand that, in 2009, the

SAT plans to further strengthen its
internal processes and teams in the
areas of audits and anti-avoidance in
general. Further expansion of detailed
anti-avoidance investigations and
of related knowledge management
resources seems likely, together with
augmentation of information collection
and administration processes.
Joanne Su
joanne.su@cn.ey.com
+86 10 58153380
Jessica Tien
jessica.tien@cn.ey.com
+86 21 58152806

Indonesia
Resources the taxing authority resourcing is expected to increase over

is devoting to transfer pricing the next two years, with an increase in
economists and lawyers. Approximately
The Directorate General of Taxes one-third of the existing resources
(DGOT), Ministry of Finance of the are transfer pricing specialists, with a
Republic of Indonesia administers strong technical background in transfer
corporate taxes in Indonesia. Within the pricing issues. There has been a growing
DGOT, a special transfer pricing unit emphasis on transfer pricing training to
has been set up as a transfer pricing increase the transfer pricing competency
coordination center. The unit works of the resources.
to prevent transfer pricing abuse in
Indonesia through a comprehensive Industry focus
development package, including tax
law, tax office resource, taxpayer and Industries currently under focus by the
tax return, and tax society. Additionally, DGOT include (in order of importance)
decentralized transfer pricing working mining and metals, consumer products,
groups and transfer pricing handling automotive, oil and gas, and real estate.
teams have been set up in regional and Factors relevant in driving an industry to
district tax offices. be selected for particular focus include
(in order of importance) significant
There are approximately 45 FTE activity in the country and unrealistic
resources at the Indonesian tax profit. The selection of industries
authority, of which approximately 10% under focus is widely communicated to
are located in the coordination center, taxpayers; for example, the DGOT issued
with 90% in local tax offices. This level of a press release when the mining industry
resourcing has been achieved over the was selected. The list of industries under
last two years. Over the next two years, specific focus is reviewed annually by the
the DGOT expects to designate one Directorate of Potential, Compliance and
specific group of transfer pricing auditors Revenue.
(consisting of five to seven auditors) for
each district tax office, such as the Large Geographic focus
Taxpayer Office (LTO), the Medium
Practical considerations and legislative
Taxpayer Office (MTO) and the Foreign
direction (such as relevant compliance
Investment Tax Office.
rulings) drive the choice of jurisdictions
In terms of background, 90% of for review. Typically, transactions
the transfer pricing resources are with major trading partners, low-tax
registered accountants, and the rest jurisdictions, non-treaty partners and
are economists. The existing level of domestically headquartered companies

are reviewed in the scope of audits. being selected based on risk analyses
The top jurisdictions (in order, as per performed by specific tax officers,
the current caseload of transfer pricing considering factors such as:
reviews) of the relevant counterparties
• A high level of audit risk regarding
are:
taxpayer’s controlled transactions
• Singapore
• Availability or the taxpayer’s
• Hong Kong and Macau willingness to provide documentation
substantiating the arm’s length nature
• Japan
of the controlled transactions
• Western Europe tax haven countries
• An economically unrealistic profit trend,
• The United States as compared to the industry trend
Going forward, case selection is expected

Types of transactions under to be based on a systematic approach
scrutiny considering the following factors:
The DGOT has specifically identified • Consistent commercial loss for
certain transactions that are currently five years
the focus of transfer pricing reviews.
• Significant value of related-party
The nature of such transactions and the
transactions compared to taxpayer’s
corresponding composition of the current
turnover and operating profit
caseload of transfer pricing reviews are
summarized in the table below. • An economically unrealistic profit trend,
as compared to the industry trend
Transaction Current
caseload % In addition to the above factors, the
taxpayer’s tax audit history is also an
Tangible goods 60%
important consideration in selection of
Cost sharing/cost pooling 30%
arrangements
cases for transfer pricing scrutiny.
Intra-group services 10%

The DGOT expects to place greater
The work of the DGOT transfer pricing
emphasis on scrutinizing transactions
enforcement resources is integrated
involving IP (e.g., royalties, licensing) and
(e.g., in terms of sharing of information)
intra-group services over the coming years.
with that of indirect tax specialists. As
such, the same transfer price needs to
Audit triggers be used for corporate (direct) tax and
The central transfer pricing unit governs indirect tax purposes.
the selection of cases for transfer
pricing review. Currently, cases are

Comparable data Yield/performance of transfer
Typically, local country comparables pricing reviews
are preferred. Alternatively, regional In the context of measurement of
comparables based on companies performance of transfer pricing reviews
located in the same continent as the within Indonesia, approximately 90%
taxpayer could also be used. of review cases involve an adjustment
The Indonesian tax authorities allow to the taxpayer’s income and 60% of
the use of regional comparables, adjustment cases are sustained on
provided they enhance comparability of appeal. Further, 50% of the taxpayers
the information with the tested party. are assessed as high risk, while only 10%
The DGOT prefers the use of internal are in compliance with documentation
comparables over external comparables. requirements.
In preparing and presenting comparable Transfer pricing disputes

data, there are specific requirements in
relation to the number of years of financial In the context of disputes, there are
information, the method for calculating more than ten ongoing cases in domestic
an arm’s length range and the method for appeal (preceding court action) and one
determining an appropriate PLI. There is a case pending in a MAP.
general preference for weighted average
over simple average and for pooling of Current influences on transfer
financial data over averaging. pricing
Mandatory guidance regarding financial World Customs Organization
adjustments to comparable data is developments and OECD initiatives
contained in Directorate General (DG) have influenced a change in transfer
Decree Number Kep-01/PJ.7/1993 pricing policy in Indonesia, since some
and DG Circular Letter Number SE-04/ of Indonesia’s counterpart countries are
PJ.7/1993. members of these organizations.
Transfer pricing methods Likely trends in transfer pricing

activity
Indonesian transfer pricing legislation
(as contained in policy statements Kep- Over the next two years, the Indonesian
01/PJ.7/1993 and SE-04/PJ.4/1993) tax authority expects to place greater
specifies a hierarchy of transfer pricing emphasis on transfer pricing compliance
methods to determine arm’s length measures, dispute resolution and yield Ernst & Young contact
remuneration for controlled transactions. targets.
The CUP method and the traditional Rachmanto Surahmat
transaction methods are to be applied in rachmanto.surahmat@id.ey.com
priority to the other methods. +62 21 5289 5000

Japan*
*
Country chapter Resources the taxing authority examinations in Japan could best be
completed based on the is devoting to transfer pricing described as generalists. The Japanese
insights of Ernst & Young tax authorities place strong emphasis
professionals and publicly The Japanese tax authorities’ transfer on on-the-job training, internal training
pricing examinations are centrally (e.g., through its National Tax College),
coordinated by the National Tax Agency and cross-tax experience through internal
(NTA), which is ultimately under the rotations within various tax departments
control of the Japanese Ministry of (inside the RTBs or between RTBs and the
Finance. There are 11 Regional Taxation NTA).
Bureaus (RTBs) in Japan, but only the
three largest RTBs, (the Tokyo RTB, Industry focus
Osaka RTB, and Nagoya RTB) have
resources fully dedicated to transfer Factors such as the importance of
pricing examinations of large MNEs. intellectual property, profitability and
Transfer pricing examinations are whether the activities of the industry
conducted by the RTBs, who report to the are significant within Japan are
Director of International Examinations taken into account when identifying
at the Examination Division of the NTA’s specific industries for transfer pricing
Large Enterprise Examination and examinations. Industries that are currently
Criminal Investigation Department. The under particular scrutiny by Japan’s
role of the NTA is to provide central tax authorities are automotive and
direction with respect to transfer pricing automotive parts, consumer products,
enforcement efforts in order to ensure pharmaceuticals, medical devices,
uniform treatment of transfer pricing technology, banking and capital markets,
cases. and insurance.
The Japanese tax authorities currently Geographic focus

have approximately 157 FTE employees
involved in transfer pricing examinations, The Japanese tax authorities continue
of whom approximately 5% are located to target Japanese and foreign MNEs,
centrally within the NTA, with the generally focusing on taxpayers engaged
remainder at the RTBs (79% are located in transactions with Japan’s major trading
at the Tokyo RTB, 13% at the Osaka RTB partners or low-tax jurisdictions. In the
and 3% at the Nagoya RTB). While there current caseload of transfer pricing
has been an increase of approximately reviews, the most prevalent jurisdictions
25% in the number of full-time resources of the relevant counterparties are:
over the last two years, the existing level • The United States
of resources is not expected to increase
• Australia
significantly over the next two years.
• Singapore
The resources involved in transfer pricing

• China In cases where there are multiple
• Thailand comparables with a high degree of
comparability, the arm’s length price may
be computed as a weighted average of
those comparable results. In applying
scrutiny the TNMM, the most common PLIs used
The nature of transactions that are the operating margin and mark-up on
are typically the focus of Japanese total costs. Other PLIs, such as return on
transfer pricing examinations and the assets or Berry ratio, are typically less
corresponding composition of the current commonly used.
caseload of transfer pricing examinations
There is no formal or mandatory
are summarized in the table below.
guidance provided about adjustments to
Transaction Current comparable data. Such adjustments are
caseload % optional and are more frequently seen
Tangible goods 55% in APAs, under certain circumstances,
rather than in examinations.
Intellectual property 23%
(IP) (e.g., royalties,
licensing) Audit triggers
The RTBs decide which taxpayers will be
Financial transactions 2% subject to transfer pricing examinations.
(e.g., loans, other debt
instruments) The selection of taxpayers and the scope
of the audit are mainly driven by factors
Transfer pricing penalties such as:
Japan does not have a specific transfer • The profitability of the taxpayer
pricing penalty regime. Nonetheless, • Whether there is evidence of business
Japanese corporate tax avoidance restructurings
penalties may be imposed in transfer
pricing cases. The basic penalty is 10% • Issues identified during previous tax
of the additional tax. If the amount of audits of the taxpayer
the additional tax exceeds the greater • The nature and volume of the
of ¥500,000 or the amount of tax paid taxpayer’s related-party transactions
when the return was filed originally, a
15% penalty is applied. In the case of Indirect and customs tax
fraud, a penalty may be levied at 35%.
The delinquency tax (interest) rate may The work of Japan’s transfer pricing
range between 4% and 14.6% per annum. examination resources is not directly

integrated with that of indirect tax Transfer pricing methods
specialists. As such, there is also no
requirement that the same transfer price As outlined in Article 66-4 of the
be used for corporate (direct) tax and Special Taxation Measures Law, Japan’s
indirect tax purposes. transfer pricing regulations require the
application of the three transaction-
Comparable data based methods (i.e., CUP method,
RPM and cost plus method) first before
Japan’s tax authorities have a very considering the application of other
strong preference for local (i.e., methods (such as the TNMM or profit
Japanese) comparables. Pan-Asian split method).
comparables might be acceptable under
certain circumstances; for example, The use of the comparable profits
if no local comparables are available. method is considered inappropriate
The comparability criteria are generally in Japan. Although the TNMM was
strictly applied. introduced in Japan in 2004, its use in
transfer pricing examinations is rather
Japan’s transfer pricing regulations do limited, as Japan’s tax authorities
not specifically adopt the use of ranges
typically try to use a profit split approach
when testing whether a taxpayer’s
for inbound transactions. However, the
transfer pricing is at arm’s length.
TNMM has become the most frequently
In cases where there are multiple used method in APAs (where it is used for
comparables with a high degree of about 55% of the transactions covered by
comparability, the arm’s length price may APAs).
be computed as a weighted average of
those comparable results. In applying Advance Pricing Agreements
the TNMM, the most common PLIs used (APAs)
are the operating margin and mark-up on
Japan has a formal APA program
total costs. Other PLIs, such as return on
accessible to all taxpayers. In practice,
assets or Berry ratio, are typically less
Japan’s tax authorities reserve the right
commonly used.
to reject APA applications in certain
There is no formal or mandatory cases (e.g., where a local entity in
guidance provided about adjustments to Japan is still in a start-up period and
comparable data. Such adjustments are lacks sufficient history in the Japanese
optional and are more frequently seen market) or if the application is deemed
in APAs, under certain circumstances, to be part of a tax avoidance scheme.
rather than in examinations.
The APA team received 113 APA
requests during the year ended June

2008, representing an 8% increase involved in these cases are the United
over the previous year. Approximately States, Australia and Asian countries
222 applications were in progress (such as Singapore, China and Thailand).
during the year ended June 2008. It should be noted that litigation has
The average duration for conclusion of not been a common method used by
APAs is approximately one year in the taxpayers to resolve transfer pricing
case of unilateral APAs and two years disputes in Japan.
for bilateral APAs. Top treaty partners
that have concluded bilateral APAs with Current influences on transfer
Japan are the United States, Australia pricing
and Singapore.
Additionally, approximately 125 cases Japan is responsive to implementation
of double taxation were resolved during of centralized business and tax models.
the year ended June 2008, under the Japan’s tax authorities tend to closely
competent authority procedure. The examine and scrutinize business
average duration of such proceedings restructurings that would result in
was between one and two years. a reduction of profits in Japan. For
instance, if, in the course of setting up a
regional principle structure in a low-tax
Yield/performance of transfer jurisdiction such as Singapore, a full-
pricing reviews fledged distributor in Japan is converted
into a commissionaire, the restructuring
The main performance measurement
is likely to attract scrutiny from Japan’s
criteria for the effectiveness of transfer
tax authorities.
pricing examination activities in Japan
are the number of transfer pricing Likely trends in transfer pricing
examinations undertaken and the
activity
amount of income adjustments.
Japan’s tax authorities are likely to place
Transfer pricing disputes greater emphasis on dispute resolution
over the next two years.
In the context of transfer pricing
disputes, there are currently 279 cases
in the MAP stage in Japan. Taxpayers
seeking resolution in these cases are
mainly in sectors such as the automotive,
automotive parts and electronics Ernst & Young contact
industries. The top three jurisdictions
Kai Hielscher
kai.hielscher@de.ey.com
+49 89 14331 16711

Korea
Resources the taxing authority selection of taxpayers is done on a

is devoting to transfer pricing random, computerized basis.
The National Tax Service (NTS) Types of transactions under

administers taxes in the Republic
scrutiny
of Korea. In principle, there is no
centralization with respect to transfer Although there is no formal focus on
pricing reviews, and any of the local specific transaction types by the NTS,
tax offices may review transfer pricing the NTS has identified that a majority
related issues. However, there is a of the transactions under review in the
central division in charge of examining context of APAs involve tangible goods,
cross-border intercompany transactions IP or intra-group services. There have
involving large corporations, and the also been instances of APA requests for
APA office of the NTS (formally, the cost sharing/pooling arrangements.
International Cooperation Division)
reviews and evaluates all APA Transfer pricing penalties
applications.
The NTS has the power to impose
The Seoul Regional Tax Office has transfer pricing penalties. There are two
approximately 100 FTE examiners types of penalties that may be imposed.
involved in transfer pricing reviews, in
• An underreporting penalty —
addition to the regular tax examiners at
approximately 10% of the additional
the local tax offices who are sometimes
tax resulting from a transfer pricing
engaged in transfer pricing reviews.
adjustment
This level of resourcing has remained
consistent over the last two years. • An underpayment penalty (similar to
However, in response to the increasing an interest payment) — approximately
number of APA requests, resources 10.95% per annum of the additional tax
involved in APAs are anticipated to for the period following the due date
increase (whereas the amount of for the filing of the corporate income
resources for transfer pricing reviews tax return up to the date of payment
is expected to remain unchanged). In Additionally, a penalty of up to
terms of their backgrounds, the majority KRW30 million may be imposed for
of the tax examiners are trained in a failure to submit documentation
accounting, tax law or economics. requested by the NTS within the specified
time (normally 60 days).
Industry focus
Where imposed, penalties have
There is no formal program prioritizing historically ranged up to 25% of the
the review of taxpayers in a particular additional tax resulting from a transfer
industry or industries. In fact, the

pricing adjustment. Penalties are inter-quartile range is the preferred
calculated on a computerized basis. The method for calculating the allowable
NTS has also set up an internal review arm’s length range, as defined in the
system as well as internal guidelines Law for Co-ordination of International
governing the enforcement of penalties, Tax Affairs (LCITA). The Korean transfer
to ensure their consistent application. pricing regulations prescribe generally
The current approach towards penalties acceptable PLIs. The most reasonable
is not expected to change over the next PLI, however, is determined on a case-
two years. specific basis. In the context of pooling
versus the averaging of financial data,
Audit triggers the pooling method is not applied in
Korea.
Instigation of a transfer pricing
audit is undertaken on a centralized, There is no formal or mandatory
computerized basis by the NTS and is guidance provided for undertaking
mostly (i.e., in 90% of cases) triggered adjustments to comparable data. Such
by a standard audit cycle/program. adjustments are optional and are likely
to be supported by the NTS if they are
Indirect and customs tax justifiable and enhance the comparability
of the information with the tested party.
The commissioner of the Customs
office and the commissioner of the NTS
recently entered into a Memorandum
of Understanding to share information According to the LCITA, the traditional
in relation to prior transfer pricing transaction methods — the CUP method,
examinations. However, there is no the RPM and the cost plus method — take
requirement that the same transfer price priority over the transactional profit
be used for corporate (direct) tax and methods (i.e., the profit split method and
indirect tax purposes. the TNMM). In cases where none of these
methods are applicable, the regulations
Comparable data permit the use of any other reasonable
method(s).
The NTS prefers the use of local
comparables to eliminate the effects of
market differences. However, regional
comparables are also permissible on a (APAs)
case-by-case basis. The APA process in Korea is accessible
In preparing and presenting comparable to all taxpayers. Jurisdictions that
data, generally three to five years of have concluded bilateral APAs with
financial data need to be used. The Korea are the United States, Japan and
member states of the European Union.

It is anticipated that more APAs will be Likely trends in transfer pricing
concluded with China in the future. activity
The APA team received 32 APA requests The NTS expects to place greater
from taxpayers during 2007; 7 bilateral emphasis on transfer pricing compliance
APAs and 13 unilateral APAs were measures over the next two years.
processed during that year. According
to LCITA guidelines, a unilateral APA
must be processed within two years. The
average processing time for a bilateral
APA is approximately two to three years.
The APA office is making efforts to
reduce the processing time for unilateral
and bilateral APAs. The NTS began
publishing APA annual reports in 2008;
the first report pertains to the year 2007.
The number of requests for resolution

under the competent authority
procedure has been increasing recently.

pricing
Korea is responsive to OECD initiatives.
Changes to the OECD Transfer Pricing
Guidelines may trigger similar changes
to Korea’s transfer pricing regulations.
The 2006 revision to Korea‘s transfer
pricing regulations is an example of such
an effect. Efforts are being made to
decrease the processing time for APAs,
especially unilateral APAs. The new
government’s business-friendly approach
has helped sustain a transparent
transfer pricing policy and overall tax
Ernst & Young contact environment.
Kyung Tae Ko
kyung-tae.ko@kr.ey.com
+82 2 3770 0921

Malaysia
Resources the taxing authority In terms of backgrounds, the 13 transfer

is devoting to transfer pricing pricing specialist resources consist of
(ranked in order by percentage of total
The Inland Revenue Board of Malaysia resources) accountants, economists
(IRB), which administers Malaysia’s and those with business and finance
taxes, recently established a department backgrounds. In addition to the transfer
entirely dedicated to transfer pricing- pricing specialists, the rest of the
related issues. The Jabatan Cukai resources are generalists with some
Multinasional, or Multinational Tax transfer pricing knowledge. The IRB
Department (MTD), forms part of the anticipates increased training, both
Compliance Division of the IRB. It is internal and external, with more mature
structured with subdivisions responsible jurisdictions to increase the number
for different aspects of the IRB’s transfer and proficiency of its transfer pricing
pricing activities, namely: the APAs/ specialists.
MAP subdivision, the Transfer Pricing
Multinational Audit subdivision, the Industry focus
Transfer Pricing Policy subdivision
and the Transfer Pricing Compliance The IRB does not target specific
subdivision. industries. Instead, transfer pricing
audit targets are selected by the IRB’s
Two years ago, only a few FTE resources computer system. A score is attached
were dedicated to transfer pricing, and to high risk companies. A company’s
resources from the large pool of audit ranking as high-risk is attributable to a
and investigation personnel would share number of criteria not specified by the
the transfer pricing responsibilities. The IRB. These criteria do, however, include
MTD’s Multinational Audit subdivision performance metrics such as profitability
now has 13 FTE resources dedicated as well as the amount of related-party
to transfer pricing examinations, transactions and dealings with low-tax
which comprises approximately half jurisdictions/tax havens. If ranked as high
the total number of resources within risk, companies within the same industry
the department. These employees are may be revisited.
predominantly field-based, whereas the
remaining resources in the APAs/MAP, The IRB has examined companies in
Compliance, and Policy sub-divisions are the consumer products, media and
based in the central unit. The IRB expects entertainment, pharmaceuticals,
the number of resources to grow to 40- technology and telecommunications
50, as a department, to cope with the industries.
anticipated workload brought about by
the increase in focus on transfer pricing
by the IRB.

Geographic focus 35% (where no transfer pricing
documentation is available) and 45%
The IRB does not target companies in (for general corporate tax adjustments)
certain jurisdictions for transfer pricing on the balance of tax underpaid.
reviews. These graduated rates, however, are
Rather, it leverages on the score system not formalized, although they are
and the company designated as a communicated to taxpayers.
high-risk company through the score The IRB is considering the relative merits
system. Any perceived focus on one of issuing a formalized list of graduated
jurisdiction (i.e., over another) is merely rates of penalties to ensure transparency
due to the larger proportion of MNEs and consistency in the application of
from that jurisdiction being based in penalties levied for various transfer
Malaysia. The IRB does not specifically pricing-related offences. Penalties
target particular jurisdictions but would currently range from 25% to 50% of
examine companies having dealings with the balances of tax underpaid by the
low-tax jurisdictions/tax havens based on taxpayer.
circumstances.
The average penalty imposed was
Types of transactions under between 25% and 35% of the balance
of tax underpaid by the taxpayer. The
scrutiny
IRB expects the severity of the current
The IRB does not select companies penalty regime to remain the same as
for transfer pricing review based on it maintains its campaign to increase
transaction classes. The selection is overall tax compliance. The IRB is
score-based and computer-generated. expected to impose lower penalties on
However, there appears in practice to be transfer pricing adjustments, where
a larger number of transfer pricing audits taxpayers prepare contemporaneous
done on tangible goods followed by documentation, based on the taxpayer’s
transactions involving IP and intra-group attempt in good faith to determine and
services. comply with the arm’s length principle.
Transfer pricing penalties Audit triggers

The IRB has graduated rates of penalties The MTD decides which companies are
in place (currently imposed on taxpayers selected for audit. Various statistics in
whose financials have been subject to the computer-generated score attached
transfer pricing adjustments). These to a prospective audit target are
range from an average of 25% (in examined. The main factors considered
cases where taxpayers have transfer involve the company’s profitability as well
pricing documentation prepared), as the proportion/extent of its related-

party transactions and dealings with Working capital adjustments are optional,
low-tax jurisdictions/tax havens. These and the IRB generally accepts them,
criteria (ranked in order of prevalence) provided it can be clearly demonstrated
are: that the relevant adjustments increase
the comparability with the tested
• Profitability
party. Additionally, the IRB may require
• The volume of related-party that working capital adjustments be
transactions undertaken by tax payers performed on the comparable set for
their consideration.
• Dealings with low-tax jurisdictions/tax
havens
Indirect and customs tax Under the IRB Transfer Pricing
Guidelines issued in July 2003, there
The IRB does not actively share
is a hierarchical order of preference
information with the Royal Customs and
of the CUP method, RPM and cost
Excise Department (RCED) because
plus method (or traditional methods)
of confidentiality provisions in tax
over the TNMM and profit split method
legislation. There is no official legislative
(transactional methods). The IRB will
or regulatory requirement that the same
accept all transfer pricing methods
transfer price be used for both corporate
based on their respective merits in
direct tax and indirect tax purposes.
relation to their reliability in examining
arm’s length pricing. However, there
Comparable data
is no direct reference to the CPM in
The IRB has a strong preference for the IRB Transfer Pricing Guidelines.
local country comparables, due to the There are no additional transfer pricing
enhanced comparability on the basis methods provided in the IRB Transfer
of similar economic circumstances. Pricing Guidelines, but the IRB would
However, there are no formal consider these methods based on their
requirements to present comparable respective merits. The hierarchical order
data in a particular format in transfer of preference of transfer pricing methods
pricing documentation. (i.e., traditional versus transactional) is
publicly stated in the IRB Transfer Pricing
The IRB in practice examines the tested
Guidelines.
party’s margins in reference to the arm’s
length range of the comparables on a
year-by-year basis, instead of pooled, Advance Pricing Agreements
averaged or weighted-average statistics (APAs)
over the period under examination. APAs are specifically provided for in
local legislation (Section 138C of the

Malaysian Income Tax Act, 1967), nor does it anticipate any change at this
effective 1 January 2009. Formal stage. The IRB acknowledges that this
guidelines on the specifics of the APA crisis will affect taxpayers to different
application process are expected to be degrees. The economic circumstances
released shortly. The IRB has received of taxpayers are being considered by the
some applications for unilateral APAs, IRB in examining the arm’s length nature
in spite of the lack of formal process of their related-party transactions.
guidelines. Participation in the APA
The IRB reiterates that most changes
program is optional for taxpayers;
or developments, such as the specific
however, the terms of the APAs are at
legislation of Section 140A of the
the discretion of the IRB. Of the current
Malaysian Income Tax Act, 1967 on
caseload, most applications are dealing
transfer pricing and the issuance of
with unilateral APAs.
IRB Transfer Pricing Guidelines and
further rules/guidance, are driven by the
taxpayers. All factors effecting change in
pricing reviews
transfer pricing legislation or regulation
The IRB measures the performance of will be considered based on their impact
its MTD based on cases settled as well in a Malaysian context. The IRB has no
as on the overall tax revenue collected fixed time frame for these changes, as
by the IRB. While the increase in number transfer pricing legislation/regulation
of assessments generated by the MTD is still a relatively new area; however,
constitutes a part of this overall tax changes are anticipated in due course.
revenue, this performance metric is
indicative of the increased compliance Likely trends in transfer pricing
amongst taxpayers, which is the overall activity
goal of the Compliance Division of the
The IRB will continue to increase its
IRB as a whole.
focus on transfer pricing. Its overall
target is an increase in tax revenue as
Transfer pricing disputes a whole, as indicative of an increased
With respect to disputes, there are two level of compliance from taxpayers.
ongoing cases in MAPs involving transfer Additionally, the IRB hopes to continue
pricing adjustments. to educate taxpayers as to the benefits
of compliance with a view towards
Current influences on transfer continuing to increase compliance
pricing statistics in the nation.
The IRB has not made any change in
Janice Wong policy or practice due to the current
janice.wong@my.ey.com global economic situation and influences,
+6 03 7495 8223

New Zealand

is devoting to transfer pricing The IRD does not target companies in
The Inland Revenue Department (IRD) certain jurisdictions for transfer pricing
administers taxes in New Zealand. reviews.
Within the IRD, transfer pricing reviews In the current caseload of transfer
are carried out by a centralized unit pricing reviews, the top five most
which acts as an advisor and provides prevalent jurisdictions of the relevant
assistance to the general IRD field audit counterparties are:
operations. There has been an increase
in the number of FTE resources involved • Australia
in transfer pricing examinations, from • The United States
approximately three and a half to five
and a half over the last two years. This • The United Kingdom
number is not expected to change over • Japan
the next two years.
• Germany
In terms of background, the transfer
pricing resources of the IRD consist of Types of transactions under
one economist, while the other resources scrutiny
are accountants. All of these resources
IP transactions and financial transactions
are specialists in transfer pricing.
are currently the focus of the IRD for
Industry focus transfer pricing review. Key transactions
that make up the current caseload of
New Zealand transfer pricing audits transfer pricing reviews (ranked in order
currently focus on the automotive, of prevalence) are:
banking and capital markets, insurance,
oil and gas, pharmaceuticals, technology, • IP-related transactions (e.g., royalties,
and telecommunication industries. licensing)
Significant business activity in New • Financial transactions (e.g., loans,
Zealand, the importance of IP and the other debt instruments)
predominance of foreign MNEs are the
factors driving the selection of industries
for particular focus. • Tangible goods
The selection of industries currently • Cost sharing/cost pooling
under specific focus from a transfer arrangements (although fairly
pricing perspective is widely uncommon in New Zealand)
communicated to taxpayers. This list of
industries is reviewed annually.

Transfer pricing penalties • The nature of related-party
transactions
New Zealand does not have a specific
transfer pricing penalty regime; the • A standard audit cycle or program
general penalty regime is applied. A • Previous tax audits of the taxpayer
consistency committee looks at the
imposition of penalties across all tax Indirect and customs tax
types. Over the last two years, penalties
were applied in up to 25% of cases The transfer pricing enforcement
where transfer pricing adjustments resources do not work in an integrated
were issued. Where penalties were way with indirect tax specialists.
imposed, they generally ranged up to However, the IRD has a close relationship
20% of the transfer pricing adjustment with Customs. The IRD can ask Customs
— the average shortfall penalty rate for information. Despite the exchange
applied for lack of reasonable care or of information, there is no formal
an unacceptable tax position. The rate requirement that the same transfer price
is reduced to 10% for a first offense. It be used for corporate (direct) tax and
is not anticipated that this approach to indirect tax purposes.
penalties will change in the next two
years. Comparable data
The IRD has no strict requirement for
Audit triggers local comparables. The data that is
Transfer pricing audits are instigated considered as the best comparable
through a general audit, where transfer and exhibits the closest key economic
pricing questionnaires are sent to clients. characteristics is used. However,
The central Transfer Pricing Unit has since the markets in New Zealand and
input into the process. A variety of Australia are considered to be similar,
considerations are taken into account comparables from these locations are
in determining which taxpayers to preferred. The IRD prefers comparables
audit, including (ranked in order of from the United States or the United
prevalence): Kingdom over comparables based on
Asian companies. The IRD factors a risk
margin (1% to 3%) into transfer pricing
assessment by the IRD
studies that rely wholly on overseas
• The profitability of the local taxpayer comparables, as New Zealand is a
relatively small market. The IRD gives
recognition to economies of scale,
restructurings
competition, higher cost of capital
• The volume of related-party and higher distribution costs in New
transactions undertaken by the Zealand, when using US or European
taxpayer comparables.

In preparing and presenting comparable 1) The IRD does sanction cost
data, there are no strict requirements, contribution and cost sharing
and each case is evaluated on the basis methods.
of its own circumstances. 2) The IRD has a practice note that talks
of a rule of thumb for royalties
The IRD expects three to five years of being no more than 25% of EBITR.
financial data and emphasizes creating a
reliable comparable set without strictly
prescribing any particular acceptable Advance Pricing Agreements
points within a range. In terms of PLIs, (APAs)
the IRD generally accepts weighted
New Zealand has a formal APA program.
averages and often uses the EBIT margin,
A unilateral APA is obtained through the
Berry ratio, and other relevant PLIs.
binding rulings process that prescribes
The IRD views adjustments with some certain general formalities as to
skepticism. With regard to working applications. The IRD receives five to
capital adjustments, the IRD considers seven applications per year. The IRD has
that the complex algebra is “generally given open access to the APA program,
not worth the trouble as the resulting for taxpayers. There are five applications
adjustments are very minor.” The IRD currently in process for the APA
places greater emphasis on identifying if program, out of which three applications
and why there are significant deviations are for bilateral APAs and two
between the working capital levels applications are for unilateral APAs. The
of the taxpayer and the suggested top two countries involved for bilateral
comparables, rather than prescribing APAs are Australia and the United States.
standard adjustments. It generally takes six to twelve months to
complete an APA process. Approximately
Transfer pricing methods three competent authority cases are
resolved annually, and it takes six
There is no formal hierarchy between months on an average to resolve these
transfer pricing methods. Local legislation cases. There is currently one competent
supports five methods (CUP, resale price, authority case unresolved.
cost plus, profit split and CPM). The CPM is
considered of no practical difference to the
TNMM, and profit split includes full profit
split or residual profit split. The IRD will, in pricing reviews
practice, consider any method that provides The IRD measures the effectiveness
the most reliable solution. Two interesting of transfer pricing review activities
points of note in relation to transfer pricing by coverage of the taxpayer base,
methods in New Zealand are: particularly at the large enterprise level.

It looks at how effectively it is monitoring
transfer pricing policies and results on
the taxpayer base. The IRD seeks to
review all large taxpayers periodically as
part of an ongoing review process.

ongoing case and one pending case
in domestic appeals (preceding court
action). No transfer pricing-specific case
has proceeded to be heard by courts in
New Zealand as yet.

activity
The IRD has stated their three areas of
future focus to be:
1) Arrangements which look to import
losses into New Zealand, generally
ensuring that loss-making companies
justify their performance (i.e., that it
is not as a result of pricing policies)
2) Companies looking to take advantage
of undue volatility of spreads in credit
markets
3) Adventurous pricing of hybrid debt
instruments, such as mandatory
convertible notes
In addition to these areas, the IRD

will focus on intangibles, business
restructurings and financial
arrangements.
Mark Loveday
mark.loveday@nz.ey.com
+64 9 300 7085

Singapore*
Resources the taxing authority The IRAS plans to undertake field visits *
Country chapter
is devoting to transfer pricing to taxpayer offices and facilities as part completed based on the
of the consultation process for taxpayers, insights of Ernst & Young
The Inland Revenue of Singapore (IRAS) i.e., where queries are not sufficiently professionals and publicly
administers taxes in Singapore. Transfer addressed in the initial questionnaires.
pricing is a relatively new area of focus Currently, however, the IRAS does not
in Singapore, so the approach of the have transfer pricing specialists based in
IRAS towards transfer pricing is at a the field.
developmental stage. The comments
made below are based on current There was an increase in the number of
experience, and the approaches to transfer FTE resources involved in transfer pricing
pricing may develop further/may change. examinations two years ago — from five to
six. There are approximately two resources
Within the IRAS, transfer pricing based in the central unit. The number
reviews are carried out by a group of of transfer pricing resources is likely to
seven transfer pricing specialists who increase over the next two years due to
handle transfer pricing cases and other the level of requests for APAs as well as
international tax work. Another team in the IRAS’s desire to facilitate the transfer
the corporate tax division undertakes pricing consultation process further.
transfer pricing consultations (and
related) work. The group of seven The team that deals with transfer pricing
transfer pricing specialists is involved in has resources with a mix of backgrounds.
a relatively large number of APAs and The team is trained in transfer pricing
some MAP cases. The corporate tax specifically and tends to deal with a wide
division is involved in the initial phases of range of transfer pricing issues.
transfer pricing consultation work, such
as issuing questionnaires and collating Types of transactions under
responses. Transfer pricing consultation scrutiny
is the IRAS’s process for ascertaining
The IRAS’ focus on transfer pricing is
the level of taxpayers’ compliance with
relatively new in Singapore. The IRAS
Singapore through the issuance of
is not focusing on a particular type of
questionnaires, Transfer Pricing (and
transaction to target for transfer pricing
related) Guidelines, field visits and
reviews. However, the IRAS has recently
meetings. The consultation process
issued guidelines relating to intra-group
involves gathering information about
service charges and intra-group loans.
how taxpayers are conducting their
transfer pricing practices in the light Although the IRAS does not restrict its
of the recommendations made in the reviews/consultations to these types
Singapore Transfer Pricing Guidelines. of transactions, historical practices

in Singapore relating to interest- has not imposed penalties on transfer
free related-party loans and other pricing-specific issues.
transactions remunerated on a cost plus
The IRAS anticipates that appropriate
basis with a markup of 5% are likely to
compliance will occur as a result of clear
need clarification. The guidelines indicate
guidelines from the IRAS and further
that the IRAS expects appropriate
specific recommendations made through
consideration of the arm’s length
the transfer pricing consultation process.
principle in relation to both loans and
Hence, the IRAS anticipates that it will
services. In the case of loans, the IRAS
not need to impose a significant level
expects Singapore lenders to lend on
of penalties going forward in transfer
terms consistent with the arm’s length
pricing cases. However, it is anticipated
principle in relation to cross-border loans
that penalties will inevitably be assessed
(and this must be in place by 1 January
in the next two years, owing to a stronger
2011). In the case of services, the IRAS
focus on transfer pricing matters.
believes cost plus 5% to be appropriate
for routine services as defined in the
Singapore guidelines. However, the
Audit triggers
IRAS requires the method selection to Given the relatively recent focus on
be appropriately supported and the transfer pricing in Singapore, there is
economic analysis to be appropriately no significant history of or indicators
documented for other types of services. for transfer pricing audits in Singapore.
General and typical audit triggers seen
Historically, the IRAS has reviewed and
in other countries are likely to give rise
raised queries predominantly about
to transfer pricing queries from the IRAS
inbound and outbound service charges.
and potentially further review, such as:
Transfer pricing penalties • Whether the taxpayer has

appropriately assessed and
Singapore does not have a specific
documented its transfer pricing risk
transfer pricing penalty regime; the
general penalty regime is applied. Under • The profitability of the local taxpayer
the general tax provisions relating to • The volume of related-party
the understatement of income, the transactions undertaken by the
penalty range is 100% to 400% of the tax taxpayer
underpaid. Penalties are most likely to be
applied if the taxpayer has insufficient or
no transfer pricing documentation when
a transfer pricing adjustment is made. Transfer pricing enforcement resources
The IRAS has laid down procedures to share information across the IRAS (to
ensure that penalties are appropriately the extent necessary).
applied and reviewed. To date, the IRAS

The IRAS expects the same transfer price Guidelines. It believes that certain
to be used for direct tax and indirect tax circumstances will necessitate
purposes, and any differences between adjustments be made to data to
the accounting and tax positions needs to improve comparability. The IRAS
be appropriately explained when queried expects the rationale for making
by the IRAS. financial adjustments to be explained
in the taxpayer’s transfer pricing
Comparable data documentation.
The IRAS prefers local comparables. The

IRAS understands that the sample size
of Singapore uncontrolled comparable The IRAS expects taxpayers to use
data for certain types of transactions appropriate methods to remunerate
can be limited, and, therefore, it accepts related-party transactions. The IRAS
appropriate regional comparable data recognizes the five transfer pricing
in such cases. However, the IRAS would methods outlined in the OECD Guidelines.
expect the use of Singapore-based Cost sharing and the strict flow-through
CUP in the case of loans denominated of costs in certain circumstances are
in Singapore dollars, as it believes the other two methods allowed by
Singapore-based CUPs are readily the IRAS. This position is based on
available for this purpose, based on recommendations that the IRAS has
public data. The IRAS expects the made in the Singapore Transfer Pricing
taxpayer’s analyses to support the basis Guidelines as well as in recent guidelines
for the geographic territories covered in on related-party loans and services.
any benchmarking data. The IRAS believes that the method
that produces the most reliable results
should be selected and applied (taking
data, the IRAS does not have any specific
into account the availability of data and
requirements; however, it does agree
accuracy of adjustments).
with the recommendations of the OECD
Transfer Pricing Guidelines on economic
cycles and the need to consider an
appropriate period of data in transfer (APAs)
pricing analyses. The IRAS expects the Singapore has a formal APA program.
taxpayer to document the reason(s) for The IRAS’s circular (Supplementary
selecting the applicable PLI and document Administrative Guidance on Advance
supporting reasons for why certain Pricing Arrangements, published on
statistical techniques have been used. 20 October 2008) outlines procedures
The IRAS does refer to adjustments relating to unilateral, bilateral and
in the Singapore Transfer Pricing multilateral APAs. Before the publication

of this circular, the IRAS also referred to Current influences on transfer
the availability of APAs in the Singapore pricing
Transfer Pricing Guidelines issued on
23 February 2006. The IRAS expects to see the impact of
the current economic environment on
The IRAS receives approximately ten the type of documentation prepared
applications per year, and this number and on the commercial reasons given
is expected to increase. The IRAS has to explain why financial results and/or
given taxpayers open access to the APA transfer pricing methods have changed.
program. However, it is at the discretion
of the IRAS to accept the APA request.
The IRAS commits to respond to the
taxpayer if it will process the request
activity
further within one month of the pre- The IRAS will continue to focus on
filing meeting request. The IRAS wants understanding the level of taxpayer
to make APAs available to all taxpayers compliance through the transfer
that request an APA. However, if an pricing consultation process. The IRAS
APA is rejected, the IRAS provides an expects taxpayers to continue to focus
appropriate explanation to the taxpayer on factually accurate and technically
outlining its reasons for not accepting the appropriate analyses in their transfer
request for further consideration. pricing documentation. The IRAS will also
focus on providing support to taxpayers
More than 14 applications for bilateral
through APAs and MAP (where
APA and 4 applications for unilateral APAs
appropriate).
are currently being processed. In general,
approximately 75% of the applications
received by the IRAS deal with bilateral
APAs, while the remaining deal with
unilateral APAs. The top three countries
involved in bilateral APAs are Japan,
China and Australia. It generally takes two
years to complete a bilateral APA process,
and typically six to twelve months to
complete a unilateral APA process.
pricing reviews
The IRAS is focusing on measuring
Jesper Solgaard compliance with, as well as facilitating,
jesper.solgaard@sg.ey.com APA and MAP requests where applicable.
+65 6309 8038

Taiwan*
Resources the taxing authority • I► P-related transactions (e.g., royalties, *

Country chapter
is devoting to transfer pricing licensing) completed based on the
The Taxation Agency is responsible for Transfer pricing penalties professionals and publicly
available information.
approving transfer pricing adjustment,
supervising transfer pricing examinations The Taiwan Taxation Agency has the
and evaluating effectiveness of transfer power to impose transfer pricing
pricing reviews within Taiwan. The Audit penalties. However, no transfer pricing
Division of the Taxation Agency and local penalties have been imposed to date. The
offices of the National Tax Administration authority expects an increase in transfer
are authorized to establish task forces to pricing penalty assessments over the
undertake transfer pricing examinations. next two years.
The tax staff members are not Audit triggers

fully dedicated to transfer pricing
examinations. When a transfer pricing Transfer pricing audits are instigated
review is considered necessary, it is by the relevant decentralized taxation
performed by tax staff who are also offices, depending on the head count
responsible for other tax activities. Most of available staff and specific need.
of the transfer pricing resources are Typically, corporations identified as
allocated to audit units in local offices and potentially high risk (e.g., those more
the Fifth Division of the Taxation Agency. likely to underreport income) are
selected as targets for transfer pricing
Geographic focus audits. The selection of taxpayers
for review is based on a number of
Practical considerations drive the choice
considerations, such as:
of jurisdictions for review. The tax
authority specifically targets companies • The outcome of a risk-based
with intercompany transactions with assessment
affiliates located in low-tax jurisdictions. • The nature of related-party
transactions
Types of transactions under • The volume of related-party
scrutiny transactions
The following types of transactions • Any transfer pricing issues identified
are currently the focus of the Taxation during previous tax audits of the
Agency for transfer pricing reviews taxpayer
(ranked in order of prevalence):
• The transfer of tangible goods Indirect and customs tax
• Financial transactions (e.g., loans, The transfer pricing auditors are given
other debt instruments) access to data stored on the indirect tax

(VAT) database. However, there are no Transfer pricing methods
provisions requiring arm’s length transfer
pricing in the context of indirect taxes The transfer pricing methods that are
(specifically VAT) in Taiwan. generally considered acceptable are
mentioned in Taiwan Transfer Pricing
Guidelines. Typically, taxpayers are
Comparable data
required to apply the most appropriate
Regional (i.e., within the same continent transfer pricing method based on the
as the taxpayer) comparables are type and nature of the related-party
generally acceptable. transactions.
In preparing and presenting comparable According to the Taiwan Transfer Pricing
data, there are specific requirements Guidelines, the transfer pricing methods
in relation to the number of years of available to taxpayers include the CUP
financial information, the method for method, the RPM, the cost plus method,
determining an appropriate PLI, and the the CPM, the profit split method and
pooling or averaging of financial data. other appropriate methods approved by
the Ministry of Finance.
Transfer pricing adjustments are
mandatory when appropriate.
According to the Taiwan Transfer Pricing (APAs)
Guidelines, Section 7, Article 8, “If
there is a substantial difference on the Taiwan government has issued the
aforesaid factors (characteristics of the Directions Governing the Application
assets or services, functions performed, for an Advance Pricing Arrangement by
contractual terms, risks assumed, a Profit-seeking Enterprise. The local
economic and market conditions, offices of the National Tax Administration
business strategies, and other factors are in charge of processing APA
affecting the degree of comparability) applications.
between the circumstances of a profit-
seeking enterprise and its Unrelated Yield/performance of transfer
Parties, or between its Controlled pricing reviews
Transaction and a Uncontrolled
Transactions made between Unrelated
review activities is measured by factors
Parties, an adjustment shall be made to
such as an increase in the tax yield, the
the prices or profits in the comparable
percentage of review cases involving
Uncontrolled Transaction taking into
adjustment to a taxpayer’s income and
account the impact of such differences.”
the extent of experience sharing.
However, there is no mandatory guideline
for how such adjustment shall be made.

activity
The Taiwan Taxation Agency expects
to place greater emphasis on transfer
pricing compliance measures as well as
on interaction with customs and other
indirect taxes over the next two years.
George Chou
george.chou@cn.ey.com
+86 21 2228 8888

Thailand*
*
Country chapter Resources the taxing authority the industry (for instance, consistent
completed based on the is devoting to transfer pricing losses, diminishing profits or profits
insights of Ernst & Young lower than the confidential benchmark
professionals and publicly The Thai Revenue Department has a range of profits set by the Thai Revenue
specific transfer pricing team at the Department) and the importance of IP
head office under the Bureau of Large to the industry are taken into account
Business Tax Administration (LTO). In in identifying specific industries for
addition to performing transfer pricing scrutiny. The industries currently under
reviews of large taxpayers, the LTO’s focus for transfer pricing reviews in
transfer pricing team also handles all Thailand are automotive, consumer
unilateral, bilateral and multilateral APA products, media and entertainment,
applications. metals, technology (plus electronics),
It should be noted, however, that while telecommunication, and power
transfer pricing reviews are centralized, and utilities. This list is generally
the tax authorities at Area Revenue kept confidential and is revised at
Offices and Area Revenue Branch Offices the discretion of the Thai Revenue
have the power to request transfer Department.
pricing documentation and even carry
out transfer pricing assessments on Geographic focus
local taxpayers. The tax officers at Area Practical considerations, based on the
Revenue Offices and Area Revenue Thai Revenue Department’s discretion,
Branch Offices are generalists and follow drive the choice of jurisdictions
the Thai Transfer Pricing Guideline for review. Typically, transactions
closely when performing their duties. involving major trading partners and
There are approximately 13 transfer perceived low-tax jurisdictions as
pricing specialists at the LTO who have well as circumstances of significant
strong technical backgrounds in transfer intercompany transactions and/or
pricing issues. This level of resourcing consistent losses are reviewed.
has changed over the last two years,
decreasing from 15 transfer pricing Types of transactions under
specialists to the current resource level scrutiny
of 13.
The transactions currently under focus
In terms of background, the transfer for transfer pricing reviews in Thailand
pricing resources are mostly economists are:
and registered accountants.
• Transactions involving tangible goods
Industry focus • IP-related transactions (e.g., royalties,

licensing)
Factors such as the profitability of

• Intra-group services Revenue Department. The selection of
the taxpayer and the scope of the audit
• Cost sharing/cost pooling
are typically driven by considerations
arrangements
(ranked in order of prevalence) such as:
Transfer pricing penalties • The profitability of the taxpayer
Thai law does not provide for specific • Whether there is evidence of business
transfer pricing penalties. Instead, restructurings
penalties and surcharges related to the
• The nature and volume of the
assessment of additional corporate taxpayer’s related-party transactions
income tax and the reduction of
deductible expenses under the Thai
corporate income tax system apply
to transfer pricing assessments. The The Thai tax authorities use their
current rate of the surcharge is 1.5% per discretion in sharing information with
month (or 18% per annum) applied to customs and indirect tax specialists.
the shortfall tax, capped at 100% of the As such, there is no requirement that
amount of the shortfall tax. In addition, a the same transfer price be used for
one-time penalty may be imposed on the corporate (direct) tax and indirect tax
shortfall tax if the tax authority issues purposes.
a notice of assessment. In practice,
however, most transfer pricing audits are Comparable data
closed or settled by way of negotiation
The local database is available to the
before the authority issues the notice of
Thai tax authority; therefore, local
assessment.
country comparables are preferred. In
Over the last two years, penalties have cases where local comparables are not
been applied in up to 18% of the cases available, regional comparables may be
where transfer pricing adjustments were used at the tax authorities’ discretion.
issued. Where penalties were imposed,
they generally ranged up to 18% of the
data, there are specific requirements
shortfall tax. It is not anticipated that this
in relation to the number of years of
approach to penalties will change in the
financial information, the use of simple
next two years.
versus weighted averages, the method
for calculating an arm’s length range
Audit triggers and the method for determining an
Typically, transfer pricing audits are appropriate PLI.
initiated pursuant to annual (at least
No formal or mandatory guidance is
once a year) routine visits by the Thai
provided about adjustments to be made

to comparable data. Such adjustments Yield/performance of transfer
are optional and are likely to be pricing reviews
supported by the Thai tax authorities if
they enhance the comparability of the The Thai tax authority has no specific
information with the tested party. tax yield targets set internally; therefore,
there is no measurement as to the
Transfer pricing methods effectiveness of its TP review activities.
Over the next two years, the Thai tax
In practice, the TNMM is the most
authority expects to place greater
commonly applied transfer pricing
emphasis from a transfer pricing
method. Other acceptable methods
perspective on compliance measures.
include RPM, cost plus and profit split.

(APAs) It should be noted that most transfer
pricing disputes are typically closed or
Thailand has no formal APA program, but settled by way of negotiation before
all Thai taxpayers have the right to enter domestic appeal. It is understood
into an APA. The APA team has received that currently there are four cases of
fourteen bilateral APA requests to date, corresponding adjustment in MAP. The
out of which only two bilateral APAs with taxpayers in these cases are in the
Japan have been concluded. Currently, electronics industry with Japan as the
three bilateral requests are in process, counterparty.
while the remainder are still pending.
The two bilateral APAs with Japan were
concluded in just under three years. The
number of APA requests is expected to
increase in the next two years.
Following increasing bilateral APA

requests from Japan (as a result of
stringent transfer pricing reviews of Thai-
Japanese transactions in Japan), the
Thai Revenue Department is expected to
introduce new transfer pricing guidelines
Ernst & Young contact specifically for bilateral APAs.
Yupa Wichitkraisorn
yupa.wichitkraisorn@th.ey.com
+66(0)2264 0777 ext:55003
Narumol Limprasert
narumol.limprasert@th.ey.com
+66(0)2264 0777 ext:21017

Vietnam*
Resources the taxing authority pricing perspective is not formally *

Country chapter
is devoting to transfer pricing communicated to taxpayers. completed based on the
The General Department of Taxation The first three transfer pricing audits professionals and publicly
(GDT) administers taxes in Vietnam. in Vietnam have involved automotive available information only.
Vietnamese transfer pricing regulations companies.

were passed in 2006, and the GDT is
still trying to develop a core of transfer Geographic focus
pricing resources to conduct transfer The GDT does not target companies in
pricing audits. The core transfer pricing certain jurisdictions for transfer pricing
team of the GDT is located in Hanoi. There reviews.
are approximately five FTE resources
currently involved in transfer pricing In the current caseload of transfer pricing
examinations, and all of them are based in reviews, the most prevalent jurisdictions
the central unit. This number is expected of the relevant counterparties are:
to increase over the next two years. • Taiwan
In terms of background, the core transfer • Singapore
pricing resources are all generalists,
although the GDT is currently trying • Korea
to develop their transfer pricing • Japan
competency. The GDT has also provided
• Germany
overseas training to tax auditors who are
now acting as transfer pricing auditors. • The United States

scrutiny
Vietnam transfer pricing audits
currently focus on the automotive, Related-party transactions involving
pharmaceuticals, goods processed tangible goods, IP, services and financial
for export (e.g., shoes, garment), and transactions are currently the focus
agriculture product industries, as for transfer pricing reviews. Taxpayers
well as services and cost contribution are required to disclose details of these
agreements (CCAs). Enterprises that transactions on the transfer pricing
post losses during their tax incentive disclosure form. As the transfer pricing
period and enterprises that fail to submit disclosure form also requires the
the transfer pricing disclosure form disclosure of foreign exchange gains and
when filing their corporate income tax losses, transfer pricing auditors may
returns are also areas of focus of the examine foreign currency transactions
GDT. The selection of industries currently between related parties.
under specific focus from a transfer

Key transactions that make up the current Audit triggers
caseload of transfer pricing reviews
(ranked in order of prevalence)are: Transfer pricing audits are instigated
by a central decision-making body. The
• Tangible goods core transfer pricing team based at the
• Intra-group services central office determines the companies
to be audited for transfer pricing. It is
• IP (e.g., royalties, licensing) anticipated that, in the future, when
• Financial transactions (e.g., loans, the tax authorities at the provincial and
other debt instruments) city levels become more knowledgeable
about transfer pricing regulations, case
• Cost sharing/cost pooling selection may be decentralized. A variety
arrangements of considerations are taken into account
in determining which taxpayers to audit,
Transfer pricing penalties including:
According to the Vietnam transfer • The profitability of the local taxpayer
pricing regulations, the GDT may adjust
taxable income or income tax payable if • The nature of related-party
transfer prices are not at arm’s length. transactions undertaken by the
No other penalties are imposed on taxpayer
transfer pricing adjustments, other • The volume of related-party
than the price adjustments themselves. transactions undertaken by the
However, in the case of the violation of taxpayer
other tax rules relating to transfer pricing
• VAT, employment, customs or other
(e.g., a failure to file the disclosure
indirect tax reviews
form), administrative penalties for tax
violations apply. There are no processes • Previous tax audits of the taxpayer
to ensure the consistent application
of transfer pricing penalties. However,
assessment by the GDT
the regulations do provide a method
for making adjustments to income or • Whether there is evidence of business
expenses in cases where transfer prices restructurings
are found to be not at arm’s length.
The GDT has undertaken only two
Adjustments made by the GDT in the transfer pricing audits to date, both of
transfer pricing audit of an automobile which involved automobile companies.
company related to warranty expenses. A third automobile company was
The percentage of adjusted warranty audited for transfer pricing, but the final
expenses in relation to gross revenue was assessment resulted in tax assessments
less than 10%. with no transfer pricing findings or

adjustments. The lack of transfer pricing Asian sub-continent to be comparable.
audits in Vietnam to date is because the In preparing and presenting comparable
regulations are still relatively new and the data, the GDT expects a minimum of
GDT has yet to develop a sophisticated three consecutive years of financial data
approach to transfer pricing. to be used.
It is anticipated that transfer pricing In terms of PLIs, there is no specific

reviews may be triggered in the future by requirement on whether simple or
a company’s failure to file the necessary weighted average is accepted, but the
transfer pricing disclosure form and by a GDT use the terms “average” value or
company’s level of profitability. “median” value and there are specific
formulas to determine the appropriate
Indirect and customs tax PLIs. The PLIs follow the choice of
transfer pricing methodology. The GDT
There is very little interaction between
provides guidelines for making financial
the transfer pricing core team of the
adjustments to comparable data and
GDT and the customs officials (from
considers their use to be mandatory if
the General Department of Customs).
adjustments are required to increase
There is no specific requirement that the
comparability of transactions.
same transfer price be used for direct
and indirect tax purposes. However, both The allowable arm’s length range refers
regulations provide that the authorities to the standard market price margin,
may adjust the transfer price based on which is either of the following two
the criteria set out in the respective values:
regulations.
1) Values calculated from independent
transactions selected for comparison
Comparable data
when three comparable or fewer
The GDT has not specified any preference transactions are used
for local or regional comparables; 2) Values falling between the first and
it requires that comparability must the third quartiles of the statistical
consider market conditions. While, in operation of probability of quartiles,
practice, the GDT prefers the use of calculated from the market price
local comparables, the use of regional margin of independent transactions
comparables is permitted. when more than three comparable
transactions are used
Since the markets in Singapore, Malaysia,
Thailand, Philippines, Hong Kong and Transfer pricing methods
Japan are considered to be similar, Local legislation supports the following
comparable data from these locations methods: the comparison of prices in
are preferred by the GDT. The GDT also independent transactions, RPM, cost
considers data from the Southeast

plus, profit split, TNMM and CPM. There Likely trends in transfer pricing
are no other methods permitted under activity
the domestic regulations. There is no
formal hierarchy between transfer It is anticipated that compliance
pricing methods. measures and yield targets (i.e.,
increasing the tax take based on audit
However, the use of comparison of activity) will be areas of increased focus
prices in independent transactions is by the GDT over the next two years.
preferred by the GDT. The regulations
allow the use of a combination of any of
these methods or the use of two or more
methods concurrently. This information
is based on Circular 117/2005/TT/BTC
(the Circular). This Circular was issued
by the Ministry of Finance to implement
legislation.

Given the relatively recent nature of
the transfer pricing regulations in
Vietnam, there are a limited number of
disputes. The jurisdiction involved as a
counterparty currently involved in a MAP
is Germany, in a dispute involving an
automotive company.

pricing
Any amendments to Vietnam’s approach
to transfer pricing are most likely to be
driven by the local experiences gained
from the Circular’s first two years of
implementation. Stimulus packages have
recently been announced in the areas
of corporate and indirect taxes in an
Ernst & Young contact attempt to combat the global financial
crisis. However, a change in transfer
Carlo Navarro pricing policy due to the global economic
carlo.navarro@vn.ey.com crisis is not foreseen.
+84 4 831 5100

Surveyed
countries
Europe, Middle East,
India, Africa (EMEIA)

Austria
Resources the taxing authority Industry focus

is devoting to transfer pricing Transfer pricing audits in Austria
There is no centralized group specializing currently focus on the automotive,
in transfer pricing within the Austrian consumer products, pharmaceutical and
Ministry of Finance (the Austria Tax high-tech industries. The importance
Authority (ATA)). Instead, there are of IP to the industry, profitability levels
decentralized tax groups for international and information from external resources
tax affairs, which also deal with the like publicly available industry analyses
review of transfer pricing issues. These are the factors driving the selection of
tax groups employ approximately 50 FTE industries for particular focus. The list of
resources involved in transfer pricing industries is currently seldom reviewed
examinations. Approximately 40% of the by the ATA; however, this is expected to
resources are transfer pricing specialists, change in the near future, with annual
with a strong technical background in reviews likely.
transfer pricing issues. The number of
resources engaged in transfer pricing has Geographic focus
increased by approximately 70% over the
The ATA targets companies in certain
last two years.
jurisdictions for transfer pricing
In terms of background, the resources reviews with the focus of attention
consist of a few economists, while the on transactions with parties located
majority are regular tax officials trained in tax havens. Typically, transactions
in-house on transfer pricing matters. with Austria’s major trading partners
These resources are kept abreast of and low-tax jurisdictions (particularly
key transfer pricing developments where transaction volumes are high)
by provision of periodic training and are reviewed in the scope of audits. For
special transfer pricing courses at the this purpose, jurisdictions where the
designated Federal Tax Academy. tax rates are low (or nil) due to rulings,
tax holidays or other incentives are also
The Austrian Ministry of Finance is
considered as low-tax jurisdictions. As
currently undergoing a significant
per the current caseload of transfer
restructuring of its operations. As part
pricing reviews, the top five jurisdictions
of this reorganization, it is expected that
of the relevant counterparties are:
a centralized specialist group, which
will also include transfer pricing experts 1) Switzerland
dealing with international taxation issues, 2) Luxembourg
will be established in the near future. 3) The Netherlands
4) Ireland
5) Malta

Types of transactions under • The existence of evidence of business
scrutiny restructurings
The ATA has specifically identified certain
transactions that are currently the focus • The nature of related-party
of transfer pricing reviews. The nature of transactions
such transactions and the corresponding
• The volume of related-party
composition of the current caseload of
transactions
transfer pricing reviews are summarized
in the table below. • Previous audits of the taxpayer
Transaction Current
caseload %
IP (e.g., royalties, 30% The transfer pricing enforcement
licensing) resources work in an integrated way with
Financial transactions 25% indirect tax specialists. However, there
(e.g., loans, other debt is no formal requirement that the same
instruments) transfer price be used for corporate
Tangible goods 20% (direct) tax and customs purposes.
Cost sharing/cost pooling 5% Comparable data
arrangements
Typically, local country comparables are
preferred. Regional comparables are
The ATA has also identified business generally accepted only in cases where
restructurings as an area of interest. local comparables could not be identified.
Where local comparables are not
Transfer pricing penalties available, the ATA prefers pan-regional
Austria does not have a specific data from the “old” 15 EU member states
transfer pricing penalty regime; also, (prior to 1 May 2004) over all current
such penalties are not expected to be EU member states.
introduced in the near future. The ATA expects comparable searches
to be in line with the principles set out in
Audit triggers the OECD Guidelines. Generally, financial
Transfer pricing audits are instigated by data for three years is expected. The
the relevant decentralized tax groups. A inter-quartile range is the preferred
variety of considerations are taken into method for calculating the allowable
account in determining which taxpayers arm’s length range. Application of
to audit, including (ranked in order of the full range is only acceptable if the
importance): comparables are virtually perfectly

comparable to the tested party and the next one to two years by the Austrian
full range is narrow. The simple average Ministry of Finance.
is preferred to the weighted average.
The Austrian Ministry of Finance publishes
There is no preference for any specific nonbinding opinions on a case-specific
type of PLI; generally, the PLI chosen basis in answer to queries by taxpayers
by the taxpayer is likely to be accepted, concerning individual transfer pricing
provided it is reasonable. While the ATA issues. In addition, it is possible to file a
does not have any specific preference request for a binding ruling on domestic
between pooling and averaging of (or unilateral) matters with the ATA.
financial data, the pooling method is
rarely applied in Austria. Yield/performance of transfer
There is no guidance provided about pricing reviews
adjustments to comparable data. The The effectiveness of the transfer pricing
acceptance of adjustments is reviewed review activities is not separately
on a case-by-case basis. measured by the ATA. However,
adjustments resulting from the
Transfer pricing methods review of benchmarking studies are
measured against the associated costs
The ATA follows the OECD Guidelines,
of performing these studies (such as
which identify a hierarchy of methods,
license fees for external databases) to
included in the policy statement issued
determine whether costs incurred have
by the Austrian Ministry of Finance, to
been justified.
be used in determining the arm’s length
remuneration for controlled transactions.
The traditional transaction methods
are preferred to the transactional profit In the context of disputes, there are
methods. Cost sharing/cost contribution approximately 50 ongoing cases in MAP
arrangements mentioned under Chapter and 2 ongoing cases under arbitration.
8 of the OECD Guidelines are also The treaty partners involved in a
permissible. While the profit split method majority of these cases are Germany, the
is one of the identified transfer pricing Netherlands and the United States.
methods, a full profit split is generally not
acceptable to the Austrian tax authorities. Current influences on transfer
pricing
(APAs) Austria is responsive to factors such as
Austria does not have a formal APA the global economic slowdown, OECD
program. An APA program is expected initiatives, EU initiatives (such as the
to be introduced and implemented in the EU Joint Transfer Pricing Forum) and

the implementation of centralized
business and tax models. For instance,
it is expected that, in light of the global
economic slowdown, the ATA will likely
accept losses of local distribution entities.

activity
In the recent past, the transfer pricing
focus has largely been on issues such
as IP migration, entities with operating
losses and business restructurings. The
ATA expects to place greater emphasis
on yield targets (i.e., focus on increasing
tax revenues based on audit activity)
and interaction with customs and other
indirect taxes over the next two years.
Andreas Stefaner
andreas.stefaner@at.ey.com
+43 1 211 70 1041
Esther Manessinger
esther.manessinger@at.ey.com
+43 1 211 70 1177

Belgium
Resources the taxing authority Industry focus

is devoting to transfer pricing There are no formal programs prioritizing
Transfer pricing audits at the Belgian the review of taxpayers in any particular
tax authority, are handled on a industry or industries. Factors such as
centralized basis by a special Transfer whether the activities of the industry
Pricing Audit Cell (TPAC), consisting are significant within the country, the
of trained transfer pricing experts. importance of IP to the industry, and the
The TPAC has been very active in profitability of the industry are taken into
sending lengthy information requests to account in identifying taxpayers for review.
selected taxpayers. They also serve as a
knowledge resource on transfer pricing Geographic focus
issues for the field tax inspectors, who
Geographic considerations, as such, are
have varying levels of transfer pricing
not drivers for the selection of taxpayers
experience.
for review. However, transactions with
There are eight FTE specialist transfer major trading partners and low-tax
pricing resources located centrally jurisdictions are typically reviewed in the
at the TPAC. There are no specialist scope of audits. The top five jurisdictions
decentralized resources. All transfer (in order, as per the current caseload of
pricing issues are to be reported to the transfer pricing reviews) of the relevant
TPAC. The TPAC may then handle these counterparties are:
issues or may, as a minimum, provide • France
support to field tax inspectors as to how
they should be handled. The existing • Japan
level of resourcing has remained the • Luxembourg
same over the last two years. However,
this number is expected to increase • Ireland
in the future, given the ever-growing • Germany/the United Kingdom
importance of transfer pricing in today’s
international business relationships and Types of transactions under
the increased attention from foreign tax
scrutiny
authorities in this respect.
The Belgian tax authority has identified
In terms of background, all the specialist
the following transactions (in order of
transfer pricing resources are economists
prevalence) that are currently the focus
and have significant experience in dealing
of transfer pricing reviews in Belgium:
with transfer pricing issues.
• Business restructurings

• Cost sharing arrangements local field tax inspectors have the power
to independently decide to review
• Tangible goods
transfer pricing issues during a tax audit.
The selection of the taxpayer and the
other debt instruments)
scope of the audit are typically driven by
various factors, such as (ranked in order
of prevalence):
No specific transfer pricing penalty regime
applies, since transfer pricing adjustments
are within the scope of the ordinary • Whether there is evidence of business
Belgian tax penalty framework. The TPAC restructurings
has the authority to autonomously decide
on the penalty rate, and hence there is
assessment by the tax authority
consistency in application of penalties.
Penalties vary from 10% to 200% (in very • The volume of the taxpayer’s related-
exceptional cases) of the additional tax party transactions
levied under the amended assessment. • Previous tax audits of the taxpayer
The rate applied in any particular case
depends on the degree of intent to
avoid tax or the degree of the taxpayer’s
negligence. Additionally, taxpayers also The work of Belgian transfer pricing
incur interest liability for the late payment enforcement resources is not integrated
of additional tax. with that of indirect tax specialists. As
such, there is also no requirement that
Over the last two years, penalties have
the same transfer price be used for
been applied in over 75% of cases where
corporate (direct) tax and indirect tax
transfer pricing adjustments were
purposes.
issued. In practice, if the transfer pricing
audit ends in a settlement between the
Comparable data
taxpayer and the TPAC, the penalty is
typically reduced to nil. Where penalties The use of regional pan-European
are imposed, they generally range up to comparables is widely accepted in
10% of the additional tax. This is, however, Belgium — this is even acknowledged in
determined on a case-by-case basis. This the Belgian administrative guidelines
approach to penalties is not anticipated to on transfer pricing. In the standard
change in the next two years. approach, a pan-European comparison
often means the inclusion of the 15
Audit triggers countries of the European Union as
it existed before 1 May 2004 plus
The TPAC typically selects its own files Switzerland, Norway and Iceland.
for transfer pricing audits. Additionally,

Increasingly, the wider European region Transfer pricing methods
is being used, subject to meeting
comparability criteria. Belgium follows the OECD Guidelines
for transfer pricing and hence
Where local country and pan-European conceptually adheres to the hierarchy
information is not available, the use of of transfer pricing methods outlined in
non-European or global information the guidelines. The CPM is one method
is accepted subject to maintenance of considered to be inappropriate by the
strong documentation to support the Belgian tax authority.
comparability criteria.
If none of the OECD-approved transfer
In preparing and presenting comparable pricing methods can be applied to
data, typically financial data for three determine the arm’s length remuneration
years needs to be used (unless under for the transaction under review,
APA negotiations, where information for other transfer pricing methods can be
four years is required). The inter-quartile considered. However, their selection
range (encompassing the results between and the rejection of the OECD-approved
the 25th percentile and the 75th transfer pricing methods should be
percentile of the observation derived soundly documented.
from uncontrolled comparables’ inter-
quartile ranges) is the preferred method Advance Pricing Agreements
for calculating the arm’s length range.
(APAs)
The weighted average is preferred to the
simple average. Operating margin and Belgium has a formal APA program,
markup on costs are the most commonly accessible to all taxpayers.
used PLIs. Pooling as well as averaging of
About 99% of the current caseload
financial data is accepted.
of APAs represents unilateral APA
There is no formal or mandatory guidance requests. The number of bilateral APA
provided as to adjustments to comparable requests is, however, increasing (from
data. Such adjustments are optional and three applications during the year 2008
will likely be supported by the Belgian to three applications during the first
tax authority where they enhance the quarter of the year 2009). The top
comparability of the information with the three treaty partners in these bilateral
tested party. For instance, in the case of APA requests are Japan, France and
limited risk structures, adjustments for the Netherlands. The average duration
inventory, receivables and intangibles are of the APA process is approximately up
typically accepted. to 9 months for unilateral APAs and 14
months for bilateral APAs.

Yield/performance of transfer Current influences on transfer
pricing reviews pricing
The tax yield (other than tax yield The transfer pricing environment in
through field audits) realized by the Belgium is responsive to factors such
special TPAC was approximately €15m in as initiatives at the OECD and EU levels
2008 (compared to €13m in 2007 and and the implementation of centralized
€10m in 2006). Approximately 70% to business and tax models. For instance,
80% of the transfer pricing audits carried the profit allocation between head offices
out by the TPAC result in an adjustment and branches and the OECD Draft on
to the taxpayer’s income. Most cases Business Restructurings are having
handled by the TPAC are settled during an impact on the approach to transfer
audit. Only a few cases move into the pricing in Belgium.
administrative appeal phase. So far, none
of these cases have progressed into a Likely trends in transfer pricing
transfer pricing court case. activity
Transfer pricing disputes Over the next two years, the Belgian
tax authority expects dispute resolution
The status of current transfer pricing activities to increase, in response to the
disputes in Belgium is as below. introduction of transfer pricing rules
across a number of relevant jurisdictions.
Ongoing Pending
Domestic appeal 4 1
(preceding court
action)
Litigation 0
Mutual 1
agreement
procedure
Arbitration 10
The above information relates to transfer

pricing audits performed by the TPAC.
Information regarding other field audits
where transfer pricing adjustments were
imposed is not included in the above Ernst & Young contact
table. The jurisdictions most frequently
involved in these cases are France, Herwig Joosten
Germany and the Netherlands. herwig.joosten@be.ey.com
+32 02 774 9349

Czech Republic
Resources the taxing authority taxpayers in the automotive industry, this

is devoting to transfer pricing sector is most frequently scrutinized by
the Czech tax administration.
Within the Czech tax administration,
separate specialized groups perform Types of transactions under
transfer pricing audits of large taxpayers
scrutiny
and address transfer pricing matters in
the context of APAs and MAPs. Transfer While there is no formal focus on specific
pricing reviews of small taxpayers transaction types by the Czech tax
are typically carried out by the tax administration, the authorities have
authorities locally. Thereafter, the Czech identified the review of transactions
Ministry of Finance is competent for involving tangible goods, provision of
potential foreign negotiation. services and more complex transactions
of all types as areas of interest.
More than 30 FTE resources are involved
in transfer pricing reviews of large
taxpayers in the Czech Republic. This
level of resourcing has been consistent Czech law does not provide for the
over the last couple of years and is not imposition of specific transfer pricing
expected to change. penalties. The unified system of penalties
applies to all taxpayers and assessments,
While there are no specific preferences
including transfer pricing cases. There is
in terms of the background of the
a possibility for taxpayers to apply for a
resources, there has been a growing
tax pardon under specific circumstances
emphasis on imparting ongoing
where tax penalties are imposed by the
education to increase the transfer pricing
Czech tax authority. This approach to
competencies of these resources. It is
penalties is not anticipated to change in
expected that there will be greater focus
the next two years.
on training the resources to enhance
their practical skills in risk assessment.
Transfer pricing training is also being
Audit triggers
given to other members of tax audit Transfer pricing audits are instigated by
teams to enable them perform simple the relevant local authorities based on a
transfer pricing checks and risk analyses. risk analysis. Though not based on any
published guidance, generally, a variety
Industry focus of factors influence the selection of
taxpayers for review, such as:
There is no formal program prioritizing
the review of taxpayers in a particular • The profitability of the local taxpayer
industry or industries. However, due
• The nature and volume of related-
to the presence of a large number of
party transactions

• The existence of evidence of business be used in determining arm’s length
restructurings remuneration for controlled transactions.
• Previous tax audits of the taxpayer
Indirect and customs tax (APAs)
The work of Czech transfer pricing The Czech Republic has a formal
enforcement resources is integrated APA program that is accessible to all
(especially in terms of sharing taxpayers. The APA ruling program,
information) with that of indirect tax including provisions for unilateral as well
specialists. As such, the same transfer as for bilateral APAs, was introduced
price needs to be reported for income tax in 2006. The APA team has as yet only
and VAT purposes. received unilateral APA requests. Ten
unilateral APA requests have been
Comparable data received from taxpayers per year on
average, and there are approximately
The Czech Ministry of Finance has a four applications currently in process.
general preference for comparable The average time for completion of
information from the European/ unilateral APAs is approximately eight
Central European region. In the months.
absence of specific local guidance
or recommendations, the OECD Yield/performance of transfer
recommendations are generally followed
pricing reviews
for the selection of comparable data.
Approximately 50 tax audits per year
There are no specific requirements
are focused on transfer pricing. Around
related to the method for calculating
50% of these audits result in transfer
an arm’s length range, the method for
pricing adjustments. While the precise
determining an appropriate PLI, or the
benefit of transfer pricing reviews to the
pooling or averaging of financial data.
tax authorities is difficult to measure,
While specific requirements do not exist,
an increase in taxpayer compliance is
in preparing and presenting comparable
perceived as the most significant benefit.
data, typically a three-year running
The Czech tax system combines the
average is used to eliminate market
results of various tax aspects examined;
deviations.
therefore, additional tax assessed on
transfer pricing adjustments cannot be
Transfer pricing methods separately quantified.
The Czech Republic follows the OECD
Transfer Pricing Guidelines, which
identify a hierarchy of methods to

In the context of disputes, there is
currently one ongoing proceeding
between the Czech Republic and
Germany. Another case with Germany is
expected soon.

pricing
The transfer pricing environment in the
Czech Republic is responsive to the OECD
initiatives and the EU Joint Transfer
Pricing Forum initiatives. Business
restructurings and centralized intra-
group services have been identified as
the areas of focus for transfer pricing
reviews. Furthermore, the Czech Ministry
of Finance is closely considering the
effects of the current global financial
crisis on comparability of data.

activity
Over the next two years, the Czech
Ministry of Finance expects to place
greater emphasis on development of
processes pertaining to MAPs and also to
encourage bilateral APA requests from
taxpayers.
Jiri Teichmann
jiri.teichmann@cz.ey.com
+420 225 335 327

Denmark
Resources the taxing authority companies have been dealing with

is devoting to transfer pricing perceived low-tax jurisdictions. Typically,
transactions with Denmark’s non-
The Danish tax authorities (SKAT) treaty partners and perceived low-tax
administers taxes within Denmark. jurisdictions are reviewed in the scope
Within SKAT, transfer pricing reviews of audit. Practical considerations are the
are carried out by the decentralized key drivers for certain jurisdictions being
Transfer Pricing Center (approximately selected by SKAT.
12 full-time resources) and the Center
for Large Companies (approximately Types of transactions under
65 to 75 full-time resources). There has
scrutiny
been no recent increase in the number
of resources involved in transfer pricing IP transactions, intra-group services,
examinations, and the number of transfer financial transactions and loss-making/
pricing resources is expected to remain low-margin companies are currently the
the same over the next two years. focus of SKAT for transfer pricing reviews.

consist of approximately 5% economists, Denmark has a specific transfer pricing
11% lawyers and 20% accountants penalty regime, which was recently
by background, while the remaining implemented. However, to date, there
employees have a bachelor’s degree in have been no cases involving transfer
tax law and accounting. The background pricing penalties being imposed under
of resources currently involved in this regime. The new regime for transfer
transfer pricing examinations has pricing penalties is linked to poor transfer
remained roughly the same over the pricing documentation. Other penalties
last two years. SKAT anticipates the (surcharges and interest) apply in the
background of resources currently case of an income adjustment that is not
involved in transfer pricing reviews to necessarily linked to a lack of or poor
change significantly by including more transfer pricing documentation.
economists and more resources with
a specialized background in transfer Audit triggers
pricing.
Transfer pricing audit strategy is
determined by a central decision-making
Geographic focus
body. However, it is the local centers
SKAT does not target companies located that implement this strategy. Various
in certain jurisdictions for audit. However, considerations are taken into account in
SKAT’s experience is that strong grounds determining which taxpayers to audit,
to challenge cases have existed where including:

• The profitability of the local taxpayer years of financial data to be used for
comparison and emphasizes the averaging
of financial data (preferring weighted
• The nature of related-party averages to simple averages). However, a
transactions undertaken by the pooling method could also be used if it is
taxpayer (e.g., those involving IP) relevant. The use of an inter-quartile range
is considered appropriate for determining
transactions undertaken by the the arm’s length range of a comparable
taxpayers as part of a overall risk set. There is no guidance provided by
assessment SKAT on the financial adjustments
performed on comparable data.
The resources involved in transfer
pricing reviews generally do not work Denmark follows the OECD Guidelines
in an integrated way with indirect tax hierarchy of methods to be used in
specialists as the integral risk concept is determining arm’s length remuneration
applied. There is no formal requirement for controlled transactions. The TNMM is
that the same transfer price be used for the method most used by taxpayers.
purposes. Advance Pricing Agreements
(APAs)
Comparable data Denmark has no formal APA program.
As a starting point, SKAT prefers local However, bilateral APAs are allowed
comparables. However, in practice, due in accordance with the Danish double
to the lack of local comparables, regional taxation agreements (DTAs). APAs are
comparables are often accepted. Since dealt in an informal way in practice.
the markets in Denmark, other Nordic
The APA team received ten applications
countries and Europe are considered
last year, out of which seven are now
similar, comparables from these locations
completed. APAs are an area of high
are accepted by SKAT. On a high level,
focus for SKAT. There are twelve bilateral
the regional comparables are considered
APA applications currently in process.
in the following order of priority:
The average duration of the APA process
• Denmark ranges from 24 to 36 months. Binding
rulings are the other alternative types of
• Nordic countries
advanced rulings available.
• Pan-European
SKAT expects a minimum of three to five

The transfer pricing department does
participate in competent authority
processes. Five to ten competent
authority cases are resolved annually.
They take approximately 24 months on

average to resolve. There are currently
no unresolved cases.

activity
SKAT expects compliance measures,
dispute resolution, and interaction with
customs and other indirect taxes to be
areas of increased focus over the next
two years. SKAT is focusing on meeting
taxpayers up front to improve compliance
and is focusing on more APAs for dispute
resolution.
Thomas Bjerre
thomas.bjerre@dk.ey.com
+45 3 587 2901

Egypt
Resources the taxing authority Transfer pricing penalties

is devoting to transfer pricing Egyptian law does not provide for the
Egypt formally introduced the transfer imposition of specific transfer pricing
pricing and arm’s length concepts for the penalties. The penalties that generally
first time under Article 30 of the Income apply in the case of an infringement of tax
Tax Law 91/2005. Transfer pricing laws also apply to transfer pricing cases.
guidelines are expected to be issued in
the near future. Therefore, it should be Audit triggers
noted that transfer pricing tax practice in
Tax audits are required to be carried out
Egypt is still in its early stages; as such,
through a risk-based sampling process.
transfer pricing examinations have not
Case selection is done electronically,
yet commenced in Egypt.
based on specific criteria.
Recently, the Egyptian Tax Authority
(ETA) established a centralized group in Indirect and customs tax
charge of international taxation affairs
The work of the ETA is integrated
including transfer pricing. The group
is responsible for introducing transfer
with that of indirect tax specialists. The
pricing guidelines. In addition, the
issue of whether the same transfer price
central group will monitor the transfer
needs to be used for corporate (direct)
pricing implementation process including
tax and indirect tax purposes is likely
transfer pricing reviews. However,
to be addressed in the transfer pricing
transfer pricing audits will be performed
guidelines, which are expected to be
by the tax offices under the supervision
released shortly.
of the centralized group.
There are 11 FTE resources in the Comparable data

centralized group. This level of resourcing
The requirements relating to comparable
is expected to increase based on
data are likely to be addressed in the
the expected workload. In terms of
transfer pricing guidelines, which are
background, 70% of the resources are
expected to be released shortly.
accountants, 20% are economists and
the rest are lawyers. A training plan has
been prepared to enhance tax auditors’
transfer pricing capabilities. Therefore, Egyptian transfer pricing regulations
a significant change is expected over the specify a hierarchy of transfer pricing
coming years in the background of these methods to determine arm’s length
resources. remuneration for controlled transactions.
The regulations follow the hierarchy
specified by the OECD Guidelines. In

cases where none of the specified
methods are suitable, the regulations
permit taxpayers to use any other
appropriate method.

(APAs)
Although the Egyptian Income Tax Law
allows the tax commissioner to conclude
APAs with taxpayers, Egypt has not yet
set up a formal APA program.

activity
Given the pending introduction of new
guidelines, from a transfer pricing
perspective, the ETA expects to place
greater emphasis on compliance
measures.
Sherif El-Kilany
sherif.el-kilany@eg.ey.com
+202 3336 6627
Mohamed El-Sawie
mohamed.el-sawie@eg.ey.com
+202 3336 2000

Estonia
Resources the taxing authority • Sweden

is devoting to transfer pricing • Finland
The Estonian Tax and Customs Board • Denmark
(ETCB) administers taxes in Estonia.
Within the ETCB, transfer pricing Types of transactions under
reviews are carried out by a centralized
scrutiny
unit consisting of ten inspectors, one
coordinator and one tax advisor. The While there is no formal focus on specific
inspectors are not fully dedicated to transaction types by the ETCB, the ETCB
transfer pricing examinations, and they has indicated that the majority of the
are also involved in reviewing other transactions reviewed involved the sale
important tax-related matters. There has of tangible goods (50% of cases) and
been an increase in the number of FTE services (mainly management services,
resources involved in transfer pricing loans, etc.).
examinations, from three to twelve, over
the last two years. This number is not Transfer pricing penalties
expected to change over the next two
The ETCB has the power to impose
years.
transfer pricing penalties. A penalty of
In terms of background, there are equal €3,200 may be imposed for a failure to
numbers of economists and registered submit transfer pricing documentation.
accountants amongst the FTE resources Further, default interest of approximately
involved in transfer pricing examinations. 22% per annum on unpaid or late taxes
Lawyers are invited to take part in is also likely be levied. There are no
the transfer pricing audit process, if processes in place to ensure consistent
necessary. application of transfer pricing penalties.
Though penalties are considered in
Geographic focus the case of intentional tax avoidance,
assessment of penalties is not a priority
Although transactions with low-tax
to the ETCB.
jurisdictions are currently the focus
for Estonian transfer pricing audits, Under Estonian tax law, the ETCB has the
geographic considerations are not power to instigate criminal proceedings
drivers for the selection of taxpayers for intentional tax avoidance.
for review. In the current caseload
of transfer pricing reviews, the most Audit triggers
prevalent jurisdictions of the relevant
Tax inspectors make an assessment
counterparties are:
of each case as to whether the likely
• Latvia and Lithuania costs of performing the tax audit can

be justified when compared with the In preparing and presenting comparable
possible outcome of the audit. data, no standardized requirements have
been laid out in relation to the number
The reasonableness to perform tax
of years of financial information to be
audits is thus determined, and potential
used, the use of simple versus weighted
tax risks are identified. This process
averages, the method for calculating
forms the basis for screening of
an arm’s length range, the method for
taxpayers for review and for setting
determining an appropriate PLI, or the
targets.
pooling or averaging of financial data.
Factors that play an important role in the
selection of taxpayers for review include: Transfer pricing methods
• The profitability of the local taxpayer In practice, five transfer pricing
methods (CUP, RPM, cost plus, profit
party transactions split and TNMM) are used. There is no
strict hierarchy between the methods.
Generally, the ETCB aims to place However, there is a general preference
minimal administrative burden on for internal comparables over external
taxpayers from transfer pricing audits. comparables. If none of the five methods
can be applied in a particular case, then
Indirect and customs tax the law permits the use of any other
suitable and justifiable method.
The Estonian transfer pricing
enforcement resources are not
strictly dedicated to transfer pricing Advance Pricing Agreements
examinations. The tax inspectors have (APAs)
general competency and are able to Estonia does not have a formal APA
review various tax issues, including program. However, the ETCB encourages
matters related to indirect and customs requests by taxpayers for advanced
taxes. From a pricing perspective, there rulings on domestic (or unilateral)
is no requirement that the same transfer transfer pricing matters. The ETCB
price be used for corporate (direct) tax expects to place greater emphasis on the
and indirect tax purposes. use of APAs over the next two years.
Comparable data Yield/performance of transfer

Comparable information from Estonian pricing reviews
databases is generally preferred. The use
The effectiveness of the transfer pricing
of regional comparable data is permitted
review activities is, to some extent,
on a case-by-case basis.
measured by comparison of revenue

from tax audit with costs related to such
audits.

Transfer pricing audits generally take
between three months and one year to
complete. If no transfer pricing risks are
indentified, then the audits are closed.
However, tax audits may remain open if
no comparable price or transaction can
be identified.
There are up to approximately five cases

per year regarding transfer pricing issues
in Estonia. In the context of disputes,
there is one ongoing case and three
pending cases in domestic appeals
(preceding court action).

pricing
Estonia is responsive to developments at
both the OECD and the EU level. Direction
from these bodies is constantly reviewed
and considered in determining Estonia’s
transfer pricing policy. A policy change is
likely, following the recently announced
stimulus packages aimed at combating
the global financial crisis.
Ranno Tingas
ranno.tingas@ee.ey.com
+372 611 4578

Finland

is devoting to transfer pricing Geographic considerations are not
The Konserniverokeskus (Large drivers for the selection of taxpayers
Taxpayers’ Office (KOVE)) administers for review. However, transactions with
taxes of large taxpayers, and the local tax neighboring countries (specifically
offices administer taxes of all the other Sweden and Norway) and Finland’s
taxpayers in Finland. Within the KOVE, other major trading partners represent
transfer pricing reviews are carried out the majority of the current caseload of
on a centralized basis by specialized transfer pricing reviews.
individuals. Additionally, a network of
transfer pricing experts has also been set Types of transactions under
up, including two representatives from scrutiny
each local tax office.
While there is no formal focus on specific
There are approximately 45 experts transaction types by the KOVE, the KOVE
involved in transfer pricing reviews did identify the review of transactions
at the Finnish tax authority, of which involving IP as an area of interest.
approximately one-third are located Key transactions forming the current
centrally in the KOVE, with the caseload of transfer pricing reviews
remainder in local tax offices. This (ranked in order of prevalence) are:
level of resourcing has been consistent
over the last few of years, although
this number is anticipated to grow. In • Intra-group services
terms of background, there is an equal
• Tangible goods
representation by economists, lawyers
and registered accountants amongst the • Financial transactions (e.g., loans,
resources involved in transfer pricing other debt instruments)
reviews. Approximately 40% of the
resources are transfer pricing specialists,
arrangements
with a strong technical background in
transfer pricing issues.
Industry focus The Finnish tax authority has the power
to impose transfer pricing penalties.
Transfer pricing audits in Finland
In cases involving transfer pricing
currently focus on the technology,
adjustments, an additional penalty of up
machine and forestry industries.
to 30% of the amount of the adjustment

may be levied. Penalty interest may • The volume of related-party
also be levied on a late payment or an transactions
underpayment of taxes resulting from
• Transfer pricing issues identified
transfer pricing adjustments.
during the review of other areas of
A penalty of up to €25,000 may be taxation
imposed for a failure to comply with
the transfer pricing documentation Indirect and customs tax
requirements regardless of whether
The work of Finnish transfer pricing
the pricing of the transactions has been
enforcement resources is not integrated
at arm’s length. The KOVE has put in
place best practices and audit principles
with that of indirect tax specialists. As
to ensure consistent application of the
such, there is also no requirement that
transfer pricing penalty provisions.
Over the last two years, penalties have corporate (direct) tax and indirect tax
been applied in most of the cases where purposes.
transfer pricing adjustments were
assessed. Where penalties are imposed, Comparable data
they generally are in the range of 5% of
Since there is only a limited amount of
the transfer pricing adjustment. It is not
local company information, in practice,
anticipated that this approach to penalties
regional (Scandinavian) comparables
will change in the next two years.
are preferred. However, pan-European
and even global comparables are
Audit triggers
accepted, where they increase the
Transfer pricing audits are instigated reliability of comparable information. The
by the relevant decentralized offices. selection of a region for the identification
Various considerations are taken into of comparables is at the discretion of the
account in determining which taxpayers taxpayer.
to audit, including (ranked in order of
importance):
• The outcome of a risk-based in relation to the number of years of
assessment by the KOVE financial information, the use of simple
versus weighted averages, the method
• The nature of related-party
for calculating an arm’s length range,
transactions
method for determining an appropriate
• Whether there is evidence of business PLI, or the pooling or averaging of
restructurings financial data.

There is no formal or mandatory Yield/performance of transfer
guidance provided as to adjustments to pricing reviews
comparable data. Such adjustments are
optional and are likely to be supported The effectiveness of transfer pricing
by the KOVE where they enhance the review activities is, to some extent,
comparability of the information with the measured with regard to the increase
tested party. in tax yield. The annual transfer pricing
adjustments have been approximately
Transfer pricing methods €100m.
Finland follows the OECD Guidelines Transfer pricing disputes

hierarchy of methods to be used in
determining arm’s length remuneration In the context of disputes, there are
for controlled transactions. This principle approximately ten pending cases in MAP
is included in relevant transfer pricing and one ongoing case under Arbitration.
legislation. In addition to the transfer
pricing methods specifically mentioned Current influences on transfer
in the OECD Guidelines, the Finnish tax pricing
administration’s guidelines also refer
to the use of discounted cash flows
Finland is responsive to OECD initiatives
in connection with the valuation of
and EU initiatives, which have been taken
intangibles.
into account and implemented as and
when applicable.
(APAs) Likely trends in transfer pricing
Finland does not have a formal APA activity
program. Nevertheless, it should be
From a transfer pricing perspective, the
possible for Finland to conclude APAs
KOVE expects to place greater emphasis
with treaty partners, in cases where
on compliance measures (with the
the treaty contains a specific article
objective of increasing general taxpayer
providing for resolution of double
awareness levels) and dispute resolution
taxation (i.e., via MAP between
(aimed at increasing the possibility to
competent authorities). The KOVE also
use MAPs and APAs) over the next two
encourages requests for advanced
years.
rulings on domestic (or unilateral)
transfer pricing matters.
Sari Takalo
sari.takalo@fi.ey.com
358 207 280 190

France
Resources the taxing authority includes around 15 transfer pricing

is devoting to transfer pricing specialists. This level of resourcing is not
expected to change over the next two
The Direction Générale des Finances years. The DGFiP provides active training
Publiques (DGFiP) administers taxes to its inspectors to increase their transfer
in France. There are local tax audit pricing competencies.
departments throughout the country,
but they are managed by a central As an indication, the tax audit results
administration department. The central for the last two years show that
administration department includes a approximately 85% of tax reassessments
team dedicated to international affairs, concerning transfer pricing in France are
in particular the monitoring of transfer issued by inspectors who are specialists
pricing. in the subject or who are supervised by
such specialists.
Additionally, there is a department
within the Tax Legislation Directorate, Industry focus
dedicated to setting up international tax
standards, including those related to In view of the manner in which audits are
transfer pricing, and the negotiation and scheduled in France (a standard audit
interpretation of tax treaties. The Tax cycle), special attention on transfer
Legislation Directorate also acts as the pricing controls is not paid to any
competent authority in matters of MAPs particular industry sector. The national
and arbitration. recommendations given to inspectors
are general; they must pay attention
Transfer pricing reviews of big businesses to transactions performed between
are within the purview of Direction companies belonging to the same group
Nationale de Contrôle (National Audit to make sure that the remuneration
Department) and are handled by a team allotted to French companies
of transfer pricing-dedicated inspectors. corresponds to the functions they have
In all other cases, transfer pricing reviews carried out.
are handled by general tax examiners
during the course of regular tax audits, Geographic focus
in consultation with transfer pricing
specialists in the audit management Geographic considerations are generally
divisions. not drivers for the selection of taxpayers
for review. However, in view of the position
Due to its organization, resources of taken by France in the fight against tax
the DGFiP devoted to transfer pricing havens and the national recommendations
are not relevant in France. However, the given to tax audit managers, any intra-
central administration department’s group transactions involving companies
team dedicated to international matters set up in a tax haven country are

monitored closely and examined in depth to transfer pricing by the DGFiP are
in the course of a tax audit. not necessarily used by the Customs
Administration, and vice versa.
Comparable data
French law does not provide for the
imposition of specific transfer pricing The comparables selected should be
penalties. However, businesses are under reliable. They should most closely
an obligation to document transfer pricing. resemble the characteristics of the
It is expected that a further obligation may tested party, including market conditions
soon be added in the French Tax Code to and nationality, and they should require
provide for the imposition of a fine if the minimal adjustment.
taxpayer does not produce the required
transfer pricing documentation, upon the Transfer pricing methods
inspector’s request.
France follows the OECD Transfer Pricing
Guidelines, which identify a hierarchy
Audit triggers
of methods to be used in determining
Given France’s standard audit program, arm’s length remuneration for controlled
taxpayers with international transactions transactions.
can expect to be audited on a regular basis.
The organization of the DGFiP does France has a formal APA program. The
not lead to a distinction between APA team receives approximately 20
departments that deal with direct taxes bilateral APA requests from taxpayers
and others that deal with indirect taxes. per year, and there are approximately
Therefore, tax inspectors are competent 40 applications currently in process.
to review all the taxes and duties payable Approximately 80% of the caseload
by the businesses they inspect. Further, relates to bilateral or multilateral APAs.
subject to the inspector’s discretion,
some information may be shared The average duration of the APA process
between Tax Administration inspectors is between 18 to 24 months in the case
and indirect tax specialists if required. of bilateral or multilateral APAs and
between 12 to 14 months in the case
The prices fixed by the DGFiP inspectors of unilateral APAs. Treaty partners
are used for the purposes of both direct that have most frequently concluded
and indirect taxes. However, to the extent bilateral APAs with France are the United
that the methods used to fix transfer Kingdom, Switzerland, Germany and the
prices in tax matters and customs values United States.
are not identical, the adjustments made

Yield/performance of transfer Likely trends in transfer pricing
pricing reviews activity
Monitoring the performance of transfer Transfer pricing efforts are focused on
pricing audits takes into account continued training of tax inspectors and
various data that concern factors development of their transfer pricing
such as the number of businesses expertise. Legal provisions could soon
that have been the subject of transfer specify the nature of the documentation
pricing reassessments, the amount that companies must keep in order to
of reassessments notified, the justify their transfer pricing policies. The
departments that have performed these OECD’s work on the subject of business
reassessments and the significance of restructurings will be monitored closely
the audits maintained after negotiation so as to take into account, if necessary,
within the framework of MAPs. the principles that may be identified in
discussions with businesses (in APAs as
Current influences on transfer well as during tax audits).
pricing From the perspective of transfer pricing
In general, any changes in legislation dispute resolution, France intends to
and administrative practices may be continue to hold joint commissions
the result of changes in jurisprudence regularly with its major treaty partners
(at European or national level), to optimize and accelerate the handling
modifications to the principles set of cases under MAP.
by the OECD or the result of pan-
European discussions. The practices
of international groups may lead to
a change in certain administrative
practices or, at the very least, in
the arguments used by the tax
audit departments to justify their
reassessments. For instance, the
guidelines of the EU member states
concerning the documentation to be set
up by businesses to justify their transfer
pricing policies, which result from
community discussions, could soon be
Ernst & Young contact integrated into French legislation. In the
context of combating the global financial
Franck Berger crisis, measures are being contemplated
franck.berger@ey-avocats.com to address transactions with tax havens.
+33 4 78 63 17 10

Germany
Resources the taxing authority transactions with Germany’s major

is devoting to transfer pricing trading partners and low-tax jurisdictions
are reviewed in scope of audits.
The German Federal Central Tax Office Additionally, domestically headquartered
(Bundeszentralamt für Steuern), companies are also included in the
together with German state tax regular audit cycle.
authorities, administers taxes in
Germany. The responsibility for tax In the current caseload of transfer
audits, including transfer pricing audits, pricing reviews, the top five most
however, lies with the German state tax prevalent jurisdictions of the relevant
authorities (or the Bundesländer). Some counterparties are:
states have set up regional specialist 1) The United States
groups for international taxation. While, 2) ►Japan
generally, transfer pricing audits could 3) France
be performed by any local tax auditor, in 4) ►The United Kingdom
certain cases, the federal tax auditor may 5) Korea
be called in for this purpose.
involved in transfer pricing reviews German tax authorities have the
consist of a few economists and some power to impose transfer pricing
lawyers, while the majority of resources penalties. However, over the last two
are regular tax officials who have years, penalties have been applied in
received specific training on transfer a negligible number of cases where
pricing matters. The transfer pricing transfer pricing adjustments were issued.
resources are kept abreast of key Where penalties are imposed, they
transfer pricing developments through generally range up to 25% of the transfer
periodic training. pricing adjustment. It is not anticipated
that this approach to penalties will
Industry focus change in the next two years.
Transfer pricing audits are largely driven

Audit triggers
by the size of taxpayers. There is no
formal program prioritizing the review Instigation of a transfer pricing audit is
of taxpayers in a particular industry or undertaken by the relevant decentralized
industries. resources in the various states within
the framework of a routine audit cycle. A
Geographic focus variety of considerations are taken into
account in determining which taxpayers
Practical considerations drive the choice to focus on and the scope of the audit,
of jurisdictions for review. Typically, including:

• The profitability of the local taxpayer Advance Pricing Agreements
• The existence of evidence of business (APAs)
restructurings Germany has a formal APA process
• Previous tax audits of the taxpayer for bilateral APAs and a formal ruling
process for unilateral APAs. These
processes are accessible to all taxpayers.
party transactions
The APA team receives approximately 20
Comparable data bilateral APA requests from taxpayers
per year, and there are approximately
Typically, for inbound cases, regional
60 applications currently in process. The
(pan-European) comparables may be
average duration of the APA process
used, and for outbound cases, local
could range anywhere between one to
comparables in the region/country of the
three years. Top treaty partners that
foreign tested party would need to be
have concluded bilateral APAs with
used.
Germany are the United States, Japan,
In preparing and presenting comparable France and the United Kingdom.
Additionally, approximately 80 cases of
related to the number of years of
double taxation are resolved annually
under the competent authority
weighted averages or the method for
procedure. The average duration
determining the appropriate PLI. It
of such proceedings could range
should be noted that the German tax
anywhere between three to four years.
authorities in general require the use of
Approximately 530 applications are
inter-quartile ranges for determination
currently in process, with 80 of these in
of the arm’s length range unless fully
arbitration.
comparable comparables exist.
There is no formal/mandatory guidance Transfer pricing disputes

provided about adjustments to
In the context of disputes, there are
comparable data.
approximately 450 ongoing cases in MAP
and 80 ongoing cases under arbitration.
Transfer pricing methods Taxpayers seeking resolution in these
Germany follows a hierarchy of transfer cases are mainly involved in industries
pricing methods, as outlined in the such as automotive, pharmaceuticals,
German Foreign Tax Act, to determine banking and retail. The treaty partners
the arm’s length remuneration for involved in a majority of these cases are
controlled transactions. The CPM is the United States, Japan, France and the
specifically identified by the German tax United Kingdom.
authorities as an inappropriate method.

pricing
in Germany is responsive to OECD
initiatives and EU initiatives. For instance,
Germany is expected to introduce
new provisions relating to permanent
establishments (PEs), following the
OECD’s amendments to the commentary
on Article 7 of the Model Tax Convention.
Legal provisions have been put in place
regarding the “transfer of functions” in
the context of business reorganizations.

activity
The German tax authorities expect
increased focus over the next two
years on the Executive Order Law on
General Transfer Pricing, circulars on
General Transfer Pricing and Transfer
of Functions, new provisions on
partnerships and PEs.
Oliver Wehnert
oliver.wehnert@de.ey.com
+49 211 9352 10627

Hungary
Resources the taxing authority in, or undertaking transactions with,

is devoting to transfer pricing jurisdictions considered to be tax havens.
Types of transactions under scrutiny
The Adó- és Pénzügyi Ellenőorzési
Hivatal (Hungarian Tax and Financial Types of transactions under
Control Administration (HTFCA))
scrutiny
administers taxes in Hungary. Within
the HTFCA, transfer pricing audit Intra-group services and IP transactions
strategy is formulated by the President are currently the focus of the transfer
of the HTFCA, and this strategy is pricing reviews by the HTFCA. In
communicated through the audit addition, financial transactions and
guidelines published each year. The cost sharing arrangements are also
strategy is Implemented by local offices. transactions of particular interest. The
There has been a continuous increase current caseload of transfer pricing
in the number of resources involved in reviews predominately relate to intra-
transfer pricing examinations, and the group service transactions.
HTFCA anticipates this trend to continue.
In terms of background, the majority
of resources are economists and The HTFCA applies general tax penalties
accountants, with some lawyers. There to transfer pricing adjustments. A
has been no change in this profile of noncompliance penalty for inadequate
resources in recent years, and no change transfer pricing documentation may also
is expected in the near future. be applied. Penalties are assessed on
a case-by-case basis and by taking into
Industry focus account the attitude of the taxpayer
(i.e., whether the taxpayer did
There is no specific industry focus
everything reasonable in the given
applied to transfer pricing audits by
situation to comply with the law). The
the HTFCA. Transfer pricing audits are
HTFCA has issued guidelines on the
conducted in line with the yearly audit
processes that are in place to ensure a
guidelines issued centrally. However,
consistent application of transfer pricing
industry profitability in Hungary is taken
penalties.
into consideration in determining which
taxpayers to target for audits. Over the last two years, penalties were
applied in virtually all cases. A default level
Geographic focus of penalty is seen as between 20% and
30% of the relevant tax adjustment. The
The HTFCA does not target companies average penalty rate applied was 40%.
in certain jurisdictions for transfer
pricing reviews, except for those located
Audit triggers

Transfer pricing audits are instigated Transfer pricing methods
in accordance with the central audit
guidelines of the HTFCA. Traditional methods are preferred
by the HTFCA, in line with provisions
A variety of considerations are taken into in the Hungarian Corporate Income
account in determining which taxpayers Tax Act. The HTFCA will, in practice,
will be the focus of audits within consider any other method if none of
Hungary’s standard audit program, the traditional methods can be applied
including (in order of importance): in a specific case. However, the choice
• The profitability of the local taxpayer of any nontraditional method should
be explained in the taxpayer’s transfer
• Previous tax audits of the taxpayer pricing documentation.
transactions undertaken by the Advance Pricing Agreements
taxpayer (APAs)
The HTFCA also anticipates increasing Hungary has a formal APA program. The
the number of planned investigations as HTFCA receives four to five applications
per the 2009 audit plan. per year. The HTFCA anticipates
the number of APA application to
Indirect and customs tax increase in the coming years. There are
approximately two to three applications
In most instances, the same team audits
currently in process, all of which are
both direct and most indirect taxes.
unilateral APAs. It generally takes
Customs audits are performed by a
four to eight months to complete an
separate organization. There is formal
APA process. There is currently one
cooperation between the customs
competent authority case in progress,
office and tax specialists of the relevant
initiated by a foreign tax authority.
authorities. Corporate tax and VAT-related
findings are made on the basis of similar
pricing principles; however, this is not
necessarily the case with customs duties. activity
The HTFCA expects that compliance
Comparable data measures will be an area of increased
There is no developed practice in focus over the next two years.
relation to comparable data. Each case
is evaluated individually on the basis
of specific facts, circumstances and
possibilities by the HTFCA.
Denes Szabo
denes.szabo@hu.ey.com
+36 1 451 8209

India
Resources the taxing authority caseload of transfer pricing reviews

is devoting to transfer pricing (ranked in order of prevalence) are:
The Income Tax Department (ITD) • Intra-group services

administers taxes in India. Within the • Tangible goods
ITD, the transfer pricing audit team is
currently headed by the Director General
of International Taxation and comprises • Financial transactions (e.g., loans,
nine directors (of which seven are other debt instruments)
dedicated to transfer pricing) and 23
transfer pricing officers (TPOs) based
arrangements
in major cities in India. The number of
transfer pricing resources has increased
substantially over the last two years,
from a core team in 2006 of five Indian law provides for the imposition
directors and seven TPOs. The level of of the following specific transfer pricing
resourcing going forward will largely penalties.
depend on the amount of work and the
number of cases under scrutiny. Default Nature of penalty
In case of a post- 100%-300% of tax
TPOs are generally senior tax officers of inquiry adjustment, on the adjusted
the rank of Joint Director or Additional there is deemed to amount
Director. They regularly interact with be a concealment of
income.
OECD experts on transfer pricing to
understand global best practices. All the Failure to maintain 2% of the value of
documents. each international
resources currently involved in transfer transaction
pricing examinations are transfer pricing
Failure to furnish 2% of the value of
specialists with a strong technical documents. the international
background in transfer pricing issues. transaction
By background, the TPOs are all Indian Failure to furnish Rs. 100,000
Revenue Services officers, and a few of accountant’s report.
them are also accountants and lawyers.
In most cases, penalties are generally
Types of transactions under kept in abeyance until the matter is
scrutiny settled in appeals. The existing approach
to penalties is not expected to change
There is no formal focus on specific over the next two years.
transaction types by the ITD. However,
the transaction types forming the current

Audit triggers There are no specific requirements
in relation to the use of simple versus
The selection of cases for scrutiny is weighted averages, the method for
presently based on the monetary value calculating an arm’s length range, or the
or volume of the taxpayer’s international method for determining an appropriate PLI.
transactions. The guidelines prescribing
the monetary thresholds are laid down Financial adjustments to comparable data
by the Central Board of Direct Taxes are optional. The Indian regulations provide
(CBDT). that a transaction can be considered
as comparable if reasonably accurate
Indirect and customs tax adjustments can be made to eliminate
differences that are likely to materially
A joint working group has been set up affect the price, cost or profit between a
to explore the possibility of sharing controlled and an uncontrolled transaction.
information in an integrated manner
between transfer pricing enforcement Transfer pricing methods
resources and indirect tax specialists.
However, currently there is no formal The Indian transfer pricing regulations do
framework for the same. Furthermore, not prescribe any hierarchy of transfer
there is also no requirement that the pricing methods. The Indian transfer
same transfer price be used for corporate pricing regulations prescribe the use of
(direct) tax and indirect tax purposes. the following five methods only:
1) CUP
Comparable data 2) RPM
Typically, the ITD only accepts local 3) Cost plus method
country comparables. Indian transfer 4) Profit split method
pricing regulations require the use 5) TNMM
of contemporaneous data (i.e., data The past four cycles of transfer pricing
relating to the financial year when audits in India have indicated the reliance
the international transaction has of taxpayers on the TNMM on account
taken place). Further, the Indian of the paucity of reliable price and gross
transfer pricing regulations allow margin data in the public domain. The ITD
for the use of multiple-year data in recognizes the limitations of information
the event that such data is likely to available in databases and taxpayers’
influence the determination of transfer inability to apply some of the
prices in respect of the international transaction-based methods.
transaction. Averaging of financial data
is most common in the presentation of
comparable data.

(APAs)
To date, an APA program has not been
implemented in India. However, the
authorities are exploring the feasibility
of this option. Although a mechanism
exists in India for advance rulings, as
transfer pricing is a valuation issue, it
is not admitted by the Advance Ruling
authority.

activity
Over the next two years, the ITD expects
to place greater emphasis on transfer
pricing compliance measures as well
as on the interaction with customs and
other indirect taxes.
Vijay Iyer
vijay.iyer@in.ey.com
+91 981049 5203

Israel*
Resources the taxing authority of industries under specific focus is *

Country chapter
is devoting to transfer pricing reviewed every one to two years. completed based on the
The Israeli Tax Authorities (ITA) professionals and publicly
Geographic focus available information only.
administer taxes in Israel. Within the
ITA, transfer pricing reviews are carried The ITA specifically targets the United
out by a centralized group that consists States, transactions with Israel’s major
of the Transfer Pricing Department and trading partners and transactions with
the Assessment Division. The number of low-tax jurisdictions in audits.
individuals involved in transfer pricing Practical considerations are the key
examinations depends on circumstances. drivers for certain jurisdictions being
Transfer pricing examinations are selected by the ITA. In the current
generally part of complex tax audits and caseload of transfer pricing reviews,
are done by the same tax officers. There the most prevalent jurisdictions of the
are no transfer pricing specialists in local relevant counterparties are:
tax bodies.
There are three FTE resources currently
involved in transfer pricing examinations, • Member states of the European Union
all of them economists by background, • Offshore jurisdictions
and all of them based in the central
unit. There has been no increase in the Types of transactions under
number of resources involved in transfer
scrutiny
pricing examinations over the last
two years. This number is expected to The ITA currently focuses on sales of
increase marginally by one over the next tangible goods, IP, intra-group services
two years. and stock-based compensation as a
component of other transactions for
Industry focus transfer pricing review. The approximate
percentage of the total caseload
The biotechnology, pharmaceutical, involving the following transactions are:
technology and telecommunication
industries appear to be the current Transaction Current
focus for Israeli transfer pricing audits. caseload %
Significant business activity in Israel and Intra-group services 40%
profitability are the factors driving the
Tangible goods 30%
industries selected for particular focus.
However, the selection of industries IP (e.g., royalties, 30%
licensing)
pricing perspective is not formally
communicated to taxpayers. The list

Audit triggers The ITA expects a minimum of three
years of financial data, with a preference
Instigation of a transfer pricing audit is for averaging rather than pooling of
rarely governed by a central financial data. The ITA has no formal
decision-making body; rather, the preference for weighted averages versus
decision is made on a case-by-case basis simple averages. Israeli law provides for
by the local assessing office. A variety selection of the appropriate PLI.
of factors are taken into account in
determining which taxpayers to focus Financial adjustments to comparable
resources on in the context of Israel’s data are optional, and no additional
standard audit cycle, such as: guidance is provided by the ITA.

The relevant law provides the following
restructurings
transfer pricing methods: CUP, RPM, cost
• Whether there were previous tax plus, TNMM, CPM, and full profit split and
audits of the taxpayer residual profit split methods. The order
of preference for the transfer pricing
Indirect and customs tax methods is found in the local regulations.
The ITA considers CUP as a priority
The transfer pricing enforcement
method with respect to all transfer
resources do not work in an integrated
pricing transactions. No method is
way with indirect tax specialists, and
specifically outlined as being considered
there is no formal requirement that
inappropriate by the ITA.
purposes.
(APAs)
Comparable data Israel has a formal APA program. Thus
The ITA prefers local or regional far, it is estimated that there have been
comparables with respect to comparable approximately fifteen APAs processed
data; however, very limited information in Israel and that the APA team receives
or databases exist. Therefore, approximately five unilateral APA
comparables from the following regions requests from taxpayers per year,
are also permissible where local with approximately one to three APA
comparables cannot be found: North requests currently in process. The
America, Western/Eastern Europe, the average duration of the APA process is
Far East and global comparables. approximately six months.

In the context of disputes, approximately
99% of ongoing cases are in domestic
appeal (preceding court action), with
only 1% of ongoing cases proceeding to
litigation.

pricing
The transfer pricing environment in Israel is
responsive to OECD initiatives, and the ITA
meets regularly with OECD representatives.
No change is perceived in policy or practice
based on any stimulus packages recently
announced in an attempt to combat the
global financial crisis.

activity
The ITA expects compliance measures
and dispute resolution to be areas of
increased focus over the next two years.
Lior Harary-Nitzan
lior.harary-nitzan@il.ey.com
+972 3 623 2749

Italy*
*
Country chapter Resources the taxing authority Significant business activity in Italy
completed based on the is devoting to transfer pricing (with focus on large and middle-size
insights of Ernst & Young taxpayers), the importance of IP to
professionals and publicly The Italian Tax Authority (ITA) the industry, and profitability (profit
administers taxes in Italy. The ITA is fluctuations and year-end adjustments)
currently undergoing restructuring under are factors driving the selection of
which regional offices will be in charge industries for particular focus.
of managing assessments as far as
large taxpayers are concerned. Transfer The selection of categories of taxpayers
pricing groups have been established currently under specific focus from
within the tax administration both at a transfer pricing perspective is
the central and regional levels. The APA communicated to taxpayers. Laws,
team is located in the central office. The circulars and official press releases are
ITA expects that, in the future, transfer issued annually to provide indications on
pricing specialists will be concentrated the activity to be performed by the tax
at the regional/central level, as large inspectors.
taxpayers are to be assessed by regional
offices as well as the central office. Geographic focus
The ITA considers transfer pricing to be The ITA specifically targets companies in
a key assessment area. As such, the ITA blacklisted countries and countries that
is increasing the number of resources have tax regimes more favorable than
dedicated to transfer pricing and is Italy’s. Typically, transactions with Italy’s
improving the technical skills of these non-treaty partners, with countries with
resources. Transfer pricing specialists limited exchange of information and low-
operate as well within the APA team. tax jurisdictions are reviewed in an audit.
These specialists also support tax Additionally, domestically headquartered
officers in the field and in tax settlement companies (where foreign tax credit
procedures. discipline plays a role) are also included
in the regular audit cycle. Transfer
In terms of background, the resources pricing reviews often involve low tax
of the ITA involved in transfer pricing jurisdictions (both blacklisted and non-
reviews consist mainly of accountants, blacklisted countries).
with a few economists.
Both legislative direction and practical
Industry focus considerations appear to be the key
drivers for certain jurisdictions being
Italian transfer pricing audits currently selected by the ITA. In the current
focus on the banking and capital caseload of transfer pricing reviews,
markets, consumer products, oil and the most prevalent jurisdictions of the
gas, and pharmaceutical industries. relevant counterparties include low-tax

jurisdictions (i.e., both blacklisted and of the transfer pricing adjustment. It
non-blacklisted countries). is anticipated that the assessment of
penalties will remain the same in the next
Types of transactions under two years.
scrutiny
Audit triggers
The sale of tangible goods and IP, other
IP transactions (such as the payment Transfer pricing audits are instigated
of royalties or license fees), intra-group at both the local and at a central level,
services, financial transactions, cost depending on the size of the taxpayers
sharing or cost pooling arrangements, involved. Large taxpayers are often
the intra-group sale of business concerns selected at central level or regional level.
and stock-based compensation are A variety of considerations are taken into
the related-party transactions that are account in determining which taxpayers
currently the focus for transfer pricing to audit. Companies undertaking
review. Key transactions comprising business restructurings, including those
the current caseload of transfer pricing involved in M&A activity with other
reviews (ranked in order of prevalence companies or groups and taxpayers
based on observations) are: that have intra-group transactions
with companies resident in low-tax
• Intra-group services jurisdictions are under particular focus.
• Cost sharing/cost pooling The ITA specifically focuses on major and
arrangements midsize taxpayers.
• IP The factors that usually trigger transfer

pricing reviews in the jurisdiction
• Intra-group sales of business concerns
(ranked in order of importance based on
• Tangible goods observations) are:
• Financial transactions • Previous tax audits

• Risk-based assessment
Italy does not have a specific transfer
pricing penalty regime. The general tax • Nature of related-party transactions
penalty regime is applied. Over the last • Profitability
two years, penalties were applied in a
minimum of 50% of cases where transfer • Volume of transactions
pricing adjustments were issued. Where • Standard cycles/programs
penalties were imposed, they ranged
from a minimum of 100% up to 200% A Circular Letter was recently issued (on
3 March 2009) by the Italian Tax Police.

This circular provides new and updated Comparable data
instructions concerning tax audit activity.
It addresses corporate income tax, VAT The ITA has no formal transfer pricing
and regional tax on production activities, documentation requirements and
as well as other indirect taxes. no guidelines as to how to conduct
comparable searches. Though local
There are specific sections (including data is often preferred by the Italian tax
checklists) concerning transfer pricing, administration, comparable analysis
costs related to blacklisted countries and performed on a pan-European basis
PE issues. The Italian tax authority has might be acceptable.
placed more emphasis on intra-group
services and intra-group transactions Performing comparable analyses
concerning intangibles, with respect to involving jurisdictions outside of Europe
transfer pricing. A Circular Letter of the involves greater transfer pricing risks
Tax Administration dated 9 April 2009 given comparability issues. In the
identifies intra-group transactions, the absence of specific Italian requirements,
transfer of goods, intra-group financing it is the taxpayer’s decision to evaluate
and intra-group transactions concerning the comparability of the markets and
intangibles as potentially critical. then define the geographical area where
the analysis should be performed (taking
into account the provisions of the OECD
and the EU Code of Conduct on Transfer
The ITA resources involved in transfer Pricing).
pricing reviews work in an integrated way
with indirect tax specialists when transfer
data, there are no strict requirements.
pricing challenges are identified. Audits
The ITA may consider three to five years
of custom duties are usually performed
of financial data appropriate. An inter-
separately from other audits. As such,
quartile range is usually considered as
though there is some exchange of
the most reliable range. In terms of PLIs,
information with respect to customs and
the tax authority generally accepts both
transfer pricing, this is less frequent than
simple and weighted averages and often
in other instances.
uses the operating margin. Data pooling
There is no formal requirement that the may be used for corroboration, but data
same transfer price be used for corporate pooling is very rarely applied without
(direct) tax and indirect tax purposes. average data. The structure of Italian
The arm’s length principle, which is the financial statements does not allow for
basis for determining transfer prices for automatically determining gross margins
direct tax purposes, is not automatically for companies. Financial adjustments
applicable for indirect tax purposes. to comparable data are recommended
where they can provide reliable results

and materially improve the comparability available for transfer pricing. However,
of the controlled and uncontrolled there are some other rulings available,
transactions. including tax haven discipline and anti-
avoidance rules.
Transfer pricing methods The EU Arbitration Convention is
Regarding acceptable transfer pricing preferred to MAPs (under the relevant
methodologies, Italian Regulations on double tax treaties) for cases involving
transfer pricing identify the standard EU companies. Both EU arbitration
methods to be used for determining the and MAPs have been rarely adopted
transfer pricing of the intercompany in the past. The information on these
transactions, which are the CUP, the procedures is not publicly available.
resale minus method and the cost plus There are technical uncertainties
method. In addition the mentioned regarding the application of these
Regulations set forth some additional processes.
minor methods, including the global
profits allocation, the CPM, the return Yield/performance of transfer
on invested capital and the gross margin pricing reviews
for the economic sector. However, it is
specified that the nonstandard methods The effectiveness of transfer pricing
should be taken into consideration only review activities is, to some extent,
as mere instruments to be applied along measured having regard to the increase
with the standard ones. in tax yield and the percentage of
taxpayers assessed as high risk.
Cost contribution and cost sharing
mechanisms are other transfer pricing Transfer pricing disputes
approaches applied, generally in the case
of intra-group services. The ITA is reducing tax litigation
by encouraging taxpayers to reach
Advance Pricing Agreements settlements, thereby avoiding expensive
and long litigation. New settlement
(APAs)
opportunities are being introduced that
Italy has had a formal APA program since allow taxpayers to reduce penalties up to
2004. The ITA has given open access to one-eighth (if the taxpayer agrees with
the APA program for taxpayers. the findings of the tax inspectors before
any tax assessment notice is formally
Only unilateral APAs are applicable in
issued). The tax settlement procedure
Italy, and the number of applications
is a way of managing transfer pricing
received per year is limited. The average
controversies and penalties, and penalty
duration of the APA process may range
reductions down to one-fourth of more
from one to two years. Currently, there
standard penalty levels may be achieved
are no other advanced ruling options

pricing
The transfer pricing environment in Italy
is responsive to the OECD initiatives, EU
initiatives and the implementation of
centralized business and tax models. The
EU Joint Transfer Pricing Forum has been
stimulating the ITA to reactivate the EU
Arbitration Convention. OECD provisions,
EU provisions and their updates are usually
considered during Italian tax audits.
It is anticipated that an update of local

transfer pricing rules will be issued by the
ITA. However, there is no clear indication
currently available on when the new rules
will be issued nor about their content.

activity
The ITA expects dispute resolution to
be an area of increased focus over the
next two years. Although the number
of dispute resolutions in process is still
limited, they are increasing.
Davide Bergami
davide.bergami@it.ey.com
+39 02 851 4409

Kazakhstan*
Resources the taxing authority Legislative direction and practical *

Country chapter
is devoting to transfer pricing considerations are the key drivers for completed based on the
certain jurisdictions being selected by the insights of Ernst & Young
The Tax Committee of the Ministry of TCMF. professionals and publicly
Finance (TCMF) administers taxes in
Kazakhstan. Within the TCMF, transfer Types of transactions under
pricing reviews are carried out by a
scrutiny
centralized group which consists of
between five and ten individuals. Transfer The transactions receiving the most
pricing examinations are generally focus from the TCMF for transfer pricing
undertaken as part of complex tax audits review are currently the sale of tangible
and are carried out by the same tax goods, intra-group services and financial
officers. There are no transfer pricing transactions. According to the Kazakh
specialists in the local tax bodies; they are Transfer Pricing Law, transfer pricing
all concentrated in the TCMF. The number control applies to transactions between
of transfer pricing resources is expected related and unrelated parties (unlike
to increase over the next two years. OECD transfer pricing principles).
Industry focus Transfer pricing penalties

Kazakhstan transfer pricing audits Kazakhstan does not have a specific
currently focus on the banking and capital transfer pricing penalty regime. The
markets, mining and metals, oil and general tax penalty regime is applied.
gas, and power and utilities industries. The Code on Administrative Violations
Significant business activity in Kazakhstan, establishes the legislative requirements.
profitability, and strategic importance are Over the last two years, penalties applied
the factors driving the industries that are have generally applied in up to 100% of
selected for particular focus. cases where transfer pricing adjustments
were issued. Where penalties were
The selection of industries currently
imposed, they generally ranged up to
75% of the transfer pricing adjustment.
pricing perspective is not officially
It is anticipated that the assessment of
communicated to taxpayers.
penalties will increase in the next two years.
Geographic focus Audit triggers

The TCMF targets companies in certain
Transfer pricing audits are instigated by
jurisdictions to some extent. Typically,
a central decision-making body in the
reviews focus on transactions with
context of the standard audit program in
Kazakhstan’s major trading partners and
Kazakhstan. A variety of considerations
low-tax jurisdictions. Transactions with
are taken into account in determining
non-treaty partners are also a focus.

which taxpayers to audit, including: Transfer pricing methods
• The profitability of the local taxpayer There is a formal hierarchy between the
• The volume of related-party transfer pricing methods. The methods
transactions undertaken should be used in the following order:
• The nature of related-party • CUP

transactions • Costs plus method
• Subsequent resale price method
• Profit split method
The resources involved in transfer pricing
reviews work in an integrated way with • Net margin method
indirect tax specialists, and they actively
share information. Despite the exchange Advance Pricing Agreements
of information, there is no formal (APAs)
requirement that the same transfer price
be used for corporate (direct) tax and Kazakhstan has a formal APA program.
indirect tax purposes. The TCMF has given taxpayers open
access to the APA program. It takes
Comparable data 60 working days to complete an APA
process, as outlined in local legislation.
The TCMF has no specific rules requiring There are no specific provisions in
the use of local comparables or for Kazakhstan’s Transfer Pricing Law that
financial adjustments to comparable stipulates that an APA is binding for the
data. Nor have specific rules been laid tax authorities.
out in relation to the number of years
of financial information that should be Yield/performance of transfer
considered, the use of simple versus
pricing reviews
weighted averages, the method for
calculating an arm’s length range, the The TCMF expects compliance measures
method for determining an appropriate and yield targets (i.e., an increase in the
PLI, or the pooling or averaging of tax take based on audit activity) to be
financial data. areas of increased focus over the next
two years.

pricing
in Kazakhstan is responsive to the
implementation of centralized business
and tax models. The new transfer
pricing legislation that came into effect
on 1 January 2009 was largely in
response to the impact of these types of
restructurings.
Roman Yurtayev
roman.yurtayev@kz.ey.com
+7 727 258 5960

Kenya
Resources the taxing authority audits. The top jurisdictions (in order,
is devoting to transfer pricing according to the current caseload of
transfer pricing reviews) of the relevant
The Kenya Revenue Authority (KRA) counterparties are:
administers taxes in Kenya. The KRA
does not have a centralized center for • The United Kingdom
transfer pricing reviews. As such, no • Other European jurisdictions
resources are dedicated to performing (Switzerland, the Netherlands)
transfer pricing review, and typically,
resources are drawn from other
departments to perform reviews. Going
forward, the KRA intends to establish a Types of transactions under
specialized team to lead efforts toward scrutiny
establishing a framework for transfer The composition of the current
pricing reviews. caseload of transfer pricing reviews is
In terms of background, the resources summarized in the table below.
engaged in transfer pricing reviews
Transaction Current
are revenue officers with the following caseload %
backgrounds: accountants, followed by
Tangible goods 60% to 70%
economists and lawyers. The KRA plans
to invest in transfer pricing, and the Intra-group services 20%
number of transfer pricing resources is IP (e.g., royalties, 10%
expected to increase in the coming years. licensing)
Industry focus Transfer pricing penalties

The KRA mainly focuses on companies Kenyan law does not provide for the
with high-risk transactions; therefore, imposition of specific transfer pricing
factors such as profitability of the penalties. The penalties generally
industry, level of royalties paid and applicable under the Income Tax Act
the level of activity of the industry also apply to transfer pricing cases.
within Kenya are relevant factors in the
selection of industries for scrutiny. Over the last two years, penalties have
been applied in fewer than 25% of cases
Geographic focus where transfer pricing adjustments were
issued. Where penalties are imposed,
Practical considerations drive the choice they generally range up to 25% of the
of jurisdictions for review. Typically, additional tax. However, it is expected
transactions with perceived tax havens that the level of penalties imposed by the
and low-tax jurisdictions are targeted for KRA will increase over the next two years.

Audit triggers arm’s length range. There is no formal or
mandatory guidance provided regarding
Transfer pricing audits are instigated by adjustments to comparable data. Such
local KRA offices and divisions, and there adjustments are optional and are likely to
is no central process for determining be supported by the KRA if they enhance
which cases should be looked at. The the comparability of the information with
selection of the taxpayer and the scope the tested party.
of the audit are typically driven by
factors such as:
• A risk-based assessment by the KRA
Kenyan transfer pricing legislation allows
• The volume of related-party the use of the most suitable transfer
transactions pricing method for determining arm’s
length remuneration for controlled
• The nature of related-party
transactions, provided the choice
transactions
of method can be justified and is
• The profitability of the local taxpayer documented. The transfer pricing
methods are outlined in the Income Tax
• The incidence of business
restructurings (Transfer Pricing) Rules 2006 and follow
the methods in the OECD Guidelines.
• The previous audits of the taxpayer The rules do not explicitly permit the
comparable profits method. However,
Indirect and customs tax the rules give the taxpayer discretion
to use such other method as may be
prescribed by the Commissioner, where,
resources are granted access to the
in his opinion and in view of the nature
Simba system used by the Customs
of the transaction, the arm’s length price
department and can share information
cannot be determined using any of the
with it. Within Kenya, the same transfer
methods specified in the guidelines.
price needs to be used for corporate
Comparable data (APAs)
Typically, local country comparables are Kenya does not have a formal APA
preferred, although the use of global program. Requests for resolution
comparables is also acceptable. of double taxation cases under the
competent authority procedure typically
In preparing and presenting comparable take longer than one year to resolve.
data, specific requirements apply in
relation to the method for calculating an

pricing reviews
review activities is measured by the
percentage of review cases involving an
adjustment to the taxpayer’s income.

In the context of disputes, most of the
cases are ongoing in domestic appeal
(pending court action). The most
prevalent industries in such cases
are agriculture, manufacturing and
production. The top jurisdictions (in
order, according to the current caseload
of transfer pricing reviews) of the
relevant counterparties are the United
Kingdom, countries in Europe and the
United States. Having previously lost a
transfer pricing case in the High Court,
the KRA has tended to avoid going to
court over transfer pricing disputes.

activity
Over the next two years, from a transfer
pricing perspective, the KRA expects to
place greater emphasis on compliance
measures, dispute resolution, yield
targets, and interaction with customs
and other indirect taxes.
Geoffrey G. Karuu
geoffrey.g.karuu@ke.ey.com
+254 20 2715300

Lithuania
Resources the taxing authority taxpayers and periodically reviewed.

is devoting to transfer pricing However, industry sector is only one of
a number of factors used by the STI to
The State Tax Inspectorate (STI), a unit determine audit targets.
of the Ministry of Finance, administers Geographic focus
taxes in Lithuania. Within the STI,
tax audits are handled by the Large The STI targets companies with
Taxpayers Department (LTD). Transfer transactions with low–tax jurisdictions.
pricing review is an integral part of any This is determined both by a formal
tax audit and is carried out by general blacklist for certain jurisdictions as well
tax examiners. While the LTD has a as by practical considerations.
specialty transfer pricing group, these
transfer pricing specialists are primarily Types of transactions under
responsible for training the generalists scrutiny
and for planning and providing general
The STI has specifically identified certain
assistance in transfer pricing audits.
transaction types that are currently the
The transfer pricing specialists may be
focus of transfer pricing reviews. The
directly involved in a tax audit only on a
composition of the current caseload of
case-specific basis.
transfer pricing reviews is summarized in
There are nine specialist transfer pricing the table below.
resources at the STI, split between
the central unit and local tax offices. Transaction Current
These resources are predominantly caseload %
accountants. There has been an increase
in the number of specialist transfer
pricing resources, from three to nine, Tangible goods 30%
over the last two years. However, this Financial transactions 20%
number is not expected to increase going instruments)
forward.

Industry focus
Lithuanian law does not provide for the
In determining particular industries
to focus on, the STI considers such
penalties. The penalties that generally
factors as the level of activity within
apply to infringements of the tax laws
Lithuania and the profitability of the
also apply to transfer pricing cases.
industry. Currently the STI has a focus on
consumer products and pharmaceuticals Over the last two years, penalties have
industries. This list of priority industries been applied in approximately 25% to
is specifically communicated to the 50% of cases where transfer pricing

adjustments were issued. Where In preparing and presenting comparable
penalties are imposed, they generally data, there are no specific requirements
range between 25% to 50% of the in relation to how comparable data
additional tax. It is not anticipated that is presented. No formal guidance
this approach to penalties will change in is provided as to adjustments to
the next two years. comparable data, but such adjustments
are recommended, and are likely to be
Audit triggers supported by the STI if they enhance the
comparability of the information with the
The relevant decentralized offices
tested party.
instigate transfer pricing audits, taking
into account recommendations issued by
the LTD. The selection of taxpayers and
the scope of audits are typically driven Lithuanian transfer pricing legislation
by a risk-based assessment, taking into specifies a hierarchy of transfer pricing
account: methods to determine an arm’s length
remuneration for controlled transactions.
The STI has specifically identified the
• The nature and volume of the CPM as an inappropriate method.
taxpayer’s related-party transactions
• Issues arising in previous tax audits of Advance Pricing Agreements
the taxpayer (APAs)
Lithuania does not have a formal APA
Indirect and customs tax program. Nevertheless, it is possible for
As transfer pricing reviews form part taxpayers to apply for an advanced ruling
of general audits, there is a correlation in cases where there is a double taxation
between direct tax and indirect agreement. An APA program is expected to
tax reviews. However, there is no be formally introduced in the near future.
requirement that the same transfer price
be used for corporate (direct) tax and Yield/performance of transfer
indirect tax purposes. pricing reviews
Comparable data
review activities is measured using
In performing transfer pricing analysis, various considerations, such as an
local country comparables are preferred, increase in the tax yield, the percentage
although regional comparables (either of review cases involving an adjustment
from the Baltic states or, more broadly, to the taxpayer’s income, and the
including member states of the European percentage of taxpayers in compliance
Union) may also be used. with documentation requirements.

ongoing case in litigation. The taxpayer
in this case is in the pharmaceutical
industry.

pricing
Lithuania is responsive to European
Union initiatives (such as the EU Joint
Transfer Pricing Forum). For instance,
Lithuania is expected to change
its transfer pricing documentation
requirements following introduction of
the European Union’s Code of Conduct
on transfer pricing documentation.

activity
Over the next two years, the STI expects
to place greater emphasis on compliance
measures from a transfer pricing
perspective.
Leonas Lingis
leonas.lingis@lt.ey.com
+370 5 274 2279

Norway
Resources the taxing authority industries currently under specific focus

is devoting to transfer pricing from a transfer pricing perspective is
not communicated to taxpayers and is
The Directorate of Taxes administers reviewed annually.
taxes in Norway. Within the Directorate
of Taxes, transfer pricing reviews are The Directorate of Taxes especially
currently being carried out by three out focuses on the attribution of profits to
of the five regional offices. There has PEs.
been an increase in the number of FTE
resources involved in transfer pricing Geographic focus
examinations, from approximately 50 The Directorate of Taxes specifically
to between 80 and 100 over the last targets companies located in tax
two years. This number is expected to havens and low-tax jurisdictions.
level off at approximately 100 over the Typically, perceived low-tax jurisdictions
next two years. Resources are highly are reviewed in the scope of audits.
decentralized, with a team of four central Additionally, domestically headquartered
transfer pricing specialists supporting companies are also included in the
field officers. regular audit cycle. Transfer pricing
In terms of background, the resources reviews often involve low-tax jurisdictions
comprise approximately 50% lawyers, (including both blacklisted and non-
30% accountants and 20% economists. blacklisted countries).
The background of resources currently This is reflected in the current caseload
involved in transfer pricing examinations of transfer pricing reviews, with
has changed significantly in the recent particularly high numbers of cases
years, due to difficulties with recruiting involving Switzerland, Belgium, Ireland
accountants. and the Netherlands.

Transfer pricing audits in Norway scrutiny
currently focus on the consumer
The Directorate of Taxes focuses on IP
products, insurance, oil and gas,
transactions, intra-group services and
pharmaceuticals, technology, oil
financial transactions (loan/thin cap) for
services and telecommunication
transfer pricing review. The approximate
industries. Significant business activity
percentage of the total caseload
in Norway (especially for oil and gas/
involving the following transactions are:
oilfield services) and the importance
of IP to the industry are key factors
driving the selection of industries
for particular focus. The selection of

Transaction Current • Disclosures made on a special
caseload % transfer pricing form (RF 1123) to be
submitted with tax return
IP (e.g., royalties, licensing) 20%
Intra-group services 20% In addition, any taxpayer with questions
arising as a result of form RF 1123 is
Financial transactions 40%
(e.g., loans, other debt most likely be asked to submit transfer
instruments) pricing documentation.
Transactions arising from 20%
business restructuring Indirect and customs tax
Transfer pricing penalties Generally, the transfer pricing resources

do not work in an integrated way with
Norway does not have a specific transfer indirect tax specialists.
pricing penalty regime. The general
penalty regime is applied in transfer Comparable data
pricing cases. There are no processes in
place to ensure consistent application of The Directorate of Taxes adheres to
transfer pricing penalties within Norway. the OECD approach when performing a
Over the last two years, penalties were comparability analysis, where a search
applied in up to 30% of cases where for comparables is part of this analysis.
transfer pricing adjustments were issued. The comparables could both comprise
Where penalties were imposed, they internal or external ones, but must
generally ranged up to 30% of the tax satisfy the five comparability factors.
adjustment. In a search for external comparables, it
is preferred for these to be as local as
In addition, it is noted that failure to possible. However, since the markets in
submit a documentation of sufficient Scandinavia, Nordic region and Northern
quality may result in a loss of the right to Europe are considered to be more similar,
appeal against the assessment. comparables from these locations are
acceptable.
Audit triggers
A variety of considerations are taken into data, the Directorate of Taxes expects a
account in determining which taxpayers minimum of three years of financial data
to audit, including: to be used and the method for calculating
• The profitability of the local taxpayer — the allowable arm’s length range to
loss-making businesses be based on an assessment of the
transactions and information available
• Business restructurings (identified (i.e., not an automatic elimination of the
from a form submitted with the tax lower and upper quartiles).
return)

The methods for determining the proper activities in the period 2005 to 2007 by
PLI (e.g., the operating margin) should the increase in tax yield.
be based on the suitability of the PLI and Transfer pricing disputes
the value driver for the transaction.
In the context of disputes, there are
Furthermore, the use of database approximately 100 pending cases in
searches could be recognized as proof of domestic appeals (preceding court
an arm’s length range if the comparable action), 30 to 40 cases in litigation
set is reliable. It is recommended that and 20 to 30 case in MAP. The
financial adjustments be made to jurisdictions most frequently forming
comparable data, if adjustments can the counterparties to the underlying
be made and will improve the reliability transactions of these disputes and
of the data/comparison. However, a currently under MAP/arbitration are
comparable set may provide support that Denmark, Germany, the Netherlands, the
the price level used is at arm’s length. United Kingdom, the United States and
Sweden.
Norway follows the OECD Guidelines,
which identify the methods to be used in pricing
determining arm’s length remuneration The transfer pricing environment in
for controlled transactions. The position Norway is responsive to the global
relating to preferred transfer pricing financial crisis or credit crunch, the
methods is not based on legislative implementation of centralized business
provisions but, rather, on general and tax models, and OECD initiatives,
practice. which have been taken into account and
implemented when applicable.
The Norwegian tax authorities have
(APAs) changed their policy to provide an
Norway does not have a formal APA increased scrutiny of the implications
program. If a mutual agreement of tax efficient supply chain models
procedure (MAP) is initiated before and other business restructuring or
reassessment is finished, the process conversion issues as described by
may be very similar to a bilateral APA. the OECD Discussion on Business
Restructurings draft released in 2008.
Yield/performance of transfer Norway will also follow up the new
pricing reviews legislation in the future. This policy has
The Directorate of Taxes measured the increased the risk of a reassessment
effectiveness of transfer pricing review due to a change in functions, risks or

assets (especially IP) in connection with
conversion to commissionaire structures
or other centralized business models.
The Directorate of Taxes will also monitor

closely the impact of the global financial
crisis on existing business models.

activity
The Directorate of Taxes expects dispute
resolution and increasing the resources
involved in MAPs (double taxation
issues) to be areas of increased focus
over the next two years.
Marius Leivestad
marius.leivestad@no.ey.com
+47 24 00 23 86

Poland
Resources the taxing authority significant changes in the background of

is devoting to transfer pricing the resources for the last two years.
The Ministry of Finance, the Tax There are Tax Offices in Poland
Inspection Department, the Income supervised by the Tax Administration
Tax Department for Advance Pricing Department in the Ministry of Finance,
Agreements and the Tax Administration which are authorized to inspect
Department are the relevant bodies that taxpayers in the area of transfer pricing
administer transfer pricing in Poland. as well. The statistics for the Tax Offices’
activities were, however, not included in
The Tax Inspection Department in the this report, which is based solely on the
Ministry of Finance supervises the data of the Tax Inspection Department
departments involved in the inspection and the Income Tax Department for
of related-party transactions in the Advance Pricing Agreements.
Tax Inspection Offices all over Poland.
Generally, the inspectors employed in Industry focus
the local departments do not focus solely
on transfer pricing issues. Currently, Transfer pricing audits in Poland
there are 250 FTE resources employed currently focus on the consumer
for the inspection of the related-party products, pharmaceuticals, real
transactions in the Tax Inspection Offices estate, technology, power and utilities,
in Poland. There are 8 people in the team construction and chemical industries.
in the Ministry of Finance responsible Significant business activity in Poland
for the supervision of the activity of and the profitability of the local taxpayer
the departments for the inspection of are the factors driving the selection of
related-party transactions. There are industries for particular focus. Other
16 heads of the teams who work at the considerations driving the selection
office in the Tax Inspection offices. There of industries include being part of
are 234 inspectors working in the field multinational capital groups, being a
on transfer pricing inspections. There branch of a foreign taxpayer, having
were 224 FTE resources two years ago. foreign contractors and the quantum of
The number of FTE resources is expected activities.
to increase over the next two years. The selection of industries for specific
In terms of background, the focus from a transfer pricing perspective
resources involved in transfer pricing is not widely communicated to taxpayers.
reviews consist of approximately The list of industries in focus changes
60% economists, 30% lawyers, without any specific time frame and takes
5% accountants while the other account of the results (e.g., the size of
resources have science and humanities irregularities) of audit activities.
backgrounds. There have been no

Geographic focus an adjustment is made as a result of a tax
inspection. The penalty tax rate can only
The Polish tax authorities target be applied if a taxpayer did not provide
companies in certain jurisdictions for the tax authorities with the transfer
transfer pricing reviews with the focus pricing documentation required under
of attention on the transactions with Polish law.
parties located in tax havens. Typically,
transactions with Poland’s major trading Over the last two years, penalties were
partners, non-treaty partners and applied in up to 25% of cases where
companies with headquarters in tax transfer pricing adjustments were issued
havens are reviewed in the scope of audit. by the Tax Inspection Offices. Where
penalties were imposed, they generally
Legislative direction is the key driver for ranged up to 25% of the transfer pricing
certain jurisdictions being selected by adjustment. It is not anticipated that
the Polish tax authorities. There is an this approach to penalties will change in
official list of the tax havens published in the next two years, and it is expected to
a Ministry of Finance Decree dated remain roughly the same. In 2008, the
16 May 2005. tax inspection offices applied the penalty
In the current caseload of transfer tax rate in three cases for the amount of
pricing reviews, the top five most PLN890,000 (approximately
prevalent jurisdictions of the relevant US$280,000).
counterparties are:
Audit triggers
1) Germany
2) Luxemburg Transfer pricing audits are not instigated
3) Cyprus by a central decision-making body. A
4) France variety of considerations are taken
5) Switzerland into account in determining which
taxpayers should be the focus of audit
activity, including (ranked in order of
scrutiny importance):
Transfer pricing reviews by the Polish tax • The volume of related-party
authorities currently focus on the sale of transactions undertaken by the
tangible goods, IP transactions, intra- taxpayer
group services, financial transactions and
cost sharing/cost pooling arrangements. • The nature of related-party
transactions undertaken by the
taxpayer
A penalty tax rate of up to 50% may be
applied in transfer pricing cases where • Previous tax audits of the taxpayer

• VAT, employment, customs or other and many analytical tools are applied in
indirect tax reviews practice. The analysis should be made
in a way that results in the most reliable
and comparable data. The Polish tax
assessment by the Polish tax
authorities recommend making financial
authorities
adjustments to comparable data to
• Whether there is evidence of business improve comparability with the tested
restructurings party. The Polish tax authorities expect
The central team in the Ministry of the best comparable data to be selected
Finance does not directly decide on the out of the market data available and that
selection of particular cases for audit the particular price/margin/PLI used falls
but, based on a coordinated approach, within the arm’s length range identified.
sets the industries on which inspectors
should focus and indicates other criteria, Transfer pricing methods
based on which the selection for transfer The transfer pricing methods and their
pricing audits should be made. hierarchy are outlined in the relevant
Polish law. This hierarchical order of
Indirect and customs tax preference follows the OECD Guidelines.
The transfer pricing enforcement However, there is no direct reference to
resources work in an integrated way with the CPM in the Polish transfer pricing
indirect tax specialists. Generally, the guidelines. Under the Polish law, the
same transfer price should be applied tax authorities need to verify the arm’s
in practice. However, technically, it is length character of the transfer prices
possible to have different pricing, as the by using the CUP, resale minus, cost
VAT law has its own definition of market plus, TNMM or profit split methods.
value and circumstances requiring Cost sharing and cost contribution
adjustments, and therefore there could arrangements are not listed as the
be a difference in prices. transfer pricing methods. However,
the transfer pricing law gives some
indication on how to establish the arm’s
Comparable data
length value in case of such type of
Local comparables are preferred as they arrangements.
are considered to be more reliable, and
as such, they are given greatest weight Advance Pricing Agreements
in most cases. Where Polish comparables (APAs)
cannot found, Central/Eastern European
comparables may be used. Poland has a formal APA program that
entered into force in 2006. There were
In preparing and presenting comparable twelve applications filed in 2006, three
data, there are no specific requirements,

applications filed in 2007, five applications Transfer pricing disputes
filed in 2008 and one application in 2009
under the APA program. Seven APA cases In the context of disputes, there are ten
are currently in process in the Ministry ongoing cases in the domestic appeals
of Finance, of which six applications are process (preceding court action), four
for unilateral APAs and one application is ongoing cases and two pending cases
for a bilateral APA. The average length of for litigation, two ongoing cases for MAP
time required to complete an APA process and six initial discussions for arbitration.
is fourteen months. The two jurisdictions most frequently
represented by counterparties to the
The strategy of the Ministry of Finance underlying transactions in these disputes
is to strengthen the APA process and are Germany and France.
to develop APAs as a tool for taxpayers
to reduce their potential transfer Likely trends in transfer pricing
pricing risks. Therefore, Ministry of
activity
Finance expectation is that, thanks to
the experience gathered so far, the The Polish tax authorities expect
efficiency of the procedure will improve yield targets (i.e., an increase in the
through maintaining the best practices tax take based on audit activity) and
in the communication with taxpayers the interaction with customs and
and shortening the average length of other indirect taxes to be the areas of
time required. It is also the Ministry increased focus over the next two years.
of Finance’s strategy to increase the
number of bilateral APA cases.
pricing reviews
The Polish tax authorities measure the
effectiveness of transfer pricing review
activities by the increased tax yield and
the percentage of review cases where
an adjustment is sustained on appeal. In
2008, 338 transfer pricing inspections
were conducted by the Tax Inspection
Offices. In 41 cases (out of the 338
inspections conducted), an adjustment
was made to the transfer price, and Ernst & Young contact
additional income was assessed on
Aneta Blazejewska-Gaczynska
taxpayers.
aneta.blazejewska-gaczynska@pl.ey.com
+48 22 557 8996

Portugal*
*
Country chapter
Resources the taxing authority The selection of industries currently
completed based on the is devoting to transfer pricing under specific focus from a tax
insights of Ernst & Young perspective, and therefore also from a
professionals and publicly The Directorate General for Taxes transfer pricing perspective, is widely
(Direcção Geral dos Impostos) (the communicated to taxpayers. This list
DGT)administers taxes in Portugal. of industries is reviewed annually. A
Within the DGT, transfer pricing reviews list of companies that will be subject to
are carried out by a special transfer a special scrutiny, taking into account
pricing unit within the Tax Inspection indicators such as turnover, tax losses
Group. and use of tax benefits, is published
There has been an increase in the every four years. The last one was
number of FTE resources involved in published in the current year.
transfer pricing reviews, from less than
10 resources to a level that fluctuates Geographic focus
below 50 resources over the last two The DGT does target companies in
years. It should be noted, however, that certain jurisdictions for transfer pricing
of these resources, approximately 10 reviews. Typically, perceived low-tax
could be considered transfer pricing jurisdictions are reviewed in the scope
specialists. This number is expected to of an audit. Additionally, domestically
sharply increase over the next two years. headquartered companies are also
In terms of background, the specialist included in the regular audit cycle.
transfer pricing resources in the Tax The stated policy of the Portuguese
Inspection Group are mainly economists. authorities is the key driver for
The background of resources currently certain jurisdictions being selected
involved in transfer pricing examinations by the DGT. In the current caseload
is anticipated to change significantly, with of transfer pricing reviews, the most
the increase in percentage of lawyers prevalent jurisdictions of the relevant
over the coming two years. counterparties are:
Industry focus • Blacklisted offshore jurisdictions

• EU and EFTA jurisdictions with
Transfer pricing audits in Portugal
more favorable treatment of certain
currently focus on the automotive,
categories of income such as trading,
banking and capital markets, consumer
IP and hybrid instruments
products and real estate industries.
Significant business activity in Portugal • EU and EFTA jurisdictions with a
and the business turnover of industry system of rulings that provide for
participants are the factors driving the substantial reduction of taxable
selection of idustries for particular focus. burden in all categories of income such
as trading, IP and hybrid instruments

Types of transactions under the objective of the preparation of a
scrutiny specific transfer pricing penalty regime.
Over the last two years, penalties were
The DGT is currently focusing on the applied in up to 100% of cases where
following transaction types for transfer transfer pricing adjustments were issued.
pricing reviews: the sale of tangible It is anticipated that penalties assessed
goods, IP transactions, intra-group in relation to transfer pricing matters will
services, business model conversions, increase in the next two years.
and the sale of a business. Key
transactions that make up the current Audit triggers
caseload of transfer pricing reviews
(ranked in order of prevalence) are: Transfer pricing audits are instigated by
the DGT. A variety of considerations are
• Financial transactions (e.g., loans, taken into account in determining which
other debt instruments) taxpayers to audit, including (ranked in
• I► P (e.g., royalties, licensing) order of importance):
• Tangible goods • The outcome of a risk-based

assessment by the DGT
• I► ntra-group services
• Business model conversions restructurings
Transfer pricing penalties • The profitability of the local taxpayer
Portugal does not have a specific • The nature of related-party

transfer pricing penalty regime; the transactions undertaken by the
general penalty regime applies (for taxpayer
example, failing to prepare the annual • Previous tax audits of the taxpayer
tax documentation, when required by
law, attracts a penalty of up to 100,000 Indirect and customs tax
euros). In some cases, such as when
documentation was necessary and not Transfer pricing enforcement resources
created and when misleading information work in an integrated way with indirect
was provided in the transfer pricing tax specialists, especially in the context
annexes of the Annual Tax Declaration, of assessing the potential existence
criminal ramifications may be at stake of a PE of a foreign entity based
for the company’s chartered accountant on registration in Portugal for VAT
(TOC) or/and the management. purposes. There is a requirement that
However, the transfer pricing legislative the same transfer price be used for
agenda, foreseen in the preamble to corporate (direct) tax and indirect tax
Decree-Ruling 1446-C/2001, establishes purposes.

Comparable data the taxpayer to be the best available
method. Specific rules for CCAs and
The Portuguese transfer pricing law service agreements are also foreseen
gives prevalence to local comparables, in the law. The position with regard to
and these are given the highest weighting preferred transfer pricing methods is
from a comparables perspective. based on legislative provisions.
Iberian data is considered the next-best
alternative by the DGT where Portuguese
comparable information is not available.
If both types of comparable data are (APAs)
not available, which should be clearly Portugal has a formal APA program.
highlighted in the comparables search, Taxpayers have the right to apply
then pan-European data is considered as for an APA; however, it is within the
the last resort. discretionary powers of the DGT to move
In preparing and presenting comparable the APA forward.
data, the DGT expects a minimum of It generally takes a maximum of one year
three to five years of financial data to be to complete an APA process. However,
used. The DGT generally accepts simple different timings are foreseen in the law,
averages and prefers the averaging depending on the type of APA applied
of financial data rather than a pooling for. There are no other alternative
approach. The PLI is determined advanced ruling options available other
depending on the type of business model. than an APA.
The Portuguese transfer pricing law, and
the DGT, considers financial adjustments Likely trends in transfer pricing
(e.g., working capital adjustments, activity
asset intensity adjustment) made to the
The DGT expects dispute resolution and
comparable data to be mandatory.
yield targets (i.e., increasing tax take
based on audit activity) to be areas of
Transfer pricing methods increased focus over the next two years.
There is no formal hierarchy between
transfer pricing methods in Portugal. The
choice of an appropriate transfer pricing
method depends on the type of business
model and the transactions involved.
The CUP, RPM, cost plus method, profit
Ernst & Young contact split method and the TNMM are explicitly
listed in the local legislation law. A CPM
Paulo Mendonca may be applied if it is demonstrated by
paulo.mendonca@pt.ey.com
+351 21 791 2045

Romania
Resources the taxing authority to €3,500 and an estimation of the 1

Based on information
is devoting to transfer pricing appropriate transfer prices by the tax available to Ernst & Young,
authorities in place of those determined these FTE resources
The National Agency of Fiscal by the taxpayer. The adjustments trigger a comprise mostly of
economists and registered
Administration (NAFA) administers profits tax liability of 16% on any additional accountants.
taxes in Romania. Transfer pricing income, and late payment interest of
examinations are performed by general around 36% per annum is also be levied.
tax audit inspectors based in the field. Romania has put in place legislative
However, a central transfer pricing unit provisions to ensure consistent application
has been set up within the NAFA, to of the transfer pricing penalty provisions.
work in cooperation with the field-level
inspectors. Over the last two years, penalties have
been applied in approximately 25% of
There are approximately 10 FTE cases where transfer pricing adjustments
resources1 at the central transfer were issued. Where penalties are
pricing unit. Only a few of the resources imposed, they generally range from 25%
involved in transfer pricing examinations to 50% of the additional tax. Penalty
are transfer pricing specialists. Most assessments are expected to increase
of the examiners based in the field are over the next two years.
generalists.
Audit triggers
Transfer pricing audits are instigated by
scrutiny
the central transfer pricing unit. Within
The NAFA has specifically identified that Romania’s standard audit program, the
the following transactions (in order of selection of the taxpayer for further
prevalence as per the current caseload) review and the scope of the audit are
are currently the focus of transfer pricing driven by various considerations such as
reviews: (ranked in order of importance):
• Intra-group services • T
► he profitability of the taxpayer
• IP (e.g., royalties, licensing) • VAT, employment, customs or other
indirect tax reviews
• Tangible goods
• T
► he nature and volume of the
Transfer pricing penalties taxpayer’s related-party transactions
Failure to present transfer pricing

documentation or the presentation of
incomplete documentation within the The work of Romanian transfer pricing
specified time may trigger a fine of up enforcement resources is integrated
with that of indirect tax specialists,

insofar as instigation of a transfer pricing Transfer pricing methods
audit is concerned — for instance, VAT
reimbursement requests often trigger Romanian transfer pricing legislation
transfer pricing audits. However, there specifies a hierarchy of transfer pricing
is no requirement that the same transfer methods to determine arm’s length
price be used for corporate (direct) tax remuneration for controlled transactions,
and indirect tax purposes. which is line with the hierarchy laid down
in the OECD Transfer Pricing Guidelines.
Comparable data
Typically, local comparables are (APAs)
preferred. The Romanian transfer pricing
documentation legislation specifically Romania has a formal APA program,
mentions that the comparability analysis which is accessible to all taxpayers.
should consider territorial criteria in the Currently, four APA requests are in
following sequence: Romania, European process. The average duration for
Union and other International territories. processing of APA requests is 12 months
The transfer pricing documentation for unilateral APAs and 18 months for
should detail the criteria based on which bilateral or multilateral APAs.
potential Romanian comparables, if any,
were rejected. Current influences on transfer
pricing
data, the inter-quartile range is preferred The transfer pricing environment in
for calculating the allowable arm’s Romania is responsive to the global
length range. There are no specific economic slowdown and the initiatives at
requirements in relation to the number the OECD and the EU levels. It is expected
of years of financial information, the use that these factors will result in an
of simple versus weighted averages, the increase in the number of transfer pricing
method for determining an appropriate audits going forward. Further, with
PLI, or the pooling or averaging of the introduction of specific Romanian
financial data. transfer pricing documentation
requirements in the year 2008, transfer
There is no formal/mandatory guidance
pricing has become one of the key issues
provided about adjustments to
in tax audits of multinational enterprises.
comparable data. Such adjustments
are likely to be supported by the
Romanian tax authorities, as long as any
adjustments are in line with the OECD
Transfer Pricing Guidelines.

activity
Over the next two years, the Romanian
tax authority expects to place greater
emphasis on compliance measures and
yield targets from a transfer pricing
perspective.
Alexander Milcev
alexander.milcev@ro.ey.com
+402 1402 4000

Russia*
*
Country chapter
completed based on the is devoting to transfer pricing No specific geographic focus has been
professionals and publicly In Russia, transfer pricing reviews are observed whereby the Russian tax
not undertaken by dedicated transfer authorities pick up transactions with
pricing specialists or transfer pricing certain foreign jurisdictions — although,
departments. However, as part of the as many Russian companies use offshore
expected reform of the Russian transfer jurisdictions, several cases do involve
pricing rules, the Russian tax authority such countries. However, perhaps
may set up a separate department to surprisingly, the majority of transfer
handle such cases. pricing court cases in Russia have
involved domestic transfer pricing issues.
There is an increased emphasis on
transfer pricing education. The Russian Types of transactions under
tax authority has, in the past, arranged
transfer pricing training sessions by
scrutiny
representatives of, among others, the In our experience, the most frequently
OECD and the Danish tax authority to reviewed transactions (ranked in order
increase the transfer pricing competency of prevalence, based on a review of
of its resources. It is expected that available court cases) relate to the
transfer pricing awareness and knowledge export of tangible goods, the rental or
will continue to increase as a result of the leasing of real estate and intra-group
increased attention to this issue. services charges (cost sharing).
The Russian tax authority does not

Industry focus
often challenge foreign MNEs in relation
In terms of absolute numbers of cases, to their import of goods. The tax
one of the most frequent issues that the authority might refer to the transfer
Russian tax authority applies the transfer pricing provisions when challenging
pricing provisions to is the leasing and service fees, but such charges are
renting, and buying and selling, of office primarily challenged on the basis of
space and apartments at a nonmarket nondeductibility (as not economically
price. However, this is not to say that justifiable or for insufficient evidence of
the real estate industry is the most services being rendered) and not only on
common focus for scrutiny in Russia. the transfer price itself.
In general, the Russian tax authority
IP transactions should not fall within the
pays special attention to commodities
scope of the Russian transfer pricing
industries (oil, gas, metals and timber)
rules, based on a literal interpretation
and, in particular, to exporters, which
of those rules. However, the Russian
have, historically, been known to use
tax authority has tried to broaden the
aggressive transfer pricing structures.

interpretation of the transfer pricing company’s profitability drops following
rules and, in one case, has successfully the introduction of a service charge or
lowered the royalty rate paid for a royalty. However, in general, to date,
trademark. the only structured trigger for transfer
pricing-related audits seems to have
But, in general, IP transactions are
been if a company exports commodities
likely to be challenged on the basis of
to a perceived low-tax jurisdiction.
nondeductibility on the basis that the
Otherwise, there is no clear pattern
charge is not economically justifiable.
behind what triggered the other transfer
pricing cases that have so far been heard
Transfer pricing penalties before the Russian courts.
Russia does not have a specific transfer
pricing penalty regime. In some cases, Indirect and customs tax
the Russian courts have chosen to
Historically, the work of Russian transfer
apply the general penalty regime, which
pricing enforcement resources has not
results in penalty of either 20% or 40%
been integrated with that of indirect tax
of undeclared taxes plus late payment
specialists. In general, the Russian tax
interests. In general, the Russian courts
authority and customs authority have
have taken the view that penalties do
tended to treat each other as rivals and
not apply to transfer pricing cases,
have not shared information. However,
as transfer pricing is an “estimation
this may change in the near future, as
exercise” for which the Tax Code does
the Russian tax and customs authorities
not provide the taxpayer with a right or
have called for royalty payments to be
wrong answer.
included in the price of goods declared
Over the last two years, penalties have for customs purposes, if a Russian-
been applied in fewer than 25% of cases based distribution company is to pay a
where transfer pricing adjustments were trademark royalty (although this is a
issued. Where penalties are imposed, customs and not a transfer pricing issue).
they generally range up to 20% of the
As such, there is no requirement that
additional tax. If Russia decides to go
ahead with the expected transfer pricing
reform, we would expect the assessment
purposes.
of penalties to increase, and a specific
transfer pricing penalty regime may be a
part of these reforms.
Comparable data
Only comparable data provided from
Audit triggers official sources, such as the State
Statistics and Price Setting Authority,
Profitability may trigger transfer pricing
experts and independent appraisers,
related challenges; for example, if a

official information regarding exchange plus method. The traditional RPM and
quotations and information regarding cost plus method (as defined under the
market prices published in printed OECD Guidelines) could be considered
publications, would be considered in the potentially inappropriate, as the Russian
case of a dispute. Such data is primarily transfer pricing rules refer to the use
of Russian origin. of operating income in applying these
methods. The Russian equivalents of the
The term “official source” is not defined
RPM and cost plus method are, in fact,
in the Tax Code, but these sources have
variations of the TNMM. In turn, they can
been listed in clarification letters issues
also be said to be variations of the CPM,
by the Ministry of Finance’s Department
depending on the specific fact pattern.
of Tax and Customs Policy.
The Russian transfer pricing rules also
In preparing and presenting comparable do not recognize the profit split method
data, there are no specific requirements (regardless of whether full profit split or
related to the number of years of residual profit split).
financial information, the selection of
In addition to the methods identified
method for calculating the arm’s length
above, the Russian tax authorities have
range, the use of simple versus weighted
also upheld the use of the discounted
averages, or the pooling or averaging of
cash flow approach in a specific case
financial data. In the context of PLIs, it
involving IP (trademark royalty rate).
should be noted that the Russian transfer
pricing rules make reference to the use
of “operating income” when applying
the local versions of the RPM and cost (APAs)
plus method. It is also interesting to note Russia does not have a formal APA
that the Russian transfer pricing rules program. The formulation of such a
only refer to the “market price” (i.e., in program is likely under consideration
effect, it is assumed that there is only as part of the expected transfer pricing
one market price for any given product reform in Russia.
or service at a given point in time).
Finally, there is no formal or mandatory There are no options to obtain official
guidance provided about adjustments to advanced rulings. However, a taxpayer
comparable data. may obtain a clarification letter from
the Ministry of Finance. Although this
Transfer pricing methods does not serve as a formal ruling, a
clarification does provide a high degree
Russia follows a hierarchy of transfer of support should a local tax inspector
pricing methods, which includes seek to challenge the taxpayer’s
(ranked in order of preference) the transactions or tax position.
CUP method, the RPM and the cost

Yield/performance of transfer The two ministries note that transfer
pricing reviews pricing reform is needed, as foreign
multinationals use transfer pricing as a
The Russian tax authority loses mechanism to transfer profits out of their
approximately 85% to 90% of all court Russian subsidiaries, thereby minimizing
cases relating to transfer pricing, and this their tax burden in Russia. Additionally, it
trend has not changed over the past five is acknowledged that Russian companies
years. also use transfer pricing to shift their tax
Therefore, increasing the success rate of bases between regions or even offshore.
court cases is probably the authority’s The reformed transfer pricing law is
main performance indicator. expected to serve as an effective tool
Transfer pricing disputes in enabling the Russian tax authority to
crack down on tax evasion.
Litigation is the favored means
of resolving transfer pricing (and It seems likely that foreign multinationals
tax) disputes in Russia. In the years will be listed as the primary target or
2006, 2007 and 2008, there were selling point for the transfer pricing
approximately 600 to 800 court cases reform, as the Russian government is
each year referring to the Russian looking for additional revenues, and
transfer pricing rules. This figure is subsidiaries of foreign multinationals
based on information available at Federal currently seem to have more taxable
Arbitration Court-level only (i.e., the income than domestic companies. Most
court of third instance) as limited public Russian multinationals have suffered
information is available from the cases economically as a result of the global
settled in the courts of first or second economic crisis and, as a consequence,
instance. have limited profits (if any) to shift
offshore.
pricing
activity
The Ministry of Finance and the Ministry
of Economics have agreed on and If the expected transfer pricing reform
formalized a concept for Russian transfer is put in place, we anticipate Russia will
pricing reform and are expected to adopt a more effective transfer pricing
release the draft law by 1 August 2009 law that would provide the tax authority
at the latest. It is currently expected with a real possibility to crack down on
that the draft law will be submitted to transfer pricing abuses. It is likely the
starting point for the new regime would Ernst & Young contact
parliament in late autumn and enacted as
of 1 January 2010. be compliance measures followed by
Henrik Hansen
yield targets.
henrik.hansen@ru.ey.com
+7 495 648 9608

Slovak Republic
Resources the taxing authority and tax havens are reviewed in

is devoting to transfer pricing audits. The most frequently observed
counterparties in the current caseload of
A specialized transfer pricing group transfer pricing reviews are:
has been created at the level of Tax
Directorate in the Slovak Republic. • Germany
Additionally, three small specialized, • T
► he United States
decentralized transfer pricing groups
• The Netherlands
have also been created at Košice, Banská
Bystrica and Trnava. However, transfer
pricing compliance examination may be Types of transactions under
carried out by any tax authority during scrutiny
a tax audit, without involvement of the The STA has specifically identified the
specialized transfer pricing groups. following transactions (ranked in order
Of the eight specialist transfer pricing of prevalence) that are currently the
FTE resources at the Slovak tax focus of transfer pricing reviews:
authority (STA), five resources are • Intra-group services
located centrally in the Tax Directorate,
and one resource is located in each of • T
► angible goods
the decentralized, specialized transfer • Financial transactions (e.g., loans,
pricing groups. These specialized groups other debt instruments)
have been set up only recently, and
the number of resources is expected to • IP (e.g., royalties, licensing)
increase in the next two years. • C
► ost sharing/cost pooling
All the specialist transfer pricing arrangements
resources are economists, who can be Additionally, the authority has identified
described as generalists with some level stock-based compensation as an area of
of transfer pricing knowledge. There is interest.
a growing emphasis on increasing the
transfer pricing competencies of the Transfer pricing penalties
resources through internal/international
training on transfer pricing matters. Slovak law does not provide for the
Geographic focus penalties. The penalties generally
applicable according to the Act on
There is no formal program prioritizing Tax Administration No 511/1992 (as
the review of taxpayers in a particular amended) also apply to transfer pricing
jurisdiction. However, typically, cases.
transactions with low-tax jurisdictions

Over the last two years, penalties have Transfer pricing methods
been applied in approximately 35% of
cases where transfer pricing adjustments The Slovak transfer pricing legislation
were issued. Where penalties are specifies a hierarchy of transfer pricing
imposed, they generally range up to methods to determine arm’s length
25% of the additional tax payable. This remuneration for controlled transactions.
approach to penalties is not anticipated The traditional transaction methods
to change in the next two years. are preferred to the transactional profit
methods. If none of the specifically
identified methods are suitable for
Audit triggers
determining the arm’s length price, the
Transfer pricing audits are instigated either taxpayer is permitted to adopt any other
by the Tax Directorate or by the local tax suitable method.
authorities, on a case-by-case basis.
The work of the transfer pricing The Slovak Republic does not have
resources is not integrated with that a formal APA program. Typically,
of indirect tax specialists. There is also taxpayers are allowed to approach the
no requirement that the same transfer tax authorities and seek their approval on
price be used for corporate (direct) tax the transfer pricing method adopted. It
and indirect tax purposes. The STA is should be noted that the authorities can
expected to jointly administer direct taxes only approve the methodology and do
and customs duties in the next two years. not have the power to approve a specific
price or percentage for the taxpayers’
Comparable data related-party transactions.
Typically, local country comparables
are preferred. Alternatively, regional Yield/performance of transfer
comparables with comparable market pricing reviews
conditions, located in the same continent
as the taxpayer, may also be used.
review activities is measured based
There is no formal or mandatory on various considerations, such as an
guidance provided as to adjustments increase in the tax yield, the percentage
to comparable data. Such adjustments of review cases involving an adjustment
are generally to be made in the case of to the taxpayer’s income, the percentage
significant differences in the transactions of review cases where an adjustment is
or functions being compared. sustained on appeal and the percentage
of taxpayers in compliance with the
documentation requirements.

Generally, most of the decisions of the tax
authorities on the assessment of a penalty
due to non-compliance with transfer pricing
requirements are followed by taxpayer
appeals. There have been no court
disputes, litigation, mutual agreements or
arbitration in this respect yet.

activity
Over the next two years, the STA
expects to place greater emphasis on
compliance measures (to ensure greater
taxpayer compliance with transfer pricing
documentation requirements) and
joint administration of direct taxes and
customs duties, as well as on ensuring
closer cooperation in the field of transfer
pricing.
Gunter Oszwald
gunter.oszwald@sk.ey.com
+421 2 333 39610

Slovenia
Resources the taxing authority public announcements of the specific

is devoting to transfer pricing types of businesses being closely
examined.
The Ministrstvo za finance, Davcna
uprava Republike Slovenije (DURS) Geographic focus
administers taxes in Slovenia. The DURS
has a dedicated group of 30 inspectors Practical considerations and legislative
who undertake transfer pricing reviews. direction (such as a formal blacklist of
These transfer pricing resources make certain jurisdictions) drive the choice
up approximately 7% of the total of active of jurisdictions for review. Typically,
inspectors. Some inspectors of transfer transactions with Slovenia’s major
pricing group are highly specialized trading partners and low-tax jurisdictions
in international taxation, but some of are reviewed in the scope of audits.
them conduct other types of audits. The
work of the transfer pricing group of Types of transactions under
inspectors is coordinated by the General scrutiny
Tax Office.
The DURS has specifically identified the
This level of resourcing has been following transactions (ranked in order
consistent over the last seven years. of prevalence) that are currently the
Other inspectors are also regularly focus of transfer pricing reviews:
informed about transfer pricing
legislation and procedures for
inspecting taxpayers’ transfer pricing • Tangible goods
arrangements.
In terms of the background of the other debt instruments)
transfer pricing specialist resources,
90% of them are economists while the
remaining 10% are lawyers. • Cost sharing/cost pooling
arrangements
Industry focus
Factors such as whether the activities
of the industry are significant within Under relevant legislation, the DURS
the country, the importance of IP to may impose a penalty for not filing
the industry and the profitability of the prescribed transfer pricing
the industry are relevant in identifying documentation. The assessment of
specific industries for scrutiny. penalties is expected to increase in the
Occasionally, the tax authorities make next two years.

Audit triggers well as upon the taxpayer’s discretion.
In the absence of local comparable
The General Tax Office instigates information, regional comparables
transfer pricing audits within Slovenia. located in the same continent as the
The selection of the taxpayer and the taxpayer or those located in certain
scope of the audit are driven by various specified countries may be used.
considerations such as:
• The profitability of the local taxpayer Transfer pricing methods
• Whether there is evidence of business The Slovene transfer pricing legislation
restructurings specifies a hierarchy of transfer pricing
methods to be used in determining arm’s
length remuneration for controlled
assessment by the DURS
transactions. If none of the specifically
• The nature and volume of related- identified methods are suitable for
party transactions determining the arm’s length price, the
• Transfer pricing issues identified taxpayer is permitted to adopt a suitable
during previous tax audits of the combination of such specified methods.
taxpayer
• Information available from reports
pricing
in the media and from Amadeus and
other public databases The transfer pricing environment in
Slovenia is responsive to developments
Indirect and customs tax such as the current global economic
slowdown, the implementation of
The work of Slovene transfer pricing
centralized business and tax models, and
enforcement resources is integrated
initiatives at the OECD and the EU levels.
(especially in terms of sharing of
information) with that of indirect Slovenia implemented fundamental
tax specialists. However, there is no provisions of the OECD Guidelines in its
requirement that the same transfer price legislation with the tax reform in 2005.
be used for corporate (direct) tax and With the tax reform effective in 2007,
indirect tax purposes. Slovene legislation with respect to transfer
pricing was further harmonized with
Comparable data legislation of the other EU member states.
The choice of local versus regional Based on the provisions of the Code
comparables depends upon the nature of Conduct on Transfer Pricing
of the industry and the number of Documentation for Associated
comparables that may be obtained, as Enterprises in the European Union

(EU TPD – 2006/C176/01), Slovenia
introduced provisions relating to transfer
pricing documentation requirements in
Tax Procedure Act-2.
The DURS monitors the global economic

situation and takes into consideration
market conditions that affect transfer
pricing inspecting policies.

activity
The DURS carries out tax audits with
the strategic objective of reducing the
tax gap in the budget of the Republic of
Slovenia. The DURS also strives to take
preventive action to increase the level
of voluntary payments of tax liabilities.
The DURS is keen on establishing a
tax environment that will nurture its
relationships with taxpayers and tax
advisors based on mutual trust and
cooperation.
Lucijan Klemencic
lucijan.klemencic@si.ey.com
+386 1 583 17 21

Spain
Resources the taxing authority driving the selection of industries for

is devoting to transfer pricing particular focus.
The Agencia Estatal de Administración The selection of industries that are

Tributaria (the Spanish Tax Authority currently under specific focus from a
(STA)) administers taxes in Spain. transfer pricing perspective is not widely
Within the STA, transfer pricing reviews communicated to taxpayers. This list of
are carried out by decentralized units, industries is reviewed every three years.
with the exception of efforts dedicated
towards large taxpayers. There is no Geographic focus
centralization within the taxing authority, Perceived low-tax jurisdictions, evidence
but, in practice, coordination is done of limited-risk business structures
at a higher level. Approximately 20% of (e.g., involving limited risk distributors
the FTE resources currently involved (LRDs) or commissionaire entities) and
in transfer pricing examinations are issues concerning the existence of a PE
transfer pricing specialists, while for VAT purposes are the drivers for the
approximately 10% of the total transfer selection of countries for focus by the
pricing resources are decentralized. The STA. In the current caseload of transfer
STA expects to dedicate a high number pricing reviews, the top three most
of professionals over the next two years prevalent jurisdictions of the relevant
to transfer pricing. However, no specific counterparties are:
budget has been allocated to this.
• Switzerland
In terms of background, the
transfer pricing resources consist of • T
► he United States
approximately 50% economists, 40% • Germany
lawyers and 10% engineers. The STA
does not anticipate any change in Types of transactions under
background of resources currently
scrutiny
involved in transfer pricing examinations.
The STA currently focuses on the
Industry focus sale of tangible goods (especially in
the chemical and pharmaceuticals
Currently, the focus for transfer pricing industries), IP transactions and intra-
audits in Spain are the automotive, group services for transfer pricing
consumer products, media and reviews.
entertainment, mining and metals, oil
and gas and pharmaceutical industries.
The importance of IP to the industry
and industry profitability are the factors

The approximate percentages of the account in determining which taxpayers
total caseload involving the following to audit, including (ranked in order of
transactions are: importance):
Transaction Current • Whether there is evidence of business

caseload % restructurings
Tangible goods 20% • The volume of related-party
IP (e.g., royalties, 20% transactions undertaken by the
licensing) taxpayer
Intra-group services 50% • The profitability of the local taxpayer
Financial transactions 10%
instruments) Indirect and customs tax
Transfer pricing penalties resources work in an integrated way with
indirect tax specialists. However, there
Spain has a specific transfer pricing
is no formal requirement that the same
penalty regime. However, there are
transfer price be used for corporate
no processes in place to ensure the
consistent application of transfer pricing
penalties in the jurisdiction. Over the
last two years, penalties were applied Comparable data
in up to 10% of cases where transfer The STA has no strict requirement for
pricing adjustments were issued. Where local comparables. The data considered
penalties were imposed, they generally as the most comparable and exhibiting
ranged up to 25% of the transfer pricing the closest key economic characteristics
adjustment. It is anticipated that the to the tested party are used. However,
level and frequency of penalties will where local comparables are not
increase in the next two years. It is available, the STA prefers pan-regional
also expected that the application of data from the “old Europe 15” (i.e., the
penalties will broaden from the current 15 EU member states prior to 1 May
focus on reassessment related penalties 2004) plus Norway and Switzerland.
to include more frequent penalties for
failing to comply with documentation In preparing and presenting comparable
requirements. data, there are no specific requirements
financial information, the method for
Audit triggers
Transfer pricing audits are not instigated range, the use of simple versus weighted
by a central decision-making body. A averages, the pooling or averaging
variety of considerations are taken into of financial data, or the method for
determining the appropriate PLI.

The STA is considering the option Transfer pricing disputes
of providing guidance related to the
financial adjustments to be made to the The jurisdictions most frequently forming
comparable data. However, no decision the counterparties to transactions
has been taken on this as of June 2009. underlying transfer pricing disputes
with Spain are the United States, the
United Kingdom, Germany and France.
Disputes involving the pharmaceuticals
There is a formal hierarchy between and automotive industries are the most
transfer pricing methods under the frequent in Spain.
relevant Spanish law. The CUP, RPM
and cost plus methods constitute the Current influences on transfer
methods in the highest level of the pricing
hierarchy. The profit split method and
TNMM form the second level of the The transfer pricing environment
hierarchy. Applying a discounted cash in Spain is responsive to OECD and
flow methodology is the other method EU initiatives, such as the EU Joint
specifically mentioned as permitted in Transfer Pricing Forum. Indeed, with
the Spanish legislation. regard to documentation requirements
and domestic MAP and arbitration
Advance Pricing Agreements procedures, Spain is closely following
the developments coming from the Joint
(APAs)
Forum.
Spain has a formal APA program, with
the right to access the APA program Likely trends in transfer pricing
open to all taxpayers. The STA receives activity
approximately 25 applications per
year out of which 6 are applications Compliance measures and dispute
for unilateral APAs. There are 22 resolution are the likely focus areas
applications currently in process for the taxing authority in the next two
under the APA program. The top three years.
countries involved for bilateral APAs are
the United States, the United Kingdom
and France. It generally takes eight
months to conclude a unilateral APA and
more than fourteen months to conclude a
bilateral APA.
Approximately 20 competent authority
Juan Jose Terraza Torra cases are resolved annually.
juanjose.terrazatorra@es.ey.com
+34 933 663 741

Sweden
Resources the taxing authority These include certain types of

is devoting to transfer pricing transactions including:
The Skatteverket (Tax Agency) • IP-related transactions

administers taxes in Sweden. Within the • Financial transactions
Tax Agency, transfer pricing reviews are
• “Limited risk” structures
carried out by a centralized project team
with members of the project located • Business restructurings
in Stockholm, Gothenburg and Malmö,
• PEs (attribution of profits)
established in 2008. All transfer
pricing-related questions that arise
during an inquiry are reported to
this project team. There are 25 FTE Sweden does not have a specific transfer
resources assigned to the team. pricing penalty regime, but rather the
general penalty regime is applied on
transfer pricing adjustments. Generally,
consist of economists, auditors and
penalties are levied by the Tax Agency
lawyers. Competent authority matters
if an income adjustment is made.
are handled by a separate unit, not by the
According to Swedish tax legislation,
centralized project team.
penalty fees can be charged if the
taxpayer has hidden information or
Geographic focus
disclosed misleading information in the
Although there is no formal geographic tax return. Penalty fees are typically
focus, the Tax Agency targets charged at 40% of the tax not paid as a
transactions with countries where it result of the incorrect information/lack of
perceives that the arm’s length principle information. Interest is also charged on
is not applied in accordance with the the additional tax imposed.
OECD Guidelines or where the proper
application of the arm’s length principle is Audit triggers
distorted. Hence, the geographic location
A variety of considerations are taken
of counterparties to a transaction may be
into account in determining which
a factor that influences the risk analysis
taxpayers to audit, including:
(amongst many other factors).
Types of transactions under assessment by the Tax Agency
scrutiny • Evidence of business restructurings
The Tax Agency applies a risk analysis
model, which focuses on a number of
potential risk areas.

Indirect and customs tax are considered by the Tax Agency only
where it can be argued that they improve
The transfer pricing enforcement comparability.
resources do generally not work in
an integrated way with indirect tax
specialists although they may liaise
with each other on specific cases. The There is no formal hierarchy between
Customs authority is a separate agency. transfer pricing methods other than what
follows from the OECD Guidelines and
Comparable data the Swedish regulations support the use
of an appropriate method rule. The Tax
The Tax Agency prefers Swedish or Agency accepts the methods in the OECD
Nordic comparables. However, regional Guidelines.
comparables are not rejected for the
sole reason that they are not Swedish or
Nordic. Pan-European comparables are
accepted by the Tax Agency depending (APAs)
on the facts and circumstances. Sweden does not have a formal APA
Assessments are based on the program, although bilateral APAs have
comparability factors used, including been concluded with treaty partners
whether the economic circumstances in under Article 25 of the Model Tax
the selected countries are reasonably Convention. The Ministry of Finance
comparable. has handled these APAs. Formal APA
In preparing and presenting comparable legislation is expected in the near future,
data, no explicit systematic requirements likely from 1 January 2010.
apply with regard to features such as
the number of years of financial data to Likely trends in transfer pricing
be considered and statistical tools to be activity
used. These requirements would depend
The Tax Agency has a program for
on the facts and circumstances and what
informing and educating companies (in
would be the closest approximation to
particular small and medium enterprises
an arm’s length result. In practice, the
(SMEs)) in transfer pricing-related
Tax Agency has a general preference for
matters.
three years or multiple year periods of
financial data. The Tax Agency considers The activities of the Tax Agency
the use of full range or the inter-quartile are aimed at achieving a consistent
Ernst & Young contact range depending on the facts and application of the arm’s length principle
circumstances. Financial adjustments and the uniform treatment of taxpayers.
Mikael Hall
mikael.hall@se.ey.com
+46 8 520592 35

Switzerland
Resources the taxing authority Types of transactions under

is devoting to transfer pricing scrutiny
Within Switzerland, tax audits are the There is no particular focus on specific
responsibility of the individual Cantonal transactions types within Switzerland.
tax administrations. The Division of As per the current caseload of transfer
International Affairs within the Federal pricing reviews, the following are the
Tax Administration (FTA) is responsible most prevalent transactions scrutinized:
for MAPs and bilateral APAs.
There are approximately 500 FTE Transaction Current

caseload %
resources involved in tax audits across
the Cantonal tax administrations, with Tangible goods 60%
two centrally located transfer pricing IP (e.g., royalties, 20%
specialists located within the FTA. Both licensing)
of these centrally located transfer pricing Cost sharing/cost pooling 20%
specialists are economists. The level of arrangements
resourcing has not changed over the last
two years. However, the current level of Audit triggers
resourcing may grow depending on the
number of transfer pricing review cases. Transfer pricing audits are instigated by
the relevant decentralized resources.
Taxpayer selection is typically based on a
Geographic focus
standard audit cycle/program.
Practical considerations drive the choice
of jurisdictions for review. Typically, Indirect and customs tax
transactions involving tax havens are
reviewed during audits. In general, the same transfer price needs
to be used for direct tax and indirect
In the current caseload of transfer tax purposes, although there are some
pricing MAPs/APAs, the top five most exceptions to this provision. However,
prevalent jurisdictions of the relevant the Swiss transfer pricing enforcement
counterparties are: resources do not work in an integrated
1) Japan way with the indirect tax/customs
2) France specialists.
3) United States
4) Canada Comparable data
5) The United Kingdom There is no strict guidance concerning
the comparable data to be presented by
taxpayers. Typically, local or regional

(preferably the same continent as the resolution of double taxation (i.e., via
taxpayer) comparables may be used. MAP between competent authorities).
In calculating ranges, the weighted Additionally, approximately ten cases of

average is generally preferred to the APAs are resolved annually under the
simple average. The PLIs that are competent authority procedure. The
generally used are the gross margin, net average duration of such proceedings is
margin, return on capital employed and around two years.
the Berry ratio. The choice of the pooling
method or the method of averaging of Transfer pricing disputes
financial data is based on the number of
There are currently approximately
available comparables. In preparing and
50 cases pending (including APAs)
presenting comparable data, financial
resolution through MAP. The most
data covering three to five years are
common treaty partners involved in
usually used.
these cases are Japan, Korea and
There is no formal or mandatory Australia.
guidance provided about adjustments to
comparable data. Such adjustments are Current influences on transfer
optional and are likely to be supported pricing
if they enhance the comparability of the
information with the tested party. The transfer pricing environment in
Switzerland is responsive to OECD
Transfer pricing methods initiatives. The transfer pricing reviews
and initiatives by the FTA and the
Switzerland does not formally identify a Cantonal tax administrations are
hierarchy of transfer pricing methods, aligned with the OECD Transfer Pricing
although, in practice, preference is given Guidelines.
to the CUP method. The methods set out
in the OECD Guidelines are considered to Likely trends in transfer pricing
be appropriate.
activity
Advance Pricing Agreements The FTA is likely to place greater
(APAs) emphasis on dispute resolution over the
next two years.
Switzerland does not have a formal APA
program. However, it is possible for
Switzerland to conclude APAs with treaty
partners, in cases where the treaty
contains a specific article providing for
Raoul Stocker
raoul.stocker@ch.ey.com
+41 58 286 35 08

The Netherlands

is devoting to transfer pricing Although transactions with low-tax
Within the Belastingdienst (Dutch jurisdictions and non-treaty parties are
Tax Authority, (DTA)), the Transfer considered by the DTA when performing
Pricing Coordination Group (TPCG) a holistic risk analysis, geographic
is responsible for coordinating considerations are not drivers for
administration in the field of transfer the selection of taxpayers for review.
pricing and for enforcement of transfer Details of the most frequently reviewed
pricing policies. The TPCG is a nationwide jurisdictions were therefore not provided.
operating organization and consists of
four regional coordinators, a coordinator Types of transactions under
within the APA-team and a network of scrutiny
members located in the respective local
While there is no formal focus on specific
offices.
transaction types, the DTA has identified
The TPCG and the APA team currently the review of headquarter costs and
have approximately 25 FTE resources, intra-group service charges as areas of
with the majority being decentralized. interest, along with transactions with
This level of resourcing has been entities in low effective tax rate countries
consistent over the last couple of years, and on the allocation of profits to PEs
although this number is anticipated to in the case of construction projects.
grow in the coming years. The resources This focus is largely consistent with
include the DTA’s benchmarking transaction types identified during
specialists. In addition to the specialist Ernst & Young’s last Authority Survey in
resources, all of the DTA’s inspectors 2005–2006.
have transfer pricing included in their
training. In terms of background, around Transfer pricing penalties
75% of all resources are registered
accountants, while the remainder are No specific transfer pricing penalty
from a tax background. regime exists in the Netherlands.
However, when applying general penalty
provisions to transfer pricing reviews,
Industry focus
the penalty is generally applied in a more
While within the DTA, tax inspectors are tolerant manner, with penalties generally
identified as industry specialists, there is only applied in cases of intentional
no formal program prioritizing the review non-compliance with the arm’s length
of taxpayers in a particular industry or principle. It is not anticipated that this
industries at the current time. approach to penalties will change in the
next two years.

The approach of the DTA to penalties the discretion of the taxpayer. The DTA
is evidenced by the fact that in recent would obviously support the use of local
years, penalties have been applied in less comparables where they increase the
than 25% of instances where transfer reliability of comparable information.
pricing adjustments were issued by
the DTA. Where penalties are imposed,
however, they are often sizeable,
generally ranging between 50% and
100% of the amended tax payable.
versus weighted averages or the method
for calculating an arm’s length range.
Audit triggers With regard to the selection of an
There is no standard audit cycle in the appropriate PLI, it should be noted that
Netherlands, and transfer pricing audits the DTA generally does not accept the
are, therefore, instigated by the relevant Berry ratio as the correct PLI for sales-
decentralized resources in the various related activities (however, it may still be
regions. A variety of considerations are used as a secondary “sanity” check for
taken into account in determining which the level of remuneration received).
taxpayers to audit, including:
There is no formal guidance provided
• Profitability as to adjustments to comparable data,
which are supported by the DTA where
• Bbusiness restructurings
they enhance the comparability of
• Previous audits of the taxpayer the information with the tested party.
Working capital adjustments are
perceived as the most objective of those
party transactions
adjustments made, and diagnostic ratios
may also be applied to comparable data.
In the Netherlands, while VAT is the Transfer pricing methods
responsibility of the DTA, Customs
In general, the DTA follows the OECD
is managed by a separate body
Transfer Pricing Guidelines hierarchy
(the Douane). There is a increased
of methods to be used in determining
cooperation between the DTA and
arm’s length remuneration for controlled
Customs. The DTA in cooperation with
transactions. There is no “best method”
the Douane is willing to include custom
rule applied by the DTA.
issues when discussing a possible APA.
Due to the limited availability of
Comparable data comparable information, in practice,
taxpayers apply traditional transactional
The Netherlands does not require the use
methods less often. In this respect, the
of local comparables. This decision is at

TNMM is widely applied by taxpayers in Likely trends in transfer pricing 1
Transfer pricing and Mutual
the Netherlands, and this approach is activity Agreement Procedures;
agreed by the DTA. Bert van der Kolk, Theo
The DTA has introduced a new way of Elshof; International
transfer pricing journal
Advance Pricing Agreements working with taxpayers called “horizontal
March/April 2009.
control.” Under horizontal control the
(APAs)
tax authorities and the taxpayer work
The APA process in the Netherlands together based on common trust. The
is well established and accessible to DTA will support the increased use of
all taxpayers. The DTA Ruling Team horizontal control moving forward.
currently receives approximately 230
The DTA also expects the interaction of
to 280 applications from taxpayers
transfer pricing and indirect taxes (VAT
per year, and there are currently
and customs) to be an area of increased
approximately 161 applications in
focus, both from its perspective and from
process. The average duration of the
the perspective of taxpayers.
APA process is approximately 54 days.
Most APAs in the Netherlands involve
unilateral APAs.
pricing reviews
The DTA does not measure the
effectiveness of the transfer pricing
review activities undertaken.

There is a very limited number of
domestic appeals in the Netherlands at
the current time. There were 155 MAP
cases open in the last quarter of 2008, of
which approximately one-third involved
transfer pricing. The pending transfer
pricing MAPs are considered to be the
tip of the iceberg, as many taxpayers
are currently unaware or unconvinced
that a procedure under Art. 25(5) of Ernst & Young contact
an applicable treaty can successfully
eliminate (economic) double taxation.1 Erik Kamphuis
erik.kamphuis@nl.ey.com
+31 10 406 8630

Turkey*
*
Country chapter
Resources the taxing authority Types of transactions under
completed based on the is devoting to transfer pricing scrutiny
professionals and publicly Responsibility for tax within Turkey While there is no formal focus on specific
is split between four separate groups transaction types by the GİIB, the review
across the Ministry of Finance and the tax of transactions involving IP, intra-group
authority (GİIB) (covering tax inspectors, services and tangible goods are key
revenue controllers, tax reviewers and areas of interest for transfer pricing
inspectors). Each of these four groups reviews.
has the authority to conduct a transfer
pricing audit. However, the only full-time Transfer pricing penalties
transfer pricing resources are within the
Turkish law does not provide for the
GIİB, with a core team consisting of ten
members. However, this group is involved
penalties. The general penalty rules
in execution matters and, as such, does
mentioned in the Tax Procedures Code
not perform tax audits. This team has
also apply to transfer pricing cases. A tax
only been established over the past two
loss penalty, equal to the additional tax,
years, and the level of knowledge of
may be levied, in addition to late payment
technical transfer pricing matters outside
interest at the rate of 30% per annum.
this team is limited.
Turkey has put in place appropriate
Tax auditors mainly have a background
measures to ensure consistent
in economics, finance and business
application of the transfer pricing penalty
administration at undergraduate level.
provisions. The transfer pricing penalty
The number of transfer pricing audits is
assessments within Turkey are expected
expected to increase over the next two
to increase in the next two years.
years, which will correspondingly require
an increase in specialized transfer pricing
experts. Audit triggers
The relevant decentralized offices
Industry focus instigate transfer pricing audits within
Turkey. Audit plans are developed
The pharmaceutical industry in Turkey
to determine specific sectors to be
has seen the most activity in terms of
considered in the scope of an audit.
transfer pricing audits, although other
These plans are sometimes shared
industries are also likely to come under
publicly. The selection of the taxpayer
scrutiny. Factors such as the profitability
and the scope of the audit are driven by
of the industry and the volume of
factors such as:
related-party transactions are taken into
account in identifying specific industries • T
► he profitability of the taxpayer
for scrutiny.

• The nature and volume of the methods to determine an arm’s length
taxpayer’s related-party transactions remuneration for controlled transactions.
The traditional transactional methods
• The extent of business restructurings
are preferred, but the taxpayer may
use any other method if a reasonable
explanation can be provided as to why
Although the same transfer price needs traditional methods are not suitable for
to be used for direct tax and indirect tax the transactions under review.
purposes, the work of Turkish transfer
pricing enforcement resources is not Advance Pricing Agreements
currently integrated with that of indirect (APAs)
tax specialists.
Turkey has a formal APA program,
Comparable data accessible to all corporate income
taxpayers. However, to date, no
There are no publicly available bilateral or multilateral APAs have been
databases in use in Turkey for searching concluded.
comparable information. As such, while
local comparables are preferred, there Likely trends in transfer pricing
is no legislative provision prescribing a
activity
preference for local comparables, and,
therefore, regional comparables within Over the next two years, there is
Europe could also be used. expected to be greater emphasis
on determining compliance and
documentation measures.
financial information required, the use
of simple versus weighted averages, the
method for calculating an arm’s length
range, the method for determining
an appropriate PLI, or the pooling or
averaging of financial data.
No formal guidance is provided about

adjustments to comparable data.
Transfer pricing methods Ernst & Young contact

Turkish transfer pricing legislation
specifies a hierarchy of transfer pricing Feridun Gungor
feridun.gungor@tr.ey.com
+90 212 368 5204

United Kingdom
Resources the taxing authority sector specialists, lawyers, accountants

is devoting to transfer pricing and systems analysts, who do not tend to
be dedicated transfer pricing resources.
Her Majesty’s Revenue and Customs
(HMRC) has recently made a significant Industry focus
effort to increase the transfer pricing
capabilities within the organization. HMRC does not focus on particular
Previously there were a limited number industries. Rather, the approach taken is
of full-time transfer pricing specialists on the basis of a risk assessment for each
at the International and Large Business entity that takes into account all relevant
Section (LBS) levels, but there were factors including industry. Clustering in
a large number of nonspecialists who some industries may, however, result
pursued enquiries on transfer pricing from the accumulation of knowledge
issues at the local level. and experience by individual Inspectors,
but this is not due to a policy to focus on
When the Transfer Pricing Group (TPG) particular industries.
was established in April 2008, it was
envisaged that there would be around 60 Geographic focus
people nationwide (of whom 20-30 would
be based at the Business International The approach adopted by HMRC is
unit in London) and that all transfer risk-based with all entities reviewed
pricing cases would be handled by this on an equal footing, and there is
group. Typically, each TPG specialist also no explicit geographic focus. The
supervises nonspecialists in handling geographic location of counterparties
transfer pricing enquiries. In addition to to a transaction may be a factor that
aiding better targeting of inquiries and feeds into the risk assessment (amongst
improved quality, the new structure also many other factors). However, this factor
helps to ensure continuity for inquiries typically would not trigger a transfer
if the local case handler for a taxpayer pricing inquiry by itself.
changes.
The makeup of teams involved in transfer
pricing inquiries varies depending on
scrutiny
the needs of the specific case. When During a risk assessment, HMRC
appropriate, the TPG may call upon analyzes all transactions and considers
dedicated transfer pricing economists, some transactions to have a higher risk
economists from a broader pool not than others, depending on the facts and
designated to transfer pricing or even circumstances.
external advisors, if appropriate. The
For financial services transactions there
TPG may also call upon commercial
is a specialist financial services team.

Stock options are a current area of focus The LBS uses a scoring approach in its
as part of the overall risk assessment. case selection process, which is not
specific to transfer pricing.
The penalty regime for transfer pricing
is the same as for other direct tax Joint inquiries with indirect and customs
infringements; there is no specific taxes can be undertaken if appropriate.
penalty regime for transfer pricing. The
Business International Division and the Comparable data
appropriate Transfer Pricing Panel (TPP)
The HMRC approach, as set out in the UK
are involved in all cases potentially
legislation and in HMRC’s International
involving penalties as part of an overall
Manual, is to apply the OECD Guidelines
settlement so as to ensure consistency in
within the context of specific facts and
approach.
circumstances. On this basis, local
HMRC considers that it is too early to comparables may well be best, but
say whether the new penalty regime in suitability depends on the activities
the United Kingdom will lead to more being benchmarked and the economic
penalties becoming eligible in transfer similarities between different markets.
pricing settlements. There is also an acknowledgement
that the lack of data availability may
Audit triggers sometimes make the identification of
local comparables difficult. In summary,
Case selection is undertaken at the local
there are no prescriptive rules, and any
level and is based on a risk assessment
comparables set should be supported by
and the preparation of a business case.
robust, persuasive analysis in conformity
However, final approval on selection for
with the OECD Guidance.
an inquiry is given by the relevant TPP or,
in some cases, the Transfer Pricing Board. Adjustments are encouraged where they
The TPP reviews risk assessments and the improve the comparability of a data set.
business case for all proposals to take up However it was noted that the application
a transfer pricing inquiry; sign-off by the of several material adjustments may
panel is required before an inquiry may invite the question of whether the set is
commence. This process helps to ensure actually comparable in the first place.
better targeting so that only worthwhile
cases are taken up. A small number of Transfer pricing methods
cases have been rejected at this stage.
HMRC’s position is that the most
A risk-based assessment is undertaken appropriate method, with reference to
that will be geared to the facts and the transfer pricing methods laid out in
circumstances of the particular taxpayer.

the OECD Guidelines, should be applied. Transfer pricing disputes
The preference is for the CUP method,
followed by whichever other method is There are currently six CAs (one is full
most appropriate. time and the others have additional
roles within HMRC). Companies with
HMRC is open to the use of alternative a valid case under MAP often miss out
approaches, e.g., CCAs, if appropriate to due to not paying proper attention
the situation. to the time limits. Since a case is not
prejudiced by putting in a protective MAP
Advance Pricing Agreements claim, taxpayers are advised to put in
(APAs) a protective claim as early as possible,
without necessarily waiting for a final
The UK has a formal APA program. HMRC position in the other jurisdiction.
expects the number of applications
for the APA program to increase this
year. Allowing taxpayer participation
in the APA program is at the discretion pricing
of HMRC. In cases involving sufficient HMRC has a major focus on improving
complexity to warrant an APA, HMRC compliance by taxpayers.
welcomes an “expression of interest”
dialogue with the taxpayer at a very In addition, the new transfer pricing
preliminary stage, before much detailed process and panels provide a more
modeling and drafting has been robust way of supervising transfer pricing
undertaken, to discuss whether this MAP claims and reduces the risk of a UK
criterion is met. The average length of adjustment being withdrawn at MAP.
time required to complete an APA process The UK is heavily involved in the work
is 18 to 21 months (from the receipt of of the various OECD working parties on
the formal application to completion). transfer pricing and PEs and in the work
Historically, taxpayers have not shown of the EU Joint Transfer Pricing Forum.
much interest in unilateral APAs. Bilateral
APAs have also been of more value to
HMRC, because they obviate competent
authority (CA) disputes.

activity
The new transfer pricing process is in
place in the UK and seems to be working
well from initial assessment. The UK
is closely involved in the ongoing work
of the OECD. Any updates to the OECD
Guidelines would require a Treasury
Order before they can apply under UK
legislation (Schedule 28AA(2)(3)(b)).
Overall, HMRC approves the OECD

discussion draft on business
restructurings, although it acknowledges
the need for further work on some of the
Issues Notes. Much of the content of the
notes is wholly consistent with HMRC’s
policy and practice.
David Lewis
dlewis1@uk.ey.com
+44 020 795 18846

Transfer pricing contacts
Global contacts
Thomas Borstell John Hobster
thomas.borstell@de.ey.com jhobster@uk.ey.com
+49 211 9352 10601 +44 207 951 6438
Esther Dahmen Alexander Lorimer

esther.dahmen@uk.ey.com alexander.lorimer@nl.ey.com
+44 20 7980 0720 +31 88 40 71223
▌ Argentina ▌ China ▌ Egypt
Carlos Casanovas Joanne Su Sherif El-Kilany

carlos.casanovas@ar.ey.com joanne.su@cn.ey.com sherif.el-kilany@eg.ey.com
+54 11 4318 1619 +86 10 58153380 +202 3336 6627
▌ Estonia
▌ Australia
Jessica Tien Ranno Tingas
Paul Balkus jessica.tien@cn.ey.com ranno.tingas@ee.ey.com
paul.balkus@au.ey.com +86 21 58152806 +372 611 4578
+612 9248 4952
▌ Colombia ▌ Finland
▌ Austria Gustavo Pardo Sari Takalo

gustavo.pardo@co.ey.com sari.takalo@fi.ey.com
Andreas Stefaner
+1 571 651 2210 358 207 280 190
andreas.stefaner@at.ey.com
+43 1 211 70 1041 ▌ Costa Rica ▌ France
Rafael Sayagues Franck Berger

▌ Belgium rafael.sayagues@ey.com franck.berger@ey-avocats.com
+1 212 773 4761 +33 4 78 63 17 10
Herwig Joosten
herwig.joosten@be.ey.com ▌ Croatia ▌ Germany
+32 02 774 9349
Robert King Oliver Wehnert
robert.king@hr.ey.com oliver.wehnert@de.ey.com
▌ Brazil +385 1 2480 540 +49 211 9352 10627
Gil Mendes ▌ Czech Republic ▌ Greece
gil.f.mendes@br.ey.com
+55 11 2112 5466 Jiri Teichmann Stelios Kyriakides
jiri.teichmann@cz.ey.com stelios.kyriakides@gr.ey.com
+420 225 335 327 +30 210 28 86 414
▌ Canada
▌ Denmark ▌ Hungary
Greg Noble
greg.noble@ca.ey.com Thomas Bjerre Denes Szabo
+1 604 891 8221 thomas.bjerre@dk.ey.com denes.szabo@hu.ey.com
+45 3 587 2901 +36 1 451 8209
▌ Chile ▌ Ecuador ▌ Hong Kong
Sergio Sapag Javier Salazar Patrick Cheung

sergio.sapag@cl.ey.com javier.salazar@ec.ey.com patrick.cheung@hk.ey.com
+156 2 6761676 +1 593 2 255 5553 +852 28469905

▌ India ▌ Korea ▌ Phillipines
Vijay Iyer Kyung Tae Ko Romulo Danao

vijay.iyer@in.ey.com kyung-tae.ko@kr.ey.com romulo.danao@ph.ey.com
+91 981049 5203 +82 2 3770 0921 +63 2 894 8392
▌ Indonesia ▌ Latvia ▌ Poland
Rachmanto Surahmat Ilona Butane Aneta Blazejewska-Gaczynska

rachmanto.surahmat@id.ey.com ilona.butane@lv.ey.com aneta.blazejewska-gaczynska@pl.ey.com
+62 21 5289 5000 +371 704 3836 +48 22 557 8996
▌ Ireland ▌ Lithuania ▌ Portugal
Joe Bollard Leonas Lignis Paulo Mendonca

joe.bollard@ie.ey.com leonas.lingis@lt.ey.com paulo.mendonca@pt.ey.com
+353 1 2212 457 +370 5 274 2279 +351 21 791 2045
▌ Israel ▌ Malaysia ▌ Romania

Lior Harary-Nitzan Janice Wong Alexander Milcev
lior.harary-nitzan@il.ey.com janice.wong@my.ey.com alexander.milcev@ro.ey.com
+972 3 623 2749 +6 03 7495 8223 +402 1402 4000
▌ Italy ▌ Mexico ▌ Russia

Davide Bergami Jorge Castellon Henrik Hansen
davide.bergami@it.ey.com jorge.castellon@ey.com henrik.hansen@ru.ey.com
+39 02 851 4409 +1 55 5283 8671 +7 495 648 9608
▌ Japan ▌ New Zealand ▌ Singapore

Kai Hielscher Mark Loveday Jesper Solgaard
kai.hielscher@de.ey.com mark.loveday@nz.ey.com jesper.solgaard@sg.ey.com
+49 89 14331 16711 +64 9 300 7085 +65 6309 8038
▌ Kazakhstan ▌ Norway ▌ Slovak Republic

Roman Yurtayev Marius Leivestad Gunter Oszwald
roman.yurtayev@kz.ey.com marius.leivestad@no.ey.com gunter.oszwald@sk.ey.com
+7 727 258 5960 +47 24 00 23 86 +421 2 333 39610
▌ Kenya ▌ Peru ▌ Slovenia

Geoffrey G. Karuu Marcial Garcia Lucijan Klemencic
geoffrey.g.karuu@ke.ey.com marcial.garcia@pe.ey.com lucijan.klemencic@si.ey.com
+254 20 2715300 +151 1 411 4424 +386 1 583 17 21

Transfer pricing contacts
▌ South Africa ▌ USA

Corlie Hazell Purvez Captain
corlie.hazell@za.ey.com purvez.captain@ey.com
+27 11 772 3990 +1 713 750 8341
▌ Spain ▌ UK
David Lewis
Juan Jose Terraza Torra
dlewis1@uk.ey.com
juanjose.terrazatorra@es.ey.com
+44 020 795 18846
+34 933 663 741
▌ Sweden ▌ Venezuela
Katherine Pinzon
Mikael Hall
katherine.pinzon@ve.ey.com
mikael.hall@se.ey.com
+58 212 953 5222
+46 8 520592 35
▌ Switzerland ▌ Vietnam
Carlo Navarro
Raoul Stocker
carlo.navarro@vn.ey.com
raoul.stocker@ch.ey.com
+84 4 831 5100
+41 58 286 35 08
▌ Taiwan
George Chou
george.chou@cn.ey.com
+86 21 2228 8888
▌ Thailand
Narumol Limprasert
narumol.limprasert@th.ey.com
+66(0)2264 0777 ext: 21017
▌ The Netherlands
Erik Kamphuis
erik.kamphuis@nl.ey.com
+31 10 406 8630
▌ Turkey
Feridun Gungor
feridun.gungor@tr.ey.com
+90 212 368 5204

Acknowledgments
We would like to sincerely thank the tax authority representatives who responded to
this survey and the Ernst & Young transfer pricing professionals who provided their
perspectives and insights, garnered from their experience of working with the tax
authorities in their jurisdictions. All these efforts were facilitated by a central core team,
whom we would like to acknowledge for their contribution: Alexander Lorimer, Ana-
Maria Janschek, Dan Karen, David Tracey, Esther Dahmen, Nitin Jain, Paul Griffiths, Ralf
Heussner and Tammy LeGrys.

Ernst & Young
Assurance | Tax | Transactions | Advisory
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Ernst & Young Global Limited, a UK company
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About Ernst & Young’s Transfer Pricing and Tax

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We bring you a global perspective on transfer
pricing and tax effective supply chain
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© 2009 EYGM Limited.

All Rights Reserved.
EYG no. DL0145
This publication contains information in summary form and is

therefore intended for general guidance only. It is not intended to
be a substitute for detailed research or the exercise of professional
judgment. Neither EYGM Limited nor any other member of the
global Ernst & Young organization can accept any responsibility for
loss occasioned to any person acting or refraining from action as
a result of any material in this publication. On any specific matter,
reference should be made to the appropriate advisor.

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2009 Global

transfer pricing survey

1 2009 Global transfer pricing survey

Thomas Borstell John Hobster

Countries that appear in this edition

Argentina Denmark Indonesia Mexico Slovak Republic United Kingdom

2009 Global transfer pricing survey 2

APA (Advance Pricing Agreement)

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We are delighted to introduce the latest

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9 2009 Global transfer pricing survey

What should transfer pricing function leaders be doing now?

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Resources the taxing authority Types of transactions under *

For unpaid taxes related to international

2009 Global transfer pricing survey 12

According to the provisions of the

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Resources the taxing authority industry are taken into account in

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• The volume of related-party The Brazilian legislation requires the

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Advance Pricing Agreements

Likely trends in transfer pricing

17 2009 Global transfer pricing survey

Resources the taxing authority had a direct role in most high-profile or

2009 Global transfer pricing survey 18

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Resources the taxing authority The profitability of local taxpayers is

Industry focus Types of transactions under

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Transfer pricing penalties

Ernst & Young contact

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Resources the taxing authority The selection of industries under

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In preparing and presenting comparable

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Yield/performance of transfer Likely trends in transfer pricing

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The TPCA typically accepts working

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Likely trends in transfer pricing

Ernst & Young contact

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Transfer pricing penalties Likely trends in transfer pricing

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Resources the taxing authority 10 attorneys. The economists and

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