VALUE CREATION, TRANSFER PRICING, AND COMBATING ABUSE IN INTERNATIONAL TAXATION
Hilmar Nierop
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Herreveld Van den Hurk & Partners (www.hhp.law ) is small boutique advisor firm with an interdisciplinary team of top specialists in strategies and controversies in international taxation. The authors of this edition of the newsletter are Prof. Dr. Hans van den Hurk and Prof. Dr. Pilar Coutinho Elói .
Hans is professor corporate international tax law and international tax policy, University Maastricht, Netherlands and founding partner of HHP. Pilar is professor international taxation, Pontifical Catholic University of Minas Gerais, Brazil (PUC-MG) and partner of HHP.
VALUE CREATION, TRANSFER PRICING, AND COMBATING ABUSE IN INTERNATIONAL TAXATION
In the complex world of international taxation, the concepts of value creation, transfer pricing, and abuse are intricately intertwined. As multinational enterprises (MNEs) engage in cross-border transactions, the allocation of profits and taxation of these transactions become critical issues for governments worldwide. To ensure a fair and equitable distribution of tax revenues, countries aim to align taxation with the actual value generated within their jurisdictions. This article delves into the fundamental principles of value creation, transfer pricing regulations, and the measures taken to combat abuse in international taxation.
Value Creation and Its Significance:
Value creation refers to the process of generating economic value through the activities, functions, and risks undertaken by businesses. In today's global economy, traditional notions of value creation are evolving rapidly. While tangible assets and physical presence were once the primary drivers of value, intangible assets, such as intellectual property, technology, and data, are now becoming crucial contributors to value creation. The concept of value creation has inspired many of OECD Guidelines.
The Shift in Transfer Pricing:
To address the challenges posed by the evolving nature of value creation, transfer pricing regulations have undergone significant transformations. Transfer pricing is the determination of prices for goods, services, or intangibles exchanged between associated enterprises within an MNE group. The arm's length principle, a core tenet of transfer pricing, aims to ensure that these intercompany transactions are conducted as if they were between unrelated parties.
However, traditional transfer pricing methods often fail to adequately account for intangible assets and the value they contribute to global operations. In response to these challenges, the Organisation for Economic Co-operation and Development (OECD) introduced the Base Erosion and Profit Shifting (BEPS) project. The BEPS project aims to combat tax avoidance strategies and ensure that profits are taxed where value is created.
Abuse and the Principal Purpose Test (PPT):
One of the essential tools introduced by the BEPS project is the Principal Purpose Test (PPT). The PPT is designed to prevent treaty abuse and ensure that tax treaties are used for their intended purposes. When applied, the PPT denies treaty benefits if one of the principal purposes of an arrangement or transaction is to obtain such benefits, and if granting those benefits would be inconsistent with the object and purpose of the relevant provisions of the treaty.
Real Economic Substance as a Safeguard:
Amidst the complexities of applying the PPT, the concept of real economic substance emerges as a key safeguard against abuse. The systematic interpretation of the PPT emphasizes that transactions with real economic activities, value creation, and legitimate business reasons should not be denied treaty benefits. This means that MNEs engaged in bona fide transactions that create economic value between countries should be entitled to treaty benefits.
The FAR-Analysis as a Solution:
In combating abuse, the FAR-analysis (Functional, Assets, and Risks) emerges as a practical tool adapted from transfer pricing methodology. The FAR-analysis helps identify the real economic relationships and value generation within an MNE group. By analysing the functions, assets, and risks assumed by each entity, tax authorities can assess the legitimacy of transactions and ensure that profits are allocated in line with value creation.
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Conclusion:
Value creation, transfer pricing, and abuse in international taxation form a complex and ever-evolving landscape. As the global economy continues to evolve, the application of tax rules must adapt to ensure fairness and transparency. The integration of real economic substance as a safeguard against abuse, along with the adoption of the FAR-analysis, offers a promising solution to address these challenges. By aligning tax regulations with genuine value creation and legitimate business activities, countries can strike a balance between fostering economic growth and combatting tax avoidance and abuse.
UPCOMING EVENT:
The abovementioned topics will be discussed in more detail by Prof. Dr. Hans van den Hurk and Prof. Dr. Pilar Coutinho Elói, during a webinar organized by Sindusfarma. Sindusfarma is the Brazilian business association in the S?o Paulo State’s pharmaceutical industry. Other speakers are Mr. Bruno Aguiar , Mr. Flávio Yoshida and Mr. Robert de Vries .
Time: September 28, 2023. 9.00-12.00 hours (Brazilian Time / UCT-3).
Title: “New Rules for Transfer Pricing Taxation in Brazil (Portuguese/English)”.
INVITATION TO COMMENT, SHARE, FOLLOW AND CONNECT:
Please do provide us with your questions and comments on the abovementioned topics and feel free to like and share this newsletter.
You can follow HHP via @herreveldvandenhurk&partners or via the following link:
Mr. Hilmar Nierop , partner of HHP, is happy to discuss with you any needs or ideas on international taxation and tax strategies and controversies. You can reach him via [email protected] . and follow him per #taxationbyhilmarnierop
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Innovation Consultant ? Turning innovation into value
1 年I can only fully support your statements. In our modern business world, where intangible assets are increasingly cross-border traded, valuation methods must also be adapted. Values such as human capital, customer and structural capital as well as values from strategic alliances must be included. AREOPA as a leading consulting firm for the management of intellectual capital has the objective and the know-how to leverage this hidden potential and make it more usable. For example, for the financing of knowledge-based companies or IAS based IC accounting. We have also successfully implemented projects in the area of transfer pricing.
FOUNDER and DIRECTION at HUMANBE - ACTION TANK ON SUSTAINABLE DEVELOPMENT
1 年Thank you Hilmar Nierop for the invitation but sorry international taxation on what and for what?? ??
Value creation is a determination that differs per company. Insight in, not only the IP, but also the business processes should be taken into consideration when performing a VCA. The issue with a good value creation assessment is that most of the interviewees feel they are very important and make significant contributions to the value created. And in some way they are. It all revolves around the employees of a company. That element, next to the view of the local tax authorities, come into play when determining the value creation of a company.