International Tax Review's Transfer Pricing Special Focus has been saved
International Tax Review's Transfer Pricing Special Focus
The impact of COVID-19
Deloitte Southeast Asia's Transfer Pricing specialists share their analysis and insight in the 22nd edition of ITR's Transfer Pricing guide.
Profit-linked intra-group service charges: An Indonesian perspective
The arm’s-length guaranteed profit of a low-risk entity (LRE) will not alleviate the transfer pricing (TP) exposure of the intragroup services (IGS) fee that is charged to allocate appropriate profit/loss within the group entities based on the value creation concept. The absence of clear guidance in Indonesia on the allocation of excess profits or losses under this scenario may result in the tax authority viewing IGS separately and in isolation from the LRE’s profitability.
The rise of intangibles and the impact on TP analysis
Intangibles in a business context have increased in manifold ways over recent decades. This rise has brought an increased focus on intangibles in global tax and TP, among thinktanks such as the OECD, leading to the BEPS action.
However, amid the TP guidance issued by the OECD, other thinktanks, local governments and courts, efforts should also be made to appreciate how businesses think and operate, the role and rise of intangibles in business, and key actions that are not directly reflected in financial statements but significantly influence business outcomes. This would aid better TP analysis.
In this article, we present two case studies to highlight how some multinational enterprise (MNE) groups may have taken resilient action during the pandemic, the rise of intangibles within their businesses, with technology itself becoming the end-product/service, technology embedded within the product/service and integration of the technology in how businesses operate, and their potential impact on TP analysis. Current accounting practices face a challenge to appropriately capture the true picture.
Emerging TP adjustments in light of COVID-19: A practical standpoint
The unprecedented changes in the economic environment following the outbreak of the COVID-19 pandemic have resulted in multiple challenges for MNEs and tax administrations.
These challenges involved government-imposed restrictions leading to decreased demand and disruptions in the global supply chain, among others. Accordingly, many businesses have suffered losses due to the operational and market pressures arising from the pandemic. This poor performance of the taxpayers had the knock-on effect of intensifying the actions of tax administrations to ensure that such losses are not attributable to TP policies adopted by the MNEs.
Disruptive technologies and evolving value chains
The evolution of the internet from a simple website containing bland pages of text (Web 1.0) to its ‘current’ version (Web 2.0) has paved the way for companies to transform business, scale globally, and achieve unprecedented exponential growth.
User-generated content can be viewed virtually by millions of people in an instant on various platforms, propelling the growth of the gig economy and e-commerce. Web 2.0 tremendously disrupted sectors that failed to integrate the new web-based business model. In Web 1.0 and 2.0, the exploitation and centralisation of user data has been fundamental to the operation of the internet. The codes for these two are written andcontrolled by a small group of experts and data aggregation, analytics as well as some processing permissions for commercialisation of the data are usually required from central authorities.
The concept of Web 3.0 was introduced in 2006 with the core objective of addressing the principles of openness, transparency, freedom of expression, decentralised ownership, and reduced interventions.
Web 3.0 aims to improve user interactions through immersive experiences and flexibilities using artificial intelligence, virtual reality, machine learning, automation and control over data, thereby enhancing user ownership, utility, monetisation and experiences. It is a verifiable, self-governing, trust-less, permission-less, decentralised and robust transfer of data across platforms. It has the potential to be even more disruptive than its predecessors.
Understanding how such digital transformation affects the end-to-end value chain is essential for the tax function. Heads of Tax will need to consider the impact of such digital transformation on existing transfer pricing (TP) operating models and the creation of digital ‘value’ and ‘assets’ across the value chain.
A closer look at Thailand’s TP landscape
TP laws provide power to the Thai tax authority to reassess the taxable income and expenses of related party transaction(s), ensuring that they are consistent with the arm’s-length principle for corporate tax purposes. The arm’s-length principle requires that the pricing of related party transactions be based on the pricing that would have been agreed upon in transactions between independent parties. The law is effective for accounting periods commencing on or after 1 January 2019.
Key TP considerations during the recovery from COVID-19 in Vietnam
The COVID-19 pandemic is currently in its third year and has had an unprecedented impact on human life and business all over the world. The impact of COVID-19 has been equally devastating on businesses in Vietnam. Many have been negatively affected and some have been forced to modify the way in which they conduct their business.
The value chain of MNE groups has been impacted considerably and so has TP outcomes. In the ensuing paragraphs, we will discuss some of the TP challenges that could be faced by an entity in Vietnam that is a part of a MNE group, and the possible ways to navigate through these challenges.