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Anatomy of a Transactional Profit Split Agreement: Key legal considerations. The slide below attempts to give an overview of the four key areas of functionality of an intercompany agreement to implement a transactional profit split. To be precise, this refers to a split of 'actual profits' rather than 'anticipated profits', as described in the OECD TPG. It's worth mentioning a few basic points: 1. You need to understand the overall 'matrix' of intercompany transactions / agreements before you set pen to paper on the agreement. This is particularly important on profit split arrangements, because this factors into the distinction between 'unique and valuable contributions' and other transactions, and into the definition / calculation of the 'residual' profits to be split. 2. The choice of the profit split method usually implies that relevant risks are assumed jointly, which depends in part on the contractual terms. So the contract design goes hand-in-hand with the choice of how the transfer pricing method is applied. 3. Getting clear on revenue streams is critical, including in particular which entities receive third party revenue (directly or indirectly), and which don't. Without clarity on this, you can't understand / design / document / characterise the adjusting payments. 4. Equally important is getting clarity on where IP rights sit (i.e. with which entity) - both for pre-existing IP and for IP created during the course of the profit split arrangement. If you get this wrong, (a) the group may not be able to enforce its IP effectively, and (b) you may have an unwelcome surprise when it comes to transitioning to a different arrangement (e.g. a CSA in place of a profit split). 5. Tax authorities always have the benefit of hindsight, whereas taxpayers are expected to document arrangements in advance. That's just how things are. The easiest, quickest, cheapest and most effective approach is to do your best to design, implement and operate an arrangement in advance, which has substance from a TP, legal and governance perspective, and which meets the needs of all the relevant stakeholders.

Anatomy of a transactional profit split agreement: key legal considerations... #internationaltax #transferpricing #profitsplit #LCNLegal

Subject: Notice 2024-38 1. References to other revenue procedures for part of the representation, for example, RP 2017-52, is confusing. Recommend incorporating what is to remain of those other revenue procedures into RP 2024-24 so that you only have to look at one revenue procedure. 2. Rev Proc 2024-24 makes multiple references to section 357(d). However, there are no proposed or final regulations or any other guidance on the provisions of section 357(d). Thus, how is it possible that the IRS will review assertions, representations and so on by the taxpayer relating to section 357(d) when there is no guidance published? 3. There are many representations in RP 2024-24. Many of them are representations as to legal matters and questions of law. Representations have traditionally been used as to factual matters. How do you justify so many representations as to matters of law? It does not seem to be appropriate. 4. The appendix lists RR 80-323 as guidance to be relied on. But the law relating to that ruling was made obsolete by section 357(d) and even though RR 80-323 has not been revoked, it has been overruled by section 357(d). The appendix needs to fix this. 5. The major emphasis on the time period separation for a recast seems to ascribe too much importance to time periods. See, e.g., reg. 1.197-2(k), example 19. "...Acquisition of partnership interest following formation of partnership. (i) The facts are the same as in Example 18 except that, in 2000, A formed P with an affiliate, S, and contributed the intangible to the partnership and except that in a subsequent year, in a transaction that is properly characterized as a sale of a partnership interest for Federal tax purposes, B purchases a 50 percent interest in P from A....." 

Understanding Transfer Pricing: Ensuring Compliance and Fairness In the global business landscape, transfer pricing has become an essential aspect of tax compliance and corporate governance. Transfer pricing refers to the pricing of transactions between related parties, such as subsidiaries of a multinational enterprise. Here’s a brief overview of the fundamental principles and practices: 1. The Arm’s Length Principle: The cornerstone of transfer pricing is the Arm’s Length Principle, which requires that transactions between related parties be conducted as if they were between independent entities. This principle ensures that the prices reflect market conditions and prevents profit shifting to low-tax jurisdictions. 2. Key Transfer Pricing Methods: There are several methods to determine arm’s length prices, including: • Comparable Uncontrolled Price (CUP) Method: Compares the price of transactions between related parties with those of similar transactions between independent entities. • Resale Price Method (RPM): Bases the price on the resale price to independent customers, minus a margin. • Cost Plus Method (CPM): Adds an appropriate profit margin to the costs incurred by the supplier of goods or services. 3. Documentation and Compliance: Maintaining detailed documentation is crucial. It includes the Master File, Local File, and Country-by-Country Report, which provide comprehensive information on global business operations, transfer pricing policies, and detailed transactional data. Proper documentation not only ensures compliance but also mitigates the risk of disputes with tax authorities. 4. Special Considerations: Certain transactions require special attention, such as financial transactions, intangibles, and intra-group services. Each type of transaction has unique characteristics that must be considered to ensure compliance with transfer pricing regulations. Developing and adhering to robust transfer pricing policies is crucial for multinational corporations to manage the intricacies of international tax laws and prevent potential penalties. Ensuring that your practices are up-to-date and compliant will foster equitable and transparent business operations. #TransferPricing #TaxCompliance #CorporateGovernance #ArmLengthPrinciple #GlobalBusiness

*Transfer Pricing Documentation under Corporate Tax* Corporate Tax Law specifies the Transfer Pricing documentation obligations on a Taxable Person that enters into transactions with its Related Parties or Connected Persons. Maintenance of *Master file and Local file* is required if * Businesses that are part of an MNE Group with *consolidated revenue over 3.15 billion* AED or * Where the *Taxable Person’s Revenue exceeds 200 million* AED. *Country by Country Reporting (CBCR)* only applies for businesses that are part of an MNE Group with consolidated *revenue over 3.15 billion AED* However, even if you do not meet MF/LF criteria, maintain records validating arm's length transactions with Related/Connected Parties. The FTA may request supporting information from all taxpayers. Such information may include: * Functional analysis * Benchmarking studies * Intercompany agreements * Minutes of Meetings * Evidence of decisions taken * Invoices * Workpapers computing the transfer prices, among others.

Understanding the VAT treatment of client account funds is essential for legal practices. Our latest article provides a clear overview of the VAT implications of interest earned on these accounts. Read more: https://lnkd.in/ehMF3E_j #VAT #LawFirms #Finance #Accountants #Saffery

Why Delineating Every Transaction in Your Local File is Non-Negotiable in Transfer Pricing? In the complex world of transfer pricing, the local file serves as a critical document that ensures transparency and accuracy in intercompany transactions. One of the most crucial elements in preparing a robust local file is the “delineation” of transactions. But what does delineation mean, and why is it so important? Delineation refers to the detailed characterization and analysis of the terms and conditions governing each intercompany transaction. It's not just about listing transactions, it's about understanding the actual conduct of the parties involved and ensuring that the transaction is consistent with the economic reality. Here’s why you should be prioritizing it: - Risk Identification: Proper delineation gives you a clear picture of who’s shouldering the risks in every transaction. When you can pinpoint this, you’re not just meeting regulatory standards and you’re proving your pricing is rock-solid. - Regulatory Confidence: Tax authorities aren’t just looking for numbers; they’re looking for a narrative that aligns with economic reality. A well-delineated transaction tells a story of compliance and accuracy that regulators can trust. - Audit-Ready: In the event of an audit, a local file with meticulously delineated transactions stands as your best defense. It shows that you’ve done your homework and that your transfer pricing aligns with the arm’s length principle. - Strategic Clarity: Understanding the true nature of every transaction allows you to make smarter business decisions. You’re not just reacting to compliance needs and you’re strategically positioning your company for success. Delineation isn’t just a buzzword. It’s the process that turns your documentation from basic to bulletproof. Ensuring that each transaction is properly delineated can significantly reduce the risk of disputes with tax authorities and support the overall transfer pricing strategy of the business. #TransferPricing #TaxCompliance #TPStrategy #GlobalTax #TaxProfessionals #TPDocumentation

Transfer Pricing (TP) Concepts #4 - TP Agreements vs. TP Documentation #TransferPricing Agreements are like making plans for a fun day out – clear and hopeful. You decide what you will do, just like companies decide on prices for trading goods or services between their associated enterprises. Everything is pre-determined the way it should happen. Then comes the TP Documentation, the real story of what happened. It’s like when your day out doesn’t go as planned – maybe the weather acts up, or something else unexpected happens – but you adapt and make the best of it. In the business world, it could mean unexpected cost increases, situations like COVID, petrol prices or supply issues. In short, while TP Agreements are the ideal plan, TP Documentation shows the reality, which is full of surprises and adjustments. It's about making plans and then navigating the twists and turns life throws your way, just like in business. However, transfer pricing agreements should be aligned with the TP documentation on the intent and in spirit. If there are any changes in how the conduct was carried out, it is expected to undertake changes to the agreements. Bigger companies have faced transfer pricing issues because their legal agreements did not align with the business realities. The Coca-Cola TP adjustment by the US IRS is one such fantastic example. Stay tuned for a fun series on learning about the TP concepts. I am happy to hear your thoughts in the comments section. TransPrice Tax Advisors LLP TransPrice-GDT Tax Advisors (UAE)

Functional analysis plays a crucial role in the field of Transfer Pricing within corporate taxation. Transfer Pricing refers to the pricing of goods, services, or intellectual property transferred within a multinational enterprise (MNE) group. The goal of Transfer Pricing regulations is to ensure that transactions between related entities are conducted at arm’s length, meaning the prices and terms should be similar to Read more: https://lnkd.in/gqZpsZDH #RoyaltyRange #TransferPricing #functionalanalysis #TP

𝐒𝐐𝐀𝐓 𝐒𝐞𝐫𝐢𝐞𝐬: 𝐏𝐚𝐫𝐭 𝟒 - 𝐓𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐏𝐫𝐢𝐜𝐢𝐧𝐠 Welcome back to our final installment in the 𝐒𝐐𝐀𝐓 series at 𝐈𝐍𝐃𝐆𝐞𝐧𝐢𝐮𝐬 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐢𝐧𝐠. Today, we are discussing the last part of 𝐒𝐐𝐀𝐓: 𝐓𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐏𝐫𝐢𝐜𝐢𝐧𝐠. • 𝐓𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐏𝐫𝐢𝐜𝐢𝐧𝐠 𝐄𝐱𝐩𝐥𝐚𝐢𝐧𝐞𝐝 Transfer Pricing refers to the 𝐫𝐮𝐥𝐞𝐬 and 𝐦𝐞𝐭𝐡𝐨𝐝𝐬 for pricing transactions within and between enterprises under common ownership or control. • 𝐇𝐞𝐫𝐞’𝐬 𝐰𝐡𝐚𝐭 𝐲𝐨𝐮 𝐧𝐞𝐞𝐝 𝐭𝐨 𝐤𝐧𝐨𝐰: 𝟏. 𝐃𝐞𝐟𝐢𝐧𝐢𝐭𝐢𝐨𝐧: Transfer Pricing involves setting the price for goods, services, and intangibles transferred between related 𝐞𝐧𝐭𝐢𝐭𝐢𝐞𝐬. The goal is to ensure that the prices are in line with the market rates and comply with the 𝐀𝐫𝐦'𝐬 𝐋𝐞𝐧𝐠𝐭𝐡 𝐏𝐫𝐢𝐧𝐜𝐢𝐩𝐥𝐞. 𝟐. 𝐌𝐞𝐭𝐡𝐨𝐝𝐬 𝐨𝐟 𝐓𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐏𝐫𝐢𝐜𝐢𝐧𝐠: There are several methods used to determine the arm's length price, including: • 𝐂𝐨𝐦𝐩𝐚𝐫𝐚𝐛𝐥𝐞 𝐔𝐧𝐜𝐨𝐧𝐭𝐫𝐨𝐥𝐥𝐞𝐝 𝐏𝐫𝐢𝐜𝐞 (𝐂𝐔𝐏) 𝐌𝐞𝐭𝐡𝐨𝐝: Compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction. • 𝐑𝐞𝐬𝐚𝐥𝐞 𝐏𝐫𝐢𝐜𝐞 𝐌𝐞𝐭𝐡𝐨𝐝 (𝐑𝐏𝐌): Based on the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. • 𝐂𝐨𝐬𝐭 𝐏𝐥𝐮𝐬 𝐌𝐞𝐭𝐡𝐨𝐝 (𝐂𝐏𝐌): Adds an appropriate markup to the costs incurred by the supplier of goods or services in a controlled transaction. • 𝐓𝐫𝐚𝐧𝐬𝐚𝐜𝐭𝐢𝐨𝐧𝐚𝐥 𝐍𝐞𝐭 𝐌𝐚𝐫𝐠𝐢𝐧 𝐌𝐞𝐭𝐡𝐨𝐝 (𝐓𝐍𝐌𝐌): Examines the net profit margin relative to an appropriate base (such as sales, costs, or assets) that a taxpayer realizes from a controlled transaction. • 𝐏𝐫𝐨𝐟𝐢𝐭 𝐒𝐩𝐥𝐢𝐭 𝐌𝐞𝐭𝐡𝐨𝐝 (𝐏𝐒𝐌): Divides the combined profits from the controlled transactions in a manner that would be expected from agreements between independent enterprises. 𝟑. 𝐃𝐨𝐜𝐮𝐦𝐞𝐧𝐭𝐚𝐭𝐢𝐨𝐧 𝐑𝐞𝐪𝐮𝐢𝐫𝐞𝐦𝐞𝐧𝐭𝐬: Proper documentation is crucial to justify the 𝐩𝐫𝐢𝐜𝐢𝐧𝐠 𝐚𝐧𝐝 𝐞𝐧𝐬𝐮𝐫𝐞 𝐜𝐨𝐦𝐩𝐥𝐢𝐚𝐧𝐜𝐞 𝐰𝐢𝐭𝐡 𝐫𝐞𝐠𝐮𝐥𝐚𝐭𝐢𝐨𝐧𝐬. This includes . Detailed contracts and agreements • Transfer pricing policies and methodologies • Financial data and benchmarking studies to support the arm's length nature of the transactions. 𝟒. 𝐂𝐨𝐦𝐩𝐥𝐢𝐚𝐧𝐜𝐞 𝐚𝐧𝐝 𝐑𝐞𝐠𝐮𝐥𝐚𝐭𝐢𝐨𝐧𝐬: Adhering to 𝐭𝐫𝐚𝐧𝐬𝐟𝐞𝐫 𝐩𝐫𝐢𝐜𝐢𝐧𝐠 regulations helps avoid penalties and ensures smooth operations. Compliance with international guidelines, such as those provided by the 𝐎𝐄𝐂𝐃, is essential for multinational companies to avoid disputes with 𝐭𝐚𝐱 𝐚𝐮𝐭𝐡𝐨𝐫𝐢𝐭𝐢𝐞𝐬. 𝟓. 𝐁𝐞𝐧𝐞𝐟𝐢𝐭𝐬: Proper transfer pricing ensures 𝐟𝐚𝐢𝐫 𝐭𝐚𝐱𝐚𝐭𝐢𝐨𝐧 across jurisdictions, reduces the risk of 𝐝𝐨𝐮𝐛𝐥𝐞 𝐭𝐚𝐱𝐚𝐭𝐢𝐨𝐧, and helps maintain good relationships with tax authorities. It also enhances the transparency and credibility of 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐬𝐭𝐚𝐭𝐞𝐦𝐞𝐧𝐭𝐬. Sachin Gor CA Sunil Bohara