Release date: September 8, 2011
Guest: Marc Levstein
Running time: 7:34 minutes
In today’s episode, we spoke with Marc Levstein about global business restructuring: what it means, recent trends, and specific issues that the authorities are targeting.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry Lewandoski: In today’s episode we’ll speak with Marc Levstein, a senior manager based out of our Toronto office. Marc is part of PwC’s Value Chain Transformation practice which focuses on tax efficient global business restructuring — which is what we’ll be talking about today.
Thanks for joining us, Marc.
Marc: Glad to be here.
Gerry: It seems there are many issues to consider when restructuring a business. But first of all, can you tell us exactly what is meant by “business restructuring?”
Marc: Sure. But actually, there’s no legal or universally accepted definition of a business restructuring. I can tell you that from a tax and transfer pricing perspective, it’s generally viewed as the cross-border redeployment of functions, risks and assets by a multinational corporation.
For example, we typically see business restructurings that involve transfers of intangible property into a centralized entity typically located in a preferred tax jurisdiction. Another example is the creation of shared service centres in low cost jurisdictions.
Gerry: Have you noticed any recent trends in business restructuring?
Marc: Well, there has been a big increase in both the number of business restructurings and the level of tax authority scrutiny they attract. I think this relates somewhat to the OECD’s new guidance on business restructurings, which was included in the 2010 Transfer Pricing Guidelines.
That being said, overall the increase in restructurings is a result of the global economy, as companies are increasingly revisiting their operational structures looking for ways to lower costs, rationalizing their geographic footprint to address the rise of the so-called BRIC countries (that is, Brazil, Russia, India and China), and realigning operations with their core competencies and growth expectations.
However, often the tax structures are not aligned with international business objectives, resulting in tax inefficiencies that need to be remedied.
Gerry: It appears to be a perfect storm for these restructurings. And how have tax authorities responded?
Marc: Well, that’s an interesting question, as two camps are emerging. First, there are countries that are trying to maintain their tax base by implementing punitive measures to prevent companies within their borders from moving high value functions, assets and risks offshore. Germany is a good example. It’s issued administrative principles on business restructurings that are binding on its local tax authorities. We expect that other tax authorities may do the same in the near future.
In the second camp are countries trying to attract new investment by offering significant tax incentives for companies willing to relocate key parts of their operations. Belgium, Luxembourg and the Netherlands are examples; these countries are now competing with long-established preferred tax jurisdictions such as Switzerland, Ireland and Singapore to attract the income associated with high value functions and intellectual property.
Gerry: And what about more specific issues. What are tax authorities focusing on in an actual restructuring?
Marc: Well these issues are typically case-specific, but generally include which entity should bear closure costs, potential exit charges with respect to the movement of valuable intangibles or transfer of functions and risks, and the assertion by tax authorities related to the creation of local intangibles even when the existing transfer pricing policies and associated legal agreements treated the entity as routine. In any case, it’s really important to note that regardless of how much guidance exists in the public domain, these issues all boil down to an interpretation of the arm’s length principle.
Gerry: Marc, you mentioned recent OECD guidance on this issue. What effect has this had on business restructuring?
Marc: Given the complexity and dollars related to business restructurings, the guidance has been welcomed by both tax authorities and the business community as it sets out a common understanding of the transfer pricing issues and a framework for how these issues should be addressed.
Gerry: What about Canada? What does the CRA think about this guidance?
Marc: The CRA has endorsed the guidelines, but it’s too soon to tell how it will interpret them. Also, it’s important to remember these are only guidelines in Canada, not law.
That being said, some issues in the guidance have particular impact on both Canadian-based multinationals and Canadian subsidiaries of foreign-based multinationals.
For example, one issue that caused concern in the Canadian business community was related to a tax authority’s ability to re-characterize a business restructuring, or disregard it altogether, as the CRA already has this option under the Income Tax Act. Thankfully, the OECD says that a transaction should be disregarded only in exceptional circumstances, and specifically states that just because an arrangement between associated enterprises is not seen between independent parties, it doesn’t mean that the arrangement is not arm’s length.
Gerry: Why is this such an important point?
Marc: Because often in a business restructuring scenario there is limited comparable third party data available, and tax authorities have used this to argue that associated transactions, say, an IP migration, are therefore not arm’s length.
One further point here, though. While the guidance states that re-characterization should only occur in very limited circumstances, Canadian taxpayers should be aware that the OECD endorses the concept of realistically available alternatives; that is, an entity would not have entered into a transaction if an alternative option was clearly more attractive.
That being said, this is a difficult concept to apply in practice, so we generally advise our clients to prepare supporting documentation in relation to the options that were realistically available to them.
Gerry: So what are the first issues a company should address when undertaking a business restructuring?
Marc: Well, these issues run the full gamut from tax, through legal, IT and human resources. And of course, as business restructurings generally involve transactions between related parties, transfer pricing aspects are a vital component and cannot be ignored.
However, probably the most important issue is the underlying purpose of the restructuring itself. While the OECD guidance states that a restructuring can be undertaken primarily for tax reasons, our experience has been that a key to implementing a tax efficient business restructuring is the taxpayer’s ability to clearly articulate the business purpose and how the restructuring helps align the tax structure to the overall business model.
Therefore, we often ask our clients some “boundary type questions” when undertaking the initial feasibility analysis such as whether the company is willing to move key decision makers, risks and assets across borders, and whether the restructuring makes sense from a business perspective. For example, does it align with the growth strategies of the company? If a taxpayer can comfortably answer “yes” to these questions, it’s in a good position to successfully restructure in a tax efficient manner.
Gerry: Thanks again for joining us Marc.
Marc: You’re very welcome.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.