WHY TRANSFER PRICING? OR How Did We Get Here From There?

Transcription

1 WHY TRANSFER PRICING? OR How Did We Get Here From There? Barbara J. Mantegani Mantegani Tax PLLC Julie Joy Bloomberg BNA

2 Here - Where Are We Now? Transfer pricing one of the most significant (if not the most significant), tax issues facing MNEs of all sizes Virtually every country has implemented transfer pricing rules, including documentation, that incorporate the recommendations from the OECD s BEPS project In the last year both the OECD and the UN have issued completely revised transfer pricing guidelines that arguably expand the ability of tax authorities to reallocate income More than 70 countries have signed the MLI MAP inventories for all OECD countries up more than 160 percent over the last 10 years EU targeting unilateral transfer pricing agreements as state aid With transparency as the watchword, UK MNEs now required to post information regarding their tax strategies on the company website, and chances that CbCR will be made public in the EU and elsewhere are increasing

3 from There - Where Did We Begin? 1986 U.S. Congress amends Section 482 to add the commensurate with income standard to intercompany transfers of intangibles in response to perceived abuses; suggests Treasury look more broadly at transfer pricing 1988 Treasury issues Transfer Pricing White Paper that describes current state of compliance and enforcement and recommends regulatory changes Treasury releases almost complete revision of transfer pricing regulations (excluding services) and imposes documentation requirements 1995 OECD issues Transfer Pricing Guidelines documentation suggested but not recommended 1996 United States issues its first cost sharing regulations 1997 OECD adds cost sharing chapter (Chapter VIII) to its guidelines Late 1990s to early 2000s Transfer pricing remains a concern of larger, developed economies and enforcement efforts begin an uptick but information not shared across countries; IRS updates services regulations EU enforcement increases, Joint Transfer Pricing Forum takes deep dive into transfer pricing enforcement challenges, additional countries, e.g., China and India, increase transfer pricing audit activity 2010 OECD adds Chapter IX Business Restructurings to its guidelines, which introduces new analytical structure to examining the transfer pricing implications of all types of business changes

4 And Then What Happened? Technology revolutionizes business processes throughout the supply chain New markets open and companies explore alternative business models Intangibles become even more important and become subject of close scrutiny by tax authorities, especially intangibles included in cost sharing arrangements Countries increasingly focus on transfer pricing as concerns grow that some taxpayers could be reallocating income in a way not consistent with the arm s length standard companies challenge this assessment Global financial crisis disrupts virtually every industry and region, causing overall tax revenues to shrink and losses become more widespread Tax authorities become more aggressive at trying to increase their share of a smaller pie and start talking more to each other Developing countries, through work of the UN, become more active in transfer pricing arena Taxpayers that suffer global losses required to justify the allocation of losses across jurisdictions, with countries fighting for routine returns

5 But Wait, There s More European Commission targets some large U.S. multinationals through state aid decisions that strike down unilateral pricing agreements between various European countries and those U.S. companies, e.g., Apple, Starbucks, Amazon, McDonald s OECD and UN exhibit heightened interest in the transfer pricing implications of the digital economy, and OECD launches the BEPS project, which identifies the digital economy as its first action item (final report still not issued) Tax authorities launch coordinated programs of transfer pricing audits, which fairly can be characterized as BEPS inspired New documentation requirements, especially the Country by Country Report, create new opportunities for tax authorities to drill down into an MNE s transfer pricing story, but also could lead to data overload Countries adopt anti-avoidance rules to encourage better behavior, both in TP or despite TP

6 What Have We Learned on this Journey? Companies of any size that do business cross-border need to analyze their supply chain with transfer pricing glasses and have third party reality check Coherent global story is critical, since there are no longer local or regional silos and you have to expect that every country will know everything For public companies, cross-functional coordination is a must, and investor relations/public relations/marketing departments should be involved in developing or reviewing the transfer pricing message Given the level of transfer pricing audit activity around the world, companies should Have comprehensive and defensible policies Be consistent throughout the world and have explanations for variable results Develop a dispute resolution strategy in advance Biggest lesson regarding transfer pricing in 2018: Know your story, tell your story, stick to your story