Q&A: Transfer pricing – meeting the demand for transparency


Financier Worldwide Magazine

December 2017 Issue

FW moderates a discussion on meeting the demand for transparency in transfer pricing between Luis Abrantes at Carlsberg, Joanna Gniadecka at Liberty Global B.V., David Sayers at Mazars LLP, and Nathaniel Carden at Skadden, Arps, Slate, Meagher & Flom LLP.

FW: In your opinion, what are some of the significant developments to have taken place within the transfer pricing arena over the last 12 to 18 months? In general, have you seen a greater drive toward transparency and reporting on transfer pricing?

Abrantes: The level of activity by many tax stakeholders, such as legislators, the Organisation for Economic Co-operation and Development (OECD), non-governmental organisations (NGOs) and tax authorities, has increased. This is reflected in the number of inquires and the aggressiveness of the demands. I believe this is linked to the publication of the base erosion and profit shifting (BEPS) final reports, as well as the culmination of political decisions, generally made during the credit crunch years, when multinationals had too much leeway to avoid paying taxes. Transfer pricing was one of the main culprits of that leeway. The drive for transparency fits into this trend and has definitely been on the increase. Concrete measures like country-by-country (Cbc) reporting, actions by NGOs intending to expose abusive tax practices and the European Commission’s drive to make CbC public, rather than a document to be submitted to multinational enterprises’ (MNE) tax authorities and shared among tax authorities, all support the view that transparency is on the rise.

Carden: Clearly, the initial implementation of CbC reporting is a significant development, largely because it is now becoming clear, at least in the US, that the rules are much easier to describe in theory than to implement in practice. Uncertainty arising from the treatment of hybrid entities, partnerships and intercompany transactions is causing many companies to invest significant resources in compliance. Because of the way the rules are applied, it is not clear that CbC reporting will in fact increase transparency – instead, companies with very different operating profiles and approaches to tax planning may end up having CbC reports that look very similar. On the substantive front, the incorporation of the BEPS reports into the OECD guidelines is obviously a very significant development given the fundamental changes in the BEPS Actions 8-10 report. That report is very focused on functions performed by various affiliates over time. At the same time, in the US the IRS and Treasury appear increasingly committed to an approach that treats transfer pricing as a corporate finance exercise, analysing transactions on an upfront basis to determine whether a risk-bearing participant is compensated as a hypothetical financial investor would be. These differences in rules also reduce any value from increased transparency, since different reporting positions may be a result of different rules across jurisdictions, rather than differences in functions or risks across countries.

Sayers: The biggest change I have seen is tax authorities pre-empting BEPS. The UK has been an enthusiastic adopter of the OECD proposals and has sought to use them at the earliest opportunity. Across the globe we have seen a move away from one-sided transfer pricing and a strong preference on the part of tax authorities for residual profit split, which is fine in theory, but not always easy to work with at a practical level. I view transparency as a good thing and we have campaigned for that for a long time. However, I appreciate the fears and sensitivities around disclosure of commercially confidential information. In practical terms, CbC reporting is a lot of work for MNEs and as not all countries have adopted at the same time, there are decisions to be made over early and voluntary disclosure to avoid multi-country filing. We also have significant concerns relating to the impact of the BEPS interest relief restrictions and the one size fits all approach. This has caused significant concerns for infrastructure companies in particular.

Gniadecka: Transparency is the ‘new normal’ in transfer pricing, or in tax in general. Nowadays, building and maintaining the transfer pricing landscape is an end-to-end task, involving design policy consistency, implementation issues and dispute resolution strategies. This of course places significant stress and burdens on transfer pricing experts who cannot afford strategic ‘loose ends’. In terms of developments, a lot of attention is being given to CbC reporting and the growth of the Inclusive Framework around the BEPS project – initiatives which broaden tax measures and significantly increase the number of countries committing to minimum BEPS standards, one of which is CbC reporting. It is also interesting to follow the developments around different types of mandatory disclosure measures. Depending on the country, there is a continuing trend to introduce disclosure programmes in different tax and reporting areas, which lead overall to large amounts of tax and accounting intelligence being collected – information that is ready to be exchanged between OECD countries.

FW: Could you outline the challenges that face businesses as they try to maximise their tax efficiencies while staying within the bounds of transfer pricing regulations? Is it becoming tougher to achieve this balance?

Carden: Currently, the biggest challenge I see multinationals facing arises from different transfer pricing rules in different jurisdictions. While the BEPS initiative may be viewed as a way to unify multinational tax administration around a common set of principles, countries’ practices in applying BEPS vary widely. Moreover, countries often adopt different views as to the significance of various development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) functions as well as the extent to which those functions are performed locally. Hence, maximising tax efficiencies is often a matter of avoiding double taxation or costly audits. Moreover, because of these competing interpretations across countries, it is hard to know what a ‘competitive’ tax rate will ultimately turn out to be.

Sayers: We are seeing the death of tax-driven supply chain planning as we used to know it. Firms are being much more cautious in their approach to tax planning. It is still there, but much more based around substance and where the real risks and functions are situated rather than the contractual ones. This kind of substance-based tax planning still works, but the question is, how much substance do you need? Even if you have a thousand people in a location, that may not be enough substance if they are not performing the roles that are foreseen by the transfer pricing documentation, which is not unusual. Separation of intangibles from value creators is also a problem. How many different people in a business contribute to the value of a brand? It is not just the marketing department as some people seem to think. The best employees are often the best brand ambassadors, no matter what their role.

Gniadecka: The most significant challenge facing businesses is to combine the tax efficiency of transfer pricing policies with their sustainability. This requires a greater analysis of the transfer pricing component in order to achieve a tax efficient, but also BEPS-compliant, transfer pricing solution. In the current environment, the outcome of implementing a transfer pricing model based on this methodology may be a transfer price primarily driven by a one-sided approach. However, for sustainability purposes, this requires additional corroborative analysis, such as value chain analysis (VCA). In addition to extended work on the analytical side, the boundaries of transfer pricing itself have expanded and are now deeply submerged in the business context. Consequently, multinational taxpayers are able to put together convincing transfer pricing solutions.

Abrantes: It is much tougher to achieve a balance. An area that used to receive little attention from tax authorities is now getting a lot of it. There are many aspects in an intercompany transaction with broad grey areas, which can generate multiple outcomes which are defensible at arm’s length. This is true, not just for ranges of prices or margins in the traditional sense, for example the inter quartile ranges, but also for concepts like risks borne and the importance of a given stage in the value chain, among others. Naturally, tax authorities will interpret information under the most favourable light to suit their interests, often without a comprehensive understanding of the business or the transaction. Tax authorities are also faced with significant resource restrictions, and processing the documentation required from taxpayers puts pressure on those resources. This can lead to incorrect conclusions, to the detriment of taxpayers, often reached in a rush to meet legal deadlines or internal procedural timings. In any case, these issues require significant resources from taxpayers.

FW: Have you seen an increase in transfer pricing disputes in recent times? What options are available to parties seeking to resolve disputes of this nature as swiftly and equitably as possible?

Sayers: The challenges from tax authorities are generally of better quality and technically superior to even a few years ago. Tax administrations feel empowered by BEPS, but also public opinion. We are seeing many stronger penalties as well. Disputes can often take years to resolve. We are seeing lots of challenges simply based on the statement that a third party would never have engaged in such behaviour. However, unusual transactions do exist, but that does not mean to say they are not arm’s length. We much prefer to settle matters by informal negotiation, but in some countries that just does not work and tribunals or courts are the only option. However, sometimes it is difficult to explain complex transfer pricing procedures in court. In Europe we have the arbitration procedure, which is normally more efficient and timely than mutual agreement procedures (MAPs) under double tax treaties, but is still time consuming and expensive. Sometimes the costs outweigh the tax at stake and clients are worried about triggering another transfer pricing audit in the other jurisdiction, so they just bite the bullet and concede to economic double taxation.

Abrantes: Although any increase or decrease in the number of disputes will undoubtedly depend on a taxpayer’s circumstances, such as geographic footprint, changes in structure, introduction of new intercompany transactions or significant variations in profitability or volumes of intercompany transactions, I believe there has been a general increase in transfer pricing disputes. A good, cooperative relationship with tax officers is naturally the ideal context in which to settle disputes about transfer pricing, but if that stage has been passed, then move to advanced pricing agreements (APAs), MAPs or arbitration, which rely on bilateral agreements or the new MLI, which resulted from BEPS. Tax courts and subsequent levels of legal recourse are also a possibility. However, all these options tend to be slow, and I believe that once the dispute phase is reached, there is not really a swift avenue that can be followed. The thoroughness and ambiguity typically associated with transfer pricing cases necessarily reflects the speed of these procedures, as competent authorities, arbitrators, panels of experts or judges have to go through high volumes of data, often dealing with complex business issues. These are, of course, largely dependent on the specificities of each MNE and the markets where it operates.

Gniadecka: The number of cross-border transfer pricing disputes has been substantial since the BEPS project began and is likely to escalate as tax authorities interpret the complexity of current transfer pricing changes differently. Unfortunately, initiatives which are supposed to counterbalance complexity have been among the slowest moving elements of the BEPS project. Currently, the OECD has set minimum standards and best practices for tax authorities seeking to eliminate double taxation through bilateral tax treaties and provided a peer monitoring system to ensure compliance. Additionally, more countries have committed to implementing binding arbitration through the OECD Multilateral Instrument, which also contributes to overall improvement. For MNEs, this translates to investing more time and resources in managing disputes, even if a number of issues have already been addressed. Overall, taxpayers need to be able to demonstrate their group strategy toward resolving tax and transfer pricing disputes, a complex matter which makes full efficiency difficult to achieve. For some companies, taking a midstep in terms of rulings may be the optimum solution, such as attempting to avoid potential conflict via the negotiation of APA. Many of these questions link back to the resources at hand and the timing of each solution, thus leading to different strategic options.

Carden: The US continues to see extensive transfer pricing controversy, often resulting in litigation. This is in large part because the tax authorities are trying to establish certain transfer pricing principles as matters of law, which is difficult when most transfer pricing questions are fundamentally factual. While litigation is a time consuming and costly way to resolve disputes, it may continue to increase because of very fundamental disputes between taxpayers and tax authorities that do not lend themselves to compromise. Not all transfer pricing issues raise fundamental questions, of course. For those, the IRS Appeals and competent authority processes continue to function as efficient avenues to dispute resolution. The Advance Pricing and Mutual Agreement (APMA) office in particular has becoming increasingly focused on resolving these sorts of disputes, leaving more fundamental or contentious questions to other dispute resolution processes.

FW: Are transfer pricing audits and disputes affecting the way businesses develop and implement their transfer pricing strategies? Given that tax authorities may come out on top after an investigation, how can businesses best go about avoiding conflict?

Gniadecka: The BEPS project has shown that transfer pricing policies are under intense scrutiny, with a high risk of conflict with tax authorities. Adding to the complexity is potential disputes between tax authorities in different jurisdictions. Certainly, this imposes on taxpayers the need to be prepared in advance for such eventualities which, in practical terms, means substantial work on both the analytical and compliance sides of transfer pricing. In this regard, corroborative analysis, such as value chain analysis (VCA), can help in the construction of a defence file at an early stage of the design and implementation of a policy, including dispute resolution strategies according to the solutions at hand, as well as desirable timelines. Many MNEs address tax authorities proactively, for example through horizontal monitoring, such as in the Netherlands, or by accessing available APA. Securing a positive ruling is one of the best tools currently available for avoiding future tax audit conflicts. Strategies need to be reasonable from a timing perspective and should include a ‘Plan B’ in the event of an unsuccessful negotiation.

Carden: Successful transfer pricing policies fundamentally require a coherent connection between the approach to intercompany transactions and a business’s view of its value chain and sources of competitive advantage. Hence, the best way to avoid conflict with tax authorities, or to prevail in the event of such conflict, is to ensure that business management and senior leadership understands and agrees with the core positions underlying the transfer pricing policies. For example, if a company’s position is that manufacturing leadership is a core competency, then its transfer pricing policies need to reflect the importance of manufacturing and compensate that function accordingly.

Abrantes: I believe businesses will avoid relying on intercompany transactions wherever possible, considering the negative attention that they receive. For example, in a centralisation process that involves a substantial charge by an external provider, the external provider may charge each of its affiliates, rather than centralising the cost in a single group company for further intercompany recharging. Secondly, I believe businesses are realising that substance and documentation are critical factors in managing their intercompany transactions, and thus involving their tax departments earlier. Traditional transaction cost theory suggests that the internalisation of transactions from market to firm reduces costs, but businesses are learning that after internalisation, costs have been increasing, due to transfer pricing rules. Avoiding conflict depends on many factors, including the visibility of the business, the materiality of its intercompany charges, the soundness of its transfer pricing practices and documentation, the quality of the relationship with tax officers and, to some extent, chance.

Sayers: Fast growing companies in the technology sector sometimes struggle to keep up with documentation requirements, which leaves them exposed. A lot of these businesses have a relatively informal approach to governance and documenting transfer pricing policies sometimes falls a long way down the list of priorities. Some of the smaller ones also try to copy transfer pricing policies which they see that may be in the public domain. This often has disastrous results as they do not have the resources to set it up in the first place and a lot of housekeeping is needed. My key message is that transfer pricing needs to be an early part of the business planning cycle. Some basic planning at the start will save a lot of headaches later on. It need not be hundreds of pages or hugely expensive – just practical and adapted to fit the needs of the business.

FW: As the transfer pricing environment continues to evolve, how important is it for businesses to regularly review and update their tax policies and processes? In your opinion, what should businesses do to ensure they meet the heightened demands of tax authorities?

Carden: A common trap that many companies fall into is that transfer pricing becomes a ‘set it and forget it’ exercise. This can be true both for transfer pricing policies, which are often not updated to reflect changing business strategies and conditions, as well as compliance processes, which may be very robust when policies are first implemented but then slip over time as business attention shifts to other areas. To minimise the risk of transfer pricing becoming ‘stale’, policies and processes should be folded into existing business cadence, rather than forced onto a separate framework. For example, intellectual property (IP) management or development is often undertaken via an established process that uses clear stage gates for approvals. Affiliates within the group that, under the company’s transfer pricing policies, assume development risks and management responsibilities should be part of such processes, rather than separate or after-the-fact reviewers. Likewise, quarterly management review processes can be an excellent way of ensuring that relevant affiliates are involved in important decisions that impact their returns.

Abrantes: Companies should start by considering the consistency of their practices. There should be no selective transfer pricing solely because of tax optimisation goals – usually referred to as ‘cherry picking’. They should consider substance-based solutions. For example, remuneration and profit potential should follow the people, decision making, expertise, value creating assets and actual risks. Companies should aim to improve business partnering within the organisation to manage risks arising from their operational decisions. This can work both for getting better control over intercompany transactions and to govern and guide the business in a direction that minimises the appearance of risky tax setups. They should improve the status of existing documentation, not only in the traditional sense of the expression – what would nowadays be called the three level structure, with masterfile, local files and CbC – but consider group governance, intercompany agreements, properly phrased and documented invoices, and transfer pricing manuals or internal instructions. Companies must develop the ability to access real-time transactional data. Many tax departments in MNEs still operate with a significant gap between finance and operations, living in a ‘bubble’ of documentation, benchmark studies and principles that may be disconnected from the reality of the numbers. This may reveal itself only during an audit, when it will most certainly be too late to prepare appropriately.

Sayers: It is true that transfer pricing needs a living document. Once done, it does not need to be an expensive exercise to update it when the need arises. How often depends on the complexity of the business model. Rapidly changing technology companies may need to update it more often, particularly if they are still showing losses after several years of trading, which is not unusual. The other point is to make sure the documentation reflects the reality on the ground. Too often I see multi-country transfer pricing documentation that has been obviously done from a comfortable desk in the office of an accounting or consulting firm. So the message to businesses is make sure your people are involved in the process. Transfer pricing stands and falls on the facts, so if the facts are not accurate, we may as well stop there. To that extent we put a strong emphasis on functional analysis interviews, which are done on site and may take a day or more. If you get the facts right in the first place, you are on much stronger ground.

Gniadecka: Businesses should regularly review and update their transfer pricing policies, ideally on an annual basis. In terms of the OECD’s new transfer pricing guidance, MNEs are required to update and review their transfer pricing documentation to set new standards, such as a redefined risk and asset analysis. Moreover, even if some BEPS recommendations are not yet included in the official guidance or regulations, it is highly probable that they will soon be applied by tax authorities. Consequently, updated OECD BEPS actions trigger a need for specifically targeted reviews and updates of transfer pricing policies. In addition, with tighter links between transfer pricing models and underlying business rationale, regular cross-checks between transfer pricing assumptions and business reality should not be neglected by taxpayers.

FW: What final piece of advice can you offer to businesses on ensuring their transfer pricing strategies do not put them at risk of a targeted audit or investigation?

Gniadecka: In the current, complex tax environment there is no golden rule which, if applied, would ensure a risk-free transfer pricing strategy. However, if it comes down to limiting the risk, a transfer pricing strategy needs to reflect the business rationale of a taxpayer, and thus a transfer price applied should have an economically justified outcome in the overall business strategy. This could be easier said than done, especially for MNEs in loss-making situations or with highly cyclical businesses. Nevertheless, the better underlying economic scenarios are tied to the transfer pricing model, the better the chances of a positive tax audit or investigation outcome.

Sayers: Companies should look at BEPS as a whole new world and an opportunity. Focus on substance and value creation. There are still transfer pricing solutions out there which will fit with commercial objectives, rather than the other way around, and when they do, it can be very satisfying. Aim to get the basics right in terms of documentation and do not skimp on it. Real transfer pricing requires judgement and experience, not automation and commoditisation.

Abrantes: To reduce the risk of being targeted, intercompany transactions that are stable and do not impose a substantial burden on the business are ideal. This may naturally not be achievable for many businesses, however. So more generally, companies should focus on the substance of their transfer pricing practices and have a transfer pricing documentation package that covers every intercompany transaction with a balanced level of detail.

Carden: In the US, most multinationals find that any transfer pricing positions of any significance are subject to scrutiny. However, companies that follow three basic steps are generally successful in managing controversies. First, transfer pricing policies and procedures should be reconciled to and consistent with business value drivers and existing processes. Second, companies should carefully review all documentation – not just transfer pricing studies, but also intercompany agreements and other internal correspondence – so that inquiries can be addressed quickly and with certainty. Finally, successful companies recognise that transfer pricing is as much about what happens on day 1000 as what happens on day one. Ensuring that processes are followed and updated as appropriate is critical to avoiding contentious audits and potentially sizeable adjustments.

FW: What trends and developments are likely to shape transfer pricing in the months and years ahead? In your opinion, are companies poised to respond adequately to these political and regulatory shifts?

Sayers: I think many of the new challenges going forward will come from the EU Commission. People have had time to get used to BEPS over the last five years and are fairly comfortable with the key messages. I am disappointed to see the revival of the Common Consolidated Corporate Tax Base. It was a bad idea six years ago and remains so now. Transfer pricing is still imperfect, but if you look at how formulary apportionment works in the US, I think I know which I prefer. So I am strongly in favour of the retention of the arm’s length principle, as modified by the BEPS proposals. Companies are aware of this, but I think very few are prepared for it, whether or not it comes in on a phased basis. If the UK leaves the EU, this is the one thing I will not be sad to leave behind.

Abrantes: I believe CbC reporting will be the main game changer. Although it is primarily aimed at starting discussions and leading to questions about an MNE’s value chain and transfer pricing models, in my view it will be abusively relied on as a way to reach conclusions immediately. Second, even if used appropriately, it will increase the speed with which tax authorities decide how to direct their audits to MNEs. As for the readiness of MNEs, improving the consistency of their transfer pricing models, as well as revisiting their substance in light of the value chain and functional analysis, while ensuring proper documentation is in place to support it, will be paramount. This will, nevertheless, allow MNEs to respond adequately only to some extent, as I believe discretionary aggressive positions by tax authorities will take place, taking advantage of increased transparency and instructions to increase tax collection from MNEs. From that perspective, there is not much MNEs can do, other than increasing tax provisions and readiness.

Carden: The prospect of tax reform will clearly be the biggest driver of changes to transfer pricing. While the exact contours of US reform are not yet known, I expect companies’ approaches to transfer pricing to change in several ways. Most obviously, a reduction in the US corporate tax rate will reduce the overall financial impact of US transfer pricing adjustments. Additionally, the US and other countries, as well as the European Union itself, appear to be increasingly focused on preserving the tax base arising from sales of products or services into domestic markets. Examples of this include prior US proposals to levy a higher rate of tax on foreign intangible income related to domestic US sales and the European Commission’s suggestion of an equalisation levy on companies providing digital goods and services. If the US adopts a separate set of rules in an attempt to limit base erosion, particularly by non-US multinationals, this could lead to significantly more disputes, especially if such rules are in contravention of the arm’s length standard and OECD guidelines. Finally, changes to the treatment of income earned by the owners of noncorporate businesses, partners in partnerships, may create all new transfer pricing challenges, such as distinguishing salary from equity returns.

Gniadecka: Moving forward, I expect to see a further shaping of ultimate standards for CbC reporting and BEPS. With the guidelines not particularly detailed as yet, we are likely to see a number of implementation issues arise. In terms of broader international tax and transfer pricing transparency, I believe this should increase and expect further debate around non-covered areas. For both taxpayers and government authorities, managing related compliance tasks and effectively using intelligence will become increasingly challenging. All these areas are far from ‘done and dusted’ yet.


Luis Abrantes is a tax director and head of transfer pricing at Carlsberg, based in Copenhagen, Denmark. He can be contacted on +45 3327 2043 or by email:

Joanna Gniadecka is director of global transfer pricing at Liberty Global. Based in the Netherlands, she leads all of the company’s transfer pricing-related matters. Previously, Ms Gniadecka worked for ArcelorMittal, KPMG and JSW Consulting in the areas of international taxation and transfer pricing. She graduated from the University of Warsaw and is also a licensed tax adviser. She can be contacted on +31 (0)20 778 8092 or by email:

David Sayers is chairman of Mazars’ global transfer pricing group and has 18 years’ experience in transfer pricing assignments in a wide range of areas including financial services, retail and consumer goods. He has led multijurisdictional project teams on a number of occasions and has helped many businesses with transfer pricing issues across Europe, including several CAC 40 and Fortune 500 companies. He can be contacted on +44 (0)7770 46 88 99 or by email:

Nate Carden focuses on both planning and controversies arising in connection with transfer pricing and related international tax issues. Building on several years of experience as a management consultant with McKinsey & Co, Mr Carden specifically concentrates on the tax aspects of ongoing business operations. He works with corporate and other clients across many industries, with a particular focus on life science, healthcare and technology companies. He can be contacted on +1 (312) 407 0905 or by email:

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