Transfer pricing


Financier Worldwide Magazine

April 2019 Issue

Transfer pricing (TP) is a pressing topic at the moment, with a number of key developments impacting tax regimes across the globe. These include the ongoing implementation of country-by-country reporting (CbCR) exchanges by tax authorities, the publication of the EU’s non-cooperative jurisdictions ‘black list’ and the impact of US tax reforms on international tax planning. So, as tax authorities navigate through a sea of required reports, companies would be well-advised to build as much flexibility into their TP policies and systems as possible.

FW: What do you consider to be the most significant developments in the transfer pricing (TP) arena over the last 6 to 12 months?

Gracia: We have seen a number of significant developments in the last 12 months. First, a new workstream on transfer pricing (TP) on intragroup financial transactions has been launched. We have seen the outcome of the discussions on the application of the transactional profit split method, as well as on the implementation of the approach to pricing transfers of hard-to-value intangibles and on the attribution of profits to a permanent establishment. We have also seen the outcome of the ongoing peer review on the implementation of the Base Erosion and Profit Shifting (BEPS) Action 5 on the exchange of information on tax rulings beyond the EU borders. The EU department for competition has also launched attacks on TP rulings previously granted to multinationals and we have seen the European General Court of Justice developments on the state aid files that have been appealed. There has also been the issue of ongoing implementation and extension of the geographic coverage of country-by-country reporting (CbCR) exchanges by the tax authorities, the terms of the new obligations in DAC 6 on tax intermediaries, which can encompass the obligation to communicate certain TP schemes, and the publication of the EU ‘black list’ covering non-cooperative jurisdictions and the ensuing pressure on, among others, zero-rated jurisdictions to approve legislation on minimum substance requirements to be deemed as tax residents in such jurisdictions.

Odimma: There have been a number of key developments in TP within Africa. First, there has been an increase in the number of requests for documentation. Most African countries have enacted country-by-country legislation, which has led to increased requests for TP documentation and disclosures. Second, there has been an increased involvement of the Africa Tax Administrators Forum (ATAF) in the African TP landscape. The ATAF has taken a lead role in developing TP in Africa through the release of several tools to help countries improve their TP readiness. Publications such as the Toolkit for Transfer Pricing Risk Assessment in the Africa Mining Industry’ and ‘Suggested Approach for Drafting Transfer Pricing Legislation’ have had a significant impact. Third, there has been an increase in the number of TP audits across African countries. African tax authorities have increased the number of audits of related-party transactions with an emphasis on comparable companies.

Carden: The most important trend in the last 6 to 12 months is not specific to TP, it is the political pressure that many governments face to take action against multinationals that are perceived as not paying a ‘fair share’ of tax. As a result of this pressure, many governments are departing from the internationally recognised arm’s length standard and instead are developing measures that assert taxation rights, irrespective of the location of a multinational’s development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) functions. Examples of this include the US Base Erosion and Antiabuse Tax, the UK’s Digital Services Tax and proposed UK source withholding regime, and the ‘Significant Digital Presence’ element of the European Commission’s proposal for a Digital Services Tax.

Ku: 2018 was an important year for TP in the Netherlands as, on 11 May 2018, the Dutch ministry of finance published its new TP decree. Through the decree, the Netherlands has incorporated the latest changes set out by the BEPS reports and the updated 2017 Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. As a result, the Dutch TP decree now provides detailed guidance on, for example, hard-to-value-intangibles and low value adding services.

Abrantes: Action 13 and the arrival of CbCR are among the most significant TP developments. It is expected to increase the cooperation between tax authorities and will provide tax authorities with a standardised and quick overview into multinationals. It should have tax departments looking into the figures in their ‘table 1’, possible interpretations tax authorities might make, how they are consistent with the data in ‘table 2’ and the content provided in their TP reports. Furthermore, even more complexity and uncertainty is predicted following newly published or forthcoming new rules in certain markets, such as limitations on the deductibility of I/C costs in Poland or expanding the scope of the beneficial ownership concept.

Assassi: From a US perspective, and given the impact that the US has on the global economy, both in terms of exports and imports, the 2018 Tax Reform Act was clearly the most significant development of the last 12 months. While the major changes in the Tax Reform Act relate to broad international tax matters, TP, as a material factor in any international tax planning, is consequently affected by and affecting those changes. The second most important development would be the first full year implementation by most countries of the OECD’s BEPS Action 13 TP documentation requirements.

Many MNEs have made significant changes to their ownership and licensing of intangibles in response to the BEPS project.
— Nathaniel Carden

FW: How would you gauge the ongoing impact on companies of the Organisation of Economic Co-operation and Development’s (OECD) TP guidelines, such as its recently released public discussion draft on the TP aspects of financial transactions?

Odimma: The discussion draft seeks to address the substance of financial transactions rather than their form. In Africa, related-party transactions that involve financial transactions are always reviewed with exchange control rules in place. In many instances, the tax treatment is contradictory to the exchange control rules. African tax authorities tend to employ thin capitalisation rules when assessing the tax deductibility of interest against any detailed TP disclosure of financial transactions. In many countries, there seems to be an accepted interest rate in relation to country risk and relevant central bank benchmarks when related-party financial transactions are involved.

Abrantes: The OECD’s TP guidelines force multinationals, and particularly tax departments, to continuously stay up-to-date with regulatory trends, monitoring which ones will likely have an impact on their business, how their internal resources are able to cope with the, almost always, increased compliance burden, and assessing when and how it is relevant to inform senior management of expected implications.

Carden: In response to the development and release of the final BEPS reports in the first half of the 2010s, many companies focused on restructuring their supply chains to increase the connection between DEMPE functions and income allocations, reduce the use of hybrid instruments and entities, and convert commissionaire or other service entities into in-country distributors. Many multinational entities (MNEs) incurred significant expense under the ostensible indication from the BEPS reports that a structure involving no hybrids, no commissionaires and adequate DEMPE functions, outside of so-called ‘LRD countries’ would be respected. Unfortunately for many multinationals, it appears that many countries, potentially including the US, are unhappy with the results of the BEPS initiative and believe that the fundamental functions, assets and risk framework of the arm’s length standard is inadequate.

Ku: Historically, the Netherlands has been used by many multinationals for intercompany financing activities. One of the main reasons for this is that the Netherlands has detailed guidance in place for how intercompany financing activities should be remunerated on an arm’s length basis. In addition, it was possible to obtain an advance pricing agreement (APA) from the Dutch tax authorities in which the spread to be reported would be confirmed as arm’s length. The recently released public discussion draft on the TP aspects of financial transactions seems to have had a limited impact on intercompany financing activities in the Netherlands. However, the two-sided perspective approach and commercial rationality may have an impact on Dutch policies in the future.

Assassi: Any OECD TP guideline update is important to any multinational. Most major trading partners around the globe adapt their local TP regulations to the OECD official guidelines, so it is usually only a matter of time before the new guideline becomes law. The benefits of a time lag between the OECD TP guideline updates and the issuance of local regulations is that multinationals have a window to adjust their internal TP policies to address the pending new laws, or to restructure parts of their organisation to accommodate the new requirements.

Gracia: We have been expecting the OECD to address TP guidelines on financial transactions for some time, but the guidelines have crystallised the hugely different approaches and concerns which can be found among the different tax authorities. It remains to be seen whether a conclusive outcome will arise from those discussions.

BEPS actions 8 to 10 have led to an increase in documentation and disclosure requirements globally.
— Sebastine Odimma

FW: Moreover, in what ways has the OECD’s base erosion and profit shifting (BEPS) initiative impacted TP issues such as disclosure, intangibles, risk and dispute resolution? To what extent do such initiatives compel companies to revisit their TP policies and calculations?

Carden: Many MNEs have made significant changes to their ownership and licensing of intangibles in response to the BEPS project. This has often involved not just changes to legal agreements and registrations, but also substantial modifications to personnel locations and enterprise resource planning (ERP) systems that implement intercompany pricing arrangements. Unfortunately for these organisations, this has not led to increased predictability or easier dispute resolution. In fact, because of the myriad ways that different countries are implementing BEPS Actions 8 to 10 and the related revisions to the OECD’s Transfer Pricing Guidelines, some multinationals are facing a greater risk of double or inconsistent taxation. Specifically, some countries seem to believe that the creation of new locations performing DEMPE functions automatically results in an asset transfer to the new location, even where there is no reduction or change to personnel elsewhere in the organisation. But not all countries adopt this view, making it difficult to even start a mutual agreement or APA process.

Ku: The BEPS reports, as well as a number of other global tax developments, such as the US Tax Reform and the Anti-Tax Avoidance Directives, have had a large impact on multinationals. These developments have led to many multinationals revisiting not only their legal structures but also their operational models. Any changes to operational models mean that TP policies have to be revisited. For example, over the past few months, we have seen many projects whereby US multinationals are restructuring their existing CV/BV structures.

Abrantes: The impact of the BEPS initiative depends on the starting point of the BEPS release and the realities facing each company. For certain companies BEPS may mean little more than additional compliance brought by Action 13 and a general refreshing of the impact of new regulation. For others, existing or planned structures may be impacted by several other actions, such as permanent establishment exposure, financing structures and income capturable by new controlled foreign company (CFC) rules.

Gracia: The most important impact has been on tax planning activity, particularly when it has not been substantiated with the right allocation of assets, functions and risks. The EU initiative on non-cooperative jurisdictions, the focus on zero-rate jurisdictions and the pressure to implement substance requirements will no doubt have an impact. Increasingly, tax authorities are insisting that they will not abide by the content of intragroup agreements, but instead will look at the facts to draw conclusions about the real interactions between related entities before assessing the arm’s length transactions on the basis of real or reconstructed transactions. This approach will definitely reduce paperwork and oblige companies to be consistent when it comes to establishing, for example, an intangibles holding subsidiary in a tax-friendly jurisdiction.

Assassi: The ultimate objective of BEPS, at least as they relate to TP issues, was transparency. Governments felt they needed more access to more transactional and business model detail that would not require special requests or formal audits to access. The challenge for multinationals was to determine what level of information detail was truly required, what level was implied or suggested, but not formally imposed, and what level was clearly not required to be disclosed in the CbCR, the master file or the local files. 2018 was only the first full-scale year of multinationals trying to comply with these new BEPS TP transparency requirements. It is likely that more adjustments will be implemented by multinationals as we all learn from future audits in various jurisdictions what is truly meant by information transparency for each OECD Member State.

Odimma: BEPS actions 8 to 10 have led to an increase in documentation and disclosure requirements globally. However, a major issue with countries in Africa is the availability of local comparable. The absence of local comparable, together with the perceived profit shifting by MNEs have led to a lot of unexplained TP adjustments in countries in Africa. Most MNEs have now moved to central TP functions in order to have visibility across the constituent entities across the continent. This is aimed at showing consistency with regard to the treatment of related-party transactions. The ATAF proposal on the treatment of intangibles is a departure from the arm’s length principle. The ATAF proposes that tax deduction on royalties should be limited to a percentage of the tax adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) of the company paying the royalty, before the royalty amount is considered. Most African countries have included this in their TP legislation.

FW: In your opinion, have recent changes made to tax regulatory frameworks improved multinationals’ understanding of potential TP liabilities? Is there still widespread uncertainty around certain points?

Abrantes: Changes to tax regulatory frameworks generally improve understanding of TP liabilities, but in many specific cases they do not. Many areas that had previously scattered regulations have now been unified and improved under BEPS actions. On the other hand, more regulation with several overlapping areas means more cases of inconsistent application by jurisdictions. The way regulation is adopted in national laws, how it is interpreted by tax authorities, or even how the increased areas regulated may be at odds with each other, all contribute to doubts about the compliance of a given arrangement within a specific regulatory area. There is definitely still widespread uncertainty and I believe this will increase with additional layers and areas of regulation.

Assassi: While the initial intentions of most governments’ new tax laws include an element of simplification and clarification for taxpayers, the unfortunate reality is that most new tax laws create more complexities than they end up alleviating. The US Tax Reform Act is a perfect example. It is always difficult to layer new tax laws on a thick tax code and make sure there is a consistent, coordinated application of the unchanged regulatory sections with the new or changed rules. There will be a lot of hiccups over the next few years before formal guidance or clarification can be provided by the Internal Revenue Service (IRS) on the new special circumstances of potential inconsistencies between the various rules.

Odimma: Multinationals today are very aware of the possible TP liabilities if proper controls are not put in place to ensure compliance. In addition, there is the chance that companies may suffer reputational damage where the arm’s length principle is not followed for related-party transactions. There is greater involvement of senior management in TP discussions to ensure alignment in value creation and rewards across entities in different jurisdiction. MNEs have also recruited more capable TP experts to manage their in-house TP department.

Ku: Although promising when introduced in the Netherlands, we do not see many multinationals making use of a tax control framework arrangement with the Dutch tax authorities. For many reasons, it seems that this is not something that multinationals pursue. That being said, many multinationals are looking to obtain certainty on a variety of tax and TP topics by obtaining an APA or by quite simply discussing a matter beforehand with the Dutch tax authorities. In this respect, we have seen an increased demand for bilateral or multilateral APAs, as this provides certainty in all jurisdictions involved.

Gracia: The goal of the recent changes has been to increase transparency while helping multinational companies to introduce the necessary changes to the ways in which they run their TP strategies. However, the new regulation will likely lead to an increase in tax litigation because there is much more subjectivity today than before the introduction of BEPS on the evaluation of the value added by each group’s entity contributing to the value chain. BEPS is led, and driven, by agencies seeking to collect more revenue, and each tax authority will put the emphasis on different items of the same value chain. It is worth remembering that BEPS is going to be applied by tax officers who may not be trained on these very sophisticated concepts, so even if multinationals have a clear idea of what BEPS means, the controversies will arise more often, resulting in tax litigation.

Carden: The principal issue for multinationals is that while the overarching regulatory frameworks have changed in a relatively clear way, major countries have not yet developed standards of practice for implementing these frameworks. As a result, BEPS has, in the short term, actually increased the uncertainty regarding TP positions. Furthermore, MNEs operating in Europe now face two practical levels of review – individual tax authorities and the European Commission. While TP-related state aid cases make their way through the judicial process, multinationals will likely find it very difficult to assess the risks associated with what were previously believed to be relatively certain TP positions and related exposures.

Regulatory developments are influencing tax planning strategies in much the same way that they always have – minimising global effective tax rates, while optimising compliance with existing tax regulations.
— Azedine Assassi

FW: In what ways have regulatory developments influenced how companies now implement their tax planning strategies for TP purposes?

Odimma: The risk of double taxation is now more real than ever before. African MNEs are looking for comparables in nearby countries given the absence of local comparables. Asia and Eastern European companies have been adopted as a closer substitute for companies in Africa. Furthermore, TP has taken centre stage in business design and structuring, in order to avoid unplanned liabilities and reputational damage.

Gracia: On an international level, the most significant developments have arisen from the BEPS project. Actions 8 to 10 amending the OECD Guidelines and, above all, Action 13 on the introduction of CbCR reporting for the largest multinationals, set a precedent which might give rise to further developments at national or regional level covering a wider scope of companies, or to public disclosure. The extension of the EU Directive on Mutual Administrative Assistance to embed CbCR reporting within EU legislation, the obligation among EU tax authorities to exchange information on any tax rulings and APAs and the new reporting obligations of tax intermediaries on aggressive tax planning schemes are also relevant, as well as state aid cases where the EU Commission is questioning the TP rationale agreed with certain Member States since the 1990s, when the OECD guidelines were poorly developed.

Carden: Most multinationals have taken BEPS quite seriously. They have internalised the overarching principle of BEPS Actions 8 to 10 and attempted to modify their TP policies and organisational structures accordingly. In many instances, this has resulted in substantial organisational change and relocation of personnel. Unfortunately, different approaches to implementation and enforcement of BEPS Actions 8 to 10 means that these changes have often resulted in more, rather than less, uncertainty. Furthermore, this uncertainty has been exacerbated by the indications in the more recent OECD efforts on the Tax Challenges of the Digitalisation of the Economy that countries are dissatisfied with the results of BEPS Actions 8 to 10 due to the high degree of mobility that characterises the current highly globalised economy.

Abrantes: Most companies are well-aware that many regulatory developments can impact the outcome of their tax planning and TP arrangements. Even areas that may be seen as not directly related to TP – such as permanent establishment, interest limitation, CFCs – can impact the outcome of TP setups. Nearly every tax regulation is related to TP. I believe companies therefore move much more carefully, taking more time to analyse the implications of their planning strategies, and probably more frequently than before, choosing to not implement new strategies to avoid the increase in uncertainty and compliance burden. Long-term planning is probably also reduced, as every year seems to bring new regulation or tax authority practices, adding uncertainty to the sustainability of implemented models.

Assassi: Regulatory developments are influencing tax planning strategies in much the same way that they always have – minimising global effective tax rates, while optimising compliance with existing tax regulations. The definition of optimised compliance will often depend on each multinational’s controversy risk tolerance level, from a bottom line financial perspective, as well as from a reputational point of view.

FW: To what extent can a greater use of technology and data analytics assist organisations in balancing their drive for efficiencies with their TP regulatory compliance obligations? Are more companies incorporating technology solutions into their tax processes?

Assassi: Data analytics are certainly useful tools, given the increased levels of data required by tax authorities on a standard required submission basis, let alone in a formal audit setting. However, it is still unclear how many resources, and at what qualification levels, tax authorities are willing to dedicate to mining through all this data. It may turn out that the auditors’ capabilities for analysing Big Data are so inadequate that they may not be able to handle what they have asked for. In which case, taxpayers could determine that further investment in data analytics tools may be an unnecessary expense at this time – at least until the auditors’ capabilities can catch up. Tax laws are only an effective deterrent tool if they can realistically be enforced.

Ku: We have certainly seen an increase in the use of technology by multinationals in order to assist or fulfil their TP regulatory compliance obligations. Most notably, CbCR and master file/local file obligations. Tax technology is being used to identify potential red flags and to proactively manage TP risks as much as possible.

Carden: Technology is certainly useful in helping organisations implement TP policies with minimal disruption to their supply chains, avoid post hoc manual entries and obtain data needed for compliance and reporting purposes. However, because the macro TP environment is in such substantial flux, most MNEs with which we work have put off large investments in TP-related technology until the overall governing rules stabilise, which will allow them to understand what information is going to be needed for planning and compliance purposes.

Gracia: Technology is essential in multinationals in order to monitor the functioning of the TP policy in the group, and to identify new developments and risks of deviation from the policy established.

Abrantes: Automating TP documentation should represent the low-hanging fruit, although it is not necessarily fast or easy. However, getting into operational TP, integrating TP compliance, governance and planning with financial systems, is likely a much more ambitious project. Traditionally, financial systems are not developed with TP in mind, and projects to adapt or add to the existing systems, such as TP-friendly interfaces, may be significant. Furthermore, fragmentation of IT and financial systems can add a sizeable obstacle. I believe companies are and will continue to incorporate IT solutions into their tax processes, but I do not think it will be a smooth or fast transition to automation.

Odimma: Big Data analytics plays a central role in the collation and analysis of information for MNEs operating in multiple jurisdictions. CbCR requires proper use of technology to make the process easier. More companies are leveraging in-house software for the collation of information while some rely on off-the-shelf software to address the onerous reporting and disclosure requirements under the new TP environment. Businesses are looking to increase their control over their TP positions in order to minimise risk. MNEs are becoming more centralised, focusing on process standardisation and consistency, and are seeking technology-enabled solutions. Forward-thinking companies are taking a strategic approach to TP. They are rethinking their processes, technology choices and management philosophy of their TP activities to better match today’s evolving tax landscape.

Tax technology is being used to identify potential red flags and to proactively manage TP risks as much as possible.
— Jian-Cheng Ku

FW: Do you expect tax authorities to collaborate more frequently on cross-jurisdictional TP audits? How does this approach affect both participating countries and multinational companies?

Carden: It is likely that tax authorities will collaborate more frequently on cross-jurisdictional TP audits in the future, particularly given the OECD’s current two-pillar framework on Tax Challenges of the Digitalisation of the Economy. Both of those pillars – the reallocation of taxing rights based on some form of customer location and the establishment of global minimum tax rules – will require extensive coordination on both the policymaking and audit side. The various ‘significant digital presence’ and ‘marketing intangibles’ proposals will likely result in rules, or at least safe harbours, that use formulary apportionment principles. Countries that adopt these rules will then have to coordinate both ex ante rules and ex post audits to define the base of income to be split and agree on the division of income between countries.

Gracia: The Spanish Tax Inspectorate has been participating in simultaneous tax audits – mainly focused on TP issues – for at least 15 years, always in the frame of the initiatives sponsored by the EU authorities and Member States. They have now joined the International Compliance Assurance Programme (ICAP), sponsored by the OECD, in the framework of collaborative relationships. The Spanish tax authorities consider this kind of initiative instrumental to the wider gathering of information. Multinationals will see many more of these simultaneous audits going forward. The risk of more frequent double taxation cases will have to be addressed by way of mutual agreement procedures (MAPs) and through arbitration panels. However, we do not foresee the Spanish Tax Inspectorate participating in joint TP audits in the short term, although it would be desirable for the benefit of the taxpayers as joint tax audits eliminate the risk of double taxation, which is a very important issue in the field of TP.

Abrantes: The regulatory framework has been facilitating and contributing to more cross-jurisdictional collaboration on TP audits. It affects multinational companies by increasing uncertainty and burden with controversy management. In theory, it could be the opposite; one could imagine efficiencies and higher certainty arising from communicating with multiple tax authorities in a common forum. However, such cross-jurisdictional collaboration still rests, most frequently, on a cross-jurisdictional conflict of interest: the competition for tax revenues. That competition is often a zero-sum game, and although authorities may meet, exchange information and set up joint audits, there is still a long way to go to reach common ground. For taxpayers, that represents deterioration. The burden of bilateral audits remains, but is now worsened by multiple simultaneous requests and uncertainty about what information authorities are exchanging in the back office.

Ku: We do expect tax authorities to collaborate more frequently on cross-jurisdictional TP audits. Over the past few years, we have seen more initiatives on transparency, such as CbCR and master file/local file obligations, but there has also been an exchange of rulings. All these developments mean that tax authorities around the world have more information available to them today. However, the increased flow of information does not mean that TP audits are becoming easier to handle for tax authorities. On the contrary, we expect that tax authorities will have to cooperate with each other more than ever before.

Odimma: There is increased collaboration among African tax authorities when it comes to sharing information about MNEs in their respective regions. As such, with the increased involvement of the ATAF, in both policy discussions and the training of tax inspectors from African countries, a joint audit is a possibility in the coming years. Accordingly, MNEs are advised to ensure consistency in TP policy across different countries and to build robust defence files to support every related-party transaction.

Assassi: We expect tax authorities to collaborate more frequently, however it is probably the most concerning ‘unknown’ in this new TP transparency regime. Collaboration processes are now more formalised and are likely to provide fast and almost automatic access by any one tax jurisdiction authority to disclosures made in another tax jurisdiction. That means the days of customising TP reporting for each side of a related-party transaction are over. Just because the pricing is acceptable to one of the transacting party’s jurisdictions does not mean it is acceptable to the other transacting party jurisdiction. It is now more imperative than ever before that TP for a given inter-company transaction passes the arm’s length test in both jurisdictions involved.

FW: Have you witnessed a noticeable increase in TP disputes between companies and tax authorities in recent times? What dispute resolution options are available to companies that find themselves at odds with tax departments?

Odimma: There has been a notable increase in the number of TP disputes in Africa in recent years and this trend is expected to continue. The issue of secret comparable is also becoming more prominent. TP cases in Africa are limited, and most of the cases are concluded through negotiated settlements. As tax inspectors gain more competency and audit skills, a spike in TP disputes is expected. It is important to understand the respective dispute resolution methods available in each country and then try to explore them. It is always more effective to try to mutually negotiate settlements before approaching the courts. This provides avenues for a better understanding of the facts by both parties. Also, some countries do not suspend the collection of additional taxes even if the case is in court.

Ku: In the Netherlands, we have not seen an increase in TP disputes between companies and tax authorities. It is very common in the Netherlands for parties to seek advance guarantees on the TP aspects of a proposed transaction or restructuring in the form of an APA. As a result, TP disputes are relatively rare. Going forward, we may see an increase in TP disputes in relation to hard-to-value intangibles as the new guidance provides the opportunity for tax authorities to challenge the value of intangibles with the benefit of hindsight. Whether tax authorities will actually make use of this possibility remains to be seen, but it definitely makes obtaining certainty upfront in the form of a ruling more desirable.

Assassi: It is way too soon to assess controversy risk impact. Tax authorities are typically auditing tax years two to three years after the year is closed. We may not find out the audit impact of these new rules for at least another year or two. The expectation, however, is that there will be a noticeable spike in audits in the initial post-BEPS implementation years as tax authorities will ironically have more questions under this increased transparency environment than they probably did pre-BEPS.

Gracia: We are certainly seeing cash pooling recharacterisations in short-term intercompany loans and residual cash pooling where spreads must be at arm’s length and the cash pool leader is denied the role of financial entity entitled to earn a profit for its functions. To the extent that TP reassessments do not carry a serious penalty, or the penalty is annulled by the courts, the best available option for resolving TP disputes is the arbitration procedure set forth by the EU Arbitration Convention, or one of the few bilateral treaties signed by Spain which contemplate it.

Abrantes: TP disputes are likely more sensitive to the internal context than regulatory changes and it is hard to measure the extent to which external regulations are impacting this. The general preferable solution is still to reach a point of agreement before any formal controversy steps develop. That may, however, be difficult, and in some cases we see tax inspectors defending unsustainable positions, perhaps because it is difficult to accept that no adjustments are necessary after significant time has been invested in investigating a taxpayer or inter-company arrangement. If no alignment is reached during initial information exchanges, then multiple options usually open up, and their appropriateness is very case specific. The traditional ones include MAPs, APAs, arbitration and taking the case to court – but none of these are fast or easy. The framework to facilitate the efficiency of these options has been expanding, however it still has significant complexity and, in any case, the resources needed to investigate TP cases appropriately restrains the quantity of cases and speed of resolution.

Carden: In the US, pre-2010 TP positions continue to be a source of dispute between taxpayers and the IRS. However, unilateral TP disputes arising from more recent years actually appear to be on the wane. This is, in part, due to changes in TP rules in the early 2010s, the implications of which are still being digested on the audit and dispute side. Moreover, comprehensive US tax reform at the end of 2017, which included a so-called ‘transition tax’ imposed on subsidiary earnings, may reduce the number of disputes because the financial consequences of TP adjustments are somewhat offset by transition tax. On the cross-border or bilateral side, however, we see multinationals getting into an increasing number of disputes that are taking a long time to resolve, mainly owing to different approaches to BEPS Actions 8 to 10 that are being adopted by major treaty countries.

The regulatory framework has been facilitating and contributing to more cross-jurisdictional collaboration on TP audits.
— Luis Abrantes

FW: In what ways have recent, high-profile TP disputes impacted the approach companies are taking to refine and develop their TP strategies, with a view to avoiding conflict or defending their position?

Abrantes: Awareness of TP and tax has increased, especially given headlines on TP and tax cases, and the expansion of stakeholders in tax-related matters. Non-governmental organisations (NGOs), consumers, shareholders, analysts and potential investors all may take an interest in the solidity of TP strategies. Senior management thus tend to understand that TP is not a sideline matter. They tend to understand why economic substance is paramount, and consider TP in the whole context of the value chain, business models, functional profiles, and the need for evidence to support TP alignment with those elements.

Gracia: TP disputes have been publicised by the media and NGOs and put at the top of the agenda of political concerns by many governments, creating an atmosphere which may impact the reputation of the firms involved. Further, APAs are being exchanged quarterly by tax authorities in the EU. Hence, other companies are adopting a wary stance when dealing with their global TP policies. Post-BEPS, corporate structures are required to be more sustainable than before, particularly on the risk-taking side, which, among others, requires the relevant individuals to be seconded to the territories where the value-added is declared. We believe that companies should seek to negotiate more APAs. The reality is that taxpayers are increasingly interested in such negotiations, but tax administrations are increasingly unsure about accepting them, and this is due to the obligation to exchange information within the EU, as well as outside of the EU area under BEPS Action 5.

Ku: We have not seen high-profile TP disputes in the Netherlands that have impacted the approach companies are taking to their TP strategies. However, EU state aid cases do have an impact on multinationals – they are, by definition, high-profile, their impact is substantial and they must definitely not be underestimated, particularly considering the high stakes involved. We have seen an increase in the number of multinationals undertaking a review of their TP models and policies to assess the risk of an EU state aid claim. Such a review is often prompted by auditors.

Assassi: Companies were mostly emboldened by the latest TP tax court cases, at least in the US. The IRS has not fared that well in defending its more aggressive positions regarding IP valuation methods. The courts seem to side with the taxpayers’ more limited scope of IP value, as opposed to the IRS’s more encompassing definition of transferred IP. The major tax disputes likely served more of an impetus for the US government to include such clarifications in the US Tax Reform than they did discouraging any TP strategists from doing what they were doing prior to the court case results.

Carden: In part due to high profile controversies, tax and TP issues generate significantly more public attention than they did 10 or 20 years ago. As a result, the approaches to TP issues adopted by multinationals are heavily influenced by factors other than the anticipated ultimate resolution of any tax dispute. This is particularly true for consumer-focused companies or companies that otherwise have a high public profile. We have observed two major behavioural trends in response to these pressures. First, tax leadership within multinationals is more closely coordinating TP policies with business leadership in order to ensure that the tax department’s view of value creation aligns with business leadership. Second, companies are increasingly relying on legal departments and even public relations teams to assess the implications of TP positions.

Odimma: TP cases are at a premium in Africa, either due to the unwillingness of MNEs to go to court or a lack of trust in the court system. Thus, companies now maintain robust TP and defence files to support every related transaction. Where possible, comparables are selected from regions with similar economic characteristics with Africa. There is also increased involvement of senior management in TP projects and a multidisciplinary and departmental approach to developing TP strategies.

FW: In the event a company finds itself subject to a tax audit or investigation, how should it respond? What general steps should it take throughout the process?

Ku: Although there is no general plan that fits all types of tax audits, generally speaking it is good to cooperate with the tax authorities but at the same time make sure that the tax authorities respect the rights of taxpayers during an audit. As the Dutch tax authority is an administrative body, tax inspectors involved in tax audits have to adhere to the principles of sound administration. As such, it is advisable to involve a tax lawyer as soon as possible in order to ensure that these principles are not infringed. Of course, companies can take an active approach to avoiding tax audits by maintaining a good relationship with the tax authorities. Also, it is important to separate privileged tax advice from tax compliance documentation, as the Dutch tax authorities have access to the latter during a tax audit, but not to the former.

Assassi: First, partner with the auditors to narrow the scope of the investigation as precisely as possible. Second, address the auditors’ questions and information requests as concisely and as minimally required as possible. Third, perform a thorough data mining exercise within the multinational’s internal systems to ensure no other existing data or information would potentially contradict the responses you provide to the auditors. Fourth, assess at each stage of the audit whether a reasonable settlement may be more cost effective than pursuing a relatively trivial issue. This is particularly true if you do a good job narrowing the scope in step one. Finally, depending on the scope and nature of the issues audited, you may need to consider at what point a legal team with litigation experience needs to be involved.

Carden: Success in audits depends on preparation before any tax authority inquiry starts. This requires developing TP policies that reflect, and are consistent with, business operations, as well as ensuring consistent implementation and documentation of these policies. It also involves using, but not overly relying on, technology that records and reports transactions in a manner consistent with intercompany agreements and policies. Once an audit begins, proactive management aimed at open communication and defence of positions, through presentations to tax authorities, for example, can be an effective tool for reaching a successful resolution and avoiding escalation that could lead to financial and reputational damage.

Odimma: A good TP defence starts from the development of TP policies and the building of a robust defence strategy, even before an audit is announced. Further, there should be continuous review of the company’s policies to ensure they align with practices across different jurisdictions. Companies should be proactive in identifying gaps in their TP strategy and should address them before a TP audit. Secondly, open and honest communication during the audit will give the tax inspector insight into the company’s operations. The inspectors require a proper understanding of the business processes to appreciate the TP policy in place. Where possible, a pictorial presentation of the company’s business and operation is necessary to show the value chain. Understand the TP audit process from field stage to dispute stage. It is important to leverage alternative dispute mechanisms where possible. This will ensure key issues are clarified before escalation to the courts. Research tax advisers with strong technical and relational skills in the country of dispute and engage them early in the process.

Gracia: First, a company should get a good tax adviser to set the strategy of defence from the outset and make the necessary TP documentation available to the tax administration. In Spain, it is compulsory to make the master file, the local file, and from 1 January 2016, the CbCR reporting, for groups with a consolidated net turnover of at least €750m in 2015, available to the Spanish tax authorities. With some notable exceptions, courts are generally siding with the tax authorities’ approach when the discussion deals with the methodology in a TP controversy, even if the proposal of the tax authorities is somewhat flawed, due to the lesser knowledge of economic concepts among courts and their current bias toward tax authorities in the fight against aggressive international tax practices.

Abrantes: The response to an audit or investigation is very dependent on the transactional circumstances and jurisdictions involved. If a company believes itself to be on solid TP ground, with TP well-aligned with the arm’s length principle, as well as value chain and economic substance, then the only universal advice is to make that as clearly evident as possible to tax inspectors, with a view to discourage them from pursuing the controversy route, which will necessarily carry additional pressure on resources.

Technology is essential in multinationals in order to monitor the functioning of the TP policy in the group, and to identify new developments and risks of deviation from the policy established.
— Eduardo Gracia

FW: How do you expect the TP environment to evolve over the course of 2019 and beyond? What overarching trends and developments do you anticipate will have an impact on how companies roll out their TP policies going forward?

Carden: The most significant changes to TP in the coming years will involve departures from the arm’s length standard and the use of functions, assets and risks – two cornerstones of TP for most of the last century. The US, EU, UK and now the OECD all seem to have reached the conclusion that, as a result of the mobility created by the globalisation and digitalisation of the world economy, the allocation of taxing rights over business income based on the activities and assets of the organisations that earn that income is no longer a viable, or at least sufficient, approach to taxation. The future of TP which follows the traditional OECD guidelines and the arm’s length standard is thus very much unclear. Consequently, until the relevant rules regarding customer- and market-based taxation rights become clear, we advise multinationals to build as much flexibility into their TP policies and systems as possible. Additionally, it is prudent to seek bilateral, or even multilateral, agreements that cover the next several years as the new rules are developed, refined and implemented.

Odimma: One of the key trends in 2019 will be more TP audits. Respective tax authorities have recruited technology experts to analyse the information from CbCR. As such, there will be request for more information. Tax on digital transactions will also take centre stage, with tax authorities in Africa seeking avenues to bring them to their tax nets through TP adjustments where possible. Another expected trend will be an increase in peer reviews across Africa to leverage the capabilities available within the continent. This is currently driven by the ATAF. More African countries will also adopt ATAF proposals for drafting TP legislation. More countries will formalise their TP laws.

Gracia: We expect to see continuous monitoring in the area of TP over the coming years, as it becomes an increasingly important issue for multinational companies. In particular, in a post-BEPS world, it is foreseeable that we will see greater scrutiny by national tax authorities on where the added value is generated in the value chain within multinational groups in order to avoid profit shifting through TP policy. Consequently, for taxpayers, this will entail enhanced documentation efforts and reporting obligations, an increased risk of cross-border disputes and more legal uncertainty in the international arena for the taxpayer because, although transparency itself is not bad, the subjectivity in the interpretation of this data will generate legal uncertainty. Lastly, we expect the outcome of the discussions on the TP aspects of financial transactions at OECD level, if it finally comes out, will have a significant impact on multinational companies.

Abrantes: Uncertainty and complexity will continue to increase in the TP environment. Transparency may be a more recent element in the bigger picture, but it will add to both the uncertainty and complexity of tax management.

Assassi: Controversy risk is likely to increase in the next two to five years as tax authorities learn how to navigate through all the new wealth of information they will receive from all these reporting requirements. Companies will need to go through the initial learning curve mistakes of planning within the new tax reform laws in the US and elsewhere. TP policies in the future will not fit as easily as they have into one or a few standard template models. It will not be as simple as it was for some companies to have just two TP policies, one for the entrepreneur and one for the limited risk operators. Nuances will need to be accounted for through more differentiated TP policies for various transactions and regions to satisfy the more stringent value-creation-alignment requirements.

Ku: We have seen an increase in restructuring projects and, given the current, changeable tax landscape, we expect this trend to continue, whereby multinationals will revisit their legal structures and their operational models. Any change of operational model goes hand in hand with TP. Another trend that we expect to continue is increased transparency. This will lead to multinationals wanting to have certainty on all tax and TP matters. As such, we expect that multinationals will continue to seek certainty by obtaining rulings, and more by means of a bilateral or multilateral ruling.


Eduardo Gracia advises a wide range of Spanish and international corporates, funds and financial institutions on the tax planning and structuring of inbound investment into Spain relating to project finance, M&A, real estate and distressed asset deals. He has also advised on outbound investments advising on the corporate and operational restructuring of multinationals. He specialises in Spanish, EU and international taxation of companies, VAT and other indirect taxation, as well as tax dispute resolution matters. He can be contacted on +34 91 364 9854 or by email:

Luis Abrantes has been with Carlsberg since 2010 and heads the group’s transfer pricing (TP) team. Since joining Carlsberg, he has been significantly involved in business reorganisations in Europe and Asia, supporting commercial functions with value chain analysis and new business models, as well as developing governance. Recently, one of his key priorities has been the establishment of new value-based models for new technologies and digital assets. He can be contacted on 45 3327 2043 or by email:

Jian-Cheng Ku advises on international tax law and transfer pricing, with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations and the planning and design of transfer pricing policies. His clients include multinational companies, financial institutions and private equity firms. He has co-authored several articles on international taxation and Dutch taxation aspects. He can be contacted on +31 20 5419 911 or by email:

Azedine Assassi is currently responsible for global transfer pricing matters involving the $30bn aviation business division of General Electric Co. Mr Assassi  builds on his 20-plus years of experience in transfer pricing, first as an IRS field economist, then as the lead economist at the IRS appeals division, before joining Big 4 consulting firms for the second half of his career where he advised leading multinational enterprises (MNEs) in pharma, high tech, and industrial sectors. He can be contacted on +1 (513) 240 6471 or by email:

Sebastine Odimma is responsible for tax dispute and resolution for Maersk companies within Africa. Until recently, he was responsible for the tax affairs of more than 40 Maersk companies within 20 countries in West and Central Africa. In his role, he supervises tax compliance, strategy, optimisation and transfer pricing risk assessment of related-party transactions, as well as tax advisory on any inbound investment into West and Central Africa. He can be contacted 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:

© Financier Worldwide



Eduardo Gracia

Ashurst LLP


Luis Abrantes



Jian-Cheng Ku

DLA Piper Nederland N.V.


Azedine Assassi

GE Aviation Division


Sebastine Odimma

MAERSK Transport and Logistics


Nathaniel Carden

Skadden, Arps, Slate, Meagher & Flom LLP

©2001-2019 Financier Worldwide Ltd. All rights reserved.