Transfer pricing

February 2017  |  ROUNDTABLE  |  CORPORATE TAX

Financier Worldwide Magazine

February 2017 Issue

February 2017 Issue

Transfer pricing has evolved beyond its once esoteric reputation to become a key discipline for companies confronted with a proliferation of rules and regulations, not to mention a considerable uptick in tax authority scrutiny. With developments such as the OECD’s Action Plan on BEPS having upped the ante, more aggressive tax authority audits, comprehensive documentation requirements and harsher penalties are now the order of the day. For companies, the need for a robust transfer pricing strategy is imperative.

FW: Could you outline some of the significant developments in the transfer pricing arena over the last 12 to 18 months? In what ways have these developments impacted how organisations go about implementing their tax planning strategies?

Gracia: On an international level, clearly the most significant developments have arisen from the Base Erosion and Profit Shifting (BEPS) Project. Actions 8 to 10 amending the Organisation for Economic Co-operation and Development (OECD) Guidelines and, above all, Action 13 on the introduction of Country-by-Country Reporting (CbCR) 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 within EU legislation and the new obligation among EU tax authorities to exchange information on any tax rulings and Advance Pricing Agreements (APAs) are also relevant and forward-looking developments, as well as state aid cases where the EU Commission is questioning, among other aspects, the transfer pricing rationale agreed with certain Member States since the 1990s, when the OECD Guidelines were poorly developed. From a Spanish perspective, Spain is the first country in the world to incorporate CbCR obligations into its legislation, taking advantage of the approval of a new corporate income tax law back in 2014 which was developed throughout 2015. The impasse on the formation of a new government has delayed the approval of the form to submit the CbCR information to the tax authorities, but it was officially published at the end of 2016 once the new government was formed.

Gaspar: A great challenge for multinationals conducting transfer pricing in Brazil is the gap between local transfer pricing regulation and other countries’ rules, notably the OECD’s guidelines. While the former is based mostly on fixed margins, the latter is based upon the arm’s length standard (ALS) and reconciling both can be rather difficult. Nevertheless, over the years Brazil has come closer to ALS in some aspects and I can now see some connection between Brazil’s current PCI/Pecex methods and OECD’s CUP, especially when it comes to commodities. Other relevant changes in the country refer to the enhancement of the aforementioned PCI/Pecex methods with additional adjustments brought by rulings IN RFB 1.458/2014 and 1.568/2015, bringing them even closer to an independent comparable.

Okin: Issuance of final BEPS deliverables and accompanying guidance in 2015 and 2016 has triggered a significant amount of activity among large multinationals. As the process of preparing required CbC reports begins in earnest, companies have been assessing their existing structures and giving careful consideration to operational changes that may be necessary to maintain their overall effective tax rate. Additionally, the European Commission’s actions in the realm of state aid have given taxpayers significant pause. Recent state aid developments have sent a dual message to taxpayers that national government-level approval of a transfer pricing structure is not enough to eliminate tax risk and that reputational risk is always lurking. Finally, country-specific initiatives like comprehensive regulations in the US relating to intercompany debt and the diverted profits tax in the UK have had a noticeable effect on taxpayer behaviour.

Chien: Transfer pricing developments have been significant in the past 12 to 18 months – from updated OECD guidance to changes in domestic rules. The OECD guidance is still evolving, for example, the work on profit splits and profit attribution. With the operations of multinational enterprises (MNEs) becoming more transparent via countries sharing the CbCR and master file, MNEs are concerned that transfer pricing and the ‘facts and circumstances’ analysis involved, will be an easy pot for revenue authorities to stir up in search of additional tax revenues. On the other hand, authorities have welcomed the new transparency initiatives as there is a perception that the private sector is engaging in tax arbitrage across countries and avoiding taxes. The developments in transfer pricing, PE and domestic taxation of cross-border activity that do not directly address transfer pricing, such as the UK’s diverted profits tax (DPT), have had an impact on transfer pricing. Such developments have put pressure on MNEs to consider moving into buy-sell models as a part of their tax planning strategy, which theoretically shifts the audit risk from dependent agency PEs to transfer pricing.

Steedman: The OECD published guidance on 15 Actions under the BEPS project in October 2015, introducing new guidance on a range of transfer pricing and international tax matters. While many countries are adopting the OECD’s recommendations per the BEPS project, we are seeing differences in the detail of domestic legislation to implement the BEPS recommendations in different countries. This means that taxpayers need to monitor the detail of requirements in different countries. For example, multinationals had to respond quickly to manage a large number of notification requirements for CbCR imposed before the 31 December 2016. In the UK, we have seen the early adoption into law of Action 4 of the BEPS project regarding interest deductions. This will have far-reaching implications for UK companies with significant levels of debt and companies are strongly encouraged to review what the new rules mean for them as soon as possible as they are complex and include new reporting requirements.

Radziewicz: Some of the most significant developments include the finalisation of BEPS Action Items and implementation plans for CbC reporting; European Commission rulings regarding retrospective taxes owed by Apple in Ireland and Starbucks in the Netherlands; and the introduction of final US Treasury regulations guiding the treatment of intercompany debt and equity, 385 Regulations, and intangible transfers, 367 Regulations. These developments represent a monumental shift in how tax authorities will approach audits and have created uncertainty for multinational corporations as they consider tax planning in the wake of significant new documentation requirements. The global transparency arising from CbC reporting, coupled with potentially inappropriate applications of BEPS concepts by local tax jurisdictions, may lead to substantial increases in controversy and audits. As a result, multinationals have been cautious in implementing tax planning strategies as it remains unclear whether individual countries might differ in their views of what is or is not a legitimate arm’s length transaction.

The OECD’s effort to effect major change in the transfer pricing landscape is laudable and well-intentioned. However, it will take many years before we can truly judge the effectiveness of the initiatives.
— Liz Chien

FW: How is the OECD’s base erosion and profit shifting (BEPS) initiative set to alter the transfer pricing landscape? How will issues such as disclosure, intangibles, risk and dispute resolution be affected in the long term?

Gracia: The most important impact will be on tax planning activity, which is not substantiated with the right allocation of assets, functions and risks. Increasingly, tax authorities are insisting that they will not abide by the content of relevant intra-group agreements, but instead will look at the facts to draw conclusions about the real interaction between related entities before assessing the arm’s length transactions on the basis of real or otherwise reconstructed transactions. This approach will definitely curtail paperwork and oblige companies to be consistent when it comes to establishing, say, an intangibles holding subsidiary in a tax friendly jurisdiction. By the same token, the new information in the hands of the tax authorities, coupled with their new approach, will no doubt substantially increase TP reassessments, domestic tax litigation and, above all, international mutual assistance and arbitration procedures under the double tax treaties and the EU Arbitration Convention. Hopefully the EU proposal to extend arbitration to fields other than TP will help to mitigate the risks of double or multiple taxation which will likely happen.

Gaspar: Multinationals have been monitoring the BEPS initiatives for the past few years and there are few differences between the initiative and how transfer pricing is done in Brazil. The outcome to Actions 8 to 10 were published in 2015, but it is still hard to understand if and how they will impact Brazil, given the fact that Brazil is not an OECD country and local fixed margins practices differ materially from it. Recent regulation has been enacted regarding the concept of substance and CbCR, Actions 5 and 13. Tax professionals are keen to understand the impacts going forward.

Okin: From a compliance and disclosure perspective, tax administrations can be expected to be more informed and better situated to identify high-value audit opportunities. In particular, the OECD-recommended form and scope of transfer pricing documentation means that any tax authority receiving the documentation will have fairly comprehensive information regarding a company’s global operations, including visibility into the supply chains for key products and service offerings. Further, OECD’s new guidelines relating to automatic exchange of tax rulings and CbC reports could result in more coordinated audit processes among different jurisdictions as a means of preserving scarce resources at the tax administration level. With respect to intangibles, the BEPS deliverable relating to transfer pricing has placed a spotlight on the importance of companies’ pairing proper personnel and functions with interests in intangibles as a means of demonstrating control over intangibles-related risks and entitlement to intangibles-related profits.

Chien: The OECD’s effort to effect major change in the transfer pricing landscape is laudable and well-intentioned. However, it will take many years before we can truly judge the effectiveness of the initiatives and whether the good intentions match actual results on the ground. While a few areas of the updated OECD transfer pricing guidelines appear to diverge from the arm’s-length principle, as long as the separate legal entity principle continues to be a keystone in international tax, the arm’s-length principle should continue to be observed. In the US, it is difficult at present to divine the long-term impact of the OECD BEPS initiatives because of the uncertainty around whether the incoming Trump administration will implement BEPS, and because of the high likelihood of sweeping tax reform being enacted under the new administration and Republican congressional majorities.

Radziewicz: The uncertainty surrounding precisely how these issues will be handled going forward has had its own impact on the landscape. Companies are unsure whether long-held principles of the arm’s length standard will be upheld and, more importantly, whether interpretation of these principles will be consistent across the globe. The purpose of the BEPS initiative was to curb harmful tax practices, but the broad strokes of the plans may have significant impacts on unexpected items. There is potential for different treatments of risk and intangibles depending on the taxing jurisdiction in transactions that may not have been the initial target of BEPS, for example, in transactions where taxpayers were acting in accordance with the arm’s length standard and were not trying to shift profits to gain tax advantage. BEPS also introduces the potential for straying from the arm’s length principle. For instance, under the guidance on allocation of risks for transfer pricing purposes in Chapter I, which has been the bedrock of transfer pricing documentation, though I suspect the arm’s length standard should generally prevail. At a minimum, BEPS will fundamentally alter the way documentation is prepared, audits are conducted and penalties assessed.

Steedman: The impact of the OECD’s BEPS initiative will depend on the extent of adoption of the OECD’s recommendations by national governments and how the guidance is implemented by tax authorities. Broadly, we believe the BEPS guidance has raised the bar in terms of the level of examination and rigour that is required by taxpayers when testing their transfer pricing policies or developing new policies. The additional guidance for intangibles and the examination of risk will require greater consideration and documentation. The disclosure of company financial information that will come with CbCR in combination with heightened awareness of transfer pricing as a result of the BEPS project is expected to lead to an increase in the number of transfer pricing disputes around the world.

FW: To what extent has the new BEPS initiative forced companies to focus more on transfer pricing? Was this area previously neglected or underestimated, to a certain degree?

Okin: My experience prior to kickoff of the BEPS initiative was that multinational companies generally placed transfer pricing high on the list of international tax concerns, largely due to the size of potential tax adjustments as well as associated reputational risk. However, the BEPS initiative has contributed to a new sense of unease regarding transfer pricing compliance. Much of this unease stems from the uncertainty regarding the intended scope and application of the new transfer pricing guidelines. For instance, the OECD guidance emphasises the importance of development, enhancement, maintenance, protection and exploitation of intangibles, the so-called ‘DEMPE functions’, in determining who is entitled to intangibles-related profits, but there are significant outstanding questions as to how adjustments will be implemented as a practical matter. Additionally, CbCR has caused large multinationals to give serious consideration to where money is earned and the types of entities that comprise their structures.

Chien: The extent of the data required in the CbCR has required that many non-tax functions within a MNE work together to provide the in-house tax team with the requested data. The extent of coordination required within a MNE is immense. As such, many MNEs that previously may not have focused on transfer pricing have been forced to prioritise the subject matter, and in many cases, hire dedicated transfer pricing managers. In countries with domestic transfer pricing documentation requirements and livelier audit activity, transfer pricing had always been a focus of MNEs. However, in countries that did not have such formal requirements, such as Japan, some companies did not focus on transfer pricing until the implementation of domestic CBCR and master and local file requirements.

Gracia: Companies are more aware of the importance of transfer pricing. Back in 2007 to 2009 there were a series of legislative changes in this area in Spain, but until tax audits started focusing on transfer pricing documentation obligations, and then on more substantive transfer pricing issues, resulting in a high number of reassessments, taxpayers were not paying enough attention to this area. In recent years, there has been growing concern about what transfer pricing entails, and many more organisations are giving these issues the importance that they deserve.

Radziewicz: The developments leading up to the BEPS project, including several high-profile shaming of companies perceived to have engaged in BEPS, have cast a bright light on transfer pricing for the major stakeholders of a company, where previously it may have been an area that was not quite as visible. Transfer pricing has not previously be neglected per se, as most multinational tax departments were keenly aware of trends, issues and risks related to transfer pricing. However, the BEPS initiative has put the issue of transfer pricing at the forefront of a company’s board of directors and executives. The European Commission and US Senate investigations have also played a large role in highlighting these issues.

Steedman: A number of the BEPS Actions focus on transfer pricing, but much of the new guidance follows pre-existing transfer pricing principles. However, the level of examination of risk – the control of risk and ability to absorb risk – and substance that is expected has clearly increased. We would not say that companies previously neglected transfer pricing, but with the publication of the OECD’s guidance on 15 Actions under the BEPs project and the implementation of Actions into law in different countries, now is the time for companies to thoroughly review their transfer pricing policies and for those with group consolidated revenue of €750m, or equivalent, to prepare three-tier transfer pricing documentation.

Gaspar: Multinationals are definitely more concerned with transfer pricing in Brazil. Not only do I see a growing trend in specialised consulting firms offering transfer pricing-related services to companies, but also companies hiring in-house tax staff with some level of transfer pricing experience. Having an in-house transfer pricing specialist can be fruitful to the extent that transfer pricing regulation has to be taken into account when designing businesses and deals to prevent or mitigate a potential future tax assessment and litigation.

With respect to the BEPS transfer pricing guidelines, there is still the possibility for confusion and uncertainty, unfortunately.
— Aaron Okin

FW: In your opinion, will the changes made to tax regulatory frameworks help multinationals in their understanding of potential transfer pricing liabilities? Or is there still scope for confusion and uncertainty?

Chien: Transfer pricing, being based on a ‘facts and circumstances’ assessment, has always been an area with a certain level of ambiguity in the outcome. However, the updates and changes to the regulatory framework have greatly increased that uncertainty, because of the introduction of more subjective measures, especially in the risk and intangibles areas, and the scaling back of more objective measures. Until the updated frameworks are tested in actual cases, from which should hopefully emerge practical standards, it is now more difficult to assess the potential transfer pricing liability, for example, for FIN 48 reserve purposes.

Steedman: Unfortunately, there are slight differences in the implementation of the OECD’s BEPS guidance between different countries. As such, the level of consistency that taxpayers may have hoped for as a result of the BEPS project may not be achieved in practice. This is illustrated by the additional requirements of some countries, China, for example, in terms of the transfer pricing documentation that is expected in the jurisdiction. Further, uncertainty will continue to result from how tax authorities interpret tax legislation. Therefore, there is still scope for confusion and for double taxation despite the OECD’s recent recommendations.

Radziewicz: In some instances, these new regulatory frameworks may assist a multinational in identifying potential gaps between the intention of global transfer pricing policies and the actual results on a legal entity basis – where such gaps existed and where not already known. However, there is still confusion and uncertainty on how local tax authorities will use BEPS-inspired regulatory policies to implement new regulatory changes and audit intercompany transactions. What may be deemed acceptable or unacceptable in the context of certain transactions involving intangibles and the assumptions of risk are primary areas of uncertainty. In some respects, these changes have created more uncertainty within companies that had a previous understanding of their existing transfer pricing-related tax liabilities.

Gaspar: ALS has gradually been introduced within some of the Brazilian methods and some of the BEPS’ Actions are being rolled out in the country. Such developments can be fruitful, but this is still a time for caution and a moment to observe how this is all going to unfold.

Gracia: The aim of the changes has been to help multinational companies. However, the new regulation will lead to an increase in tax litigation because now there is much more subjectivity than before 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. I think it is worth remembering that BEPS is going to be applied by many tax officers who are not 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.

Okin: With respect to the BEPS transfer pricing guidelines, there is still the possibility for confusion and uncertainty, unfortunately. The BEPS transfer pricing guidelines are somewhat helpful in concretising what tax administrations will expect from taxpayers – for example, the guidelines are explicit that board members are expected to have particular expertise in order for their management of particular risks to be respected. However, there are other places in the guidelines where it is unclear how the rules are intended to be applied to a taxpayer’s particular facts, which poses difficulties regarding understanding and planning for the tax implications of a particular transaction. This type of ambiguity in the guidelines is likely to lead to different interpretations and, potentially, controversies between taxpayers and tax administrators.

FW: Do you foresee tax authorities collaborating more frequently on cross-jurisdictional transfer pricing audits? How does this approach affect participating countries and multinational companies?

Gaspar: Despite the fact that Brazil has double taxation treaties providing language on transfer pricing, especially exchange of information, I have never heard of an actual example where a coordinated cross-jurisdictional audit has taken place. Perhaps the lack of possible credits arising from transfer pricing adjustments is the reason, or the fact that Brazil is still developing in this space.

Radziewicz: While CbC reporting will further increase information sharing between tax authorities, cross-jurisdictional audits certainly appear to be an aspirational goal for tax authorities. Ultimately, transfer pricing is a zero-sum game. If one jurisdiction asserts that profit has shifted unfairly, the profiting jurisdictions must agree, or the company must be subjected to double taxation. This will play a major role in whether tax authorities are truly dedicated to finding the right answer, or an answer that benefits their jurisdiction. In reality, the individual tax authority’s incentives will likely not be aligned and these types of audits may be more limited to specific instances where those incentives are aligned, rather than becoming the norm.

Gracia: The Spanish Tax Inspectorate has been participating in simultaneous tax audits – mainly focused on transfer pricing issues – for at least 10 years, always in the frame of the initiatives sponsored by the EU authorities and Member States. The Spanish tax authorities consider this kind of initiative instrumental to the wider and broader gathering of information which may then be used in the course of the tax audit run at the level of the taxpayer established in Spain. Multinationals will see many more of these simultaneous audits going forward, the risk being more frequent double taxation cases, which will have to be addressed by way of mutual agreement procedures (MAPs) and arbitration panels. However, we do not foresee the Spanish Tax Inspectorate participating in joint transfer pricing audits in the short term, although it would be desirable for the benefit of the taxpayers taking into account that joint tax audits ensure the elimination of double taxation, which is a very important issue in the field of transfer pricing.

Okin: A greater degree of collaboration between tax authorities in coming years seems very likely. Cross-jurisdictional cooperation on transfer pricing matters has certainly occurred in the past, but the increase in the amount of information taxpayers are now obligated to disclose, for example, CbC reports and transfer pricing master file information, and the sharing of that information among tax administrations, means that those administrations will already have open lines of communication with respect to particular companies that could stimulate joint audit activity. Joint audits could help resource-constrained tax administrations to more efficiently deploy audit resources by teaming up with a second jurisdiction to share the burden of the audit activity and expense.

Steedman: Certainly, through the mechanism for the exchange of CbC reports, tax authorities will have more ready access to company information. However, this does not necessarily mean there will be greater collaboration between tax authorities. In our experience, the collaboration between tax authorities on transfer pricing audits is very much dependent on the people resource available within tax authorities and the culture of working with different tax authorities, neither of which have changed significantly in recent years.

Chien: Tax authorities will certainly collaborate more frequently on cross-jurisdictional transfer pricing audits. The days of one-sided testing are over. Tax authorities are keenly interested in understanding the entire 360 degree view of the transaction, if not the whole global value chain, and we will see more cases applying profit split methods or PE profit attributions. With more information, tax authorities are becoming more expansive in legal and regulatory arguments to assert and sharing these ‘best practices’ with other countries. There is a fundamental lack of trust between taxing authorities and MNEs, and if taxing authorities can obtain more information, and resources via cross-jurisdictional tax audits, then that is an attractive proposition for taxing authorities. As such, MNEs need to be prepared to provide information, though extra-jurisdictional, to a country and ensure that internal controls are followed with respect to revenue contracts and decisionmaking activities across the value-chain.

While CbC reporting will further increase information sharing between tax authorities, cross-jurisdictional audits certainly appear to be an aspirational goal for tax authorities.
— Justin Radziewicz

FW: Has there been a noticeable increase in transfer pricing disputes between companies and tax authorities in recent times? What dispute resolution options are available to parties so that disputes of this nature are resolved as efficiently as possible?

Radziewicz: There has certainly been an increase in disputes in recent times. However, this outcome is expected as tax authorities continue to develop a deeper understanding of transfer pricing. BEPS has shined an even brighter light allowing tax authorities to investigate potential issues that they may have previously left unidentified, but I think a much more noticeable increase in disputes – and, particularly, double tax cases – will arise from the BEPS project deliverables over the next three to five years. APAs, MAPs, Competent Authority and litigation remain the primary sources of dispute resolution, though the efficiency of each avenue is largely dependent upon the tax jurisdictions and issues being examined.

Steedman: We have yet to see a significant increase in audit activity by tax authorities, but we have every expectation this will come in the next few years. The BEPS project has served to raise the awareness of transfer pricing within tax authorities around the world and this in itself is expected to lead to greater scrutiny of companies’ transfer pricing. The changes to the definition of permanent establishment are also expected to contribute to an increase in disputes with tax authorities. In the UK, when disputes involving double taxation do arise, companies have the option of potentially following the MAP. Both approaches are typically long and inefficient. However, the new multilateral instrument (MLI) to be signed by over 100 countries in June 2017 includes measures to strengthen the effectiveness and efficiency of the MAP. In addition, the MLI provides an optional provision on mandatory binding MAP arbitration as a mechanism to guarantee that treaty-related disputes will be resolved within a specified time frame.

Okin: Over the past several years, there has been an uptick in US transfer pricing disputes that have prompted litigation. While some settled before a final decision, others have been fully litigated or are awaiting appellate court review. US taxpayers have a couple of different dispute resolution opportunities available that can help prevent litigation. Prior to an audit, taxpayers can seek an APA that sets forth the agreement of the taxpayer and the IRS regarding the transfer pricing of a particular transaction. If an audit results in an unagreed proposed adjustment, the taxpayer can generally seek review by an internal IRS Appeals officer with the authority to accept, reject or modify the proposed adjustment based on the IRS’s hazards of litigation. If the IRS Appeals process fails to yield an agreement or is unavailable, the taxpayer is required to pay the additional tax unless it initiates litigation.

Gracia: We are certainly seeing an increase in transfer pricing controversies between companies and the Spanish tax authorities, since the most significant tax reassessments are often issued on transfer pricing matters. A recent trend that we have noticed in tax audits is to deny the nature of a shareholder loan as a liability giving rise to deductible financial expense and recharacterise it as equity, on the basis of the conduct of the lender and borrower when it comes complying with obligations arising from the loan agreement on payments of interest, repayments of principal, extensions of maturity and total leverage, among others. Spanish tax authorities maintain that loans are not actually loans when the behaviour of the parties deviated from their contractual obligations, or the leverage was not responsive to arm’s length conditions. To the extent that transfer pricing reassessments do not carry a serious penalty, or the penalty is annulled by the courts, the best available option for resolving transfer pricing 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 – hopefully more, once the multilateral agreement implementing BEPS is approved and ratified.

Chien: Transfer pricing audits, especially relating to cost sharing and buy-ins, have been a normal part of a US MNE’s audit cycle, with tax authorities approaching audits from a technical and legal basis, rather than a political basis. In 2010, that all changed as the mainstream financial press around the world began reporting extensively on the tax structures of global MNEs, with a seeming fixation on US-based technology MNEs. The media exposure significantly increased the level of awareness that laypeople, and in turn, politicians and NGOs, had of the subject matter. Almost overnight, ‘transfer pricing’ became a four-letter word synonymous with tax avoidance. All of this attention resulted in intense political pressure on revenue authorities to scrutinise the global value chains and intercompany arrangements of MNEs, which has resulted in various risk assessment programmes and more aggressive audits on MNEs, especially US technology MNEs. Dispute resolution mechanisms are still being developed. MAP remains the main avenue, but countries’ MAP departments are frequently backed up several years with cases. The US has advocated for mandatory binding arbitration, and while many similarly-minded countries have signed up, the countries that are the source of unorthodox interpretations of tax rules that generate a large number of cases that end up in MAP, are the biggest opponents of mandatory binding arbitration. Given this landscape, for the time being, avoiding the dispute in the first place is the best option for dispute resolution.

Gaspar: I have seen an increase in tax assessments related to transfer pricing. This, almost necessarily, means litigation due to the way procedures are designed in Brazil, as it opens administrative litigation all the way to specialised administrative tax courts and, in the event the taxpayer is unsuccessful at the administrative level, the discussion is usually then taken to judicial courts. The whole process generally can take more than a decade, up until a final decision at the judicial Supreme Court level is obtained.

FW: How are recent, high-profile transfer pricing disputes likely to affect the way companies develop and implement their transfer pricing strategies?

Steedman: The question of whether a taxable presence or permanent establishment has been created is one of the themes of recent high profile transfer pricing disputes. With this background and the new definition of permanent establishment per Action 7 of the BEPS project, we expect companies to be very cognisant of the activities that overseas staff are permitted to undertake and how contracts are concluded. Also, we expect much greater focus on how risk is managed within a group and measures to ensure that there is sufficient substance in key locations.

Gracia: Transfer pricing disputes have been aired by the media and NGOs and put at the top of the agenda of political concerns by many governments and parliaments, hence creating an atmosphere which may be impacting the reputation of the firms involved. Further, APAs will now be exchanged quarterly by tax authorities in the EU. Hence, other companies are adopting a wary stance when dealing with their global transfer pricing policies. Post-BEPS, corporate structures must be more sustainable than before, particularly on the risk-taking side, which, among others, requires the relevant people be seconded to the territories where the value-added is declared.

Chien: Such disputes will impact how companies assess transfer pricing risk. Because transfer pricing is facts and circumstances based, such disputes are only useful to provide directional insight on priorities and positions of tax authorities.

Gaspar: Transfer pricing disputes, as with all tax disputes in general in Brazil, are privileged while at the administrative level. It is therefore difficult to track ongoing administrative litigation cases and, when it comes to judicial cases, there are currently very few of these underway. The lack of jurisprudence to guide taxpayers on how to interpret the legislation is an additional source of uncertainty, as either other taxpayers will not know about transfer pricing administrative court decisions or will find out about them many years later.

Okin: Most of the recent court cases and other disputes involving transfer pricing relate to intercompany financing transactions, cost sharing and other intellectual property transfers. These types of issues are common to many multinationals, so companies tend to closely follow pending transfer pricing litigation as it unfolds in order to determine what lessons can be gleaned and applied in their own circumstances. Moreover, companies can be impacted by these cases in the form of revised regulations. For instance, a cost sharing regulation, now-invalidated, requiring cost sharing participants to share stock-based compensation expense was originally promulgated by the government at the same time they were in the middle of litigation with a taxpayer regarding the same issue.

Radziewicz: The EU Commission ruling against Apple introduces a significant change in the status quo when it comes to taxpayers dealing with previously closed tax positions. The retroactive application of the Commission’s own version of an arm’s length standard has increased anxiety and uncertainty around tax positions where a ruling has already been obtained. While there are not many options for taxpayers related to historical positions, going forward this ruling, and other similar ones, along with BEPS guidance, has created a clear focus on the substance of transactions. One response to this is that companies are examining options to transfer valuable assets or functions out of tax havens with little substance into more operationally substantive entities in tax efficient jurisdictions.

We have yet to see a significant increase in audit activity by tax authorities, but we have every expectation this will come in the next few years.
— Ruth Steedman

FW: In a scenario in which a company finds itself subject to a tax audit or investigation, how should it respond? What steps should it take from the outset to reduce potential financial and reputational damage?

Gaspar: When it comes to audit or investigation, the best position for the taxpayer is to have prepared in advance. Having a strong internal process analysing transactions in advance, doing thorough work fitting the method chosen – given taxpayers can generally choose the method in Brazil – to adequate legal framework and grounds and keeping documentation organised in advance, are key for a smooth process. It is worth emphasising the need for a thorough internal process within the organisation, with clear responsibility and accountability between areas to ensure a proper audit trail along the way on costs, documents and so on.

Chien: Cooperation is key. While some audits, depending on the country, may be politically driven, the majority of audits are undertaken by teams trying to do their jobs and get to the right answer. Many countries have strict confidentiality rules that prohibit government employees from publicly discussing any details of audits. Regardless, to manage the reputational risk, it is good practice to inform and keep updated the MNE’s internal policy, communications and legal teams and to work closely with those teams to craft a response in the event of a public disclosure. To manage the financial risk, companies should already have assessed the risk of tax positions and put up reserves as appropriate. This approach should cover the majority of cases, but there will always be edge scenarios where regulators assert a novel argument to make a large tax assessment, the European Commission ‘state aid’ cases, for example.

Steedman: There are a few key measures that companies can take in the case of a tax audit. Our advice in this respect is to have robust transfer pricing documentation in place. This enables taxpayers to respond quickly to a request from tax authorities for documentation and, hopefully, to start the audit process on the right foot. Dealing with tax authorities on a timely basis and in a collaborative way is also generally recommended. Further, we recommend having a mechanism in place to ensure it is clear where in a group transfer pricing documentation is owned, for example, by the head office or in local operating companies, and to monitor the submissions that are made to tax authorities to ensure consistency.

Gracia: First, a company should get a good tax adviser to set the strategy of defence from the outset and make available to the tax administration the required transfer pricing documentation. In Spain, it is compulsory to keep available to the Spanish tax authorities the master file, the local file, and from 1 January 2016, the CbCR for groups with a consolidated net turnover of at least €750m in 2015. It was notable in 2016 that some judgments by Spanish courts on large TP reassessments have sided with the taxpayer on the basis that, at the stage of analysing the evidence in the court file, the tax authorities did not sufficiently support their findings, whereas the taxpayer had a solid file in place.

Radziewicz: A proactive approach is key to reducing these risks. Prior to responding to audit inquiries, a multinational should first internally assess and understand the risks associated with the jurisdiction. This would include identifying all material transactions, determining whether sufficient documentation is in place, analysing undocumented transactions and quantifying potential exposures, considering the size and type of transaction. In many instances, it is beneficial to prepare additional documentation for riskier transactions. While this may not provide penalty protection, it can provide a starting point for discussion and ensure the company puts forth its strongest case rather than putting together incomplete documentation due to time pressures. Being well-prepared to defend positions mitigates risks substantially. It is also important to centralise efforts and develop a clear chain of command for responding to audit requests. This will ensure the company’s ability to control the flow of information to tax authorities and assure that responses are consistent with the facts on a global basis. As more tax authorities share information, the provision of inconsistent responses in different jurisdictions will increase financial and reputational risk.

Okin: Communication and a reasonable degree of cooperation with the tax authority are critical to a smooth audit experience, but companies should not be shy about seeking to escalate issues to more senior tax administrators if auditors are being unreasonable. Pre-audit preparation can also help companies minimise audit burden, as well as alleviate future reputational concerns. The company’s rationale for entering into and structuring a transaction as it did should be documented contemporaneously with the transaction and comprehensively such that a general audit strategy will be in place and answers will be readily available before any questions arise. In particular, documentation should address the business motivations for the transaction and the assumptions and data relied upon in pricing the transaction.

FW: Could you outline the challenges that face multinationals as they try to maximise their tax efficiencies while staying within the bounds of transfer pricing regulations? Is it becoming tougher to balance the drive for efficiency with compliance requirements?

Chien: Challenges arise from the increased uncertainty in how certain scenarios will be characterised, because the updated rules have not been tested yet in audit. This landscape makes it difficult for MNEs to devise and implement transfer pricing strategies that would maximise tax efficiencies and steers MNEs to behave more conservatively. With the updated substantive rules and the compliance requirements focused on transparency and information sharing, it is now more difficult for MNEs to arbitrage tax rules of different countries. MNEs can no longer expect a taxing authority to only focus on the activities in that country. Rather, taxing authorities want to understand the full value chain and have a full 360 degree view of a transaction. The days of one-sided testing and reflexively using the transactional net margin method (TNMM) are over.

Gracia: Nowadays, the main challenge that multinationals face is to be able to demonstrate to the various national tax authorities that the added value has been generated in the territory where it is declared – in other words, that the added value has been correctly attributed to the various entities involved in this value chain, taking into account that each tax administration will try to justify a different attribution of the income for the benefit of its own tax collections. It is definitely more burdensome to balance efficiency and compliance obligations, which give rise to a reduction in the number of cases in which an entity in the group based on a tax-friendly jurisdiction is attributed assets, functions and risks to participate in the value chain.

Steedman: The burden of ensuring transfer pricing compliance is certainly increasing, particularly for companies operating across many jurisdictions. For example, the implementation of Action 4 in the UK has resulted in a whole new reporting requirement, which could be time consuming and complex.

Radziewicz: The goals of maximising tax efficiency and staying within the bounds of transfer pricing regulations in some respects already align. For example, it is not efficient to take such an aggressive position that has no chance of withstanding audit. Transfer pricing policies in conflict with existing law and tax regulations lead to controversy and costly support fees which can offset any deemed efficiencies gained through aggressive planning inconsistent with the arm’s length standard. That being said, increasing compliance requirements have put a strain on tax departments’ budgets and available time. Inefficiency can arise from excess time spent developing and supporting transfer pricing policies that align with existing regulations.

Okin: The unsettled state of international tax regulation holds three major challenges for multinationals. The first is determining how to effectively structure transactions to comply with new, and sometimes unclear, rules in the absence of useful indications of how the new rules will be applied to taxpayers in practice. The second relates to implementing new structures in a way that preserves enough flexibility to efficiently modify the structure based on evolution of the regulatory environment, which can be very difficult when making decisions regarding long-term investments that need to be made in the near term. The third, which accompanies both the first and the second, is the challenge of ensuring that any transfer pricing-related changes are implemented in a manner that results in minimal business disruption.

Gaspar: The first challenge multinationals find in Brazil when doing transfer pricing is the gap between local transfer pricing regulation and OECD’s guidelines, and reconciling both can be rather difficult. Lacking certainty in applying local methods can also mean added difficulty as a result of the limited paradigms arising from rulings issued by the Revenue Service and from courts, meaning a lack of specific rules on intangibles which can cause a multiplicity of possible interpretations without any guidance from rulings or case law.

The lack of jurisprudence to guide taxpayers on how to interpret the legislation is an additional source of uncertainty.
— Fabio Gaspar

FW: As transfer pricing continues to evolve – via the introduction of BEPS and other initiatives – how important is it for companies to regularly review and update their tax strategies? Is there a need to be flexible rather than prescriptive during this process?

Steedman: We highly recommend that companies review their transfer pricing policies for compliance with the recommendations from the BEPS project, if they have not already done so. In the UK, it is also essential that companies consider the implications of the new interest deduction rules introduced in line with Action 4 of the BEPS project. Going forward, we would not expect transfer pricing policies to need to be reviewed regularly, unless there is a change in the business, for example, a transfer of functions between related parties, an acquisition or disposition, or further changes in transfer pricing requirements. However, regular reviews, perhaps annually, to ensure transfer pricing policies are adhered to are essential.

Okin: Staying apprised of changes in the current regulatory environment will be an important part of staying competitive and minimising wasted corporate resources associated with the implementation of structures that are obsolete before they are operational. In particular, companies will want to keep up-to-speed with the latest thinking of tax authorities – including in public statements other than official pronouncements or policy documents – in order to strengthen their ability to predict the direction of future regulations. To avoid business disruption, maintaining flexibility should be prioritised to the extent possible. Given the degree to which BEPS and some country-specific regimes emphasise location of people and the performance of functions, companies planning new initiatives that involve relocation of employees should consider how changes in the rules would impact the new structure, as well as alternative transfer pricing arrangements that could be adopted in light of changed regulatory circumstances.

Radziewicz: It is absolutely critical that companies regularly review and monitor their tax positions and strategies and maintain flexibility in their policies going forward. Transfer pricing is playing a more central role in many global tax authorities’ audit strategies and their level of understanding and sophistication is developing rapidly and in some cases diverging from global standards. As such, many longstanding positions are being challenged and tested with a focus on curbing the practices tax authorities view as harmful. With so much information being shared through CbC reporting, instances where a local tax authority takes a more isolated, self-preserving view may lead to global policies being simultaneously accepted and challenged in different locations. Consistent global policies are still a best practice when possible, but the allowance of flexibility in adjusting them to meet local tax authority expectations may alleviate some pressures going forward.

Gaspar: Despite the outcomes of the BEPS project published in 2015, and the fact that Brazil was involved as a G20 member, my opinion is that the tax authorities in Brazil feel comfortable with the current fixed margin methods and should not give up the ‘simplicity’ and ‘control’ they provide. Although I would hope for changes toward full ALS methods and a link to the OECD’s guidelines, I do not see it happening in the near future. Nevertheless, we do believe that authorities will keep using and improving current regulations to seek more scrutiny and that tax audits will remain an important item in the Revenue Service agenda.

Gracia: We expect to see continuous monitoring in the area of transfer pricing over the coming years, as it becomes an increasingly important issue for multinational companies. In particular, it is important to bear in mind the reputational risks that can arise from the application of a specific transfer pricing policy. In addition, the tax function within multinational companies should be raised to and monitored by the company’s board of directors, especially in terms of the transfer pricing strategy that each multinational group decides to apply. As transfer pricing developments continue to evolve, corporate groups need to be flexible. They must revisit old decisions in this area and amend them when necessary, above all, taking into account that the BEPS project is still pending further developments in a number of areas.

Chien: While it is good practice to keep abreast of developments in tax policy and to review that against the MNE’s tax strategy, realistically, until new policy is enacted and tested, it will be difficult for a MNE to make any sharp pivots on strategy.

Nowadays, the main challenge that multinationals face is to be able to demonstrate to the various national tax authorities that the added value has been generated in the territory where it is declared.
— Eduardo Gracia

FW: How do you envisage the transfer pricing environment unfolding over the coming months and years? What trends and developments are likely to shape the way companies roll out their transfer pricing policies going forward?

Okin: Overall, my prediction is that the transfer pricing environment will continue to remain in a state of uncertainty for at least a few years before becoming more predictable. Recent regulatory changes have modified both the analytical framework as well as the number of tax administrators with access to taxpayer information, both of which are likely to result in a change in enforcement patterns on the part of tax administrators who feel emboldened by the new rules. Additionally, the tax implications of the ever-expanding Internet of Things is far from clear. Finally, at least for US companies, the extent to which transfer pricing will remain an important aspect of managing overall tax efficiency will depend to a large degree on the outcome of corporate tax reform.

Radziewicz: Unfortunately for taxpayers, I sense that the next three to five years may be filled with increasing compliance requirements, burdensome data requests and a large uptick in challenges to multinationals’ transfer pricing policies. The uncertainty caused by the varying interpretations of BEPS by tax authorities, business and consultants indicates some instability as new regulations are implemented and the new ‘status quo’ is established. As such, I would expect many companies to be very cautious with their transfer pricing policies going forward to avoid both reputational and financial damage in a highly-contested environment that is beginning to reach the public more often than ever before.

Gaspar: As far as Brazil is concerned, I would expect authorities to continue focusing on transfer pricing audits throughout 2017 and with increased sophistication. Due to the fact that local regulation is subject to different interpretation, all transactions need to be carefully documented and the legal grounds which they rely on need to be well detailed in advance. Moreover, I would insist on the importance of doing all the transfer pricing work in advance and to have a clear internal process on the way to go about this, between all the involved areas in the company.

Chien: As a general matter, global transfer pricing policies should be rolled out uniformly and be as consistent possible from country to country, but this will be defined by specific domestic rules and audit activity. While many tax professionals would bet that transfer pricing is here to stay, there are increasingly strident voices in the field, especially from the non-governmental organisation community, advocating for formulary income allocation methods. Movement in the direction of formulary methods would significantly minimise the need for transfer pricing, but at present it seems insurmountable for countries to ever agree on the allocation factors.

Steedman: The introduction of CbCR represents a step change in the transparency of company information available to tax authorities, but we also anticipate an increase in the transparency of information available to the public. For example, the European Commission has called for public disclosure of CbC reports and the UK government has introduced a requirement for large UK companies to publish their tax strategy online. Thus, transfer pricing and tax are likely to remain in the eye of the media and the public. Of course, if there are significant changes in the US tax regime, we would expect to see companies taking this into account in the development of their transfer pricing policies and this could have a major impact. The BEPS project has served to raise the awareness of transfer pricing within tax authorities around the world and this in itself is expected to lead to greater scrutiny of companies’ transfer pricing going forward.


Eduardo Gracia specialises in tax matters of M&A, real estate, finance and distressed debt, as well as on international tax, European tax and transfer pricing projects. He has advised a wide range of Spanish and international corporate, funds and financial institutions on the tax planning and structuring of inbound investment into Spain. He has also advised on a considerable number of outbound investments, advising on the corporate and operational restructuring of multinationals. He can be contacted on +34 91 364 9854 or by email:

Justin Radziewicz joined Duff & Phelps as a director with significant experience advising clients’ senior management teams on a variety of transfer pricing and valuation matters. Mr Radziewicz has supported and managed large litigation support projects, prepared US, OECD and local country transfer pricing documentation for tangible, intangible and service transactions, assisted in the design and preparation of economic planning and global transfer pricing policy projects and analysed complex transfer pricing issues in compliance and controversy contexts. He can be contacted on +1 (312) 697 4930 or by email:

Ruth Steedman is a highly experienced transfer pricing professional who has specialised in transfer pricing for over 20 years and has experience in all areas of policy setting, documentation, implementation, monitoring and defence. At FTI Consulting, Ms Steedman leads a team of dedicated transfer pricing advisers, working alongside tax, economics, strategic communications and corporate finance professionals. She can be contacted on +44 (0)20 3727 1711 or by email:

Fabio Gaspar is a tax lawyer with over 10 years’ professional experience. Mr Gaspar specialises in tax planning and consulting on Brazilian and international taxation, with a background in tax litigation and corporate law. He has authored a number of papers and lectured on tax subjects in distinguished publications and forums worldwide. His current role as head of upstream tax Brazil at Shell includes being responsible for transfer pricing regarding upstream assets. He can be contacted on +55 (21) 3984 7785 or by email:

Aaron Okin advises clients on a wide range of tax issues, with a particular focus on supply chain-related tax planning and transactions involving intellectual property. A significant component of his practice includes advising clients with respect to structuring and documenting transactions involving licences or other transfers of intellectual property rights, the manufacture and sale of tangible goods, and the provision of services. Mr Okin also helps clients navigate tax audits and controversies. He can be contacted on +1 (312) 407 0139 or by email:

Liz Chien is a US-trained tax counsel experienced in international tax policy, planning and transfer pricing, with a focus on supporting the international expansion of technology-based businesses. Ms Chien previously served as an adviser supporting Action 1 of the OECD BEPS Project and as the head of tax for Google in the Asia-Pacific region. She started her career as a tax attorney with the law firm, Baker & McKenzie LLP in Silicon Valley.

© Financier Worldwide



Eduardo Gracia



Justin Radziewicz

Duff and Phelps


Ruth Steedman

FTI Consulting


Fabio Gaspar

Shell Brasil Petróleo Ltda.


Aaron Okin

Skadden, Arps, Slate, Meagher & Flom LLP


Liz Chien

International Tax Attorney

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