Transfer pricing controversy is fast becoming the number one tax priority on the agenda for finance and tax professionals and, given the amounts involved, is also a priority in the boardroom, write Conor O’Sullivan and Neil Casey of our Tax practice.
Tax authorities around the world are aggressively seeking to tax additional profits of multinational groups by challenging the design and implementation of Group transfer pricing policies. This has led to a proliferation of many protracted transfer pricing disputes between taxpayers and tax authorities – usually with very large amounts of additional taxation at risk.
At the core of the Apple dispute with the EU over tax of €13 billion (before interest) is the application of transfer pricing principles. A US multinational semiconductor company received a tax assessment from Irish Revenue in late 2018 for €43 million in relation to intercompany pricing for one accounting period – raised five years after the accounting period ended.
International tax treaties between countries typically provide for a mechanism known as a Mutual Agreement Procedure (“MAP”) to seek to resolve these disputes and avoid the imposition of double taxation. These MAP cases typically occur after a lengthy period of audit dispute whereby the taxpayer and the tax authority have been unable to agree. The latest statistics available tell us that there are over 6,000 open transfer pricing cases in MAP processes for resolution globally. On average these cases take a further 3 years to resolve. Ireland’s inventory of MAP cases rose by over 33 per cent in the 12 months up to January 2019.
Tax authorities have demonstrated they are prepared to assert extremely aggressive positions with regard to transfer pricing matters. This can be extremely disruptive and lead to a drain on resources for the business, which typically extends beyond the finance and tax function. Dealing with such disputes can be a costly exercise and will often result in the taxpayer seeking a resolution by making a settlement payment to the tax authority in question in order to bring the matter to a conclusion and move on.
Any non-principled settlement of a dispute can lead to difficulty in seeking double taxation relief in Ireland. It is clear that Ireland is taking a tougher stance on these matters and all Irish taxpayers are advised to ensure that they keep open their rights to enter the MAP process for such disputes (whereby the Competent Authority (CA) of the Revenue Commissioners has the ability to negotiate directly with their foreign counterparts). There are very many examples in the last number of years whereby the Irish CA, appropriately supported by a taxpayer, has shown the ability to resolve a dispute on a principled basis that more closely reflects the merits of the Irish taxpayers’ position.
This proliferation of disputes has occurred despite the revised OECD Transfer Pricing Guidelines published in 2017 which provide a clearer framework for approaching the analysis of complex cross-jurisdictional supply chains. In particular, clear guidance has been provided on how to differentiate between those functions which control the assumption of key risk in the business as opposed to those who contribute to that process or contribute to the management of business risks assumed.
So why is this happening? We think the answer lies in the fact that taxpayers do not proactively seek to manage the risk of transfer pricing dispute and are insufficiently prepared when the controversy arises – either through lack of resources or lack of available data / evidence to support the position of the business a number of years earlier. A large reason for this has been the traditional view of transfer pricing documentation as a compliance exercise – to be completed under duress to avoid fines/penalties.
Other taxpayers view transfer pricing documentation requirements as an opportunity to present their case clearly and on a principled basis, in manner that aligns with the business model and management structures. Such documentation acts as the first line of defence in avoiding a dispute or in resisting challenge when it arises. Strong documentation that tells a clear transfer pricing story that aligns with the business model is often an immediate deterrent to challenge by tax authorities, who themselves have limited resources and who must therefore choose their battles. It also minimises the cost of conducting any disputes that occur while providing a strong basis to support the Irish CA in any dispute that ends in Mutual Agreement Procedure.
This article originally appeared in the Business Post, and is reproduced here with their kind permission.