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Transfer pricing is an area companies cannot afford to overlook. It is imperative that organisations appropriately price intercompany transactions, and regularly review and update their transfer pricing documentation to comply with rules and regulations. This is the first line of defence in managing transfer pricing tax risk and responding when authorities raise a challenge. Companies need to focus on transfer pricing to ensure that profits reported in relevant tax jurisdictions are consistent with the business activities they undertake there. Dedicated tax teams are important to this process. Enlisting the aid of experienced transfer pricing professionals, both internally and externally, should be integral to a transfer pricing programme.

UNITED STATES

Caplin & Drysdale

“The biggest development during the past 12 months was the 3M decision, in which the US Tax Court sustained the Internal Revenue Service (IRS) blocked income regulations. The case involved an IRS adjustment to royalty income earned by 3M US from a Brazilian subsidiary. Brazil limited by law the amount of the royalty and the parties agreed that an ‘arm’s length’ royalty would be larger. The taxpayer took the position that the IRS blocked income regulations, by requiring an inclusion of income that could not legally be paid, conflicted with the US Supreme Court decision in First Security Bank of Utah and so are ultra vires.”

CANADA

Grant Thornton Canada LLP

“Canada’s proposed changes to the federal transfer pricing adjustment rules are the most significant recent transfer pricing development. The proposed changes introduce a new series of rules to replace section 247(2) – a transaction determination rule, an adjustment rule, a non-recognition rule, a replacement rule, and a consistency rule. The transaction determination rule requires Canadian taxpayers to analyse and determine controlled transactions based on their economically relevant characteristics, meaning more robust transfer pricing analyses and documentation.”

UNITED KINGDOM

Price Bailey LLP

“The Finance Bill 2023 introduced two important new measures in relation to transfer pricing. With effect for accounting periods beginning on or after 1 April 2023, the largest taxpayers – those with a global turnover exceeding €750m – now have to prepare UK transfer pricing in the Organisation for Economic Co-operation and Development’s prescribed ‘master file and local file’ format. Prior to that, UK domestic legislation had not dictated the format of transfer pricing documentation, requesting only that it was sufficient to support the filing position adopted in UK corporation tax returns regarding related-party transactions.”

LUXEMBOURG

ATOZ Tax Advisers S.A

“A large number of the controlled transactions involving Luxembourg companies are financial transactions. Therefore, the single most important development impacting transfer pricing over the last 12 months was the interest rate policy of the central banks in the Western world. The numerous interest rate hikes adopted in 2022 and 2023 completely changed the interest rate environment at record speed. Since the second half of 2023, the European Central Bank (ECB) and the US Federal Reserve stopped increasing interest rates and, more recently, the Fed, the ECB and other central banks signalled that interest rate cuts would be considered in the not-so-distant future.”

GERMANY

CMS Germany

“In 2023, there were some law changes and the Federal Ministry of Finance issued new administrative principles (APs) on transfer pricing. These changes now contain an explicit statement that not only secured but also unsecured loans can be at arm’s length. Another major point concerns the transfer of business functions out of Germany. In this respect, the APs state that in cases of a contractually agreed price adjustment clause, a further later adjustment of the original transfer price according to section 1a of the Foreign Tax Act (AStG) is excluded. However, this only applies if the price adjustment clause is reasonable, although it is unclear when this is the case in practice.”

SPAIN

Garrigues

“Spain has been one of the most active jurisdictions in terms of transfer pricing in recent years. There is growing interest by tax authorities in specific related-party transactions, and in understanding the entire transfer pricing policy applied globally by the group to which a Spanish taxpayer belongs. The Spanish tax authorities’ ‘360-degree strategy’ has been at the heart of the automated transfer pricing risk analysis system for some time.”

ITALY

Chiomenti

“The Italian Budget Law for 2023 amended the domestic definition of permanent establishment for Italian tax purposes, enacting the investment management exemption (IME) safe harbour, which establishes a non-rebuttable presumption according to which an Italian or non-Italian resident is considered, subject to certain conditions, to be ‘independent’, and therefore no permanent establishment can be considered to exist in Italy. Following the introduction of the IME safe harbour, the Italian tax authorities published guidelines for determining the arm’s length nature of the remuneration for activities carried out by a resident or non-resident entity operating in Italy.”

AUSTRALIA

Ashurst

“Significant developments in the transfer pricing space have directly impacted the way in which organisations are operating and conducting business. Recent domestic case law has seen a significant win for the Australian Taxation Office (ATO) in challenging transfer pricing arrangements, with the taxpayer struggling to discharge the burden of proving that assessments were excessive. The courts point to the need for specific analysis underlying each dealing to be based on a reliable hypothesis.”

CONTRIBUTORS

Ashurst

ATOZ Tax Advisers S.A

Caplin & Drysdale

Chiomenti

CMS Germany

Garrigues

Grant Thornton Canada LLP

Price Bailey LLP