February 2021 Issue
The importance of tax and transfer pricing (TP) continues to increase amid the economic impact of coronavirus (COVID-19). Key developments in the TP space include the OECD/G20 move to develop a solution to the tax challenges of the digitalisation of the economy, as well as the implementation of new obligations on tax intermediaries under DAC 6. Going forward, tax leaders and professionals need to act strategically and adapt to major changes in a post-pandemic tax market.
FW: What do you consider to be among the major trends currently shaping the transfer pricing environment?
Gaspar: The Organisation for Economic Co-operation and Development’s (OECD’s) ‘Tax challenges arising from digitalisation’ economic impact assessment continues to be the most anticipated transfer pricing (TP) development. While it will be interesting to see how consensus is sought around it, specifically for Brazil the TP landscape has seen more practical challenges. Brazil is not a member of the OECD and does not follow its TP guidelines. In fact, Brazil’s TP methods are largely based on fixed margins and simplicity. The prospect of Brazil acceding to the OECD shone a different light on discussions around the appropriateness of Brazil’s TP methods. The journey to potentially join the OECD led to a joint project between the OECD and the Brazil Revenue Service (RFB) seeking to harmonise their methods. The amount of attention TP has received in recent years, coupled with the fact that it has consistently been one of the strategic audit items for the RFB, has caused companies to seek compliance and carefully consider their reputation and creating an audit trail when building their business models.
Starkov: Developments surrounding the OECD Secretariat proposals dubbed Pillar One and Pillar Two dominated the news during 2020 and will almost certainly continue to be in the spotlight for 2021. If agreed upon by the group of some 135 countries that constitute the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), these initiatives will usher in sweeping changes to the international taxation landscape. But even if an agreement is not be reached by countries in 2021, many of the design features of these proposals will, likely, remain under discussion in the international taxation community, and may eventually be implemented in the form of guidance to taxpayers and tax authorities or even in the form of international treaties. Because of this, it is prudent for taxpayers to become familiar with these proposals. As currently envisioned, the Pillar Two measures for preventing “under-taxation” will be applicable to all multinational companies. And, although some of the features of the Pillar One proposal will be applicable only to groups providing “automated digital services” and “consumer facing companies”, the proposal to standardise the remuneration of dependent distributors that perform “baseline marketing and distribution activities” will be applicable to groups in all industries. In addition, tax authorities in some countries have just begun examining the TP documentation prepared by taxpayers under the OECD BEPS guidance – the so-called “local files” and “master files”. Facts presented in that documentation may be new to some tax authorities, which may lead to further questions and investigations of taxpayers’ records.
de Homont: The largest trend we are seeing in Europe results from the Development, Enhancement, Monitoring, Protection and Exploitation (DEMPE) of intangibles concept, which prescribes a more detailed look at intangibles beyond legal ownership. This leads to a fundamental shift from one-sided TP views to understanding the full context of transactions. Whereas in the past it was often sufficient to look at supposedly comparable results of one party, we now see that DEMPE leads to a situation in which all entities in a transaction are evaluated: country-by-country reporting (CbCR) increases the transparency of outcomes of how much other tax is paid in other jurisdictions and the relative fuzziness of the DEMPE concept leads to more disputes about which entity exactly is more important for intangibles. Overall, this leads to a significant increase in controversy, especially regarding intangibles and appropriate licence fees or royalties. In particular, we are noticing an uptake in litigation proceeding regarding TP, even in countries where taxpayers were previously more cautious about litigation, such as Germany.
Caja: Addressing the evolution of the digital economy will continue to be one major trend in the TP environment. However, the more pertinent trend facing many traditional manufacturing multinational organisations will be the fallout created by CbCR requirements. Tax authorities will now have access to more information than ever before and the major trend I see is associating profitability with assets, both tangible and intangible. The presence or absence of employees, hard assets and true intangible assets will be tied to expected returns on those assets to the entity that owns them and where the value is generated. Tax authorities will associate reported profits with substance as submitted in CbCR.
Odimma: The coronavirus (COVID-19) pandemic has thrown up a lot of complexities with TP across the Africa region. There has been an increased push from African tax authorities against some TP methods that retain low margins in subsidiaries due to the low risk of the operation. These companies with low margins are making losses as the fixed overheads erode their low profit margin. There is increasing reallocation of these costs to the parent company by tax authorities. There is also a focus on tax transparency with an increase in the number of exchanges of information across the region.
Gracia: One major development shaping the current TP environment in Spain has been the OECD proposal for a ‘unified approach’ under Pillar One, which focuses on the allocation of taxing rights in a digitalised economy and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules. We are waiting to see if the Biden administration will accept the blueprint published by the OECD in late 2020 to unblock the impasse in which we find ourselves. On the other hand, the Economic and Financial Affairs Council (ECOFIN) has stated that by mid-2021 the European Union (EU) will publish its own model for the taxation of digital companies and if no agreement is reached, there will be a multiplication of national solutions for the taxation of digital companies. A second major development was the launch of the OECD’s ‘Transfer Pricing Guidance on Financial Transactions’, although the Spanish Tax Administration had already been applying, to a large extent, the OECD criteria in this area for some time. A third development has been the preparation for the national implementation of the new obligations on tax intermediaries under DAC 6, which can encompass the obligation to communicate certain TP schemes. It should be noted that the COVID-19 crisis has led to a delay in the deadline for the first information to be provided to tax administrations, so its effects will be seen from 2021 instead of 2020. Finally, it should also be noted that companies should review their TP policies considering the changes caused by the COVID-19 crisis, in light of the OECD Guidance on the transfer pricing implications of the COVID-19 pandemic, published in December 2020.
“Designing transactions and business models with TP in mind from the start can prove effective in many instances and should help companies to maximise compliance while sustaining a good reputation.”
FW: In your opinion, have the changes made to tax regulatory frameworks helped multinationals to understand their potential transfer pricing liabilities?
de Homont: Many changes in the TP landscape – most importantly DEMPE and the new Pillar discussions – are designed to increase local taxation rights and promote substance over form. The good thing is that it makes abusive structures less viable, but at the same time it shifts the debate from the relatively clear formal contractual basis to the, often more subjective, economic reality. I do think this is a good development, but for taxpayers it means they must design and document their TP much more on economic analysis or risk reassessments based on unexpected interpretations by tax authorities. This is especially challenging as the OECD guidelines are somewhat open to interpretation and taxpayers need to implement their TP now, while tax authorities will likely take a few years to converge on a consistent interpretation. In my opinion, taxpayers can only try to comprehensively describe the overall context and be affirmative in defending their structure.
Caja: The changes made in the tax environment worldwide make it clear that ‘abusive’ structures will not be tolerated and that governments are taking a more unified approach to evaluating the ‘results’ of intercompany transactions, as opposed to focusing on methodologies. The BEPS initiatives are more bottom-line driven, although they add additional layers of compliance. Beyond the conceptual frameworks being developed, compliance, enforcement and cross-border cooperation among tax authorities still has some way to go. So, even if you feel as if you understand the purpose of these initiatives and you create TP methodologies in line with them, there really is no assurance that they will not be challenged in one or more tax jurisdictions – it is just the nature of TP among related parties in different jurisdictions.
Starkov: Tax laws and related regulations have been evolving rapidly in recent years, on both an international and country level, which barely gave taxpayers any room to catch their breath. In addition, the COVID-19 pandemic ushered in many new initiatives by national and local governments designed to temporarily alleviate the tax burden of corporate taxpayers. In many cases, these temporary government support actions will interact with other tax laws in a way that makes corporate tax liabilities far from easy to predict without careful analysis. In terms of the US tax landscape, Treasury regulations in many sections of the Tax Cuts and Jobs Act (TCJA) have been issued only in the last year or two, and taxpayers were busy incorporating this guidance into their tax provision processes and forecasts. Then, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 and effectively altered several TCJA positions, such as the rules on carry-back of the net operating losses (NOLs) and the limits on deduction of business interest, to name just two examples. These changes compelled many taxpayers to undertake complex modelling exercises to make optimal decisions regarding managing their NOLs and interest payments.
Odimma: In the sense that multinationals are aware of the compliance obligations and the relevant penalties for non-compliance, the recent changes made to tax regulatory frameworks have helped multinationals. However, in terms of TP audits, some of the rules have become more ambiguous. For example, some countries have detailed acceptable TP methodologies but will resort to secret comparables during a TP audit, thereby shifting the balance of power against multinationals.
Gracia: There is a clear difference between those companies with a consolidated worldwide turnover of more than €750m and those with less. The former, subject to a high degree of scrutiny by national tax authorities thanks to annual CbCR obligations, are highly compliant. For those whose turnover is lower, the degree of compliance is more varied – some companies are very compliant, but others see it as a burden rather than an opportunity.
“To achieve the balance between good compliance practices and tax efficiency, tax planning should be viewed holistically.”
FW: What challenges face multinationals in their efforts to maximise tax efficiencies while meeting compliance requirements?
Gracia: Typically, there are issues with the quality and consistency of the databases. The continuous uploading of data by database owners may give rise to inconsistencies over time, when searching data for the same fiscal years or when reviewing and checking results achieved years later. The lack of contemporaneous data is a problem when a crisis, such as COVID-19, arises forcing an immediate review of the TP policy of the group to align it with the reality of the business in difficult times. Questions may include whether any point in the range is valid or whether the median is to be used, whether pan-European data are as good as national data, and so on. Maintaining good TP documentation is essential to avoiding further enquiries and facing tax adjustment-related penalties.
Gaspar: The first challenge multinationals may encounter in Brazil when doing TP is the gap between local TP regulation and the OECD’s guidelines. A lack of certainty when applying local methods can also lead to added difficulty as a result of the limited jurisprudence from rulings issued by the RFB and the courts. Most multinationals these days aim to be compliant, despite the challenges. Designing transactions and business models with TP in mind from the start can prove effective in many instances and should help companies to maximise compliance while sustaining a good reputation.
Caja: The mere presence of tax efficiencies can and often will lead to challenges by tax authorities, whether warranted or not. The immediate challenge is developing substantive and contemporaneous documentation that clearly supports the value that creates the results. Understanding the value chain in an organisation is a must. Developing the substantive documentation around the value chain will create the transparency tax authorities hope to see and is just good compliance practice.
Starkov: In the current climate, many multinationals prioritise tax transparency and good compliance practices over the perceived tax efficiency of alternative arrangements, although consideration of the latter is never off the table. To achieve the balance between good compliance practices and tax efficiency, tax planning should be viewed holistically, including not only the tax benefits, but also consideration of the costs of implementing, maintaining and defending the chosen transaction structure. The aim of such an approach is a tax structure that will be defensible in multiple jurisdictions and with a reasonably high certainty of a positive outcome for the taxpayer. The analytical framework that aids in developing such tax structures is called the value chain analysis.
de Homont: The main focus of most taxpayers has been to avoid or prevail in disputes, especially when they would result in double taxation. While not necessarily focused on tax efficiency, TP disputes can easily result in large cash tax payments and their increasing number does somewhat shift the focus, at least in Europe. From this perspective, for most taxpayers the main issue is less to walk a line between tax compliance and tax efficiency, but rather to navigate an unclear landscape of evolving interpretation and tax authorities trying to retain more income locally. That said, valuation of intangibles typically poses difficult trade-offs between tax compliance, tax efficiency and practicality. When intellectual property (IP) or other intangibles are transferred, the value can be highly uncertain and the tax treatment quite different. Taxpayers simply face the challenge of producing a robust, sensible yet practical valuation.
Odimma: Some of the challenges facing multinationals in the effort to balance tax efficiencies with compliance requirements include the difference between the law and practice in different jurisdictions. Ambiguous tax laws present a huge challenge for companies on how to proceed with meeting their compliance requirements. In some cases, the tax authorities have a clear understanding of what they intend to achieve, but they are poorly reflected in the tax laws. This impacts the ability of multinationals to effectively comply with statutory obligations. Further, there is an aggressive drive from tax authorities as a result of unreasonable revenue targets handed down from governments, which tends to impact the concept of equity and fairness in their approach to tax audits.
“When a dispute cannot be resolved within an audit, taxpayers principally have two options: national court proceedings or arbitration procedures.”
FW: In what ways have recent developments impacted the way organisations go about implementing their tax planning strategies?
Odimma: Organisations are now aiming to retain global tax firms and access TP software to track legislative developments across different countries to ensure they do not miss deadlines. Most organisations are increasingly adopting tax technology to help with quality data recovery to ensure audit readiness. Organisations have also leveraged technology to manage the end-to-end cycle from accounting entries to tax computations.
Gaspar: Brazil is part of the G20 and, as such, has been involved in OECD debates for a long time. While Brazil has adopted some of the G20’s recommendations to the extent they are compatible with the fixed margins model, including mutual agreement procedures (MAP), it is not yet clear whether full alignment with the OECD’s guidelines will be achieved. The way the system is currently designed, based on fixed margins, themes like risks and functions are not as relevant as they are in an OECD framework. Similarly, intangibles are challenging to deal with under a fixed margins approach. Different TP methodology across countries can materially increase the risk of double taxation. Convergence into a single system is desirable and could lead to more countries abiding by the same set of rules, although TP is naturally a subject prone to difference in interpretation among taxpayers and tax authorities, including between tax authorities in different jurisdictions. Hence, focusing on well-functioning dispute resolution is also key to dealing with this challenge. The joint project with the OECD has culminated in a preliminary recommendation that Brazil would have to let go much of its current model in order to align with OECD guidelines, since both could not coexist. This conclusion sparked a strong reaction from some of the most prominent TP scholars in Brazil, who published a manifest defending a possible compromise in applying both methods. The outcome of the joint RFB/OECD assessment was published about a year ago, highlighting the objective of future efforts to implement a modern, simple and efficient system aligned with the OECD standard. This refreshed system would retain simplicity while allowing a proper taxable basis for the parties concerned and avoid double taxation. To that effect, different paths have been identified and explored in detail, from full alignment, immediate or partial, to partial alignment, although the latter has been dismissed as a viable option.
Caja: Recent developments have or will lead organisations to re-evaluate their corporate structures moving forward. The simplification of the legal structure is one fallout as holding companies will be less likely to survive, given their negative connotation in today’s world. The appearance of a tax-driven structure can lead to unwanted scrutiny by tax authorities and the CbCR rules will make it easy to identify those structures. I also see an increase in the use of external advisers and internal professionals whose focus is on developing and documenting TP policies that can be defended across multiple jurisdictions.
Starkov: In our experience, in recent years, taxpayers began paying close attention to whether the allocation of profits to specific entities or jurisdictions is supportable by the functional and risk profiles of those entities. In the pre-BEPS world, the allocation of profits often hinged on contractual arrangements and legal rights to valuable intangibles allocated among the entities of the group in the most tax efficient way. Such allocation principles may no longer be defensible post-BEPS. What justifies the allocation of entrepreneurial profit now, in the eyes of most tax authorities, is the contribution toward the DEMPE, which is supported by functions, risks and assets vested in the respective legal entities. Examination of value drivers within multinational groups, which is linked to the DEMPE concept, may reveal that the geographical footprint of these value drivers is quite different from the notional IP ownership in the group. In such a case, a realignment of contractual intangibles ownership and the relevant parts of the TP system may be in order.
de Homont: The main objective is to reduce tax risks and wind down legacy structures without causing too much disruption. This is, however, a challenging exercise, as straight out reversal of past structures can lead to questions on exit taxation for entities that were previously labelled as ‘principals’. Additionally, since the new OECD guidelines are not considered new regulations, but rather a refined interpretation, they are often also applied to past years. This means that changing structures to adapt can increase the risk for previous years. Taxpayers should therefore carefully identify the economic reasons associated with any change.
Gracia: Since the publication of the ‘OECD Transfer Pricing Guidance on Financial Transactions’, the Spanish tax administration has tackled at least three types of related financial transactions: cash pooling, debt issues and shareholder loans. Regarding the first two, rejecting the notion that cash pool leaders and debt issuers are financial entities and consequently that their arm’s length remuneration should be a financial spread over the amounts lent or on-lent, but rather low value-adding service companies, their remuneration should be based on a cost plus-like methodology. In the case of shareholder loans, these should be recharacterised into equity instruments. This means that organisations must be much more careful than before about the allocation of functions and risks between related entities when carrying out these financial transactions, to prevent them from being recharacterised after review by tax authorities.
“The appearance of a tax-driven structure can lead to unwanted scrutiny by tax authorities and the CbCR rules will make it easy to identify those structures.”
FW: Have you seen a noticeable increase in transfer pricing disputes between companies and tax authorities in recent times? What options are available to resolve such disputes as efficiently as possible?
de Homont: European tax authorities have been investing heavily in their TP capabilities and in most countries large multinational enterprises (MNEs) are regularly and typically audited in more depth than they were just a few years ago. Moreover, tax authorities have been emboldened by the BEPS project and challenge structures they find objectionable. So, overall, European tax authorities have become much more assertive when it comes to TP. Conversely, many taxpayers were forced to substantially expand the detalisation of their TP documentation – a process that required time and funds. When these taxpayers now find themselves challenged with relatively shallow arguments by tax authorities, they can be considerably more confident than they were in the past – and consequently show a greater willingness to stand their ground instead of going for a half-baked compromise. When a dispute cannot be resolved within an audit, taxpayers principally have two options: national court proceedings or arbitration procedures. In Europe, the latter do force tax authorities to resolve any double taxation. However, the taxpayer is not party to this, so there is little control over the outcome. Tax authorities are also chronically understaffed in this area, so this process takes quite some time.
Caja: I am seeing a slight uptick in TP inquiries and have experienced two TP focused audits in recent years. This is certainly a developing trend for us, as many of our non-US operations have not been profitable for a number of years. The best option is having contemporaneous documentation available from the start. If this is not accepted, the use of advisers to expand on the information provided to further support your position is an option as well. Finally, if the issue is significant enough, litigation is an option that has to be kept on the table. One option that might prevent a dispute in the first place is the use of an advanced pricing agreement (APA), but they can be expensive and burdensome to maintain.
Starkov: In 2020, many controversial proceedings have been put on hold or had a very slow pace of progress, for obvious reasons. That said, TP audits and litigation were on the rise before the pandemic and I would expect this trend to continue after the pandemic subsides. There are several reasons for this, including the fact that CbCR reporting laws made multinationals ‘open their books’ to tax authorities in many jurisdictions where such disclosures were not common in the past. Moreover, the impact of the COVID-19 pandemic, when many governments made large outlays of public funds to implement emergency mitigation measures, created substantial budget deficits which governments may be expected to alleviate by raising revenues from corporate taxpayers. Taxpayers have several options at their disposal to deal with TP controversies. The first line of defence is TP documentation that is comprehensive and well-grounded in facts. APAs present another viable option to achieve a measure of tax certainty, although the advantage of an APA has to be weighed against the substantial compliance burden that comes with it. In situations when a tax audit cannot be resolved using principled negotiations, litigation against the tax authority may be a viable option. In addition, arbitration proceedings may be available to taxpayers in certain jurisdictions.
Odimma: The fall in oil prices and the COVID-19 pandemic have seen countries in Africa turning to TP audits to generate revenue to make up any shortfalls. Furthermore, the relationships between African tax authorities and many multinationals have continued to deteriorate over the years, with tax authorities alleging that multinationals are shifting profits. This has led to a steep increase in TP disputes across Africa. To help manage these trust issues, tax transparency reporting has become increasingly important, enabling multinationals to tell their side of the story, particularly with respect to the amount of tax paid, as well as the levels of employment and value created in the relevant countries. Companies are also encouraged to carry out a self-health check to ensure their TP polices align with practices used in their respective subsidiaries. Some multinationals have intelligently written TP policies which are not a representation of what happens in their subsidiaries. Developing a culture of proactive review of TP risk on business operations is an excellent antidote to unexpected adjustments. Furthermore, the importance of having a good tax advisory firm as a partner for the dispute resolution process cannot be overemphasised, as local knowledge is a key aspect.
Gracia: In Spain, tax litigation is at a record level due to the tax collection needs of the authorities, the higher annual tax collection goals set by the Spanish tax authority to reduce the public deficit, and the salary incentives that tax auditors earn based on the amounts reassessed, even if those are then challenged in the courts and even if they lose the case in the courts. Notably, there are now many more TP disputes and we are beginning to see rulings from national courts at the highest levels that address very specific TP issues that were unthinkable in previous years. One of the reactions to this phenomenon has been an increase in the number of requests for APAs with the Spanish tax authorities, most of them bilateral and not unilateral as before, and also for MAP and arbitration procedures to try to avoid going to court. The situation has improved following the adoption of Directive 2017/1852, of 10 October 2017, on tax dispute resolution mechanisms in the EU, although it is regrettable that Brexit has caused the UK to fall outside the scope of the Arbitration Convention and this directive for submissions made from 1 January 2021.
Gaspar: TP 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 details about TP administrative court decisions, or will find out about them many years later. Together with TP being a strategic audit item and one where interpretation may vary, this likely points to an increase in audits. MAP has recently been brought into force in Brazil, which has been greatly welcomed by scholars. How it will develop in practice, however, remains to be seen.
“The fall in oil prices and the COVID-19 pandemic have seen countries in Africa turning to TP audits to generate revenue to make up any shortfalls.”
FW: If a company finds itself subject to a tax audit or investigation, what advice would you offer on how it should respond?
Caja: Make sure you have contemporaneous documentation that makes sense, supports what you have reported and can be provided on a timely basis. Engage your TP experts immediately – in-house or external consultants – and make every effort to respond to any inquiries with their assistance. Provide the information requested – do not over or under provide. Have confidence when discussing the information being provided. Understand the auditor’s perspective, and what gave rise to their inquiry. As a courtesy and to avoid miscommunication, consider whether or not the reports being provided can be provided in the local language, if possible.
Gaspar: When it comes to audit, the best position for the taxpayer is to have prepared in advance. Having a strong internal process to analyse transactions in advance, doing thorough work to ensure the chosen method fits adequately within the legal framework, and keeping documentation up-to-date and 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, covering costs, documents and so on. Also, in-house TP experts can prove fruitful to the extent that regulation has to be taken into account when designing businesses and transactions to ensure compliance. On the reputation side, being transparent about tax affairs has grown from a luxury to an imperative necessary to sustain a societal licence to operate.
Starkov: Following best practices for preparation of local TP documentation is one of the best ways to be prepared for a tax audit. In addition, when an audit starts, a company needs to make a decision as to what positions it will be reasonably expected to defend, and based on this assessment, take stock of the resources available to support these positions. Some of these resources may be internal – employees of the tax group and, perhaps, certain operational employees as well – while, at the same time, certain other resources will likely have to be sourced externally, such as tax experts, economists and attorneys. It is critical to identify external resources with expertise in the relevant subject matter and with experience handling similar disputes.
de Homont: Taxpayers must be aware that giving in to the demands of tax authorities is an irreversible process, most of the time. The compromise reached in a given tax audit will form the baseline position of tax authorities in the next audit cycle. Thus, taxpayers should base their audit strategy on their long-term TP and business objectives. If taxpayers have made a serious effort to reach an arm’s length result in their transactions, they would be wise to hold on to this position or else they will risk being confronted by repeated arbitrary assessments. When taxpayers do decide to fight an assessment, they should take care to structure their defence in a way that would ultimately prevail in court – even if they do not have the intention to initiate court proceedings – as a well-prepared case will strengthen the bargaining position vis-à-vis the auditor. In order to increase the chances of winning in court, we have found it beneficial to provide the full economic context of a transaction. Instead of describing just the functions, risks and assets of the entity in question, show the role of this entity in the entire value chain context.
Gracia: Companies should get a good tax lawyer – preferably one independent from the TP adviser, although a good degree of collaboration between the two is essential – to set the defence strategy from the outset and make the required TP documentation available to the tax administration. In Spain, it is compulsory to have available 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 the prior fiscal year. With some notable exceptions, courts are generally siding with the tax authority’s approach when the discussion deals with the methodology in a TP controversy, even if the proposal by the tax authorities is somewhat flawed, due to the courts’ lack of knowledge of economic concepts and their current bias toward the tax authority’s stance on the fight against aggressive tax practices. Because of this problem, the courts tend to align themselves with the tax administration, which is why alternative dispute resolution mechanisms, where the discussion is led by TP experts, are of interest.
Odimma: A company under audit or investigation should be transparent and explain its internal processes properly. The company should also ensure there is proper documentation to support all its related-party transactions. It is always a good idea to engage an experienced tax adviser or TP expert to provide support during the tax audit and investigation.
“We are beginning to see rulings from national courts at the highest levels that address very specific TP issues that were unthinkable in previous years.”
FW: How important is it for companies to regularly review and update their transfer pricing processes? What considerations should they make when doing so?
Starkov: No business remains static over time. Rather, all businesses are in a state of permanent evolution that impacts business processes and transaction flows. TP methods and the systems designed to implement them only capture the underlying business processes with a high degree of approximation. Because of this abstraction from microeconomic realities, TP methods, once established, may work reasonably well for a period of time. However, they may have to be reconsidered when significant events happen or when the changes gradually accumulated over time make existing TP methods inadequate. ‘Big events’, such as acquisitions, dispositions and geographical expansion, will be easy to track, and each of these events has to be examined carefully to identify its effect on transfer prices. It is much harder to spot the moment when the cumulative effect of ‘small events’ may merit a TP change. To keep pace with such ‘small events’, TP practitioners have to be keenly aware of the management decisions made within the group and familiarise themselves with the operations of each of the group’s entities.
de Homont: The main drivers of substantial updates to intercompany agreements should be changes in the business, be it restructurings or significant external changes. In addition, taxpayers should be mindful of the changing regulatory landscape and ensure their TP models are up to date in that respect. The DEMPE concept in particular has far-reaching consequences for setting up intangible licensing arrangements or where local entities with some significant activities are still categorised as ‘routine’.
Caja: It is critical that TP reviews are done annually at a minimum. Adjustments will change even if the methodology remains consistent, so when reviewing TP adjustments, it is important to ascertain whether the underlying business has gone through any changes. Acquisitions, disposals, and large-scale restructurings are obvious events that will generate a need to review TP policies related to impacted entities. However, many unannounced or subtle changes in the value chain occur every year. It is important to have consistent communication with leadership in order to ascertain that TP documentation remains grounded in fact.
Gracia: A review of functional and economic analyses every three years, to keep them updated and aligned to reality, is essential and the best practice accepted by all tax authorities. We would advise that the value chain is always supported by the economic substance necessary to obtain that added value. In other words, it is important that in each of the jurisdictions in which multinational groups operate, there is alignment between the added value that is generated and the functions, risks and assets, both tangible and intangible, which have been attributed to the companies generating the added value. This may be especially important in times of crisis, such as the COVID-19 pandemic.
Odimma: The importance of regularly reviewing TP processes can be likened to cost leadership polices adopted by organisations. A policy is useless as a strategy if it is not properly executed. As such, a proactive review of a company’s TP processes will ensure proper diagnosis of possible exposure areas, which will afford the company the opportunity to rectify them before an audit. In most countries, especially in Africa, companies enjoy some savings if identified control lapses are rectified before an audit.
Gaspar: A thorough internal process with roles and responsibilities is highly advisable in the TP space. Further, clear, public tax strategy narrative and principles can be helpful on the transparency and reputation side. Scrutiny from tax authorities and the general public are likely to continue to increase, especially as countries seek a path to recovery from the impacts of the pandemic. The next couple of years are going to be hugely exciting in the TP space. From the outcomes of the ‘Tax challenges arising from digitalisation’ economic impact assessment to the potential overhaul of TP in Brazil, practitioners will not have a dull moment. Still, those are two ambitious goals and whether – and when – they will be brought to life, remains to be seen. International tax principles as we know may change and, likely, we will all need to adapt.
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 in tax dispute resolution matters. He can be contacted on +34 91 364 9854 or by email: eduardo.gracia@ashurst.com.
Sebastine Odimma is responsible for tax dispute and resolution for Maersk companies within Sub-Saharan and Africa. In this role he supervises the company strategy and approach to tax dispute resolution across entities in Africa. Prior to this, he was responsible for the tax affairs of more than 40 Maersk companies within 20 countries in West and Central Africa. He can be contacted on +23 48 18793 9272 or by email: sebastine.odimma@maersk.com.
Paul R. Caja has over 30 years of tax experience, with the most recent serving as vice president of taxes at MTD Products. In this role, he is responsible for the oversight of the worldwide tax function of the company. These responsibilities encompass all tax compliance, including transfer pricing, financial reporting and tax strategy and development. He can be contacted on +1 (330) 558 3304 or by email: paul.caja@mtdproducts.com.
Philip de Homont is a Frankfurt-based expert in transfer pricing and intellectual property valuation. He specialises in transfer pricing litigation support for international corporations and law firms. Mr de Homont has extensive experience in defending licencing and valuation arrangements for intangibles. He can be contacted on +49 (69) 710 447 502 or by email: philip.de.homont@nera.com.
Dr Vladimir Starkov is a Chicago-based economist and testifying expert specialising in transfer pricing and asset valuation. He has provided consulting services for multinationals, tax authorities, attorneys and others for engagements on tax controversy proceedings, as well as negotiation and implementation support for multilateral, bilateral and unilateral advance pricing agreements with tax authorities. He can be contacted on +1 (312) 573 2806 or by email: vladimir.starkov@nera.com.
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 books and lectured on tax subjects in distinguished publications and forums worldwide. He can be contacted by email: fabio.gaspar@shell.com.
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