Clark Armitage Comments on DEMPE Functions in Law360

Law360 Tax Authority

Some authorities have misapplied international guidelines developed to separate legal and economic ownership when allocating profits made from exploiting intangible assets, transfer pricing specialists said Friday.

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DEMPE has no counterpart in U.S. transfer pricing rules, but several U.S. bilateral treaties have adopted the OECD approach — namely Canada, Japan, Germany, the U.K., Belgium, Bulgaria, Iceland, Switzerland, Luxembourg and Spain, according to Lange. However, DEMPE concepts have arguably crept into U.S. case law, most notably in the U.S. Tax Court's 2020 ruling that said the Internal Revenue Service could change The Coca-Cola Co.'s transfer pricing method, said Clark Armitage of Caplin & Drysdale, who spoke on the panel with Lange.

The Tax Court judge found that Coca-Cola's subsidiaries in Brazil did not engage in significant marketing activities, nor did they have a voice in selecting the services for which they were made financially responsible, according to Armitage.

"In other words, they didn't have a DEMPE function," he said. "Maybe you didn't need DEMPE to get to that conclusion," he said, but the judge who issued that opinion "sort of teed up the ability of maybe IRS auditors looking at that language to draw conclusions about its relevance to their audit."

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