Financier Worldwide Annual Review: Transfer Pricing 2021 – United States
Excerpt taken from the report.
Q. 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?
Stevens: One major recent development is the US’s return to a leading role in negotiations on the Organisation for Economic Co-operation and Development’s (OECD’s) Pillars One and Two. These initiatives would largely affect US companies and would subject a slice of global profits to formulary apportionment rather than the arm’s length principle, as well as implementing a global minimum tax. The Biden administration has offered novel proposals for resolving certain key issues and achieved agreement among the G7 countries on core elements of the overall package, greatly improving the outlook for multilateral consensus in 2021. A second development affecting transfer pricing planning is the Tax Court’s ruling for the Internal Revenue Service (IRS) in Coca-Cola. Among other significant holdings, the Court ruled that an affiliate cross-charged for marketing expenses was not entitled to an entrepreneurial return from any resulting marketing intangibles where it did not have legal or contractual rights in the intangibles or perform development, enhancement, maintenance, protection and exploitation (DEMPE) functions, although the Court did not rely explicitly on the OECD’s DEMPE principles. The Court also held that contractual terms delimit a taxpayer’s functional analysis; the IRS can assert that the substance of a transaction trumps the arrangements described in intercompany contracts, but the taxpayer is stuck with its form.
Q. To what extent are the tax authorities in your country of focus placing greater importance on the issue of transfer pricing? Have they increased their monitoring and enforcement activities?
Stevens: The IRS has sought to increase the efficiency and effectiveness of its monitoring and enforcement activities rather than their absolute scope or intensity. An IRS national office function with independent decision making and timelines – the Transfer Pricing Practice (TPP) – now controls transfer pricing issues in audits. The Transfer Pricing Examination Process document, updated most recently in October 2020, further promotes consistency and sets taxpayer expectations. The generally high experience level of TPP employees, together with the agency’s broader shift to a risk assessment approach, has tended to ensure a pragmatic focus in US transfer pricing audits in recent years.
Q. Could you outline the challenges that companies face 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?
Stevens: Our view is that tax efficiency and transfer pricing compliance are complementary. Transfer pricing regulations look to arm’s length parties’ behaviour and so are inherently flexible, and US law affords taxpayers considerable latitude to select the most tax efficient among available structures. Compliance does not ensure avoidance of controversy. In-house transfer pricing professionals should be prepared to explain to audit teams the business and technical rationale for a position perceived as aggressive. As with all tax authority interactions, a coherent, compelling and accurate story, told consistently around the globe, is essential.