Financier Worldwide Indepth Feature: Transfer Pricing 2023
Clark Armitage and Elizabeth Stevens offer insights in Indepth Feature: Transfer Pricing for the May 2023 issue of Financier Worldwide Magazine. To access the full roundtable article, please visit Financier Worldwide's website or click on the PDF in the Related Materials below.
Excerpt taken from the article.
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 organizations go about implementing their tax planning strategies?
Armitage/Stevens: A key U.S. transfer pricing (TP) development is the publication of the 3M Tax Court decision. That decision, which was joined by the slimmest possible majority of Tax Court judges, found in favor of the Internal Revenue Service (IRS) in a Brazilian blocked income case. The court required the U.S. taxpayer to include in income arm’s length royalties from its Brazilian subsidiary rather than the lower maximum royalties permitted to be paid under Brazilian law. The decision stands for the proposition that TP trumps inconsistent foreign law. This can have both positive and negative implications for taxpayers, depending on the impact of the local law on the taxpayer’s global reporting position.
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?
Armitage/Stevens: For more than a decade, the IRS has focused closely on TP enforcement. In 2012, it created the Treaty and Transfer Pricing Operations office, which has authority over the competent authority process and, through its Transfer Pricing Practice (TPP) unit, issue control in TP audits. The TPP has 170 employees whose sole focus is identifying and making TP adjustments. The U.S. Inflation Reduction Act dedicated some $80bn to providing additional IRS resources. One focus of the increased budget is international enforcement. TP enforcement can be expected to grow.
Q. Could you outline the challenges that companies face as they try to maximize 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?
Armitage/Stevens: A significant and relatively new TP challenge is uncertainty in the law of TP. The OECD’s introduction of the development, enhancement, maintenance, protection and exploitation (DEMPE) concept has led countries to adopt varying views on what functions play key roles in developing intangibles. This has produced numerous controversies, including litigation in many countries, and challenges to achieving resolution in the competent authority process. Many companies, especially those whose residual profits are driven by something other than product patents, are hard-pressed to know how to predict what types of positions countries might take.