Financier Worldwide Roundtable: Transfer Pricing
Clark Armitage offers his insights in Roundtable: Transfer Pricing for the February 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 provide an overview of the main trends currently shaping the transfer pricing environment?
Armitage: The US global intangible low-taxed income (GILTI) rules changed the landscape of international taxation. Eventually, all countries likely will have some GILTI analogue, only stronger. Corporate income tax rates likely will increase because GILTI-like taxes raise the rate floor. In addition, developed countries face enormous debt burdens and likely will remain aggressive in transfer pricing (TP) enforcement. While a minimum tax can materially reduce the benefits of ‘tax-haven’ TP, higher corporate rates and aggressive enforcement increase the need for effective dispute resolution and the motivation for seeking it. These trends are likely to deepen over the next decade.
Q: In your opinion, have the changes made to tax regulatory frameworks helped multinationals to understand their potential transfer pricing liabilities?
Armitage: In addition to GILTI, two US developments have fundamentally altered how companies must approach US TP. The 2017 Tax Cuts and Jobs Act eliminated companies’ ability to move goodwill, going concern and workforce-in-place out of the US tax net in a tax advantaged way. Where companies might once have placed large residual values on those items, thus reducing values associated with other IP and operations, the incentive for distortion is now reduced. Similarly, the US ‘adoption’ of development, enhancement, maintenance, protection and exploitation (DEMPE) has narrowed the potential for material allocations of profits to ‘cash boxes’. These developments have freed companies to take and defend more middle-of-the-road approaches to valuing IP, which better positions them to rationalize their global TP and defend their positions on audit.
Q: What challenges face multinationals in their efforts to maximize tax efficiencies while meeting compliance requirements?
Armitage: A key challenge for multinationals is the aggressiveness of TP enforcement. A large majority of countries may have formally adopted the ‘OECD Transfer Pricing Guidelines’ or the ‘United Nations Practical Manual on Transfer Pricing for Developing Countries’, but some continue to take positions on audit that are out of synch with those rules and that sometimes lack a rules-based approach. A significant number of countries still set targets for additional tax collections from TP audits. Companies may be forced to negotiate special, non-arm’s length arrangements up front – a process at odds with the OECD and UN guidelines – or to endure long, costly and uncertain controversies. Mandatory binding arbitration, adopted through the OECD Pillars or bilateral treaties, could address some of these issues.