May 31, 2024

Adventures In Transfer Pricing – Practical Experience In Germany

May 31, 2024/ Ruchelman P.L.L.C.

For many years, German tax authorities suspected that M.N.C.’s transfer pricing policies were not in line with the arm’s length principle. Consequently, it comes as no surprise that Germany spearheaded international regulatory developments related to the arm’s length standard. International M.N.C.’s face ever increasing tax controversies in matters related to transfer pricing. In some cases, T.N.M.M. benchmarking is challenged under the view that a German sales entity makes intangible-related D.E.M.P.E. contributions in the field of marketing. In other cases ,C.U.T. benchmarking for intercompany license fees is challenged on grounds that the intangible property licensed to a German affiliate is unique by definition, thereby leading to a profit split. Restructures are attacked using inflated values for routine activities that remain in Germany. However, all is not bleak. In three case studies, Dr. Yves Herve, a Senior Managing Director in the Frankfurt Office of NERA and Philip de Homont, MSc, a Managing Director in the Frankfurt Office of NERA, illustrate in “plain language” the ways by which in-depth economic analysis has been used to overcome aggressive assertions by tax examiners.

December 03, 2023

Entering a New Dimension – O.E.C.D. Transfer Pricing Guidance as Hard Tax Law

December 03, 2023/ Ruchelman P.L.L.C.

Except for the U.S., transfer pricing law frequently includes a provision that references the O.E.C.D. T.P. Guidelines as the guidance that must be used to interpret other provisions of relevant law. Nonetheless, national tax administrations publish their own interpretive guides to the O.E.C.D. T.P. Guidelines, thereby adding to a body of administrative guidance that can vary from country to country. The European Commission has recently proposed a Council Directive on transfer pricing released as part of the Business in Europe: Framework for Income Taxation (“B.E.F.I.T.”). The Directive proposes to codify the arm’s length principle and elements of its interpretation from the O.E.C.D. T.P. Guidelines. This elevates the O.E.C.D. T.P. Guidelines into E.U. law, thereby making them more than an arm’s length principle interpretive standard. It does so with several subtle and not-so-subtle variations. Michael Peggs and Michael Bennett caution that making soft law into hard law impairs the ability of tax administrations to compromise on points of controversy.

September 29, 2022

Medtronic Part Deux: The Best Method Is Yet To Come?

September 29, 2022/ Ruchelman P.L.L.C.

Bad blood exists between the I.R.S. and Medtronic Inc. when it comes to transfer pricing matters. Regarding the tax years 2005 and 2006, the I.R.S. challenged a transfer pricing methodology it approved in an M.O.U. settlement with Medtronic involving the same transactions and issues in the context of an earlier year. The I.R.S. lost in an earlier case, appealed to the 8th Circuit Court of Appeals, which sent the matter back to the Tax Court to address several factual issues. In a recent decision, the Tax Court modified its earlier finding by adjusting the comparable uncontrolled transaction (“C.U.T.”) in a subjective way to obtain a result that seemed to be fair in the view of the court. Michael Peggs suggests that the second trial did not produce practical guidance that was any better than the very limited guidance in the original decision.

January 30, 2022

Goodwill and Mister Donut – A Going Concern?

January 30, 2022/ Ruchelman P.L.L.C.

· A sale of a business often involves an element of goodwill, a term that can have different meanings in different contexts, depending on whether the term relates to (i) purchase price allocations for financial statement purposes or income tax purposes or (ii) attempting to compute the source of income for foreign tax credit purposes. Compounding the definitional inconsistency, the meaning of the term has changed over time. In a 25-year old case, the overseas Mister Donut franchising business was sold to a foreign buyer in an asset-sale transaction. Although only intimated in the case, the taxpayer likely had significant amounts of deferred assets on its balance sheet arising from unused foreign tax credits. Because the seller was a U.S. company, gain from the sale of business generally results in the generation of domestic source income. Under the law in effect at the time, goodwill was sourced where business was carried on. Was that provision the key to access deferred foreign tax credits? The U.S. Tax Court said no. Sometimes, goodwill is not goodwill for foreign tax credit planning purposes. Michael Peggs and Wooyoung Lee look at the court’s reasoning and comment on certain contemporary aspects of the decision in light of provisions in the Tax Cuts and Jobs Act and several I.R.S. pronouncements on goodwill.

November 29, 2021

The "Value Creation" Question has Escaped the New Pillar 1 Mousetrap

November 29, 2021/ Ruchelman P.L.L.C.

In every decade, a phrase or a term pops up that is widely used, although its meaning may vary from person to person. Examples in past decades include “groovy,” “viral,” “neat,” and “heavy.” In his article, Michael Peggs identifies “value creation” as a phrase that has gone “viral” among the O.E.C.D., the G-20, and tax authorities. The “neat” aspect is that, over the centuries, the term has meant different things to different commentators. Nonetheless, it remains the central foundational feature of controlling policy for global policy wonks. It could mean that while everyone appears to be marching in unison, they are really marching in different directions, much to the chagrin of multinational enterprises. “Heavy!”

September 27, 2021

The Cameco and Glencore Transfer Pricing Cases – Comments on the Common Complications in Commodities Commerce Controversy

September 27, 2021/ Ruchelman P.L.L.C.

Two transfer pricing cases, Commissioner of Taxation of the Commonwealth of Australia v Glencore Investment Pty Ltd. in Australia and Cameco Corporation v. Her Majesty The Queen in Canada, address arm’s length transfer pricing methodology for mined minerals during a period of steep increases in spot prices. In each case, the revenue authority challenged the taxpayer’s revision of pricing from the use of fixed prices to adjusted prices that were comparable in methodology to contemporaneous uncontrolled transactions. Each case was decided in favor of the taxpayer. Michael Peggs explains the reasons why the approaches of the tax authorities were rejected. He cautions that the precedential value of the cases may be limited in light of changes made in the 2017 version of the O.E.C.D. Guidelines. One ongoing takeaway from the two cases is that, to settle a transfer pricing dispute, a large multinational company must be prepared to make significant investments in data gathering, executive, time, and cost of litigation.

May 27, 2021

New Italian Transfer Pricing Regulations Affect Multinational Enterprises

May 27, 2021/ Ruchelman P.L.L.C.

Italian transfer pricing documentation rules were introduced in 2010. The system affords taxpayers the possibility of penalty protection for transfer pricing adjustments, provided that qualifying transfer pricing documentation is maintained by the taxpayer. Late in 2020, new regulations were introduced. The new regulations contain several important changes for multinational enterprises based in Italy or having an Italian member. Marco Valdonio, a partner of Maisto e Associati, Milan, and Mirko Severi, an associate of Maisto e Associati, Milan, explain the principal revisions to the Italian rules. They address the changes that broaden the scope of companies required to maintain a master file, reductions in the scope of the exception to annual filing for certain local members of a foreign-based multinational group, and changes to the content of both the master file and the local file.

January 24, 2021

Form or Fizz? Coca-Cola Transfer Pricing Decision

January 24, 2021/ Ruchelman P.L.L.C.

In Coca-Cola Co. & Subsidiaries v. Commr., the taxpayer learned an important lesson for multinational groups using a residual profit split method to determine intercompany transfer prices. The factual underpinning of a residual profit split is critical to method selection, best method analysis, and selection of a reliable split metric when applying the method. In the case, the taxpayer relied on a favorable resolution of transfer pricing issues in an examination of earlier years and failed to confirm the continued existence of favorable facts. Michael Peggs explains all. Resolution of an examination does not provide the same certainty as an advance pricing agreement.

November 25, 2020

Wait No Longer, the Other Shoe Won’t Drop in Denmark

November 25, 2020/ Ruchelman P.L.L.C.

It seems in the world of transfer pricing litigation, a pattern of mutual expectations has emerged. Companies expect tax authorities to take revenue-maximizing positions and expect courts see the issue more clearly and vacate or substantially vary the assessment of the tax authority. At the same time, tax authorities expect that courts will uphold audit findings of material transfer pricing income adjustments using methods and data overlooked or ignored by companies. In October, the Danish Tax Agency received a decision from the Western High Court concerning an appeal originating from a transfer pricing audit commenced in 2006. Michael Peggs explains the reasons for the 14-year marathon and ponders whether transfer pricing norms in a post-B.E.P.S. world will put an end to this type of examination.

September 28, 2020

The Do's and Don'ts of I.R.S. Transfer Pricing Storytime

September 28, 2020/ Ruchelman P.L.L.C.

Earlier this year, the I.R.S. updated its Transfer Pricing Documentation Best Practices F.A.Q. list with a response to Q. 4. What are some areas the I.R.S. has identified in transfer pricing documentation reports that could benefit from improvement? It seemed to be a reaction to two events on the global tax stage. First, the I.R.S. regularly encounters too many suboptimal reports that provide unreliable data leading to a prolonged examination. Second, recent activity in the European Union and the O.E.C.D. suggest that U.S. taxpayers face claims of local value-creation by foreign tax authorities, resulting in increased foreign income allocations. Such allocations reduce the U.S. tax base. Michael Peggs discusses do’s and don’ts explained by the I.R.S., and the benefits that are obtained from a robust transfer pricing report, both within budget-related considerations of a global company.

March 20, 2020

O.E.C.D. to Use Hybrid Model to Develop Digital Economy Nexus and Profit Attribution Rules

March 20, 2020/ Ruchelman P.L.L.C.

The O.E.C.D. announced on January 31, 2020, that its policy development efforts under Pillar One, related to the taxation of the digital economy, will move forward using the non-consensus “Unified Approach” as a working model. The O.E.C.D.’s deadline for obtaining a consensus outcome is highly ambitious. Michael Peggs provides his views. Despite what people may think about when this effort should have begun, it is crucially important that it has begun at last and in an organized way.

January 24, 2020

O.E.C.D. Unified Approach Garners Less Unified Comments from Europe’s Tech Producers and Users

January 24, 2020/ Ruchelman P.L.L.C.

How does a group of experts comment on the indescribable in order to arrive at a consensus? Inconsistently is the answer. As the O.E.C.D. continues its work on the taxation of the digital economy, the O.E.C.D. Centre for Tax Policy and Administration received comments in advance of a public consultation in late November 2019. The public consultation heard input from interested parties on the policy development aspects of a "Unified Approach" to the determination of tax nexus and profit allocation rules relevant to customer-facing corporate participants in the digital economy. From the consultation, a "great divide" appears to exist on the Unified Approach. The policy interests are clearly inconsistent when looking at (i) tech haves v. have-nots and (ii) consumers v. producers. The broadly North-South partition that caused the demise of the E.U. Commission’s significant digital presence and D.S.T. directives continues to be argued in the larger forum of the O.E.C.D. Tech haves and producers appear to share a common view with U.S. tech firms. Michael Peggs explains the divide in quantitative terms and suggests that, with the exception of the U.K., the adage that looks to see "whose ox is being gored" is a useful tool in identifying those jurisdictions that support digital taxes and others that are opposed.

November 20, 2019

How Soon Is Now? The O.E.C.D. Starts Work on a Substitute for Unilateral Digital Economy Fixes

November 20, 2019/ Ruchelman P.L.L.C.

As of November 2019, the arm’s length principle continues to operate among the O.E.C.D. Member States. In a little more than a year, this may be different. The O.E.C.D.’s workplan for urgent policy development will investigate a new nexus standard that departs from the arm’s length principle applied for decades. In his article, Michael Peggs explains the current debate between tax administrations concerning the attribution of profit to digital or non-physical P.E.’s and the three popular approaches that have been proposed. The mood in the O.E.C.D. is that markets matter most under each of the suggested approaches. Brainpower and manufacturing prowess are less important.

June 28, 2019

Debt Characterization and Deductibility Under Domesticated International Rules

June 28, 2019/ Ruchelman P.L.L.C.

The limitation of interest deductibility to 30% of adjusted E.B.I.T.D.A. has focused the attention of U.S. corporations and their lenders on new constraints. How does a borrower demonstrate the capacity to carry and service debt, and how do related parties demonstrate that the rate of interest and other terms attaching to a cross-border loan are arm’s length? Michael Peggs and Stanley C. Ruchelman address these issues, explaining the three methods used to identify the boundary between debt and equity: (i) the qualitative approach of case law (I know it when a I see it, although I can’t agree to a uniform standard of application), (ii) the data-driven approach of comparative analysis (I know it when I can measure the effect, much like gravity), and (iii) the procedural approach for borrowers as set out in the Code §385 regulations which were in effect for a short period of time (I know it when I follow the recipe in the regulatory cookbook).

September 26, 2018

O.E.C.D. Discussion Draft on Financial Transactions – A Listing of Sins, Little Practical Guidance

September 26, 2018/ Ruchelman P.L.L.C.

In July, the O.E.C.D. Centre for Tax Policy and Administration released Public Discussion Draft on B.E.P.S. Actions 8-10: Financial transactions (the “Discussion Draft”) addressing financial transactions (e.g., loans, guarantees, cash pools, captive insurance, and hedging). Michael Peggs and Scott R. Robson review the draft guidance and express disappointment. The Discussion Draft is not a thought leader, as tax authorities have successfully litigated the issues inherent in intercompany loans. Decided cases generally reflect a “not in my back yard” approach to deductions for interest expense. The Discussion Draft makes statements regarding allocation of risks in financial transactions that are inconsistent with arm’s length evidence. It also promotes decisions based on 20-20 hindsight. All these lead to several unanswered questions: What is the ultimate meaning of the term “arm’s length” when used in a cross-border financial transaction? Is it the terms and conditions that exist in actuality among lenders and borrowers, or is it the terms and conditions that should exist in the mindset of the tax authorities?

July 30, 2018

Joint Audits: A New Tool for Cross-Border Tax Evasion

July 30, 2018/ Ruchelman P.L.L.C.

When a large corporate taxpayer receives an audit notification letter from the tax authority in its country of residence, the taxpayer typically knows what to expect: a lengthy process of documenting and defending its tax position. It also knows the process under domestic law for appealing adverse tax adjustments, and if cross-border issues are raised, it knows how to take advantage of Mutual Agreement Procedures between competent authorities under an income tax treaty. The full process can take years to resolve. Now, however, a pilot program between German and Italian tax authorities empowers a joint cross-border audit team to conduct a single joint audit of cross-border operations between the two countries. The joint audit is intended to be more effective for resolving issues of double taxation in cases involving complex facts related to (i) transfer pricing issues, (ii) residency or permanent establishment issues, and (iii) aggressive tax planning schemes. Marco Orlandi of Ludovici Piccone & Partners, Milan, examines the actual process followed in the pilot program and comments on whether the goals of the joint audit have been achieved.

June 14, 2018

Managing a Transfer Pricing Exam? Wash Your Hands with Soap and Water

June 14, 2018/ Ruchelman P.L.L.C.

For management of a U.S. subsidiary of a foreign parent, the process by which the I.R.S. conducts an examination of a tax return creates a heightened stress level. It begins with the arrival of an information document request ("I.D.R.") for transfer pricing documentation, which often comes as a surprise to a company. Typically, two or three years have passed since the close of the year under examination and little is recalled about transactions. From there, the expressed positions of I.R.S. examiners and management often are at odds. Drawing on many years of experience in defending intercompany transfer pricing policies, Michael Peggs takes a step back from the fray to examine how opposing, pre-conceived notions on both sides combine with the Semmelweis Reflex to exacerbate what should be a straightforward tax examination.

January 26, 2018

Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

January 26, 2018/ Ruchelman P.L.L.C.

The Large Business and International Division of the I.R.S. (“LB&I”) periodically develops international practice units (“I.P.U.’s”) that serve as training material for international examiners. In November 2017, an I.P.U. entitled “Common Ownership or Control Under IRC 482 – Inbound” was published. On the same date, the I.R.S. issued a sister I.P.U. for outbound transactions, “Common Ownership or Control Under IRC 482 – Outbound.” Together, they serve as a primer for determining whether sufficient control exists between two parties to bring the arm’s length transfer pricing rules of Code §482 into play. Stanley C. Ruchelman explains how the I.R.S. trains its examiners when determining whether a transfer pricing adjustment is appropriate.

September 20, 2017

Eaton A.P.A. Cancellations Were an Abuse of I.R.S. Discretion

September 20, 2017/ Ruchelman P.L.L.C.

A recent U.S. Tax Court decision involving Eaton Corporation affirmed that the I.R.S. cannot arbitrarily circumvent administrative rules that are set down in revenue procedures and relied upon by the I.R.S. and a taxpayer. As a result, the I.R.S. must reasonably exercise its discretion when seeking to terminate an advance pricing agreement with a taxpayer. Michael Peggs looks at the process of obtaining an advanced pricing agreement and comments on the court’s decision.