Managing uncertainty in transfer pricing: evolving methods and current state of APA play

Wednesday 17 May 2023

Session Chairs

Tomás Bailey, Matheson, Dublin

Elizabeth J Stevens, Caplin & Drysdale, Washington, DC


Markus Baur, IBM, Innsbruck

Mark van Casteren, Huygens, Amsterdam

Nikolaj Bjørnholm, Bjørnholm Law, Copenhagen

Lisandra Ortiz, Miller & Chevalier, Washington, DC

Nils Harbeke, Pestalozzi, Zürich

Marco Valdonio, Maisto e Associati, Milan


Anton Falkenberg, Hannes Snellman, Helsinki


The panel discussed the sources of uncertainty in transfer pricing and the tools available to taxpayers to address that uncertainty. The tools for managing uncertainty were divided into two categories: reactive tools and proactive tools. Regarding reactive tools, the panel discussed audit settlement, administrative appeal or litigation, and mutual agreement procedure (MAP) or arbitration. With proactive tools, the focus point was the advance pricing agreement (APA) procedure. The panel analysed the pros and cons of the different approaches and discussed what lies ahead for the APA landscape.

Tomás Bailey started the session by introducing the panellists. Elizabeth Stevens introduced the learning objectives for the session and the agenda for the panel discussion.

Drivers of uncertainty

The panel then discussed the transfer pricing (TP) trends that the panellists recognise in their respective jurisdictions. Mark van Casteren, Nikolaj Bjornholm and Marco Valdonio commented that the transfer pricing aspects of corporate restructuring have been in focus for tax authorities in the Netherlands, Denmark and Italy. Van Casteren also mentioned the challenges arising in connection with intragroup financing, especially with regard to determining credit ratings. Lisandra Ortiz commented that the United States (US) tax authority is seeking to develop new law via litigation.

The panel discussed new aspects of transfer pricing uncertainty arising from the Covid-19 pandemic. Nils Harbeke described how the pandemic has highlighted the issue of loss allocation, especially to what extent low risk entities can generate losses. Harbeke expects that these cases will end up in court in the future. Van Casteren noted that the pandemic has also impacted the comparability of margins of years before, during and after the pandemic, as well as benchmarking study results.

Tools for managing uncertainty

Bailey introduced the two categories of tools for managing uncertainty: reactive tools and proactive tools. Markus Baur then offered insight into the considerations that a taxpayer should take into account when deciding how to address a specific source of transfer pricing uncertainty. As a predicate point, the particulars of the risk need to be identified and understood. Aspects to consider include: the magnitude of the risk, whether there is a reputational risk involved, whether it is a one-time risk or a consistent risk associated with a certain business model, and whether and how the risk carries implications for other jurisdictions. The taxpayer’s available resources, and the resources likely to be needed to pursue different approaches, should also be taken into account. Taxpayers should also consider whether they have good working relationships with the relevant tax authorities. Baur concluded that, for the taxpayer, selecting among the tools for managing uncertainty is all about balancing risk management with the resources available.

Reactive tools

Under the umbrella of reactive tools, the panel first discussed audit settlements. Harbeke commented that the advantages of an audit settlement are that it is less formal and allows for an open dialogue. However, an audit settlement in one country might affect the transfer pricing model in other countries. Bjørnholm mentioned that alternative dispute resolution has been tested in Denmark and explained how in Denmark an outcome corresponding to a settlement is achieved through a demand for reassessment lodged by the taxpayer.

Next the panel discussed the issues to be considered when evaluating whether to pursue litigation. These include: will MAP have to be abandoned at some point, or is a dual track possible? Is the court handling the case specialised in tax law? Do the judges have the knowledge on economics to handle TP cases appropriately?

Valdonio then explained the issues to consider when making a decision to initiate a MAP. Firstly, the existence or non-existence of an arbitration clause is an important factor. Another important consideration is that it is possible that one of the countries involved denies the applicability of the MAP. There is also the risk of no agreement being reached due to the absence of an effective arbitration clause. Thirdly, the passage of time should also be considered, as even when double taxation is eliminated there is no protection against costs accrued from interest. Baur noted that a MAP is somewhat disconcerting to taxpayers as they are not in the room and do not know what is being discussed between the competent authorities handling their cases.

Proactive tools

Drawing upon Baur’s comment, the panel then pivoted from discussing proactive approaches to managing uncertainty that put the taxpayer ‘in the room,’ specifically, APAs.

Is an APA right for you?

Ortiz detailed the upfront considerations for pursuing an APA. The advantages of an APA are the forum in which an APA is negotiated likely may lead to a more favourable outcome because the people involved are often very familiar with TP questions. APA provides certainty on taxation and possible penalties. There might also be a carryover effect or a halo effect in other jurisdictions with similar transactions. The key downside is the upfront cost and resource commitment. There may be user fees, outside counsel fees and the necessary commitment of internal tax department resources and perhaps even commitment of other department resources. The cost of an APA should be weighed against the achieved certainty and potentially avoided tax costs. Bilateral or multilateral APAs are preferable, but unilateral APAs might sometimes be the only available option.

Van Casteren then analysed the scope issue: how specific can APAs be? He commented that if an APA goes beyond methodology and its application, and the critical assumptions include more specific conclusions, these conclusions are often based on unreliable predictions. Ortiz commented that in the US, the tax authority may insist that some additional transactions also be included in the APA.

APA developments

Ortiz then covered three recent US TP cases and explained their implications for the APA process and TP more generally. The first case, Eaton (Eaton Corp and Subsidiaries v CIR, No 21-2674 (6th Cir 2022)), concerned a dispute over the tax authority’s cancellation of two unilateral APAs. The taxpayer discovered that it had made some calculation errors. When the taxpayer informed the tax authority of these errors and corrected them, the tax authority cancelled the APA. The case eventually ended up in the US Sixth Circuit Court of Appeals, which reaffirmed that an APA is a contract and principles of contract law apply. The Court sided with the taxpayer and required the tax authority to show that it met some exception that allowed it to back out of the deal it had negotiated with the taxpayer.

The second case, Medtronic (Medtronic v Commissioner, (TC Memo 2022-84)), concerned a dispute over the most appropriate TP method. The taxpayer considered the best method to be the comparable uncontrolled transaction (CUT), whereas the tax authority considered the cost plus method (CPM) to be superior. In the end the US Tax Court adopted, with some adjustments, an unspecified multi-step method based on a method that had been presented by the taxpayer earlier in the process. Unspecified methods may be used in the APA context in the US and Ortiz noted that many commentators predict that the use of such methods will grow as a result of the decision.   

The third case, 3M (3M Co v Commissioner, 160 T.C. 3), concerned the validity of a TP regulation relied on by the tax authority to disregard Brazilian legal restrictions limiting the amount of royalties a Brazilian affiliate could legally pay to its US parent company. The US Tax Court held for the tax authority, but this decision can still be appealed.

Conclusion and final remarks

In their closing remarks the panel concluded that APAs will remain an important tool in the future, regardless of implementation efforts concerning Pillar One and Pillar Two of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).