Trends in transfer pricing (2023)

Rogério Bittencourt

Mattos Filho, Rio de Janeiro

rogerio.bittencourt@mattosfilho.com.br

Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London

Tuesday 17 January 2023

Session Chair

Richard Slowinski Alston & Bird, Washington, DC

Speakers

Annabelle Bailleul-Mirabaud CMS Francis Lefebvre, Neuilly-sur-Seine

Christian Wimpissinger Binder Grösswang, Vienna

Sven-Eric Bärsch Flick Gocke Schaumburg, Frankfurt

Nils Harbeke Pestalozzi, Zürich

Sarah Bond Freshfields Bruckhaus Deringer, London

Introduction

The panel was presented in a well-organised way, with presentations and clear explanations on interesting and current topics of transfer pricing practice. The topics covered included: advance pricing agreements (APAs) and mutual agreement procedure (MAP) practice trends and experience; Covid-19 and extraordinary events; transfer of functions across borders; International Compliance Assurance Programme (ICAP), European Trust and Cooperation Approach (ETACA) and tax rulings; intercompany financing: HMRC v BlackRock and HMRC v Singtel cases; and data collection and sale by related companies.

Panel discussion

The panel started with the topic ‘APA and MAP Practice Trends and Experience’ presented by Annabelle Bailleul-Mirabaud and Sven-Eric Bärsch. Bailleul-Mirabaud explained how more traditional agreement and dispute resolution tools (APA and MAP) interact and compare with more recent tools, such as domestic and international tax compliance programmes and simultaneous joint audits. Bärsch added commentaries on MAP practice trends and the 2021 MAP statistics of the Organisation for Economic Co-operation and Development (OECD), which show that, in 2021, there were significantly more MAP cases closed, fewer new cases and generally positive outcomes, even though cases still took a long time, and authorities continue to adapt.

The panellists also explained some challenges for MAPs in terms of the eligibility of taxpayers to access the MAP and the implementation of MAP outcomes, as well as several examples of popular transfer pricing MAP cases.

Bailleul-Mirabaud highlighted that APAs are becoming more popular due to the growing complexity of transfer pricing issues. In addition, tax administrations and the OECD continue to invest in staff and APA programmes. Bailleul-Mirabaud added information about bilateral APAs, their types, methods considered and unique issues.

The next topic, Covid-19 and extraordinary events, was presented by Nils Harbeke and Richard Slowinski, who explained that, in times of crisis, the basic assumptions that economic conditions remain comparable and that risks that are remunerated are transaction-specific are jeopardised. The panellists presented an example: a loss situation that arose due to crisis-related effects, which raised the question of which group company should bear the special effects and claim the tax loss.

Slowinski pointed out that the relevant inter-company agreement and the terms therein would be a point of departure for such analysis, and if they describe how additional costs should be borne by the parties, then how the parties acted and whether the terms were in accordance with the arm’s length principle should also be evaluated.

Harbeke further discussed standard topics from transfer pricing practice: documentation, tax audits and APAs. Referring to the tax loss example due to the special effects of crises, he argued that a business could react by making price adjustments and contract amendments. Harbeke added that, in terms of documentation, audits and APA, it is important to evaluate how parties address shipping costs, foreign exchange rate movements and so on.

In addition, Slowinski reasoned that possible discussion points concerning documentation are whether contract adjustments are recognised by jurisdictions and the establishment of a specific connection with the crisis situation to justify the transfer price despite the intercompany agreement.

On tax audits, Bailleul-Mirabaud made important remarks. The last remark pointed out that, in 2022, France started to audit previous years, for example, loss situations. She believed it is important for the taxpayer to show the decrease of turnover for the specific entity, otherwise tax authorities would not accept the loss situation.

Regarding changes in APAs in times of crisis, Slowinski explained that, in the United States, there is an opportunity for real-time discussions with the Internal Revenue Service (IRS) regarding explaining the impact of the Covid-19 crisis and to show that the APA’s critical assumptions (existing assumptions or under negotiation) were impacted. However, this depends on the willingness of tax authorities to recognise exceptional circumstances.

Regarding the topic of transfer of functions, Christian Wimpissinger brought specific hypothetical cases to explain how cases should, in his opinion, receive proper transfer pricing treatment. Bärsch contributed with remarks from the German transfer pricing perspective.

Regarding ICAP, ETACA and rulings, the panellists presented ICAP’s participants, scope, objectives and phases, and ETACA’s objective. Wimpissinger identified the more important comparison points among the various ruling procedures.

Then Sarah Bond spoke about inter-company financing cases, starting with the BlackRock case involving a US-United Kingdom-US ‘sandwich’ acquisition structure. Bond explained that the key question was whether a $4bn debt (loan notes issued by the UK to the US) was arm’s length. To resolve the case, the relevant economic characteristics of the transactions were taken into account as part of the comparability analysis, including the analysis of the control exercised by the lender on the debt itself, on the shareholding and on dividends.

In the first instance, the transaction was not considered to be arm’s length. The case is currently under appeal. Bond also explained the Singtel case, which also involves a loan note issuance that was amended (with the maturity date and interest rates changes). The amendments were also not considered to be arm’s length by the court because they did not have a commercial rationale. To conclude, Bond discussed whether the BlackRock case was limited to its facts, how to mitigate risks and how to obtain certainty.

Finally, on ‘data collection and sale by related companies’, Slowinski commented on fundamental issues, business model examples of data collection and monetisation, types of data and ownership questions in industries such as automotive, social media and the sharing economy. Wimpissinger added important remarks on how work mobility impacts data collection and sale, and discussed relevant examples, including the International Franchise Association (IFA) Conference example relating to the treatment of bird migration data for tax purposes.

Conclusion and final remarks

To conclude, Slowinski gave the audience the opportunity to ask questions, and later closed the panel and greeted those present.