Transfer pricing: anticipating and responding to new challenges

Thursday 5 May 2022

Report on a conference session at the 11th Annual IBA Finance and Capital Markets Tax Virtual Conference 2022

Mees de Smet
HVK Stevens, Amsterdam

Thursday 3 March 2022

Session Chair

Richard Slowinski  Alston & Bird, Washington, DC


Raul-Angelo Papotti  Chiomenti Studio Legale, Milan

Rezan Okten  Houthoff, Amsterdam

Monique van Herksen  Simmons & Simmons, Amsterdam

Cliff Rand  Aird & Berlis, Toronto, Ontario

Catherine O'Meara  Matheson, Dublin

Philip Tully  Matheson, Dublin

Fernando Tonanni  Machado Meyer, São Paulo


On 3 March 2022, the fifth day of the Annual IBA Finance and Capital Markets Tax Conference took place. One of the subjects discussed was transfer pricing, specifically anticipating and responding to new challenges.

Among other topics, the key trends in transfer pricing litigation, developments in applying transfer pricing rules, audits, mutual agreement procedures and advance pricing agreements were discussed. Finally, the transfer pricing impact of Covid-19 was analysed. The panel members mainly discussed these developments from their own domestic perspective.

Key points and trends in transfer pricing litigation


Raul-Angelo Papotti, a partner at Chiomenti, started off by briefly elaborating on a recent Italian Supreme Court decision (No 1232/2021). In this case, the Italian tax authorities challenged the amount of a royalty payment. The involved tax subject, an Italian parent company, was of the opinion that the amount of the royalty was affected by the group's business strategy to penetrate the United States market and, therefore, at arm's length. According to the tax subject, a low royalty price was justified because it had an effect on the group's opportunities to enter the US market.

The relevance of business strategies in determining transfer prices has been endorsed by Italian courts, as well as the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. However, the Supreme Court considered that the group's economic interest may only override the arm's length principle if combined with other economic or technical elements. This reflects the importance of proper underlying documentation, which illustrates the relevant facts and circumstances. In other words, assessing how long and to what extent an independent party would have supported and granted benefits to another independent contractor in comparable circumstances was essential. Richard Slowinski, a partner at Alston & Bird, further underlined the importance of documentation and the time-bound impact of a comparison with independent parties. A non-arm's length royalty may be acceptable only for a limited period, whereas a non-arm's length royalty for an undefined period may be difficult to defend based on independent party evidence. This further emphasises the importance of due diligence of legal agreements and economic substance.


Cliff Rand, a partner at Aird & Berlis, reflected on the recent judgment in the Cameco case (2020 FCA 112), which was already a well-known case for most of the conference members. In this lawsuit, the Canadian tax authorities challenged the allocation of profits. Most of the profits were realised by the subsidiary, located in Luxembourg and later in Switzerland. The profit allocation was due to a sharp increase in the price of the commodity (uranium) that was traded with the Canadian parent company. During the term of the agreement, the resale benefit of the price increase would be taxable in Luxembourg/Switzerland.

The Canadian tax authorities issued reassessments to reallocate the profits of the European subsidiary to Cameco Corporation in Canada on the basis that the transfer price was not at arm's length and, therefore, caused profits to be shifted offshore.

The Canadian tax authorities may use two sets of transfer pricing provisions to challenge cross-border non-arm's length transactions. First, they can apply the arm's length principle to the transaction or series of transactions. Less obvious is the second provision that allows the Canadian tax authorities to re-characterise the transaction or series of transactions if the transaction would not have been entered into between persons dealing at arm's length, and it can be reasonably considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit. The last-mentioned provision is a complicated approach for the Canadian tax authorities, but did indeed form the main argument in the Cameco case.

The focus of the case in the Federal Court of Appeal was whether the series of transactions that gave rise to the Luxembourgian/Swiss subsidiary's profits would not have been entered into between persons dealing at arm's length under any terms and conditions.

The court accepted the lower court's finding that the transactions would have been entered into between persons dealing at arm's length. The transactions would have been entered into (between persons dealing at arm's length) because the economic benefit of participating in the agreements was negligible or negative at the time they were entered into and because the prices charged by Cameco to its foreign subsidiary were well within an arm's length range. Because the first requirement was already not met (ie, transactions would have been entered into between parties dealing at arm's length), it was not necessary for the court to determine whether the series was entered into primarily for bona fide purposes other than to obtain a tax benefit.

This decision initially felt as if the court gave significant weight to form (over substance) but after contemplation, the panel members agreed that substance was more significant for the final decision.

United States

Slowinski briefly touched upon some key takeaway points from high-profile transfer pricing disputes in the US. The disputes currently being addressed by the US courts constitute some of the largest dollar value of transfer pricing cases that have ever been disputed.

Based on recent case law, it could be argued that courts may apply heightened requirements to apply transaction-based methods, such as the comparable uncontrolled price method. The courts traditionally preferred real-world transactions: benchmarks consisting of unrelated comparable transactions. Recent case law suggests that courts may be more receptive to profit-based methods, such as the comparable profits method.

New developments in applying transfer pricing rules to financial transactions


The characterisation of transactions continues to be of significant importance. Not only do functions, assets and risk need to be taken into account but also the accurate delineation of transactions and the commercial rationale. The perspectives of all the parties involved, including all realistically available options, are to be considered. For example, to determine the arm's length price of a guarantee fee, the implicit impact of a group's credit rating needs to be taken into account. New OECD guidance offers direction on some of the concepts that often caused issues in the past. However, the guidance partly differs from current practices.

The scale of entities is also relevant to determine the appropriate transfer pricing method. For example, a routine service provider may merely be able to apply the cost plus method. A full-on entrepreneur, however, may be able to negotiate premiums for remuneration.

From a Dutch perspective, it can be noted that the Dutch tax authorities are reluctant to provide certainty on financial arrangements. It is impossible to achieve certainty in advance through a ruling on back-to-back arrangements and financial transactions unless support services are provided (with sufficient substance). There is only the possibility for informal meetings to obtain at least some form of comfort. In this aspect, the Dutch tax authorities may no longer be in line with the OECD Transfer Pricing Guidelines.


The OECD Guidance on Financial Transactions was formally adopted in Irish legislation in December 2021, but the Irish tax authorities had already noted (in published guidance) that following the OECD Guidance on Financial Transactions is best practice.

From January 2020 and onwards, the expansion of Irish transfer pricing rules caused the practice to no longer apply solely to trading transactions. Since then, non-trading transactions have also been subject to transfer pricing legislation. Currently Irish tax subjects are filing their returns and looking closely at the tax balance, and the sources of assets and income are of importance.

Non-trading transactions were out of scope for Irish transfer pricing legislation in certain scenarios. This allowed for possible mismatches in which deductions and income could be offset against or subject to differing tax rates of 12.5 per cent or 25 per cent. The domestic exemption from the arm's length requirement for certain 'Irish to Irish' transactions is topical because of the two different tax rates. The 12.5 per cent rate applies to active operations and the 25 per cent applies to passive income streams for non-trading companies. The scope and interpretation of this exemption have been subject to debate, and limited guidance gave rise to issues that required clarification. Legislation, updated in 2022, is clearer, but still limited in scope, and there are many conditions and hoops through which to jump.


New US Treasury and Internal Revenue Service (IRS) regulatory projects are in progress and are relevant to defining financing transactions. The regulatory projects relate to the concept of 'realistic alternatives', the clarification of the definition of 'group membership' and how the advantages of the membership of a multinational group can have an impact on transfer prices. These projects are not yet reflected in US legislation, but they may change the perspective for transfer pricing and the determination of risk allocation (based on facts and circumstances). For example, when analysing financing transactions, the role of implicit support and the guarantor's cost to provide the guarantee in comparison to the benefit to the recipient may require additional evaluation.

How tax authorities' transfer pricing audits are evolving


Recent tax assessments in Ireland have been focused on intellectual property within high-risk and high-value areas. Increased resources for Irish tax authorities allow for an increase in the number of assessments. Unfortunately, there are no published decisions from the Irish Tax Appeals Commission. Irish transfer pricing cases are open to settlement and litigation, and assessments are currently under appeal.


Multinational enterprises may utilise various hybrid transactions designed to obtain more tax deductions than inclusions within the corporate group. One of these is the forward subscription structure, a financing arrangement possibly used by multinationals with a Canadian subsidiary. The Canadian tax authorities have been auditing these transactions. On 4 July 2019, the Canadian tax authorities issued a 'notice' to tax professionals stating that forward subscription structures are 'hybrid mismatch arrangements' and that they may seek to apply the re-characterisation rule in Canada's transfer pricing legislation to reassess the arrangement. A notice is rather infrequent in Canadian tax law, so this came as a surprise to and a first for many tax advisers.

The forward subscription structure makes use of the fact that interest in Canada can (under certain conditions) be deducted, while the receiving entity (US) does not include the interest in its taxable base. The sole purpose of these arrangements, according to the Canadian tax authorities, is to create an interest deduction for Canadian tax purposes without a corresponding income inclusion for US tax purposes. According to the Canadian tax authorities, the forward subscription structure lacks commercial purpose.

Because the interest rate is in accordance with the arm's length principle, the Canadian tax authorities are limited to applying the same provision as was used (unsuccessfully) in the Cameco case. They stated that third parties (at arm's length) would not have entered into the forward subscription arrangement and that the arrangement had no bona fide purpose other than to obtain the tax deduction. Therefore, they deemed the annual interest accrued on the loan to be a dividend (subject to withholding tax).

The 2021 Canadian Federal Budget proposed amendments, effective 1 July 2021, to deny the benefits of 'hybrid mismatch arrangements' following the recommendations of the OECD's Action 2 base erosion and profit shifting (BEPS) report. Under the proposed amendments, the interest payments would not be deductible because they are not included in the ordinary income on the other side of the border. The Canadian tax authorities claim that the future provision is merely there for certainty and that, prior to new legislation, they had the possibility to fight the structure by re-characterising interest as dividends. Doubts about the chances of success for this approach were noted.


Recent tax assessments and audits from the Brazilian tax authorities have been focused on disregarding the cost plus method due to insufficient documentation support for import and export transactions. A second visible trend is seen within the assessment of cross-border payments of royalties and technical services. There are increasing attempts from the tax authorities to fully disregard intragroup expenses incurred with royalties or payments for technical services or the transfer of know-how, in particular in the tech industry. Fernando Tonanni, partner at Machado Meyer, argued that if one can prove the necessity of these expenses, one should be allowed to take the corresponding deductions.


Another Italian tax case, concerning a foreign insurance company operating in Italy, was mentioned. The insurance activities are carried out abroad at the premises of the tax subject and not at the premises of the Italian subsidiaries. The insurance products issued by the tax subject are distributed on the Italian market through independent insurance brokers that operate on behalf of their clients.

The Italian tax authorities claimed that the brokers represent a hidden agency permanent establishment in Italy. The brokers' activities were not limited to auxiliary and preparatory services, but were substantial; the brokers had an almost exclusive and structured relationship over time with the tax subject and were only formally independent. Finally, the brokers habitually and substantially participated in the conclusion and the management of insurance contracts in favour of the Italian clients.

The Italian tax authorities challenged the omitted Italian tax return as a criminal tax violation. This qualification as a criminal offence pushed the tax subject to settle. A tax settlement agreement was reached whereby the Italian tax authorities did not prove the permanent establishment requirements under the applicable bilateral tax treaty. As a result, the tax subject has been taxed only on the income deriving from the brokers' distribution activity carried out in Italy, which was a substantial discount to the original claimed amount. Finally, the criminal proceedings against the tax subject were dropped.


The prime US audit developments revolve around the increased amount of dispute resolution tools and the enlarged scale of the examination resources of the US tax authorities. More means, in combination with more controversies and larger foreign-initiated transfer pricing cases, allow for more possibilities for audits and legal battles. Furthermore, Slowinski noticed a heightened interest in tax issues on a C-suite level.

Getting to 'yes' through mutual agreement procedures (MAPs) and advance pricing agreements (APAs)

General takeaways

Both MAP and APA approaches tend to involve a less problematic route to resolve tax disputes. First and foremost, one of the challenges surrounding MAP and APA is being allowed access to the procedures. Penalties may close access to MAP, and requests need to be complete when it comes down to essential information; tax authorities can challenge whether requests are complete, which can delay resolution. Monique van Herksen, partner at Simmons & Simmons, emphasised the importance of explicitly proving double taxation to satisfy the requirements for the involved authorities.

Besides these issues, statutes of limitations need to be carefully considered to keep all options open. Approval to get into the procedures can take a significant time and may jeopardise litigation possibilities. Other challenges include the difficulty of choosing the most suitable treaty instrument or European Union arbitration possibility, the increased risk of audits and the disclosure of APAs to treaty partners. However, ensuring a remedy if the MAP fails remains the most important issue when following through with the MAP procedure.

The denial of the MAP procedure can be appealed according to the Italian Supreme Court because it is an administrative decision. The Dutch Lower Court and Dutch Council of State have arrived at a similar conclusion. Nonetheless, the Spanish Supreme Court has rejected the possibility of appeal under the condition that the request must be treated in good faith. A request cannot simply be rejected by the authorities without sufficient reasoning.

OECD MAP statistics show that denial of MAP access was six per cent of the overall inventory in 2019 and three per cent in 2020. Withdrawals were six per cent of the overall inventory in 2019 and 11 per cent in 2020. The decreased number of denials is obviously a good sign, but the number of withdrawals is questionable.

There has been  a continued increase in the number of transfer pricing cases in inventory, and the increase in closures has not offset the increase in newly opened cases. The number of months it takes to turn over transfer pricing cases also increased at the start of the pandemic: from 30.5 months (2019) to 35 months (2020), which is another clear example of tax challenges caused by Covid-19.

Non-transfer pricing cases have fared better: the time it took to complete these procedures went from 22 months (2019) to 18.5 months (2020). One needs to keep in mind that 24 months is the target figure.

Overall trends point towards a continuing high transfer pricing case inventory. Italy, India, Germany and the US have been leading the charts for the past ten years. It has been emphasised that, in these countries, it is essential to ensure clients are well-prepared for transfer pricing dispute resolution tools. Pillar I, Pillar II and developing countries looking to increase the number of general anti-avoidance rules (GAARs) will likely lead to more disputes.


MAP and APA procedures require effort and resources from both authorities and taxpayers. Information sharing concerning the value drivers of the business is of importance in this process. Another key aspect is determining the objective, formulating this as clearly as possible, and to maintain a good relationship with the authorities. Frequent and open dialogue builds relationships in this respect, whereby persistence is important because the procedures can be long and frustrating. Philip Tully emphasised what was already mentioned by Herksen: Ireland has clearly seen an increase in APA procedures.

Practical issues with the impact of Covid-19 on transfer pricing and year-end adjustments


The essential question regarding the impact of Covid-19 on transfer pricing is whether Covid-19 is the driving factor for potentially bad results. Proper documentation needs to be present to prove that the bad results are actually caused by Covid-19. For example, routine entities are not expected to have significantly higher or lower results due to the pandemic. Nonetheless, the Dutch tax authorities are willing to allow some flexibility when establishing remuneration.

Rezan Okten, counsel at Houthoff, described how many taxpayers have deviated from transfer pricing policies without reaching an agreement beforehand. This deviation from APAs may lead to many disputes, and consultation in advance is recommended.


There have been no specific Covid-19 protection measures, but the will to join the OECD further increased during the pandemic. For example, potential adjustments to fixed margin approaches might be implemented to gain greater alignment with the OECD Transfer Pricing Guidelines and improve the chances for Brazil to join the OECD. However, some difficulties that can hinder potential membership have arisen. In this regard, the issue with implementing MAP and APA procedures under the current national context of forbidding tax reductions may form an impediment.


Slowinski noticed the need for company-specific treatment because companies within the same sectors or industries can experience markedly different outcomes due to the pandemic. The scope and duration of the pandemic impact is sometimes open to debate. Another issue is the transfer pricing treatment of government grants.

Fortunately, the OECD guidance on the transfer pricing implications of the Covid-19 pandemic from 18 December 2020 offers more grounds for presenting transfer pricing adjustments to the US tax authorities.   ​​​​​​​