Author | Harold McClure

The Swiss Federal Court ruled in favor of the tax authorities on July 17, 2024 in a litigation that frames a Swiss debate over the role of the annual circular on safe harbor interest rates issued by the Swiss Federal Tax Administration.

Topics: Credit Rating Arm's Length Interest Rates Intercompany Loans

A December 15, 2023 ruling by the North Holland District Court involved the transfer of certain distribution rights from British American Tobacco Exports B.V. to British American Tobacco UK Limited. The ruling decided that the value of certain transferred “residual profits” was almost £1.7 billion, which was based on a very elementary application of DCF.

Topics: Discounted Cash Flow Valuation

The IRS has recently asserted implicit support in several situations where a foreign based affiliate extended an intercompany loan to a US borrowing affiliate. In this piece, we'll discuss an intercompany loan involving Perrigo, and compare the IRS settlement to the litigation involving GE Capital Canada before we turn to another potential IRS issue.

Topics: US Internal Revenue Service Intercompany Guarantee Fees Intercompany Financing Intercompany Loans US Transfer Pricing Canada Revenue Agency

Determining arm's length remuneration for a Czech manufacturing affiliate under different transfer pricing models.

Topics: Return on Assets Contract Manufacturer Royalty Rates Tax Controversy TNMM/CPM

Panama’s Administrative Tax Court ruled in favor of the tax authority Dirección General de Ingresos (DGI) in a January 19, 2023 decision involving remuneration for a related-party wholesale distributor of electronics determined using Transactional Net Margin Method (TMMM; CPM in the US). In earlier discussions, we noted how DGI benchmarked the return for a limited-function wholesale distributor of petroleum and the return for a high-function distributor of pharmaceuticals.

Topics: Limited Risk Distributor Asset Intensity Adjustment TNMM/CPM

This litigation raised an oft-seen issue as to the correct definition of “sales” for transfer pricing approaches that rely on the Comparable Uncontrolled Transaction (Price) method.

Topics: Intangibles Comparable Uncontrolled Transaction (Price) Method Portugal Royalty Base Royalty Rates

On February 20, 2023 Ampol Limited settled its procurement hub transfer pricing dispute with the Australian Tax Office (ATO). Procurement affiliates have been a point of emphasis for the ATO in recent years, and have been gaining the attention of other tax authorities, including the US IRS.

Topics: Australia Australian Tax Office Singapore Procurement Hub Tax Controversy TNMM/CPM

A 2008 restructuring transferred the European rights to the McDonald’s intangibles to McD Europe Franchising Sàrl, a Luxembourg-resident subsidiary with branches in both Switzerland and the U.S. While this migration of intangible assets created substantial controversy in Europe, the real transfer pricing concern would be an IRS issue and not an issue for the French Tax Authority (FTA) if the royalty rate remained at 5%.

Topics: Intangibles Europe Best Method Royalty Rates Tax Controversy TNMM/CPM

The tax authorities in China and in South Korea have issued different safe harbors with respect to the interest rates on intercompany loans. Safe harbor rates are often in conflict with what would represent an arm’s length rate. Our discussion poses a hypothetical intercompany loan from a South Korean parent corporation to its Chinese manufacturing affiliate to highlight how the arm’s length interest rate depends on the contractual terms of the loans including date, term, and currency and the credit rating of the borrowing affiliate.

Topics: Interest Rates Intercompany Financing Credit Rating Arm's Length Interest Rates

The Israel Tax Authority prevailed in Israel vs CA Software Israel Ltd (October 2022, Tel Aviv District Court, Case No 61226-06-17), which involved the valuation of transferred software. While the taxpayer’s experts tried to justify the lower valuation arguing that the economic useful life of the transferred intangibles was very short.

Topics: Discounted Cash Flow Intangibles Valuation of Intangibles Tax Controversy

There are several approaches to accounting for ongoing marketing expenses necessary to maintain a brand in a discounted cash flow valuation.

Topics: Intangibles France Valuation of Intangibles

The Dutch tax authority prevailed in its challenge of several British American Tobacco intercompany financing transactions.

Topics: Intercompany Guarantee Fees Intercompany Financing Arm's Length Interest Rates Intercompany Loans

Transfer pricing practitioners in the US as well as in other nations often face the dilemma that clients wish to establish intercompany management fees as a percentage of revenues while tax authorities may test the implied cost plus from any intercompany management policy.

Topics: Intercompany Services Management Fees CUP State Transfer Pricing TNMM/CPM

Licensees bear significant commercial risk when they use valuable intangible assets owned by another entity. As such, any method that affords them with an expected return to its tangible assets that is only as high as the overall enterprise’s cost of capital is inconsistent with sound economics.

Topics: Intangibles Medtronic Royalty Rates Tax Controversy Section 482 TNMM/CPM US Transfer Pricing

Harold McClure expounds on the issue of currency denomination in intercompany financing, addressing currency adjustments in longer-term fixed interest rates, past controversies, and regulatory guidance.

Topics: Financial Transactions OECD United Nations Adjustments Intercompany Financing Arm's Length Interest Rates

This discussion presents a simplified illustration of the issues with respect to the unspecified method applied in Medtronic III in contrast to the IRS' extreme CPM approach and a traditional RPSM approach based on sound financial economics.

Topics: Residual Profit Split Method Unspecified Method Intangibles Medtronic Tax Controversy Tax Policy Section 482 US Internal Revenue Service TNMM/CPM US Transfer Pricing

Italy’s Supreme Court remanded May 17, 2022 a case in which Regional Tax Commission of Lombardy challenged the transfer pricing between Promgas Spa and Gazprom Export, finding alleged deficiency in the tax authority’s application of the Transactional Net Margin Method (TNMM).

Topics: Resale Price Method CUP Oil and Gas Transfer Pricing TNMM/CPM

A discussion of the possible issues in the recently settled transfer pricing dispute between Western Digital Corp. and the United States IRS.

Topics: Intangibles United States Asia-Pacific Transfer Pricing

Use of the CPM/TNMM to determine royalty rates for valuable intangibles in transfer pricing is incompatible with basic financial economics.

Topics: DEMPE OECD Guidelines Intangibles Royalty Rates Tax Policy US Internal Revenue Service TNMM/CPM

There are often legitimate concerns with using book value versus market value of assets in applying a Return on Assets approach in transfer pricing. While employing a Return on Costs approach may be a reliable alternative, it must also account for comparability differences in asset intensity.

Topics: Financial Economics Benchmarking CAPM Asset Intensity Adjustment Return on Assets Contract Manufacturer

To determine whether the usual financial ratios provide insights into what would represent an arm's length range, any analysis of controlled healthcare distributors must account for the underlying facts surrounding the functions and expenses occurred by the distribution affiliate.

Topics: Pharmaceutical Industry Benchmarking Resale Price Method Tax Controversy TNMM/CPM

Interests fluctuate based on market conditions, and analysts must consider whether the market conditions surrounding their data are comparable to those of the tested intercompany transaction when benchmarking an arm's length interest rate in transfer pricing.

Topics: CUFT Interest Rates Intercompany Financing

Applied properly, the Comparable Profits Method (CPM) can be a useful approach for well-defined transfer pricing issues, such as the appropriate profitability of a sales affiliate. Unfortunately, CPM is often applied mechanically without regard for economic principles and functional comparability.

Topics: Benchmarking State Transfer Pricing Tax Policy TNMM/CPM Profit Indicators

Brazil’s unique transfer pricing rules have allowed multinationals to shift income to tax havens in certain situations. We explore through the lens of the Macopolo case how Brazil could benefit from adoption of the arm's length standard.

Topics: Base Erosion and Profit Shifting (BEPS) Brazil OECD Guidelines Tax Controversy Tax Policy TNMM/CPM

Harold McClure explores intercompany financing issues through the lens of a recent case before the EU General Court and an upcoming battle between Perrigo and the IRS.

Topics: Interest Rates United States Europe Intercompany Financing

International tax law firms are rightfully warning clients of audit risks with respect to intercompany financing in France. Taxpayers can mitigate risk by following new OECD guidance, providing sound economic analysis and avoiding overly aggressive positions on group vs. standalone credit ratings.

Topics: Interest Rates United States France Intercompany Financing

In February 2021, the Supreme Court of Canada declined to hear the Canadian Revenue Agency's (CRA) appeal in its case against uranium multinational Cameco Corporation. However, this only marked the end of Round 1, as the courts only ruled on 8 of 14 years under review.

Topics: Mining and Extractives Canadian Revenue Agency Tax Controversy TNMM/CPM Profit Indicators

The Israel Tax Authority is questioning whether costs plus markup models Israeli R&D affiliates are at arm's length. This could present issues for multinationals that have not been giving proper consideration to cost base, asset intensity and ownership of valuable intangibles in their benchmarking.

Topics: DEMPE Base Erosion and Profit Shifting (BEPS) Benchmarking Intangibles Tax Policy

A recent article asserted that state tax authorities should use the Comparable Profits Method (CPM) with care in the evaluation of transfer pricing for tangible goods. However, some of the examples cited, including the recent Coca Cola case, in their piece are misplaced for reasons we will address.

Topics: State Transfer Pricing Tax Controversy Tax Policy TNMM/CPM

Selecting alleged comparable companies with different functions than the tested party is known to open Pandora's Box in transfer pricing controversy, and is often exacerbated by a failure to adjust for material differences between the tested party and the selected comparables.

Topics: Comparability Limited Risk Distributor Tax Controversy Profit Indicators

Changes to tax laws are often seen as the primary solution to curb profit shifting. However, proper application of the arm's length principle alongside BEPS CbCR disclosures already offer powerful tools in this endeavor.

Topics: Pharmaceutical Industry Base Erosion and Profit Shifting (BEPS) Tax Policy TNMM/CPM

Comparability is a key issue in transfer pricing that is often not fully appreciated. However, comparability issues are hardly uncommon in transfer pricing controversies and can create a trickle-down effect that leads to major taxation issues.

Topics: Comparability Limited Risk Distributor TNMM/CPM Profit Indicators