The Methods (And Madness) Of Transfer Pricing For Tangible And Intangible Property

Transfer pricing has to do with the allocation of income among parties controlled by the same persons (controlled parties) that engage in transactions with each other (controlled transactions).[1] In the international context where controlled parties may operate in different countries with different tax burdens, the concern is that the controlled parties may shift income from a higher-taxed country from a lower-taxed country. Here’s a simple example:

The Example

Here ProdCo and WidgCo are controlled parties because they are both 100% owned by Owner. And they’re engaged in a controlled transaction, because ProdCo is purchasing Widgets from WidgCo, which ProdCo then incorporates into Product which it sells to consumers for $100 a pop. ProdCo is based out of Country A, which has a 20% income tax rate, while WidgCo is based out Country B with a 10% income tax rate.

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Section 482, Comparable Uncontrolled Transaction, Comparable Profits Method

Tax Court in Brief | Medtronic, Inc. v. Comm’r | Section 482, Comparable Uncontrolled Transaction, Comparable Profits Method

Short Summary: This opinion regards a transfer pricing, comparable uncontrolled transaction (“CUT”), comparable profits method (“CMP”), and deficiencies in tax totaling approximately $548,180,115 for 2005 and $810,301,695 for 2006 against taxpayer Medtronic, Inc. and its consolidated affiliates. The underlying transactions—being the transactions for which deficiencies were determined—stemmed from a long history of third-party settlement agreements in medical device patent litigation, assignments of patent royalty rights, related-company agreements and licenses and valuation of consideration exchanged in those agreements for, but not limited to, patents, royalties, litigation settlements, product liability risk assumptions, self-insurance risks, and other.

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SALT TP

The 2022 SALT Transfer Pricing Quiz (the “Quiz”) is anything but your run-of-the-mill test of knowledge.

We created the six multiple-choice question Quiz based on our two-part Tax Notes State article, “SALT Transfer Pricing — What You Need to Know” (“the article”), which was published in January 2022. The Quiz is designed to reinforce foundational “SALT 101” and “TP 101” level content and recent developments in these interrelated tax fields. You’ll score well on the Quiz if you have basic SALT and transfer pricing know-how, even without reading the article.

Launch Quiz!

However, if you’re unsure of your Quiz answers, all correct answers (and instructions on how to determine the answer to the sixth and final question) can be found in SALT Transfer Pricing — What You Need to Know: Part 1 and SALT Transfer Pricing — What You Need to Know: Part 2. We can share a limited number of copies of the article with interested readers. You can request the article within the Quiz or by contacting Guy Sanschagrin or Doug Schwerdt of WTP Advisors.

Trying to gauge your interest in diving deeper into SALT transfer pricing? Check out our recent flyover of Part 1 of the article: Six “SALTy” Transfer Pricing Facts.

We hope you enjoy self-assessing your SALT transfer pricing know-how, competing with tax peers to become the “2022 SALT Transfer Pricing Quiz Champion,” and taking home a prize from a lineup of emblematic Peugeot SALT mills/grinders – your choice from an array of colors that are reminiscent of the American flag.

The deadline for online Quiz submission is Saturday, April 30, 2022.

WTP Advisors is administering the Quiz and all of your Quiz responses (score, name, etc.) will be kept in strict confidence (all Quiz submission data will also be deleted on May 31, 2022).

 


If you have any questions or would like more information on this blog post or the Quiz, please contact the authors:

Guy Sanschagrin, Principal in Charge of Transfer Pricing and Valuation Services, WTP Advisors    guy.sanschagrin@wtpadvisors.com

Doug Schwerdt, Transfer Pricing Specialist & Intra-Group Financial Transactions Leader, WTP Advisors    doug.schwerdt@wtpadvisors.com

 

#TransferPricing #SALT #MTC #SITAS #WTPAdvisors #TransPortal #SALTpartners #TGS #ThinkGlobalSustainability   

What Is the IRS Transfer Pricing Examination Process?

The Transfer Pricing Examination Process (TPEP) provides a guide to best practices and processes to assist with the planning, execution, and resolution of transfer pricing examinations consistent with the Large Business & International (LB&I) Examination Process (LEP), Publication 5125. This guide will be shared with taxpayers at the start of a transfer pricing examination, so they understand the process and can work effectively with the examination team.

Transfer pricing examinations are factually intensive and require a thorough analysis of functions performed, assets employed, and risks assumed along with an accurate understanding of relevant financial information. They are resource intensive for both the IRS and taxpayers. To ensure resources are applied effectively, LB&I is using data analytics to identify issues for examination that have the most significant risk for non-compliance. In addition, teams should continually assess the merits of issues during an examination. Our goal in a transfer pricing examination is to determine an arm’s length result under the facts and circumstances of the case.

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Corporate Tax Executives Handling Transfer Pricing Remotely

It goes without saying that the COVID-19 pandemic is the major concern of nearly all multinational enterprises (MNEs) at the moment. Radical containment measures continue to be put in place by governments around the world in efforts to slow the spread of the virus. Many of these measures center on the concept of ‘social distancing’ and have included closing businesses and organizations, cancelling events, prohibiting international and domestic travel, and quarantining cities and even regions. COVID-19 containment measures have disrupted business as usual, from manufacturing plant shutdowns to creating information inefficiencies and collaboration challenges at MNE headquarters and across global entities. These business disruptions create challenges for effectively managing transfer pricing information and workflows.

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Transfer Pricing And Intra-Group Financial Transactions

Christodoulos Damianou, together with colleagues Christos Theophilou and Demis Ioannou of Taxand Cyprus present a case study of how the Cypriot tax authorities use safe harbour rules in determining arm’s-length interest rates.

Transfer pricing has always been a challenging exercise, in particular in regard to intra-group financial transactions. It was not until February 2020 that the OECD eventually published specific guidance on financial transactions, namely the “Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8-10”.[1]

In the context of intra-group loans, to provide administrative simplicity for both the taxpayers and the tax authorities, safe harbour (or safe haven) rules are often used by tax authorities in determining arm’s-length interest rates. Such rules are usually optional (i.e. the taxpayer can elect to either apply the safe harbour rule or follow the country’s domestic transfer pricing guidelines).

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Transfer Pricing Exams & IRS Preparedness Measures

In this fourth article in our Looming Transfer Pricing Exams & IRS Preparedness Measures series, we briefly summarize the IRS’s Transfer Pricing Examination Process (TPEP) Resolution Phase, which is the final phase of the TPEP’s three phases, and we list extrajudicial taxpayer courses of action such as Appeals.

The goal of the Resolution Phase is to reach agreement on the tax treatment of each transfer pricing issue examined. Important parts of the Resolution Phase include the IRS’s presentation of the issue and its resolution, case closing, and when necessary, issuing a Revenue Agent Report with adjustments, penalties (if the taxpayer failed to timely provide documentation), and tax liability.

The TPEP instructs the issue team to provide the taxpayer an opportunity to agree or disagree with the findings for each transfer pricing issue developed during the examination. For a transfer pricing issue to be resolved, there must be an open discussion between the issue team and the taxpayer in three areas: 1) factual development, 2) the law(s) that applies to the facts, and 3) each party’s interpretation of the law(s). The issue team should meet with the taxpayer to discuss all issues and determine whether a “principled resolution” can be reached. If a field resolution is not reached, the issue team will finalize the Notice of Proposed Adjustment (“NOPA”) and Economist Report.

The TPEP discusses options that the taxpayer can pursue, including Appeals,[1] and when a tax treaty country is involved, U.S. Competent Authority (CA) requests, Accelerated CA Procedures to cover subsequent taxable years, and Simultaneous Appeals Procedures whereby Appeals works jointly with the Advance Pricing and Mutual Agreement (APMA) Program and the taxpayer prior to APMA’s consultations with the foreign CA(s). Taxpayers may request CA assistance after receiving a NOPA and are not required to wait until the conclusion of an examination to file a CA request. If APMA accepts a CA request, it will assume jurisdiction over the transfer pricing issues. Otherwise, the case remains under the jurisdiction of the issue team.

We invite you to read our article Six Time-Tested TPEP Takeaways where we share pertinent insights that are even more important today than a few years ago when the TPEP was still hot off the press.

Stay tuned for the next blog post in this series, where we discuss the IRS’s April 2020 transfer pricing guidance, Transfer Pricing Documentation Frequently Asked Questions (FAQs).

If you have any questions or would like more information on the issues discussed in this article, please contact the authors:

Guy Sanschagrin, Principal in Charge of Transfer Pricing and Valuation Services, WTP Advisors (Minneapolis, MN, USA) guy.sanschagrin@wtpadvisors.com

Doug Schwerdt, Transfer Pricing and Valuation Specialist, WTP Advisors (Houston, TX, USA) doug.schwerdt@wtpadvisors.com

 

Read Blog Post Part 1 in this Series

Read Blog Post Part 2 in this Series

Read Blog Post Part 3 in this Series

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[1] The TPEP reaffirms that the IRS requires 365 days to remain on the statute of limitations for taxpayers to request Appeals consideration.

Doug Schwerdt

In this third article in our Looming Transfer Pricing Exams & IRS Preparedness Measures series, we highlight and summarize the essential aspects of the IRS’s Transfer Pricing Examination Process (TPEP) Execution Phase.

The Execution Phase immediately follows the opening conference and consists of continued risk assessment, fact finding, information gathering, and issue development. Stages of issue development include determining the facts, applying the law to those facts, and understanding the various tax implications of the issue. The issue team is advised to make every effort to resolve factual differences with the taxpayer.

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GUY SANSCHAGRIN

In this second article in our Looming Transfer Pricing Exams & IRS Preparedness Measures series, we highlight and summarize the essential aspects of the IRS’s Transfer Pricing Examination Process (TPEP) Planning Phase.

The Planning Phase determines the scope and issues of the transfer pricing examination. The TPEP states, “Issues selected for examination should have the broadest impact on achieving compliance regardless of the size or type of entity.” Important steps in the Planning Phase are: 1) the Initial Transfer Pricing Risk Assessment, 2) issuance of the Initial Transfer Pricing Information Document Request (IDR), 3) IRS internal planning meetings, 4) development of the exam plan, timelines and milestones, and 5) the opening conference, which is the final step of the Planning Phase and marks the transition to the Execution Phase.

Evolving Guidance
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Transfer Pricing Software

COVID-19 necessitates a reassessment of the existing transfer pricing paradigms of Multinational Enterprises (MNEs). Supply chain disruptions and changes in consumer demand resulting from the COVID-19 pandemic and global recession are impacting virtually all major industries. These disruptions erode profits and will require MNEs to adjust transfer pricing approaches. MNEs also face challenges such as government restrictions on travel and enabling personnel to work remotely.

Three points are well illustrated by Will James in the 16-Mar-2020 BKD, LLP Thoughtware® article Transfer Pricing in the Wake of COVID-19: 1) Transfer pricing audits are anticipated to increase for 2020 and future tax years for MNEs with adversely affected profitability; 2) MNEs need to start preparing for audits now by documenting the arm’s length nature of their transfer pricing arrangements and including evidence and analysis of extraordinary COVID-19 business disruptions that result in lower profitability or losses; 3) Documentation of lower profitability or losses that result from COVID-19 and the recession is particularly important for reduced-profit or loss-making MNE entities subject to profit-based methods guaranteeing minimum returns (e.g., Transactional Net Margin Method).

The following is a checklist to consider:
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Jimmy Cox - Dutch Tax Rulings

In the Netherlands it is possible to discuss your specific tax position with the Dutch tax authorities and mutually agree on the tax consequences thereof. The Dutch tax authorities and the taxpayer are bound by the agreement they make. The agreement has to be regarding the interpretation and qualification of facts. The ruling has to be in conformity with the Dutch tax legislation. In other words the agreement cannot be in conflict with the Dutch tax legislation (contra legem). In August 2004, the Dutch ruling policy was formalized in an advance tax ruling (ATR) policy and an advance pricing agreement (APA) policy.

Dutch advance pricing agreement (APA)

An APA covers the agreement on an at arms’ length remuneration or on the transfer pricing methodology. The basis for an APA is a transfer pricing study. The Dutch tax authorities and the tax payer agree that the outcome of the transfer-pricing study would form the basis for the determination of the income for Dutch corporate income tax purposes.

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Jimmy Cox On Taxes In The Netherlands

According to a majority of the members of the European Parliament, the Netherlands is, just like Malta, Cyprus, Ireland and Luxembourg, a fiscal paradise and it is demanding (without any underlying jurisdiction, incidentally) that the European Commission place these five countries on its list of tax havens.  This list is, of course, is more akin to a pillory than an honor roll.

Does the Netherlands merit being designated as a tax haven?  Most inhabitants of the Netherlands would not experience this as being the case; after all, the VAT on shopping, for crying out loud, has increased by 50% this year alone, and the highest bracket in income taxation (over EUR 68,508) remains at 51.75%:  a solid deduction indeed.  It is true that taxation on company profits has decreased from 20 to 19%, but this latter figure is still considerably higher than in Ireland (12.5%) or Bulgaria (10%), for example.  Furthermore, companies making profits higher than EUR 200,000 continue to pay 25% over this threshold.

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