Multinational companies’ transfer pricing practices have recently been subject to an extraordinary level of scrutiny from policymakers and tax authorities in the United States and around the world. Late last year, United States Senator Carl Levin (D-MI) chaired a hearing of the U.S. Senate Permanent Subcommittee on Investigations on “Offshore Profit Shifting and the U.S. Tax Code.” During the hearing, the Subcommittee confronted Microsoft executives over royalty payments made by Microsoft’s Irish and Swiss subsidiaries pursuant to the company’s intercompany intangible property transactions. The Subcommittee also questioned the propriety of Hewlett Packard’s use of intercompany financing arrangements with its subsidiaries in Belgium and the Cayman Islands. The hearing concluded with a harshly-worded statement by Senator Levin, in which he referred to multinationals’ transfer pricing arrangements as “gimmicks,” “dubious transactions,” and “legal fictions.” For its part, the IRS has aggressively expanded its transfer pricing enforcement resources over the past several years, increasing its enforcement staff and hiring prominent national experts from Big 4 firms.
Other countries have seen similar developments. Following reports that Starbucks’ UK subsidiary used transactions with its Dutch and Swiss affiliates to avoid UK tax liability for the past three years, Parliament summoned executives from Starbucks, Amazon, and Google to account for the role of intercompany transactions in reducing their companies’ tax liabilities. In Australia, a bill was introduced in Parliament early this year in response to the Australian Tax Office’s loss in the high-profile court case, SNF (Australia) Pty Limited v. Commissioner of Taxation (2011). Responding in part to these concerns, the Organisation for Economic Cooperation and Development (OECD) recently released a report titled “Addressing Base Erosion and Profit Shifting,” which identifies transfer pricing as an area of particular concern to its member states’ tax administrations.
At issue in many of these controversies is the role of intangible property. Given the globalized business environment and the increased prominence of intangibles (such as brand names, trademarks, and patents) in determining a company’s profitability, intercompany royalties, and other payments relating to intangible property have drawn especially close attention from tax authorities. In particular, cost-sharing arrangements in which related enterprises agree to share the costs of developing intangible property, have led to high-stakes disputes between taxpayers and tax administrations. As with other intangible property transactions, cost-sharing arrangements raise difficult valuation questions relating to intangibles’ profit potential, useful lives, and risk profiles. The complexity inherent in these issues gives rise to a vast range of potential disagreements between taxpayers and tax authorities.
Not surprisingly, the scale and complexity of intercompany transfers of intangibles make them a target for tax administrations throughout the world. In this environment, multinationals should be prepared to have the pricing of their intercompany intangible transactions subject to examination by skeptical tax authorities. Now more than ever, it is essential for companies to receive the advice of experienced transfer pricing specialists. True Partners Consulting’s transfer pricing group offers the kind of expert advice that companies need to face these challenges. We have extensive experience consulting with mid- to large-sized companies on planning opportunities, tax-efficient restructuring advice, compliance procedures, and documentation studies. We will partner with you to navigate the hazards posed by the increasing scrutiny of tax administrations throughout the world.
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