Controversy is not only the handling of disputes that have emerged, but also communication with tax authorities, effective handling of tax audits and possible risks and considerations for the transfer pricing policy applied. At Quantera Global, we see controversy as a broad concept. For us, transfer pricing controversy is any interaction between tax authorities and multinationals.
As a result of the increased transparency and resources used by tax authorities in the area of transfer pricing, we notice that more and more multinationals are facing controversy issues. The disputes mainly concern the facts and circumstances of certain intercompany transactions and how these are interpreted. In practice, the following topics are usual suspects:
Transparency leads to more data, which results in more information. Different interpretations and understandings of data can lead to conflicts. Therefore Multinationals need to ensure that tax authorities understand their situation. This can be achieved by proactively interacting with the tax authorities and explaining your situation. Steering the process in your favour is very well possible. A transfer pricing strategy is never one size fits all, but Quantera Global can help you set up your tailored strategy.
Completely preventing transfer pricing controversy is not always realistic, however it is possible to prepare for controversy. Tax authorities will form their own opinion on the facts and circumstances. You as a company can minimise the chance of misunderstandings regarding facts and circumstances with proper substantiation and documentation. Preparation for controversy can include a proper review and analysis of your transfer pricing policy combined with proper documentation. It is essential to have a solid and consistent substantiation of how intercompany transactions are structured and remunerated. Quantera Global can help your company prepare. Important aspects to consider are which instruments to use, clear internal procedures and how to handle (expected) disputes.
Managing Director
The client, a Dutch company with its head office in the United States of America, was confronted with a tax audit by the Dutch tax authorities covering a 5 years period. In short, the client and his tax advisor characterized the company a profit & loss responsible entity, whereas the Dutch tax authorities were of the opinion that the client was to be characterized as a routine sales office that should obtain a routine remuneration (NOPM 5%) and could not incur any losses. The Dutch tax authorities’ opinion was triggered by a meeting they previously had with the client.
This client’s tax advisor (who was not an experienced transfer pricing professional) tried to the best of his abilities to manage the tax audit, however after a while the Dutch tax authorities felt that the process was being frustrated and were going to take the position that the client was to be characterized as a routine sales office. Consequently, the Dutch tax authorities were contemplating to impose an adjustment of approximately EUR 1.5 million on short notice. Only at that moment we were invited by the client’s tax advisor to assist him and his client in this tax audit.
As the client did not have any existing transfer pricing documentation available, we started out to perform a detailed analysis. Part of the analysis was to make an assessment on the characterization of the client.
In the following discussions we had with the Dutch tax authorities, we substantiated that (based on the facts and circumstances) the Dutch company should not be characterized as a routine sales office. However, some aspects of the case were still considered to still be a grey area.
Result
We reached a compromise with the Dutch tax authorities which led to an outcome that was acceptable to all parties involved. The Dutch tax authorities’ contemplated adjustment (based on a routine remuneration of NOPM 5%) was not imposed and the client’s outstanding losses could only be partly utilized.
During the process we were able to re-establish a good relationship between the client and the Dutch tax authorities as well as between the tax advisor and the Dutch tax authorities.
Entity X is the head office of an innovative MNE and active in multiple business divisions. Due to an acquisition strategy there were multiple transfer pricing methods used, which were not consistent across these business divisions. Entity X asked us to support them in developing a new transfer pricing model. The new transfer pricing model should consider the central and regional R&D functions performed within the MNE.
During the process of developing a new TP model, the Dutch tax authorities issued a large tax assessment over fiscal years 2013, 2014 and 2015. The Dutch tax authorities were convinced that entity X should be considered to be entitled to the residual profits, mainly due to the central R&D function of entity X. This view was not in line with the MNE’s view nor our view after analysing the MNE.
We had several discussions with the Dutch tax authorities to explain the business of the MNE and to make them fully understand the complexity of the MNE, including the difference between central and regional R&D functions.
Result
In the end, we have been able to reach an agreement with the Dutch tax authorities for a fraction of the initial tax assessment, which was satisfactory to all parties involved. In addition, we were able to extend the agreement with Dutch tax authorities up till and including 2018.
Furthermore, we entered into an APA procedure to extend the agreement to future years.
A transfer pricing audit is an investigation by a tax authority to ascertain whether a company is compliant with transfer pricing regulations. Tax authorities conduct such audits to ensure that their taxpayers are compliant and report sufficient profit.
Mutual agreement procedures (MAPs) can be used by taxpayers if they end up in a situation of double taxation due to a transfer pricing correction made by a tax authority. Simply put, the taxpayer requests the competent authorities of the jurisdictions involved to discuss with each other what the arm’s length pricing should have been in order to eliminate double taxation. The MAP is regulated in the OECD Model Tax Convention, tax treaties and the EU Arbitration Convention.
Your company may have doubts about how to deal with controversy. Do you need a proactive controversy strategy or will a retroactive approach suffice, you might wonder.
With the help of the Mutual Agreement Procedure (MAP), tax administrations resolve an increasing amount of (international) tax treaty disputes. However, there are still many dispute cases that remain unresolved.
As an independent transfer pricing firm, we are in the perfect position to provide an expert witness testimony / opinion on legal procedures concerning transfer pricing.