HMRC Scrutinizes Transfer Pricing Arrangements
We all know that corporate taxation entails more than just a simple percentage of a company’s profits; it is far, far more involved than that. The 15 weighty tomes that are the final reports of the base erosion and profit shifting project – the fruits of the OECD’s countless hours of labor – are a testament to that.
At the heart of it all is transfer pricing. But, mention the phrase “transfer pricing” to the uninitiated, and they will probably return a blank, bovine stare, almost puppy-like in its wide-eyed, head-slightly-tilted innocence. You’d almost see cartoon-esque question marks forming in their eyes. Start to talk about transfer pricing to them for any length of time, and you might be in danger of losing a valued friend or acquaintance (“where’re you going? I haven’t finished explaining the comparable uncontrolled transaction method yet!”). Forevermore, they would dart into the janitor’s store as you approach the office water cooler.
But for those in the know, those of us initiated into the secret codex of international taxation, of multilateral instruments, of hybrid mismatches, of country-by-country reports, transfer pricing is very important. Numerous board-level surveys tell us as much. And not for nothing are four of the 15 BEPS Actions devoted to the subject.
Governments know it too, which is why, emboldened by BEPS, they have become increasingly willing to scrutinize these intercompany pricing arrangements, and in many cases it has been worth their while in doing so. Take the United Kingdom for example, where earlier this month HM Revenue and Customs revealed that in the six fiscal years between 2012/13 and 2017/18, it secured an additional GBP6.5bn (USD8.2bn) by challenging the transfer pricing arrangements of multinationals.
In the United States, the Internal Revenue Service’s victory in the Altera case is set to shake-up the US transfer pricing environment (although an impending review of that decision by the same court does subject this to some uncertainty). Hot on the heels of Altera was a federal appeals court decision in the Medtronic case, which again backed the IRS.
There can be few doubts that the ground has shifted considerably in the world of international corporate tax, and it continues to move in governments’ favor. Indeed, taxation has probably never been so exciting! Just don’t tell your friends.
For more information on this, and other topical international tax matters, please visit: https://www.cchgroup.com/roles/corporations/international-solutions/research/global-tax-weekly-a-closer-look