Report on a session at the 14th Annual IBA Finance & Capital Markets Tax Conference held in London on 21 January 2025

Session Chair

Richard L Slowinski, Alston & Bird, Washington, DC

Panelists

Antonietta Alfano, Maisto e Associati, Rome
Sven-Eric Bärsch, Flick Gocke Schaumburg, Frankfurt
Anders Oreby Hansen, Beierholm, Copenhagen
Amelia O’Beirne, A&L Goodbody, Dublin
Deeksha Rathi, Slaughter and May, London
Philip Tully, Matheson, Dublin

Reporter

Ritva Aalto, Krogerus, Helsinki

Introduction

The panel discussed various topics related to transfer pricing audits and dispute resolution. The speakers elaborated on domestic case law and highlighted the recent trends in transfer pricing audits, including challenges in intra-group financing transactions, as well as assertions on embedded royalties by the respective tax authorities. The effect of new local, European Union and Organisation for Economic Co-operation and Development (OECD) transfer pricing rules on the resolution of transfer pricing disputes was also covered in the discussion.

Panel discussion

After the opening words by panel chair Richard L Slowinski, Antonietta Alfano began by discussing an Italian court case on the imposition of penalties related to a mutual agreement procedure (MAP). The Lombardy Second-Tier Tax Court^[1] concluded that a significant reduction in the tax claim under the MAP must be considered to imply the existence of objective uncertainty, which means that no penalties should be imposed. Slowinski pointed out that imposing penalties in transfer pricing cases is a trend in other countries as well. Alfano highlighted another court case involving the First-Tier Tax Court,^[2] according to which the tax authorities denied access to a MAP in a case involving a self-adjustment made by the taxpayer, following an audit carried out by the tax authorities, due to the lack of a deed of assessment. The Court held that the self-adjustment made could be viewed as a measure equivalent to a notice of assessment, since there was a final adjustment following a claim raised by the tax authorities at the end of a tax audit.

Anders Oreby Hansen discussed a recent Danish court case^[3] on the significance of transfer pricing documentation and burden of proof rules. The Danish Supreme Court held that when the relevant transfer pricing documentation is not significantly deficient, the burden of proof is placed on the tax authorities, and, in this particular case, the tax authorities were not able to fulfil the burden of proof. Oreby Hansen also elaborated on transfer pricing audit trends in Denmark, such as the aggressive approach taken by the Danish authorities in regard to the documentation of financial transactions. In this regard, standardised comparables are not acceptable as they need to be case specific.

The next speaker, Philip Tully, started by pointing out that the transfer pricing landscape has changed recently in Ireland and there is more activity by the Irish authorities in regard to transfer pricing cases, whereas historically there was no such activity involving transfer pricing audits. In this context, transfer pricing topics have been raised as part of the cooperative compliance network for large taxpayers. Furthermore, one area of focus of the Irish authorities is intellectual property (IP) onshoring transactions. Tully also pointed out that the use of multilateral dispute resolution is occurring more often.

Amelia O’Beirne discussed an Irish transfer pricing case involving charges related to stock-based awards. A United States parent company had not charged its Irish subsidiary for the awards granted to the employees of the Irish subsidiary. However, the Irish subsidiary was required to recognise an expense related to the awards in its financial statements. The Irish subsidiary provided services to the parent company for which it received a cost-plus based service fee. The Revenue Commissioners (Na Coimisinéirí Ioncaim), challenged the pricing by claiming that the cost for the awards should have been included in the cost base, based on which the cost-plus markup for the services was determined. The Tax Appeals Commission held that the accounting treatment was not a decisive factor in the case. The key issue was who was the decision-maker, based on the functional analysis, and who then should bear the cost. The US parent was considered to be the decision-maker and, consequently, the outcome of the case was in favour of the taxpayer.

Conclusion

Slowinski concluded that there is a new trend in that more transfer pricing disputes are arising in jurisdictions that have not been involved in such disputes before. Slowinski provided an overview of US trends. In the US, the Internal Revenue Service (IRS) has been given more funding, which has resulted in more tax revenue being generated, there are more targeted campaigns to ensure compliance, economic substance arguments have been applied more frequently and the dollar volume of transfer pricing disputes is higher than ever before. As such, companies are reviewing their intra-group agreements to make sure they are in line with their transfer pricing models.

Sven-Eric Bärsch discussed the statistics on advance pricing agreements (APAs) in Europe. He concluded that APAs are a strong instrument, but they have limitations. Deeksha Rathi raised a question about how much certainty APAs provide, due to a recent ruling wherein the pricing agreed upon in an APA was challenged for a period after the APA had expired.

Bärsch shared observations on recent transfer pricing disputes in Germany. He highlighted that transfer pricing litigation has become more relevant in practice. The German authorities have applied the risk-control concept during tax audits, according to which tax auditors may conclude that all the risk management decisions have been taken by the German parent company, leading to the allocation of the subsidiary’s interest income to the parent company, for instance.

Alfano provided a brief update on EU transfer pricing rules and the potential reactivation of the European Commission’s Joint Transfer Pricing Forum, which was followed by an overview from Rathi on potential changes to the relevant law and guidance in the United Kingdom.

Tully also discussed cases in which the tax authorities have recharacterised service fees as royalties. The Australian tax authorities, for example, have issued aggressive guidance targeted at structures with Irish IP owner entities. Alfano elaborated on similar situations in Italy.

As the final topic, Slowinski covered the challenges associated with intercompany financing transactions. In the US, the IRS has issued a memorandum that states that group membership and potential implicit support may be considered in determining the arm’s length interest rate if an unrelated lender will consider it. This position has caused a lot of discussion in the US. Alfano shared the details of an Italian case wherein the Court held that the group credit rating was the most appropriate rating. Further, Bärsch discussed new German rules on interest on inbound financing. Oreby Hansen pointed out a recent position taken by the Danish authorities according to which intra-group loans are considered to be financial activity that triggers labour market contribution obligations based on employee salaries. Finally, Rathi reflected on the BlackRock case^[4] and concluded that it is uncertain how long the victory for the taxpayer will last. Rathi estimated that there will probably be increased transfer pricing litigation in relation to financing transactions.