Transfer Pricing Perspectives: Winds of Change

www.pwc.com/transferpricing Winds of change Transfer Pricing Perspectives A collection of articles that discuss some of the significant policy and legislative changes taking place in Transfer Pricing Foreword In the constantly shifting tax regulatory Perspectives: Winds of Change, is a collection landscape, post-recessionary pressures of articles evolving from the PwC Global have resulted in governments looking for Transfer Pricing Conference 2010, that ways to increase tax revenues. This has review some of the significant policy led to new policies and legislation; new and legislative changes taking place and OECD guidelines; increased tax authority the challenges these present, along with enforcement around transfer pricing and some transfer pricing challenges from additional documentation requirements selected industries. in certain countries. In addition, wider economic, environmental and technological To keep up to date with the latest transfer factors are bringing about organisational pricing developments around the world, transformation, as companies review sign up to our PKN alerts by visiting their strategies in light of today's business www.pwc.com/pkn. We have a number challenges. This evolving landscape of events taking place in 2011 including Garry Stone presents an even greater challenge to the PwC Annual Global Transfer Pricing Global Leader, Transfer Pricing company executives who need to keep their Conference in Singapore from 19 - 21 finger on the pulse of change and constantly October. Further event details will be PwC US adapt their pricing strategies. available shortly and also via your usual transfer pricing or tax contact. I look forward to seeing you there and hope you enjoy this edition of Transfer Pricing Perspectives. Garry Stone PwC US Contents Click to navigate First published in International Transfer Pricing Journal 2 (2011), cited with the permission of IBFD, see www.ibfd.org Transfer Pricing Litigation: A Comparative Study of Fourteen Countries Introduction This article summarises what you should It has been explained many times why know about litigating a transfer pricing companies can expect to face more case in a foreign country, as well as challenges to their transfer pricing models looking at the overseas issues which you in all the countries in which they operate. will have to consider, over and above the When such disputes arise, they can be dealt issues you already face from litigation in with in various ways, including negotiate your home country. Our review covers 14 and settle; litigate; or apply for a mutual countries, with representation from all agreement procedure or arbitration under trading continents: Australia, Belgium, international treaties. Each of these ways Brazil, Canada, France, Germany, India, has its own advantages and disadvantages. Japan, Korea (Rep.), Malaysia, Mexico, the During the PwC1 Global Transfer Pricing Netherlands, Poland and the United States. Conference in Budapest in October 2010, PwC practitioners debated with the tax directors and other leading tax specialists of international companies on litigation as a possible way of settling disputes with tax authorities. It soon appeared that there are quite some differences among the countries represented, and that some of these differences were unexpected. 1’PwC’ refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. ‘ PwC practitioners debated with the tax directors and other leading tax specialists of international companies on litigation as a possible way of settling disputes with tax authorities’ Administrative appeal As a first step, a multinational corporation may have to file for administrative appeal against the transfer pricing adjustment with the local tax authorities. If the company wants to litigate its case in court, this step is mandatory in some countries, but not in all countries, as indicated in Table 1. In India, which has more complex rules in this area, the taxpayer can choose to start the administrative appeal at two different institutes of the government, namely the Dispute Resolution Panel or the Commissioner for Appeals. The existence of two options means that you have to develop a strategy which enables you to make the best choice for your case. All countries where an administrative appeal is a mandatory step prior to litigation, reported that they have rules allowing the taxpayer to go to court if the government fails to take a decision on the administrative appeal within Table 1 Key a certain time period. Administrative appeal is a Belgium, Canada, Administrative appeal is a mandatory step for litigation mandatory step for litigation France, Germany, India, Administrative appeal is not a mandatory step for litigation Japan, Korea, Malaysia, Netherlands, Poland Administrative appeal is not a Australia, Brazil, Mexico, mandatory step for litigation United States All countries have a system in place in which Reputational aspects of the administrative appeal is handled by a tax litigation different person than the one who has issued Most multinational corporations consider the tax assessment with the transfer pricing corporate responsibility as a cornerstone adjustment. The purpose of this procedure of their reputational strategy. Corporate is to ensure that the issue is reviewed within responsibility is about corporate self- the tax authority by an independent tax regulation, support to law enforcement and inspector with a fresh view. In Poland and ethical standards. It is about the deliberate the United States, the administrative appeal inclusion of the public interest into corporate is even handled by a separate part of the decision making. The question therefore government. In most countries, however, arises as to how tax litigation relates to the the administrative appeal is handled by a company’s corporate responsibility strategy different individual within the same tax and to its reputation, especially if the issue office. As transfer pricing adjustments in may be described in a newspaper article as practice are decisions by a team within a "aggressive tax planning". As an anecdote, tax authority, you may be concerned at how you may recall that, when GlaxoSmithKline fresh the view in administrative appeal settled its US transfer pricing dispute with is in reality, as the internal reviewer may the IRS in 2006, a reputable newspaper Key Table 2 already know of the case and the sentiments commented that “the IRS accused Taxpayers named in Taxpayers named in Australia (but petition for surrounding the case, e.g., within the GSK of transfer pricing”. Apparently litigation litigation anonymity), Belgium, Brazil, framework of internal technical meetings. misunderstandings easily arise. Some Canada, France, India, Japan, Taxpayers not named in Korea, Malaysia, Mexico, Poland, companies have a strict policy not to litigate litigation With these issues in mind, the question their tax issues because the government is United States arises as to why taxpayers would bother also an important customer of the group. Taxpayers not named Germany, Netherlands to file an administrative appeal in those The company therefore may want to balance in litigation countries where it is not a mandatory step possible benefits of litigation against the prior to litigation. The answer is that, possible impact of litigation on its reputation despite the said issues, a large number of with financial markets and customers. Table disputes are resolved on administrative 2 shows in which countries it can become appeal in favour of the taxpayer, especially public knowledge that a multinational in the United States. In addition, it is corporation has serious tax issues. less costly and less time consuming than litigation. Finally, none of the countries require that the administrative appeal be filed by a lawyer who is admitted to the bar. ‘ In Canada, 50 percent of the disputed tax must be paid upfront or else be guaranteed’ Key Up-front payment Guarantee Suspended Subject to negotiation Cash is king Table 3 An important consideration for the group In Brazil, taxpayers can choose to bring Up-front payment Canada (50%), Japan, Korea, Malaysia, Poland, will be whether it has to pay the disputed tax their case before an administrative court United States (federal district court; court of upfront, especially in view of the long time or directly before a judicial court. Disputed federal claims) frame of litigation. All countries reported tax is suspended while the litigation is in Guarantee Brazil (judicial court), Canada, France (but not in that the full cycle of litigation lasts between the administrative court. Before the judicial MAP), Japan (only in MAP), Mexico five and ten years. India is the exception to court, taxpayers must proceed with a Suspended Belgium, Brazil (administrative court), this rule, where litigation is anticipated to deposit of the disputed tax or offer assets in Netherlands, United States (tax court) take more than ten years. guarantee. Alternatively, they can plead for Subject to negotiation Australia, Germany, India a preliminary injunction in order to suspend There were a number of variations in the disputed tax, although such preliminary response to the question of whether the injunction is unlikely to be granted. In disputed tax must be paid up-front. In Canada, 50 percent of the disputed tax must the United States, the answer depends be paid upfront or else be guaranteed.

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