TAX REFERENCE LIBRARY NO 140 Published in association with: Transfer Pricing Controversy 3rd edition Transfer Pricing Deloitte.com/TP Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global EDITORIAL Getting ahead of the 8 Bouverie Street London EC4Y 8AX UK next transfer pricing Tel: +44 20 7779 8308 Fax: +44 20 7779 8500 Managing editor Anjana Haines challenge [email protected] Commercial editor Prin Shasiharan [email protected] Deputy editor Josh White [email protected] n collaboration with experts Senior reporter Mattias Cruz Cano from Deloitte, ITR brings you [email protected] I exclusive insight into how trans- Reporters fer pricing (TP) controversy is evolv- Alice Jones [email protected] ing as global businesses go through Danish Mehboob [email protected] a transformative phase in 2020. Production editor João Fernandes The guide arrives at a pivotal [email protected] moment as multinationals juggle Head of business development Margaret Varela-Christie challenges thrown at them by Prin Shasiharan [email protected] trade frictions and increasing regu- Commercial editor Head of business development – Events Jamil Ahad lations, amid widespread economic ITR [email protected] disruption. Business development executive Raquel Ipo The idea of settling into a ‘new [email protected] normal’ following the COVID-19 address problematic themes such Subscriptions manager Jack Avent pandemic has forced tax authori- as the retrospective application of [email protected] ties and taxpayers to respond. A guidelines and the regulations sur- Head of editorial David Braid number of industries are expecting rounding financial transactions. [email protected] additional scrutiny and detailed As demands and queries pro- © Euromoney Trading Limited, 2020. The copyright of all editorial documentation requests to become gressively become international, matter appearing in this Review is reserved by the publisher. the norm in the coming years. global TP controversy frame- No matter contained herein may be reproduced, duplicated or Businesses also fear that the appli- works have strengthened. China, copied by any means without the prior consent of the holder of cation of the arm’s-length princi- India and South Korea have rein- the copyright, requests for which should be addressed to the ple could be altered as forced their models over the past publisher. Although Euromoney Trading Limited has made every governments ramp up efforts to decade by adopting best prac- effort to ensure the accuracy of this publication, neither it nor any yield tax revenues. tices, while a number of develop- contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions, or any In spite of the challenges, inno- ing economies in Asia and Africa opinions or advice given. This publication is not a substitute for vation and product development continue the process of formalisa- professional advice on specific transactions. among TP professionals is at an tion. Four landmark cases from all-time high. The use of data ana- the recent past: Adecco Directors Leslie Van De Walle (Chairman), Andrew Rashbass lytics has spearheaded efficiency (Denmark), Cameco (Canada), (CEO), Wendy Pallot, Jan Babiak, Colin Day, Imogen Joss, when it has come to audits, while, Glencore (Australia), and Philips Lorna Tilbian, Tim Pennington with the help of fine-tuning, the (France), have also helped invig- ITR is published four times a year by Euromoney Trading Limited. number of mutual agreement pro- orate guidelines. This publication is not included in the CLA license. cedures in the EU are on the rise. Across the globe, Deloitte’s TP In Latin America, advance pricing controversy teams are well placed Copying without permission of the publisher is prohibited ISSN 0958-7594 agreements are being promoted to assist companies through their and will subsequently raise the particular challenges. We hope that Customer services: +44 20 7779 8610 confidence of investors in the you enjoy reading the practical UK subscription hotline: +44 20 7779 8999 region. insights explored in the third edi- US subscription hotline: +1 800 437 9997 Meanwhile, the OECD contin- tion of our Transfer Pricing: ues to lead multilateral efforts to Controversy guide. WWW.ITRINSIGHT.COM 1 Transfer Pricing Controversy 4 Foreword Transfer pricing controversy: Settling into the new normal Paul Riley, Shaun Austin and John Breen preview ITR’s controversy guide, produced in collaboration with global transfer pricing (TP) experts from Deloitte. 7 The arm’s-length principle Testing the meaning of the arm’s-length principle in 2020 and beyond Kerwin Chung and Iva Georgijew assess the impact of the coronavirus pandemic on global transfer pricing and consider how the concept of the arm’s-length principle will subsequently evolve. 12 Impact of COVID-19 How COVID-19 has transformed the hospitality, life sciences and consumer products sectors Deloitte’s Jacqueline Doonan, Aydin Hayri, Oscar Burakoff and Clarke Norton explore the impact that the economic disruption has had on transfer pricing (TP) controversy in the hospitality, life sciences and consumer products industries. 18 Key controversy cases Exploring four recent transfer pricing cases Deloitte’s practitioners from across the globe report on four of the most prominent transfer pricing (TP) controversy cases from the recent past: Adecco (Denmark), Glencore (Australia), Cameco (Canada), and Philips (France). 24 Mutual agreement procedures The rise and rise of mutual agreement procedures in the EU Eddie Morris, Jennifer Breeze and Janelle Sadri discuss how the growth in the number of mutual agreement procedures, coupled with fine-tuning of the process, has affected its themes of access, resolution and implementation. 29 Data analytics Surge in data analytics enhance efficiency of transfer pricing audits Eric Lesprit, Mariusz Każuch and Howard Osawa look at three national case studies and consider whether the increased use of international data improves cooperation among tax administrations. 34 Financial transactions Financial transactions: A complex landscape for taxpayers and tax authorities Mo Malhotra, Ariel Krinshpun and Ockie Olivier evaluate how the OECD guidance on financial transactions will influence an increasingly convoluted transfer pricing environment. 39 OECD guidelines The challenges of applying the 2017 OECD guidelines to pre-2017 years Jari Ahonen and Juan Ignacio de Molina discuss global examples and assess the practical impact of retroactively applying the OECD Transfer Pricing Guidelines. 44 Advance pricing agreements Reducing tax uncertainty in Latin America through APAs Ramón López de Haro and Alejandro Paredes evaluate how promoting the negotiation of advance pricing agreements (APAs) may raise the confidence of potential investors in the region. 2 WWW.ITRINSIGHT.COM CONTENTS 47 Developing best practices The state of transfer pricing controversy in Asia’s leading markets Aaron Wang, Vrajesh Dutia and Chris In explain how adopting global best practices has proved to be beneficial for the development of dispute resolution procedures in China, India and South Korea. 51 Building disputes framework Building the tax controversy environment in Africa, Southeast Asia and the Middle East Fred Omondi, Carlo Llanes Navarro, Anil Kumar Gupta, Lenny Saputra and Rabia Gandapur look into how developing economies across the world are embracing increasingly complex transfer pricing framework. WWW.ITRINSIGHT.COM 3 Transfer pricing controversy: Settling into the new normal Paul Riley, Shaun Austin and John Breen preview ITR’s controversy guide, produced in collaboration with global transfer pricing (TP) experts from Deloitte. oing into 2020, observers foresaw continued economic growth. Despite the overarching spread of uncertainty from various direc- G tions including Brexit, trade frictions, and proposed digital servic- es taxes, it was expected that cross-border trade – including intra-firm trade within multinational enterprises (MNEs) – would continue to expand. Arising from this, many envisaged that the trend of tax authori- ties devoting ever-increasing attention and resources to TP matters would continue. Consistent with this view, statistics issued by the OECD Centre for Tax Policy and Administration indicated an increase in the number of requests for advance pricing agreements (APAs) and mutual agreement procedure (MAP) assistance, indicating that these dispute resolution mechanisms were coming under greater demand than ever. In early 2020, the OECD issued ‘Transfer Pricing Guidance for Financial Transactions’, the final major guidance under BEPS Action Items 4 and 8 through 10. Moreover, the OECD continued to pursue its work in the digital area, with these ongoing developments expected to increase the levels of TP controversy still further. Against this backdrop, the appearance of the novel coronavirus (COVID-19) came as a dramatic shock. As national governments took steps to limit the spread of the virus, and as business activity became severe- ly impacted, governments in many countries adopted interim measures to inject cash into their economies. Alongside this, audit, APA and MAP activity either stopped or significantly declined in most countries. However, such activity, particularly in connection with TP audits, is now