In April, the IRS released a practice unit on country-by-country (or “CbC”) reporting. The purpose of the document is twofold: (i) describe the background of CbC reporting and (ii) provide guidance to IRS personnel on the use of CbC reports “in the IRS high-level transfer pricing risk assessment process.” Although the practice unit repeatedly stresses that the IRS will not audit CbC reports, there is potentially less to this claim than meets the eye.

Continue Reading Less than Meets the Eye: The IRS Practice Unit on CbC Reports

On March 22, 2022, the Internal Revenue Service’s Advance Pricing and Mutual Agreement Program (“APMA”) released its 2021 Announcement and Report Concerning Advance Pricing Agreements (“2021 Annual Report”). The 2021 Annual Report shows that multinationals’ demand for advance pricing agreements (“APAs”) is high and increasing, with APMA receiving 145 APA applications in 2021, a 20% increase from 2020. The report similarly shows that APMA made steady progress in concluding APAs during 2021 with 124 completions, with notable highlights including a substantial increase in completions of bilateral APAs with Germany and a decrease in completions of bilateral APAs with India. Continue Reading APMA’s 2021 APA Annual Report Shows High Demand for APAs by Multinationals and Steady Progress by APMA in Concluding Cases

In a recent Legal Update[1], we discussed the emerging intersection between Tax and ESG and highlighted the various external stakeholders pressuring for greater visibility into the global tax positions of multinational companies (MNEs).  One increasingly vocal stakeholder group is activist shareholders.  Recently, a group of institutional investors of a Fortune 50 company initiated a shareholder proposal calling for the company to publicly disclose where and how much tax it pays around the world.  This is only the latest in what is becoming a regular request by activist shareholders.

Continue Reading Tax Meets ESG: Shareholder Activism Expanding to Tax Transparency

On January 20, 2022, the OECD released the latest version of its OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The 2022 Transfer Pricing Guidelines update the 2017 edition by incorporating guidance released by the OECD over the past few years on the transactional profit split method, hard-to-value intangibles, and financial transactions. Although there is no completely new guidance in the 2022 Transfer Pricing Guidelines, some of the previously released guidance now formally incorporated in the Guidelines is quite significant. This includes new Chapter X on financial transactions, which among other guidance incorporates proposed and controversial changes to the Commentary on Article 9 of the OECD Model Tax Convention.

Continue Reading The 2022 OECD Transfer Pricing Guidelines: Mostly An Update

The European Commission has repeatedly expressed its ambition to implement the Two-Pillar agreement in a coherent and consistent way across Member States. On December 22, 2021, a mere two days after the Inclusive Framework released its Pillar Two package, the EC proposed a Directive to implement Pillar Two for large multinational groups operating in the European Union. The Directive would implement the GloBe Model rules only, leaving Pillar One for another time.

The proposal sets out how the effective tax rate will be calculated per jurisdiction, and includes binding rules that will ensure large groups in the EU pay a 15% minimum rate in every jurisdiction in which they operate. The design elements of the Directive consist of the OECD Model rules and the -still to be released-Commentary and detailed implementation guidance. The Commission proposes that the Directive be finalized by the middle of 2022 and transposed into national law in Member States and effective on January 1 ,2023. The timetable envisaged by the Commission is ambitious and raises an issue with regard to the OECD process. Indeed the explanatory Commentary is not scheduled to be released by the OECD before January or February and the implementation guidance will not be available until then end of 2022 or even early 2023.

It remains to be seen whether the EU is overly ambitious particularly in light of the fact that the US legislation that would implement Pillar Two is delayed and uncertain.

Continue Reading EU Sets Pillar Two In Motion

On December 20, 2021, the OECD released the Model Rules for Pillar Two or the “Global Anti-Base Erosion” (GloBE) Rules.[1] The GloBE Rules are the first step towards implementing the groundbreaking international agreement reached by more than 135 countries announced by the OECD/G20 Inclusive Framework in October 2021.[2] Pillar Two provides for a minimum 15% tax on corporate profits for multinational enterprises (MNEs) with more than EUR 750 million in consolidated revenues. Continue Reading The OECD’s Pillar Two Model Rules Have Arrived

In ancient Rome, a college of “augurs” would predict the future by observing the flight patterns of birds, examining the entrails of animal sacrifices, or interpreting natural phenomena. While perhaps less colorful, our method of divination will hopefully be a little more precise. To develop this blog post, we have consulted our own augurs and have summarized all our predictions for transfer pricing developments in the coming year.

Continue Reading Looking Forward: Predictions for 2022

Pillar Two, which ensures that an MNE’s in-scope income will be subject to a minimum tax rate of 15%, is ready to go. On December 2, the Model Rules were agreed upon within the OECD Inclusive Framework and the EU is willing to speed up Pillar Two implementation. The formal endorsement by the Inclusive Framework (IF) and release of the Model Rules to the public are expected next week. A week later, on December 22, the draft EU Directive should be available and a EU Council discussion is already planned during the first week of January 2022. With respect to the primary rule of Pillar Two, the Income Inclusion Rule (IIR), the contemplated EU directive would apply when an Ultimate Parent entity (UPE), an Intermediate Parent Entity (IPE) or a Partially Owned Parent Entity (POPE) is located in a EU Member State.

Continue Reading OECD Pillar Two: The EU Implementation on Its (Express) Way

On October 13, 2021, the G20 Finance Ministers and Central Bank Governors issued a Communiqué formally endorsing the political agreement reached by 136 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) on a two-pillar framework to dramatically change the taxation of multinational enterprises (MNEs). The  Communiqué calls on the IF “to swiftly develop the model rules and multilateral instruments. . .with a view to ensure that the new rules will come into effect at global level in 2023.” The Finance Ministers’ endorsement is an intermediate step concluded in anticipation of the G20’s full approval of the agreement to be considered at the next G20 meeting in Rome at the end of October.

As discussed in our recent Legal Update, the IF had announced the landmark 136-country agreement just five days earlier on October 8, 2021. Importantly, the agreement would reallocate $125 billion of annual profit to countries that would not otherwise tax such profits under current international tax norms and require that all profits be subject to a global minimum tax rate of 15%. To reallocate such profits, the agreement relies in large part on a new formulary taxing right called “Amount A.” Specifically, Amount A reallocates 25% of the residual profits (i.e., profits in excess of a 10% margin) of approximately 100 of the world’s largest and most profitable MNEs from the jurisdictions that currently earn the residual profits to the MNE’s market jurisdictions. While Amount A is an explicitly non-arm’s length allocation, it operates as an overlay rather than an override to the existing transfer pricing rules. This will likely create complex interactions between the new and existing rules that will put additional pressure on existing transfer pricing methodologies and create the potential for double taxation. This in turn will put added pressure on the new multilateral mandatory dispute resolution mechanism that the agreement contemplates will be put in place to resolve Amount A-related disputes.

Click here for the complete Legal Update.

On August 13, 2021, the IRS released a Chief Counsel Advice (“CCA”) (CCA 202132009) addressing the tax treatment of intercompany reimbursements of the Branded Prescription Drug (“BPD”) fee, a non-deductible excise tax imposed by the Patient Protection and Affordable Care Act on entities that manufacture or import branded prescription drugs for sale to specified government programs. The CCA concludes that intercompany reimbursements of the BPD fee are not per se excludable from gross income, but rather, the inclusion or exclusion of the reimbursement depends on whether the entity paying the fee was the beneficiary of the payment under the facts and circumstances. For pharmaceutical companies subject to the BPD fee, the CCA stops short of providing certainty that reimbursements of the fee are per se excludable, but nevertheless, offers useful guidance on how the reimbursements might be structured to support exclusion in many cases. Outside of the pharmaceutical industry, companies in other industries that pay and receive intercompany reimbursements of other material non-deductible costs may also find the CCA’s guidance to be instructive by analogy.

Continue Reading IRS CCA Addresses Intercompany Reimbursements of Branded Prescription Drug Fee: Guidance May be Relevant to Taxpayers Across Industries with Material Non-Deductible Expenses