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In the dawn years of transfer pricing, when the bulk of international trade focused on tangible goods, relatively little attention was devoted to the analysis of transactions involving services.  The 1968 U.S. Treasury Regulations governing intercompany services focused on the allocation and apportionment of costs with respect to services undertaken for the benefit of the related parties, roughly in line with the current Services Cost Method, and provided a high level discussion of the services that were an integral part of the business activity of a member of a controlled group without elaborating on the methods to be used to test compliance with the arm’s length standard (Section 1.482-2(b) (1968)).  In the 1995 Transfer Pricing Guidelines from the Organization for Economic Cooperation and Development (“OECD”), the analysis of pricing of intracompany services occupied a mere 15 pages.  In the mid-2000s, there was a renewed focus on the pricing of intercompany services.  First to the stage were the U.S. Treasury Regulations in Section 1.482-9 promulgated in August of 2009, followed by several International Practice Units in 2014 through 2017, and then by the OECD with a revised Chapter VII in the 2017 OECD Guidelines.  The increased attention is not surprising:  over the last 20 years, from 1999 to 2019, the growth of trade in services far outpaced that of tangible goods (215% vs 137% for exports and 199% vs 143% for imports), with particularly robust performance in maintenance and repair, financial, and business services.
Continue Reading Intercompany Services: The Next Frontier of Transfer Pricing Disputes

Assume the Internal Revenue Service (“IRS”) is auditing your company’s transfer pricing. The administrative process is starting to break down, and it looks as if the IRS might assert a sizeable income adjustment. What is your duty to save documents for a potential upcoming court case?
Continue Reading Document Preservation for Transfer Pricing Litigation: What You Need to Know

The headline news about the U.S. Tax Court’s decision on the value of Michael Jackson’s estate might have been a shock to some – or, perhaps, to many. The King of Pop’s inflation-adjusted earnings since his death in 2009, according to the Forbes magazine, were $2.1 billion. His annual earnings in 2016 were $825 million, the highest single-year payday ever recorded by a front-of-camera celebrity. And yet his image and likeness at the time of his death was valued at a meager $4 million by the U.S. Tax Court.
Continue Reading What Are You Worth?

Skyline Paris with Eiffel Tower and French flag

In a decision dated December 11, 2020 (Value Click Case), the French Administrative Supreme Court overturned a Paris Court of Appeal decision dated March 1, 2018, and concluded that the French affiliate of the group (“French Co”) should be considered as the dependent agent of the Irish affiliate company (“Irish Co”) in France for permanent establishment (“PE”) purposes. The decision is a significant reversal of prior court cases, such as the Google decision dated April 25, 2019, and it may lead to the unilateral application by France of an expansive interpretation of the definition of PEs under Article 12 of the MLI adopted with no reservation by France.
Continue Reading Landmark Decision in France Regarding PE of Digital Company

Federal Tax Court

The parties recently completed briefing on an IRS motion for partial summary judgment in Western Digital Corporation v. Commissioner. The motion asks the US Tax Court to hold that a safe harbor in the Section 482 regulations is not relevant to whether intercompany receivable terms are “ordinary and necessary” under a provision in Subpart F. In our view, the motion is an unusual attempt to bar the taxpayer from making a well-founded legal argument in a case that is over a year away from trial.
Continue Reading IRS Seeks to Bar Transfer Pricing Argument in Western Digital

Hold on a second. Cost sharing is a tax shelter? For over five decades, cost sharing has been a transfer pricing structure endorsed by Congress, regulated by Treasury and the OECD, agreed to by the IRS and foreign tax authorities alike, and widely embraced by taxpayers. How can it be a “tax shelter”? And yet that is precisely the headline from a recent district court decision in the Western District of Washington.

How did this happen? Is it right? And should we, as taxpayers, be worried about the reach of this holding somehow expanding to other tried-and-true vehicles similarly embraced by the tax law?
Continue Reading Cost Sharing Is a Tax Shelter Now. Wait, What?

Nuclear explosion

In a recent landmark case involving basic transfer pricing principles, Canada v. Cameco Corporation, 2020 FCA 112, the Canadian Federal Court of Appeal sided with the taxpayer. The Court rejected an argument by the Crown that would have applied “realistic alternatives”-like principles to effectively disregard and recharacterize certain related party purchase and sales transactions. For international observers, the case is worth studying, if for no other reason than to understand the government’s aggressive arguments. In light of the codification of the realistic alternatives principle in IRC § 482, the IRS might now be emboldened to make similar arguments in the US.
Continue Reading Canadian Federal Court of Appeal Nukes Crown’s Transfer Pricing Arguments

Western Digital

In May, the IRS asserted $340 million in transfer pricing penalties in Western Digital Corporation v. Commissioner. If the IRS prevails, these would appear to be the largest transfer pricing penalties sustained in US Tax Court history.

The penalties are notable not only for their amount, but also for the way the IRS raised them. The IRS did not apply penalties in its notices of deficiency or in its initial Tax Court pleadings. Instead, the IRS asserted the penalties in amended pleadings over a year after the case began.
Continue Reading IRS Asserts Big-Ticket Transfer Pricing Penalties in Western Digital