Public Policy and Legislative

In the U.S., transfer pricing benchmarking under the Comparable Profits Method (“CPM”) or Transactional Net Margin Method (“TNMM”) depends on the availability of public company financial data. In recent years, the decreasing number of U.S. listed and non-exchange traded companies has made this benchmarking more challenging, not only due to the smaller population from which the comparable can be selected: Many of the remaining listed and non-exchange traded companies are either large companies that own intangibles or small companies that often operate at a loss. This trend should prompt transfer pricing practitioners to consider new, creative approaches in selecting comparable companies for purposes of CPM/TNMM, and in appropriate cases, to re-consider transactional or other methods that do not rely on publicly available profitability data. Further, an APA might now be a prudent choice to obtain certainty, even if APAs had not been considered necessary or worthwhile from a cost-benefit perspective in the past to mitigate tax risk.

Continue Reading The Vanishing U.S. Comparable

Consider the following hypothetical: Researchers at a US-parented drug company develop an artificial intelligence (or “AI”) system that can identify new therapeutic targets with minimal human intervention. The drug company sells the system to its foreign affiliate in a lower-tax jurisdiction. What is the appropriate valuation of the system on this outbound transfer (e.g., based on the cost to create it or based on the value of the IP it is likely to generate)? And, when the AI system later successfully creates a new therapeutic, which entity will be entitled to the non-routine returns from sales of the therapeutic: the US parent that developed the system, the foreign subsidiary that owns the system that developed the therapeutic, or some combination of both?

Continue Reading Transfer Pricing for AI-Generated Intellectual Property

According to the OECD, the new international taxation framework set forth in its Pillar One blueprint recognizes that in an increasingly digital age, taxing rights can no longer be exclusively determined by reference to physical presence. The blueprint therefore contains new nexus rules for in-scope revenue under Amount A. (For an overview of Pillar One and a discussion of the scope of Amount A, please see our prior blog posts.) The scope tests seek to capture those large MNEs that are able to participate in an active and sustained manner in the economic life of market jurisdictions through engagement extending beyond the mere conclusion of sales, in order to generate profits, without necessarily having a commensurate level of taxable presence in that market (based on existing nexus rules).

The nexus rules are designed to protect the interests of smaller jurisdictions, and in particular developing economies, and their desire to benefit from the new taxing right. The new nexus rules determine entitlement of a market jurisdiction to an allocation of Amount A only. They do not alter the nexus rules for other tax purposes. The new nexus rules could apply differently for ADS (Automated Digital Services) and CFB (Consumer Facing Businesses). For ADS, exceeding a market revenue threshold could be the only test to establish nexus. According to the OECD, the very nature of the ADS allows them to be provided remotely and such businesses generally have a significant and sustained engagement with the market even if there is not a physical presence. For CFB, the OECD believes that the ability to participate remotely in a market jurisdiction is less pronounced. This, together with the additional complexity and compliance costs associated with sourcing revenue derived by CFB and the broad acknowledgment that profit margins are typically lower for CFB compared to ADS, could justify a higher nexus standard for CFB. One approach for satisfying this higher nexus standard is through a higher threshold and the presence of additional indicators (“plus” factors) which would evidence an active and sustained engagement in that jurisdiction beyond mere sales.


Continue Reading OECD’s Pillar One Blueprint: Nexus for Purposes of Amount A

The new taxing right established through Amount A of Pillar One[1] only applies to those multinational entity (MNE) groups that fall within the defined scope of Amount A.  The scope of Amount A is based on two elements:  an activity test and a threshold test.

According to the OECD, the definition of the scope responds to the need to revisit taxing rules in response to a changed economy.  The existing international tax rules generally attach a taxing right to profits derived from a physical presence in a jurisdiction.  However, given globalization and the digitalization of the economy, the OECD believes that businesses can, with or without the benefit of local operations, participate in an active and sustained manner in the economic life of a market jurisdiction through engagement extending beyond the mere conclusion of sales, in order to increase the value of their products, their sales and their profits.


Continue Reading Tax Challenges Arising From Digitalisation, Report on the OECD’S Pillar One Blueprint: Scope of Amount A

Just in time for the holidays, the OECD has published detailed guidance about the impact of the COVID-19 pandemic on transfer pricing. The guidance has useful information for taxpayers and tax administrations alike. It contains general advice on the application of basic transfer pricing principles during the pandemic, as well as specific advice on four issues: (i) comparability analyses, (ii) allocating losses, (iii) government-assistance programs, and (iv) advance pricing arrangements (“APAs”). The OECD guidance is broadly consistent with comments we made in a prior post about the impact of the pandemic on transfer pricing.

Continue Reading OECD Guidance on Pandemic’s Impact on Transfer Pricing

As indicated in an earlier post, the EU Commission had proposed in July to amend the Directive on Administrative Cooperation, to extend the EU tax transparency rules to digital platforms. The Member States have now agreed on the proposal. The agreed proposal on administrative cooperation (DAC 7) will ensure that Member States automatically exchange information on the revenues generated by sellers on digital platforms, whether the platform is located in the EU or not.

Continue Reading New Tax Transparency Rules for Digital Platforms (Update) and More

The European Union passed a sixth version of its Directive on Administrative Cooperation in the Field of Taxation, known as “DAC 6” (Directive (EU) 2018/82 2), on 25 May 2018. DAC 6 introduces reporting requirements for professional intermediaries (and under certain circumstances tax payers) relating to their involvement in a wide range of cross-border arrangements and transactions featuring “hallmarks” of tax planning concerning one or more EU Member States or the UK. These are referred to in DAC 6 as “reportable cross-border arrangements“. Specific hallmarks relate to transfer pricing (category E) and they do apply without main benefit test.

Failure to comply with DAC 6 could imply significant penalties under domestic legislations of the EU member states (and the UK) as well as reputational risks for not only intermediaries ( law firms, accounting firms , banks …) but also for businesses and individuals.


Continue Reading Always More Transparency in the EU: DAC6 and Transfer Pricing

Addressing the tax challenges arising from the digitalization of the economy has been a top priority of the OECD since 2015.  In January 2019, the OECD agreed to examine proposals in two pillars.  Pillar One is focused on nexus and profit allocation whereas Pillar Two is focused on global minimum tax.  In July 2020 the OECD was mandated to produce reports on the Blueprints of Pillar One and Pillar Two by October 2020.

According to the OECD, in an increasingly digital age, businesses are able to generate profits through participation in the economic life of a jurisdiction with or without the benefit of a local physical presence, and this should be reflected in the design of nexus rules.  The Pillar One Blueprint proposes to allocate a portion of residual profit of in-scope businesses to market or user jurisdictions (“Amount A”) generally without regard to physical presence.
Continue Reading Tax Challenges Arising from Digitalisation, Report on the OECD’s Pillar One Blueprint: Executive Summary

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?

In February 2018, the OECD and Brazil started a joint project to analyze the similarities and differences between Brazilian legislation and the transfer pricing (“TP”) frameworks to assess cross-border transactions between associated enterprises from a tax standpoint. This project is within the scope of Brazil’s initiative to engage with the OECD in tax-related projects, and, in a broader respects, consistent with Brazil’s interest in initiating the process to join the OECD.

Continue Reading General View of the Project “Transfer Pricing in Brazil”