What are the main current topics in transfer pricing controversy?
The first one is no surprise; everyone is talking about the OECD BEPS project. This includes country-by-country reporting requirements. While it’s not a hot topic in controversy yet, it certainly will be. In other words, it may be too soon for anything to have risen to the level of creating controversy yet, but it’s becoming a hot topic, and is expected to be a hot topic for the future.
What is currently creating a lot of the existing controversies is also no surprise; it is primarily the issue of transfers of intangibles. This topic touches so many different issues, including the cost sharing of intangibles and the intercompany licencing of intangibles. In the United States we had a regime for Puerto Rican companies under Section 936, and when the U.S. government did away with it, there were intangibles issues created because you needed to have an intercompany licence to the new foreign entity. There are many transfer pricing issues out there, but it all seems to come back to the issues of intangibles, at least with respect to the U.S. However, I think this more-or-less also applies to the rest of the world as well.
As the BEPS process is likely to increase the global TP controversy, what steps do you think companies can take, if any, to reduce the potential issues?
I strongly believe that BEPS is bound to increase controversy, and I think it specifically comes from the country-by-country reporting that is being implemented. Once all the cards are laid out by taxpayers, we can expect the controversies to begin.
I think the best steps to take depends on the current situation that your company finds itself in. For example, how aggressive of a structure does your company have? In some cases there may not be anything to do necessarily, other than to focus on the country-by-country reporting and be confident in providing the appropriate level of data.
On the other side of the spectrum, there are certainly steps to consider, although some can be extreme. One action that could be taken is to consider restructuring your operations in preparation for the new rules.
It truly depends on the situation.
What do you think the future will be for mandatory binding arbitration?
In general, the BEPS project was not intended to reduce controversy, so the fact that we are creating additional controversy as a result of BEPS is what some would say, fine. Perhaps it’s not the intended consequence, but from my perspective it’s a natural consequence of the project itself. I think people are talking about mandatory binding arbitration because it is what they are hoping will save taxpayers from the issues that the BEPS project necessarily creates. With that said, I am slightly pessimistic.
What are the main aspects of a successful controversy management strategy in the post-BEPS era?
I think it is very important to choose your advisers wisely and to pick the best people for the job at hand; keeping in mind that they may not always be from the same firm. There will be one or two advisers that rise to the top, and you should not hesitate to engage them. It is really going to be important to have the best resources supporting you, and at some point this may involve the support of multiple advisers. In some cases it may not be enough to have an attorney (or attorneys) representing you, but you may be well served to include support from an external economist, even if you have on-staff economists employed by your company. It’s not necessarily a time to try to save money on your consulting fees, but rather you will need to target the appropriate resources due to your specific facts and circumstances.
