Companies redouble TP efforts over dispute fears

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Companies redouble TP efforts over dispute fears

justice-tp-disputes-600x375

Facing more scrutiny than ever, multinational companies are devoting a growing amount of resources to transfer pricing (TP) policy in a bid to avoid damaging court cases.

“It’s not just an occasional bolt-on to the day-to-day operations of a tax department,” one TP director at a British company said. “Managing the risk of disputes has become the number one priority for many tax leaders.”

The risks of getting caught off guard can damage profitability and cost a company its reputation. The tax authorities are also facing pressures over how to find the resources to deal with disputes, especially as many revenue services are underfunded. The costs are high for both parties as court cases can take years, or even decades, to conclude.

“This is at the forefront of what a corporate tax department does now,” the director said. “It’s not just about what could happen in the future.”

Despite fighting multiple cases in recent years, the IRS shows no sign of backing down from future US disputes. Even in jurisdictions, such as India, where the number of cases are in decline there is an increase in the complexity of the disputes.

The problem is that the heightened scrutiny and exposure that taxpayers face means many challenges are unforeseeable. TP disputes are only going to increase as more countries pursue unilateral action on measures like digital taxation, or decide to reassess the terms of an advance pricing agreement.

“We’re not just dealing with possible disputes over how to apply agreements,” the director said. “It’s about the fundamental concepts of where and how multinationals generate value and profit.”

“Multinationals are looking to articulate how they create value and what taxes they should be paying,” they said. “It’s meant to be fact-driven.”

Instead of a fact-driven process, there is more subjectivity involved in how certain aspects of new TP standards work in practice and this does not help reduce the risks for businesses. Even past deals going back decades are up for question.

In the cases of Medtronic and Coca-Cola, the taxpayers have had to defend their interpretation of past agreements with the revenue authorities and, therefore, APAs do not offer the guarantee they once did.

The onus is likely to fall on TP directors in the meantime because of the critical role transfer pricing plays in identifying where value is created and how it should be treated. But the world may be moving away from some of key concepts like the arm’s-length principle (ALP).

One vice president of TP at a tech company suggested that this cuts to the heart of the matter. “Every tax system needs longevity and stability to guarantee certainty for taxpayers,” the vice president said. “If you think the present tax system has longevity, you’re wrong.”

“We need consistency and a wide uptake to ensure consistency,” they added. “Going for a hybrid approach or switching between different models is not going to work.”

Many developed countries are enacting new measures on digital tax, but, at the same time, developing countries are raising their own demands on taxpayers. India has implemented its own equalisation tax to deal with the dilemma of how to tax the online economy. But it is far from alone.

There is a growing trend towards source-based taxation, which may mean many governments erode the ALP in favour of a different approach to profit allocation. Yet this is going on just as corporate tax rates are falling around the world.

“Source-based taxes increase economic inefficiency in the international tax system,” one tax director at a telecommunications company said. “You have to tax things that are immobile and consumers tend to be immobile.”

“This is why some people say corporate tax is dead and we should move to indirect taxes on consumption,” they said. “The problem is this would be regressive.”

The pace of change in international tax has raised more questions for taxpayers than ever before. As tax laws are reformed, the challenge is twofold. The tax authorities find themselves grappling with new rules and taxpayers often lack the precedents they need to prepare themselves for every eventuality.

more across site & shared bottom lb ros

More from across our site

Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
The US president also unveiled a new 50% levy on copper imports; in other news, a UK wealth tax proposal has been criticised by the Institute for Fiscal Studies
Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Gift this article