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Transfer pricing cases to watch in 2020

Apple wins big

Taxpayers must prepare for an increasing number of difficult questions from the tax authorities over the coming decade. ITR reviews a few of the biggest upcoming TP cases for tax professionals to keep an eye on in 2020.

All around the world multinational companies continue to face the brunt of tax authorities looking to raise more revenue. Transfer pricing (TP) has become a core focus in such cases. Companies with cost-sharing agreements, holding companies, inter-company loans and intellectual property are on the radar of tax administrations.

These cases often revolve around the specifics of TP methodology. The exact application of the arm's-length principle (ALP) and the best way to achieve it are more contested today than a decade ago.

"TP planning takes up more time today than ever before, it's now front and centre of tax strategy," says Sandy Bhogal, partner at Gibson, Dunn & Crutcher. "Companies are facing more scrutiny over TP as a result."

It's also at the heart of the debate on international tax reform. The OECD has presented proposals to rewrite global rules on profit allocation, while governments are still implementing the BEPS project. The full impact of initiatives like country-by-country reporting (CbCR) is still taking shape.

Several prominent cases should be on the radar for tax professionals around the world. The EU continues its war on illegal state aid, while the US courts are busy processing cases brought to them by the Internal Revenue Service (IRS).

New decade, old battles


After two years in court, Apple and the Irish government still hope to overturn the EU's controversial 2016 decision to recoup a tax bill of €13 billion ($14.4 billion) plus €1.2 billion in interest. The stakes are high if the EU General Court rules against the iPhone maker.

The European Union General Court (EGC) opened proceedings on the state aid case in September 2019 and heard the company and the Irish authorities present their arguments against the European Commission.

The US technology company has operated in European markets through Ireland for decades. The company first set up its Irish operation in 1980 and today has more than 6,000 employees in the country, but the operation had a dual structure with a head office running parallel to the manufacturing plant.

The European Commission believes that Apple's effective tax rate in Ireland fell to an all-time low of 0.005% in 2014, but the company maintains that the rate is misleading because it includes Apple's global revenue and the global business effective rate was 24.6%.

Taxpayers may see the Apple case reach its finale in 2020, or there may be a long struggle ahead. The US technology company may still have to flip a hefty bill in back taxes, if the case doesn't go in its favour, and the Irish government will be obliged to collect.


In the US, the Altera case has dragged on for many years, but it's still possible the case will go to the US Supreme Court in 2020. The high-tech industry is watching the tussle closely as the outcome will have multi-billion-dollar repercussions for household names like Facebook and Google.

The case goes back to 1997 when the IRS and Altera, which is now owned by Intel, signed an advance pricing agreement (APA) to cover the US company's arrangements with its subsidiary in the Cayman Islands. The agreement exchanged licensing rights on Altera's pre-existing intangible assets for royalty payments from the subsidiary. A key part of the fine print of the deal obliged Altera's US entity and the Cayman subsidiary to pool their resources to share the burden of research and development (R&D) costs.

Everything was fine until the US adopted new regulations through the 2003 Administrative Procedure Act, and the US Treasury obliged taxpayers to include employee stock options in the cost pool under cost-sharing agreements.

The IRS argued that the taxpayer had failed to include stock compensation costs as part of its qualified cost-sharing arrangements. This failure, the tax authority argued, reduced Altera's income in the US and in doing so violated Section 482. Years of legal argument ensued.

The Ninth Circuit Court set a historic precedent with its ruling in favour of the IRS July 2018, and defended its position again in June 2019. Altera decided to fight on anyway, but the company lost its bid for a rehearing in November. The next step could be the Supreme Court.

Banco Santander

Back in the EU, Banco Santander has locked horns with the European Commission for more than a decade over a state aid dispute that could set a precedent for other similar battles. The Spanish bank was originally one of a few companies in this battle.

The case concerns a corporate tax benefit introduced by Spain in 2001, and could be appealed yet again to the Court of Justice of the European Union (CJEU). Spanish law grants a corporate tax break to Spanish companies buying a 5% stake or more in a foreign company for at least a year.

In January, the CJEU issued an opinion on the case, rejecting a Spanish tax tribunal's request for guidance on the validity of the European Commission's decision in Banco Santander. The CJEU ruled that the Central Tax Tribunal does not meet the criteria of independence to be seen as a court or tribunal.

The European Commission ruled in 2014 that the Spanish bank had received illegal state aid. The Spanish government was obliged to claw back the revenue from the tax breaks granted to Santander. This was a landmark decision given that Banco Santander is one of the largest banks in Europe.

Not all state aid cases get a favourable hearing in the EU courts. For example, the CJEU ruled in favour of the taxpayers in the case of Starbucks in 2019. This was a significant blow to the EC's work on state aid. However, the Santander case could counter this precedent if it goes against the taxpayer.


Glencore has the curious distinction of being the first company to face a court battle over the Paradise Papers leaks. However, the mining company's TP case deserves much more attention given its implications.

The Australian Taxation Office (ATO) challenged Glencore on its international structure, in which Cobar Management (CMPL) sold 100% of the copper concentrate produced in New South Wales to its Swiss parent company Glencore International AG (GIAG).

Although the price itself was based on the rate set by the London Metal Exchange, the ATO claimed that this price-sharing arrangement was not in line with the arm's-length principle. The mining company would not have entered into such an arrangement had it been between independent parties, the tax office argued.

The Federal Court of Australia (FCA) rejected the ATO's position in September 2019 and held that the CMPL-GIAG arrangement was in line with the ALP.

Nevertheless, very few TP cases end swiftly. The ATO has already filed an appeal at the Full Federal Court and the mining company will have to fight its corner once again. The case could have significant implication for companies routing operations through Switzerland.


The Medtronic case is another US case that goes back several years, but it's now on remand and may resurface in 2020. Similar to the Altera case, Medtronic's legal battle concerns its cost-sharing arrangements with its Puerto Rican subsidiary.

The case first concluded in June 2016 when US Tax Court Judge Kathleen Kerrigan largely ruled in the company's favour, but the IRS launched its appeal in July 2017, arguing that the Tax Court did not apply the correct transfer pricing method when it calculated the arm's-length royalty rates for Medtronic's inter-group licenses.

The proceedings span more than a decade, as the case goes back to 2005 and 2006 – when the IRS claimed Medtronic was due to pay $1.4 billion in taxes to Puerto Rico. The IRS maintains that the Tax Court made an error of law in using the Pacesetter transaction as a comparable uncontrolled transaction (CUT).

The 1994 Treasury regulations should apply first to evaluate whether the Pacesetter agreement qualified as a CUT, the revenue service claimed. If the IRS had won in 2016, the revenue service could have extended its claim to the company's arrangements since 2007.

The Eighth Circuit Court of Appeals remanded the Tax Court decision in August 2018 and gave the IRS another chance to win the decade-long court case. Whether or not Medtronic can successfully defend itself will have implications beyond the healthcare industry.

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