Transfer pricing cases to watch in 2021
Companies like Apple, Coca-Cola and Facebook are locked in court battles over their transfer pricing (TP) arrangements. ITR reviews a few of the biggest TP cases for tax professionals to keep an eye on in 2021.
Several landmark cases were concluded in 2020, including Cameco, Glencore, Vodafone and Cairn, where the courts ruled in favour of the taxpayer. Yet tax authorities are determined to appeal a number of transfer pricing cases in the coming year that include household names such as Apple, Coca-Cola, Facebook and Vodafone. Many more new TP cases are also expected as governments try to recover tax.
“Fights among different countries in terms of tax controversy are going to be significant in the years ahead,” said one tax director at a multinational company. “Revenue-starved countries will get parochial and seek out their ‘fair share’.”
Tax directors are expecting more disputes because of the competition among countries for tax revenue. Taxpayers are also preparing for a wave of audits and disputes as tax authorities look to raise revenue without increasing tax rates to recover the costs of the COVID-19 crisis. In the meantime, tax authorities have plenty of unfinished business to settle.
New year, old problems
In the EU, the European Commission’s decision to appeal the Apple case to the Court of Justice of the European Union (CJEU) could set the standard for state aid cases.
Apple won a historic victory against the European Commission in July 2020 at the General Court of the EU (GCEU), but it was unlikely the Commission was going to accept defeat. By September, the Commission had decided it would be take the case to the CJEU.
“The General Court has made a number of errors of law. For this reason, the Commission is bringing this matter before the European Court of Justice,” said Margrethe Vestager, vice president of the European Commission.
Neither Apple nor the Irish government are going to concede. Irish Finance Minister Paschal Donohue stands firm that “the correct amount of Irish tax was paid, and that Ireland provided no state aid to Apple”.
Many US multinational companies that have operated across the EU through similar arrangements as Apple are watching the case because they believe they have been unfairly targeted by the Commission. This perception will continue whether Apple wins or loses the CJEU case. However, if Apple does lose, the European Commission will be emboldened to pursue more state aid cases.
Ireland’s finance minister said the appeal process “could take up to two years to complete”.
After the US Tax Court ruled against it, Coca-Cola is preparing for the next round of battle with the Internal Revenue Service (IRS). The soft drinks company has even hired lawyer J Michael Luttig, a former federal judge and former Boeing counsel, to advise it on the case.
The Coca-Cola Co. v Commissioner case was one of the landmark court battles to reach a conclusion in 2020. The Tax Court upheld two tax adjustments that the IRS had issued to increase Coca-Cola’s taxable US income from 2007-2009by more than $9 billion. The decision was a bad sign for businesses that rely on profit split arrangements to distribute costs efficiently.
The case set an important precedent for US taxpayers with profit split arrangements. As much as the ruling was bad news for such companies, the decision was positive for taxpayers seeking a dividend offset treatment.
Nevertheless, this was a significant victory for the IRS, but the soft drinks company has appealed it. However, even if Coca-Cola loses its fight with the IRS it will not have to pay the full figure of $3.4 billion that the revenue service was hoping to gain as the adjustments have been cut back by $1.8 billion.
If Coca-Cola fails to overturn the case, companies like Facebook might be in a much weaker position in their own battles with the IRS.
Facebook is waiting for the US Tax Court to issue a decision in its own case with the IRS. The case will have widespread implications for taxpayers with comparable arrangements.
The IRS took Facebook to the US Tax Court in February 2020over the valuation of its intangible assets. The IRS alleged the company had overvalued its intellectual property (IP) and owed the revenue service more than $9 billion in taxes.
In 2010, Facebook moved its IP to Ireland and the social media company valued the assets at $6.5 billion. However, this was before Facebook went public in 2012. The IRS argues that the true value was $21 billion and that the company owes more than $9 billion in taxes. Facebook stands by its 2010 valuation.
A lot has changed since 2010. Not only is Facebook a global brand, the company has overhauled its Irish structure and adopted a local seller model in 2017 and, three years later, dismantled its IP structures. The company synonymous with social media is also supporting the OECD’s work on the digital economy.
“Tech companies should serve society. That includes at the corporate level, so we support the OECD’s efforts to create fair global tax rules for the internet,” wrote Mark Zuckerberg, CEO of Facebook, in a February 2020 article in the FT.
“These are problems that need to be fixed and that affect our industry as a whole. If we don’t create standards that people feel are legitimate, they won’t trust institutions or technology,” he added.
Facebook has more than $55 billion in cash reserves and the hefty tax bill, not taking into account interest and penalties, would cost it almost 20% of those reserves. This is just as the company is undertaking capital-heavy investments in new data centres and undersea cable networks.
However, this case is about more than one company’s plans. The IRS case could mean that platforms will face yet further questions about past structures. It could also mean the past stays in the past, if the social media company can defend its record and persuade the US Tax Court to take its side.
Vodafone and Cairn
The Indian government is appealing The Hague decision in the Vodafone case and planning to do the same in the Cairn case. The Permanent Court of Arbitration in The Hague ruled on September 25 2020 in favour of Vodafone against the Income Tax Department.
The Hague court unanimously rejected the tax authority’s retrospective demand of back taxes. The decision was welcomed as ‘good news’ for investors doing business in India. The court reached a similar conclusion in the case of Cairn in December and rejected the Indian tax authority’s position.
“India has already filed an appeal in a Singapore appeals court against the Vodafone verdict,” said a senior government official.
“The Indian government has the sovereign right of taxation, and private individuals cannot decide on that. Besides, it falls outside the domain of a bilateral investment treaty and beyond the jurisdiction of international arbitration,” the official argued.
Vodafone has been fighting the case for more than a decadeand won its appeal at the Supreme Courtin 2012. However, the Indian government continued its bid to claim a retrospective tax payment and has refused to amend tax laws in line with court decisions and expert reviews.
The Vodafone case has become infamous among Indian taxpayers and investors looking at the Indian market. There may be more twists and turns before this case is finally closed and it will continue to influence business decisions on whether to invest in India.