Deloitte’s TP controversy guide: Dynamism and disruption
ITR has collaborated with Deloitte TP experts from around the globe to examine the latest controversies in this ever-changing aspect of the tax landscape.
All TP practitioners will be only too aware that the volume, breadth, and depth of TP controversy has been increasing for many years. This is not a trend that is likely to reverse in the immediate foreseeable future, as further legislative and regulatory change (both domestic and from the OECD) continues, as does the dynamic and changing macro-economic environment, as we move from COVID-19 to supply shortages, higher inflation and interest rates.
Deloitte teams' experience and Deloitte surveys bear out the above, noting also that there have been similar increases in the frequency of penalties, broader challenges beyond pure tax (e.g. criminal liabilities), and increased alignment of tax authorities between TP and other, particularly indirect, taxes.
It is clearly impossible to cover or do justice to all pertinent areas of TP controversy within one publication, but the Deloitte specialists who have drafted the articles that follow have attempted to focus on some of the most current and prominent areas. In doing so, we have looked to balance consideration of some of the most common and challenging current aspects, with a focus also on some more specific, but also critical, areas.
The former category includes two areas that are becoming more prominent. Namely, responses to TP positions during COVID-19, as 2020 and 2021 returns start to go through audit cycles, and business restructuring, as the dynamic and changing macro-economic environment, combined with the increasing pace of technological change, create ever more frequent business change and TP issues and the transfer pricing issues and controversy which this brings. Similarly, consideration of the position, and potential ability to defend, loss-making distributors has become particularly pertinent in the recent dynamic and challenging economic environment. Deloitte’s own experience and surveys still see this as the single most common area of TP controversy, ahead of business restructuring, intangibles, and service charges, even if the absolute quantum of amounts under dispute in the former two areas is greater.
The article on debt brings together both legislative change, with the introduction of Chapter 10 of the OECD Guidelines, and the wider environmental factors. The latter reflects both the end of a relatively stable interest rate environment, as this gives way to a much greater dynamism and change in interest rates, and the continuing evolution of the wider debt environment, as newer types of arrangements and instruments bring fresh TP considerations.
Whilst the above articles principally focus on dispute aspects of TP controversy, the OECD and tax authorities have also looked to increase the effectiveness of potential dispute mitigation and prevention, in particular advance pricing agreements (APAs) and mutual agreement procedures (MAPs). These areas are covered in separate articles. Regarding the former, our focus is on what is often one of the most critical decisions for taxpayers considering the use of APAs: the choice between unilateral or bilateral APAs. For a number of countries, there is limited choice as unilateral APAs with treaty partner countries may be rare and difficult to engage with a tax authority on in practice.
For MAPs, much work has been done by the OECD to improve their effectiveness, with Action 14 leading to the peer review programme, and MAP statistics being regularly published. Our article therefore attempts to look behind the above, which are all positive in themselves, to consider from a more practical perspective how effective MAPs are in the current environment, noting that conclusions on this vary depending on aspects such as the complexity of the issues giving rise to the underlying controversy, and also the treaty partners involved.
The final group of articles explores more deeply certain specific areas of TP controversy. Firstly, as in previous publications, controversy in certain industry sectors is in focus, here considering financial services and energy and resources. These are both industries where there are more specific and nuanced TP considerations than apply in most other industries, as is reflected in the controversy environment. Secondly, the changes and challenges regarding Mexican maquiladoras are considered, which impact several, particularly North American, multinational enterprises. Lastly, an interesting, and, for certain countries, increasing, trend is considered, where TP controversy has led to changes in domestic law. This typically arises because of court cases or similar which have resulted in outturns that are unfavourable to tax authorities.
We trust that the following articles are of interest and value to you as you navigate the complex and evolving challenges in the TP controversy landscape.