It has been a great honour – and an even greater education – to be asked to edit the inaugural edition of The Transfer Pricing Law Review.

Since the financial crisis in 2008, there has been continuous public attention on multinationals’ tax position – which, for the most part, turns on their transfer pricing policy, and whether this properly aligns the taxable profits in each country with the value-generating activities taking place there. In the past couple of years, that public and political pressure has begun to turn into concrete action: for example, through the BEPS reforms on country-by-country reporting and transfer pricing; the European Commission’s state aid investigations into Apple, Starbucks and others, which almost all relate to transfer pricing matters; and, as several chapters in this review make clear, increased audit scrutiny at the national level. It seems clear that transfer pricing issues will be filling tax professionals’ working lives for several years at least.

This publication aims to give readers a high-level overview of the principal transfer pricing rules in each country covered. Each chapter summarises the substantive transfer pricing rules, explains how a transfer pricing dispute is handled, from initial scrutiny through to litigation or settlement, and discusses the interaction between transfer pricing and other parts of the tax code (such as withholding taxes, customs duties, and attempts to prevent double taxation).

This review contains contributions from 17 countries, covering a broad spread both geographically and economically. We are very grateful to the authors of the country chapters for lending their time and expertise to this project.

Four key themes that emerge from the country chapters are:

  • a More disputes: unsurprisingly, many countries (including Mexico and Poland) report an increase in transfer pricing disputes, particularly around profit allocation in a multinational supply chain.
  • b Profit splits: several countries (including Israel, Mexico and the UK) are seeing tax authorities push for a greater use of profit splits, particularly for high value-added activities where it may be difficult to find a precise comparable. (How you identify an appropriate share of profits for each different country is, of course, a separate challenge here.)
  • c TP compliance tools: many of the reporting countries have adopted rules that are designed to encourage greater transfer pricing compliance. Country-by-country reporting, which has been very widely adopted, is the prime example of this, but other instances include automatic transfer pricing penalties in Canada and Russia, and the diverted profits taxes adopted in Australia and the UK.
  • d Varied transfer pricing approaches: it is striking that different countries continue to apply transfer pricing in rather different ways. At one end of the spectrum, Brazil has rejected the OECD arm’s-length principle entirely, arguing that imposing fixed ratios and limits is more effective. Even within the large majority of reporting countries that apply the OECD principles, however, there are differences in approach which could lead to diverging outcomes in practice. For example, Germany’s transfer pricing rules apply a ‘prudent and diligent managing director’ test on top of the normal arm’s-length principle (which has perhaps inspired the ‘prudent economic operator’ concept developed by the European Commission in their tax state aid investigations); and the Luxembourg chapter discusses a recent case in which an interest-free loan from Luxembourg to Italy resulted in taxable interest income in Luxembourg, with no corresponding deductions in Italy. These variations, of course, increase the risk of double taxation of the same profits – and it is thus important (if perhaps optimistic) that countries adopt the BEPS Action 14 recommendations on tax dispute resolution mechanisms with the same enthusiasm they have often shown for the tax-raising recommendations.

Finally, we would like to thank the publishing team at Law Business Research for their diligence and enthusiasm in commissioning, coordinating and compiling this review.

Steve Edge and Dominic Robertson

Slaughter and May

London

June 2017