It has been a great pleasure to edit this third edition of The Transfer Pricing Law Review. This publication aims to give readers a high-level overview of the principal transfer pricing rules in each country covered in the Review. Each chapter summarises the country's 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).
Other than Brazil, which adopts a mechanical approach, all the countries covered in this Review apply an arm's-length standard and adhere, at least to some extent, to the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines (the OECD Guidelines). However, as the chapters make clear, there remains significant divergence, both in countries' application of the arm's-length standard (e.g., the transactions it applies to, the pricing methods preferred and whether secondary adjustments are imposed) and in the documentation requirements imposed. Transfer pricing practitioners, therefore, cannot simply assume that the OECD Guidelines contain all the answers but must in fact engage with their detailed application within each country.
However, as (almost) all large economies apply an arm's-length standard in transfer pricing, case law from other countries can often shed light on how the OECD Guidelines should be applied – for instance, the Canadian decision in Cameco, on the Canada Revenue Agency's power to recharacterise transactions on arm's-length grounds, will be valuable reading for anyone involved in a similar debate with their own tax authorities.
As we have said in earlier editions of the Review, transfer pricing rules will continue to be high on the corporate tax agenda for many years to come, and they are continuing to evolve at a rapid pace. Over the next year or so, we expect the following to be the three areas of principal focus.
First, more countries than has hitherto been the case have adopted the recommendations on transfer pricing from Actions 8–10 of the Base Erosion and Profit Shifting Action Plan (which attribute more value to significant people functions rather than capital or contractual risk allocation) . This is likely to lead to more disputes in the short to medium term, especially where functions are split across different countries and allocating returns between them can be a difficult and contentious exercise.
Second, the European Commission is continuing to use its state-aid powers to drive the transfer pricing agenda. Many of the high-profile transfer pricing state-aid cases (Apple, Amazon, etc.) will shortly reach the EU's General Court. Recently, in the opening decision in Huhtamaki, the Commission criticised a Luxembourg regime that provided for transfer pricing adjustments that reduced Luxembourg companies' taxable profits, arguing that this should only be done where necessary to avoid actual double taxation. In contrast, it could be argued that the Luxembourg regime is consistent with the principle that a country should tax the value that, at arm's length, is actually generated there.
Third, digital taxation continues to dominate the transfer pricing debate, with several countries announcing digital services taxes, or other regimes, such as the UK tax on offshore receipts in respect of intangible property, which operate independently of arm's-length transfer pricing rules. More broadly, the OECD's current consultation on taxing the digital economy proposes several measures that expressly depart from the arm's-length standard – for example, by deeming that all or part of the reward from marketing intangibles arises in the customer's jurisdiction, even if none of the functions controlling that intangible are located there.
Finally, we would like to thank the authors of all of the country chapters for their comprehensive and illuminating analysis of each country's transfer pricing rules; and 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