The Transfer Pricing Law Review: Editors' Preface
It has been a great pleasure to edit this sixth 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, 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); and Brazil itself is considering aligning its TP rules with the OECD norm by 2024. However, as the chapters make clear, there remains significant divergence, both in countries' interpretation 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 administration of the rules (e.g., the documentation requirements imposed and the availability of advance pricing agreements). Therefore, transfer pricing practitioners cannot simply assume that the OECD Guidelines contain all the answers but must engage with their detailed application within each country.
Given their economic importance, transfer pricing rules will be high on the corporate tax agenda (and the broader political agenda) for many years to come, and they are continuing to evolve at a rapid pace. Over the next few years, we expect the following to be among the main areas of focus.
First, as many of the chapters make clear, litigation over transfer pricing disputes is expected to increase (almost) everywhere over the next few years, as tax authorities become more confident in their interpretation of transfer pricing guidelines, and ever more alert to public pressure to make big business pay its 'fair share'. Some countries have a long record of transfer pricing litigation, and have resolved many of the procedural hurdles in asking a court to rule on exactly where value is created in a multinational; for example, the approach to handling (often conflicting) expert evidence, and the challenge of developing factual evidence in a proportionate but comprehensive way. However, it is clear that asking for a ruling results in lengthy – and costly – hearings before the tax tribunals, and many other countries will find themselves grappling with transfer pricing litigation for the first time soon.
Second, some of these disputes will concern the extent to which transfer pricing can be used to recharacterise transactions, rather than merely to adjust the pricing of transactions. For example, the German courts have recently held that transfer pricing rules are not limited to pricing adjustments alone; and Ireland introduced rules that enable the Irish Revenue to impose a 'substance over form principle. In contrast, the Canadian courts ruled, in the Cameco case, that TP recharacterisation was permitted only where the underlying transactions were 'commercially irrational'.
Third, many countries are strengthening the requirements for contemporaneous transfer pricing documentation, either aligning with the OECD master file or local file model (as in Israel and Portugal), or potentially going beyond this (as the United Kingdom has proposed).
Finally, the OECD/G20 project to address the tax consequences of digitalisation continues to progress apace (at least within the OECD itself), with consultations on aspects of the two pillars being launched (seemingly) weekly, normally with absurdly short deadlines for comments. In particular, Pillar One marks a pivot away from the arm's-length standard for large and highly profitable multinationals, under which a portion of their profits (above a 10 per cent hurdle rate) would automatically be reallocated to market jurisdictions. This would, of course, be a radical shift away from the traditional arm's-length standard, but the arm's-length principle will continue to play a crucial role for large businesses and tax authorities. First, it is not yet clear whether Pillar One, in particular, will ever become law, and the prospects of the US Congress approving it seem limited in the current political circumstances there. Furthermore, even if (or where) Pillar One becomes law, the arm's-length standard will continue to apply (1) to the vast majority of businesses that fall outside the reallocation rule, either because of size or profit margins; and (2) to the majority of the profits of those businesses that are subject to the reallocation rule.
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