Thu, Mar 1, 2018

Transfer Pricing Times: IRS and Coca-Cola Getting Ready for Trial

In this edition: the U.S. Internal Revenue Service (IRS) filed a pretrial memorandum against The Coca-Cola Company; the IRS announced an increase in the user fees for unilateral, bilateral and multilateral advance pricing agreement requests; the Inland Revenue Authority of Singapore released revised Transfer Pricing Guidelines (Fifth Edition); Indonesia’s Director General of Taxation issued Regulation No.PER-29/PJ/2017; and the Malaysian Inland Revenue Board issued the Labuan Business Activity Tax (Country-by-Country Reporting) Regulations 2017.

View our transfer pricing times articles.


IRS and Coca-Cola Getting Ready for Trial

The Internal Revenue Service (“IRS”) filed a pretrial memorandum against The Coca-Cola Company (“Coca-Cola” or the “Company”) on February 15, 2018, arguing that the Company’s transfer pricing methods do not comply with arm’s-length standards set forth under Section 482.

The primary issue in the $3.3 billion transfer pricing case for applicable tax years 2007-2009 is the arm’s-length amount of royalties payable by certain foreign licensees to Coca-Cola for the licensing of intellectual property (“IP”) used in the production, marketing and sale of Coca-Cola concentrates in foreign markets. 

The IRS contends that Coca-Cola undercharged its foreign licensees for the use of the IP, claiming that the Company’s use of the Comparable Uncontrolled Transaction (“CUT”) method as a means to test the transaction does not comply with Section 482 and indicating that it does not correspond to income that is inherently attributed to the intangible itself. The IRS further asserts that the best method to determine the profit that the foreign licensees are entitled to is to use the Comparable Profits Method (“CPM”) by comparing profits earned by the foreign licensees to those earned by potentially comparable companies in the industry. Furthermore, the IRS proposes an adjustment of Coca-Cola's taxable profits by approximately $9.4 billion, which would result in the $3.3 billion tax assessment. 

In its response to the IRS’s filing, Coca-Cola argues that the IRS’s assertion to use the CPM as the best method is subjective and insupportable, claiming that the functional and risk profile of the foreign licensees is not similar to that of potentially comparable companies under the CPM. Furthermore, Coca-Cola claims that the IRS’s strategy is to target selective foreign licensees that reside in countries that the U.S. does not have treaties with, as opposed to accepting the Company’s transfer pricing policies with foreign licensees that reside in treaty countries. 

As demonstrated in each of the recent U.S. Tax Court cases involving taxpayers such as and Medtronic, Inc., the IRS took a similar approach in challenging that the CUT method selected by taxpayers for calculating the arm’s length pricing was not the best method, and argued that the profit-based method should be applied instead. The U.S. Tax Court; however, ultimately ruled in favor of the taxpayers in these cases and rejected the IRS’s methods.

Finally, Coca-Cola claims that its position is also supported by the 1996 Royalty Closing Agreement (“RCA”) between the Company and IRS where both parties established that the Company’s foreign licensees would retain 10 percent of gross sales, with the residual operating profit being split equally between Coca-Cola and the licensees. Coca-Cola indicated that it intends to use this RCA as support for the upcoming trial since it was meant to cover years 1989-1995 but also provide the Company with penalty protection in matters of future intercompany pricing. In a ruling passed on February 23, 2018, the U.S. Tax Court denied the IRS’s motion to exclude the use of this RCA by Coca-Cola for purposes of the upcoming trial which is set to begin on March 5, 2018 and estimated to last six weeks. 


IRS to Increase Advance Pricing Agreement User Fees in Two-Phased Process

On February 6, 2018, the Internal Revenue Service (“IRS”) announced an increase in the user fees for unilateral, bilateral, and multilateral advance pricing agreement (“APA”) requests. The user fees will change in a two-phased process over the next 12-month period. This is the first change of APA user fees since the new procedure was introduced in 2015 (“Rev. Proc. 2015-41”). For 2018, the two-phase change in APA fees is as follows:

  • Phase I: For APA requests filed after June 30, 2018, the user fees will be as follows: $86,750 for new APAs; $48,500 for renewal APAs; $42,000 for small case APAs; and $17,750 for amendments to APAs. 
  • Phase II: For APA requests filed after December 31, 2018, the user fees will increase as follows: $113,500 for new APAs; $62,000 for renewal APAs; $54,000 for small case APAs; and $23,000 for amendments. 

These changes are further illustrated below:

2018 APA User Fees Chart


New APAs 

Renew APAs

Small Case APAs 


Before - June 30, 2018 





After - June 30, 2018





After - December 31, 2018






As shown above, the user fees of each APA category will nearly double between now and the beginning of 2019. The IRS noted the increase in fees is linked to the associated cost of service for the IRS. According to the annual statutory report released by the Advance Pricing Agreement Program (“APMA”), there were 183 and 98 APA requests filed in 2015 and 2016, respectively. The record number of requests in 2015 was due to the prospect of higher APA user fees and new procedural requirements announced in Rev. Proc. 2015-41. The number of 2016 APA requests filed, however, remains in line with the number of requests filed on the five-year average, which is approximately 100 requests. Due to the change in APA user fees, taxpayers expecting to file an APA request within the next year may consider accelerating the APA filing process to avoid being subject to the increased rate of user fees later in the year. At a recent conference, the head of APMA, John Hughes reiterated that despite the increase in user fees, APAs continue to be a useful mechanism to provide certainty in an uncertain tax environment. 


Singapore: Revised Transfer Pricing Documentation and Guidelines

Pursuant to transfer pricing documentation requirements legislated in Section 34D and Section 34F of the Singapore Income Tax Act (“ITA”), the Inland Revenue Authority of Singapore (“IRAS”) released revised Transfer Pricing Guidelines (Fifth Edition) on February 23, 2018 (the “Revised TP Guidelines”) to provide clarity on the IRAS’s expectations of Singapore taxpayers in ensuring compliance from Singapore transfer pricing perspective.

Key changes of the Revised TP Guidelines are summarized as follows:

Mandatory TP Documentation Requirements and Safe-harbor Thresholds

With effect from the Year of Assessment (“YA”) 2019, e.g. financial year ending 2018 (“FY 2018”), Singapore taxpayers are required to prepare TP documentation when: 

  1. The annual gross revenue from their trade or business operation exceeds SGD 10 million; or
  2. Transfer pricing documentation is required for the previous basis period (the first applicable basis period for this condition will be FY 2019 (YA 2020), with Section 34F of ITA being effective from FY 2018 (YA 2019).  

However, even if they fulfill condition (2) above, Singapore taxpayers are exempted from preparing transfer pricing documentation if their gross revenue is not more than SGD 10 million for the basis period in question and for the immediate two preceding basis periods.

If the above condition(s) is fulfilled, Singapore taxpayers are required to prepare transfer pricing documentation only for the significant related party transactions which exceed the safe-harbor thresholds, detailed within the Revised TP Guidelines. 

Adopting Three-Tiered Transfer Pricing Documentation Practice 
Under the Revised TP Guidelines, transfer pricing documentation is based on a three-tiered structure consisting of documentation at the group level, entity level, and country-by-country report (“CbCR”). The information required in the documentation at the group level and entity level are broadly aligned with the recommendations from the Organization for Economic Cooperation and Development’s (“OECD”) three-tiered transfer pricing documentation practice with some minor amendments, e.g. taking out the important service arrangement from the documentation at group level. 

Transfer Pricing Adjustments 
The IRAS has provided additional guidance on the principle of transfer pricing adjustments, clarifying that it has the discretion to determine whether related party transactions exist and determine the arm’s length price based on the commercial or financial relations of the independent parties. 

It remains to be seen how extensively these powers of reconstruction will be used in practice by the IRAS, but such powers do increase the potential risks for taxpayers in Singapore, and we have certainly seen greater enforcement activity by the IRAS on transfer pricing issues in recent months and years.

Non-Compliance and Penalties

The new Section 34E of ITA introduces a surcharge of 5% on TP adjustments, not exceeding SGD 10,000 (increase in income or decrease in deductions or losses) made by IRAS in case of non-compliance with the arm’s length principle. It is worth noting that the 5% surcharge and non-compliance penalties would not be eligible for relief under any applicable double tax agreements and hence would be a permanent cost for taxpayers. 


Indonesia: Further Clarifications on Country-by-Country Reporting

As an addition to the Minister of Finance Regulation No.213/PMK.03/2016 (PMK-213), Indonesia’s Director General of Taxation (“DGT”) issued Regulation No.PER-29/PJ/2017 (“PER-29”) on December 29, 2017 to provide further clarifications to the safe harbor thresholds for the preparation of Country-by-Country (“CbC”) reports in Indonesia. The most immediate impact from PER-29 is the need for submission of the Notification Form for financial year 2016 to the DGT before April 30, 2018. 

Notification Requirements and Timelines
PER-29 stipulates that the Notification Form and the CbC reports must be submitted to DGT through DJP online, the DGT’s official website, or manually to the tax office, no later than 16 months after the fiscal year ends for the taxpayer, e.g. April 30, 2018 for fiscal year ended December 31, 2016.  From financial year 2017 onwards, filing of the CbCR will be due within 12 months after the fiscal year end. 

In addition, the CbC report for a Domestic Parent Entity requires additional “working papers” to be filed in a prescribed digital format, e.g. XML Schema Electronic Format, while a Foreign Parent Entity is exempted from the requirement, as it is not in accordance with OECD standards.

Further Action Points
The DGT will announce and issue the list of countries/jurisdictions on a yearly basis in relation to the following three categories:

  1. Countries/Jurisdictions with Qualifying Competent Authority Agreement (“QCAA”) in place where QCAA is an agreement between the authorities of the Indonesian government and the partner country or partner jurisdiction which requires automatic exchange of CbC reports;
  2. Countries/Jurisdictions with QCAA in place, but DGT could not obtain CbC reports from; and
  3. Countries/Jurisdictions with International Agreements in place.

Upon the announcement of the abovementioned list of such countries, domestic taxpayers obligated to provide the CbC report have 3 months to submit such information. If such domestic taxpayers fail to do so, the DGT may grant a 30-day extension from the date of the request letter sent by DGT. The taxpayer will be given a receipt upon the submission of the Notification and the CbC report.

This receipt is to be attached to the Corporate Income Tax Return of the following year, e.g. year of assessment of 2017.


Malaysia: Country-by-Country Reporting is Required for Labuan Entities

On December 26, 2017, the Malaysian Inland Revenue Board (“MIRB”) issued the Labuan Business Activity Tax (Country-by-Country Reporting) Regulations 2017 to set out the guidelines for Country-by-Country (“CbC”) reporting by Labuan entities.

Labuan is a Federal Territory of Malaysia which maintains its own independent corporate laws and taxation regime separate from the rest of Malaysia under the Labuan Business Activity Tax Act 1990 (“LBATA”).

These guidelines state that, effective from January 1, 2017, a CbC report must be filed by a Labuan-based Multinational Enterprise Group (“MNE Group”) with:

  • Total consolidated group revenue for the preceding financial year is at least MYR 3 billion (approximately €750 million) and;
  • The ultimate holding entity or any of its constituent entities is a Labuan entity carrying on a Labuan business activity.  

These guidelines are expected to be aligned with the OECD recommendations from Base Erosion and Profit Shifting (“BEPS”) Action Plan 13. The CbC report should be submitted within 12 months from the end of the covered financial year, e.g. December 31, 2018 for the financial year ended December 31, 2017.

Importantly, every Labuan constituent entity, Ultimate Parent Entity or Surrogate Parent Entity will need to submit a notification to the tax authority disclosing the identity and country of residence of the reporting entity on or before the last day of the reporting financial year, e.g. December 31, 2018 for the financial year ended December 31, 2017.

The penalties for non-compliance with Labuan Business Activity Tax CbC reporting rules as compared to the Income Tax CbC reporting rules in the rest of Malaysia are as follows:

Labuan Business Activity Tax (Country-By-Country Reporting) Regulations 2017 Income Tax (Country-By-Country Reporting) Rules 2016 and (Amendment) Rules 2017 

Income Tax (Country-By-Country Reporting) Rules 2016 and (Amendment) Rules 2017 

Failure to file the CbC report, furnishing incorrect information related to CbC report or to notify the tax authority on the status of CbC report by Labuan entity before the deadline will result in:

I. Fine not exceeding MYR 1 million; or 
II. Imprisonment for up to 2 years; or
III. Both (I) and (II). 

Failure to file the CbC report, furnishing incorrect information related to CbC report or failure to comply with any rules to implement or facilitate arrangements relating to the exchange of CbC reports:

I. Fine ranging from MYR 20,000 to MYR 100,000; or 
II. Imprisonment for up to 6 months; or
III. Both (I) and (II). 

Therefore, as the penalties in Labuan are significant compared with the rest of Malaysia, Labuan entities should certainly consider an immediate review of their transfer pricing compliance and confirm their obligations under the new Labuan CbC guidelines.

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