Fri, Feb 26, 2016

Transfer Pricing Times: Volume XIII, Issue 2

IRS Appealing Altera Corp. Ruling

On February 19, 2016, the Internal Revenue Service (IRS) notified the U.S. Court of Appeals for the Ninth Circuit that it will appeal last year’s ruling in Altera Corp. v. Commissioner. As background, on July 27, 2015, the U.S. Tax Court opined in favor of Altera Corp., which argued that the $96.6 million transfer pricing adjustment proposed by the IRS and related primarily to the inclusion of employee stock option costs in Altera’s cost sharing agreement should be voided. Altera Corp. argued that the IRS had failed to follow the required Administrative Procedure Act’s (APA) notice and comment process in creating the 2003 cost sharing regulations, and that this ultimately invalidated Treasury Regulations Section 1.482-7(d)(2) (which requires related parties in a cost sharing arrangement to share stock-based compensation costs). More broadly, the opinion of the Tax Court calls into question the Service’s longstanding position that it is not subject to the rulemaking process of the APA and may have broader implications as to how new regulations will be developed in the future, depending on the outcome of the appeal. 


32 Countries Sign Agreement to Enable Automatic Sharing of Country-by-Country Information

In January 27, 2016, 32 countries1 signed the Multilateral Competent Authority Agreement (MCAA), which provides for an automatic exchange of Country-by-Country (CbC) reports across tax jurisdictions in which a Multinational Enterprise (MNE) operates. The aim is to increase transparency and help tax administrations gain a better understanding of how MNEs operate. The MCAA was a result of the Organization for Economic Cooperation and Development’s (OECD’s) BEPS (Base Erosion and Profit Shifting) Project, specifically Action 13 of the BEPS Action Plan.

The MCAA is structured in a way that allows the reporting entity of the MNE to collect information and automatically exchange CbC reports with other tax administrations in which the MNE operates. It is expected that information will first need to be gathered by most MNEs for 2016, and exchanged in 2017. CbC data will subsequently need to be filed on an annual basis. For more information, please reference the OECD’s press release available here.

(In a related development, the OECD announced on February 23, 2016 a proposed new program that would allow individual countries to participate (as “BEPS associates”) in implementing the final BEPS Action 13 recommendations. This proposal will be discussed among the Group of 20 finance ministers during their February 26-27, 2016 meeting in Shanghai.)


New IRS Practice Units

Recently-released International Practice Units by the IRS address two of the more examined and potentially controversial areas in transfer pricing. While not official announcements of laws or directives, Practice Units are developed internally by the IRS and meant to act as job aids and training materials on international tax issues. They also serve as a resource for the IRS’s field teams when conducting audits. More general information on International Practice areas can be found on the IRS’s website, here.



On February 8, 2016, the IRS’s Large Business & International Division (LB&I) released a new International Practice Unit on the determination of PCTs (platform contribution arrangements) in cost sharing arrangements. This Practice Unit specifically addresses matters related to purchase price allocation (PPA) valuations vs. PCTs, and discusses carve outs and goodwill when applying the Acquisition Price Method.

Detail on this release is available here.


Intercompany Loans

On February 4, 2016, another Practice Unit released by the IRS, titled “Intercompany Interest Rates under the Situs Rule of IRC Section 482”, discusses the general framework established under IRC Section 482 for evaluating intercompany loans. This release provides a helpful review of the three approaches for evaluating intercompany interest payments, which include:

  • the Safe Haven approach, whereby the arm’s length range is constructed around the applicable federal rate (published by the IRS),
  • the Situs Rule, whereby loans borrowed from a third party that are then on-lent to a related party are considered arm’s length if the interest rate for both transactions are equal (plus any administrative costs incurred); or
  • if neither the Safe Haven approach nor Situs Rule are applicable (or elected), then an arm’s length rate of interest must be established by reference to what unrelated parties would charge in an independent transaction under similar circumstances.

Specifically, the Practice Unit reiterates that in circumstances where funds are obtained at the situs of the borrower, the Safe Haven rule is not applicable and an arm’s length determination must be made under the Situs rule or under the third, general arm’s length approach.

In addition, the Practice Unit provides some noteworthy insights into key issues on intercompany debt:

  • Bona Fide Indebtedness: Any analysis of intercompany interest payments cannot be performed until it is established that the intercompany debt in question is in fact bona fide debt and not a contribution of capital. The Practice Unit points to Section 385, as well as Estate of Mixon v. United States and related case law with regard to the “Mixon Factors” as potential guidance in making this assessment.
  • Arm’s Length Interest: Once the intercompany debt is established as bona fide debt, the Practice Unit suggests the following as key resources in determining the arm’s length nature of interest payments:

This guidance comes at an important time for taxpayers and transfer pricing practitioners as controversy and litigation related to intercompany financing arrangements continues to be one of the hottest topics in recent years.


Google Reaches Tax Settlement with the United Kingdom

On January 22, 2016, Google reached a tax settlement with the HMRC (Her Majesty’s Revenue and Customs), agreeing to pay 130 million pounds sterling (approximately $185 million) covering taxes back to 2005. The tax settlement stems from accusations that Google did not pay its full share of taxes on sales made in the United Kingdom. As part of the settlement with HMRC, Google will adopt a new approach for UK taxes whereby the company will now pay tax based on revenue from UK-based advertisers, which it stated would more accurately reflect the size and scope of its UK business.

During a February 11, 2016 hearing with UK lawmakers, a Google global tax executive announced that HMRC’s new tax provision, referred to as “the Google tax,” will (ironically) not apply to Google. The new law was put in place last year amid concerns that global technology companies like Google were creating complex tax structures to shift profits from the UK to offshore tax havens. The law allows the UK government to charge a 25 percent tax (5 percent above the standard UK corporate tax rate) on any profits it determines were improperly moved offshore. Google’s announcement included a statement that its settlement with the HMRC has no relation to the new tax rule with regards to both past and future profits.


Focus on New Zealand: Top Transfer Pricing Issues for 2016

As part of the New Zealand Inland Revenue's (IRD) recent Large Enterprises Update, the IRD indicated that its transfer pricing focus in 2016 will cover the following:

  • unexplained tax losses returned by foreign-owned groups;
  • inbound and outbound loans in excess of NZ$10 million principal, as well as guarantee fees;
  • cash pooling arrangements;
  • payment of “unsustainable” levels of royalties and/or service charges;
  • material related party transactions with low- or no-tax jurisdictions, including the use of offshore hubs for marketing, logistics and procurement services;
  • income arising from e-commerce transactions;
  • supply chain restructuring involving the shifting of any major functions, assets or risks away from New Zealand; and
  • any unusual arrangements or outcomes that may be identified in controlled foreign company disclosures.

As the IRD have not yet formed definitive views in relation to the most appropriate transfer pricing approaches for cash pooling arrangements and the booking of e-commerce transactions, their 2016 transfer pricing focus on these controlled transactions is likely investigatory at this stage.


1. The countries that signed are Australia, Austria, Belgium, Chile, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, Netherlands, Nigeria, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland and United Kingdom. Senegal also signed at a later date.

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