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The TP effect: A call for more transparent and clearer transfer pricing rules


Transfer pricing constitutes an area of significant misunderstanding between multinational enterprises (MNEs) and tax authorities. From the outset there has been a lack of transparency from global companies in this area of tax, and a clear lack of rules from tax authorities across the world.

Over the past few years, however, it seems that these initial trends are gradually being obscured. In parallel, we have seen the emergence of clearer rules that have largely been taken up by the major global players and, alongside this, have also seen the emergence of more expert practitioners within MNEs, advisers and governments and, finally, stricter and more accurate obligations with regard to documentation.

Paradoxically, the obligation of transparency and the emergence of clearer rules have also made it possible for companies to consider tax-planning opportunities1 that they would not have necessarily explored, and some of which they were not even aware of. Indeed the absence, or at least uncertainties, related to the tax legal provisions on transfer pricing had especially led to rather erratic practices, largely dictated by the operational constraints of MNEs, or the weight of their history, with which tax rationality had only little to do.

Today the discipline is at a turning point that all constituents must learn to negotiate.

Going forward, the myopic aggressiveness of governments across the globe must make way for a more selective approach and demonstrate a clear business understanding. The, often unintentional, absence of judges in this debate must yield ground to an increased role for referees and regulators to clarify areas of uncertainty, as is the case in any legal disputes; international organisations must forsake the habit of acting purely on principles to affirm a clear, technical framework for companies to abide by. Last, the apprehensive position of global companies that are often hiding away from these matters must evolve to a greater understanding of the risks available within a protected and stabilised framework; the councils must, to help them, develop a more daring structure to transfer pricing.

Aggressive authorities
Tax authorities always perceived transfer pricing solely as a way for MNEs to optimise their tax situation, by decreasing their local taxable base to maximise the benefits of another authority. Curiously, the authorities have thought exactly the same to its detriment! In fact, the authorities' response always involved taking a more aggressive position, which paralysed MNEs' activity and slowed down operations - in any case restricting development and growth.

Progress has, however, been accomplished in most jurisdictions, where transfer pricing matters are now better known, thanks to increasingly specialised teams. But without any doubt, this progress has not been made with the aim of better apprehending the situation of the taxpayers, but rather in reaction to the aggressive positions of their counterparts. It remains the case that teams of expert tax inspectors exist in most large jurisdictions and that, in the absence of any benevolence, at least one can face well-informed assessors. The procedures put in place to prevent or solve bilateral litigations have multiplied, and their chances of success have both increased and accelerated.

Nevertheless, international companies still encounter too many situations in major jurisdictions where their legal safety is not sufficiently assured: the misinterpretation of certain factors, in particular provisions of services and transfers of intangibles, makes it very difficult - if not impossible - to invoice certain intragroup operations and, often, at the price of a double taxation. For example, as regards provisions of services, particularly basic and unquestionable operations within MNEs, companies are confronted (in certain large countries in Latin America, Asia and Europe), with interpretations that are not in conformity with tax conventions. This leads to the undue application of withholding taxes, whose credit is refused, without any surprise, in the other country. In addition, the same countries often deny the most established valorisation methods for transactions. These situations can only encourage companies to adopt practices that circumvent the problem and to comply with the requirements of the jurisdictions where they want to develop, increasing their own risks in their country of inception.

On top of this dysfunctionality, all tax authorities are often satisfied not to face the arbitration of the judges on practices, however questionable. MNEs are not free from responsibility in this respect insofar as, in the uncertainty resulting from fuzzy rules, they very often favour a negotiation under constraints rather than an arbitration stating the law. The judges also contribute to the confusion and regularly hesitate to arbitrate where the matter centres on economic factors. It is important in this respect to acknowledge the remarkable richness of the court cases of a country such as India, in which judges do not hesitate to arbitrate purely technical litigations regarding valorisation methods or the relevance of comparable cases that are presented by the parties. One can understand that the judge does not want to (or cannot), refer to rules that do not strictly form part of the domestic law: thus the OECD's recommendations are not generally integrated. As such, increasingly in the local law, they today constitute a reference-point recognised by most administrations. However, is it not a judge's role to grab the opportunity to settle conflicts that are prejudicial to the fluent functioning of an economy, even if that means forcing the legislator to face up to his responsibilities?

Intervention reinforced
Ultimately, with regard to public authorities, it looks as though international organisations such as the OECD and the European Union are the ones that have most fully played their part by considerably reinforcing their intervention in these matters over the past few years. On the one hand the European Union, conscious of the increased costs for companies and, more generally, of the potential embarrassment of poor market fluidity, have issued more precise recommendations to its member states regarding documentation, the settlement of double taxation situations and best practices relating to certain types of transactions. On its side, the OECD has increased its initiatives in order to update and progress the portfolio of recommendations that it provides. The arm's length principle, transfer pricing methodology and intangible transactions are just a few examples of recently adopted processes in this field, and these recommendations have clarified and improved the legal environment. Furthermore, the OECD has been able to go beyond the simple search for consensus between its members, which ultimately did not lead to any clear and easily applicable rule, and is now taking into account the constraints of MNEs and fully linking the business community, companies and experts to its working groups. Its productions are therefore richer, and the mindset in which they are emitted can only support a better mutual comprehension.

Thus, whereas some years ago the administrations generally saw only tax-related activity in companies' restructuring operations2, the linking of businesses to the administration's working groups has undoubtedly contributed to a better balance in the outcomes and a better acceptance of MNEs' constraints by the authorities, recognising the acceptable and even necessary nature of these operations. These efforts must continue, and the international organisations that work on the subject (one could also add PATA3 for the Pacific-America zone), must not underestimate the importance for companies to be able to rely on this structure in their daily discussions with the authorities. The role of these international organisations in the training of authorities is an important vector in the harmonisation of practices in the long term. Companies are thus entitled to expect further audacity in their future work on this issue.

In this context, companies can envisage managing their transfer pricing as with any other tax field by, first of all, ensuring they comply with rules in legal safety4 and, from there, set up tax-saving strategies.

Intragroup transactions
In this respect, it is true that the structuring of intragroup transactions can constitute an effective driver in adapting to business cycles. If it is not possible for an international group to issue invoices without cause or when clearly abnormal, it is completely legitimate - and even recommended - to reflect in the tax profits all the components that constitute an international group's value added. This would include provision of services, but also:

  • the transfer of intangibles such as know-how, ie, when employees are seconded, for a certain period of time, in subsidiaries or on projects, to bring their knowledge and transmit their expertise that in fact has only been accumulated and financed over the time by their activity within the group;
  • the balanced contribution of the group in terms of global marketing intangibles and those brought by its subsidiaries concerning its own intangibles (customer lists, local development of the brand, commercial networks etc);
  • the financial guarantees when a supplier or a customer requests to an affiliate the guarantee of its parent company;
  • insurances when the head office must ensure the reinsurance of its subsidiary companies;
  • economies of scale such as central purchases organised by the parent company when it leads to economies of scale that a subsidiary company could not obtain on its own etc.

One could multiply the examples.

Moreover, many exceptional circumstances in a company's life can involve carrying future tax savings, related to the transfer of assets or functions, from high tax jurisdictions to lower tax jurisdictions or to locations where favourable regimes are in force. They are also generally carrying risks and sometimes immediate, heavy costs. The companies must reconcile their operational and commercial constraints within the strict and complex rules set up by jurisdictions to tax these operations. Companies must adapt their strategies to these rules so as not to harm future revenues by an immediate tax cost. They therefore have to think carefully about the assets themselves as well as the way in which they carry out the transfer in order to fulfil their operational objectives without destabilising their tax position.

Taxand's Take

Practitioners in this field must assist the companies with their knowledge and know-how not only in relation to tax strategy and the valorisation of flows, but also with their local and international expertise. Indeed in this situation, where many rules are still not written and sometimes divergent from one state to another, the inflexible processes of the local practices and the cross border nature of the problems are the determinant elements of MNEs' tax safety. Beyond the purely technical aspects, it is essential for companies to become well aware of what they cannot do, or more precisely - because everything is always feasible - of what they can do without excessive cost and risk.

The time when multinational companies could operate in a non-transparent manner and carry out unjustified operations is now over. At the same time it would be useless if the authorities denied the permanent need for the adaptation and evolution of transfer pricing processes in relation to MNEs, and it would be harmful for the economy should they seek to restrict progress in this arena. In an environment that is becoming clearer and more secure, businesses can properly consider the implementation of transparent and 'entrepreneurial' tax strategies to develop their companies.

Your Taxand contact for further queries is:
Antoine Glaize
T. +33 623 088 006


Written and first published in Tax Adviser in September 2010


1. 'Tax planning' relates to transfer pricing policies aiming to optimise companies' tax position, of course in compliance with well admitted rules ensuring an acceptable legal safety.

2. Whoever takes part in such matters knows that, for the very large majority of companies, these operations are primarily dictated by operational and financial constraints of which the tax component is only one very subordinate appendix.

3. Pacific Association of Tax Administrators.

4. There is of course no way of guaranteeing that fraudulent practices do not have any other goal other than avoiding tax where it is legitimately due. Moreover, the recent measures adopted by the OECD and by many jurisdictions against tax havens will have, without doubt, a strong dissuasive effect on such practices.

Taxand's Take Author