The OECD Working Party looking at the transfer pricing of intangibles, including intellectual property, met in late March in Paris. The OECD has now published details, including the supporting presentations of that meeting.
ATO triumphs over IBM in $55m tax war – ZDnet – IBM were trying to extend the scope of a “private ruling”, which seems to be an advance pricing agreement of some sort on the transfer pricing of royalties. The agreement was reached for 2004 and IBM considered that it should continue to apply after 2004, and also tried to get a refund for tax paid from 1987-2002 on that basis that the agreement should have retrospective effect.
The Australian Tax Office disagreed, and the court has upheld the additional tax bill for 2005 onwards.
Wanted: A Tax Code for the Digital Age – BusinessWeek – discusses how Amazon reduces its tax bill, compared to similar bricks-and-mortar companies in the US, and refers to transfers of IP offshore, probably to a Luxembourg entity and how transfer pricing assisted a reduction of 6 percentage points in Amazon’s effective tax rate.
It looks as though Asda and Wal*Mart have succeeded in getting HMRC and the IRS both to recognise a transfer pricing adjustment on royalties – as it’s a settlement, there isn’t a lot of information about, so it isn’t wholly clear whether this was the result of direct negotiation or through invoking the mutual agreement procedures. Either way, Asda has to pay another £115m in tax, whilst Wal*Mart will get a corresponding deduction.
The Indian tax authorities aren’t having a great success rate on IP and tax at the moment: earlier this month the Delhi High Court set aside a claim by the Indian tax authorities to disallow (on transfer pricing grounds) a royalty paid by Suzuki India to its parent company, the Suzuki Motor Corporation in Japan. The royalty was paid for the use of the Suzuki ‘S’ logo on cars sold in India, and the tax authority took the view that in an arm’s length transaction between unconnected parties, no royalty would have been paid. This seems somewhat unlikely, and the High Court reached the same conclusion.
The OECD has identified transfer pricing issues pertaining to intangibles as a key area of concern to governments and taxpayers, due to insufficient international guidance in particular on the definition, identification and valuation of intangibles for transfer pricing purposes.
The OECD is now considering starting a new project on the Transfer Pricing Aspects of Intangibles which could result in a revision of Chapters VI and VIII of the TPG (which deal with intangibles) and is looking for comments on these issues.
Veritas Software Corp. v. Commissioner (US case 133 TC 14): The U.S. Tax Court has held that the IRS’s $1.675bn adjustment to a cost sharing buy-in payment received by Veritas Software Corp. from an Irish affiliate was “arbitrary, capricious, and unreasonable”.
The tax court also confirmed that Veritas’ use of the comparable uncontrolled transactions method (albeit with some adjustments imposed by the court) was the best way to calculate transfer pricing on the buy-in payment.
The OECD has issued a draft of revised transfer pricing guidelines; the draft considers particularly the comparability analysis and transactional profit methods of transfer pricing, with the revisions following from discussions on these methods over the last three years. The first example (Annex I) considers intangible assets, and the second (Annex II) looks at marketing intangibles.
HMRC are expected to start targeting IP in transfer pricing enquiries this year, having been forced to back down over plans to widen the extent to which they can tax the IP income of foreign subsidiaries of UK companies. Possible new penalties – of at least 10% of the tax lost as a result of insufficient transfer pricing – are expected to be introduced in the ongoing powers and penalties review. Transfer pricing enquiries can be expensive: GlaxoSmithKline’s 14 year transfer pricing dispute with the US tax authority ended in a payment reputed to be around $3.4bn.