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1、The Global Landscape of Transfer Pricing Controversy:Trends You Cant Afford to Ignore 2022 Bloomberg Industry Group,Inc.1 Table of Contents Foreword.2 I.Introduction:Potential Avenues to Resolve a Transfer Pricing Dispute.4 A.Pre-Audit Prevention.4 B.Settlement Opportunities During Audit.6 C.Post-Au

2、dit Settlement Opportunities Short of Litigation.7 D.Competent Authority.8 E.Transfer Pricing Litigation.9 F.Forum Selection Considerations.9 II.APAs:A Practical Way to Prevent Transfer Pricing Disputes.11 A.Overview of APAs.11 B.Trends in APAs.11 C.APAs Versus Alternative Dispute Resolution Mechani

3、sms.12 D.Benefits of APAs.13 E.Is an APA Right for Your Fact Pattern?.13 F.Best Practices for a Successful APA.14 G.Key Questions Survey of Jurisdictions.16 III.Avoiding Double Taxation International Remedies.20 A.Overview of MAP and Arbitration.20 B.Procedural Aspects.20 C.Articulation with Domesti

4、c Litigation.25 D.Peer Review Information.26 IV.Global Trends and Developments in Transfer Pricing Controversy.28 A.Coca ColaU.S.Controversy.28 B.Global Transfer Pricing Cases.32 V.Final Remarks.47 2022 Bloomberg Industry Group,Inc.2 Foreword Foreword Dear Readers,The number of transfer pricing audi

5、ts across the globe are expected to rise as taxing authorities look for additional revenue after the Covid-19 pandemic.Countries like the United States have provided additional funding to taxing authorities to bolster compliance by multinational enterprises(“MNEs”),targeting investments in data anal

6、ysis and artificial intelligence to increase transparency.Transfer pricing controversies are expensive and time consuming.Although entering into an Advance Pricing Agreement(APA)may prevent litigating transfer pricing matters,and improvements have been made in this area,the number of mutual agreemen

7、t procedure(“MAP”)requests to competent authorities keeps rising,and more than half of those are transfer pricing requests.Transfer pricing issues introduced in MAP take an average of 35 months to resolve compared to the 18.5-month average resolution time for other cases.1 If an issue is litigated,r

8、esolution may not come for over a decade.Perhaps,greater emphasis needs to made by the international tax community to implement additional dispute resolutions techniques within the MAP process towards its simplicity and efficiency.In practice,tax controversies concerning related-party transactions t

9、hat initially were not focused on transfer pricing matters may be resolved and/or settled through transfer pricing adjustments.This has proven to be an effective mechanism to deal with technical tax issues in cases were no mutual understanding exists between the tax authorities and the taxpayer duri

10、ng the audit and administrative appeal stages and before entering into the litigation stage.Our global transfer pricing team,comprised of lawyers and economists,prepared this Special Report in partnership with Bloomberg Tax&Accounting to share our best practices for transfer pricing controversy with

11、 businesses who may soon find themselves defending their valuations.Please feel free to reach out to the authors with any questions.1 See OECD 2020 Mutual Agreement Procedure Statistics,available at https:/www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm.2022 Bloomberg Industry Gro

12、up,Inc.3 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield Finally,we would like to acknowledge all the Baker McKenzie attorneys and economists who authored this piece and the additional contributors from around the world.Argentina Martin Barreiro Mexico Jorge Narvaez-Hasfura Carlos

13、Linares-Garcia Allan Pasalagua-Ayala Australia Thomas Brennan Netherlands Hub Stolker Belgium Gry Bombeke Poland Tomasz Chentosz Canada Chris Raybould Spain Maria Antonia Azpeitia Davinia Rogel Bruno Dominguez China Abe Zhao Shanwu Yuan Sweden Linnea Back France Ariane Calloud Caroline Silberztein L

14、aura Nguyn-Lapierre Jetlira Kurtaliqi Switzerland Balthasar Denger Germany Florian Gimmler Daniel Schmeisser Turkey Erdal Ekinci Italy Chiara Monga United Kingdom Jessica Eden Jukka Karjalainen Nigel Dolman Japan Koji Oshima Luke Tanner Akihiko Tsuda United States Eric Torrey Marc Levey Susan Ryba A

15、manda Worcester-Martin Wenham Shen Luxembourg Antonio Weffer Ukraine Hennadiy Voytsitskyi We would also like to thank our Knowledge Management professionals who assisted with this effort:Elizabeth Boone and Gareth Kelly.Best Regards,Carlos Linares-Garcia Principal Economist Chair of North America an

16、d Latin America Transfer Pricing Practices Monterrey Jorge Narvez-Hasfura Partner Chair of Global Tax Dispute Resolution Practice Mexico City 2022 Bloomberg Industry Group,Inc.4 I.Introduction:Potential Avenues to Resolve a Transfer Pricing Dispute By Susan Ryba and Ariane Calloud Global transfer pr

17、icing disputes are on the rise.For many multinational companies,transfer pricing has been and continues to be their top audit issue.New transfer pricing issues have surfaced as a result of the transformational changes to the business and operating models made by companies during the Covid-19 pandemi

18、c.In this environment,tax departments strive to proactively manage their transfer pricing disputes in a manner that minimizes exposure to potential penalties and double taxation,as well as efficiently resolve disputes with the tax authorities located in multiple jurisdictions.While some transfer pri

19、cing disputes are resolved through litigation,many jurisdictions still provide taxpayers with good opportunities to settle transfer pricing issues administratively in a non-public forum.In the sections below,we discuss how a taxpayer might prevent a transfer pricing dispute in advance using an advan

20、ce pricing agreement.Then we turn briefly to the possibility of settlement during audit.We then focus on the mutual agreement procedure,which may prevent double taxation after a domestic transfer pricing determination is made.We then turn to domestic litigation of contested transfer pricing issues.F

21、inally,we end with a discussion of recent trends and developments in Transfer Pricing.A.Pre-Audit Prevention Transfer pricing disputes are among the most difficult,time-consuming,and expensive tax controversies that multinational companies can face.Before a transfer pricing audit begins,taxpayers sh

22、ould identify which intercompany transactions are likely to be examined and in which jurisdictions these examinations could occur.This planning will allow taxpayers to evaluate the opportunities available to settle transfer pricing disputes in each jurisdiction and determine which dispute resolution

23、 forum the company prefers.While settlement opportunities vary by jurisdiction,in general,taxpayers can look to settle their transfer pricing disputes before,during,and after the audit.Audit preparation is the key to a successful settlement at any of these time periods.Because transfer pricing cases

24、 are won or lost based on the facts,taxpayers must master the factual record.The earlier the taxpayer begins to understand and control the relevant facts,the better the chances of resolving the issues on favorable terms.Accordingly,by the time the transfer pricing audit begins,the taxpayer should co

25、nsider the following:Identify the intercompany transactions likely to be examined and which tax authorities are likely to examine them;Review the intercompany agreements and other documentation governing the transactions likely to be examined and confirm that they support the desired structure and i

26、ntercompany allocation of risks;The Global Landscape of Transfer Pricing Controversy:Trends You Cant Afford to Ignore 2022 Bloomberg Industry Group,Inc.5 Determine the taxpayers theory of the case,and be able to easily articulate why the taxpayers chosen methodology is the best method and why other

27、methods were not selected;Identify individuals who possess relevant facts and documents and consider the best ways to obtain such information;and Identify and preserve documents.A taxpayers ability to present a strong,consistent position throughout the audit that shows mastery of the facts will incr

28、ease the likelihood of achieving a favorable settlement during the audit.1.APAs Advance Pricing Agreements(“APAs”)historically have been an effective tool to resolve transfer pricing issues before an audit begins.Some jurisdictions may provide taxpayers with other opportunities to obtain transfer pr

29、icing certainty before an audit begins especially in the context of compliance programs and regularization mechanisms.In France,for example,taxpayers who are in the partenariat fiscal,an enhanced relationship program with the French tax administration,may obtain certainty on specific transfer pricin

30、g questions during the fiscal year at issue.APAs,however,continue to be the leading choice for preventing a transfer pricing dispute.For a detailed discussion of the APA process and their advantages and disadvantages,please see II.,below.2.ICAP The International Compliance Assurance Program(ICAP)is

31、a voluntary risk assessment and assurance program designed by the OECD with the objective of facilitating open and cooperative multilateral engagement between MNEs and tax administrations.In contrast to APAs,ICAP does not provide an MNE group with tax certainty.Instead,its objective from a taxpayer

32、perspective is to 2 The defined period is generally the covered period/s,plus the following two tax filing periods,provided there are no material changes.3 Argentina,Australia,Austria,Belgium,Canada,Chile,Colombia,Denmark,Finland,France,Germany,Ireland,provide comfort if there is a determination fro

33、m the tax administrations participating in an MNE groups risk assessment that the risk of the activity/transaction is low.In other words,ICAP does not examine specific amounts that may be in dispute,rather,it examines whether or not the transaction should be considered low risk and,thus,not a good u

34、se of audit resources.At the conclusion of an ICAP risk assessment,an MNE will receive outcome letters from each covered tax administration,containing the results of the tax administrations risk assessment and assurance of the covered risks for the covered periods.The design,content and wording of t

35、he letter is determined by each covered tax administration but will typically address:(i)risk ratings;(ii)any agreement reached as part of an issue resolution process,and;(iii)confirmation of the covered risks that are considered to be low risk,with a statement that it is not anticipated that compli

36、ance resources will be dedicated to a further review of these risks for a defined period.2 In contrast to APAs,ICAP is currently only available in twenty-two jurisdictions.3 Notwithstanding,taxpayers have reported that ICAP letters may also provide comfort/lessen risk in other jurisdictions,even tho

37、se that do not participate in ICAP.Furthermore,while an APAs provide tax certainty whereas ICAP only has the potential to reduce risk,there are certain benefits to ICAP.ICAP is materially less resource intensive than audits or APAs.ICAP is meant to leverage existing information(e.g.,CbCR)and a singl

38、e documentation package for use by all covered tax administrations.Consequently,the timeline is much faster,with outcome letters issued within 24-28 weeks from delivery of the main risk assessment documentation.Another benefit of ICAP is that,in contrast to APAs,it may be well suited to address one-

39、off transactions(provided the taxpayer believes it to be low risk).Italy,Japan,Luxembourg,Netherlands,Norway,Poland,Singapore,Spain,the United Kingdom,and the United States.2022 Bloomberg Industry Group,Inc.6 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield Some taxpayers and advise

40、rs,however,have expressed concerns.The concerns are driven by the perception that some tax authorities may use the program to collect information for their tax audits while being reluctant to provide favorable“low risk”assessments even where these are warranted.Furthermore,the perspective as to what

41、 constitutes a low covered risk varies across tax authorities.Thus,it is possible that with the same fact and transaction pattern a taxpayer receives a“low risk”outcome letter from some tax authorities but is targeted for audit by others.As this is a more streamlined process,it is most suitable to l

42、ess complex issues than those often addressed via APA,such as hard-to-value intangibles and IP migration.But with the right fact pattern and transactions,and if it lives up to the hype,ICAP is arguably the most efficient and accessible multilateral tools available to MNEs.Although it is also possibl

43、e that a taxpayer does not receive many(or any)“low risk”outcome letters or that ICAP ends up being an additional Information Document Request(IDR)in advance of an audit,the experience of most taxpayers who have been involved in ICAP has generally been positive.B.Settlement Opportunities During Audi

44、t Some jurisdictions,including the United States,grant settlement authority to the audit team.In the United States,for example,the Exam Team has discretionary settlement authority for transfer pricing issues being audited by the Large Business and International(LB&I)Division.In particular,during an

45、LB&I examination,if a taxpayer previously settled an issue with IRS Appeals,the Exam Team has the authority to settle the issue in the current audit on the same basis.4 Exam Teams during LB&I examinations also have the ability to settle issues according to written settlement 4 See I.R.S.Deleg.Order

46、4-24(Rev.1),IRM 1.2.2.5.20(Dec.3,2020).5 See I.R.S.Deleg.Order 4-25(Rev.2),IRM 1.2.2.5.21(Oct.18,2008).6 In some jurisdictions,transfer pricing disputes can lead to criminal liability.Some countries have laws that guidelines established by IRS Appeals in certain situations.5 Even in jurisdictions th

47、at do not have a formal process to settle cases during the audit phase,there still may be an opportunity to reach resolution.In France,for example,the possibility to settle a case with the French tax administration(besides the mere reduction of tax penalties)is not formally provided by French tax la

48、w.The litigation phase,however,will not start until various steps have been completed that result in formal exchanges between the taxpayer and the French tax administration.These exchanges can help to narrow the dispute.Settling transfer pricing issues with the audit team has several advantages.Firs

49、t,it allows the taxpayer to resolve the issue quickly.Litigation and other dispute resolution forums can take many years following the end of the audit,whereas a settlement with the audit team is final by the close of the audit.Second,it is much less expensive than litigation and other dispute resol

50、ution forums.Third,the dispute and settlement agreement are not public,which reduces the reputational risk that can sometimes arise in connection with transfer pricing litigation.Fourth,it may mitigate criminal risk in certain circumstances.6 Finally,reaching a settlement allows the taxpayer to bett

51、er manage the uncertainty of pursuing litigation,especially when case law is unclear or nonexistent.Nonetheless,while it is possible to settle transfer pricing issues with the audit team,it may be difficult to reach a settlement on terms acceptable to the taxpayer.For example,settling transfer prici

52、ng issues with the audit team may create a disadvantage for the taxpayer.Unlike issues settled using an APA,issues settled during audit may not provide protection on the issue for additional tax years.Further,a determination by the Exam Team may prevent a taxpayer from being able to claim a tax cred

53、it in another jurisdiction.In such cases,require certain tax disputes to be referred to the Public Prosecutor if no resolution has been reached by the end of the audit.In France,for example,the French tax administration must report to the Public Prosecutor a case that led to the application of certa

54、in tax penalties in a tax collection notice at the end of the tax audit phase.2022 Bloomberg Industry Group,Inc.7 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield taxpayers often proceed to other dispute resolution forums or litigation.In some jurisdictions,transfer pricing disputes

55、 can lead to criminal liability.Some countries have laws that require certain tax disputes to be referred to the Public Prosecutor if no resolution has been reached by the end of an audit.In France,for example,the French tax administration must report to the Public Prosecutor a case that led to the

56、application of certain tax penalties in a tax collection notice at the end of the tax audit phase.While Italian law generally provides that transfer pricing matters(valuation matters)do not have a direct criminal impact if the taxpayer discloses its transfer pricing policy,criminal ramifications are

57、 almost automatic in cases involving deemed permanent establishment challenges because Italian tax authorities must report such cases(omitted tax returns)to the Public Prosecutor.In such jurisdictions,settlement during the audit can mitigate criminal risk.Other jurisdictions,like Spain,require fraud

58、ulent intent to trigger criminal liability in transfer pricing cases.Generally,the fraudulent intent requirement cannot be met and,therefore,these cases have no criminal impact.In some other jurisdictions,the possibility exists to reach out-of-court settlements through alternative dispute resolution

59、 mechanisms.In Mexico,taxpayers may file for tax settlements before the Mexican Tax Ombudsman(Prodecon).Prodecon acts as a facilitator between the Mexican tax authorities and the taxpayer.This procedure is called conclusive agreement and is available for taxpayers only during the audit stage.7 The o

60、ngoing audit is suspended when the taxpayer files the adoption of the conclusive agreement.The conclusive agreement,once executed,cannot be challenged either through the filing of any remedy or through the filing of a MAP in terms of the corresponding double tax convention.Although the procedure doe

61、s not provide protection for other open years,when the business model remains the same during the following years,audits may be triggered in connection with 7 Taxpayers are entitled to request the adoption of a conclusive agreement at any moment during the audit and within the 20 days following that

62、 in which the final audit minute is concluded or the letter of observations is those years in order to include them in the conclusive agreement procedure,thereby achieving a multi-year settlement.Finally,the introduction of alternative disputes resolution techniques within the MAP process may be a w

63、ay to enhance the use of the MAP process.These techniques may expedite the MAP process and make it more efficient and final.Perhaps,the most widely discussed form of these alternative techniques in the tax area is arbitration.However,the decision-making authority granted under arbitration procedures

64、 is something that governments in many jurisdictions are not willing to give away because they view the taxing faculty as a sovereign right that cannot be left in the hands of non-government officials.C.Post-Audit Settlement Opportunities Short of Litigation If a taxpayer cannot resolve all of its t

65、ransfer pricing issues during the audit,it must determine whether any post-audit dispute resolution forums are available or whether it must proceed to litigation.The availability of post-audit dispute resolution forums will vary by jurisdiction.In the United States,for example,these post-audit resol

66、ution forums are quite developed In the United States,a common dispute resolution forum to resolve transfer pricing disputes,short of litigation,is IRS Appeals.Appeals is an independent office of the IRS separate and distinct from the examination function.Appeals seeks to“resolve Federal tax controv

67、ersies without litigation on a basis which is fair and impartial to both the Government and the taxpayer.”8 Appeals serves a quasi-judicial function by weighing the available evidence in light of the applicable law to negotiate a hazards-of-litigation based settlement.To proceed to Appeals,the taxpa

68、yer must request notified,provided that the tax inspector has qualified the corresponding facts and omissions.8 IRM 8.6.1.1.1(2)(July 1,2020).2022 Bloomberg Industry Group,Inc.8 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield consideration by Appeals and,in most cases,file a writte

69、n protest.9 Appeals proceedings are not public,take less time than litigation,and are not subject to the factual discovery that often comes with transfer pricing litigation.Thus,taxpayers often consider taking U.S.transfer pricing disputes to Appeals before deciding to litigate.If a taxpayer tries t

70、o settle a transfer pricing case with Appeals,it still has the option to proceed to litigation should the Appeals process fail.10 If a taxpayer wants to go to Competent Authority(“CA”),it must do so within 60 days of the conclusion of the Appeals Conference.Accordingly,a taxpayer may consider going

71、directly to a MAP,which may be more efficient although more time consuming.For most taxpayers,the ultimate goal is a favorable settlement of transfer pricing disputes without having to proceed to litigation.However,for certain transfer pricing issues,a reasonable settlement may be impossible short o

72、f trial.In such cases,the taxpayer may choose to skip Appeals and proceed directly to court.In making this determination,taxpayers should consider the following:Whether the taxpayers issue presents a new interpretation of existing transfer pricing law or a similar issue already considered by the cou

73、rts;The likely outcome of pending transfer pricing cases and their impact on the taxpayers issue;The taxpayers prior experience at Appeals and whether it has been able to successfully negotiate transfer pricing settlements;An assessment of the climate at Appeals based on the experience of other 9 Re

74、g.601.106(a)(1)(iii);IRM 8.1.1.3(6)(Apr.4,2014).All section references herein are to the Internal Revenue Code of 1986,as amended(the“Code”),or the Treasury regulations promulgated thereunder,unless otherwise indicated.taxpayers in the same industry or region with similar transfer pricing issues;Whe

75、ther the taxpayer prefers to keep its dispute in a non-public forum;and To the extent the taxpayers transfer pricing issue continues for multiple years,the impact of facts in later years on the current case.Are the facts in later years more or less favorable?Other jurisdictions also offer an adminis

76、trative appeals option but may require that the tax be paid in advance.For example,in Spain,once the STA issues the tax assessment and the taxpayer signs it in disconformity,the resulting tax needs to be paid or suspended through provision of a bank guarantee.Then two possibilities appear prior to l

77、itigation:Appeal before the Central/Regional Administrative Court:This is an Economic-Administrative procedure,which ends with a resolution and not with a judgement.If the taxpayers position is not accepted,the litigation process can continue through the courts.Starting a MAP(if applicable):This sus

78、pends the administrative proceeding until the MAP is concluded.D.Competent Authority At the end of an audit,the transfer pricing adjustment imposed by the local tax authority may also have tax consequences in a treaty jurisdiction that could result in double taxation.In such circumstances,the taxpay

79、er may seek to have the issue settled through a MAP.Most income tax treaties contain an article that provides for a MAP and arbitration access.The MAP article authorizes designated officials of the treaty partner governments(the“CA”)to resolve any cases of double taxation or other disputes arising f

80、rom differing interpretations or applications of the 10 Historically,Appeals Conferences were ex parte.Now the IRS has encouraged the audit team to participate in the settlement negotiations.The taxpayer must consider the past relationship with the audit team to determine if it makes sense to partic

81、ipate.2022 Bloomberg Industry Group,Inc.9 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield treaty provisions by their tax administrations.11 As a principle,the conclusion of a tax settlement should not prevent MAP access for elimination of double taxation.However,in practice,certain

82、 local tax authorities for instance,the French tax administration may request,as part of settlement negotiations,that MAP access be given up.For a detailed discussion of MAP and arbitration proceedings,please see III.,below.E.Transfer Pricing Litigation Taxpayers use the settlement options above(see

83、 I.B.and I.D.)to avoid litigation.While some taxpayers choose to litigate transfer pricing issues,other taxpayers are forced into litigation as the only available option to resolve a transfer pricing dispute.Regardless of jurisdiction,transfer pricing litigation has several common themes.First,the f

84、ilings and proceedings are public in most jurisdictions.In todays environment,transfer pricing cases may be followed not only in the tax press,but also by the mainstream press and non-governmental organizations focused on tax issues.This publicity can create significant reputational risk with both t

85、he public at large as well as other tax authorities.Second,litigation is expensive.Transfer pricing litigation is factually intensive and complicated.Finally,litigation takes a long time.In many jurisdictions,it can be several years after a case is filed before it actually proceeds to trial,and afte

86、r trial,it can take a few more years before the taxpayer receives the courts decision.Even after receiving the trial courts decision,there can be several more years of appeals before a final decision is reached.In transfer pricing litigation,taxpayers usually have a key advantage compared to the tax

87、 authority because the taxpayer possesses the facts(subject to application of retention rules to be carefully managed),as well as extensive internal and external resources.Historically,the tax authority has been at an information and resource disadvantage.Tax authorities attempt to combat this infor

88、mation disadvantage through various means now at their disposal,including exchange of information,CbCR,information gathered from 11 In the United States,taxpayers can skip Appeals and go directly to the CA through MAP.third parties,and even tax raids in certain jurisdictions.In some jurisdictions,th

89、e tax authority has an advantage because taxpayers bear the burden of proof.In the U.S.Tax Court,for example,taxpayers must prove that the IRSs transfer pricing adjustment is arbitrary,capricious,and unreasonable.Once this threshold is satisfied,as a practical matter,the taxpayer must demonstrate th

90、at its existing pricing or an alternative pricing arrangement satisfies the arms-length standard and produces a more reliable result than the IRSs determination.Rules governing burden of proof,however,vary by jurisdiction.For instance,in France,the French tax administration must demonstrate the exis

91、tence of an undue benefit to a foreign affiliate and to assess it.If,however,such indirect transfer of profits has been characterized,the burden of proof then shifts,and the taxpayer must demonstrate that the transaction was arms length.Before initiating litigation,the taxpayer should choose the app

92、ropriate forum,if possible.While many jurisdictions,including France,do not allow the taxpayer to choose the litigation forum,others do.In the United States,for example,taxpayers can litigate federal civil tax cases in the Tax Court,federal district court,or the Court of Federal Claims.F.Forum Selec

93、tion Considerations Where taxpayers have the opportunity to select a litigation forum,there are several factors taxpayers should consider to inform this decision.First,does the forum require the taxpayer to first pay the proposed tax deficiency or can the taxpayer litigate without making a payment?I

94、n the United States,the Tax Court is the only forum in which a taxpayer does not have to pay the proposed tax deficiency before docketing the case.In contrast,the taxpayer must fully pay the tax and then file a refund claim to litigate a transfer pricing dispute in federal district court or the Cour

95、t of Federal Claims.12 Taxpayers should also understand how and when interest is calculated.If the taxpayer can litigate its transfer pricing dispute in U.S.Tax Court or a non-12 See 7422(a);see also 6511,6532.2022 Bloomberg Industry Group,Inc.10 Digital Revolution:Transfer Pricing on the“Global Tax

96、”Battlefield U.S.court that similarly does not require a payment,taxpayers need to understand whether interest on the proposed deficiency will continue to accrue.In U.S.Tax Court,even though the taxpayer need not pay the deficiency to litigate,interest accumulates on any unpaid deficiency while the

97、case is pending in the Tax Court or on appeal from the Tax Court.13 Another important consideration in forum selection is the existence of favorable or unfavorable precedent.Taxpayers should examine all cases potentially relevant to their transfer pricing dispute to determine the optimal forum.Taxpa

98、yers should also consider the impact of no precedent in their forum selection decisions.The location of the trial can be another strategic consideration.In U.S.Tax Court,taxpayers have some flexibility to choose the city in which the trial will occur.14 Taxpayers may be able to use this flexibility

99、strategically.A district court trial offers less flexibility and generally takes place in the district in which the corporate taxpayer has its principal office or place of business.15 13 See 6601,6621.14 See Tax Ct.R.140(a).The decision maker and their technical expertise is a final consideration.So

100、me courts allow for both jury trials and bench trials while others are limited to bench trials.In the United States,there are no jury trials in Tax Court or the Court of Federal Claims,but a district court has both jury and bench trials.Tax Court judges handle only tax cases and tend to have conside

101、rable experience handling complex tax issues.Judges in the Court of Federal Claims and district court,however,hear a variety of cases and may have limited experience with tax cases.Depending on the nature of the taxpayers transfer pricing dispute,the taxpayer may prefer a decision maker with more or

102、 less substantive tax experience.15 See 28 U.S.C.1402.2022 Bloomberg Industry Group,Inc.11 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield II.APAs:A Practical Way to Prevent Transfer Pricing Disputes By Eric Torrey and Jessica Eden While many in the field of transfer pricing are fa

103、miliar with the concept of APAs,the pace of developments in the area has been swift.Given the nature and scope of change in this field,it is worth revisiting the area and weighing the recent developments because many are yielding(or are expected to yield)favorable improvements to the process of obta

104、ining an APA.A.Overview of APAs An APA is the outcome of a process that taxpayers pursue voluntarily with one or more tax authorities.The APA that results from such a process ultimately gives taxpayers and tax administrations advance certainty related to the transfer pricing matters covered by the A

105、PA.More specifically,an APA determines the transfer pricing,in advance of the relevant covered transactions,through an agreed set of criteria(e.g.,method,comparables,critical assumptions),over a fixed period of time.16 There are three forms of APAs:Unilateral APAs,which are APAs involving a taxpayer

106、 and a single jurisdiction solely under domestic law and,only provide transfer pricing certainty in a single jurisdiction(and then only if the jurisdiction of a counterparty does not raise any transfer pricing adjustments pertaining to the covered transactions).Bilateral APAs(“BAPAs”),which are APAs

107、 involving two jurisdictions that are party to an applicable bilateral tax treaty and provide transfer pricing certainty in both jurisdictions pertaining to the covered transactions.BAPAs are typically 16 Para 4.134 TPG 2022 negotiated between the two countries CAs and are generally implemented dome

108、stically through an agreement between the relevant taxpayers and each CA.Multilateral APAs,which are APAs involving more than two jurisdictions and provide transfer pricing certainty in each of the jurisdictions involved in the process.However,multilateral APAs typically require significantly more c

109、oordination,resources,and time compared to unilateral or BAPAs.B.Trends in APAs Transfer pricing disputes are among the most difficult,time-consuming,and expensive controversies that arise in tax.With the growing complexity of the global tax environment and a rapid increase in global transfer pricin

110、g controversy,APAs are becoming more popular among taxpayers and tax administrations as an effective tool for dispute resolution and prevention.For example,according to the 2021 APA Annual Report from the U.S.Internal Revenue Service(IRS)Advance Pricing and Mutual Agreement(APMA)Program,the number o

111、f APA applications increased by about 20%from 2020 to 2021.Of this total application pool,about 83%were bilateral applications.In 2021,APMAs staff also increased by about 21%in order to handle the increasing number of transfer pricing cases.In a March 2022 statement,the acting director for APMA,Nico

112、le Welch,stated that the IRS would prioritize hiring additional employees for the transfer pricing program and ramp up engagements with U.S.bilateral tax treaty partners in person that were suspended as result of the Covid-19 pandemic.Similarly,according to the European Commissions Statistics on APA

113、s in the EU,the total number of APAs in force increased from 1,041(intra-EU)and 593(EU/non-EU)in 2019 to 1,312(intra-EU)and 839(EU/non-EU)in 2020,representing growth rates of 26%and 41%,respectively.The comparable profits method/transactional net margin method(“CPM/TNMM”)remained the 2022 Bloomberg

114、Industry Group,Inc.12 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield dominant transfer pricing method applied in APAs.For example,for 2021,APMAs APA Annual Report shows that the CPM/TNMM applied to 85%of the tangible and intangible property transactions,and the operating margin(i.

115、e.,the ratio of operating profit to sales)was still the most common profit level indicator(“PLI”)used to benchmark results(65%of the time)while the other PLIs such as the Berry ratio(i.e.,the ratio of gross profit to operating expenses)and return on total costs made up the remaining 35%.For service

116、transactions,the vast majority(90%)also used the CPM/TNMM.On September 28,2022,the OECD released the first ever Bilateral Advance Pricing Arrangement Manual(“BAPA Manual”),which was a follow-up to the inaugural Tax Certainty Day discussions where all stakeholders(tax policy makers,tax administration

117、s,business representatives and other stakeholders)agreed that APAs were an effective tool for providing advance transfer pricing certainty.The BAPA Manual reiterates the best practice from the BEPS Action 14 Final Report that jurisdictions without BAPA programs should implement these as soon as they

118、 have the capacity to do so because BAPAs provide a greater level of certainty for both treaty partner jurisdictions,lessen the likelihood of double taxation,and may prevent transfer pricing disputes.The BAPA Manual recognizes that stakeholders have identified obstacles that prevent an optimal use o

119、f BAPAs,which leads to these being underutilized in many jurisdictions.Accordingly,the BAPA Manual was developed as a guide for streamlining the BAPA process,providing tax administrations and taxpayers with information on the operation of BAPAs,and identifying 29 best practices for an effective and

120、streamlined BAPA process,with an aim to reduce the average time to complete a new BAPA to 24 months for simpler cases and 30 months for more complex cases.As tax administrations and the OECD continue to invest in APA programs by increasing staffing and other resources,and as global transfer pricing

121、controversy continues to rise,APAs continue to be an excellent forum for preventing and resolving transfer pricing issues(particularly the more 17 Para 4.134 TPG 2022.challenging ones)and provide tax certainty to taxpayers.C.APAs Versus Alternative Dispute Resolution Mechanisms APAs can be a useful

122、tool to prevent transfer pricing disputes.As the OECD Transfer Pricing Guidelines(“OECD TPG”)notes APAs are intended to supplement the traditional administrative,judicial and treaty mechanisms for resolving transfer pricing issues.They may be most useful when traditional mechanisms fail or are diffi

123、cult to apply.APAs provide a greater level of certainty in both treaty partner jurisdictions,lessen the likelihood of double taxation and may proactively prevent transfer pricing disputes.17 A key benefit of the APA process as compared to the traditional administrative inquiry process is the taxpaye

124、rs ability to control the development of the factual and technical narrative.The APA process provides greater ability for the taxpayer to focus the attention of the tax authorities on the most critical issues to reach resolution.By contrast,factual and technical development in Tax Authority-led inqu

125、iry processes often digresses into areas that are ultimately determined to be of little significance in resolving the matter.This is also a benefit of APAs over MAP processes,discussed in III.,below,which tend to follow tax authority-led inquiry processes and so can suffer from the same convolution

126、of the facts and key technical issues.BAPA processes with two CAs also hold a significant advantage,as compared to unilateral APA processes involving only one tax authority,of the natural hedge created by the interests of the respective tax authorities in a bilateral process.Where the views of one a

127、uthority are aligned with those of the taxpayer,the weight of another Tax Authoritys interpretation can be beneficial in pushing back on more unusual views on the guidelines or case interpretation.By contrast,unilateral APAs are not binding on the other state tax authority and so have limited benefi

128、t in removing double taxation if the authorities have 2022 Bloomberg Industry Group,Inc.13 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield differing views on the appropriate level of reward in each state.While APA processes require upfront investment and can sometimes take a number

129、 of years to negotiate,ultimately a negotiated outcome should be achievable far in advance of a transfer pricing dispute resolved through normal administrative inquiry processes,which may potentially lead to a MAP or even litigation.Reducing the time taken to resolve differences in views invariably

130、reduces the cost,both in monetary and resourcing terms,to resolve the dispute.D.Benefits of APAs In most jurisdictions,an APA will cover a multi-year prospective period.However,as it can often take several years to negotiate an APA(particularly on a bilateral or multilateral basis),the APA agreement

131、 will typically also cover several past years in addition to the multi-year prospective period.Once an APA has been signed,subject to meeting the critical assumptions for the APA to remain valid and in place,it will provide certainty on the prospective transfer pricing and avoid future audits on the

132、 covered issues for the term of the agreement.If facts and circumstances remain substantially the same,taxpayers could typically apply for an APA renewal to cover additional future years through an expedited,less costly,process.Importantly,as part of the process of agreeing to an APA,the taxpayer wi

133、ll have a proactive role in presenting both the facts and proposed transfer pricing.This can be a significant advantage over MAPs which take place after an audit process and in which the taxpayers involvement can be much more limited depending on the jurisdictions involved.The APA application proces

134、s is the key opportunity for the taxpayer to ensure both authorities understand the factual narrative and technical issues involved.Where,as is often the case,an APA involves a novel transaction or difficult analysis,the BAPA process ensures that both Tax Authorities are required to consider the pos

135、ition from the others viewpoint,providing greater opportunity for a balanced outcome even in the most complex of cases.Agreeing to an APA may avoid the need for comprehensive transfer pricing documentation for the APA term.The OECD Transfer Pricing Guidelines recognize that the existence of an APA s

136、hould reduce documentation requirements for the term of the APA.This can provide an administrative cost saving.However,the existence of this benefit will depend on the specific documentation rules in the relevant local jurisdiction.For example,the United Kingdom is in the process of introducing mini

137、mum transfer pricing documentation requirements to include the Masterfile,local files,and Summary Audit Trail(SAT)report.There has been no suggestion to date that these new documentation requirements will be overridden by the existence of an APA.Finally,it is worth noting that the process of agreein

138、g to a BAPA requires open and transparent engagement that can ultimately help in strengthening the relationship between the taxpayer and relevant Tax Authorities involved.This can be useful not only in other dealings with those authorities,but also from a public relations perspective,in demonstratin

139、g the significance the taxpayer places on cooperative compliance.E.Is an APA Right for Your Fact Pattern?As with most things in life,there is no single answer that is right for everyone and the same is true when it comes to deciding whether pursuing an APA is right for your organization.Every organi

140、zation is unique in some way and has its own facts and circumstances that have to be weighed individually when making such a decision,however,there are a number of factors common to many organizations that we will consider here.One of the most frequently considered factors is whether the transaction

141、s and/or entities are the subject of frequent and recurring transfer pricing audits and disputes.In cases where controversy is a certainty(or a near certainty),there is a lot to be gained from pursuing an APA because it will allow the resolution to be applied to a much greater number of taxable year

142、s,including future years,where audit and MAP resolutions are likely to address only the cycle in question.Additional filed years may also be addressed if the treaty partners in question allow for an accelerated CA procedure 2022 Bloomberg Industry Group,Inc.14 Digital Revolution:Transfer Pricing on

143、the“Global Tax”Battlefield (“ACAP”),which extends the resolution to filed but not yet audited tax years.However,unlike an APA,ACAP does not extend beyond filed years,nor does it provide protection against transfer pricing penalties.Other circumstances where an APA is frequently beneficial is where t

144、he transaction is expected to be scrutinized and challenged under audit(e.g.,hard-to-value intangibles).For some jurisdictions,even relatively routine transactions are challenged(e.g.,routine distribution)on the basis that there is some form of local intangible that warrants greater compensation tha

145、n what is set out in the transfer pricing documentation.It is important for taxpayers to approach the APA process with the right mindset.The APA process is normally a voluntary process offered at the discretion of the tax authorities involved.Tax authorities often expect that taxpayers seeking an AP

146、A do so for the purposes of resolving or avoiding double taxation and achieving certainty,and that they will be more forthcoming with information and more collaborative than they might otherwise be in an audit context.Inflexible taxpayers motivated purely by tax minimization are less likely to be ac

147、cepted into the process and,if they are accepted,less likely to be pleased with the outcome.Not all transactions are suitable for APAs.While different tax authorities have different criteria for determining whether a taxpayer and/or transaction is suitable for consideration,there are some more commo

148、n factors suggesting that an APA may not be ideal.These include simple or easily-benchmarkable transactions where there is little or no risk of controversy,one-off transactions(e.g.,sales of machinery and equipment for use in a manufacturing process),transactions that are of a nature where resolutio

149、n through an APA or MAP process is unlikely(e.g.,cases where litigation may be a preferable means for resolving controversy should the transaction be challenged),or where a particular tax authoritys views are inconsistent with 18 Multilateral APAs can be even more powerful than BAPAs.While the multi

150、lateral APAs are gaining more prominence,they still comprise a fraction of BAPAs the OECDs guidance,which could lead to an inability to reach a resolution.Other factors to consider include the time and cost for both internal resources and external advisors to support the taxpayer through an audit/MA

151、P process as compared to the time and cost associated with an APA.While pursuing an APA could be as resource intensive as one audit/MAP cycle,the APA process is often more time and cost effective than dealing with repeated audit cycles.APAs are generally also less contentious and more collaborative

152、than audits and,as previously stated,should reduce the compliance burden for the remaining term of the APA.F.Best Practices for a Successful APA An APA particularly a BAPA18 can be a very powerful tool to address recent,unaudited years,and to provide tax certainty for several years into the future.H

153、owever,as previously discussed,it can also be an expensive,resource-intensive,and-time consuming endeavor.Fortunately,there are certain best practices that can mitigate some of these pitfalls while also maximizing the likelihood of success.To introduce what we consider to be best practices for an AP

154、A,it is helpful to first define a successful APA.A successful BAPA is one in which the CAs reach a resolution on all of the proposed covered transactions.This provides tax certainty,guaranteeing that there will be no double taxation.But from the taxpayers perspective,the most successful APAs share o

155、ther attributes:they are negotiated quickly,provide a reasonably long term,and reach a resolution that closely adheres to what is proposed in the APA request.An APA request should aim to increase the likelihood of these objectives An APA request is a taxpayers opportunity to explain its business and

156、 its transactions to an unfamiliar but savvy audience.In contrast to the audit team,in most jurisdictions the CA will have no prior experience with,and therefore no expectations of or biases towards,the taxpayer.given the complexity of adding a third(or more)CAs.Accordingly,this discussion will focu

157、s on BAPAs.2022 Bloomberg Industry Group,Inc.15 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield Furthermore,in most jurisdictions the CA is staffed by more experienced transfer pricing professionals than those that handle audits.This is particularly the case for less sophisticated

158、tax authorities.Thus,it is a unique opportunity to not only explain the facts and circumstances of the business and transaction but also motivate why a particular transfer pricing approach is most appropriate.It is usually a best practice for taxpayers to have informal or formal discussions with the

159、 CAs before submitting an APA request(e.g.,pre-filing conferences),even if these are not required by the particular jurisdiction.These discussions often provide useful feedback and insights from the CAs that could inform an optimized strategy for preparing a good APA request.A good APA request is on

160、e which describes the relevant industry,the particular business,and the corresponding transactions in a clear and concise way.The language should avoid insider jargon;on the contrary,the drafting should reflect that the reader will be a layperson.Consistent with the BEPS project and the OECD TPG,the

161、 APA request should inform the reader as to the full supply and value chains,with particular emphasis on the corresponding role of the parties to the subject transactions.A well-written functional and industry analysis will not only provide sufficient context and foundation to understand and evaluat

162、e the covered transactions,it should also provide a compelling motivation for why the proposed transfer pricing methodology is most appropriate.In this regard,there should be sufficient information in the APA request to inform the key inflection points for the selection of the most appropriate trans

163、fer pricing method.A seasoned transfer pricing practitioner could read the prior paragraph and conclude that these best practices also apply to transfer pricing documentation prepared for compliance.There is some truth to this.A good transfer pricing report is not one that merely provides the bare m

164、inimum to satisfy local requirements and/or provide penalty protection.A good transfer pricing report is a proactive audit defense document,a document that marshals facts in support of the taxpayers as-filed position with the aim to avoid being audited in the first place.That said,there are still ce

165、rtain differences between good compliance documentation and a good APA request.For example,in compliance documentation it may be tactically advantageous to not fully discredit alternate transfer pricing approaches and,instead,focus more on why the proposed transfer pricing methodology is most approp

166、riate.This provides the taxpayer with greater latitude in defending its as-filed position under audit.In an APA,however,it may be advantageous to offer full-throated arguments both in support of the proposed methodology and against the alternatives.After all,in contrast to recurring audits or to MAP

167、s,neither tax authority has pre-existing views of the specific transactions for this taxpayer,much less a position they may feel compelled to defend.The APA request will not only provide the information on which the CAs establish their view,it also provides a compelling argument supporting the propo

168、sed agreement.If done right,the proposed agreement will anchor the negotiation.A high-quality APA request may require a greater up-front investment.However,this investment should pay dividends.The better the APA request,the less additional information should be required by the CAs.Naturally,the fewe

169、r(and less onerous)information requests,the less post-request effort required.In other words,a greater up-front investment could be more than offset by lower post-request costs.But arguably,the more important benefit is a shorter negotiation period(i.e.,a shorter period of uncertainty).This may also

170、 result in a greater prospective term.To streamline and expedite the APA process,it is very important for the taxpayers and/or their advisors to be in regular contact with the CAs in order to facilitate the review,due diligence,negotiation,finalization,and implementation of the APA.Taxpayers should

171、also try to work with the CAs to agree on a project plan outlining the timelines for each stage of the process.If the taxpayer has other affiliates with similar transactions and fact patterns the value of an APA can be further compounded.For example,consider an MNE that owns unique,very valuable man

172、ufacturing technology.This technology allows it to command significant market share and generate premium profits.It licenses this technology to subsidiaries around the world who manufacture and sell to third parties.This fact pattern strongly benefits from an APA(e.g.,hard-2022 Bloomberg Industry Gr

173、oup,Inc.16 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield to-value intangibles and premium system profits make the MNE an attractive audit target).But this fact pattern also would strongly benefit from a network of BAPAs.After the first BAPA,the company could reap significant syne

174、rgies if it pursued additional BAPAs for its other subsidiaries.Beyond the obvious synergies in the APA request itself,there will be synergies in the negotiations as the CA in the jurisdiction of the IP owner will already be familiar with the fact pattern and the transactions.In other words,the inve

175、stment in the BAPA for subsequent jurisdictions should be significantly less than that of the first.Moreover,the CAs in these other jurisdictions will often take comfort in knowing that a prior resolution was reached.This prior negotiation will also provide comfort to the new CAs i.e.,what Im agreei

176、ng to was also agreed to by another CA in a subsidiary jurisdiction under substantially similar fact patterns.The larger the network of BAPAs,the smaller the investment per-APA and per-jurisdiction.But,far more importantly,the larger the network of BAPAs,the greater the tax certainty for the MNE.G.K

177、ey Questions Survey of Jurisdictions The discussion below addresses certain important questions from the perspective of various jurisdictions.19 The below synthesizes a survey of seasoned,on-the-ground transfer pricing advisers.1.What is the Risk that an APA Application Could Lead to an Audit?In an

178、APA process,tax authorities expect that taxpayers will be collaborative and transparent,sharing detailed information about their businesses and transactions.After all,this is a taxpayer-initiated procedure.In light of this,taxpayers may be concerned that the information shared could be used to eithe

179、r initiate audits where none would have otherwise taken place,or to better identify exposures in ongoing audits.In 19 Australia,Canada,China,France,Germany,Italy,Japan,Mexico,the Netherlands,Spain,Switzerland,the United Kingdom,and the United States.20 France is a notable exception of a jurisdiction

180、 where an ongoing APA negotiation does not preclude the initiating of an audit for a year within the proposed APA general,an APA application alone should not increase the risk of audit.This makes sense as it would seem to be a poor policy for tax authorities to disincentivize APA applications in thi

181、s way.However,an exception could be an increased risk of audits for recent years that are not within the proposed APA term.This is why it is generally recommended that an APA request propose roll-backs for any open years that have not been audited,although the availability of this coverage varies fr

182、om jurisdiction to jurisdiction.APAs provide protection against audits insofar as the guidelines in most jurisdictions20 prohibit the tax authority from initiating audits for years that are within the proposed APA term.However,in the event that the CAs are not able to reach resolution on some or all

183、 the covered transactions,or should the taxpayer reject the outcome or withdraw from the process,there may be an increased risk of audit.For example,in the United States,APMA is required to inform the taxpayers audit team if either the proposed APA does not reach resolution or if they identify an ex

184、posure that the APA does not remedy.While certain jurisdictions bar the tax authority from sharing information gleaned from an APA procedure with the audit team(e.g.,France,Spain,Japan),others make clear that any information provided during an APA process can be used in an audit(e.g.,Canada).The Uni

185、ted States makes a clear distinction that factual information can be used as evidence in any administrative or judicial proceeding(including in an audit),though non-factual information(if identified as such)shared in the APA process cannot be used as evidence in any administrative or judicial procee

186、ding.It is worth noting that in certain circumstances,APAs can be shared with the audit functionto manage or mitigate existing audits.As noted above,an APA could be used to prevent an expected audit from taking place.Moreover,it is sometimes possible to suspend audits through an term.Similarly,CA pr

187、oceedings in Switzerland are generally conducted independently from the activities of both the federal and cantonal tax administrations(although there is a certain amount of coordination taking place in practice).2022 Bloomberg Industry Group,Inc.17 Digital Revolution:Transfer Pricing on the“Global

188、Tax”Battlefield APA.This possibility depends on the jurisdiction and sometimes is at the discretion of the tax authority.In general,the likelihood of suspending an audit is greater if the APA request is filed before the audit has made significant progress.2.How Robust Are the Specific Rules and Guid

189、ance for an APA?As discussed throughout this Special Report,APAs in general and BAPAs in particular have proliferated.In this regard it is perhaps not surprising that many key jurisdictions provide rather robust rules or guidance for BAPAs.This is the case for the vast majority of jurisdictions surv

190、eyed.Notable exceptions are Australia(for unilateral APAs),Mexico and Spain(comprehensive rules but no guidance),and Switzerland(no specific legal framework for APAs which are governed on the basis of the mutual agreement provisions contained in tax treaties).It is worth noting that a few jurisdicti

191、ons have either recently provided robust rules or guidance for the first time,or have updated their guidance(e.g.,Germany,the Netherlands).Furthermore,other jurisdictions are expected to provide updated guidance in the near future(e.g.,Canada,the U.S.).3.Ease of Acceptance into the APA Program For m

192、any of the jurisdictions surveyed,acceptance into the APA program is relatively easy as long as the procedural and substantive requirements are met.However,several jurisdictions have additional barriers to admittance.Some,for example,appear to reject APA requests that involve transactions that are e

193、ither viewed as having a clear tax minimization purpose or are otherwise problematic(e.g.,Australia,Canada).21 Conversely,other jurisdictions may have a dim view of APA requests if they believe that the transaction is either low risk or not significant enough(in currency terms)to warrant an APA(e.g.

194、,the U.K.).In this instance,tax authorities are generally fielding an increasingly greater volume of APA 21 In the United States,APMA recently publicly stated that it is reevaluating its acceptance criteria and considering being more selective in their acceptance process.See,Erin Slowey,“IRS Reevalu

195、ating Advance Pricing Agreement Selection”requests and,sensibly,they want to obtain the greatest value from their APA program.Other jurisdictions may decline admittance into their APA program when,for example,they deem the taxpayer has not been sufficiently collaborative and transparent,they deem th

196、e primary objective of the transaction is tax avoidance,or one of the parties is in a listed,low-tax jurisdiction(e.g.,Australia,Canada,China,Germany,Japan,the Netherlands).It is worth noting that being accepted into a BAPA process by both jurisdictions does not necessarily guarantee that the CAs wi

197、ll reach an agreement.But there are instances where acceptance does guarantee an agreement.For example,the U.S.-Germany tax treaty calls for mandatory arbitration should the CAs fail to reach a resolution after two years after the commencement date of the case,which is defined as the earlier of i)th

198、e date on which the CAs have exchanged position papers setting forth their initial negotiating positions,or ii)two years from the earliest date on which the information necessary to undertake substantive consideration for a mutual agreement has been received by CAs.4.How Complex is the APA Applicati

199、on Process?In general,the APA application process is relatively straightforward.However,straightforward applications can still be relatively onerous in terms of the information required by the taxing authorities to accept and process the case.In certain jurisdictions,the taxpayer is in practice requ

200、ired to participate in a pre-file conference and,in some instances,provide additional information or participate in additional pre-file conferences to address the CAs due diligence concerns before being invited to apply for an APA(e.g.,Australia,Canada,China,Germany).One benefit of the recent Covid-

201、19 pandemic is that some tax Bloomberg Daily Tax Report,(Oct.6,2022),https:/ Bloomberg Industry Group,Inc.18 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield authorities now accept digital submissions(e.g.,the United States).5.Negotiation Process:Are the Information Requests Signifi

202、cant and Onerous?How Rigorous is the Technical Analysis?In our experience,BAPA processes require significant information and likely will involve technical,rigorous analysis.Furthermore,it is not uncommon for CAs to examine other intercompany transactions outside of the proposed scope of the APA to g

203、et a better sense of the overall impact from controlled transactions on the relevant entity.For example,both Canada and the United States may request that the scope of the APA be expanded to cover other transactions where they are interrelated and are most reliably evaluated together.Some CAs will a

204、lso examine considerations beyond income tax(e.g.,withholding tax,permanent establishment,anti-avoidance provisions,characterization of payments).Notwithstanding the foregoing,information requests via the APA program are arguably less onerous and the process less contentious than would be faced unde

205、r audit.Furthermore,and as discussed in the best practices section,II.F.,above,the scale and breadth of information requests can be mitigated through a high-quality APA request.In contrast to audits,APA processes generally involve more skilled professionals at the tax authority,which is beneficial t

206、o complex,nuanced fact patterns and transactions,and the counterweight of another CA that may take a more sympathetic view of the transaction.During the APA process,authorities also take into account OECD guidelines and do not just rely on domestic laws in the review.6.Tax Authorities Views of Unila

207、teral vs.Bilateral APAs Just over half of the jurisdictions surveyed noted a strong preference for bilateral or even multilateral APAs over unilateral APAs.This reflects a hesitation or even unwillingness to commit the time and resources for a unilateral APA only to have to revisit the matter under

208、MAP.Likewise,certain CAs(e.g.,the United States)have a strong preference against a unilateral APA where a tax treaty is in place because the unilateral APA process prevents bilateral discourse and negotiation on the covered issues;in such cases,the treaty partner that is not a party to the unilatera

209、l APA may not agree to providing any needed correlative relief via MAP(where required)if they were not a party to those unilateral discussions and agreement.In these jurisdictions,the basis for requesting a unilateral APA often needs to be justified in order to gain acceptance(e.g.,when there is no

210、tax treaty).The remaining jurisdictions are more receptive of unilateral APAs.These include China(where unilateral APAs have been heavily promoted over the last few years),Italy,Japan,Mexico,Spain,and Switzerland.7.What is the Typical Term of an APA?Many countries have a five-year term(inclusive of

211、jurisdictions that propose terms of three to five years).Some jurisdictions are more flexible.For example,while Canada typically limits the term to five years at the time of request,given the time needed to negotiate and conclude APAs,the Canada Review Agency(“CRA”)will generally offer to extend the

212、 term so that there are at least two to three prospective years.The United States likewise prefers that an APA request be filed early enough so that the proposed APA term covers at least five prospective years and,like Canada,would seek to extend the APA term beyond five years in the case of protrac

213、ted negotiations to ensure that the APA continues to offer prospective application.Other jurisdictions could allow for a term greater than five years but these are not common(e.g.,Netherlands-in exceptional cases thereby requiring a mid-term review).The availability of rollback years varies.Some jur

214、isdictions exclude rollbacks altogether(e.g.,France)or notes that they are at the discretion of the tax authority(e.g.,Germany).China is an outlier in potentially accepting rollbacks for as many as 10 years.In Japan,rollbacks are not allowed for unilateral APAs,but can be applicable to bilateral and

215、 multilateral APAs.Canada is the same in that unilateral APAs are effective as of the first unfiled tax year at the time the APA is signed and no rollback to any filed years is permitted.Even years that are filed while the unilateral APA is under negotiation are not eligible for coverage under the u

216、nilateral APA.2022 Bloomberg Industry Group,Inc.19 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield 8.What is the Likelihood that an APA will be Revoked or Otherwise Canceled?There is almost universal certainty in that APAs cannot be revoked or otherwise canceled provided the critic

217、al assumptions and other terms of the APA are met,as well as the monitoring and reporting requirements.One exception is if the taxpayer does not act in good faith(e.g.,purposely withholding or misrepresenting information relevant to the APA).In the U.S.,there is very recent case law limiting the IRS

218、s discretion to cancel an APA.In late August of this year,the Sixth Circuit held in Eaton Corp.&Subs.v.Commissioner22 that the IRS had the burden of proving that there were grounds to cancel the APAs under generally applicable contract-law principles and the IRS failed to meet that burden.22 Eaton C

219、orp.&Subs.v.Commissioner,47 F.4th 434(6th Cir.2022)(reversing the U.S.Tax Courts determinations that APAs are administrative determinations that are not H.Key Takeaway As tax administrations and the OECD continue to invest in APA programs by increasing staffing and other resources,and as global tran

220、sfer pricing controversy continues to increase,APAs,and BAPAs in particular,continue to be an excellent option for preventing and resolving transfer pricing issues(particularly the more challenging ones)and provide transfer pricing certainty to taxpayers vis-vis the covered transactions.subject to r

221、eview under contract principles and that an arbitrary and capricious standard of review applies).2022 Bloomberg Industry Group,Inc.20 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield III.Avoiding Double Taxation International Remedies By Laura Nguyen-Lapierre A.Overview of MAP and A

222、rbitration From a treaty perspective,there are two types of double taxation that may arise:Juridical double taxation arises where the same profit or income is subject to tax in the hands of the same legal entity for the same time period by two different countries.Examples of juridical double taxatio

223、n arise in the event of a conflict of residence,or from an adjustment regarding the attribution of profits to a permanent establishment(PE)dealing with its head office.Economic double taxation arises where two countries tax the same profit or income in the hands of two legally distinct entities.It c

224、an result from a transfer pricing adjustment between two associated enterprises situated in two jurisdictions.Both juridical and economic double taxation can be eligible to MAP provided by the applicable bilateral tax treaty.MAP is provided under Article 25 of the 2017 OECD Model Tax Convention23 an

225、d Article 25 of the 2021 UN Model.24 In the event of economic double taxation resulting from a transfer pricing adjustment,Article 9-2 of the OECD Model Tax Convention(where included 23 Model Tax Convention on Income and on Capital 2017(Full Version),OECD Publishing,Paris.24 United Nations Model Dou

226、ble Taxation Convention Between Developed and Developing Countries 2021.25 See OECD 2020 Mutual Agreement Procedure Statistics,https:/www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm(last accessed on Sept.22,2022).in the applicable bilateral treaty)can provide the possibility for t

227、he Contracting States to eliminate double taxation unilaterally,without the need to open a MAP(a similar provision is provided by the 2021 UN Model).According to available MAP data(OECD statistics25),a total of 6,478 MAP cases were pending as of the end of 2020,out of which 3,503 were transfer prici

228、ng cases.Among the 2378 cases closed in 2020,51%were concluded with a full elimination of double taxation or resolution of taxation not in accordance with the treaty.In 16%of cases,a unilateral relief was granted and in 7%of cases they were resolved via domestic remedy.The average time for transfer

229、pricing cases is 35 months(versus 18.5 months for other cases).As it is an average,there are disparities among countries,some being closer to a 2-year time line(e.g.,Australia,Belgium,Canada,Korea,Netherlands,Switzerland)while other have far longer time line(e.g.,47 months for China,63 months for In

230、dia,41 months for Japan,59 months for South Africa,47 months for the US).B.Procedural Aspects Bilateral tax treaties generally provide for the resolution of disagreements or questions regarding the interpretation or application of the treaty,in line with Article 25 of the 2017 OECD Model or of the 2

231、021 UN Model.26 In the below discussion,we will focus on the MAP and arbitration procedure as provided by the OECD Model,unless otherwise specified.27 1.MAP Under Bilateral Tax Treaties The deadline for the submission of MAP requests under treaties is generally three years from the date of the first

232、 notification of the action resulting 26 Guidance on MAP under the UN Model is developed in Part 2 of the 2021“Handbook on Avoidance and Resolution of Tax Disputes.”27 Particular bilateral treaties may depart from the OECD Model in certain respects,so the applicable treaty provisions should always b

233、e reviewed carefully.In addition,some countries supplement the general guidance provided by the OECD with national guidance.2022 Bloomberg Industry Group,Inc.21 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield in taxation not in accordance with the provisions of the Convention.Altho

234、ugh it is inconsistent with BEPS Action 14,a few countries have argued that their domestic statutes of limitations may be applied to preclude CA consideration even prior to the deadline set by the treaty.More commonly,countries may take the position that their domestic statutes of limitations limit

235、the application of a CA agreement if the treaty is silent on the matter of deadlines.Others maintain that this approach is barred by the standard treaty language providing that,any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.Gi

236、ven the variety of interpretations applied,the positions of the relevant CAs should be confirmed on a case-by-case basis as early as possible.Most treaties,in line with the prior OECD Model(2014),require that the CA process be initiated in the Contracting State where the person requesting considerat

237、ion is a resident,while the 2017 OECD Model provides that the MAP request must be presented to the CA of either Contracting State.This change in the 2017 version was made to reinforce the general principle that access to MAP should be as widely available as possible and to provide flexibility.As a p

238、ractical matter,a common practice is to file the MAP request simultaneously in both States(some countries require or strongly encourage this approach).The MAP is divided into two stages:An internal phase,during which the procedure takes place exclusively between the taxpayer and the CAs of the State

239、 to which the case was presented.The CAs make a preliminary assessment of the taxpayers objection and may resolve the issue without moving beyond the first(unilateral)stage of the MAP.28 See the Communication from the Commission to the European Parliament and the Council:A Fair and Efficient Corpora

240、te Tax System in the European Union:5 Key Areas for Action(June 17,2015).A bilateral phase,which is initiated when the CA initially seized considers whether the taxation complained of is due,wholly or in part,to a measure taken in the other State.Although the CAs are not required by treaty to reach

241、a mutual agreement,and treaties do not set a deadline for the conclusion of such agreements per se,the BEPS Action 14 Final Report specifies an average time frame of 24 months as a minimum standard for the resolution of MAP cases.Statistics(see III.A.,above)show that this time frame is not the stand

242、ard for transfer pricing cases in practice but given the MAP Forum peer review process(see below,III.D.),it could be hoped that CAs will strive to reach a resolution within this period,all the more where mandatory arbitration applies as described below,in III.B.3.2.MAP Under the European Directive O

243、n October 10,2017,the EU adopted a directive(2017/1852)on tax dispute resolution mechanisms(“European Directive”),as part of the EU Action Plan for A Fair and Efficient Corporate Tax System in the European Union.28 The European Directive introduces an effective and efficient framework for the resolu

244、tion of tax disputes concerning the interpretation and application of tax treaties and conventions.It builds on existing systems in the EU,including the European convention of July 23,199029(“Arbitration Convention”).However,the scope of the European Directive is broader than the one of the Arbitrat

245、ion Convention because it covers disputes concerning the interpretation and application of bilateral tax treaties among Member States and is not restricted to transfer pricing disputes and adjustments in connection with the allocation of profits to a PE.Furthermore,the legal nature of the European D

246、irective makes it a more powerful legal instrument than the Arbitration Convention.The European Directive applies to any complaint,submitted from July 1,2019,onward,regarding 29 Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises(90

247、/436/EEC).2022 Bloomberg Industry Group,Inc.22 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield questions of dispute relating to income or capital earned in a tax year commencing on or after January 1,2018,unless the CAs decide to apply the European Directive with regard to complain

248、ts submitted prior to July 1,2019 or to earlier tax years.Overview of Procedure The complaint must be submitted by the taxpayer within three years from the receipt of the first notification of the action resulting in,or that will result in,the question in dispute.The taxpayer has to simultaneously s

249、ubmit the complaint with the same information to each CA and has to indicate in the complaint which other Member States are concerned.The European Directive provides for a detailed time frame for each step of the procedure.Each CA shall acknowledge receipt of the complaint within two months from the

250、 receipt of the complaint.Each CA shall also inform the CAs of the other Member States concerned of the receipt of the complaint within two months of the receipt.The CAs of each of the Member States concerned shall make a decision on the acceptance or rejection of the complaint within six months of

251、the receipt thereof or within six months of the receipt of the additional information,whichever is later.The CAs shall inform the affected person and the CAs of the other Member States of their decision immediately.Within a period of six months from the receipt of a complaint,or within six months of

252、 the receipt of the additional information,whichever is later,a CA may decide to resolve the question in dispute on a unilateral basis,without involving the other CAs of the Member States concerned.Where the CAs of the Member States concerned accept a complaint,they must endeavor to resolve the ques

253、tion in dispute by mutual agreement within two years,starting from the last notification of a decision of one of the Member States on the acceptance of the complaint.The period of two years may be extended by up to one year at the request of a CA of a Member State concerned to all of the other CAs o

254、f the Member States concerned,if the requesting CA provides written justification.Double taxation is regarded as eliminated if the profits are included in the computation of taxable profits in one State only,or if the tax chargeable to those profits in one State is reduced by an amount equal to the

255、tax chargeable on them in the other.Parallel Recourse Under Bilateral Treaties The submission of a complaint puts an end to any other ongoing proceedings under the MAP or dispute resolution procedure under an agreement or convention that is being interpreted or applied in relation to the relevant qu

256、estion in dispute.Other ongoing proceedings concerning the relevant question in dispute shall end with effect from the date of the first receipt of the complaint by any of the CAs of the Member States concerned.Denial of Access A taxpayer may be denied access to the dispute resolution procedure prov

257、ided by the European Directive where penalties were imposed in that Member State in relation to the adjusted income or capital for tax fraud,willful default and gross negligence.Where the commencement of judicial or administrative proceedings could potentially lead to such penalties,and if these pro

258、ceedings were being conducted simultaneously with any of the proceedings referred to in the European Directive,a CA may stay the proceedings under the European Directive,as of the complaints date of acceptance until the date of the final outcome of those proceedings.Member States may deny access to

259、the dispute resolution procedure on a case-by-case basis,where a question in dispute does not involve double taxation.In this case,the CA of said Member State has to inform the taxpayer and the CAs of the other Member States concerned without delay.Articulation with the Arbitration Convention By eff

260、ect of the amendment by the protocol adopted in 1999,the Arbitration Convention has been automatically extended every five years since December 31,2004,unless contracting states decide otherwise.The European Directive requires that other MAPs or dispute resolution procedures,if any,are terminated to

261、 benefit from the European Directives application.This would exclude parallel 2022 Bloomberg Industry Group,Inc.23 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield submissions under the Arbitration Convention and the European Directive,although there is no specific provision as of t

262、oday as to the articulation between the Arbitration Convention and the European Directive.3.Arbitration Under Bilateral Tax Treaties 33 countries30 opted in for the introduction of a mandatory arbitration provision into their applicable tax treaties through the Multilateral Convention to Implement T

263、ax Treaty Related Measures to Prevent Base Erosion and Profit Shifting(MLI).31 Under the MLI,the mandatory binding arbitration rules will apply only if both parties to a treaty have opted in and agree on the procedures to be implemented.Irrespective of(and prior to)the application of the MLI,some bi

264、lateral tax treaties also include an arbitration clause in the event of unresolved taxation by the CAs under a MAP.32 Examples of such treaties include those between:the United States and Belgium,33 30 Based on the OECD Arbitration Profiles as of September 16,2022:Andorra,Australia,Austria,Barbados,

265、Belgium,Canada,Curaao,Fiji,Finland,France,Germany,Greece,Hungary,Ireland,Italy,Japan,Lesotho,Liechtenstein,Luxembourg,Malta,Mauritius,the Netherlands,New Zealand,Papua New Guinea,Portugal,Singapore,Slovenia,Spain,Sweden,Switzerland and the UK.Although not included in the OECD Arbitration Profiles,De

266、nmark and Namibia chose to apply Part VI(Arbitration)of the MLI.31 The MLI is the result of the work conducted under and further to the OECD/G20 Base Erosion and Profit Shifting Action 15.Pursuant to the MLI,if two countries opted in for the mandatory arbitration clause,this clause will be introduce

267、d in the bilateral convention in force between these two countries.The text of the MLI is available here:https:/www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf(accessed on Sept.22,2022).32 This clause was introduced in the OECD Model by the 2008 update.33 Article 24.7 of the USA/Belgi

268、um double taxation convention(“DTC”)signed on Nov.27,2006.34 Article 26.6 of the USA/Canada DTC signed on Sept.26,1980,as amended by protocols through 2007.the United States and Canada,34 the United States and France,35 the United States and Germany,36 the United States and Spain,37 the United State

269、s and Switzerland,38 France and Germany,39 France and the UK,and40 the Netherlands and the UK.41 Where the CAs are unable to reach an agreement under the MAP phase within two years,42 the unresolved issues can be solved through an arbitration process,at the request of the person who presented the ca

270、se.43 The OECD Commentary on Article 25 specifies that recourse to arbitration is“not automatic;the person who presented the case may prefer to wait beyond the end of the two-year period(for example,to allow the CAs more time to resolve the case under paragraph 2)or simply not to pursue the case.”35

271、 Article 26.5 of the USA/France DTC signed on Aug.31,1994,as amended by the protocols signed on Dec.8,2004,and Jan.13,2009.36 Article 25.5 of the USA/Germany DTC signed on August 29,1989,as amended by the protocol signed on June 1,2006.37 Article 26.5 of the USA/Spain DTC signed on February 22,1990,

272、as amended by the 2013 protocol signed on Jan.14,2013.38 Article 25.6 of the USA/Switzerland DTC signed on Oct.2,1996,as amended by the protocol signed on Sept.23,2009.39 Article 25.5 of the Germany/France DTC signed on July 21,1959,as amended by the MLI.40 Article 26.5 of the UK/France DTC signed o

273、n June 19,2008,as amended by the MLI.41 Article 25.5 of the UK/Netherlands DTC signed on Sept.26,2008,as amended by the protocol signed on June 12,2013.42 In contrast,the 2021 UN Model provides for a three-year deadline.43 In contrast,the 2021 UN Model provides that arbitration should be requested b

274、y the CA of one of the Contracting States.2022 Bloomberg Industry Group,Inc.24 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield The Sample mutual agreement on arbitration included in Annex to the Commentary on Article 25 provides that the two CAs will each appoint one arbitrators,wi

275、thin 60 days after the request for arbitration has been received by both CAs.The arbitrators will then select a Chair within 60 days after the date on which the last of the initial appointments was made.The OECD Model leaves the mode of application of the arbitration process to be settled by mutual

276、agreement.The Sample mutual agreement on arbitration takes as its starting point the“last best offer”approach,i.e.,each CAs is required to give to the arbitration panel a proposed resolution of the issue involved and the arbitration panel chooses between the two proposals which were presented to it,

277、without including a rationale or any other explanation of the decision.In recognition of the fact that in some cases,especially those which involve complex legal questions,the CAs may prefer to receive a more elaborate decision,the Sample mutual agreement on arbitration also provides for an alternat

278、ive“independent opinion”process,i.e.the arbitrators are presented with the facts and arguments by the parties based on the applicable law,and then reach their own independent decision which is based on a written,reasoned analysis of the facts involved and applicable legal sources.CAs can agree to us

279、e that independent opinion process on a case-by-case basis.CAs may adopt a combined approach,adopt the independent opinion approach as the generally applicable process with the last best offer approach as an option or limit themselves to only one of the two approaches.As part of the“last best offer”

280、approach,the Sample mutual agreement on arbitration recommends the following time frame:Within 60 days of the appointment of the Chair,each CA must submit to the arbitrators a proposed resolution,which may be supported by a position paper.Each CA may also submit within 120 days after the appointment

281、 of the Chair a reply submission with respect to the proposed resolution and supporting position paper submitted by the other CA.The arbitration decision has to be delivered within 60 days after the reception by the arbitrators of the last reply submission or,if no reply submission has been submitte

282、d,within 150 days after the appointment of the Chair.In case of an alternative“independent opinion”process,the recommended time frame is as follows:Each CA must provide to the arbitration panel and to the other CA any information that it considers necessary for the panel to reach its decision,within

283、 120 days after the election for the alternative process.Contrary to the last best offer approach,it is expected that one or more meetings of the arbitration panel and both CAs can be necessary to discuss the case,and the person requesting arbitration is entitled to present a written submission of i

284、ts position to the arbitrators and,if the CAs and arbitrators all agree,to make an oral presentation during a meeting of the arbitrators.It belongs to the arbitrators to develop the procedural rules on an ad hoc basis that govern the“independent opinion”arbitration process.The decision of the arbitr

285、ation panel has to be delivered to the CAs in writing within 365 days after the date of the appointment of the Chair.The“Sample mutual agreement on arbitration”suggests that the mutual agreement that incorporates the solution arrived at should be completed and presented to the taxpayer within 180 da

286、ys after the date of the communication of the arbitration decision.4.Arbitration Under the European Directive Where the CAs of the Member States concerned have not reached an agreement on how to resolve the question in dispute within the two-year period(possibly extended by one year),the 2022 Bloomb

287、erg Industry Group,Inc.25 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield CA of each of the Member States concerned has to inform the affected person and indicate the general reasons for the failure to reach agreement.This phase,which follows the MAP phase,is referred to as the arb

288、itration phase.The arbitration phase is divided into three periods:The CAs must constitute an Advisory Commission(consisting of representatives of both tax authorities concerned and independent persons of standing)or an Alternative Dispute Resolution Commission(providing flexibility in the choice of

289、 dispute resolution methods);The latter has to render its opinion;and The CAs must reach a final decision.The Advisory Commission or the Alternative Dispute Resolution Commission has to deliver its opinion to the CAs of the Member States concerned no later than six months after the date on which it

290、was set up;this period may be extended by three months.The dispute resolution process applied by the Advisory Commission is the independent opinion process.As an alternative to the process applied by the Advisory Commission,any other type of dispute resolution process,including the final offer arbit

291、ration process(otherwise known as last best offer arbitration),can be agreed by the CAs of the Member States concerned and applied by the Alternative Dispute Resolution Commission.The CAs concerned have to agree on how to resolve the question in dispute within six months of the notification of the o

292、pinion of the Advisory Commission or Alternative Dispute Resolution Commission.The CAs may make a decision that deviates from the opinion of the Advisory Commission or Alternative Dispute Resolution Commission.However,if they fail to reach an agreement as to how to resolve the question in dispute,th

293、ey shall be bound by that opinion.It should be noted that some countries(e.g.,France,Germany,Spain)have reserved their rights,under the MLI reservations,to exclude from mandatory arbitration pursuant to the MLI any case that falls within the scope of application of an arbitration procedure establish

294、ed by the EU,such as the Arbitration Convention,or the European Directive,or any subsequent regulation.C.Articulation with Domestic Litigation The possibility of resorting to MAP must be anticipated because it needs to be articulated with the strategy adopted within the framework of the management o

295、f the transfer pricing dispute in order to be fully effective.For example,although it is not in accordance with stated OECD principles,tax authorities still may request that the taxpayer renounces the right to MAP within the framework of a tax settlement;it will therefore be necessary for the taxpay

296、er to be able to determine the cost/benefit balance of a tax settlement with regard to double taxation which would not be eliminated.Moreover,“serious penalties”applied as part of the tax audit that have become definitive may prevent access to the MAP.Finally,a MAP is,in theory,completely compatible

297、 with judicial proceedings.Nevertheless,it is essential to coordinate the timing of the two procedures,depending on the objective sought.For example,the implementation of a MAP may require the taxpayer to withdraw from the litigation or waive the benefit of res judicata;or,on the contrary,the existe

298、nce of a judicial proceedings may delay the processing of the MAP,or even block access to arbitration in the event of a judicial decision becoming final.In effect,the submission of the question in dispute to procedures covered by the European Directive for instance does not prevent a Member State fr

299、om initiating or continuing judicial proceedings or proceedings for administrative and criminal penalties in relation to the same matters.Similarly,the taxpayers may have recourse to the remedies available to them under the national law of the Member States concerned.However,where the affected perso

300、n has commenced proceedings to seek such a remedy,the terms of the six-month period(under which the CAs have to make a decision on the acceptance or rejection of a complaint)and the two-year period(under which the CAs have to endeavor to resolve the question in dispute)respectively shall commence fr

301、om the 2022 Bloomberg Industry Group,Inc.26 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield date on which a judgment delivered in those proceedings has become final or on which those proceedings have otherwise been definitively concluded or where the proceedings have been suspended

302、.For the application of the European Directive,where a decision on a question in dispute has been rendered by the relevant court or other judicial body of a Member State,and the national law of that Member State does not allow it to derogate from the decision,that Member State may provide that:Befor

303、e an agreement has been reached by the CAs under the MAP on that question in dispute,the CA of that Member State is to notify the CAs of the Member States concerned of the decision of the relevant court or other judicial body,and that procedure is to be terminated as from the date of such notificati

304、on.Before the affected person has made a request for an Advisory Commission to be set up,the provisions relating to the resolution by an Advisory Commission do not apply if the question in dispute had remained unresolved during the whole of the MAP.In this case,the CA of that Member State is to info

305、rm the CAs of the Member States concerned of the effect of the decision of the relevant court or other judicial body.The dispute resolution process with the Advisory Commission is to be terminated if the decision of the relevant court or other judicial body was rendered at any time after an affected

306、 person made a request to set up an Advisory Commission but before the Advisory Commission or the Alternative Dispute Resolution Commission has delivered its opinion to the CAs of the Member States concerned.In this case,the CA of the relevant Member State concerned is to inform the other CAs of the

307、 Member States concerned and the 44 Action 14-OECD BEPS,https:/www.oecd.org/tax/beps/beps-actions/action14/(accessed on Sept.22,2022).Advisory Commission or the Alternative Dispute Resolution Commission of the effect of the decision of the relevant court or other judicial body.A careful review of th

308、e applicable treaty/EU provisions and national regulations is therefore key to ensure an efficient articulation of international remedies(bilateral or EU)and domestic procedures.D.Peer Review Information The BEPS Inclusive Framework members agreed on:a peer review process to evaluate the implementat

309、ion of this standard and to report MAP statistics under a newly developed reporting framework.The peer review process was launched at the end of 2016,with 82 jurisdictions to be reviewed in 10 batches and is now completed:In stage 1,jurisdictions implementation of the Action 14 Minimum Standard was

310、evaluated and recommendations were made where jurisdictions had to improve in order to be fully compliant with the requirements under this standard.In February 2021,the final batch of stage 1 peer review reports were published:based on OECD data,“Of the more than 1750 recommendations made,about 66%(

311、+/-1150)relate to deficiencies in tax treaties with respect to the MAP article.Around 34%(+/-600)of the recommendations relate to MAP practices and policies that are not in line with the minimum standard.”44 The follow-up of the recommendations was measured in stage 2 of the process.Stage 2 reports

312、for the 82 jurisdictions that were peer reviewed in batches 1-10 have been published from August 2019 until September 2022.Based on OECD data,For the 82 jurisdictions reviewed in stage 2022 Bloomberg Industry Group,Inc.27 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield 2,many have

313、improved their performance with respect to the prevention of disputes,the availability of and access to MAP,the resolution of MAP cases and the implementation of MAP agreements.”2022 Bloomberg Industry Group,Inc.28 IV.Global Trends and Developments in Transfer Pricing Controversy A.Coca ColaU.S.Cont

314、roversy By Marc Levey 46 The recently-decided Coca Cola case provides an important model for transfer pricing globally.Not only does the decision follow OECD principles,but it lays out,in detail,how to analyze a transfer pricing matter,prepare transfer pricing documentation,analyze marketing intangi

315、bles,ensure important legal agreements are properly executed,and ultimately defend against a transfer pricing case.On November 18,2020,the U.S.Tax Court ruled that the IRS had not abused its discretion under 482 when it reallocated more than USD 9 billion in income for tax years 2007 to 2009 to peti

316、tioner Coca-Cola from its foreign manufacturing affiliates.47 The case is factually straightforward.Below,we illustrate the relationships among the U.S.parent company(Coca-Cola),its foreign manufacturing affiliates(known as“Supply Points”),its local foreign service companies(“ServCos”),its independe

317、nt foreign bottlers,and its“extremely valuable”intangible assets,including trademarks,logos,patents,secret formulas,and“the best-known brand in the world.”46 This section and the discussions of Altera,Medtronic,and Facebook,below,are adapted from a chapter authored by Marc Levey in Transfer Pricing

318、Developments Around the World 2022(2022),77-83,with permission of Kluwer Law International.47 Coca-Cola Co.&Subsidiaries v.Commissioner,115 T.C.145(2020).2022 Bloomberg Industry Group,Inc.29 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield In applying the transfer pricing method on

319、which its return position was based,the taxpayer relied on the terms of an IRS Closing Settlement Agreement for the years 1987 through 1995(the“Closing Agreement”).48 Specifically at issue was whether the court would follow the 10-50-50 apportionment formula for allocating income from the sale of be

320、verage concentrate to its Supply Points pursuant to the Closing Agreement.Coca-Cola followed this formula for years after the expiration of the Closing Agreement.Coca-Cola argued that the IRSs use of a new method the Comparable Profits Method(“CPM”)was both inappropriate and misplaced.49 The key dec

321、ision points in the Coca-Cola case tackle many distinct transfer pricing topics,as summarized below.1.Most Appropriate Method The court determined that the CPM was an appropriate,reliable,and conservative transfer pricing method for determining the amounts that the Supply Points should have paid Coc

322、a-Cola for using its intellectual property.The Tax Court found that Coca-Colas Supply Points were essentially“wholly-owned contract manufacturers”executing steps in the beverage-production process,and that Coca-Cola,rather than its Supply Points,owned“virtually all the intangible assets needed to pr

323、oduce and sell”the companys beverages.In light of these findings,the court concluded that the CPM was“ideally suited”to determine Coca-Colas compensation for the use of its intellectual property because the CPM was capable of determining an arms-length profit for the Supply Points without reverting

324、to the value of Coca-Colas particular valuable intangible assets.The court went into extraordinary detail in analyzing the Supply Points Profit and Loss Statement,noting that its return on assets dramatically exceeded both the comparable firms reviewed and their returns on assets by five to seven ti

325、mes their returns.The court agreed with the IRS that Coca-48 Taxpayer would have sought CA relief but had been turned away by the IRS in anticipation of litigation.49 The Tax Court had concluded in an earlier decision that the taxes were creditable because the taxpayer met both prongs of the compuls

326、ory test.See Coca-Cola Co.&Subsidiaries v.Commissioner,149 T.C.446(2017).50 The court also considered the secondary argument that the Supply Points owned intangible assets in the Colas appropriate comparable parties for the CPM analysis were the unrelated bottlers because they operated in the same i

327、ndustry,with similar relationships to Coca-Cola,using its items of intangible property to perform similar functions.Ultimately,the court found the IRSs CPM analysis conservative because the bottlers generally were entitled to a higher rate of return than the Supply Points,had less restricted rights,

328、and could be terminated at will.The court considered the theories proposed by Coca-Cola to establish that the Supply Points owned valuable marketing intangibles,namely,legal ownership and economic,beneficial ownership.50 The court reviewed the trademark registrations and found that the Supply Points

329、 were not the legal owners of the trademarks nor marketing intangibles,citing the lack of adequate contractual terms.Specifically,the court reviewed the taxpayers legal agreements to determine if the marketing intangibles were conveyed by contract,whether the contracts granted specific rights of own

330、ership interest to the Supply Points or the contracts made clear that any marketing intangibles were the property of Coca-Cola.The court found the contracts provided that the long-term licenses were terminable at will and did not grant territorial exclusivity,nor guarantee a supply of production.Key

331、 points to note here are:marketing intangibles to be asserted by a taxpayer must be established by contract;the non-exclusivity and termination at will of the licenses would not constitute a“sale”or conveyance under intellectual property law;form of“long term licenses.”Citing former Reg.1.4824T(f)(a

332、)(i)(A),which provided in part that the“legal owner of an intangible pursuant to intellectual property law of the relevant jurisdiction or contract terms will be considered the sole owner of the respective intangible unless such ownership is inconsistent with the economic substance of the underlying

333、 transactions.”2022 Bloomberg Industry Group,Inc.30 Digital Revolution:Transfer Pricing on the“Global Tax”Battlefield taxpayers cannot affirmatively use the economic substance doctrine to assert marketing intangibles;pure advertising is an annual expense and likely would not constitute brand building or“non-routine”expenses;and the agreements were not economically sustainable as noted above.Applyi