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Transfer Pricing Blog

Now is Not the Time to Ignore Transfer Pricing

Posted on April 29th, 2020

By Scott Smaistrla

COVID-19 necessitates a reassessment of the existing transfer pricing paradigms of Multinational Enterprises (MNEs). Supply chain disruptions and changes in consumer demand resulting from the COVID-19 pandemic and global recession are impacting virtually all major industries. These disruptions erode profits and will require MNEs to adjust transfer pricing approaches. MNEs also face challenges such as government restrictions on travel and enabling personnel to work remotely.

Three points are well illustrated by Will James in the 16-Mar-2020 BKD, LLP Thoughtware® article Transfer Pricing in the Wake of COVID-19: 1) Transfer pricing audits are anticipated to increase for 2020 and future tax years for MNEs with adversely affected profitability; 2) MNEs need to start preparing for audits now by documenting the arm’s length nature of their transfer pricing arrangements and including evidence and analysis of extraordinary COVID-19 business disruptions that result in lower profitability or losses; 3) Documentation of lower profitability or losses that result from COVID-19 and the recession is particularly important for reduced-profit or loss-making MNE entities subject to profit-based methods guaranteeing minimum returns (e.g., Transactional Net Margin Method).

The following is a checklist to consider:

  • We anticipate that tax authorities around the world will be looking for revenue and will scrutinize transfer pricing to offset reduced tax collections.
  • Transfer pricing policies and intercompany agreements may need to be adjusted to align with changes in the MNE’s value chain to ensure they accurately reflect the MNE’s functions, assets, and risks (for additional context and insight please see Duff & Phelps’ 12-Mar-2020 article COVID-19 – The Expected Transfer Pricing Impact by Douglas Fone, Fabian Alfonso, Jill Weise, Steven Carey, and Ted Keen)
  • MNEs should proactively develop streamlined, cost-effective approaches to manage their transfer pricing risks for a post COVID-19 world.

Now is not the time to ignore transfer pricing risks and planning opportunities. When tax authorities starved for tax revenue begin to audit MNE transfer pricing, they will be looking for ill-prepared MNEs. MNEs that disregard these risks now will be exposed to proposed adjustments and nondeductible penalties.

What We Are Doing to Help Corporate Tax Executives Handle Transfer Pricing Remotely

Posted on March 30th, 2020

By Guy Sanschagrin

It goes without saying that the COVID-19 pandemic is the major concern of nearly all multinational enterprises (MNEs) at the moment. Radical containment measures continue to be put in place by governments around the world in efforts to slow the spread of the virus. Many of these measures center on the concept of ‘social distancing’ and have included closing businesses and organizations, cancelling events, prohibiting international and domestic travel, and quarantining cities and even regions. COVID-19 containment measures have disrupted business as usual, from manufacturing plant shutdowns to creating information inefficiencies and collaboration challenges at MNE headquarters and across global entities. These business disruptions create challenges for effectively managing transfer pricing information and workflows.

Companies are instructing whole departments to work from home, and the traditional workplace is increasingly reserved for jobs that cannot be performed remotely. This presents challenges for MNEs, especially at the headquarters level, such as keeping information and workflows organized, and maintaining effective communication and collaboration between stakeholders and ‘gatekeepers’ in different departments of global entities.

These challenges are pronounced in MNE transfer pricing teams due to the global nature of intercompany transactions and the local country functions, assets and risks, which are the factual foundation for analyses. Transfer pricing processes require a large amount of information that is commonly housed in disparate IT systems, databases, and in the minds of key personnel (and often on their local hard drives). If demand continues to weaken, companies will increasingly shed workers, and sooner or later this could lead to the loss of knowledge and information that is critical for maintaining effective transfer pricing processes and documentation. MNEs would be wise to think about and invest in transfer pricing information and process management systems, since these effectiveness-improving systems increasingly act as continuity management systems — especially in the current climate.

One such global transfer pricing management platform is Trans-Portal, which is designed to solve the common challenges of MNEs that have in-house transfer pricing capabilities. These challenges include:

  1. Limited resources to timely complete large numbers of documentation and Country-by-Country reports
  2. Inefficiencies with gathering and sharing information across departments and entities
  3. Shortages of capacity and resources required to monitor and adjust transfer prices during the fiscal year
  4. Difficulties organizing and tracking the status of projects
  5. Lack of an effective process to measure risk and prioritize risk management initiatives and local files
  6. Maintaining a state of readiness for transfer pricing audits in various countries

All six of the above in-house transfer pricing challenges are exacerbated by the COVID-19 pandemic. Trans-Portal is a comprehensive and customizable solution to organize global documentation, automate data collection, monitor actual transfer pricing results during the fiscal year, analyze risks, efficiently create and update master and local files, track and manage progress, collaborate globally with colleagues, and validate results and documentation. The COVID-19 pandemic is a spotlight on the need for MNEs to enhance their online capabilities to manage all these transfer pricing processes remotely as personnel work from home and do not travel.

In-house transfer pricing challenges will be further stress tested during the post-pandemic economic recovery, when many MNEs will have undergone significant organizational changes, including within tax and transfer pricing. Many such transfer pricing teams will struggle to find and put the intercompany pieces together into documentation reports to maintain statutory compliance, and when under audit, to explain the MNE’s global allocation of profits — and losses. Looking at the glass as half-full, one advantage of the current slowdown in business activity is personnel in MNEs may now have more time to improve and bring greater certainty to their global transfer pricing management processes in preparation for a more uncertain future. Now is the time for MNE tax departments to proactively improve their global transfer pricing management processes with cost-effective solutions to ease compliance burdens and enhance their ability to reduce risk.

This article was written by Guy Sanschagrin and Doug Schwerdt of WTP Advisors.

Have a question?  Contact Guy Sanschagrin at +1 (866) 298-7829 Ext. 702 or

What to Expect When You’re Expecting… A Transfer Pricing Examination

Posted on May 1st, 2019

Transfer pricing examinations can be unpleasant experiences for taxpayers. Chances are, an international business in the U.S. – whether it is headquartered in the U.S., or a subsidiary of a foreign parent – is going to have its transfer pricing examined by the IRS or another tax authority.

Transfer pricing has been cited by IRS officials for years as one of their most important enforcement priorities. But as a direct result of BEPS (the OECD’s Base Erosion Profit Shifting project), tax authorities around the world are actively engaged in the process of revising and tightening their expectations and requirements with respect to transfer pricing. The prospect of thorough and detailed examinations of taxpayers’ transfer pricing positions is growing every day.

Fortunately for multinational companies operating in the U.S., an important document exists that can help taxpayers be better prepared for the eventual IRS transfer pricing exam: The Transfer Pricing Examination Process, Publication 5300 (TPEP). Originally released in June 2018, the TPEP is a 37-page guide prepared by the IRS for its issue teams to help them be better prepared to examine the transfer pricing positions of taxpayers, and it lays out in considerable detail the process and expectations surrounding such an examination. The TPEP replaces the Transfer Pricing Audit Roadmap, which was issued in 2014. WTP Advisors’ Guy Sanschagrin and Doug Schwerdt authored a comprehensive review of the TPEP, “Review of and Insights on the IRS Transfer Pricing Examination”, which was published by Tax Notes International on March 18, 2019. This article contains key insights to help taxpayers be better prepared and it can be accessed by clicking here.

New Tax Legislation Consequences on U.S. Transfer Pricing and Intangibles

Posted on January 17th, 2018

The Tax Cuts and Jobs Act of 2017 (the Act) brought sweeping changes to the international tax landscape, including the transfer pricing arena. Intangible property is at the core of many of these changes. The impact of the new provisions generally furthers the trend of transfer pricing becoming more prescriptive, placing additional strain on and creating potential contradictions with the arm’s length standard, and may have the unintended consequence of creating double-taxation for U.S. Multinationals (MNCs) – situations in which U.S. MNCs may be taxed more than once on the same income. So, while the Act lowered the headline tax rate to 21 percent, it also broadened the base that will be taxed, with the result that the Act’s effect on each company’s tax bill will be determined by the company’s specific facts and circumstances.

Intangible Property Transfers

Importantly, the Act expands the definition of intangible property for outbound transfers of intangibles. This change is consistent with prior IRS efforts to prohibit U.S. multinationals from transferring intangibles tax-free. Previously, U.S. MNCs would take the position that the definition of “intangible property” under Section 936(h)(3)(B) did not include goodwill, going concern value, workforce in place, or any other item the value or potential value of which is not attributable to tangible property or the services of an individual. The Act eliminates this position.

  1. It legislatively overturns several recent Tax Court cases holding that assets such as workforce in place and goodwill are beyond the scope of the statutory definition of “intangible property” (see for example the Veritas and Amazon Tax Court cases.)
  • It removes the qualification that intangible property under Section 936(h)(3)(B) must have substantial value independent of the services of an individual.

As a result, certain transfers of such assets by a U.S. person to a foreign corporation will be subject to Treas. Reg. Section 367(d) and also Section 482.

The Act also explicitly requires Treasury to issue regulations that would, for purposes of applying the outbound transfer rules under Section 367(d) or the transfer pricing rules under Section 482, require the valuation of intangible property on an aggregate basis or, in a nod to the U.S. cost sharing regulations (Treas. Reg. Section 1.482-7), based on realistically available alternatives to such transfers.

These features of the Act will likely result in a broadening of the tax base. But at the same time, the Act reduced the tax rate, meaning that the final impact on a company’s tax bill could go either way. The following table illustrates.

  Old Law New Law Difference
Taxable Value 100.00 125.00 25.00
Tax Rate 35.0% 21.0% -14.0%
Tax 35.00 26.25 -8.75

In the example above, an outbound intangible transfer might have a higher taxable value under the new law due to the inability to transfer some intangible property tax-free. However, depending on the overall taxable value, the tax cost to move the entire, more broadly defined bundle of intangible property might be significantly lower than the cost to transfer the “old law” intangible property bundle.

Foreign Derived Intangible Income (FDII)

The Act’s FDII provision is intended to encourage U.S. MNCs to maintain their ownership of intangible property in the United States. The Act specifies a 13.125 percent corporate tax on U.S. taxable income related to “foreign income earned from intangibles”. FDII defines intangible income as income in excess of 10 percent of U.S. depreciable asset tax bases.

This is the U.S.’s attempt at mimicking the incentives of a “patent-box” regime – an incentive used by many foreign countries (e.g.  the UK and the Netherlands) to reward companies for maintaining ownership of intangible property in their jurisdictions. FDII is only available to U.S. C corporations – non-C Corporation taxpayers specifically do not benefit from this regime.

The computations to determine FDII are fairly complex. These calculations meld together many new and legacy international tax concepts to arrive at FDII. For instance, the computations include application of Treas. Reg. Section 861-8 Allocation and Expense Apportionment, the new “GILTI” Provisions (see next section) and Subpart F.

Global Intangible Low-Taxed Income (GILTI)

In conjunction with FDII, the Act’s GILTI provisions are intended to discourage U.S. MNCs from owning intangible property offshore. GILTI is defined as current income of a controlled foreign corporation (CFC) in excess of a 10 percent return on the CFC’s depreciable assets (as defined in Section 167) less certain adjustments. This income is taxed in the U.S. on a current basis. The tax results under GILTI have significantly different tax implications for C corporations versus pass through entities. C Corporations will be taxed at 10.5 percent and can claim foreign tax credit for 80 percent of the deemed paid foreign taxes of the CFC related to the GILTI income. If a CFC has GILTI income and an effective tax rate of at least 13.125 percent, the corporate taxpayer will not pay any tax on GILTI. Other taxpayers will pay as much as 37 percent tax on GILTI.

Territorial System

The new hybrid territorial regime abolishes deemed paid foreign tax credits on income on post 2017 dividend income received from 10 percent specified foreign corporations and instead allows for a “dividends received deduction” to domestic C-Corporations only. This regime will have numerous implications on company transfer pricing systems. Companies should determine the extent to which their current transfer pricing system supports their tax planning and risk management objectives. There are also implications associated with phase in process where there are foreign tax credits (FTCs). For example, a new Foreign Branch FTC Basket will allow for income of a foreign branch to enable FTC utilization as long as the FTCs are generated in a foreign branch. U.S. MNCs will need to perform transfer pricing studies to support the disregarded entity (e.g., under the check-the-box regime) income for both foreign and U.S. purposes to support the sourcing of the branch income for U.S. tax purposes.


We note the Act focuses FDII and GILTI computations on the tax basis of depreciable assets – moving away from fair market value. This focus on tangible property computations may cause U.S. MNCs to consider using asset-based profit level indicators (PLIs) as opposed to operating income PLIs to align with this trend, simplify administration and potentially manage the risks of double taxation. The Act continues the trend for the emergence of more prescriptive rules in transfer pricing – these rules tend to create tension with the arm’s length principle. Finally, the Act is clearly intended to encourage U.S. MNCs to locate their valuable global intangible property in the U.S. These are among the reasons why it behooves U.S. MNCs to take a closer look at the implications of the Act and perform the analysis, planning and restructuring required to manage their global effective tax rates and exposure to tax risks.

BEPS Action 13 Update

Posted on November 14th, 2017

By Guy Sanschagrin

Earlier this year, our blog “Master File / Local File Transfer Pricing Documentation FAQs” provided an overview of what a Master File / Local File (MF/LF) system looks like along with practical considerations on implementing and maintaining the MF/LF system. As of today, our blog pops up at the top of Google search results for the terms “Transfer Pricing Master File” – ahead of content published by the OECD. This tells us that many found our content unique and helpful. Given your level of interest, we thought we’d provide an update on new developments associated with the implementation of Action 13 across the world.

Updates Since March 2017

Post March 2017, BEPS initiative updates primarily focus on the adoption of country-by country (CbC) reporting. We find the most important updates provide clarification on CbC reportable revenue and on applicable accounting standards.

 A.    Definition of Revenue

The model CbC standard’s definition of “revenue” is broad. All “revenue,” “gains,” “income,” or “other inflows” are revenue for CbC reporting purposes

Generally, reportable revenue includes income statement items and P&L statement items such as:

  • Sales revenues
  • Asset sales related net gains
  • Interest received
  • Extraordinary income, and
  • Certain unrealized gains

Items not considered revenue for CbC purposes. Generally, these are:

  • “Comprehensive” income and/or earnings
  • Unrealized gains “reflected in net assets,” and
  • Items reflected in a typical balance sheet’s “equity” section

B.    Other Guidance

Generally, accounting principles and/or standards are not stipulated by the model CbC standards.


  • If an equity interest is publicly traded, accounting rules already followed by the MNE Group will control
  • If the equity interest is not publicly traded, either local GAAP applicable to the MNE’s “Ultimate” Parent will control, or IFRS will control
  • The MNE Group should use the same standards across the group (presumably to allow for comparative analysis)

Currency fluctuations and the €750 million, “total consolidated,” group threshold

  • The model CbC standards prescribe a consolidated, €750 million, reporting threshold
  • While adopting jurisdictions may denominate this threshold in non-euros, there is no requirement that these jurisdictions periodically revise the CbC threshold to reflect currency fluctuations. Note that as of this date, there is no indication that this threshold will be indexed for inflation – so smaller companies will increasingly be subject to CbC requirements over time.

Revenue included in the €750 million, “total consolidated,” group threshold

  • “[A]ll…revenue that is (or would be) reflected in the consolidated financial statements should be [included]”
  • For financial institutions, items considered similar to revenue, under applicable accounting rules, should be included

Countries Adopting BEPS / Action 13 Implementation

Currently, more than 50 countries, including the US, have adopted elements of Action 13. If an MNE has an entity operating in one of those countries, it’ll probably have to modify its reporting to comply.

As summarized in the table below, of countries adopting elements of Action 13, 57 have adopted CbC reporting. Six have draft legislation, and 15 have expressed an adoption intention. Because the CbC reporting requirement is part of the BEPS “Three Tier” reporting structure, many countries adopting CbC reporting have also adopted the MF/ LF structure.




1.     Argentina

30.  Isle of Man

1.     Israel

1.     Botswana

2.     Australia

31.  Italy

2.     New Guinea

2.     Caymans

3.     Austria

32.  Japan

3.     Russia

3.     Costa Rica

4.     Belgium

33.  Jersey

4.     Switzerland

4.     Curacao

5.     Bermuda

34.  Latvia

5.     Taiwan

5.     Georgia

6.     Bosnia Herzegovina

35.  Liechtenstein

6.     Turkey

6.     Hong Kong

7.     Bulgaria

36.  Lithuania


7.     Kenya

8.     Brazil

37.  Luxembourg


8.     Mauritius

9.     Canada

38.  Malaysia


9.     Namibia

10.  Chile

39.  Malta


10.  New Zealand

11.  China

40.  Mexico


11.  Nigeria

12.  Colombia

41.  Netherlands


12.  Panama

13.  Croatia

42.  Norway


13.  Romania

14.  Cyprus

43.  Pakistan


14.  Ukraine

15.  Czech Republic

44.  Peru


15.  Uganda

16.  Denmark

45.  Poland



17.  Estonia

46.  Portugal



18.  Finland

47.  Singapore



19.  France

48.  Slovenia



20.  Gabon

49.  Slovakia



21.  Germany

50.  South Africa



22.  Gibraltar

51.  South Korea



23.  Greece

52.  Spain



24.  Guernsey

53.  Sweden



25.  Hungary

54.  United Kingdom



26.  Iceland

55.  United States



27.  India

56.  Uruguay



28.  Indonesia

57.  Vietnam



29.  Ireland




Brief Examples of BEPS / Action 13 Implementation – China, India, and Mexico

Each country’s adoption of BEPS principles will vary. Ultimately, countries’ individual rules will control and many countries have instilled their own specific requirements while other countries have taken an “as in” approach. We provide brief updates on developments in China, India and Mexico.

A. China

In Summer 2016, China’s State Administration of Taxation issued Public Notice 42 which stipulates new reporting requirements for related party transactions, documentation, and CbC. The Annual Related party transaction (RPT) forms include twenty-two different tables, including CbC, while documentation is now in the form of three-tiered Master File – Local File, and Special [Items] File, which is essentially a description of an MNE’s supply chain.

B. India

In April 2016, India implemented a new “Finance Act” that adopted Action 13’s three-tiered Master File – Local File, with CbC structure. Only MNEs with consolidated revenue exceeding €750 million are subject to CbC reporting requirements, in accordance with the Action 13 guidelines. However, India prefers to see each business line mapped separately, so a diversified MNE, with significant Indian operations, might consider developing multiple Master Files broken out by business line.

C. Mexico

In Spring 2017, Mexico’s Tax Administrative Service issued its final Action 13 related compliance rules. Mexico adopted an objective turnover threshold for applying a CbC requirement. Subsidiary type entities, such as maquiladoras, must receive at least US $37 million to be subject to CbC reporting rules. Mexican entities must have met a turnover of US $.63 billion to be subject to CbC reporting rules. For Master Files, Mexico adopted Action 13’s five products and five percent principles.

These are just some examples of countries’ variable adoption of principles from the BEPS initiative, which is why performing a risks and opportunities analysis, before deciding on a new reporting structure and a transfer pricing documentation plan, is a worthwhile endeavor for most MNEs.

Given your level of interest in Action 13, we will continue to provide updated on new developments periodically. Please email us at to let us know of any topics you would like us to cover.

Master File / Local File Transfer Pricing Documentation FAQs

Posted on March 23rd, 2017

By Kash Mansori

A client recently asked me to explain the “Master File / Local File” (“MF/LF”) system of transfer pricing documentation that is being adopted by an increasing number of countries. So I thought that there was no time like the present to put together a basic overview of this increasingly common format for assembling and organizing an MNE’s transfer pricing reports.

The OECD’s BEPS project (see this post for additional background) resulted in the publication by the OECD of fifteen Action Items that were intended to form the basis for new laws, regulations, treaties, and administrative practices that would be adopted by the participants in BEPS. The final report for Action 13, “Transfer Pricing Documentation and Country-by-Country Reporting”, recommended the following: “countries should adopt a standardised approach to transfer pricing documentation… [based on] a three-tiered structure consisting of (i) a master file containing standardised information relevant for all MNE group members; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a Country-by-Country Report containing certain information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group.”

As MNEs consider the impact of this BEPS recommendation on their compliance activities, many Frequently Asked Questions arise. What exactly is involved in the MF/LF system of transfer pricing documentation? What are the formal requirements related to it? How urgently do multinationals need to consider adopting a MF/LF system of documentation? What is the process for doing so? What are the potential advantages and pitfalls of the system? Well don’t worry, we’ve got you covered.  


(Note: for more information specifically about the Country-by-Country (“CbC”) report, please refer to this post.)


What is the MF/LF system?

For the typical MNE, it essentially means separating their transfer pricing documentation into two pieces: one portion (the MF) that they will share with any and all tax authorities that ask for it, and another portion (the LF) that contains information specific to a particular country. So the MF will generally contain descriptions of

  •  the global business, including products, services, and business strategies;
  • the major entities in the group and what functions they perform;
  • the general categories of controlled transactions that take place within the MNE group;
  • the group’s significant intangible assets and which entities are involved in their creation, management, or enhancement; and
  • the group’s financing structure as it relates to transfer pricing.

Meanwhile, a LF will be prepared for each country in which the MNE does business, and each one will contain:

  • A description of the local entity’s business;
  • A description of its transactions with related companies within the MNE group;
  • Financial information specific to the local entity; and
  • An economic analysis that provides support for the transfer pricing policies applied to the local entity’s controlled transactions.

Note, however, that this is just a general guideline; each individual MNE must decide for itself (perhaps in conjunction with their transfer pricing service providers) exactly what information belongs in the MF and what in the LF, based on its specific facts and circumstances.


What are the formal requirements related to the MF/LF system?

The BEPS final reports do not have any legal authority, but numerous countries have incorporated the BEPS recommendations into their regulatory or legal frameworks. As of the time of this post, approximately 25 countries have now formally adopted the MF/LF system, and therefore will expect taxpayers to prepare transfer pricing documentation in that format going forward. Some of these early adopters of the MF/LF system include Australia, China, Germany, Japan, Mexico, Netherlands, and Spain, and many of these will impose penalties on taxpayers that do not comply with their new requirements. For additional details on how specific countries are treating the BEPS recommendations for transfer pricing, Deloitte has prepared a handy quick reference guide.


How urgently should MNEs switch to the MF/LF system?

Naturally the answer to this question will depend a lot on the specifics of each company’s situation. But generally speaking, MNEs that have significant activities in one of the countries that now require transfer pricing documentation to be in the MF/LF format should probably be thinking about converting their transfer pricing documentation this year. Other companies would probably be well advised to plan to change the format of their transfer pricing documentation over the next couple of years, as the list of countries requiring the MF/LF format will continue to grow.


What is the process for switching to the MF/LF system?

Converting current and comprehensive transfer pricing documentation to the MF/LF format should not be too onerous. The primary difficulties are (i) deciding which pieces of information belong in the MF and which in the LF, and (ii) making sure that the documentation contains all of the specific elements required in each country’s definition of the LF. Note that it is particularly important to carefully evaluate all of the information that could potentially be included in the MF to ensure that none of it will create unintended problems down the road with the various tax authorities that may have access to it. The perspective of a transfer pricing specialist can be very useful in this regard.

On the other hand, if an MNE’s transfer pricing documentation is not up-to-date or is incomplete, then developing the proper MF/LF system of documentation will obviously involve some additional work, and could in fact become fairly time consuming. In those cases, it is particularly important that the company begin thinking ahead and planning appropriately. Once a tax authority asks to see an MNE’s transfer pricing documentation, it will likely be too late to cobble something together in a timely manner that meets the MF/LF requirements, and the MNE will have given the tax authority a tremendous advantage in imposing adjustments that increase taxable income in their country – putting the company at risk of double taxation and incurring non-deductible transfer pricing penalties.


What are the potential benefits and pitfalls of the MF/LF System?

Many companies have traditionally maintained numerous voluminous transfer pricing reports with repetitive information across reports. The MF/LF system has the potential of streamlining the documentation development and update process to remove the burden of updating information across numerous reports through a single MF. The MF can be leveraged as a robust document to tell the company’s story about its value chain and transfer pricing policy. Moreover, the MF/LF system can be structured in a way that promotes efficiency in the process. The key will be to develop an index within the LF that cross references the local country requirements to the components of the MF/LF transfer pricing documentation. The MF/LF system structure should be carefully thought out or risk creating an inefficient process that does not provide a compelling analysis evidencing that the company’s intercompany transactions complied with the arm’s length principle.


For additional information and perspectives, please see our BEPS Action 13 Update posted Nov 14, 2017.


Apple, the EU, and Country by Country Reporting

Posted on February 1st, 2017

By Kash Mansori

The story of Apple Inc. and the European Commission is well known by now. Back in August of 2016 the EU’s Competition Commission announced their ruling that Ireland had given Apple an unfair sweetheart deal allowing it to pay less tax in Ireland than it should, and ordered Ireland to send Apple a €13 bn bill for back taxes and interest covering the period 2003-14. For their part, Ireland and Apple both have said that they intend to fight the ruling. The legal battle is likely to go on for years, and may well end up at the highest court in the EU, the European Court of Justice.

There are many interesting aspects to this story. First of all, there’s the issue of how the ongoing campaign by the EU Competition Commission to examine tax matters may effectively give it significant oversight of the EU’s tax and transfer pricing policy. I think it’s fair to say that this was an unforeseen development in transfer pricing enforcement even just a few years ago.

Secondly, the case touches on some interesting technical tax and transfer pricing issues, including but not limited to:  the role of holding companies in the tax structures of MNEs; the use of transfer pricing rules on intangibles for tax planning purposes; the ways that US corporate income tax deferral impacts tax policy and enforcement outside the US; how the concept of “fairness” applies to international taxation, and how it may sometimes be at odds with the arm’s length standard; and, perhaps most significantly, how tax letters or rulings by their very nature may be viewed by some (such as the EU Competition Commission) as “unfair”, even when those rulings are intended to simply reflect how the existing laws pertain to a specific taxpayer and its particular set of circumstances.

But in reading a nice background article by BNA on the Apple case the other day, I was struck by another significant implication of the Apple story: it’s a perfect illustration of how the new BEPS rules on Country by Country Reporting (“CBCR”) could affect MNEs in the years to come. (See this post for more about the important topic of CBCR.)

The BNA article, “The Inside Story of Apple’s $14 Billion Tax Bill” (subscription required), provides some new details about how the Competition Commission came to make its unprecedented ruling against Apple and Ireland. One bit that particularly caught my attention:

In January 2016, CEO [Tim] Cook met with Margrethe Vestager, the EU competition chief.

Vestager, a daughter of two Lutheran pastors, has a reputation for being even­handed but tough, cutting unemployment benefits while advocating strict new rules for banks when she served as Denmark’s finance minister. While she has acknowledged that her team had little experience with tax rulings—in a November interview with France’s Society magazine, she said, “We learned on the job”—Vestager says enforcement of EU rules on taxation is a matter of “fairness.”

In the meeting with Cook, she quizzed him on the tax Apple paid in various jurisdictions worldwide. She told the Apple executives that “someone has to tax you,” according to a person present at the meeting.

This seems to suggest that the Competition Commission began focusing on the Apple-Ireland tax situation not because of any technical concerns about the arrangement, but simply because it appeared to them that Apple was not paying enough tax. The tax outcome that Apple had achieved was what initially drew the Competition Commission’s attention, plain and simple.

And that is exactly what CBCR is designed to reveal to tax authorities around the world: tax outcomes. In effect, CBCR will make it less important whether a particular tax planning or transfer pricing approach adopted by a MNE is technically correct, and more important what the end result of that tax planning strategy looks like in terms of actual taxes paid. Of course, once under scrutiny then it will still be important that a taxpayer’s tax and transfer pricing policies be as defensible as possible… but the story of Apple and the EU underlines – with a bright fat yellow highlighter – the fact that CBCR will probably make it more likely than ever before that scrutiny by tax authorities will be guided by the actual tax outcomes reported by MNEs.

2016 Blog Archive

Posted on December 31st, 2016

Country by Country Reporting Update

What to Expect When You’re Expecting… An Audit

The Economist Falls for Formulary Apportionment

2015 Blog Archive

Posted on December 31st, 2015

Dutch State Aid: Starbucks update

What the Focus on “Value Creation” Misses

BEPS – What It All Means

The Quantera Global Connection

BEPS in Verse

It’s All About the Data

Australia First!

Value Creation and the Lightbulb

Small Countries Taking Big Bites

Transfer Pricing and the Regulatory Climate in India

The EU Commission’s Problematic Reasoning on Amazon

2014 Blog Archive

Posted on December 31st, 2014

There Must Be a Better Way. Right?

The Most Aggressive Tax Authorities in the World?

Attacking the Cash Box

Simplifying the Rules. A Bit.

German Wishes for Irish Taxes

What Is This ‘BEPS’ Thing, and Should I Care?

Fighting Over Tax Revenue in Europe

A New Arena for Transfer Pricing Disputes

What Others Say

"...strong technical expertise, yet they are innovative and always bringing us new insights."

"...great team players, good friends and we trust them...that's big for us."

"...very genuine, very focused and look beyond the politics and conflicts...that's a rare thing these days."

"...good communicators and they built a strong rapport, early on."

"It's rare to find a team that always looks at the bigger picture, what's best for the client and the relationship...and WTP is truly of that mindset."