Transfer Pricing And Dispute Resolution:
The Past, Present And Future
A Lawyer’s Perspective
Peter Nias
Joint Meeting IFA, HM Treasury and HMRC
Friday 25 June 2010
www.mwe.com
Boston
Brussels
Chicago
Düsseldorf
Houston
London
Los Angeles
Miami
Milan
Munich
New York
Orange County
Rome
San Diego
Silicon Valley Washington, D.C.
Strategic alliance with MWE China Law Offices (Shanghai)
© 2010 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous
results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will &
Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbH, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP.
These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.
2355686v1
TRANSFER PRICING – THE PAST
 Old Regime (prior to 1998) - sc 770 Taxes Act 1988
• Direction (No penalties)
• Accounting: FRS 8 “material” related party transactions
 New Regime – Sch 28AA Taxes Act 1988
– Accounting Periods ending on/after 1st July 1999
 Adopts OECD Model (Article 9) and Guidelines (as at 30th April 1998)
 Wide ambit: wording obscure and complex
 Documentation: production and retention requirements
 HMRC: Guidance on documentation and penalties
– Measured
– Recognised potential of new regime
 APA Regime
www.mwe.com
TRANSFER PRICING - AMBIT
“provision…has been made or imposed as between any two
persons…by means of a transaction or series of transactions”
Sc 147(1)(a) Taxation (International and Other Provisions) Act 2010
“provision…”
–
the overall situation brought about by the transaction or series of transactions; not
provision as in term, or condition in a contract
“as between…”
–
demonstrates that the parties to the transaction or series of transactions
do not need to be those between whom provision is made or imposed
“transaction or series of transactions”
– arrangements, understandings, mutual practices whether or not enforceable
– series: widely defined

Discussions on draft legislation: HMRC/Parliamentary Counsel/Law Society

DSG decision: no surprise
www.mwe.com
EXAMPLE: UK Sub Borrows to make minority
investment in French Sub at request of US Parent
Guarantee
US Parent
100%
75%
UK Sub
Loan
25% Investment
French Sub
Issues:
www.mwe.com
Is bank interest deductible? Even where no parent guarantee?
Should UK Sub charge fee to US Parent for making investment?
Should investment be re-characterised as loan?
3rd Party
UK Bank
DSG CASE
warranty
Customers
Dixons
Finance
reinsurance/
insurance
commission
commission
Cornhill/ASL
(agent)
premium
Goods
Dixons
DSG Retail
Note: Point of Sale Advantage
www.mwe.com
admin/
repairs
premium/fee
Dixons
Mastercare
Dixons
DISL
TRANSFER PRICING – THE PRESENT
 10 years experience
 Multinational Planning
– Functional analysis
– Deconstruct supply
 Impact
– Distribution/sales agency
– Manufacturing
– IP ownership
 The “undistributed middle”
 HMRC developments
– Risk assessment (Tax Bulletin 60, August 2002)
– Transferring risk (International Manual, 465030)
 HMRC Cross-Directorate TP Group
– TP specialists
– Structured governance procedure
– Focus/targeted approach
www.mwe.com
TRANSER PRICING – THE PRESENT
 Revenue needs
– Income for authorities
– Cost for multinationals
 Planning and audit challenges
– Sophisticated
– Detailed
– Aggressive?
– Potential for litigation
 HMRC litigation and settlement strategy
– Non-confrontational/collaborative resolutions without dispute (para 4)
– “Avoidance” cases?
www.mwe.com
TP – THE PRESENT
 Litigation position – increasing trend?
 Up to 2008: 4 cases (2 procedural)
Beecham Group Plc v CIR (1992)
Glaxo Group Ltd and others v CIR (1995)
Ametalco Ltd v CIR (1996)
Waterloo (2002)
 Since 2008
DSG case (2009)
Astra Zeneca case (2010)
www.mwe.com
TRANSFER PRICING – THE FUTURE
 OECD Developments
 Permanent Establishment Issues
– Profit attribution
– Existence
– SPF (significant people function)
 Restructuring Paper (Sept 2008)
– restructuring not an asset in itself requiring compensation
– no “industrial intangible”
– non recognition of transactions: dealt with by pricing adjustment
– acceptable to be tax motivated provided non tax business purpose
 TP Guidelines, Proposed Revision of Chapters 1-111 (Sept 2009)
– more flexible/pragmatic approach to transactional profit methods
– all methods recognised
– Emergence of residual profit split; no longer last resort
 International Disputes Mechanisms
– Competent authority procedure
www.mwe.com
TRANSFER PRICING – THE FUTURE
 Old TP studies too superficial/mechanical
 More detailed TP analysis expected by HMRC
– Fact/Law/Documentation
 SPF impact on functional analysis: who has control over risk
“Capacity to make decisions to take on the risk (to put capital at risk) and … whether and how to
manage the risk, internally or using an external provider”
OECD Restructuring Paper, para 30
 DSG case implications
- technical arguments
- document content
- negotiation process
- robustness of pricing method
- importance of “bargaining power”
 Increasing need for certainty in tax treatment
– APA/ATCA
– Provision/reserve in accounts
www.mwe.com
TRANSFER PRICING – POST
ACQUISITION RESTRUCTURING
US INC
UK TARGET
CO
IP Licence Royalty
EXISTING OPERATING
SUBS
IP Licence
Royalty
NON-UK IP
HOLDING AND
MANAGEMENT CO
UK/NON UK
SUBSIDIARIES
R&D Contract
IP Transfers Sale/Licence
Lump Sum Payment
www.mwe.com
TRANSFER PRICING – POST
ACQUISITION RESTRUCTURING
 Principal issues:
– IP assets transferred – TCGA or Sch 29 (part 8 CTA 209)
– Purpose behind transactions
– Accountancy treatment of licence back
• Finance lease under UK GAAP? Or Sch 29?
– Sch 28AA (part 4 TIOPA 2010)
• Arms length transaction
– Valuation principles – sale and licence back
 Other issues:
– SSE Relief
– Business Hive Up
– Consolidation/streaming of losses
www.mwe.com
TRANSFER PRICING – THE FUTURE
 Real time negotiation; pre return/filing agreement
 APA/ATCAs
 HMRC powers (and discretion)
“collection and management of revenue”, sc 5 CRCA 2005
 Improving dispute resolution; HMRC Review (July 2009)
– Litigation expensive in terms of time and legal fees
– More time on fact-finding
– Focus on working relationships with customers/agents
– New HMRC supervisory review function?
– Consider ADR techniques
 EU Arbitration Convention 90/463/EEC – 15 years; 2 cases
 MAP – arbitration provisions in Treaties
www.mwe.com
TRANSFER PRICING – THE FUTURE
 Use of mediation
– Facilitative – steering process, improving communication
– Evaluative – offering views on merits and outcomes
 Issues
– Joint appointment – costs shared
– Legal basis is contractual
– Both sides must engage
– Mediation can build sense of trust and co-operation
– Facts (as well as law)
– Confidential
– Timing
 Suitable for Transfer Pricing
– Not binary; Not just issues of law
 Process and Governance Issues
www.mwe.com
CONCLUDING REMARKS
 Early Discussion
 “Cards face up on table”; two way process
 Transfer pricing disputes
- no right answer
- compromise
 Advisers – Help/Hindrance?
 Role for lawyers
 Transfer Pricing:
– Inherently factual, but
– Legal analysis important
 Legal professional privilege – both sides
 Judges …. are lawyers!
www.mwe.com