Weekly transfer pricing roundup – 20 March 2017

This week marks three years since I have started this transfer pricing blog. In the beginning the blog was up and down, but I like to think it finally found a place that readers like yourselves are willing to come back to. The blog attracts on average over 50 readers per day.

Owing to the fact that we are starting the fourth year of this blog, I thought I try a new colour scheme for the transfer pricing roundups. As you know, most of the information is based on external news sites but I do provide some thoughts after each article. To make this even clearer I will highlight my thoughts in blue going forward.

African Tax Officials Receive Transfer Pricing Training (Tax-News)

“African tax officials have attended a four-day workshop organized by the African Minerals Development Centre (AMDC) to improve their understanding of transfer pricing issues facing the mineral sector.

The workshop was held in Tanzania on March 13-16, 2017. It was organized jointly by the AMDC, the Minerals and Energy for Development Alliance, and the World Bank.

The workshop focused on skills to assess, prioritize, and audit risks associated with transfer pricing. Participants shared knowledge of complex transfer pricing issues. They discussed illicit flows in mineral value chains and global mineral production and trade. They also examined proactive measures to protect tax bases from being eroded.”

Beside the point that this is likely to result in additional scrutiny, this should lead to more focused questions/audits which in my opinion is a good outcome (the focused part). We have seen tax authorities asking the wrong questions which leads to a lot of time spent on irrelevant points/topics. This may help to get to the meaty stuff quicker reducing the overall burden of tax enquiries.

Amazon wins $1.5 billion transfer pricing dispute in US Tax Court (MNE Tax)

“Amazon.com Inc on March 23 won a US Tax Court case, fending off IRS transfer pricing adjustments relating to a cost-sharing agreement (CSA) buy-in payment. The transfer pricing adjustments would have increased the online retailer’s taxable income by more than $1.5 billion in 2005 and 2006.

Following Veritas Software Corp. v. Commissioner, 133 T.C. 297, the Court concluded that the IRS erred when it used the discounted cash flow (DCF) method to recalculate a buy-in payment for Amazon’s transfer, under the CSA, of preexisting intangibles to a Luxembourg subsidiary, Amazon Europe Holding Technologies SCS.

The case concerns a 2005 CSA pursuant to which Amazon.com, Inc., and its domestic subsidiaries transferred to the Luxembourg subsidiary intangible assets required to operate Amazon’s European website business. The transfers were subject to 1995 cost sharing regulations that have since been replaced…

The IRS determined that the buy-in payment was not arm’s length, concluding it should be $3.6 billion rather than $254.5 million, but later reducing that amount to $3.5 billion. The IRS applied a DCF methodology to the expected cash flows from the European business to arrive at its valuation.

The IRS also disputed Amazon’s ongoing cost sharing payments, increasing those required payments…

Siding with Amazon, the Tax Court rejected the IRS’s recalculation of the buy-in payment, concluding it was arbitrary, capricious, and unreasonable. The CUT method, used by Amazon, was the best method to calculate the CSA buy-in payment, the Court said.

The Court said that the DCF methodology used by the IRS was similar to the transfer pricing methodology used in the Veritas case, which has been rejected by the Court.

By assuming a perpetual useful life, the IRS ‘s method failed to restrict the valuation to “preexisting intangible property,” within the meaning of the cost sharing regulations in effect at the time, the Court said…

Amazon’s cost-allocation method, with certain adjustments, supplies a reasonable basis for allocating costs to IDCs, the Court said.”

Interesting case and I am sure this will mean that other companies like Facebook may take on the IRS now as well. One thought, the whole ex post discussion (and ex ante) for intangibles in BEPS Action Point 8-10 comes to mind. I wonder if going forward one could argue that a third party ‘selling’ such IP would insist on a ex post re-valuation, especially where there are such material differences in valuation. What are your thoughts. 

Israel Tax Authority investigating Google and Facebook (The Stack)

“The Israel Tax Authority is currently investigating local outlets of tech giants Google and Facebook, to determine if they have a tax liability in Israel.

Investigators for the Tax Authority have reportedly conducted meetings with clients of Google, asking detailed questions about the methods used by Google and Facebook to conduct local operations.

Questions put to clients centered around the degree of involvement that local representatives of Google and Facebook had in designing marketing campaigns, and setting budgets and targets for clients. The thrust of the investigation appears to be whether the Israeli teams were acting independently, or if they were referring business matters to overseas headquarters and then merely implementing corporate decisions in the local market…

The current investigation is directly related to last year’s interpretation of Israeli tax law as related to international entities. In April 2016, the Israel Tax Authority unveiled a new set of guidelines regarding tax liability for foreign corporations operating in Israel. Under these rules, an international company would owe taxes if its services were produced in Israel. To prevent double taxation with countries that have international tax agreements with Israel, the foreign corporation must have a permanent establishment within Israel.”

And here I thought that the Amazon case was the only interesting one this week. I am interested to see where this goes and will keep you posted.

KRA not satisfied with tax collected from Uber (Daily Nation)

“The Kenya Revenue Authority (KRA) has asked MPs to come up with a special law for the regulation of the taxi-hailing apps rather than one for the entire taxi sector that conventional taxi operators are advocating for…

They however said they were not satisfied with the amount paid by Uber, the dominant company in the sector, and would be auditing its tax obligations to see whether the right amount has been paid…

He said that if KRA was to establish a link with the various technology platforms, such as Uber, it would enable them to see everybody that has used them to get a taxi, how much they have paid and how much should therefore be paid as tax by the company, the driver and the owner of the vehicle…

“Those people, from the figures we have heard, collect billions. If you do your calculations right, you’ll find that they take away billions from this country,” said Committee chairman Maina Kamanda…”

I agree that everyone must pay their fair share of tax, but singling out a company or certain sector doesn’t usually go down too well. It is difficult with all the new companies such as Uber that do things differently, but we must make sure to find a middle ground between ensuring compliance and not making the burden too much just because you are in a certain sector (including sharing of private information). Sadly, I don’t have an answer and it is always easier to point out the issues than solving them. If you have any ideas, let me know.

And if there wasn’t enough from Africa in this roundup, Ghana through its budget also proposed to strengthen and build its capacity to conduct transfer pricing audits in the extractive sector, and to also conduct integrated audits in free zone and specialised sectors.

I will leave it at that, have a great week. 

What are your thoughts?

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