September 10, 2024

SMEs must adapt to constantly evolving transfer pricing (TP) regulations and the complex global tax landscape to avoid double taxation and reduce compliance costs. Jelena Mihic Munjic, Managing Director at Kreston MDM and Elena Ramirez Marin, Partner at Kreston Iberaudit, recently shared their insights with Bloomberg Tax. Click here to access the full article or read a summary below.

Increasing scrutiny from tax authorities worldwide has amplified the importance of adhering to the arm’s length principle, with recent shifts in TP practices and legislation impacting SMEs. As SMEs engage more in cross-border transactions, compliance with TP rules has become critical. High-profile cases highlight the complexities of TP regulations, as noted in Kreston Global’s “Interpreneur report.” The OECD TP Guidelines offer a framework for determining the arm’s length value of related party transactions but are non-binding, leaving jurisdictions to implement varying domestic regulations. This creates tax uncertainty, higher costs, and double taxation risks, especially for SMEs with limited resources to manage these challenges.

Recent Transfer Pricing Cases

Apple v. European Commission (2016-2020)

The EC ordered Apple to repay €13 billion in back taxes for receiving illegal state aid from Ireland. Apple appealed, and in 2020, the ruling was annulled. The case highlighted scrutiny of multinational tax practices.

Australia v. Rio Tinto (2017-2022)

Rio Tinto settled a profit-shifting dispute with the Australian Taxation Office for nearly A$1 billion. The case emphasised transparency in transfer pricing and the risks of aggressive tax planning.

Amazon v. IRS (2017-2019)

Amazon won a dispute with the IRS over the undervaluation of intangible assets, with courts ruling in its favour. The case stressed the need for solid transfer pricing documentation.

Denmark v. Maersk Oil and Gas (2018-2023)

Denmark challenged Maersk’s transfer pricing, claiming it shifted profits abroad. The case reinforced the importance of clear documentation in transfer pricing.

Fiat Chrysler v. European Commission (2015-2022)

Fiat Chrysler was accused of receiving illegal state aid. The European Court of Justice overturned the ruling in 2023, limiting the EC’s powers over tax rulings.

France v. McDonald’s (2015-2022)

McDonald’s settled for €1.245 billion with French authorities over profit-shifting to Luxembourg, highlighting the risks of aggressive tax strategies.

HMRC v. BlackRock (2012-2024)

The Court of Appeal ruled that BlackRock’s intra-group loan was primarily for tax avoidance, emphasising the need for arm’s length terms in loan agreements.

India v. Kellogg India (2021-2022)

Kellogg India won a transfer pricing dispute, reinforcing the importance of selecting the appropriate entity in analyses.

Norway v. ConocoPhillips (2019-2023)

Norway reduced ConocoPhillips’ interest expenses, ruling its loan terms were not at arm’s length. The case stressed compliance in intra-group loans.

Future Steps

As tax regulations evolve, businesses of all sizes must adapt their transfer pricing strategies to manage risks and stay compliant. The European Commission (EC) has introduced two key Directives (published September 12, 2023), the BEFIT Directive and the Transfer Pricing Directive, aiming to harmonise and simplify tax rules across the EU.

BEFIT Directive

BEFIT targets corporate groups with annual revenues of €750 million or more, aiming to standardise tax bases across the EU. It calculates a preliminary tax result from each group’s financial statements, which is adjusted and aggregated to allow for cross-border profit and loss offsets. Member States can offer additional deductions if they meet the Global Minimum Tax Directive requirements. The goal is to simplify compliance and ensure fair taxation across the EU.

Transfer Pricing Directive

This directive addresses transfer pricing issues, ensuring that intercompany transactions follow the arm’s length principle, aligned with OECD guidelines, to prevent tax avoidance. It sets rules for related entities, transfer pricing methods, and adjustments for non-market transactions.

Directive Impact

The BEFIT and Transfer Pricing Directives will reduce compliance costs, especially for SMEs, and provide greater certainty. They aim to harmonise tax rules, combat tax avoidance, and enhance competitiveness within the EU. However, these directives will only apply within EU Member States, leaving cross-border transactions with non-EU companies unaffected.

Global Developments in transfer pricing

Outside the EU, countries like the U.S., Australia, and Canada have tightened their transfer pricing regulations, increasing scrutiny and compliance costs, especially for SMEs. Globalisation and inconsistent adoption of OECD guidelines create complexities, including double taxation.

Final Thoughts

Businesses, particularly SMEs, must stay informed and agile as global tax regulations evolve. Seeking expert advice and maintaining robust compliance practices will be essential to navigating these changes.

For more information on transfer pricing, click here.