RoyaltyStat Blog

A Proposed Transfer Pricing Safe Harbor for US retailers

Posted by Ednaldo Silva

Our analysis of a large sample of US-listed retailers has revealed that a simple formula can be used to provide reliable estimates of a controlled retailer’s operating profit markup for transfer pricing purposes. To enhance tax certainty, we recommend that US state tax authorities allow retailers to use arm’s length ranges based on this formula as a transfer pricing safe harbor.

The regression method proposed here can be applied to any industry, including to provide safe harbors for inbound controlled distributors or to provide safe harbors for outbound controlled suppliers or service providers.

Danish Tax Court: Valuation of Intangibles and the DCF Model

Posted by Harold McClure

In a previous blog post we reviewed a suggestion published in TaxNotes International to downplay the role of the Comparable Uncontrolled Transaction (CUT or CUP) approach. We also noted that in one of the litigation examples brought to illustrate pervasive issues with the CUT approach, the application of the method was not the primary point of controversy:

The Premature Death of the Comparable Uncontrolled Transaction (Price) Method

Posted by Harold McClure

A recent TaxNotes piece called for a substantial rewrite of Section 1.482-4, which addresses the transfer of intangible assets. The author, Ryan Finley, suggests that the Comparable Uncontrolled Transaction (CUT/CUP) approach should be relegated to a much more limited role. While many of the his assessments are fair, we would urge caution before relegating CUT too far to the backbench. There are certainly situations where CUT approaches are not only useful, but necessary as part of a larger framework to capture the issues and facts of the specific intercompany issue, examples of which we note later on.

Oligopoly Profit Markup

Posted by Ednaldo Silva

Corporate profits should concern policymakers, including tax legislators and tax administrators.

In economic theory, high profits converge toward an entrepreneurial average because of the expected inter-industry flow of investments. According to Stigler’s (1963, p. 54) hyperbole, “There is no more important proposition in economic theory than that, under competition, the rate of return on investment tends toward equality in all industries.”

Adecco Intercompany Royalty Litigation: CUP v. TNMM

Posted by Harold McClure

Swiss multinational employment service provider Adecco recently prevailed in a case brought by the Danish tax authority (Skattestyrelsen or SKAT) challenging the 2% sales royalty paid by Adecco affiliate in Denmark for the use of various intangible assets, including trademarks and know-how.

The arguments put forth by the taxpayer and SKAT represented the classic tension between market versus profits-based approaches to evaluating arm’s length royalties. The 3-2 split decision and SKAT’s less-than-comprehensive analysis in its argument also may have left room for the possibility that a more robust analysis could have led to a different result.

The Limited Risk Transfer Pricing Canard During a Pandemic

Posted by Harold McClure

Transfer pricing practitioners fell in love with the concept of a “limited risk distribution” (LRD) on the hope that they could convince tax authorities in high tax jurisdictions to accept the premise that the local distribution affiliate should be happy with a low operating margin. This pandemic, however, has generated a lot of new transfer pricing advice that appears to contradict the original LRD argument.

The CAPM is Misapplied in Transfer Pricing

Posted by Ednaldo Silva

The capital asset pricing model (CAPM) is widely used to calculate the expected return of equity shares, considering their risk relative to a stock market portfolio. The CAPM is ill-suited to valuing assets that lack stock’s spot market price volatility. Thus, we argue that the CAPM should not be used to determine the arm’s length remuneration for the intra-group transfer of intangibles.

Controversy Aside, IKEA on Solid Economic Footing in Royalty Dispute

Posted by Harold McClure

European affiliates of multinationals such as IKEA face scrutiny from a variety of agencies including the European Union (EU), which issued EU Council Directive 2011/16 also known as DAC6. The stated purpose of DAC6, which became effective on June 25, 2018, is to provide transparency and fairness in taxation. DAC6 applies to cross-border tax arrangements between EU affiliates and tax havens. One of these cross-border tax arrangements is intercompany royalty payments from EU affiliates to affiliate in tax havens such as Liechtenstein. Such intercompany payments by European affiliates of IKEA are being challenged by the European Commission in a State Aid inquiry, which was initiated on December 18, 2017, according to an EC press release:

Creating Defensible Transfer Pricing Reports

Posted by Ednaldo Silva

“We shall renounce . . . the subterfuges.”

Translating Credit Ratings into Credit Spreads in Intercompany Financing

Posted by Harold McClure

The Organization for Economic Cooperation and Development (OECD) released its Transfer Pricing Guidance on Financial Transactions on February 11, 2020 just before the COVID-19 crisis mushroomed. Some commentators have noted that U.S. affiliates may have to rely on intercompany financing from their foreign parents just as tax authorities and multinationals are reviewing what this new guidance implies in terms of the pricing of intercompany loans.