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:
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.
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.
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: