Adam M. Katz
Global Leader: Financial Services Transfer Pricing
“Tax administrations are experiencing double-digit declines in collected corporate taxes [...] adding pressure to achieve audit adjustments in the transfer pricing area”
Welcome to the January 2010 edition of FSTP Perspectives. The last year has been truly historic from a general economic business climate perspective and with respect to developments in the transfer pricing world. There certainly has been no shortage of topics worthy of mention in FSTP Perspectives. Moreover, in attempting to gauge where things may lead in the near future, perhaps it is best to assess recent trends and developments.
In reflecting back on 2009, which began with continued reverberation from the Summer 2008 financial downturn, we witnessed unprecedented broad government intervention such as the U.S. Troubled Asset Relief Program (“TARP”) funding and take-over of major financial institutions (and an automobile company) in the U.S, the U.K., Ireland, Iceland and the Netherlands. These actions provided much needed stability in the global credit markets and, by early 2010, many financial institutions in the U.S. paid back the initial TARP funding and interest. However, with the global economic downturn Tax Administrations are experiencing double-digit declines in collected corporate taxes (with many operating loss carry- forwards still to come) which added further pressure to achieve audit adjustments in the transfer pricing area.
The OECD continued to remain active in the transfer pricing area, following the finalization of Parts I to IV of its paper on Attribution of Profits to Permanent Establishments, with the continuation of major projects such as revising Articles 5 and 7, and related Commentary, of the Model Income Tax Treaty
and Business Restructurings. In September 2009 the OECD issued, in draft form, the revised Transfer Pricing Guidelines, followed by a four month period in which PwC and several other firms and organizations submitted comments to the OECD.
The legal and regulatory framework in many key countries continued to advance in 2009 in all corners of the world, with new rules, bulletins and other interpretations issued in places such as France, Greece, Hong Kong, India, Japan, and Russia. In the U.S., new Treasury Regulations applicable to cost sharing arrangements and controlled services transactions were issued and the next awaited set of income tax regulations is now the anticipated re-release of proposed regulations on global dealing.
The controversy and dispute resolution environment continues to be very active for multinational financial institutions. The management of myriad transfer pricing audits is now a part of virtually every corporate tax department’s regular function. The level of cooperation, and sometimes coordination, between countries in accordance with obligations under income tax treaties is unprecedented. A number of key court cases were decided during 2009 including Xilinx in the U.S., Dixons in the U.K. and General Electric in Canada. The common thread in all of these cases is that taxpayers each defended positions that were based on what comparable arrangements would have yielded under the applicable “arm’s length principle.”
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