International Transfer Pricing Audits
International Transfer Pricing audits have been controversial in the business and tax area these years. Several multinational companies have been supervised by tax authorities in different countries due to practices such as tax evasion or profit shifting. The following are some of the controversial cases that have attracted worldwide attention:
Apple Inc. and the European Union
U.S. multinational Apple Inc. has been the subject of a long-running legal and tax battle with the European Union (EU) over its Transfer Pricing practices in Ireland. In 2016, the European Commission ruled that Ireland granted Apple improper tax benefits, allowing it to pay taxes at actual low rates. It generated a record €13 billion of fines imposed by the EU on Apple, arguing that such practices distorted competition within the European single market. In 2020, the European Court of Justice ruled in favor of Apple. Subsequently, in November 2023, the Advocate General of the Court of Justice of the European Union (CJEU), Giovanni Pitruzzella, proposed to the European Court of Justice, the European Court of last instance located in Luxembourg, the annulment of the 2020 judgment. Therefore, this case is still in suspense.
Amazon.com Inc. in Luxembourg
Amazon, the e-commerce giant, has been at the center of controversy over its international tax structures, especially in Luxembourg. In 2017, the European Commission concluded that Luxembourg had granted undue tax advantages to Amazon, allowing it to reduce its tax liabilities significantly in the region. Thus, Amazon had to pay approximately €250 million in back taxes plus interest. In May 2021, the General Court ruled in favor of Amazon by concluding that the Commission had not demonstrated the existence of an advantage on behalf of the Amazon group within Article 107 TFEU. Subsequently, the European Commission appealed to the Second Chamber of the Court of Justice, which in December 2023 dismissed the appeal presented by the European Commission.
The Coca Cola Company (TCCC) and the IRS
In November 2023, the U.S. Tax Court issued a crucial ruling regarding The Coca-Cola Company’s (TCCC) Transfer Pricing Adjustment in response to disputes with the Internal Revenue Service (IRS). This ruling, subject to possible appeals, will set a relevant precedent in international taxation.
The IRS reallocated more than $9 billion in its consolidated income, generating tax deficiencies exceeding $3.3 billion. The root of these deficiencies lies in Transfer Pricing adjustments, where the IRS reallocated income from TCCC’s foreign manufacturing subsidiaries, known as “supply points,” located in seven countries. The dispute revolves around the method of allocating income and the use of royalties for intangibles between TCCC and its foreign manufacturing subsidiaries. The Court upheld the IRS’s proposed adjustment, holding that the intangibles belong to TCCC.
The U.S. Tax Court must determine whether an $882 million Transfer Pricing adjustment involving TCCC’s Brazilian subsidiary (who offset with dividends rather than royalties to TCCC) violates Brazilian law limiting the payment of royalties to foreign parents by Brazilian companies.
Conclusions
The above cases are just a few examples of the complexities and controversies surrounding Transfer Pricing in international auditing. These disputes underscore the importance of a rigorous and transparent approach to pricing between related companies and the need for greater international cooperation to address tax challenges in the globalized economy.
On the other hand, it addresses the need for expert advisors in Transfer Pricing and International Taxation to prevent possible contingencies due to the absence of clear policies within economic groups.
