International Transfer Pricing Audits

May 16, 2024

International transfer pricing audits 

  

International Transfer Pricing audits have been a controversial topic in the business and tax arena in recent years. Several multinational companies have been subject to scrutiny by tax authorities in different countries due to practices that could be perceived as tax evasion or profit shifting. The following are some of the controversial cases that have attracted worldwide attention:  

  

  1. 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. The European Commission ruled in 2016 that Ireland granted improper tax benefits to Apple, allowing it to pay taxes at very low rates. This generated a record €13 billion fine 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 has yet to be resolved.  

     2. 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. The European Commission concluded in 2017 that Luxembourg had granted undue tax advantages to Amazon, allowing it to significantly reduce its tax liabilities in the region. As a result, Amazon was ordered 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 in favor of the Amazon group within the meaning of Article 107 TFEU. Subsequently, the European Commission lodged an appeal before the Second Chamber of the Court of Justice, which in December 2023 dismissed the appeal brought by the European Commission.  

    3. 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 verdict, still 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 in excess of $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 7 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, as well as 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 in order to prevent possible contingencies in the absence of clear policies within economic groups.