Transfer Pricing Times: Volume XI, Issue 11

Inside this Edition: Recap of UK’s December 2014 Finance Bill. 

The December 2014 Finance Bill issued by HM Treasury and HM Revenue & Customs (HMRC) saw the introduction of a proposed diverted profits tax (DPT). The key features are highlighted below:

  • The regulations take effect for accounting periods beginning on or after April 1, 2015 (transactions entered into before this date are included where tax advantages are relevant for tax returns filed after April 1, 2015).
  • The proposed DPT’s focus is on multinational groups and transactions where the main purpose (or one of the main purposes) is to avoid a charge to corporation tax, which should ensure that in most cases commercially based planning is not impacted.
  • The draft legislation proposes that DPT should apply when either: 
    • a charging notice is issued by HMRC or
    • a group notifies HMRC that the rules apply (the draft legislation includes a self-assessment requirement).
  • All businesses will need to assess the potential application of DPT to their circumstances in order to conclude whether or not they must notify HMRC of being within the charge to DPT.
  • The 25 percent tax will be levied on those profits “deemed” to have been diverted (artificially) from the UK to another jurisdiction through either of the following two tests: 
    • the avoidance of a UK permanent establishment, or
    • the transfer of profits to low-tax entities in circumstances where there is a lack of economic substance.

There is an exemption for businesses with UK sales less than £10 million. For more information on the Finance Bill, click here.

Duff & Phelps recommends that groups with UK operations review their existing transfer pricing to determine whether or not the DPT rules apply (and therefore whether they have a duty to notify HMRC, and a potential financial impact). With respect to new transfer pricing design, it has never been more critical to build pricing around legitimate business changes, demonstrate economic substance, and establish the commercial (non-tax) benefits of any changes.

Duff & Phelps is holding a series of meetings with HMRC Policy Division to push for a no-names guidance/clearance process that can be provided to groups who are uncertain as to whether the regulations apply.

OECD Releases 2013 Mutual Agreement Procedure Statistics
The Organization for Economic Cooperation and Development (OECD) recently released the annual statistics on the mutual agreement procedure (MAP) caseloads for all of its member countries as well as some partner economies. These annual statistics are provided to improve the timeliness of processing and completing MAP cases under tax treaties, and to increase the transparency of the MAP process to the public. This information will also provide useful in developing and interpreting longer-term trends within the MAP caseloads and will aim to improve dispute resolution processes.

The available MAP statistics by OECD member country and some partner countries include:

  • Opening inventory of MAP cases on the first day of reporting;
  • Number of MAP cases both initiated and completed during the reporting period;
  • Ending inventory of MAP cases on the last day of the reporting period;
  • Amount of cases closed or withdrawn with double taxation during the reporting period; and
  • Average cycle time for cases that were either completed, closed, or withdrawn during the reporting period.

These statistics as well as additional details on the number of new MAP cases and the inventory of open MAP cases for OECD member countries and some partner countries can be found here.

OECD Draft Recommendations Alter Transfer Pricing Landscape
Last month, Duff & Phelps’ UK-based Transfer Pricing Managing Directors Shiv Mahalingham and Richard Newby, published an article in Bloomberg BNA’s Transfer Pricing International Journal, which discusses some of the positive changes to transfer pricing guidance resulting from the recent OECD draft recommendations.

The article highlights the following topics, which were addressed in recent OECD draft recommendations:

  • Identification of “low-value adding services” and the proposal of an associated safe harbor;
  • Lack of comparable data and its impact on inconclusiveness and subjectivity;
  • Frequency of updates and the associated financial burden for taxpayers.

The article goes on to discuss pre-emptive and real time transfer pricing strategies for taxpayers to manage their transfer pricing risk within the current environment. 

Transfer Pricing Considerations in Africa
Broader transfer pricing regimes, either through the application of international guidelines and/or the development of local regulations, continue to be introduced in developing countries. This uptick has been supported by the activities of intergovernmental organizations, such as the United Nations (UN) and the OECD. Specifically, in May 2013, the UN released a Practical Manual for Transfer Pricing in Developing Countries (click here), which effectively provides recommendations on how developing countries can apply the OECD Transfer Pricing Guidelines to leverage international best practices in building out local resources and capabilities. In a similar vein, in November 2014, the OECD released a Strategy for Deepening Developing Country Engagement in the Base Erosion and Profit Shifting (BEPS) Project (click here).

Emergence of Local Transfer Pricing Provisions in Africa
In Africa, an increasing number of countries, including Angola, Ghana, Kenya, Nigeria, Tanzania, and Uganda, have recently introduced transfer pricing provisions. The UN and the OECD continue to provide these countries with recommendations on how to focus their limited resources with respect to implementing the transfer pricing policies they have implemented. In addition, African countries are also receiving support from the African Tax Administration Forum (ATAF), which will represent the African countries in fighting BEPS in the region. For example, ATAF has committed to helping build “toolkits” used to support the implementation of BEPS measures and address issues specific to developing countries in the African region.

Implementation Obstacles
While there has been an uptake in transfer pricing policy introduction, and continued support from interested parties, there are still many difficulties associated with implementation. One such issue was recognized by the OECD in its March 2014 paper addressing concerns about the availability and quality of financial information, which can be an obstacle when applying transfer pricing methodologies in developing countries generally, and in particular in African countries (for further information refer to Volume XI, Issue 3 of the TP Times).


Publicly available and reliable comparable companies in Africa are few and far between. Practitioners generally recommend considering comparable companies in the broader EMEA (Europe, Middle East, and Africa) region or developing a global comparable set for tested parties in Africa. In doing so, reasonable adjustments should be considered. For example, working capital adjustments employing local short term interest rates to account for differences in risk and return between the African-based tested party and the comparables may be appropriate. In current market conditions, rates in African countries will generally be higher than in the EMEA region. For example, as of November 2014, the Nigerian short-term interest rate was approximately 13 percent, which is substantially higher than that of most European countries.

Miscommunication and Misinformation
MNCs operating in developing countries, specifically those in Africa, should keep up-to-date with the recent developments in the region and further be aware that transfer pricing measures will inevitably be implemented in most African countries in the near future. Additionally, MNCs should review current country-specific transfer pricing rules and discuss with their advisors the risks under the current transfer pricing landscape. For example, MNCs should assess whether contemporaneous documentation is required or offers penalty protection, if Advanced Pricing Agreements (APAs) are viable options, and if high penalties exist to help mitigate transfer pricing risks in Africa.


Given that transfer pricing requirements are relatively new in many jurisdictions in Africa, auditing teams are still becoming familiar with transfer pricing. Business leaders in Africa have complained that local tax auditors’ knowledge of transfer pricing is limited. As a result, miscommunication and misdirection may lead to a long drawn out audit processes and an inaccurate transfer pricing assessment. MNCs can mitigate these issues by documenting material transactions in a global or regional transfer pricing report format to reduce misinformation, clearly listing the steps taken in assessing the tested transaction.

Microsoft Files Complaint Against the IRS
The use of outside experts by the Internal Revenue Service (IRS) in transfer pricing audits is coming under some scrutiny. In September of this year, Microsoft Corporation filed a Freedom of Information Act request seeking information, including a contract and related records, regarding the IRS’s engagement of the law firm Quinn Emanuel Urquhart & Sullivan LLP (“Quinn”) to assist in a transfer pricing audit covering the years 2004-2009. As the requested  information had not been fully provided by the statutory deadline, Microsoft has filed a complaint against the IRS in the U.S. District Court for the District of Columbia, charging that the IRS had “unlawfully withheld” the relevant information.


Microsoft’s concerns with Quinn’s involvement may stem from the firm’s emphasis on business litigation, as opposed to tax or transfer pricing, raising questions as to Quinn’s proficiency with regard to the issues under review in the IRS audit. Moreover, Quinn’s role seems to significantly exceed that usually assigned to outside contractors by the IRS. Rather than provide analysis or testimony in discreet and well-defined areas which may turn up during audit (e.g., intercompany pricing or valuation of assets), Quinn looks to be partnering with the IRS in examining Microsoft’s tax returns for the years in question, and could also conceivably participate in questioning Microsoft personnel. (In July of this year the IRS issued new rules allowing private contractors to participate in taxpayer examinations, click here). To many observers, this represents delegation of a basic governmental function by the IRS.

The hiring of Quinn in this expanded role, along with the IRS rule change that made it possible, may be linked to a perceived lack of expertise in certain matters at the IRS, lack of resources, or both. (The resource issue will not be helped by last week’s federal government spending agreement which further reduces the IRS’s annual budget.) In addition, given Quinn’s focus on litigation, it may signal a more aggressive IRS approach to transfer pricing audits.

Click here to review a complete copy of Microsoft's complaint.

Equity Infusion Not Considered Income, Rules Bombay High Court
Following on the heels of the Vodafone ruling, the Indian subsidiary of Royal Dutch Shell Plc, Shell India Markets Pvt. Ltd (Shell India), won its case in the Bombay High Court against the income tax (I-T) department of India. Specifically the case related to the alleged undervaluation of 870 million shares issued by Shell India to an overseas group entity, Shell Gas BV, in November 2014. 


The original shares were issued by Shell India at 10 crore a share. The share valuation methodology was challenged by I- T, who posited that the shares should have been priced at 180 crore a piece, a significant increase in price. As such, proposed adjustments of 15,000 crore (3.6 billion USD) and 3,000 crore (.6 billion USD) for the periods of 2007-2008 and 2008-2009, respectively, to the taxable income of Shell India. Ultimately, these adjustments were denied, and the income of Shell India was reduced to its original level prior to the adjustments.

Issuing shares as a way of funding subsidiaries has become a common practice of multinational corporations (MNCs). While disputed by I-T, MNCs tend to view these transactions as capital transactions that fall outside the scope of transfer pricing regulations and to date, this practice has been upheld by India.

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