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The future of TP: 2020 vision

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SPEED READ In this article the authors comment on what they see as the key transfer pricing issues over the next decade. While the arm's-length principle looks secure, the international consensus will be tested by a number of developments including specific rules within transfer pricing and anti-abuse regimes that step outside the OECD Guidelines. The most controversial topic will be intangibles and will expose tensions especially over the existence of local marketing intangibles. Comparables will require much greater attention as the new OECD guidance is increasingly adopted. But there is hope that, with more resources put into MAP cases and an expansion of advance pricing agreement (APA) programmes, disputes will be resolved more quickly and with better outcomes.

In this article we gaze into our crystal ball and speculate on the likely state of transfer pricing in 2020. Some of the images we see there look positive, others maybe less so...

The big question is whether the arm’s-length standard will still be the theoretical basis for transfer pricing in ten years time. Here the picture seems clear. Despite continuing challenges from academics, both business and Governments will continue to voice allegiance to the arm’s-length standard and formulary apportionment will not be seen as a desirable or necessary alternative.


The biggest challenge to the orthodoxy of the arm's length standard will not come from China or India but instead from Europe, with the introduction of the Common Consolidated Corporate Tax Base (CCCTB) by a small number of EU Member States.

This will bring in an apportionment approach to divide up the total profits between the different Member States, dispensing with the need for separate entity tax accounting and thus the need to value intragroup transactions until these go outside of the grouping.

As this is likely to be optional rather than mandatory, most multinational enterprises (MNEs) with a significant proportion of their intra-group transactions outside the CCCTB area will ignore the grouping rules and will continue to apply the arm’s-length standard.

Only those smaller MNEs with a large proportion of their intragroup transactions within those participating Member States will find the grouping rules of relevance and helpful in reducing their costs.

While the arm’s-length standard will remain the official position within the OECD Member countries, we can expect to see continuing examples of individual OECD countries using or overriding the standard as they see fit.

Encouraged by the measures adopted by the US and the UK to deal with the transfers of valuable intangibles by bringing them within anti-abuse rules, and outside of the transfer pricing regime, other countries will seek to do the same. India's Controlled Foreign Company rules will be an obvious example.

Even staying within domestic transfer pricing regimes, we expect to see increasing instances of specific rules and practices that are at odds with OECD thinking and the general consenus. The US is likely to remain the major offender here, and we should perhaps expect more cases like Xilinx, in which the specific rule challenges the general principle. But other examples elsewhere are bound to appear as the codification of transfer pricing spreads.

So the arm’s-length standard remains the theoretical construct, but will there still be the international consenus needed to ensure that it is applied in the same way? As transfer pricing rules and requirements spread across the globe, we predict that (with the continuing exception of Brazil) these new regimes, largely in sub-Saharan Africa and the Far East, will adopt the arm’s-length standard, but they will not necessarily adhere to the OECD Guidelines. Here we see the growing dominance of the UN Model and its own transfer pricing guidelines.

With their greater focus on source-based taxation the effect will be rules and practices that will put considerable emphasis on local intangibles and on seeking and attributing profits to permanent establishments.  


Looking now to see what will be the hot topics over the next ten years, it seems certain that intangibles will be the most intractable and will give rise to the most debate and controversy. The OECD’s project on intangibles promises to be similar in scope and difficulty to the work on the attribution of profits, an arduous undertaking itself lasting a decade.

The intangibles project will surpass this in terms of its significance, as tax authorities will continually look to assert the existence of intangibles in their jurisdiction and business will continue to acquire and develop intangibles in tax-favoured locations.

The controversy will arise because, unlike previous OECD projects, this will expose tensions between Member countries, including the observer countries of India and China (which will remain firmly on the fringes of OECD). The emerging economies generally will need no encouragement to see the opportunities to argue for local intangibles, quoting the idiosyncracies of their own markets, the size of the necessary spend on advertising and marketing and the need to inject global brands with a distinctive local feel and flavour.

Similar arguments will be made in respect of local workforces and their specialist skills and knowledge. These arguments will, of course, echo similar arguments that we have heard from countries like the US and Japan over the last ten years.

The recent Indian case of Maruti-Suzuki which has only just reached the High Court, and is likely to go forward to the Supreme Court, will be instrumental in determining the extent to which local marketing intangibles can be successfully established by a tax authority. India and China have much to gain from these discussions and the ensuing debate is likely to prove a hard test for the international consensus.   

In line with customs

Rather less of a hot topic will be the attempt to find synergies and efficiencies by aligning transfer pricing rules with valuations rules for customs duties. This will be likely be viewed as a highly worthwhile project, but will remain an illusory goal as authorities will be unable to overcome the inherent contradiction of customs authorities wanting high import prices and tax authorities wanting low ones. 

So far we have been looking at the key debates which will occupy the theoreticians. What will actually be happening on the ground? The next decade will be key in implementing the revised OECD Guidelines, as well as witnessing advances in transfer pricing administration and in resolving disputes.
Perhaps the most immediate practical impact for most businesses will be the changes to the Guidelines and in particular the much greater emphasis on comparability. This will change the basis on which most transfer pricing documentation is prepared as increasingly the OECD 'nine steps’ will become a necessary component of every transfer pricing report.

Central to this, even though only an element of it, will be the requirement for improved comparability analysis. Quality not quantity will be the name of the game.

While the OECD’s new Guidelines provide a few helpful relaxations in terms of using multiple-year data and data from similar markets, overall they will provoke a move away from mechanical comparable reviews and encourage a much more qualitative approach.

Businesses will need to invest in better studies to convince a more sceptical and demanding tax authority. The corollary will also be the increasing use (and acceptance) of profit split methods by tax authorities alongside an increased reduction in the acceptance of the transactional net margin method.
The next decade is sometimes portrayed as a tsunami of transfer pricing disputes? Will this be the case or will dispute resolution strategies and tools improve substantially?

The horizon

Overall the future looks relatively promising. Tax authorities will have learnt from their early experiences and, if they can hold on to their experienced talent, will be much more expert in their auditing and understanding of transfer pricing issues. The mooted introduction of sophisticated risk assessment in countries like India will reduce the total number of disputes and concentrate those remaining on more relevant (and productive) issues.

Moreover, as emerging economies become capital exporting and well as importing, a greater balance should be evident in the approach taken by both the transfer pricing auditors and the Competent Authority when the Mutual Agreement Procedure (MAP) is invoked, which it increasingly will be.

Advance Pricing Agreements

Advance Pricing programmes will also be introduced by all the major economies and will grow in popularity with business. One side effect of this may be that to cope with demand, most countries will require the payment of a fee, possibly linked to the size or complexity of the case. This may have the effect of discriminating against smaller cases that will have no choice but to rely on the lottery of the audit.

As the APA programme expands, there will be correspondingly more unilateral APAs, which will typically be cheaper and easier to achieve. This is likely to create its own problems though, as tax authorities take the opportunity to achieve a more favourable result than they would under a bilateral. Prospects for any resolution of resulting double taxation under MAP will be remote.

Arbitration, or at least the prospect of it, is also going to loom much larger over the next ten years than it has over the previous decade. The actual start of arbitration between the US and Canada will likely lead to a sea change in the attitudes of the two Competent Authorities towards reaching much earlier agreements now the sword of arbitration hangs over their heads.

Similarly in Europe, where the number of cases heading for arbitration is increasing exponentially, tax authorities will finally wake up to the need to properly resource their dispute resolution teams and also to staff these with transfer pricing specialists with experience in the field.

Other areas of dispute resolution will appear, encouraged by OECD and developments such as the Dispute Resolution Panels in India and similar moves in the UK, but only if these engage the right people with the right experience and if they have the authority to act independently of the audit branch.

Overall, the increased focus on transfer pricing as an area of risk will drive further in-house recruitment within multinational corporations. What was once a highly specialised area of tax is becoming increasingly central to planning and compliance. Far greater emphasis will be placed on ensuring that pricing policies keep pace with the shifting geographical footprint of the business and that accounting systems deliver the statutory results promised by the policies.

Ultimately, as the discipline continues to become more mainstream, the corporate tax take relative to other taxes will continue to drop. In the longer term Governmental focus and investment may switch to more profitable areas, but in the meantime there is likely to be much to keep practitioners busy.



Diane Hay is Special Advisor on international tax with PwC. She specialises in dispute resolution and is frequently involved in Mutual Agreement cases and Advance Pricing Agreements. She was previously the UK Competent Authority with responsibility for these areas. Email:; tel: 020 7212 5157.


Ian Dykes is the leader of the UK transfer pricing network and the Partner in charge of PwC’s global transfer pricing documentation offering. He has been a full time transfer pricing practitioner for 15 years, and is responsible for the transfer pricing of consumer packaged goods specialism nationally. Email:; tel: 0121 265 5968.