Bespoke is the best approach

Ian Boc­cac­cio,
prin­ci­pal and glob­al
income tax prac­tice
leader at Ryan

What are the tax policy considerations for multinational enterprises in the digital economy?

The glob­al trans­for­ma­tion to digi­tised mod­els has led to debate and ten­sions in the inter­na­tion­al tax sys­tem about where prof­its should be taxed. The per­ma­nent estab­lish­ment (PE) require­ments in many coun­tries’ tax laws require a phys­i­cal pres­ence and do not recog­nise dig­i­tal par­tic­i­pa­tion in many coun­tries. Also, the legal enti­ty con­cept does not match the “bor­der­less val­ue cre­ation” that mobile intan­gi­ble assets cre­ate.

Many juris­dic­tions, includ­ing the Euro­pean Union (EU), have imple­ment­ed or pro­posed dig­i­tal tax­es on top-line rev­enue and intro­duced the con­cept of vir­tu­al per­ma­nent estab­lish­ment.

Profit allocation is based on the arm’s‑length principle (ALP) in international tax rules. Is the ALP still fit for purpose in the digital economy?

Some believe the ALP will dis­ap­pear, but it hasn’t because of the lack of con­sen­sus on an alter­na­tive.

We believe the ALP will pre­vail, but the indus­try must move to a stan­dard based on mar­ket evi­dence. Many com­pa­nies are not pre­pared for this, giv­en the way they cur­rent­ly han­dle trans­fer pric­ing.

The ALP states that the amount one relat­ed par­ty charges to anoth­er must be the same as if the par­ties were not relat­ed. There­fore, the arm’s‑length price is what one would observe on the open mar­ket.

As com­pa­nies become dig­i­tal, using the ALP to allo­cate prof­its for tax pur­pos­es between parts of a multi­na­tion­al has become more con­tro­ver­sial because the mar­ket price is more dif­fi­cult to estab­lish for intan­gi­bles such as data. Pric­ing inter­com­pa­ny trans­ac­tions has also become hard­er as data becomes more valu­able, and com­pa­nies grap­ple with its rapid­ly mov­ing size, speed, and com­plex­i­ty.

Pric­ing intan­gi­bles is dif­fer­ent because it focus­es on indus­try eco­nom­ics and mar­ket evi­dence. It can’t be eas­i­ly char­ac­terised into a broad­ly defined range, so it requires a cus­tomised analy­sis.

The chal­lenge is that few mar­ket trans­ac­tions are pub­licly avail­able to help price data. Often, there hasn’t been enough evi­dence in con­tro­ver­sial trans­fer pric­ing cas­es. But in that case, the com­pa­ny usu­al­ly wins against the tax author­i­ty in nego­ti­a­tions or if it goes to court.

What are the practical considerations in performing value chain analyses?

Val­ue chain analy­sis (VCA) is tied to trans­fer pric­ing because it iden­ti­fies where prof­its are cre­at­ed. Some con­sul­tants will try to “boil the ocean” with exten­sive fact find­ing and func­tion­al analy­sis. For exam­ple, VCAs do not gen­er­al­ly need a hyper­de­tailed analy­sis of devel­op­ment, enhance­ment, main­te­nance, pro­tec­tion, and exploita­tion (DEMPE) nor a micro­analy­sis of risks and con­trols.

Our approach cuts to the chase, while still run­ning key issues to the ground. It looks at the most impor­tant things in the val­ue chain, such as where cap­i­tal has been employed, and uses trans­ac­tion­al evi­dence to sup­port ALP pric­ing.   Uti­liz­ing mar­ket evi­dence is absolute­ly a best prac­tice.

What is Ryan’s competitive edge?

Clients through­out Europe and the rest of the world call on Ryan for our unique approach, exper­tise, and suc­cess in han­dling trans­fer pric­ing and val­u­a­tion. They appre­ci­ate our “inverse pyra­mid” mod­el, in which sea­soned vet­er­ans in eco­nom­ic the­o­ry work every client engage­ment direct­ly, ver­sus the com­mon prac­tice of staffing engage­ments with junior asso­ciates who fit most fact pat­terns into a broad­ly defined range. A bespoke analy­sis based on mar­ket data is the best approach.

Ryan pio­neered the use of mar­ket evi­dence over the wide­ly employed, but often-chal­lenged, prof­its-based meth­ods. Ryan’s approach offers the most robust defence of inter­com­pa­ny trans­ac­tions, pro­vid­ing suc­cess­ful out­comes in tax con­tro­ver­sy lit­i­ga­tion around the world.

We have mar­ket-lead­ing exper­tise on intan­gi­ble prop­er­ty val­u­a­tion and inte­gra­tion of trans­fer pric­ing and tax val­u­a­tion, and our record is unmatched in nego­ti­at­ing audit set­tle­ments, advance pric­ing agree­ments, and defend­ing sen­si­tive inter­com­pa­ny trans­ac­tions.

Clients appre­ci­ate our bespoke, restruc­tur­ing-relat­ed val­u­a­tion and eco­nom­ic analy­ses in trans­fer pric­ing design and con­tro­ver­sy; and in bank­rupt­cy set­tings. Our mar­ket evi­dence-based approach fos­ters the most robust defence of inter­com­pa­ny trans­ac­tions, pro­vid­ing suc­cess­ful out­comes in tax con­tro­ver­sy lit­i­ga­tion.