The need for businesses to review their TP arrangements and documentation is strengthened by the tax settlement reached by the fast-food chain with French authorities.
Although McDonald's tax dispute in France may have been resolved, tax directors say the example highlights the value of routinely reviewing transfer pricing agreements and related documentation.
According to Ivan Hanna, partner at the London law firm LCN Legal, "we advise companies to do an annual review, so that it aligns with the intellectual property licensing, justify the pricing on that basis, and the evidence to show that."
"All of that needs to be tied together. If you have decent documentation and words to back up, then there could be much more sensible conversations with tax authorities ," he continues.
Hanna believes that inaccurate TP documentation is "even worse" than insufficient data.
In 2009, royalties were raised from 5% to 10% and a sizable portion of McDonald's France's profits were transferred overseas. Royalties that had been routed through a permanent establishment (PE) in Switzerland and a Luxembourg entity are the subject of the transactions.
Following an investigation into its TP arrangements for the years 2009 to 2020, the US fast-food company agreed to pay €1.25 billion ($1.31 billion) to the French tax administration. Allegations of tax evasion by the company were resolved by this settlement.
According to papers seized during the initial investigation, the amount of the royalties doubled. The business attempted to defend this by citing the rise in McDonald's France profits and the corresponding rise in the required tax payment.
The investigation raised concerns about the Luxembourg affiliate's financial stability, confirming that the McDonald's Europe franchises in Luxembourg, Switzerland, and the US did not pay any taxes.
Businesses need thorough documentation to support their pricing decisions and strike a balance between compliance and efficiency. Understanding the value change within inter-company agreements and how the value has been created, particularly for intellectual property and royalties, is crucial.
According to Christian Kaeser, global head of tax at Siemens in Munich, while businesses can still be involved in a dispute even when they have the proper paperwork and their prices are reasonable, "consistency and transparency" remain crucial factors.
It is important to provide documentation for the commercial justification of inter-company terms in particular. IP, royalties, and IP licensing are all included in this once more.
According to Hanna, this crucial message recurs frequently. "Either there is no documentation to justify an allocation of risk or TP, or insufficient documentation that does not match what the TP is saying."
Similar legal repercussions to those McDonald's faced when they violated contracts or altered the terms of intra-group loans have been experienced by multinational corporations.
Hanna claims that the required document was "completely absent" and that tax authorities were unable to find "any justification at all for the changes" in reference to the fast-food chain's settlement.
A French multinational corporation's group tax director claims that in the wake of the McDonald's settlement, the company has realized the importance of having a strong TP policy.
Due to worries that it might lead to additional discussions with tax authorities, the company has decided against implementing trademark royalties.
The group tax director states, "We prefer to avoid that. The environment is changing the way we are doing things."
The tax director continues, "we are trying to strengthen the TP documentation, making sure the subsidiaries are documented, to make sure we capture the new business organisation – which is sometimes complicated to have the information."
In order to make sure the pricing is still reasonable and compatible with the business, the company also periodically reviews its TP agreements.
However, having teams in various countries and the constantly changing nature of TP make the process difficult.
"It can be difficult to assess where the economic ownership is, to implement the proper flows, and document it." The group tax director continues: "It’s difficult to explain to tax authorities where the IP is."
Some tax directors contend that by constructing more effective security models and relying more on strategies like dispute prevention techniques, corporations could reduce the risk of tax disputes.
Advance pricing agreements (APAs) are one possibility, but this is just the beginning.
According to Raphael Coin, founder of the Paris law firm Affidavit-avocat, having a "pre-damage tool" would allow companies to communicate effectively with foreign investors and reduce the likelihood of being fined.
He claims that "we need something to protect groups against that type of assessment. The advance pricing agreement – or whatever process – should be boosted. More tax dispute resolution methods being more accessible, with more resources."
Instead of pursuing an entire multinational corporation at once, tax authorities may think about implementing security models to raise more revenue.
According to Coin, "an agreement costs less money to the state."
Businesses would profit from certainty in their TP's tax agreements, according to Michael Beard, senior tax manager at the London-based business advisory firm Evelyn Partners.
Securing and putting into effect an APA can take a lot of time. Sometimes the APA procedure is so drawn out that new rules are implemented before the old ones are repealed.
Technicolor's group head of tax in Paris, Clément Coirault Quinquet, claims that while APAs are useful tools, they are also "complicated and time-consuming."
Companies with bilateral APAs must communicate with other jurisdictions, which can be time-consuming and produce unexpected results.
Quinquet states, "I’m not sure APAs are the best tool."
Different tax dispute resolution techniques, such as mutual agreement procedures, are preferred by some tax directors (MAPs). However, some tax disputes can only be resolved by going to a national court.
Businesses were reminded of the French government's skepticism of TP by the McDonald's settlement. The problems brought up by the settlement, though, are not novel.
The historic French Supreme Court ruling on PE issues in December 2020 involving the digital company Conversant demonstrates that the French tax authorities are more skeptical of TP.
"The best thing to do is to look at what is the practice of the tax authorities in the jurisdictions involved. In Germany, they are very aggressive. Even if you have good documentation in place, you cannot be sure what they’ll do ," the French group tax director says.
The speaker continues, "look at what the trends are, what will happen if we go to court, whether we will have to negotiate or adapt."
Businesses that adopt new tax laws and implement regional regulations may reduce the likelihood of legal disputes even more.
"Even if the rules are derived from the OECD, every country has a different approach. Some are more flexible and rely on the documentation that you have. Canada and New Zealand are countries where it’s easier to justify TP," said the tax director of the group.
The tax authorities are looking for additional revenue following the COVID-19 pandemic to close the tax gap left by emergency spending. Given the state of the economy, McDonald's settlement payment to the French tax authorities of €1.25 billion is a sizeable sum.
Areas like TP, in particular, will be on the radar of tax authorities, according to Beard. Over the years, TP has grown into a sizable number of audits. The significance of intangible assets in the scope of international licensing has only served to strengthen this.
The trend was also started by the OECD's BEPS project, claims Quinquet. "It’s at the heart of everything you do. Because of BEPS, things have changed massively – we’ve seen audit teams in TP, and tax authorities have improved their knowledge."
"In the case of McDonald’s – there is a Swiss dimension and a US dimension." He continues, "the public transaction will add extra pressure to deliver the pillar one and pillar two agenda."
Corporations should review their TP agreements in light of the McDonald's settlement to make sure that all pricing is updated and adheres to the arm's-length principle.
Any inconsistency could result in a hefty tax bill that could have been avoided if the proper paperwork had been in place. Prevention is always preferable to treatment.
By fLEXI tEAM