The most significant TP cases so far in 2022

In 2022, we will investigate the most significant transfer pricing instances involving the major corporations Rio Tinto, BlackRock, and McDonald's.

The year 2022 has been marked by significant transfer pricing court decisions, with multinational corporations like McDonald's being forced to pay record-high tax bills as a result of inquiries into their TP arrangements.

The court cases demonstrate, as always, that tax officials are cracking down harder on tax avoidance as governments all around the world struggle to increase revenue in the wake of the COVID-19 pandemic. We examine significant TP court decisions from this year and the business lessons they teach.

McDonald’s France

Following an inquiry into its TP arrangements, the US fast food chain agreed to pay the French tax agency ('le fisc') €1.25 billion ($1.31 billion) on June 16, making it the second-largest tax settlement in French history.

Between 2009 and 2020, the corporation reportedly used transactions in Delaware in the US, Luxembourg, and Switzerland to avoid paying $469 million in taxes.

Judge Eva Joly, who in 2015 represented workers at McDonald's, launched investigations. Later, the tax authorities looked into the company's affiliates more closely, especially since the corporation was showing no profit despite years of expansion.

According to the Parquet National Financier (PNF), royalties climbed from 5% to 10% in 2009, allowing the fast-food industry to move profit overseas and evade paying all of its taxes.

The settlement included a €508 million public interest fine as well as €737 million in overdue taxes and penalties.

According to tax directors, the court case has reaffirmed the necessity for firms to regularly evaluate their TP documentation in order to defend their pricing to tax authorities and prevent audits.

The judgement also highlighted the need for "consistency and transparency," particularly when IP, royalty payments, and licensing of IP are concerned, according to Christian Kaeser, worldwide head of tax at Siemens in Munich.

Businesses should take the McDonald's case as a warning to make sure their dealings are fair and adequately recorded, or they risk paying a hefty fine like the inventor of the Big Mac.

BlackRock

On July 19, the Upper Tribunal (UT) upheld HM Revenue and Customs' denial of shareholder loan interest deductions involving $4 billion in loans, siding with the investment management firm BlackRock.

BlackRock and the UK tax authority were at odds over whether or not the company's inter-company loans made as part of its acquisition of Barclays Global Investors complied with the arm's-length standard (ALP).

BlackRock had provided a short-term loan for $420 million at a rate of 2.2%, followed by loans for $1.6 billion at a rate of 4.6%, $1.4 billion at a rate of 5.2%, and $500 million at a rate of 6.6%.

HMRC chose to amend three of these loans in 2012 after questioning whether they complied with the ALP. Interest rates were changed from 4.6% to 3%, from 5.2% to 3.5%, and from 6.6% to 4.4%.

The First-tier Tribunal (FTT) sided with the business's claims in November 2020, allowing BlackRock to appeal against HMRC.

The FTT's decision was reversed by the UT's ruling in July, allowing HMRC to proceed with its appeal. There might still be more.

Rio Tinto

In response to allegations of profit shifting made against the multinational mining firm, Rio Tinto agreed to pay the Australian Tax Office (ATO) $424 million on July 20.

The company was charged with shifting profit to its Singapore-based marketing center. After initially looking into the corporation in 2017 for its 2020 tax filings, the tax authority pursued the company in 2021 for its intra-group dividend financing.

The negotiated amount was added to the A$378 million in taxes that had already been paid, increasing the total to almost A$1 billion.

According to Rebecca Saint, Deputy Commissioner of ATO, Rio's higher income from its Australian-owned commodities are expected to be taxed in the region in the upcoming years.

Following the tax settlement, she said, "The resolution of these matters means that ordinary Australians can have confidence that even the biggest companies are held to account to pay their tax due."

Celltrion

On March 16, the South Korean Financial Services Commission (FSC) imposed a KRW 15.4 billion ($12.6 million) fine on the multinational for providing TP documents that it found to be unreliable.

In April 2018, Celltrion's audit investigation was started after the huge pharma company was accused of reporting financial statements that were in violation of accounting and auditing rules.

The corporation failed to provide the additional transparency and precision that the tax office required.

The FSC's ruling reinforced the tax authority's desire to combat non-compliance with existing TP legislation and demonstrated how corporations, including those who were instrumental in the fight against the COVID-19 pandemic, are not exempt from audits.

ITV

On June 8, ITV UK and British broadcaster ITV were unsuccessful in their appeal against the European General Court, which sought to recover revenue from the business that was allegedly enjoying an unfair tax benefit.

In 2019, the EU Commission released the findings of its inquiry into state aid because the UK's controlled foreign company (CFC) regulations permitted firms to receive tax benefits.

The incentives were put in place to deter UK corporations from transferring profits abroad, but the Commission determined that the UK's CFC exemption created a selective advantage because it provided various companies with varied tax treatment even though their circumstances were equivalent.

The General Court favored the Commission's decision and came to the conclusion that the program gave these businesses an unfair advantage following the EU state assistance probe.

ITV was one of the businesses that filed an appeal of the Commission's decision, but that appeal was dismissed by the June verdict.

Future disputes

The International Consortium of Investigative Journalists (ICIJ) released a series of investigations known as the "Uber files" in early July. Although the investigations focused on leaked information rather than a real dispute, they revealed the technology firm's tax strategy and provided insight into the company's TP arrangements in low-tax jurisdictions.

The records revealed that despite a spike in takeaway orders from customers during the COVID-19 outbreak, Uber's losses represented irrational capital losses.

The corporation later claimed it was committed to abiding with the tax laws of the nations in which it did business, but tax directors claimed it had put in place specific tax structures to avoid paying its whole tax burden.

Uber has apparently exploited hubs like the Netherlands to lower its tax contribution despite being registered in the low-tax state of Delaware. In order to transfer corporate profits to its Bermuda-based subsidiaries, it has also registered technological patents there.

Later, the international corporation transferred the patents to a Dutch firm that was under the authority of a holding company with headquarters in Singapore.

Following the publication of the papers, the director of the ICIJ, Gerard Ryle, said that company management had agreed to "share driver data" in order to "contain a tax audit" and prevent Uber from using tax havens.

Uber Technologies refuted the accusations, saying it consistently provided tax authorities with all pertinent data and was dedicated to transparency.

The ICIJ disclosures demonstrate how the technology company is experimenting with fire, but if the papers lead to more inquiries, it may end up setting itself ablaze.

By fLEXI tEAM