Thought leadership from our experts

Q&A with John Wells

, Deloitte, US

What was the most significant development in your region/jurisdiction's transfer pricing practice in the past 12 months?

The Americas region is too diverse to generalize on trends, so the answers here are based on developments in the US only. The most significant development has been the regulatory changes brought about from the US Tax Reform – it had a number of elements impacting transfer pricing (TP) directly, and how our clients undertake TP, such as the Base Erosion and Anti-Abuse Tax (BEAT) regulations, the Global Intangible Low-Taxed Income (GILTI) regulations, and to a lesser extent, the foreign-derived intangible income (FDII) regulations. The US tax code also saw changes to Section 163J, which included business interest deductions, which heavily affected intercompany loans. Furthermore, the headline US corporate tax rate was decreased to 21 percent. All of these regulations had an impact on the US TP practice, as well all taxpayers with operations in the US.

What was the most notable effect of that change?

All multinational companies with operations in the US were impacted. The regulations are, in effect, the Base Erosion Profit Shifting (BEPS) promulgations for the US. The BEAT regulations, in particular, imposed a minimum tax on any taxpayers that have outbound payments to foreign related parties relating to things such as intercompany services and royalties that are greater than a certain threshold. BEAT could apply to any taxpayer, whether headquartered in the US or overseas. It therefore created a lot of planning and transactions designed to get taxpayers out of the BEAT tax.

Where is the market moving in this practice area?

Corporate taxpayers have been absorbing these regulatory changes brought about by US Tax Reform over the last year. As a result, they have been focusing less on TP planning and more on dealing with all these changes. What has happened is that Congress has layered on top of what is already a complex tax code even more complexity. This does not leave companies with much capacity to do anything other than deal with these changes. We are likely to see more planning in the future, but there has been a temporary halt while they deal with their compliance needs.

What kind of impact will this have on your work?

The changes have forced our TP practitioners to become more conversant with sections of the international tax code than ever before. It has driven closer alignment between TP and international tax practitioners. The next wave of transfer pricing opportunities are all likely to be around operational transfer pricing, focusing on people, processes, and technology. It's an ever-widening skill set that is required in order to advise our clients in line with market and regulatory developments. With all these changes, it has become even more important for our TP practitioners to help companies stay compliant in order to stave off tax authority audits and disputes.

Do you anticipate any significant legislative changes in the future with a material impact on transfer pricing in your region?

In short, it is not possible to predict future changes in our current market. We don't know what will happen with Congress, nor what the outcome of the presidential elections might be in 2020. There are also question marks over how the World Trade Organisation will view the regulations (especially FDII). It is possible that there will be further regulations, but conversely, some regulations may be reversed.

If these come into force, how will the industry look in the future?

This is not clear. We do know that there is more alignment between transfer pricing and international tax. To put it into perspective – in the past, we used to advise almost any corporate taxpayer on the most appropriate transfer pricing and international tax approaches for them, based on their industry and some knowledge of their facts. However, since Tax Reform, because of the interaction between the regulations and their mutual dependencies, intuition is removed – we find that similarly situated taxpayers, with similar tax attributes, now may have very different needs and risks. It takes a detailed modelling exercise to understand all the implications for the taxpayer, and all their attributes before we are able to advise them efficiently.

How would you describe the transfer pricing controversy landscape in your region/jurisdiction?

The landscape has become more challenging – we've seen a lot more controversy, and a lot more focus on taxpayers' transfer pricing. In particular, from an inbound perspective, there is a lot of risk. The changing rules, especially in the area of intangibles, have given the tax authorities more impetus to raise audits.

Do you expect transfer pricing procedures in your region to move towards common standards or diverge in the future?

We have seen the US move away from its traditional focus on the arm's length standard; because of US Tax Reform, which has many non-arm's length promulgations (BEAT, GILTI, FDII) within it. We have had a divergence, and if the regulations stay in place, the divergence is likely to continue.

Is the global drive towards regulation going to affect TP practice? If yes, in which areas?

Between BEPS & US Tax Reform and the digital taxing initiatives, it is likely to increase the demands on taxpayers and transfer pricing professionals to navigate this landscape. It has become very difficult for taxpayers to plan their transfer pricing and their taxes as a result of these promulgations.

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