Major Firms Seek to Shift Transfer Pricing Law Landscape in 2024

Global tax authorities and multinationals in the US, Australia, and Canada are facing off in legal challenges next year over their pricing methods with millions at stake for both sides, and the potential to alter the landscape for laws governing methods for valuing transactions.

The outcome of the cases could hand companies new tools to lower their tax bills or empower tax authorities with new approaches to raise taxes owed on transfer pricing transactions, including in a closely-watched case in Australia involving PepsiCo Inc.

Multinationals will also be testing out new ways to fight transfer pricing adjustments in 2024 by taking disputes to forums where transfer pricing hasn’t traditionally been litigated like state courts, Anna Soubbotina, principal at Charles River Associates in New York, said.

“What we’re seeing more of is more and diverse applications of transfer pricing and those tend to be less in the public eye,” Soubbotina said.

Transfer pricing refers to prices in transactions between two companies in the same corporate group. Tax authorities require those prices to be similar to those found in a transaction between arm’s length firms to keep companies from artificially lowering their tax bills.

Here’s what tax professional are watching next year.

PepsiCo

In Australia, tax lawyers will be closely watching whether PepsiCo Inc. appeals the Australia Tax Office’s victory in the new year despite the fact the case isn’t, strictly speaking, a transfer pricing case, Anthony Sloan, a tax partner at BDO in Sydney, said.

Australia’s Federal Court ruled Nov. 30 in PepsiCo Inc. v. Commissioner of Taxation, that the beverage giant was wrong to call trademarks it provided to third-party bottler Schweppes Australia “royalty free.” The ruling makes PepsiCo liable for royalty withholding tax, according to the ATO.

If the judgment stands, it will give the office a powerful new way to raise company’s tax bills on intra-company transactions without necessarily using transfer pricing provisions, Sloan said.

“If you think of transfer pricing in terms of recharacterizing transactions between related parties so that they reflect an arm’s length principle, this case lets the ATO do that and do it without direct reference to transfer pricing rules,” Sloan said. “There’s no need to rely on the transfer pricing provisions. It’s huge.”

The case also holds major consequences for any line of business involving a valuable brand, Sloan said.

The federal court ruling includes an analysis that splits the value of the brand from the physical value of the product. Taken to its logical extreme, this could mean greater transparency over how much the price of a product stems from the brand alone, a trend that could deeply complicate business practices, Sloan said.

“No one wants this,” he said.

A likely outcome to avoid disruption for companies could be for the ATO to clarify the application of the decision, Sloan said.

The ATO could say the analysis only applies in cases where an Australian company puts a multinational’s trademark on a product manufactured in Australia, but not when a company imports a fully formed product, he said.

Medtronic

In Medtronic Inc. v. Commissioner, the IRS is appealing a US Tax Court’s decision in its dispute with the medical device manufacturer, which favored the company’s use of so-called “unspecific method” for calculating intra-company prices, Steve Dixon, partner at Steptoe LLP, said.

Medtronic and the IRS are at odds over what method to use to price transactions between the firm and an affiliated manufacturer in Puerto Rico for tax years 2005 and 2006. The IRS filed its brief to the 8th Circuit Dec. 18, but an oral hearing hasn’t been scheduled.

An unspoken hierarchy exists in transfer pricing law among different pricing methods that puts unspecific methods at the bottom, Dixon said. An 8th Circuit ruling backing the tax court would make unspecified methods more attractive, he said.

“If the 8th Circuit were to bless an unspecified method, you would find taxpayers likelier to embrace them,” Dixon said. “You would also find the IRS trying to find creative ways to use unspecified methods to get the results that they think are the right arm’s length price.”

Alternatively, the IRS sees its interpretation of the comparable pricing method—which would be less rigorous than the unspecified method the Tax Court ordered—as providing it with more leverage in tax disputes, Dixon said. A decision in its favor would lead to changes in its approach in other transfer pricing cases, he said.

The comparable profits method looks at the profitability of a transaction by comparing it with to a similar exchange between arm’s length entities. A less rigorous application of the method, as the IRS wants, would allow the agency to apply the method more often in cases involving intangibles that are hard to value, Dixon said.

“The IRS would like to use the CPM in more of those cases and has thus far been largely unable to do that,” he said.

ConocoPhillips

The Louisiana Department of Revenue’s $700 million suit against ConocoPhillips Co.’s alleges a pattern of transactions that sought to shift profits out of the state.

Richard v. ConocoPhillips Co. is noteworthy because it’s part of a trend of transfer pricing cases moving away from federal courts and towards other forums, like state courts and international arbitration, Soubbotina said.

ConocoPhillips filed its brief in the suit in the state’s 19th Judicial District Court in late November. A hearing is scheduled Feb. 26 to examine exemptions to the state’s petition, according to court administration.

The oil company is challenging Louisiana’s preferred pricing method, the comparable pricing method, as part of its suit, which could impact cases outside the case, Soubbotina said.

“To the extent that this case involves discussions of the best or most applicable method in transfer pricing, that’s going to have broad implications,” she said.

Dow Chemical, Bank of Nova Scotia

Canada’s Supreme Court will likely release a decision in 2024 in a dispute between that country’s tax authority and Dow Chemical Canada ULC after holding an oral hearing on the matter in November.

The judges will decide which lower court should hear Dow’s lawsuit over a C$3.36 million ($2.54 million) downward adjustment the Canada Revenue Agency made during a transfer pricing audit.

In another case—The Bank of Nova Scotia v. Her Majesty the Queen —Canada’s Federal Court of Appeal is scheduled to hear a dispute between the agency and the Bank of Nova Scotia, one of the country’s largest banks, on Oct. 30.

The Toronto-based bank is appealing an October 2021 decision by Canada’s Tax Court that denied the company’s preferred method for calculating interest as part of a transfer pricing settlement.