Revenue authorities clash over unpaid tax from transfer pricing

Tax disputes over multinationals’ transfer pricing schemes are usually
tortuously complicated and protracted.

Now bickering among tax authorities worldwide is further delaying the
settlement of cases worth billions of pounds.

In an increasingly litigious business environment, billion-pound disputes
over alleged unpaid taxes are becoming more common. Clashes between companies
and revenue authorities are now regularly battled out in the courts with the
loser often automatically going to appeal. Disputes take years to settle,
sometimes even decades.

One of the biggest current disputes over transfer pricing ­ which refers to
the price that units of the same company charge each other for goods and
services ­ is between AstraZeneca and HM Revenue and Customs. An AstraZeneca
source said he hoped to settle its dispute with HMRC out of court before 2010.

The global pharmaceuticals company has set aside $1.3bn (£890m) for claims
over transfer pricing owed worldwide, but it is unclear how much HMRC calims the
company owes.

Companies are supposed to charge market rates for the internal transactions,
setting prices at ‘arms length’. But tax authorities believe large companies use
transfer pricing to charge artificial prices for internal transfers and move
their profits to low-tax countries to avoid paying corporation tax.

Companies, and their tax advisers, argue that agreeing a fair value for goods
and services can be
tricky, particularly for intellectual property. Rulings on transfer pricing
cases often hinge on technical details.

HMRC has turned up the heat on companies it says are dodging tax. It is
investing significant resources in senior transfer pricing specialists. Other
tax authorities ­ including India, the US, Canada, Australia, Germany and Japan
­ are also taking a harder line, prosecuting businesses they believe they can
recover substantial back taxes, interest and penalties from.

But as transfer pricing disputes cross national boundaries, tax authorities
are clashing over who should have priority in a settlement of a case and thereby
receive the bulk of the tax payment recovered.

One recent example of this turf war involved GlaxoSmithKline, the world’s
second biggest drugs manufacturer, which was fined $3.4bn (£2.3bn) by the US
Internal Revenue Service (IRS) in 2006.

The IRS and HMRC clashed during the case over who was the ‘competent
authority’ ­ the lead tax authority in a final settlement.

In Europe, the Arbitration Convention ­ established in 1990 ­ mediates
disputes between national tax authorities in the EU.

Revenue departments which agree to the process must accept the AC’s ruling
and settle the case in less than three years.

But the AC has a growing backlog of cases. By mid-2008 there were 350 tax
cases awaiting a ruling, up from 285 cases a year earlier, according to the EU
joint transfer pricing forum, a body of transfer pricing specialists in
companies, advisers and national governments.

The greatest number of transfer pricing disputes involved France (84 cases),
followed by Germany (74) and the UK (57).