Transfer pricing: are we in a global tax war? Expect controversy to heat up in light of BEPS.

• Position: Base erosion and profit shifting

Transfer pricing. This is one of the most complex and controversial areas of corporate tax, occupying considerable time and energy on the part of many of TEI's members, especially in the last twelve months.

What exactly is transfer pricing? According to Mike Patton and Eric Ryan, partners at the law firm of DLA Piper, transfer pricing refers to what related companies charge each other for goods, services, financing, or use of intellectual property (IP). "Transfer pricing has traditionally been a well-established source of tax planning opportunity for multinational enterprises (MNEs), both large and small, Patton and Ryan note. "However," they explain, "over the last year, transfer pricing has increasingly been at the center of what looks to become a global tax war."

Really? A global tax war? Aggressive enforcement of transfer pricing requirements by tax authorities has become the norm in the fast-growing economies of the BRIC countries (Brazil, Russia, India, and China), as well in the developed economies of Europe, Japan, and the United States, according to the DLA Piper attorneys. In the United States, for example, the Internal Revenue Service is emphasizing transfer pricing issues by significantly increasing the number of international examination agents and economists who focus on transfer pricing issues, by establishing administrative groups within IRS dedicated solely to transfer pricing issues, and by adopting a risk-adjusted approach to examinations--with transfers of intangibles and cost-sharing arrangements at the highest risk level, Patton and Ryan explain.

In addition, they assert, President Obamas 2015 revenue plan includes proposed legislation that would broaden the definition of intangibles to include items traditionally treated as goods.

The revenue plan also contains proposals to tax as current U.S. income "excess" profits of foreign subsidiaries attributable to intangibles transferred from the United States to a low-taxed foreign affiliate.

Focused transfer pricing examination approaches are also being taken in other countries, including China, where the tax authorities have targeted key Chinese taxpayers for transfer pricing examinations, the attorneys note.

Prep for Exams

Transfer pricing issues are extremely fact- and document-intensive, and, thus, it becomes critical to have your company's controversy strategy fully developed during an exam, experts agree. Here's how the DLA Piper attorneys explain it: "Transfer...