Blog

The EdgarStat Blog explores issues in transfer pricing and application of the transactional net margin method (TNMM or CPM in the US) and other enterprise profit-based methods.

Dutch Tax Authority Wins Challenge of British American Tobacco's Intercompany Financing
November 10, 2022 by Harold McClure

The Dutch tax authority prevailed in its challenge of several British American Tobacco intercompany financing transactions.

Topics: Intercompany Factoring Intercompany Financing Intercompany Guarantee Fees Arm's Length Interest Rates Intercompany Loans

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Intercompany Management Fees: CUP v. CPM (TNMM)
October 19, 2022 by Harold McClure

Transfer pricing practitioners in the US as well as in other nations often face the dilemma that clients wish to establish intercompany management fees as a percentage of revenues while tax authorities may test the implied cost plus from any intercompany management policy.

Topics: TNMM/CPM Intercompany Services Management Fees CUP State Transfer Pricing

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Intercompany Royalties: Does the Realistic Alternatives Principle Endorse CPM?
September 27, 2022 by Harold McClure

Licensees bear significant commercial risk when they use valuable intangible assets owned by another entity. As such, any method that affords them with an expected return to its tangible assets that is only as high as the overall enterprise’s cost of capital is inconsistent with sound economics.

Topics: tax controversy US Transfer Pricing TNMM/CPM Royalty Rates Medtronic Section 482 Intangibles

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Fixed-Rate Intercompany Loans and Currency Denomination
September 12, 2022 by Harold McClure

Harold McClure expounds on the issue of currency denomination in intercompany financing, addressing currency adjustments in longer-term fixed interest rates, past controversies, and regulatory guidance.

Topics: Financial Transactions OECD United Nations Adjustments Intercompany Financing Arm's Length Interest Rates

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Medtronic Litigation: Unspecified Methods vs. Traditional Methods
September 02, 2022 by Harold McClure

This discussion presents a simplified illustration of the issues with respect to the unspecified method applied in Medtronic III in contrast to the IRS' extreme CPM approach and a traditional RPSM approach based on sound financial economics.

Topics: tax controversy US Transfer Pricing Residual Profit Split Method TNMM/CPM Unspecified Method US Internal Revenue Service Tax Policy Medtronic Section 482 Intangibles

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Transfer Pricing Issues in Italian Imports of Russian Natural Gas
August 16, 2022 by Harold McClure

Italy’s Supreme Court remanded May 17, 2022 a case in which Regional Tax Commission of Lombardy challenged the transfer pricing between Promgas Spa and Gazprom Export, finding alleged deficiency in the tax authority’s application of the Transactional Net Margin Method (TNMM).

Topics: TNMM/CPM Resale Price Method Oil and Gas Transfer Pricing CUP

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Tutorial: Currency Adjustments in Intercompany Financing
August 03, 2022 by John Hollas

In this tutorial, we address comparability adjustments for differences in the currency of the tested loan to that of the comparable transactions.

Topics: Interest Rates Tutorial CUFT Financial Transactions Intercompany Financing

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Speculation as to the Transfer Pricing Battle Between Western Digital and the IRS
July 11, 2022 by Harold McClure

A discussion of the possible issues in the recently settled transfer pricing dispute between Western Digital Corp. and the United States IRS.

Topics: United States Transfer Pricing Asia-Pacific Intangibles

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Tutorial: Country Risk Adjustment in Intercompany Financing
May 26, 2022 by John Hollas

One of the most challenging transfer pricing issues regarding financial transactions is making a comparability adjustment for differences in country risk between the tested non-US borrower’s country and the comparable US borrower's country in pricing the intercompany loan interest rate.

Topics: CUFT State Transfer Pricing Adjustments Intercompany Financing Arm's Length Interest Rates

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Super Royalties in Transfer Pricing: Going Beyond "Economics 101"
May 24, 2022 by Harold McClure

Use of the CPM/TNMM to determine royalty rates for valuable intangibles in transfer pricing is incompatible with basic financial economics.

Topics: DEMPE OECD Guidelines TNMM/CPM US Internal Revenue Service Tax Policy Royalty Rates Intangibles

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Tutorial: Power Functions in Transfer Pricing
February 18, 2022 by Ednaldo Silva

Regression analysis yields more reliable profit indicators than the linear equation without intercept specified in US and OECD transfer pricing guidelines.

Topics: tax controversy Profit Indicators Transfer Pricing

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Danish Tax Authority Rejects Application of Return on Assets
January 13, 2022 by Harold McClure

There are often legitimate concerns with using book value versus market value of assets in applying a Return on Assets approach in transfer pricing. While employing a Return on Costs approach may be a reliable alternative, it must also account for comparability differences in asset intensity.

Topics: Return on Assets Contract Manufacturer CAPM Financial Economics Benchmarking Asset Intensity Adjustment

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Tutorial: Estimating Implied Credit Rating Using Altman Z"-Score Tool
November 05, 2021 by John Hollas

In this tutorial we introduce you to a tool in the EdgarStat CUFT Loan Agreements Database for estimating the implied credit rating of your tested borrower using the Altman Z”-Score Model.

Topics: Credit Rating CUFT Intercompany Financing

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RPM vs. TNMM: Benchmarking a LATAM Pharmaceutical Distributor
October 20, 2021 by Harold McClure

To determine whether the usual financial ratios provide insights into what would represent an arm's length range, any analysis of controlled healthcare distributors must account for the underlying facts surrounding the functions and expenses occurred by the distribution affiliate.

Topics: tax controversy Pharmaceutical Industry Benchmarking TNMM/CPM Resale Price Method

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Tutorial: Benchmarking with the CUFT Loan Agreements Database in EdgarStat
September 28, 2021 by John Hollas

Intercompany financing is a growing area of focus in transfer pricing. CUFT Analytics co-founder and managing director John Hollas provides guidance on using the EdgarStat CUFT Loan Agreements Database to benchmark an arm's length range of interest rates.

Topics: CUFT Credit Risk Intercompany Financing Arm's Length Interest Rates

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Benchmarking Intercompany Loans: Market Conditions Matter
September 08, 2021 by Harold McClure

Interests fluctuate based on market conditions, and analysts must consider whether the market conditions surrounding their data are comparable to those of the tested intercompany transaction when benchmarking an arm's length interest rate in transfer pricing.

Topics: Interest Rates CUFT Intercompany Financing

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Tutorial: Asset Adjustment to ROA is Unviable
August 17, 2021 by Ednaldo Silva

Dr. Ednaldo Silva illustrates why asset intensity adjustments to the Return on Assets profit indicator are redundant and unviable.

Topics: Return on Assets Asset Intensity Adjustment Profit Indicators

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Mechanical Applications of the Comparable Profits Method are Unreliable
July 15, 2021 by Harold McClure

Applied properly, the Comparable Profits Method (CPM) can be a useful approach for well-defined transfer pricing issues, such as the appropriate profitability of a sales affiliate. Unfortunately, CPM is often applied mechanically without regard for economic principles and functional comparability.

Topics: Benchmarking Profit Indicators TNMM/CPM Tax Policy State Transfer Pricing

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Brazil's Alignment with OECD Transfer Pricing Guidelines: The Marcopolo Case
June 23, 2021 by Harold McClure

Brazil’s unique transfer pricing rules have allowed multinationals to shift income to tax havens in certain situations. We explore through the lens of the Macopolo case how Brazil could benefit from adoption of the arm's length standard.

Topics: tax controversy Base Erosion and Profit Shifting (BEPS) Brazil OECD Guidelines TNMM/CPM Tax Policy

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Intercompany Financing: Engie State Aid Case and Perrigo’s Battle with the IRS
May 31, 2021 by Harold McClure

Harold McClure explores intercompany financing issues through the lens of a recent case before the EU General Court and an upcoming battle between Perrigo and the IRS.

Topics: Interest Rates Europe United States Intercompany Financing

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Challenges to Intercompany Loan Rates by French Tax Authority and IRS
May 07, 2021 by Harold McClure

International tax law firms are rightfully warning clients of audit risks with respect to intercompany financing in France. Taxpayers can mitigate risk by following new OECD guidance, providing sound economic analysis and avoiding overly aggressive positions on group vs. standalone credit ratings.

Topics: Interest Rates United States France Intercompany Financing

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Cameco v. The Queen: Prologue and Round II Preview
May 03, 2021 by Harold McClure

In February 2021, the Supreme Court of Canada declined to hear the Canadian Revenue Agency's (CRA) appeal in its case against uranium multinational Cameco Corporation. However, this only marked the end of Round 1, as the courts only ruled on 8 of 14 years under review.

Topics: tax controversy Mining and Extractives Canadian Revenue Agency Profit Indicators TNMM/CPM

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Transfer Pricing Issues for Israeli R&D Centers
March 24, 2021 by Harold McClure

The Israel Tax Authority is questioning whether costs plus markup models Israeli R&D affiliates are at arm's length. This could present issues for multinationals that have not been giving proper consideration to cost base, asset intensity and ownership of valuable intangibles in their benchmarking.

Topics: DEMPE Base Erosion and Profit Shifting (BEPS) Benchmarking Tax Policy Intangibles

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Tutorial: Reliability of Return on Assets as a Profit Indicator
March 09, 2021 by Ednaldo Silva

Notwithstanding its acceptance in Coca Cola Co. v. Commissioner of the IRS, Return on Assets is a controversial profit indicator to use in transfer pricing. At the very least it must be subject to economic analysis to corroborate a relationship between operating profit and operating assets.

Topics: tax controversy Tutorial Return on Assets Profit Indicators

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States Should Learn from Transfer Pricing History, but Focus on The Right Lessons
March 04, 2021 by Harold McClure

A recent article asserted that state tax authorities should use the Comparable Profits Method (CPM) with care in the evaluation of transfer pricing for tangible goods. However, some of the examples cited, including the recent Coca Cola case, in their piece are misplaced for reasons we will address.

Topics: tax controversy TNMM/CPM Tax Policy State Transfer Pricing

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Misapplication of the Resale Price Method: LATAM Petroleum Distributor
February 24, 2021 by Harold McClure

Selecting alleged comparable companies with different functions than the tested party is known to open Pandora's Box in transfer pricing controversy, and is often exacerbated by a failure to adjust for material differences between the tested party and the selected comparables.

Topics: tax controversy Comparability Limited Risk Distributor Profit Indicators

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Tutorial: Using Regression Analysis to Adjust Profit Indicators
February 19, 2021 by Ednaldo Silva

Ad hoc adjustments are a risky endeavor in transfer pricing. Using regression analysis, we can test if asset intensity is relevant to explain the behavior of the operating profit markup or profit margin and calculate a reliable adjustment to the profit indicator.

Topics: Tutorial Asset Intensity Adjustment Profit Indicators TNMM/CPM

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Tutorial: Using Regression Analysis in TNMM Transfer Pricing
February 16, 2021 by Ednaldo Silva

The prevalent use of quartiles to determine profit indicators often results in a wide (unreliable range) and ad hoc assets adjustments. These problems can be solved by using regression analysis, which produces more defensible statistical ranges of the profit indicator resistant to audit scrutiny.

Topics: Tutorial Profit Indicators TNMM/CPM

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Transfer Pricing Aspects of Taxing the Pharmaceutical Sector
January 26, 2021 by Harold McClure

Changes to tax laws are often seen as the primary solution to curb profit shifting. However, proper application of the arm's length principle alongside BEPS CbCR disclosures already offer powerful tools in this endeavor.

Topics: Pharmaceutical Industry Base Erosion and Profit Shifting (BEPS) TNMM/CPM Tax Policy

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Comparability Issues Are a Slippery Slope in Transfer Pricing
December 15, 2020 by Harold McClure

Comparability is a key issue in transfer pricing that is often not fully appreciated. However, comparability issues are hardly uncommon in transfer pricing controversies and can create a trickle-down effect that leads to major taxation issues.

Topics: Comparability Limited Risk Distributor Profit Indicators TNMM/CPM

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