Landmark transfer pricing disputes have become increasingly significant as tax authorities globally scrutinise multinational enterprises (MNEs) to ensure they comply with the arm’s length principle.

Several high-profile cases have made headlines in the past few years, shedding light on the complexities of transfer pricing regulations and enforcement. This review covers the most impactful cases, highlighting key lessons and implications for MNEs and tax authorities.

Apple vs The European Commission (2016-2020)

One of the most significant and widely publicised transfer pricing cases involved Apple and the European Commission (EC). In 2016, the EC ruled that Apple had received illegal state aid from Ireland through favourable tax rulings, allowing it to pay substantially less tax than other businesses over many years. The EC ordered Apple to repay €13 billion in back taxes. Apple and Ireland contested the ruling, and in July 2020, the General Court of the European Union annulled the EC’s decision. This case underscored the intense scrutiny on profit-shifting practices and the challenges of aligning tax policies across jurisdictions.

Australia vs Rio Tinto (2017-2022)

The dispute between Rio Tinto and the Australian Taxation Office (ATO) involved allegations of profit shifting to its marketing centre in Singapore. On July 20, 2022, Rio Tinto agreed to almost $1 billion following these allegations. This case emphasized the importance of transparency and the need for MNEs to ensure their intercompany pricing aligns with economic realities. The resolution reinforced public confidence that even the largest companies are held accountable for their tax obligations.

Amazon vs IRS (2017-2021)

Amazon’s dispute with the U.S. Internal Revenue Service (IRS) revolved around the undervaluation of intangible assets transferred to its Luxembourg subsidiary in 2005 and 2006, resulting in a significant underpayment of U.S. taxes. In 2017, the U.S. Tax Court ruled in favour of Amazon, stating that the IRS’s valuation was flawed, and that Amazon’s transfer pricing methodology was appropriate. This decision was significant for the tech industry, illustrating the complexities of valuing intangibles and the importance of thorough documentation and compliance with transfer pricing rules.

Fiat Chrysler Finance Europe vs European Commission (2015-2022)

Fiat Chrysler Finance Europe faced scrutiny from the European Commission over a transfer pricing agreement approved by Luxembourg. The Commission concluded in 2015 that Luxembourg had provided illegal state aid by incorrectly applying arm’s length principle. After multiple appeals, the Court of Justice of the European Union (CJEU) annulled the Commission’s judgment in November 2022. The CJEU’s ruling emphasized the importance of adhering to local regulations in transfer pricing matters.

France vs McDonald’s France (2015-2022)

In June 2022, McDonald’s agreed to pay €1.25 billion ($1.31 billion) to the French tax authority to settle a dispute over its transfer pricing practices. The company was accused of shifting profits to Luxembourg, Switzerland, and Delaware, avoiding significant tax liabilities in France. This settlement highlighted the risks MNEs face with aggressive profit-shifting strategies and the importance of ensuring transfer pricing arrangements reflect economic substance.

HM Revenue and Customs vs BlackRock (2012-2022)

The dispute between HM Revenue and Customs (HMRC) and BlackRock centered on intercompany loans related to BlackRock’s acquisition of Barclays Global Investors. HMRC questioned the arm’s length nature of the loan interest rates and denied shareholder loan interest deductions. In July 2022, the Upper Tribunal ruled in favour of HMRC, emphasizing the need for MNEs to ensure that intercompany financing arrangements comply with the arm’s length principle. Blackrock is appealing the decision of the Upper Tribunal and to re-make the decision of the First-tier Tribunal. This case illustrated the challenges of defending transfer pricing practices in high-stakes acquisitions.

India vs Kellogg India (2021-2022)

Kellogg India successfully defended its transfer pricing practices related to the distribution of Pringles products. The Indian tax authority had challenged the company’s selection of the tested party and the transactional net margin method (TNMM) used for benchmarking. In February 2022, the Income Tax Appellate Tribunal ruled in favour of Kellogg India, validating the company’s approach and highlighting the importance of selecting appropriate tested parties and methods in transfer pricing documentation.

Norway vs ConocoPhillips Skandinavia (2019-2023)

ConocoPhillips Skandinavia contested a tax adjustment by the Norwegian Petroleum Tax Office regarding the interest rate on a loan agreement. The court ruled in favour of the tax office, underscoring the importance of aligning intercompany financial arrangements with the arm’s length principle.
Lessons from Landmark Transfer Pricing Cases and Recent Developments in EU Legislation
These cases offer several key lessons for MNEs, reflecting an evolving landscape where tax authorities are increasingly vigilant. Courts emphasize the importance of economic substance over formal contractual arrangements, requiring MNEs to ensure their transfer pricing reflects actual business operations.
Tax authorities are intensifying their examination of transfer pricing practices, especially those involving intangible assets and high-margin industries. This increased vigilance now also targets mid-sized multinational enterprises, as tax authorities worldwide recognize the potential for significant tax revenue from these entities.

In particular, the recently proposed EU Directive on transfer pricing specifically addresses SMEs and their tax challenges, which indicates that SMEs will also be under increased scrutiny in the future to ensure compliance with fair tax practices.

The European Commission’s proposal for harmonised transfer pricing rules within the EU emphasizes a common approach to transfer pricing issues, ensuring consistency and reducing compliance costs for businesses of all sizes, including SMEs. This approach helps in maintaining a fair tax base and avoiding profit shifting and base erosion, which are critical concerns for tax authorities across the EU.

Robust documentation is crucial for defending transfer pricing arrangements, as inadequate documentation is a common issue leading to disputes. MNEs must maintain detailed records of their methodologies and justifications, as tax authorities become more rigorous. Additionally, MNEs should be prepared for the possibility of lengthy and costly disputes with tax authorities, necessitating thorough preparation, including expert legal and financial support.

Multinational enterprises, regardless of size, must remain vigilant, ensuring their transfer pricing practices are defensible, well-documented, and aligned with economic realities. By recognizing these trends and preparing accordingly, both large and mid-sized MNEs can better manage their transfer pricing risks and ensure they meet their tax obligations effectively.