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.

As businesses navigate the post-COVID landscape, the dynamics of outsourcing and transfer pricing have taken center stage. With 77% of European countries now favoring intra-continental outsourcing, the focus has shifted toward fortifying the global value chain (GVC) and reducing dependence on traditional outsourcing hubs like China and Russia.

Eastern Europe is emerging as a key player in this evolving scenario. What opportunities lie ahead, and what challenges must businesses address when it comes to transfer pricing in this region?

Biljana Sparavalo, Head of Transfer Pricing at Kreston MDM, shared her expert insights in an exclusive interview with Kreston Global. Her analysis highlights the critical nuances of this transformation, offering valuable perspectives for businesses considering or already engaging in the Eastern European market.

Benefits of European outsourcing: A win-win for accountants and clients

From an accountant’s perspective, outsourcing to Eastern Europe presents an array of advantages. Primarily, it offers cost-effectiveness and enhanced profitability, as labour costs in these regions are notably lower than in Western countries. This enables accountants to access and onboard new team members with specialised skills and knowledge that might be scarce in-house. Flexibility and scalability also contribute to the allure of outsourcing, empowering accountants to navigate varying workloads and adapt to changing demands more efficiently.

For clients of accountants, the benefits are equally compelling. Outsourcing translates into potential cost savings, which can lead to reduced accountancy fees. Clients can still expect high service quality due to the access to skills and modern technologies offered by the outsourcing team. The direct infusion of expertise and diverse perspectives brought by outsourced teams can significantly enhance the client experience. Furthermore, outsourcing can usher in innovative practices and technologies, contributing to improved service delivery.

However, while the advantages are significant, the actual benefits of hiring a European outsourcing partner may vary based on factors such as compliance, data protection, quality control, and cultural and language diversities.

Signs of the shift: Businesses moving towards Eastern Europe

“Before businesses embark on outsourcing in Eastern Europe, they typically explore opportunities in the region”, notes Sparavalo. A noticeable increase in collaborations and partnerships between businesses and European outsourcing companies serves as a tangible sign of this shift. This can be observed through official announcements, press releases, and discussions at industry events.

An additional indicator is the active participation of business representatives in conferences, forums, and industry events hosted in Eastern Europe. This demonstrates a palpable interest in leveraging the local outsourcing options available. Expansion strategies, including the opening of offices or expanding existing ones in Eastern European countries, further underline a commitment to establishing a physical presence that facilitates outsourcing activities.

Strategically, businesses align their service offerings with the strengths and specialisations of outsourcing entities in Eastern Europe. This includes areas such as IT services, software development and customer support. Investment patterns may also shift as businesses allocate funds towards infrastructures that support remote collaboration, showcasing their readiness to work seamlessly with teams spread across regions.

Companies engaged in outsourcing exploration often conduct consultations and market research specifically focused on Eastern Europe. Proactive measures such as adapting business operations to incorporate languages commonly used in the region and an increased emphasis on social responsibility initiatives illustrate a commitment to understanding and navigating the local outsourcing landscape effectively.

Opportunities for Eastern European businesses

For businesses in Eastern Europe, this paradigm shift represents a golden opportunity to actively participate in the global outsourcing market. The region’s strengths lie in its multilingual workforce, shared time zone, cost-effectiveness, and highly educated talent pool. Eastern Europe has become renowned for its expertise in the IT and technology sectors, making it a hotspot for outsourcing contracts in software and web development, as well as IT support.

The potential for European businesses to excel in outsourcing is not just limited to cost-effectiveness but extends to their commitment to delivering high-quality services. To fully capitalise on this opportunity, businesses should strategically develop their expertise to align with changing client needs. A strong focus on marketing and branding to showcase achievements and unique selling points becomes paramount.

Continuous learning and improvement, coupled with staying abreast of industry practices and trends, can make businesses more competitive. Establishing an industry presence through networking is also crucial. Active participation in conferences and engagement with clients and partners contribute significantly to achieving this goal.

Infrastructure also requires attention as businesses must ensure they have the technological and physical resources to deliver high-quality services. Implementing processes that demonstrate a commitment to providing services, flexibility and customisation can further enhance the appeal of the business. Building trust is of utmost importance when handling outsourcing projects involving confidential information. Developing a culture centred around client satisfaction and long-term relationships becomes a strategic approach in this context.

Key transfer pricing regulations in Eastern Europe

“While the rules for transfer pricing in Eastern Europe generally follow the standards set by the OECD, it’s crucial to recognise that specific laws can vary from country to country within the region”, says Sparavalo. A comprehensive understanding of the common aspects and essential regulations is pivotal for businesses navigating the complexities of transfer pricing laws in European countries, she notes.

Documentation requirements:

• Country-by-Country Reporting (CbCR): Multinational enterprises (MNEs) might be required to submit CbCR based on OECD guidelines.
• Local file and Master file: Companies may need to prepare documentation, including a detailed record of transaction-level transfer pricing (local file) and an overview of global business operations (master file).

Arm’s length principle

Transactions between related entities should be analysed at ‘arm’s length,’ meaning that the prices should be consistent with what would be agreed upon between unrelated companies.

Pricing methods

Regulations typically allow for various methods to define the arm’s length price, such as Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method, and Transactional Net Margin Method (TNMM).

Advance Pricing Agreements (APAs)

In some countries, businesses may have the opportunity to make Advanced Pricing Agreements (APAs) with tax authorities. APAs enable taxpayers and tax authorities to agree on the methodology for determining transfer pricing, avoiding disputes in the future.

Resolving disputes

Various countries have established mechanisms for resolving transfer pricing disputes, including agreement procedures (MAP) with other nations.

Consequences of non-compliance

Not adhering to transfer pricing regulations can lead to penalties. The severity of consequences depends on the nature of non-compliance.

Documentation thresholds

Certain criteria may exist to determine which entities are obligated to adhere to documentation requirements.

It’s important to note that the development stages of transfer pricing regulations still vary in Eastern European countries, and practices differ. Therefore, conducting individual assessments in each country is advisable.

Common transfer pricing challenges faced by companies in Eastern Europe

Companies operating in Eastern Europe encounter a range of transfer pricing challenges that mirror the intricacies of the business landscape and regulatory characteristics of the region. One major hurdle is the complexity and variability of regulations. Each European country having its own tax laws means that businesses must carefully align their operations with numerous jurisdictional requirements.

In terms of documentation and compliance, companies bear the responsibility of maintaining accurate records to support their transfer pricing strategies. They must navigate through reporting requirements imposed by countries, presenting an added layer of complexity. Accessing comparable data is another significant obstacle, as relevant financial information or transactions for validation purposes can be challenging to find.

Regional economic climates introduce an additional layer of complexity, as market conditions and currency fluctuations impact border transactions and the determination of transfer prices.

To successfully manage these challenges, companies should consider leveraging the expertise of transfer pricing consultants.

Investing in solutions, continuous learning, and proactive risk management tailored to their industry and the unique transfer pricing landscapes in the Eastern European jurisdictions they operate in can also be instrumental.

Adaptation and awareness: Navigating the changing landscape

In conclusion, when dealing with transfer pricing in Eastern Europe, companies need to adopt a flexible mindset and thoroughly understand how local regulations and economic conditions can affect their finances. Keeping up with updates in transfer pricing rules and engaging with tax authorities are imperative steps.

The outsourcing landscape in Eastern Europe presents not just challenges, but substantial opportunities for businesses and accountants alike. Successfully taking part in this evolving trend requires strategic planning, a commitment to learning, and a proactive approach to region-specific transfer pricing challenges.

By embracing these principles, companies can navigate the changing landscape and leverage outsourcing to their advantage.

In a recent feature on women in accounting, Liza Robbins, Chief Executive of Kreston Global, Jelena Mihić Managing Director at Kreston MDM Serbia, and Carmen Cojocaru, ESG Technical Director and Managing Partner at Kreston Romania, share their perspectives on gender diversity and inclusion in the accounting profession in an article for The Accountant.

Professional milestones for women in accounting, shaped by local, regulatory, and legislative changes, mirror broader societal progress towards gender equality. Zoya Malik, editor-in-chief of International Accounting Bulletin, speaks to accounting leaders about their career journeys, the advocacy of trailblazers, and global initiatives aimed at overcoming exclusionary practices and creating opportunities for future generations of female accountants. Insights are shared by Sarah Ghosh, immediate past president of the Chartered Institute of Management Accountants (CIMA); Asmâa Resmouki, president of the International Federation of Accountants (IFAC); Francesca Lagerberg, CEO of Baker Tilly International; Liza Robbins, CEO of Kreston Global; and Allee Bonnard, audit and assurance partner at Deloitte UK.

Pictured left to right: Liza Robbins, Jelena Mihić and Carmen Cojocaru

Liza Robbins: Gender bias

Reflecting on her career, Liza notes, “I entered the accounting industry 16 years ago, when I was appointed CEO of Morison Global. I was the second female CEO of an international group and 16 years on, I am one of four out of nearly 50 groups.” As a long-time advocate for gender diversity, Liza highlights the barriers women still face, including the challenge of balancing family and career, limited access to leadership roles, and persistent biases. “These issues can be overcome by creating more supportive and inclusive work environments, promoting flexible working conditions, and ensuring equity in advancement opportunities,” she adds.

Jelena Mihić: Resilience, adaptability, and support systems

Liza also references the experience of Jelena Mihić, Managing Director at Kreston MDM Serbia, whose career has been shaped by her roles as a woman, entrepreneur, and mother. Jelena’s approach to managing these responsibilities exemplifies resilience and adaptability. She has worked to promote a culture of shared responsibility within her firm, advocating for flexible work schedules, parental leave, and remote work options. “Her mantra is that there are no shortcuts to success: you do things properly, take the time to build a solid base, and the results will follow,” Liza observes.

On a broader scale, Liza notes that women are increasingly outpacing men in educational achievements, and businesses must adapt to attract diverse talent. “The use of remote and flexible work options, enabled by the advances of technology, support the employment of women who often need flexible working arrangements to juggle their non-work-related responsibilities,” Liza says. She stresses the importance of evolving business models that meet the needs of older women in the workforce, including phased retirement and executive coaching.

In her view, the accounting industry must position itself as a dynamic field that embraces new technologies and values empathetic leadership. “As people skills and emotional intelligence grow more important, women’s natural ability to build strong relationships will lead to greater success.”

Carmen Cojocaru: Advocating for women at all career stages

Carmen Cojocaru, ESG Technical Director and Managing Partner at Kreston Romania, also contributes to this conversation, highlighting the need for the industry to actively support women at all career stages. Carmen’s personal journey—from employee to entrepreneur while raising a family—underscores the importance of balancing work and life. In a country like post-revolution Romania, where women often had to prove themselves in ways others did not, Liza believes fostering a culture of diversity, inclusivity, and well-being will empower women to reach their full potential.

A collective vision for the future

The stories of these women collectively highlight the evolving role of women in accounting. The industry is increasingly recognising the need for flexible work environments, mentorship, and the promotion of gender diversity at all levels. However, the journey towards true equality requires continued efforts to break down barriers, both societal and structural.

As more women take on leadership roles, they not only bring fresh perspectives but also help pave the way for future generations of women in accounting. By continuing to promote inclusive practices, ensure equitable advancement opportunities, and provide robust support systems, the accounting industry can create a more diverse, dynamic, and successful future for all professionals.

To read more about Kreston Global’s UN Sustainability Goals, including gender equality, please visit our impact plan.