12 minute read 30 Sep 2019
A group of butterflies

How to prepare for a rise in tax controversy related to transfer pricing

By Peter Griffin

Principal, Transfer Pricing, Ernst & Young LLP

Transfer Pricing Principal. PhD economist by training. Loves all sports. Father of two.

12 minute read 30 Sep 2019

As businesses are required to increase reporting on their internal activities, controversy, already on the rise, is expected to accelerate.

This article is part of  our Transfer Pricing and International Tax Survey 2019. Since 1995, we have taken the pulse of global transfer pricing every two to three years by collecting and analyzing details on attitudes and experiences across a wide spectrum of taxpayers.

Storm clouds have been gathering for tax and transparency controversy for several years. Our 2019 Transfer Pricing and International Tax survey indicates executives are bracing for a monsoon.

Right now, for some it may be possible to get by with just an umbrella, but for the storm that is coming, businesses need to begin taking significantly more solid actions.
Marlies de Ruiter
EY Global International Tax and Transaction Services Policy Leader

“The sense we’re getting from everywhere we look is that tax directors increasingly are already struggling with controversy,” says de Ruiter. But the expected levels of controversy, says de Ruiter, are intensifying. “As today, just about everywhere, we see conditions and circumstances that are likely to drive remarkable numbers of reviews, challenges, audits and double taxation."

Challenges to transfer pricing


of respondents have experienced challenges to their transfer pricing over the past three years.

Challenges to transfer pricing


of respondents say that challenges to transfer pricing have led to double taxation.

But according to Tracee Fultz, EY Americas Transfer Pricing Leader, a host of key trends and related developments are pointing to a period in which double taxation and controversy will be central to the day-to-day operations of a tax department. “Fiscal pressures are increasing with jurisdictions all over the world now in competition with one another for revenue,” she explains.

The amount of information now in the hands of tax authorities and the degrees to which they are sharing this with one another are growing, giving authorities greater capabilities for collecting additional tax dollars.” Overall, this is a climate, says Fultz, “where companies can expect growth in the number and scale of audits as well as instances of double taxation to rise, exponentially.”

Double taxation

As mentioned, 40% of respondents indicate their companies were experiencing significant levels of double taxation. As for estimates of the associated costs, the most frequently-cited figure is from $1-9 million (16%) although 14% cite from $10 million and higher.

Double taxation info graphic

Two key pressure points: Intellectual property and permanent establishment

The survey provides significant insights into not only the drivers of past transfer pricing challenges, but also into areas where companies say they anticipate encountering more controversy going forward.

By far, the areas previously deemed most critical in terms of tax controversy include the transfer pricing of goods (64%), intragroup financial services (41%) and value-added tax (VAT) or good and services tax (GST) (34%). Other less-frequently cited, but still important, areas include transfer pricing for intellectual property (IP) (33%), issues relating to permanent establishment (PE) (20%), customs duty and indirect taxation (16%), transactional taxes (14%), and issues relating to fiscal residence (5%).

Going forward, survey respondents expect little to no change across most focuses with two highly notable exceptions: IP and PE. Expectations for challenges to IP rise to 49% (up from 33%), to become the second most important issue within tax controversy (up from fourth). Meanwhile, the frequency of mention for expected PE controversy nearly doubles from 20% to 39%. 

All of this is to be expected, says de Ruiter, “because both the initial BEPS project and the new OECD project now will introduce changes to how tax authorities are able to re-evaluate IP charges and the establishment of PE.” Even so, de Ruiter believes the frequency and scope of controversy in these areas will be even greater. “A great many of the changes we are seeing in the various tax reforms are more closely targeting IP in particular.” In general, says de Ruiter, “as the BEPS measures become more widely implemented and other tax reforms come online, tax controversy will rise dramatically.” 

Zeroing in

The reasons tax authorities are zeroing in on IP and PE are well understood. A growing share of the worldwide profits of companies are generated by IP, and digital businesses are, in particular, IP-reliant. Global business models have been trending toward virtual or digital for several decades. As they do, more and more businesses are able to sell their goods and services in more places albeit with far less of a physical footprint. In other words, ever-higher percentages of global cross-border cash flows are digital in nature, requiring less physical presence. Location matters in both IP and PE, hence the increased interest by tax authorities. 

A look at intellectual property

Consequently, says EY Global International and Transaction Tax Services Leader Jeff Michalak, “jurisdictions are seeing businesses generate massive cash flows, but leaving behind a diminishing share of profit in the various countries of operation. Initiatives such as BEPS and the various steps toward tax reform are all aimed at redefining how profits will be distributed in the digital, IP-driven age.” In short, says Michalak, “jurisdictions are trying to increase or protect their shares.” 

Some 84% of respondents say that their tax departments are becoming proactively involved in responding to evolving tax rules surrounding IP. At the same time, however, only 29% of executives say their businesses are working to identify or develop value-creating IP. Regarding the latter, says Michalak, “with its value on the rise, more companies and more tax directors should be getting involved, helping their companies do more in terms of developing and managing the location and value of their IP.”

A look at permanent establishment

The more digital the business model, the more efforts are needed by tax jurisdictions before they can claim income — which helps explain efforts to more broadly and rigorously define PE.

One in five executives say that within the past three years, their companies have experienced disputes surrounding PE. This breaks down as 11% saying the dispute focused on allocation of profits to their PE, while 9% say the issue was the assertion of the PE itself.

In 41% of such disputes, the national tax authority made an adjustment, although the figure may be significantly higher as 26% indicate they are unsure about the outcome. Similarly, 18% say the authority in question applied a penalty in the case of this assertion, though again the figure may be higher as 33% are unsure about the outcome.

In terms of establishing a PE, the two most frequently-cited bases are sales through agents or commissionaires (51%) and the provision of services (47%). Other rationales include business travelers or seconded employees (18%), construction or assembly of installation projects (9%), arrangements involving subcontractors (7%), toll or contract manufacturing (4%) and “other” (13%). 

Responding to controversy

Companies have options. “Their best option amid rising controversy,” says Fultz “is to be proactive with transfer pricing, to make certain they have a clear understanding of where and how value is created in their companies. To take a strategic approach, using the process to not only document how transfer pricing is done, but also to re-evaluate how their internal processes can help monitor and govern the sustainability of their operating model , helping to optimize operations and to secure the transfer pricing policy ”

In this way, says Fultz, companies can proactively reduce audit and controversy risk. But in addition to fundamentally stronger preparedness, companies also need to consider not only proactive opportunities (such as an Advance Pricing Agreement (APA) ), but also reactive tools (such as mutual agreement procedure (MAP), competent authority and even litigation).

The rise of the Advance Pricing Agreement

The survey shows that only 37% of companies are currently using any form of APA. But owing to a wide range of global tax and transfer pricing trends, “the factors feeding any decision tree are shifting in favor of ‘yes, we need certainty, and can we achieve that certainty through an APA?’ ” says Fultz. Indeed, the survey agrees with this sentiment, as going forward, 43% say they are either much more likely (4%), more likely (15%) or somewhat more likely (24%) to pursue some form of APA than they were previously (three years ago).

More than one-third of respondents use APAs used for controversy management
The numbers likely to pursue APAs are growing chart

Expanded reliance on APAs as a means of reducing tax uncertainty and risk is not only evident in the survey, but also in reports published by the US Internal Revenue Service (IRS)1 According to an IRS report, taxpayers filed 203 APA requests in 2018, doubling from only 101 in 2017. By year-end 2018, 458 APA requests were pending, up from 386 and 398 pending requests at the end of 2017 and 2016, respectively. Demand is noticeably strong in terms of bilateral APA filings between the US and India, reflecting what appears to be significant improvement in cooperation between the two nations’ taxing authorities.

All of this makes complete sense to de Ruiter. “I believe what we are seeing is the recognition that given so many evolving, differing interpretations, and legislation and risk, it makes sense to use APAs to gain greater certainty.” Bear also in mind, says de Ruiter, “that with the levels of disclosure being mandated as BEPS gets implemented, companies really aren’t sharing all that much more information than they would have been required to in the first place.” So, in the end, “for a growing number of cases, the added certainty is well worth any added marginal efforts needed to secure an APA.”

Adds Fultz, “the equation swings even more in favor of the APA when you begin to think about some of the added advantages of an APA.” She adds that one benefit to consider “is that when you’re working on an APA, you elevate the discussion, because you’ll be working with resources from the taxing authorities who have more cross-border experience as opposed to merely domestic experience. You’ll be working with people who have a stronger appreciation for the issues and in some cases, not all, lack of understanding is the key hurdle to resolution.”

In addition, continues Fultz, “once you’ve completed an APA, there’s a halo effect that attaches to your operations around the world.” As Fultz explains, “when tax authorities realize you were able to successfully conclude an APA, it sends the message that you are a cooperative taxpayer and that you’re willing to explain your transfer pricing policy and follow through to demonstrate the fairness and validity of your thinking.”

Finally, adds de Ruiter, “there’s also the benefit of being able to reduce provisions for tax contingencies.”

In one instance, we heard from one multi-national enterprise that their use of APAs was enabling them to reduce provisions by significant amounts.
Marlies de Ruiter
EY Global International Tax and Transaction Services Policy Leader

Objections to the Advance Pricing Agreement process

With only limited variation by geography, the survey shows that companies that have completed at least one APA are reasonably satisfied with their results. Specifically, 57% say they are either very satisfied (18%) or satisfied (39%), with about a quarter (24%) feeling neutral on the issue and only 13% feeling dissatisfied. The degree of satisfaction hovers at around comparable levels in terms of the required levels of disclosure.

Where businesses seem to be the least satisfied with the process is with the time required to complete an APA. Here only a third express satisfaction — 8% very satisfied and 25% satisfied. “Indeed,” says de Ruiter, “the elapsed interval for completion can be significant.” In fact, the earlier cited IRS report points out that median time to completion has increased from 33.8 months in 2017 to 40.2 months in 2018.

“But what executives need to think about is what they’re getting for these efforts overall,” says de Ruiter. An average transfer pricing controversy case can take several years to resolve, while an APA on average takes three years. From there, a typical APA achieves five years of certainty looking ahead as well as two or three years back validation. In light of rising tax risk plus all of the additional benefits cited, it is no surprise, says de Ruiter, “that we’re seeing significantly increased interest in APAs — multilateral in particular.”

Companies are reasonably satisfied with their outcome

Mutual agreement procedure and litigation

Businesses also need to consider other methods for dispute resolution. Key avenues examined by the survey include the MAP and litigation.

Only one in five companies have requested competent authority assistance, with the remaining 80% indicating “no” (62%) or not applicable (18%). This is just over half the number of companies that have had experience with the APA process, and figures vary little by respondent geography or industry. 

Relative to the APA process, executives are significantly less satisfied with the MAP process, in which tax authorities themselves seek to resolve disputes on behalf of taxpayers where multiple governments seek to tax the same transaction or business activity. In fact, only 15% rate their confidence in the effectiveness of the process as either high (14%) or very high (1%) — with even lower scores for efficiency (including required resources and time to completion). Note that this is in spite of clauses under BEPS Action 14 introducing minimum standards to which host nations are expected to adhere. Highlighted in the 2016 report, these contain issues, such as time to resolution and quality of interaction, with everything subject to periodic peer review.

Relative to APAs, executives are significantly less satisfied with the MAP process

Low confidence in MAP processes often leads companies to forego their right to pursue relief. In fact, 20% of respondents say they are experiencing double taxation, which is expressly addressed by applicable tax treaties, but have decided not to pursue a MAP action. As for why not, 47% said they expected the process to be too lengthy, 37% too expensive and 26% indicate the practical impact was too limited to offset the potential double taxation.

Another stated reason respondents did not pursue such relief stems from written or spoken statements by tax authorities that audit settlements would be void should the company pursue MAP (22%). Another 16% of executives believed that the pursuit of MAP would lead to higher future probability of audits, adjustments and penalties. 

The overall implication is that much more needs to occur before executives place significant confidence in MAP processes.

Effect of inclusion of mandatory binding arbitration in bilateral tax treaties


say such inclusion significantly or moderately increases confidence in the MAP process.


Relative to MAP proceedings, executives seem slightly more satisfied with their litigation experience. Just over one in five companies (21%) have referred a domestic matter or matters to litigation over the past three years. Of these, 25% were satisfied with the outcome — of which 4% were extremely to very satisfied and 21% merely satisfied. In contrast, 42% were dissatisfied with their litigation outcomes — of which 9% were very to extremely dissatisfied. A third of companies (33%) were neither satisfied nor dissatisfied.

Overall, says de Ruiter, “as litigation goes, this is somewhat of an expected outcome as judges often take steps that result in neither party being entirely happy with their decision,” a benchmark that confers a sense of fairness to the proceedings.

An emerging opportunity — the OECD’s compliance assurance program

A relative newcomer to the controversy avoidance and mitigation scene is the OECD’s International Compliance Assurance Programme (ICAP). Through its inaugural pilot in March 2018, the OECD invited those willing to be front-runners to explain the numbers in their country-by-country (CbC) reporting to a group of eight participating nations. At the end of a prescribed process, a successful company “obtains a low-risk rating” explains de Ruiter. While by no means legally binding, such as an APA, “a favorable rating does offer a level of assurance to tax authorities that this company is open about and confident in its transfer pricing, and that should reduce tax risk.” 

The OECD is currently moving forward with a second ICAP pilot, this time featuring the participation of 17 nations — and according to de Ruiter, the program is attracting significant interest: “For the first pilot, we had no serious inquiries. But for the second pilot, we had six or seven expressing interest.” Without question, says de Ruiter, “companies are looking for more ways to reduce their controversy risks.”

Controversy experience — nation by nation

In the end, jurisdictions whose actions have led companies to experiencing double taxation by order of frequency include: 

  • Germany — 44%
  • Italy — 26%
  • France — 21%
  • India — 15%
  • US — 13%
  • Canada — 6% 
Nearly one-third of respondents overall reported
  • Survey methodology

    The 2019 survey was conducted between March 2019 and June 2019. The survey was distributed via email and conducted using an online tool in English, Spanish, Portuguese, Chinese and Japanese; 87% of respondents chose to complete the survey in English. Routine reminders were sent out to respondents who had not completed the survey.
    Once an adequate number of responses had been recorded, the survey was closed. Any survey with completed responses past the sixth of ten sections of the survey was considered complete for analysis purposes.
    The respondents included 717 tax and finance executives representing more than 20 industry sectors in 43 jurisdictions within the Americas, Europe and Asia-Pacific.
    Figures contained in the report may not add to 100% due to rounding. The report also excludes “don’t know” responses and questions for which no response was given. Questions with fewer than five respondents are not reported in the interest of data confidentiality.


One of the key themes accompanying changes to fundamental transfer pricing practices is the shift toward greater transparency. Core issues requiring added focus include permanent establishment and intellectual property location and charges. In addition to reevaluating fundamental business structures and practices, a growing number of companies will be looking to reduce tax risk using Advance Pricing Agreements.

About this article

By Peter Griffin

Principal, Transfer Pricing, Ernst & Young LLP

Transfer Pricing Principal. PhD economist by training. Loves all sports. Father of two.