Justice for all?
Several landmark cases were closed in 2020, including Cameco, Glencore, Vodafone and Cairn, where the courts ruled in favor of the taxpayer. However, tax authorities are determined to appeal a number of transfer pricing cases over the coming year, including well-known names like Apple, Coca-Cola, Facebook, and Vodafone. Many more new TP cases are also expected as governments seek tax recovery.
"The battles between different countries over tax controversy will be significant in the years to come," said a tax director for a multinational company. "Revenue-hungry countries are becoming parochial and are looking for their" fair share "."
Tax directors expect more disputes due to competition between countries for tax revenue. Taxpayers also prepare for a wave of audits and disputes as tax authorities seek to increase revenue without raising tax rates to cover the cost of the COVID-19 crisis. In the meantime, the tax authorities still have a lot to do.
New year, old problems
In the EU, the European Commission's decision to appeal the Apple case to the Court of Justice of the European Union (ECJ) could set the standard for state aid cases.
Apple won a historic victory against the European Commission in the EU General Court (GCEU) in July 2020, but the Commission was unlikely to accept defeat. By September the Commission had decided to refer the case to the ECJ.
“The court committed a number of legal errors. That is why the Commission is bringing this matter to the European Court of Justice, ”said Margrethe Vestager, Vice-President of the European Commission.
Neither Apple nor the Irish government will admit it. Irish Treasury Secretary Paschal Donohue has established that "the correct amount of Irish tax has been paid and Ireland has not given Apple any state aid".
Many US multinational corporations that have reached agreements similar to Apple across the EU are watching the case because they believe they have been wrongly attacked by the Commission. This perception will continue regardless of whether Apple wins or loses the ECJ case. However, if Apple loses, the European Commission will be encouraged to pursue additional state aid cases.
The Irish Treasury Secretary said the appeal process could "take up to two years".
After the US tax court ruled against it, Coca-Cola is preparing for the next round of fighting with the Internal Revenue Service (IRS). The soft drinks company even hired attorney J Michael Luttig, a former federal judge and former Boeing attorney, to advise him on the case.
The Coca-Cola Co. v. Commissioner case was one of the key legal battles to reach a conclusion in 2020. The tax court upheld two tax adjustments the IRS made to increase Coca-Cola's US taxable income by more than $ 9 billion from 2007 to 2009. The decision was a bad sign for companies that rely on profit-sharing arrangements to distribute costs efficiently.
The case set a major precedent for US taxpayers with profit-sharing arrangements. As bad news as the ruling was for such companies, it was positive for taxpayers seeking dividend equalization treatment.
Even so, it was a major win for the IRS, but the soft drink company has filed an appeal. Even if Coca-Cola loses its battle with the IRS, it won't have to pay the full $ 3.4 billion that the Revenue Service was hoping for as the adjustments were cut by $ 1.8 billion.
If Coca-Cola doesn't turn the case on its head, companies like Facebook could be in a much weaker position in their own battles with the IRS.
Facebook is waiting for the US tax court to rule on its own case with the IRS. The case will have far-reaching implications for taxpayers with comparable regulations.
The IRS brought Facebook to US tax court in February 2020 for evaluating its intangible assets. The IRS alleged the company overestimated its intellectual property (IP) and owed more than $ 9 billion in taxes to the Revenue Service.
In 2010, Facebook moved its intellectual property to Ireland and the social media company valued the net worth at $ 6.5 billion. That was before Facebook went public in 2012, however. The IRS argues that the real value was $ 21 billion and that the company owes more than $ 9 billion in taxes. Facebook stands by its 2010 rating.
A lot has changed since 2010. Not only is Facebook a global brand, the company also revamped its Irish structure, introducing a local seller model in 2017 and dismantling its IP structures three years later. The synonym for social media also supports the work of the OECD on the digital economy.
“Tech companies should serve society. This also applies at company level. We therefore support the efforts of the OECD to create fair global tax rules for the Internet, ”wrote Mark Zuckerberg, CEO of Facebook, in an article in the FT in February 2020.
“These are issues that need to be addressed and that affect our industry as a whole. If we don't create standards that people think are legitimate, they don't trust institutions or technology, ”he added.
Facebook has more than $ 55 billion in cash reserves, and the heavy tax burden without taking interest and penalties into account would cost nearly 20% of those reserves. This is exactly how the company is making capital-intensive investments in new data centers and undersea cable networks.
However, this case is about more than a company's plans. The IRS case could mean that platforms face further questions about previous structures. It could also mean the past remains in the past if the social media company can defend its record and convince the U.S. Treasury to take its side.
Vodafone and Cairn
The Indian government is appealing the Hague decision in the Vodafone case and plans to do the same in the Cairn case. The Permanent Court of Arbitration in The Hague ruled in favor of Vodafone against the income tax department on September 25, 2020.
The Hague Court unanimously rejected the tax authority's retrospective request for tax relief. The decision was welcomed as “good news” for investors in India. The court came to a similar conclusion in the Cairn case in December, dismissing the Indian tax authority's position.
"India has already appealed the Vodafone ruling to a Singapore appeals court," said a senior government official.
“The Indian government has sovereign tax law and private individuals cannot decide on it. In addition, it falls outside the scope of a bilateral investment agreement and outside the jurisdiction of international arbitration, ”argued the official.
Vodafone has been fighting the case for more than a decade and appealed to the Supreme Court in 2012. However, the Government of India has continued its offer to request a retrospective tax payment and has refused to amend the tax laws in accordance with court rulings and expert reviews.
The Vodafone case is notorious among Indian taxpayers and investors involved in the Indian market. There may be more twists and turns before this case is finally closed and it will continue to affect business decisions about whether to invest in India.
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