Nearly all multinational enterprises face tax and transfer pricing examinations, both at home and abroad, at one time or another.
The good news is that companies frequently receive a clean bill of health for their tax and transfer pricing policies, documentation, and tax positions. Where there are disputes, many companies settle them out of court.
Occasionally, in the interest of reputational risk management, greater tax certainty, and transparency, companies choose to sit down with tax authorities and share their transfer pricing policies, documentation, and operational structure before an audit occurs to arrive at a mutually acceptable tax outcome. The result of this process is referred to as an Advance Pricing Agreement.
However, some companies end up in lengthy litigation or controversies with tax authorities that last for years.
What about newly public Uber Technologies, which is under investigation by tax authorities in the United States, United Kingdom, The Netherlands, and India for multiple tax years?
The company’s U.S. tax years currently under transfer pricing examination are 2013 and 2014. The review involves international and domestic related-party transactions and economic returns.
However, the examination could be expanded, perhaps ultimately involving tax years 2010 through 2019, depending on its direction and aggressiveness.
Other facts and circumstances likely will impact Uber’s worldwide effective tax rate and the overall economic returns attributable to the various jurisdictions under examination, and would therefore also affect the extent and thoroughness of the audit.
Such facts and circumstances could include: the mechanics of cost-sharing arrangements; the value attributable to intangible assets that were moved outside the United States; how royalty payments were determined; and when, where, and how net operating loss carryforwards (NOLs) were generated.
It is also likely that Uber’s overall corporate structure, value chain, intangible asset portfolio, economic ownership, and how the intangible assets were developed and maintained will be examined.
However, while Uber continues to grow its revenue at a healthy rate, profit remains elusive. U.S. federal corporate tax is paid on profit. It’s a tough argument for tax authorities to make that Uber, or any multinational, should be paying taxes when it’s not earning a profit system-wide.
What rules help referee a transfer pricing discussion and the Uber examinations?
Generally, the entire world uses a single rule book. In the United States, transfer pricing as promulgated under the Internal Revenue Code reflects the internationally accepted tax law standard requiring taxpayers controlled by the same interests to deal with each other at arm’s length — in other words, as if they were unrelated.
First and foremost, the transfer pricing rule book is about using a competitive market-based or arm’s length policy to appropriately attribute economic return to each related party or member of a controlled group of entities. This is commonly referred to as the arm’s length standard (ALS).
Under U.S. law and regulations, only a reasonable taxable profit or loss — determined using the ALS — is defensible. Using this logic or rule book, each Uber taxpaying entity in the value chain or structure should be adhering to the ALS. And the ALS is not a profit-generating mandate; it’s a market-based result. Markets frequently produce losses. Uber continues to lose billions of dollars per year.
At the same time, Uber is large enough to trigger the Base Erosion and Profit Shifting (BEPS) initiatives adopted by the U.S. and other jurisdictions in which Uber operates.
One might be excused for wondering whether the IRS or other tax authorities may be partly motivated by what they’ve learned from the data presented under the new BEPS protocols. The BEPS initiatives involve far greater tax transparency and compliance requirements across all adopting countries. Still, BEPS does not directly impact Uber’s 2013 and 2014 years that are under IRS audit.
While the various tax authorities will be drilling into the many other issues noted above, it’s more than likely the IRS will take the hardest look. And the non-U.S. tax authorities will have similar interests; after all, every transaction has two sides. However, as mentioned previously, Uber has yet to earn a profit, and without a profit, no tax will be paid.
Perhaps the discussions will focus more around sharing the loss among jurisdictions, rather than taxing a company without profits. As usual, the devil is in the details.
Victor Miesel is a principal, national transfer pricing practice leader, and chief economist at Mazars USA, a tax, accounting, and consulting firm.