Transfer Pricing, Business Restructurings and Intangibles - Case Studies: UPS v. Commissioner; DSG Retail Ltd. v. HMRC

Abstract

United Parcel Service of America, the largest motor carrier in the US, and DSG Retail the largest retailer of electrical goods in the UK, restructured operations and established captive insurance companies in offshore tax havens. In both instances, these restructurings removed sizeable amounts of income from the domestic tax base. The IRS and HMRC opened transfer pricing audits. The UPS case involved tax year 1984 and was settled in 2003; DSG Retail involved 1997 through 2005 and was settled in 2009. Both settlements came on the heels of government-favorable court decisions, and prior to the addition of Chapter IX to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the Guidelines). The OECD added Chapter IX on Transfer Pricing Aspects of Business Restructurings, to the Guidelines on July 22, 2010. The core transfer pricing issue in a captive insurance case (in OECD terms) is the measure of compensation that should be returned to a domestic company by its captive on the transfer to it of (a) the business opportunity, or (b) the right to provide re-insurance on policies that underwrite risks of retail customers. Twenty days prior to announcing business restructuring additions to the Guidelines, the OECD initiated a new project on transfer pricing and intangibles. The stated reason for the project was that the OECD had experienced considerable difficulty with the treatment of intangibles in the business restructuring meetings. UPS and DSG are case studies for the application of transfer pricing rules in a business restructuring context where a critical element involves the transfer of an intangible. This paper considers how the arguments and outcomes in these cases inform the present discussion on transfer pricing and intangibles. UPS and DSG, when read in conjunction with the new OECD Guidelines on business restructurings, present a full range of analytical approaches to transfer pricing and captive insurance companies. There is Judge Ruwe’s sham transaction approach; there is the profit split approach followed in DSG; there is the possibility of CUPs and TNMMs; then there are the more recent approaches suggested by the OECD – transferring a going concern, and transferring an intangible asset. It will be interesting to see how the new OECD project on the Transfer Pricing Aspects of Intangibles will deal with question like this. It may well be that the answer to an intangible transfers may bring us back full circle to the return on capital profit splits from Grenada Industries and DSG.