Major Transfer Pricing Battles in 2024: Airbnb, PepsiCo, and More Face Global Scrutiny

The year 2024 has seen a series of landmark transfer pricing (TP) disputes, with global companies locking horns with tax authorities across the US, Australia, the UK, India, and Italy. These cases, involving significant financial stakes, have highlighted ongoing tensions over TP practices, with companies contesting billion-dollar assessments and fines.

Airbnb Challenges $1.33 Billion IRS Ruling

In a high-profile case, Airbnb filed a petition with a US tax court in July to contest the Internal Revenue Service’s (IRS) claim that the company had underpaid its taxes by $1.33 billion for the year 2013. The IRS also levied an additional $573 million in fines. According to the IRS, Airbnb had understated its income by $4.2 billion based on resources and rights made available to its global arm, Airbnb International, back in 2013.

Airbnb countered by asserting that it had provided the IRS with the necessary documents and economic analyses that justified the cost of the licenses involved. The company further argued that the IRS had not yet provided a method that justified the re-determined tax. Airbnb defended its figures by pointing to the more than $10 billion it had invested in intangible development costs and other expenses to build its international business, which it argued led to losses justifying the figures submitted to the IRS.

Steve Wrappe, TP technical leader at Grant Thornton’s Washington national tax office, commented on the case, noting, “[These are that the] IRS is actively examining TP, intangibles are a potential target, and penalties will be considered if triggering amounts are met. These are important trends in IRS enforcement of TP.”

PepsiCo and ATO Battle Over IP Royalties

In Australia, the Australian Taxation Office (ATO) has applied for special leave to appeal to the High Court of Australia following its loss in the closely watched case of PepsiCo v Commissioner of Taxation. PepsiCo had successfully appealed a prior ruling concerning royalty withholding tax related to intellectual property (IP) in June.

The Federal Court of Australia’s full court ruled in favor of PepsiCo on June 26, overturning a previous decision from November 2023. The case involved two exclusive bottling agreements between PepsiCo and Stokely-Van Camp (SVC), both US-based companies. Under these agreements, Schweppes Australia (SAPL) was provided with the concentrate needed to produce finished beverages for retail sale in Australia. The ATO had argued that portions of the payments made under these agreements constituted royalties, subject to withholding tax (WHT). However, the full court disagreed, with Justices Nye Perram, Craig Colvin, and Ian Jackman ruling that the payments were solely for the concentrate and did not include any royalty component for the use of PepsiCo/SVC’s intellectual property.

Justice Mark Kranz Moshinsky, who had ruled in the earlier case, had suggested that even if royalty WHT didn’t apply, the diverted profits tax might. However, in the June judgment, Perram and Jackman outvoted Colvin on this issue, finding that PepsiCo had successfully demonstrated that the assessments for diverted profits tax were excessive and that the ATO had “no reasonable alternative” to the tax.

Hargreaves Loses Appeal in UK Withholding Tax Case

In the UK, Hargreaves Property Holdings (Hargreaves), the holding company of a real estate group, faced a legal setback in April after the England and Wales Court of Appeal dismissed its appeal regarding withholding tax. Hargreaves had restructured its loan financing for tax reasons, leading lenders to repeatedly assign rights in loans to third parties. HM Revenue and Customs (HMRC) argued that Hargreaves should have deducted and accounted for withholding tax on the interest payments, a position the company contested.

Michael Alliston, a partner at Norton Rose Fulbright, highlighted the significance of the case, stating, “The case is interesting to an international audience as it shows that UK domestic tests are subject to a similar purposive interpretation as may arise in a treaty context. There are also practical takeaways for borrowers in a normal lending scenario.”

Colgate-Palmolive India Faces $29.8 Million TP Order

Colgate-Palmolive’s Indian division was hit with a ₹2.5 billion ($29.8 million) TP order in July, following an assessment by India’s income tax authorities for the 2020/2021 financial year. According to a stock exchange filing by the oral hygiene company, the notice includes around ₹800 million in interest. Colgate-Palmolive India has announced plans to appeal the order before the Income Tax Appellate Tribunal, assuring stakeholders that the order would not impact its financial performance or other activities.

The TP probe follows a similar order issued last year, in which Colgate-Palmolive India was served with a ₹1.7 billion TP demand for the 2021/2022 assessment year. The company characterized the disallowances as “standard” and consistent with those from prior assessment years, which are already under appeal.

Italy’s UFI Filters Wins Supreme Court Ruling

In Italy, UFI Filters, a filtration company, secured a win in the Italian Supreme Court in April after a protracted legal battle with tax authorities over TP issues dating back to 2009. The case revolved around UFI Filters’ payments to two related companies in China for the supply of filters, which the company had deducted from its taxable income. Following an audit, Italian tax authorities determined that the mark-ups applied by the Chinese companies were not at arm’s length, based on a benchmark study of six comparable companies.

After an initial ruling against UFI Filters by the Provincial Tax Commission of Milan, the Regional Tax Commission of Lombardy ruled in favor of the company in 2016. The tax authorities subsequently appealed to the Supreme Court, which upheld the decision of the Regional Tax Commission, marking a significant victory for UFI Filters.

These cases underscore the ongoing challenges and complexities of TP enforcement globally, as companies and tax authorities continue to grapple with the interpretation and application of TP rules across different jurisdictions.

By fLEXI tEAM