I follow many TP and tax experts on LinkedIn, and one that I'd recommend is Filippo Miotto of BDO Australia.
He recently shared an article that I found particularly striking. It concerned a recent judgment in a tax case in the USA, Aspro, Inc. v. Commissioner, which concerned the years 2012 to 2014. Over an extended period, Aspro had paid its shareholders annual amounts which it claimed to be management fees rather than dividends. The IRS disagreed, as did the US Court of Appeals, which denied the deduction.
There were several reasons for this. The one that jumped out at me was this (I quote from the article): "Aspro failed to provide documentation supporting the existence of a service relationship between the parties. At a most basic level, there were no written management service agreements. In addition, there was no documentation outlining the cost or value of any purported service, and no bills or invoices were provided in connection with the purported management services. Additionally, Aspro failed to provide evidence showing how the amount of the management fees was determined."
Aspro attempted to overcome the lack of documentation by offering two expert witnesses, but the court excluded both of them.
At this point, the Spanish case that we looked at recently may be coming into your mind. It certainly came to mine. The parallels are obvious, both with that case and with other recent Tax Court judgements around the world in which the lack of intercompany agreements and proper TP documentation was a key factor.
It's said that one definition of madness is repeating the same action many times and expecting a different result. And yet here again we've seen a taxpayer going to court without proper agreements and documentation to back up its position, and finding itself worse off afterwards.
Of course, hindsight is a wonderful thing. Awareness of what is required to defend tax and transfer pricing positions is very different now than it was ten years ago. But now that we know better, we have to do better.
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