We are delighted to feature an interview with Gareth Green, Founder of Transfer Pricing Solutions, a UK company providing specialist advice and assistance on transfer pricing, thin capitalisation and associated international tax issues.
How did you get into transfer pricing?
Almost by accident. It was around 1990, so long ago that no-one had heard of transfer pricing (and a Mr Simon Fuller was auditioning members of a band to be called Take That). I was newly qualified as an accountant and had just transferred to the tax department at what was then Coopers & Lybrand. Being new to tax, I did not have a full workload of ongoing clients, which meant I had enough spare capacity to get drafted in to what was then a very unusual project to review possible locations for an IP holding company for what was then one of the world’s largest technology companies. My role was to investigate the transfer pricing implications, even though very few countries had any explicit transfer pricing rules at that time. Five years later, I was on secondment to C&L in New Zealand when the government introduced transfer pricing rules and I was appointed as the firm’s expert, by dint of this one previous project (which was one more transfer pricing project than anyone else had done!). This in turn led to a one year transfer to the US to learn transfer pricing properly, as this was pretty much the only country where any significant amount of transfer pricing work was being done, at the time.
Who has been the most influential role model for your professional life?
There are several contenders, but I would probably have to say Goetz Eaton, the head of transfer pricing at Coopers & Lybrand Boston, who was desperate enough for staff to work on his transfer pricing projects that he was willing to take a chance on accepting me on transfer from New Zealand.
What do you see as the biggest challenge affecting the tax functions of large corporates over the next 10 years?
My initial reaction was to reply that this would be implementing BEPS and dealing with the increased controversy that seems likely to arise around the world, as fiscs deploy their new BEPS armoury. However, it depends on how the tax reform agenda in the US pans out over the next year. The so-called “border tax” which is currently being proposed by the House of Representatives Republicans as part of the reform package has the potential to cause chaos in international tax on a scale that could make BEPS seem like a hiccup. If the US goes ahead and changes its corporate tax rules so that income from exports is tax-free and there is no tax deduction for the cost of imports, this will, together with proposed corporate tax rates of 15-20%, create a huge incentive to move business activity to the US. I find it difficult to believe that if this happened other countries would not retaliate. The result could be a dogs dinner of different, incompatible tax rules, leading to much higher levels of double taxation on cross-border trade. One would hope that common sense will prevail and the US will pull back from setting off a chain of events that could be extremely damaging for everyone.
How would you change the OECD’s approach in relation to BEPS?
I never thought I would say this, but I wonder if the time has come when we should be prepared to accept that it is not always possible for every aspect of the transfer pricing guidelines to abide by the arm’s-length principle. I am not in favour of a complete departure from the arm’s-length principle, but I think it is becoming increasingly untenable to reinterpret parts of the transfer pricing guidelines in ways that prevent perceived abuse of transfer pricing whilst continuing to pay lip service to the arm’s-length principle. I’m thinking, in particular, of the intellectual gymnastics that the OECD seems to have been forced into with the aim of foiling transfer pricing planning that is based around moving IP and/or risk to entities with low substance (and low tax rates).
It seems fairly clear that the overall objective of the BEPS changes on transfer pricing was to ensure that the primary determinant of transfer pricing should be factors that are difficult to move. Namely, key executives. Ownership of IP and bearing business risks are too easily moved and so the OECD needed to find some way of reducing the significance of IP and risk, which is extremely difficult, because on an arm’s-length basis IP and risk are clearly factors that affect profitability. Their solution is undeniably ingenious: that there is a truth beyond the mere facts and to divine it we should “accurately delineate” the transaction. In doing so we should ignore certain factors that clearly would be significant on an arm’s-length basis, such as who owns the IP and bears the risks. We should instead give priority to other factors such as where the DEMPE and risk control functions take place. These functions are certainly important, but it is an inconvenient fact that on an arm’s-length basis they do not override actual ownership of IP and bearing of risk.
My biggest concern is that this doublethink has unintended consequences. By framing the changes as arising from a realisation as to the correct way of applying the arm’s length principle (rather than a partial, but politically justified, departure from that principle) the OECD seems to have found itself in a position where the new approach inevitably means that we must rethink certain other aspects of transfer pricing, even though I don’t think this is what they set out to do. For instance, once one adopts the view that a party is only entitled to a risk return if it makes the decisions by which the risk is controlled, there is little option but to conclude that, as a profit split arrangement necessarily involves sharing risk, it can only be an acceptable transfer pricing arrangement if all profit split participants are involved in the high-level decision-making by which all of the relevant risks are controlled.
In a multinational group, this is unlikely to be the case, because the efficient approach will usually be for risk control decision-making to be centralised. Different risks might be controlled by different participants in the profit split, but being in a group means each group member can trust other members to carry out crucial tasks. It would be rare for every participant to nominate representatives to share in controlling every risk. This would be likely to lead to a situation where there are more cooks than needed, which wastes money and runs the risk of spoiling the broth. There are some cases where it would otherwise be glaringly obvious that a profit split is the most (or even only) appropriate method, but the OECD guidelines would nevertheless forbid the use of profit split.
For similar reasons, cost sharing arrangements are also difficult to justify, because again they inherently involve sharing of risk, so they are now only permitted if all parties to the cost sharing arrangement participate in decision-making in relation to controlling all key risks. However, even without this cost sharing arrangements would be on the endangered species list, because of another problem. It is no longer permitted to measure contributions to the arrangement on the basis of their cost. Instead, contributions should be measured on the basis of their value. As sharing of cost is the essence of a cost sharing arrangement, the whole concept is defunct. The name “cost sharing arrangement” is certainly an anachronism. (I can’t help being reminded of the ITV police drama, Taggart, which was named for the original lead character, Detective Chief Inspector Jim Taggart. Despite writing out the character in 1994, when the actor died, the ITV gamely continued with another 16 series, all still named Taggart despite having no character of that name.)
In a movie of your life story, which actor would you like to play you?
What would be your dream job if you didn’t work in tax?
I saw a documentary featuring a woman whose job involved diving with dolphins and whales in the marine reserves surrounding New Zealand. That seems pretty idyllic to me.
What is your biggest extravagance?
Horrendously expensive ski holidays.
What do you do to relax?
I wish it sounded more exciting, but the truth is: walking my dog, an English Springer Spaniel called Ziggy Stardust.
What is your favourite holiday destination?
The one that leaps to mind is the three day walking trail along the coast in the Abel Tasman National Park in New Zealand. But without the sandflies!
What piece of advice would you give your 25-year-old self?
Don’t agree to be interviewed without checking whether the interview will include impossible questions like this one.