Governments across the globe are paying close attention to the issue, and implementing more rigorous transfer pricing regulations to ensure that their tax authorities collect a fair share of the revenue derived from intercompany transactions. In particular, the U.S. Internal Revenue Service has introduced new regulations and increased its resources aimed at enforcing new standards in this area.
The Silicon Valley — and the Bay Area as a whole — is a hotbed of activity in terms of transfer pricing enforcement. The region leads the U.S. in high-tech job creation, and many industry-leading companies are headquartered there. “For global technology companies, transfer pricing is a critical issue,” said partner Bob Kirschenbaum, a key member of Bingham’s transfer pricing team.
Transfer pricing presents a significant challenge because tax authorities (in order to raise revenues) and the companies involved in the transactions must place a value on the functions performed and risks assumed by related parties that, by definition, are not operating at arms-length because they are commonly controlled by the parent. For high-tech companies, the assets that drive the business — such as copyrights, trademarks or patents — are often unique high-value intangibles. Valuing them is a complicated exercise and requires a certain degree of subjective judgment. This can lead to disputes with tax authorities seeking to maximize their “take.”
“At technology companies, unlike ‘brick and mortar’ retailers, for example, intangible assets are large profit contributors,” Kirschenbaum added. “It’s very challenging to value the relative profit contributions made by various categories of intangible assets compared to the profits driven by more routine tangible assets, such as physical property, plant and equipment.”
To minimize disputes and ensure successful resolution with tax authorities in the countries they operate in, it is prudent for global companies to develop thorough tax planning and compliance strategies regarding transfer pricing. Most jurisdictions (including the U.S.) require taxpayers to document their transfer pricing policies contemporaneously with the filing of their tax returns.
Kirschenbaum, along with partners Beth Williams and John Ryan, have deep experience helping clients in the high-tech sector (including many pre-existing Bingham clients), developing transfer pricing strategies and resolving transfer pricing disputes.
Bingham’s transfer pricing team also includes partners John Magee and Sanford Stark. Magee and Stark possess decades of transfer pricing and tax controversy experience between them, and the two led the representation of GlaxoSmithKline in the largest transfer pricing case in U.S. history.
“It’s very satisfying that we’ve been able to develop such a diverse, talented transfer pricing team on a national level,” said partner Will Nelson, co-chair of Bingham’s Tax Group. “These recent additions in Silicon Valley allow us to expand our reach into one of the most robust and exciting markets for transfer pricing. Furthermore, it allows us to achieve our goal of balancing the strength of our East Coast practice in this area with an equally dynamic West Coast presence.”