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Daniel Hoi Ki Ho, Multinational Transfer Pricing:
Evidence in the United Kingdom, 34 Int'l Tax J. 43
(2008)

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Multinational Transfer Pricing:
Evidence in the United Kingdom
Daniel Hoi Ki Ho, Ph.D., FCCA, FCPA,
FTIHK, ACA, is an Associate Profes-
sor in the Department of Accountancy
& Law, School of Business, Hong Kong
Baptist University, Hong Kong. Dr. Ho
may be reached at danielho@hkbu.edu.
hd The original version of this paper was
prepared during the study for Ph.D. at the
University of Aberdeen, U.K.
02008 D. Ho
INTERNATIONAL TAX JOURNAL
July-August 2008
By DanielHoi Ki Ho
1. Introduction
International transfer pricing is a multi-disciplinary
research area which includes accounting, marketing,
behavioural science, business policy, international
business, economic and finance, law and taxation.
The objective of this study is to investigate the inter-
national transfer pricing for intra-group transactions
of multinationals from the perspective of interna-
tional business. Specifically, this study addresses the
following issue: how and why Anglo-multinational
companies (e.g., U.S.- and Australia-based) and
Asian-multinational companies (e.g., Hong Kong-
and Singapore-based) choose their international
transfer pricing methods with their U.K. affiliates?
2. Literature Review
Research in transfer pricing may be broadly classified
into three types: prescriptive studies (e.g., Hirschleifer
3
1956, 1957,, Dopuch and Drake 1964,2 Onsi 1970,
Abdel-khalik and Lusk 1974,4 Benke and Edwards
1980), behavioural studies (e.g., Watson and Baum-
ler 1975,6 Lambert 1979,) and applied studies (e.g.,
Business International Corporation 1965, 8 Greene and
Duerr 1970,' Arpan 1972,, o Tang 1979, 1981, 1982,
1993, 2003,1 Borkowski 1992, 1996, 1997,12 Wu
4
and Sharp 1979,13 AI-Eryani Alam and Akhter 1990,1
Chan and Chow 1997, 1998). The first and third types
dominate the literature. However, most of the results
of prior studies are qualitative in nature and do not
have sound statistical support. In addition, many prior
studies have a focus on U.S.-based multinationals.
Prior studies provide insights into various aspects of
U.S. transfer pricing systems and advocate different
bases for setting transfer prices that include marginal
cost, opportunity cost, incremental cost, variable
cost plus contribution margin, market, negotiation
Multinational Transfer Pricing: Evidence in the United Kingdom

and mathematical program based transfer price (e.g., multinational companies for intra-group transactions
Hirschleifer 1956, 1957,16 Bierman 1959,17 Dopuch with affiliates in the U.K. The transfer prices include
and Drake 1964,8 Watson and Baumler 1975,-9 Ronen market-based prices (i.e., actual market price and ad-
and Mckinney 1970,no Benke and Edwards 19802n). The justed market price), cost-based prices (i.e., full cost,
study by Arpan22 is one of the earliest studies in inter- adjusted full cost, variable cost and adjusted variable
national transfer pricing systems involving non-U.S. cost), and profit-based prices (i.e., target profit and al-
multinationals. Tang23 conducted a follow-up study to located profit). In addition, this study examines a set
examine international transfer pricing practices in the of 18 environmental variables that are relevant to the
United States and Japan. However, Tang's results did establishment of international transfer prices. The set
not support many of Arpan's findings. of environment variables includes the following five
Some empirical studies dimensions: (1) regulatory
examine the influence of Much remairis to be learned compliance, (2)external
environmental variables economic environment,
on the selection of trans- about multin atiional transfer (3) internal economic
fer prices. For example, pricing practices r multinationals environment, (4)socio-be-
Burns,24 AI-Eryani, Alam operating in a dehV( loped European havioral concern, and (5)
and Akhter,25 and Business political issue. Collective-
International Corporation economy and the ariables involved ly, these five dimensions
and Ernst & Young26 found in formulatir ig international capture the essentials of
that both legal and tax vari- transfer pric:in g strategies. the business of
environment operational
a particu-
ables are important factors
that multinationals would lar country or region.
consider when they determine international transfer In this study, we hypothesize:
prices. AI-Eryani, Alam and Akhter27 and Borkowski- " H1. Multinational companies that consider
found that market-based international transfer prices compliance with laws and regulations to be
are often adopted by larger sized companies. more important will make greater use of market-
The studies by Ernst & Young29 were unique in that based international transfer prices. On the other
they dealt with global practices, perceptions and hand, multinational companies that consider
trends for international transfer pricing. The studies compliance with laws and regulations to be
by Chan and Chowo are important because they have less important will make greater use of non-
kicked off the PRC-focus transfer pricing research. market-based (i.e., cost-based and profit-based)
They made extensive visits to various PRC tax authori- international transfer prices.
ties and personal interviews with foreign investment " H2. Multinational's use of market-based in-
enterprises operating in the PRC to collect the neces- ternational transfer prices decreases with the
sary data for empirical analyses and case studies. impact of external economic environment (i.e.,
Much remains to be learned about multinational the less the importance of the difference in ex-
transfer pricing practices for multinationals operating ternal economic environment between home
in a developed European economy and the variables and host countries, the greater the incentive for
involved in formulating international transfer pricing a multinational to adopt market-based transfer
strategies. This study focuses on the international pricing methods). On the other hand, multina-
transfer pricing practices of multinationals from four tional's use of nonmarket international transfer
countries and regions: U.S.-based and Australian- prices increases with the impact of external
based (i.e., Anglo-based) multinationals and Hong economic environment.
Kong-based and Singapore-based (i.e., Asian-based) * H3. Multinational's use of market-based in-
multinationals with their affiliates in the U.K., which ternational transfer prices decreases with the
is an important developed European economy. importance of the internal economic environ-
ment (i.e., the less the importance of the internal
3. Hypotheses economic environment in the host countries, the
greater the incentive for a multinational to adopt
This study examines the specific choice of eight market-based transfer pricing methods). On the
different international transfer prices adopted by other hand, multinational's use of non-market-

44
 July-August 2008

based international transfer prices increases with 4. Research Methodology

the importance that the multinational placed on
the internal economic environment.
" H4. Multinational's use of market-based in-
ternational transfer prices decreases with the
importance of social and behavioural concern
(i.e., the less the importance of social and be-
havioral concern, the greater the incentive for
a multinational to adopt market based transfer
pricing methods). On the other hand, multina-
tional's use of non-market-based international
transfer prices increases with the importance of
social and behavioural concern.
* H5. Multinational's use of market-based in-
ternational transfer prices decreases with the
increase in the risk level of the political issue
(i.e., the lower the risk level of political issue in
the host countries, the greater the incentive for
a multinational to adopt market-based transfer
pricing methods). On the other hand, multina-
tional's use of non-market-based international
transfer prices increases with the risk level of
the political issue.
Similar to the Borkowski's study in 1996, we have
used a survey instrument to collect the relevant
data on various environmental variables that may
have implications for multinational transfer pricing
decision-making processes. Since this study aims to
examine the international transfer pricing practices
adopted by multinationals with their affiliates in the
U.K., we have invited different multinational com-
panies which have (or will establish) affiliates in the
U.K. to participate in the study. After various blocks
of mailings and substantial follow-up actions, a total
of 70 completed questionnaires were received.
5. Results and Discussions
From Table 1, it can be seen that compliance with
local tax laws and regulations in foreign countries
(i.e., the U.K.) received the highest ranking by both
groups of multinationals. It is not surprising to see that
local legal compliance is the most important consid-
eration among the respondent firms in formulating

Table 1. Rank Order and Mean Importance of Environmental Variables of

International Transfer Pricing
Ranking of Mean Standard
Importance For Mean Importance Deviation For
Transfers with UK For Transfers with Transfers with
Affiliates Variables UK Affiliates UK Affiliates
9 Influence of top management of the group's parent company 2.68 1.308
2 Corporate income local tax rates and incentives in host countries 2.11 1.210
4, 5 Local turnover tax rates and incentives in host countries 2.36 1.209
4, 5 Local customs duty rates and regulations in host countries 2.36 1.209
3 Compliance with local financial reporting requirements in host countries 2.16 1.242
13 Participation of local management from affiliates in host countries 2.87 1.272
12 Interest of local partners of foreign affiliates 2.84 1.261
14 Risk of expropriation in host countries 2.96 1.461
16 Change of government in host countries 3.42 1.373
18 Religious conflicts in host countries 4.09 1.104
1 Compliance with local tax laws and regulations in host countries 1.62 1.134
17 Human rights violations in host government 3.51 1.408
7 Existence of foreign exchange controls 2.47 1.358
10 Rates of inflation in host countries 2.73 1.176
8 Increased market share of foreign affiliates 2.59 1.226
11 Strengthened competitive position of foreign company 2.76 1.264
6 Compliance with home country tax laws and regulations 2.44 1.603
15 Compliance with home country financial reporting 3.04 1.566
Note: The importance is measured by a five-point scale as follows: 1 =Very Important to 5=Very Unimportant

INTERNATIONAL TAX JOURNAL 45

Multinational Transfer Pricing: Evidence in the United Kingdom
international transfer pricing policies. Multinationals
with international transactions often adopt business
strategies that maximize their overall profits with
minimal challenges by foreign tax authorities where
their affiliates are located.
Three other variables that receive high rankings
from multinationals are corporate income local tax
rates and incentives in foreign countries, local turn-
over tax rates and incentives in foreign countries, and
local customs duty rates and regulations in foreign
countries. All of these variables are related to tax rates
and incentives in foreign countries where affiliates lo-
cate. It is therefore suggested that tax-related matters
are well-taken into consideration by multinationals
in establishing their transfer prices with foreign af-
filiates in the U.K.
Some variables were given the lowest rankings
by multinationals for their international transfers of
goods and services with their U.K. affiliates. These
include human rights violations in foreign coun-
tries, and the religious conflicts in these countries.
The results suggest that these variables are much
less important to multinationals in the formula-
tion of international transfer pricing policies with
Table 2. Ordinary Least Square
fnr TTTC Affilinfac
xrernai tconomI
1 1-nv1 ronmIIjeI
c
Internal Economic Environment H3(-)
Political Issue H5(-)
Panel B: Aggregate Cost-based Measure
Socio-Behavioural Concern
Compliance j
| H4(+)
H1 (-
External Economic Environment H2(+)
114
Internal Economic Environment | H3(+)
Political Issue H5(+)
ap<0.1
46
affiliates in the U.K. A possible reason for this is
that the human rights problems and religious con-
flicts in the U.K. are not of particular importance
to multinational management in determining the
international transfer prices. Another reason is
that these problems and conflicts are rarely major
concerns in the U.K.
The hypotheses were tested with a multiple regres-
sion of the following form:
Y = g0 + g1X1 + 2X + +...x+5X5 + F
where
Y = aggregate measure of transfer pricing meth-
odology (market-, cost- and profit-based), and
X1.s= aggregate dimensions of different environ-
mental variables.
We ran three regressions each with a different
dependent variable representing the ag-
Regression Re,sults gregate measure of three transfer pricing
methodologies. Generally, based on the
variance inflation factor (VIF), no observa-
tions exhibited violations of multivariate
normality because the VIFs in all regressions
were very low, ranging from 1.170 to 2.318
(see Table 2).
-U.UU/
Table 2 (Panel A) provides the results for
0 the aggregate measure of market-based
0.081 1
.64 transfer prices as the dependant variable. It
-0.196 2 .318
1 shows that three out of five regression coeffi-
cients based on the aggregate market-based
price had the predicted signs, but they are
not statistically significant.
-0.042
NRegulatory
1 .893
-0160{1
.170
Sthe
Table 2 (Panel B) provides the results for
aggregate measure of cost-based transfer
prices as the dependant variable. It shows
that three of five regression coefficients based
on the aggregate cost-based price had the
predicted signs. Of these, two are statistically
-0.227 .842 significant: internal economic environment
(i.e., ( = 0.285, p < 0.1) and political issue
-0.11 .697 (i.e., & = 0.274, p < 0.1).The result provides
I support for H3 and H5 that is as follows: mul-
0.154 .965 tinational's use of cost-based international
transfer prices increases with the impact of

internal economic environment; and multinational's
use of cost-based international transfer prices in-
creases with the impact of political issue.
Table 2 (Panel C) provides the results for the ag-
gregate measure of profit-based transfer prices as
the dependant variable. It shows that one out of five
regression coefficients based on the aggregate profit-
based price had the predicted signs.
The above regression analyses results do provide
general support for the notion that the frequency of
usage of cost-based transfer prices by multination-
als for their intra-group
transactions with affiliates
located in the U.K. is sig- It
nificantly affected by two local legal comj)li ance is the most
dimensions: the internal important consic
economic environment
and political issue. While respondent fin ns in formulating
market share and competi-
tive position of affiliates in pricing gpolicies.
the foreign countries are
the key components of the
internal economic environment dimension, the risk
of expropriation in the foreign countries is the key
component of the political issue dimension.
6. Conclusion
Prior transfer pricing research was often based on
U.S. multinationals and their results were mostly
qualitative in nature. This study continues the prior
transfer pricing research efforts to further explore the fer prices. Although this study has examined some
multinational transfer pricing practices for transac-
tions with affiliates in the U.K.
An analysis of the ratings of a set of 18 environ-
mental variables showed that the compliance with
tax laws and regulations in foreign countries is the
J. Hirshleifer, On the Economics of Transfer
Pricing, J.BUSINESS,July 1956, at 172-84; J.
Hirshleifer, Economics of the Divisionalised
Firm, J. BUSINESS,Apr. 1957, at 96-108.
2 N. Dopuch and D.F. Drake, Accounting Im-
plications of a Mathematical Programming
Approach to the Transfer Price Problem,
J. ACCOUNTING RESEARCH, Spring 1964, at
10-24.
M. Onsi, A Transfer Pricing System Based
on Opportunity Cost, ACCOUNTING REV., July
1970, at 535-43.
A.R. Abdel-khalik and E.J. Lusk, Transfer
Pricing-A Synthesis, ACCOUNTING REV., Jan.
1974, at 8-23.
INTERNATIONAL TAxJouRNAL
July-August 2008
most important one for formulating international
transfer pricing policies by Anglo-based (i.e., U.S.-
based and Australia-based) and Asian-based (i.e.,
Hong Kong-based and Singapore-based) multina-
tionals for intra-group transactions with affiliates in
the U.K. Other environmental variables receiving
high ratings from multinationals include corporate
income tax rates and incentives, turnover tax rates
and incentives, and customs duty rates and regu-
lations in foreign countries. On the other hand,
human rights violations and the religious conflicts
in foreign countries are
the least important envi-
is not surpi isiing to see that ronmental variables for
formulating international
the transfer pricing policies
leiration among by multinationals for
intra-group transactions
internatic al transfer with affiliates in the U.K.
These findings are useful
to those multinationals
trying to establish their
international transfer pricing policies for the first
time and for those that are in the process of revis-
ing their policies.
Two statistically significant results are found for
both of the international transfers with U.K. affiliates.
First there is a positive relationship between internal
economic environment and use of cost-based trans-
fer prices. Second there is a positive relationship
between political issues and use of cost-based trans-
Anglo-based and Asian-based multinational transfer
pricing practices, our knowledge about non-U.S.
practices isstill limited. Further studies on the transfer
pricing practices in other countries and regions will
continue to be an interesting research topic.
ENDNOTES
R. BENKE & J.D. EDWARDS, TRANSFER PRICING:
(2001).
AN INTERNATIONAL PERSPECTIVE
TECHNIQUES AND USES (1980). R. TANG, TRANSFER PRICING PRACTICES IN THE
6 D.J.H. Watson and J. V. Baumler, Transfer UNITED STATESAND JAPAN (1979); R. TANG,
Pricing: A Behavioural Context, ACCOUNTING MULTINATIONAL TRANSFER PRICING: CANADIAN
1975, at 86-90.
REV., Jan. AND BRITISH PERSPECTIVES(1981); R. Tang,
D.R. Lambert, Transfer Pricing and Inter- Environmental Variables of Multinational
divisional Conflict, CALIFORNIA MGMT. REV., Transfer Pricing: A UK Perspective, J. BUSI-
Summer 1979, at 70-75. NESSFINANCE AND ACCOUNTING, Summer 1982;
BUSINESSINTERNATIONAL CORPORATION, SOLVING
R. TANG, TRANSFER PRICING IN THE 1990s: TAx
INTERNATIONAL PRICING PROBLEMS (1965). AND MANAGEMENT PERSPECTIVES (1993); R.
J.GREENE & M.G. DUERR, INTERCOMPANYTRANS- TANG, CURRENT TRENDS AND CORPORATE CASES
ACTIONS IN THEMULTINATIONAL FIRM (1970).
(2003).
IN TRANSFER PRICING
10 J.S.ARPAN, INTERNATIONAL INTRACORPORATE PRIC-
12 S.C. Borkowski, Choosing a Transfer Pric-
ING: NON-AMERICAN SYSTEMSAND VIEWS (1972) ing Method: A Study of the Domestic and
cited in H. GERNON & G.K. MEEK, ACCOUNTING: International Decision-Making Process,
Multinational Transfer Pricing: Evidence in the United Kingdom
J. INT'L ACCOUNTING, AUDITING AND TAX'N, at
33-49 (1992); S.C. Borkowski, An Analysis
(Meta- and Otherwise) of Multinational
Transfer Pricing Research, THE INT'L J. AC-
COUNTING, at 39-53 (1996); S.C. Borkowski,
Factors Motivating Transfer Pricing Choices
of Japaneseand United States Transnational
Corporations, J. INT'L ACCOUNTING, AUDITING
& TAX'N, at 25-47 (1997).
13 F.H. Wu and D. Sharp, An Empirical Study
of Transfer Pricing Practice, THE INT'L J. Ac-
COUNTING EDUCATION AND RESEARCH, Spring
1979): 71-79.
14 M.F. AI-Eryani, P.Alam and S.H. Akhter. Trans-
fer Pricing Determinants of US Multinationals,
21 J. INT'L BUSINESSSTUDIES409-25 (1990).
1s K.H. Chan and L. Chow, An EmpiricalStudy
of Tax Audits in China on International Trans-
fer Pricing, 23 J. ACCOUNTING AND ECONOMICS
83-112 (1997); K.H. CHAN & L. CHOW, INTER-
Section 892 of the Internal Revenue Code,
June 2, 2008. Their reports confirmed the
analysis of this article but did not propose
liberalizing Code Sec. 892 in the manner
suggested herein.
3 Press Release, U.S. Committee on Finance,
Baucus, Grassley Seek JCT Analysis of U.S.
Taxation of Sovereign Wealth Funds, Mar.
13, 2008. While the focus of Congress and
the press has been on the investment by
foreign SWFs into the United States, some
SWFs are domestic, such as the Alaska Per-
manent Reserve Fund, which the IMF has
estimated holds $40 billion.
4 Id.
I Unless otherwise indicated, all section refer-
ences are to the Internal Revenue Code of
1986, as amended (the "Code") or the Trea-
sury regulations promulgated thereunder.
6 Codified in Code Secs. 897, 1445 and
6039C.
7 T.D. 8211, 53 FR 24064 (1988). T.D. 9012
later finalized Reg. §1.892-5(a)(3) and (4),
which as modified provide that a partnership
may be a controlled commercial entity.
8 Code Sec. 6232, which provides that tem-
porary regulations expire three years after
their date of issuance, applies only with
respect to temporary regulations issued
after November 20, 1988, and thus has no
application to Reg. §1.892-1 T et seq.
9 Temporary Reg. §1.892-2T(a)(1 ).This defini-
tion was originally promulgated as part of
the 1980 regulations. But see L. Vial, 15 TC
403, Dec. 17,870 (1950), acq'd, 1952-1 CB
4 (holding that a corporation serving govern-
mental functions for Chile could qualify for
48
ENDNOTES
NATIONAL TRANSFER PRICING IN CHINA (1998).
16 Supra note 1.
17 H. Bierman, Jr. Pricing Intracompany Transfers,
34 ACCOUNTING REv. 429-32 (July 1959).
18Supra note 2.
19 Supra note 6.
20 J. Ronen and G. Mckinney, III, Transfer Pric-
ing for Divisional Autonomy, J. ACCOUNTING
RESEARCH,Spring 1970, at 99-112.
21 Supra note 5.
22 Supra note 10.
23 Tang, 1979, supra note 11.
24 J.O. Burns, Transfer Pricing Decisions in US
Multinational Corporations, J. INT'L BUSINESS
STUDIES, Fall 1980, at 23-29.
25 Supra note 14.
21 BUSINESS INTERNATIONAL CORPORATION AND ERNST
& YOUNG, INTERNATIONAL TRANSFER PRICING
(1991).
27 Supra note 14.
exemption under the predecessor to Code
Sec. 892).
10 Temporary Reg. §1.892-2T(a)(2).
1 Id.
12 Temporary Reg. §1.892-2T(a)(2).
13 Reg. §1.892-2T(c). A fund that is an integral
part may also qualify for the exemption
under Code Sec. 892.
14Code Sec. 892; Temporary Reg.
§1.892-3T(a).
15 Temporary Reg. §1.892-3T(a).
16 Temporary Reg. §1.892-3T(a)(3).
17 Temporary Reg. §1.892-3T(a)(5).
18Temporary Reg. §11.892-3T(a)(4).
19 Temporary Reg. §1.892-3T(a)(3).
20 Temporary Reg. §1.892-4T(b). See also,
Quantas Airways Ltd., CtCls, 97-1 USTC
50,344, aff'd, CA-FC, 98-2 USTC 50,859
(lease of excess office space considered a
commercial activity).
21 Temporary Reg. §1.892-4T(c). Presumably,
investments in U.S. stocks, bonds and other
securities under Code Sec. 892 would also
include derivatives, since the proposed regu-
lations extend the exclusion from a Code
Sec. 864(b) U.S. trade or business to income
from trading derivatives. Proposed Reg.
§11.864(b)-1(a). Cultural events, nonprofit
activities and governmental functions are
also not commercial activities. Temporary
Reg. §1.892-4T(c).
22 Code Sec. 892(a)(2)(B).
23 Temporary Reg. §1.892-5T(c)(2).
24 Temporary Reg. §11.892-5T(d)(4), Example
4.
25 Foreign corporations and nonresident aliens
are generally exempt from U.S. income tax
on gain from the sale of stock unless such
gain is effectively connected with a U.S.
trade or business or deemed to be effectively
connected under Code Sec. 897. Code Secs.
28 Borkowski 1996, supra note 12.
29 Ernst & Young, Transfer Pricing: Risk Reduc-
tion and Advance Pricing Agreements, TAX
NOTES INT'L, July 31, 1995, 293-310 cited
in Ernst & Young International cited in R.
TANG, INTAFIRM TRADE AND GLOBAL TRANSFER
PRICING REGULATIONS (1997); ERNST
& YOUNG,
TAXATION IN HONG KONG (8th ed. 1996); Ernst
& Young, Transfer Pricing 1997 Global Sur-
vey (1997); Ernst & Young, Transfer Pricing
1999 Global Survey: Practices, Perceptions
and Trends in 19 Countries for 2000 and
Beyond(1 999); Ernst & Young, Transfer Pric-
ing 2001 Global Survey: Making Informal
Decisions in Uncertain imes (Nov. 2001);
Ernst &Young, Transfer Pricing 2003 Global
Survey: Practices,Perceptions and Trends in
22 Countries Plus Tax Authority Approaches
in 44 Countries (2003).
30 Supra note 15.
860, 871 and 881.
26 Temporary Reg. §1.897-3T(b), Example 1.
27 Temporary Reg. §11.892-3T(a)(1 ).The exclu-
sion of income from direct interest in real
property is particularly interesting in light
of the exclusion of new leases from com-
mercial activity.
28 Code Sec. 897(h)(i). The notice and regula-
tions refer to a qualified investment entity
which includes a REIT or a regulated invest-
ment company. For purposes of this memo-
randum we refer to a REIT when discussing
these rules.
29 Code Sec. 892; Temporary Reg. §1.892-3T.
30 See Reg. §1.856-1(e)(3) (also covering
redemptions of REIT stock treated as a sale
or exchange). cf. Peter Genz, Tax Issue
Arising in REIT Liquidations 0an. 15, 2008)
(distributed at ABA Tax Section meeting in
Las Vega, Nevada).
31 Notice 2007-55, IRB 2007-27, 13.
32 Certain foreign organizations qualify for
exemption under Code Sec. 501 (a), but the
focus of this discussion in on domestic tax-
exempt organizations.
33 Code Sec. 511.
31 S. REP. No. 2375, 81st Cong., 2d Sess.,
1950-2 CB 483, 504-05.
31 Code Sec. 512.
36 Code Sec. 512(b).
31 Code Sec. 513.
38 Code Sec. 512(b)(3).
19Code Sec. 512(b)(5).
40 Temporary Reg. §1.892-3T(a).
41 Temporary Reg. §1.512(b)-i (1)(4)(a).
42 Code Sec. 501 (b).
41 Code Sec. 512(c)(1); Reg. §1.512(c)-i.
44 Temporary Reg. §1.892-5T(d)(3). Query,
however, whether Rev. Rul. 91-32 would
be upheld by a court?
45 "Any gain, derived from the disposition

of a U.S. real property interest defined
in § 897(c)(1)(A)(i) shall in no event
qualify for exemption under § 892." Reg.
§1 .892-3T(a)(1 ).
46 Code Sec. 512(b)(3).
41 Code Sec. 512(b)(5).
48 Code Sec. 514.
49 Code Sec. 514(b)(1).
50 Code Sec. 514(c)(9).
51 Code Sec. 856(h)(3)(c).
52 Id.
13 Often, the practical implications of the
availability of Code Sec. 892 exemption
to pension funds are small because of the
availability for exemption under tax treaties
with the United States. However, related
party dividends and interest are generally
excluded from treaty benefits and there
is usually no exemption from FIRPTA for
interests in noncontrolled USRPHCs.
54 Temporary Reg. §1.892-5T(b)(3). The tem-
porary Treasury regulation provides further,
however, that even if a pension trust earns
no income that would be UBIT (and thus
is not a controlled commercial entity), its
income from commercial activities will not
be exempt under Code Sec. 892. Because
the income is of the type described in Tem-
porary Reg. §1.892-3T and is not income
from commercial activities as described in
Temporary Reg. §1.892-4T. Temporary Reg.
§1.892-5T(b)(3).
Reg. §1.1248-8(c) provides spe-
cial rules for tracking attributable
earnings under Code Sec. 1248 in
CFC-to-CFC liquidations. These
special rules generally only allow
E&P to tier up for Code Sec. 1248
purposes upon the liquidation
to the extent such E&P would
be included in USP's Code Sec.
1248 amount under Code Sec.
1248(c)(2). 17 As noted above, the
60 of carryover CFC2 E&P would
appear to be included in USP's
Code Sec. 1248(c)(2) calculation.
Therefore, such earnings should
carry up to CFC1 and should go
into CFC1 's Code Sec. 1248 earn-
ings pool for purposes of Code
Sec. 1248 and for purposes of
determining the USP's "section
1248 amount" and the "all earn-
INTERNATIONAL TAxJOuRNAL
ings and profits amount" as relates
to the stock of CFC1.
Conclusion
The demise of the Killer B may have
increased the spotlight on Cash Ds
as a potential repatriation device.
The Cash D is arguably more lim-
ited in its scope than the Killer B,
requiring a U.S. multinational to
have one or more well-placed,
high basis CFCs (perhaps from
a direct or indirect acquisition)
for the structure to makes sense.
Hence, the Cash D may never at-
tain the iconic status of the Killer
B (and the legend of mega-billion
dollar repatriation transactions
that are prominently reported in
the WALL STREET JOURNAL). How-
ever, the foreign-to-foreign Cash
D has already established itself
as a worthy planning tool when a
U.S. multinational isevaluating its
repatriation alternatives.
ENDNOTES
This article contains material described
in U.S. TAXATION OF INTERNATIONAL MERGERS,
ACQUISITIONS AND JOINT VENTURES by Dolan,
Dabrowski, Jackman and Tretiak © Warren,
Gorham & Lamont, and is reprinted with
permission; all other rights in this article are
reserved to Warren, Gorham & Lamont. Spe-
cial thanks to Ron Dabrowski, an interna-
tional tax principal in KMPG's Washington
National Tax Office for his assistance with
this article.
1 Perhaps you're also feeling nostalgic about
buying gas for $2.50 a gallon.
2 Notice 2006-85, IRB 2006-41, 677.
Notice 2007-48, IRB 2007-25, 1248. One
company apparently got in under the wire,
with a $12.5B buyback reported in the May
30, 2007, WALL STREETJOURNAL. SeeWilliam
M. Bulkeley, New Offshore Arm Drives
Repurchase, Easing Tax Burden, at A4. A
great example of the maxim that "he who
hesitates is lost" (from "Cato" in 1713, by
the English poet Joseph Addison).
Notice 2008-10, IRB, 2008-10, 277.
A D reorganization is a transfer by a corpo-
ration of all or part of its assets to another
corporation if immediately after the transfer,
the transferor ...is in "control" of the cor-
poration to which the assets are transferred;
July-August 2008
but only if, in pursuance of a plan, stock or
securities of the corporation to which the
assets are transferred are distributed in a
transaction which qualifies under Code Sec.
354, 355 or 356. "Control" for a nondivisive
D reorganization isat least 50 percent (vote
or value), rather than the 80 percent vote
referenced in Code Sec. 368(c) for divisive
D reorganizations.
6 W.L. Morgan, 33 TC 30, Dec. 23,789 (1959),
rev'd, CA-3, 61-1 usTc 9317, 288 F2d 676,
cert. denied, Sct, 368 US 836, 82 SCt 32
(1961).
7 Rev. Rul. 70-240, 1970-1 CB 81.
0 Rev. Rul. 2004-83, IRB 2004-32, 157. Rev.
Rul. 2004-83, Situation 1 addresses a con-
solidated group, where Code Sec. 304 is
inapplicable pursuant to Reg. §1.1502-80(b).
Situation 2, however, provides that P,S andT
are not members of a consolidated group. See
also H.R. REP. No. 98-432, Part II, 1249 (1984)
and Rev. Rul. 67-274, 1967-2 CB 141.
1 Reg. §1 .368-2T(l)(2)(i). The target is then
deemed to distribute the nominal share
(along with the boot) to its shareholders.
Where appropriate, the nominal share is
deemed to continue moving within the
chains of ownership as necessary to reflect
the actual ownership of the selling and
acquiring corporation.
10 A Cash D may have a number of applica-
tions, in addition to repatriation. For ex-
ample, a "sale" treated as a Cash D may (1)
produce more beneficial foreign tax results
(e.g., the buyer has a lower rate of withhold-
ing tax under its tax treaty with the United
States), or (2) permit a U.S. acquirer to push
down debt of a recently acquired foreign
target to a foreign acquirer.
11 Business purpose and offshore planning
would, of course, need to be analyzed. If
there is appreciation in the stock of CFC2,
there is some uncertainty in the outcome.
There is authority to suggest that, unlike
Code Sec. 304, the dividend is treated as
paid only out of the target's earnings and
profits (E&P). See American Manufacturing,
55 TC 204, Dec. 30,399 (1970); Atlas Tool,
70TC 86, Dec. 35,124 (1978), aff'd, CA-3,
80-1 USTC 9177, 614 F2d 860, cert. de-
nied, SCt, 449 US 836, 101 SCt 110 (1980).
However, the IRS has taken the position the
E&P of both companies should be taken into
account in a Cash D. See I.E. Davant, 43 TC
540, Dec. 27,223 (1965), aff'd in part and
rev'd in part, CA-5, 66-2 USTC 9618, 366
F2d 874, cert. denied, SCt, 386 US 1022,
87 SCt 1370 (1967), and Rev. Rul. 70-140,
1970-1 CB 73.
12 For a more comprehensive description of
Notice 2008-10, see Hal Hicks and David
J. Sotos, The Empire Strikes Back (Again)-
Killer Bs, Deadly Ds and Code Sec. 367
As the Death Star Against the Repatriation
Rebels, INTERNATIONAL TAX J., May-June
2008, at 37.
13 For example, Code Sec. 964(e) uses 1248
principles to recharacterize gain from CFC dis-
positions of lower-tier CFC stock as dividends.
In addition, the Code Sec. 367(b) regulations
provide for Code Sec. 1248 principles in
computing the "section 1248 amount" and the
"all earnings and profits amount." Separately,
Code Sec. 987 should be considered.
14 Reg. §1.367(b)-4(b)(1).
Is Reg. §1.367(b)-4(d), formerly the operative
rule describing the method for preserving
E&P following nonrecognition exchanges of
CFCs in order to facilitate the future applica-
tion of Code Sec. 367(b) and Code Sec. 1248,
now incorporates the rules described in Reg.
§1.1248-8.
16 See Reg. §1.1248-3(0; see also Code Sec.
1248(c)(2) (in relevant part, only providing
rules for earnings attribution and not provid-
ing a separate gain limitation).
17 Reg. §1.1248-8(c)(1).
Mead, 533 US, at 229).
20 Swallows II, supra note 1, at 169.
21 Chevron, supra note 11, at 837-38.
22 Swallows II,supra note 1, at 170.
23 National Cable & Telecomms. Ass'n v. Brand
X Internet Servs., supra note 16.
24 Swallows II, supra note 1, at 170. In a foot-
note, the court addressed Anglo-American
Direct Tea Trading Co., 38 BTA 711, Dec.
10,446 (1938), nonacq., 1939-1 CB 39. The
court stated that the Anglo-American court
did not purport to apply the unambiguous
meaning of the word "manner," but rather,
detailed the interpretive confusion that courts
confronted. Id., at 170 note 11. By contrast,
the Tax Court held that Anglo-American ap-
plied the unambiguous meaning of the word
"manner." Swallows I, supra note 3, at 145.
25 In Biddle, supra note 4, the Supreme Court
held that a foreign tax credit was not avail-
able to a shareholder in respect of the tax
paid by the corporation. The Court stated
that U.S. revenue laws have not treated as
taxpayers those upon whom no legal duty
to pay the tax is laid.
26 See Swallows II, supra note 1, at 170.
27 See id., at 171.
28 See Reg. §§1.179-5 and 1.826-1(c). While
Reg. §1.179-5 is entitled, "Time and manner
of making election," the text of the regula-
tion states that the election must be made
on the taxpayer's first income tax return to
which the election applies, whether or not
the return is timely.
29 See Swallows I, supra note 3, at 132-34
(listing more than 80 statutory provisions).
30 "We believe that Congress acted intentionally
and purposely when it included both 'time'
and 'manner' in single sections of the refer-
enced statutes but omitted the word 'time' in
50
favor of only the word 'manner' in other single
sections of those statutes ...
as insection 882(c)
(2)...."Id., at 134-35. See also Russello, SCt,
464 US 16, 104 SCt 296 ("Where Congress
includes particular language in one section
of a statute but omits it in another section of
the same Act, it is generally presumed that
Congress acts intentionally and purposely in
the disparate inclusion or exclusion.").
31 See Swallows II, supra note 1, at 171. It
would appear that this definition of "man-
ner" is not the one used in the statute.
The word "manner" as used in Code Sec.
882(c)(2) refers not to a characteristic of
a person, but to "the mode or method in
which something is done or happens." See
WEBSTER's THIRD NEW INTERNATIONAL DICTION-
ARY (UNABRIDGED), G.& C. Merriam Co., at
1376 (4th ed. 1976) (definitions 2a(1) and
2a(2) of "manner"). Stated another way, the
word "manner" addresses how something
is done. The word "time" is ordinarily used
to address when something must be done.
32 See Swallows II, supra note 1, at 171-72. It
seems inappropriate in this case to grant any
additional deference on account of the com-
plexity of the Code. The question of statutory
interpretation involved-whether Congress
intended the word "manner" to include atime
element-is a relatively simple one that could
arise under any federal statute.
33 See id., at 172.
31 For a detailed discussion of the 2003 regu-
lations, see Ronald B. Schrotenboer, Arm's
Length in Wonderland, 2004 TNT 8-29 (Jan.
13, 2004).
15Microsoft Corp., CA-9, 2002-2 usTc T50,800,
311 F3d 1178.
36Code Sec. 927(a)(2)(B), as in effect prior to
the FSC Repeal and Extraterritorial Income
Exclusion Act of 2000 (P.L. 106-519).
31Microsoft, supra note 36, 311 F3d, at 1183.
reasonable tax test, the relationship
with the anti-abuse legislation is
released and the reasonable tax
test looses its safe-harbor character.
These arguments were rejected by
the legislator.
The new provision makes the po-
sition of the Revenue much stronger
and creates even more uncertainty
after the changes implemented in
2007. 4 This does not add to the
Dutch investment climate. It also
leaves open the question of whether
the interest deduction rules are in
violation of EU law in the case of
inter company loans from genuine
group financing companies in, for
example, Cyprus or Ireland.
Given the tax planning opportu-
nities the legislation offered during
2007, there is no grandfathering
clause for existing loans. Con-
sequently, the new legislation is
applicable to loans existing on Janu-
ary 1,2008, irrespective of whether
the taxpayer companies have a book
year that differs from calendar year.
Future
Developments
The question iswhether this amend-
ment will lead to some stability on
the interest deduction front. Based
on reports in the press that MNEs
pay effectively little corporate in-
come tax in the Netherlands (in
large part caused by the current
interest deduction rules), the Dutch
parliament has requested the Un-
dersecretary of Finance responsible
for tax matters to launch an investi-
gation regarding these allegations. It
cannot be ruled out that the results
of this investigation will lead to a
more substantial overhaul of the
Dutch interest deduction rules
leading to more restrictive rules for
deducting interest. Inthis context, it
is rumoured that the German inter-
est barrier-approach restricting the
interest deduction to 30 percent of
EBITDA is looked at as one of the
possible alternatives.
Conclusions
The amendment of the reasonable
tax test in the anti-base erosion
provisions has taken away artificial
tax planning opportunities whereby
foreign passive financing vehicles in
a low tax jurisdiction (such as Cy-
prus) were used to erode the Dutch
tax-base. It is regrettable that the

need to combat pure artificial tax
planning opportunities has not led
to a confirmation that a loan from
a genuine group finance company
qualifies as a business driven loan.
This leaves the question whether the
anti-abuse rules constitute a breach
of EU-law unanswered. Finally, it
cannot be ruled out that the current
investigation into the tax position of
MNEs in the Netherlands will lead
to more fundamental changes in the
Dutch interest deduction rules.
ENDNOTES
See Peter H.M. Flipsen, The Netherlands,
Inter-Company Financing of External Ac-
quisitions Under Dutch Anti-Base Erosion
Rules, INT'L TAX J., Mar.-Apr. 2007.
2 Comment of the Commission on legislative
proposals of the NOB to the Permanent
Committee for Finance of the Lower House
of Parliament dated November 9, 2007.
See consideration 54 of the EJC in the Cad-
bury Schweppes judgement (Case C-1 96/04,
dated September 12, 2006).
Supra note 1.
An English translation of current
Schedule 17(3) is included here.
By this year's tax law change,
the columns for the currency
and unit and for the sharehold-
ing ratios of the common parent
company will be added.
Secondary
Adjustment
As a matter of principle, Japan
does not require a correla-
tive adjustment. The amount a
Japanese subsidiary shifted to
a foreign parent company by
way of transfer pricing is treated
simply as the flow-out of the
fund without characterizing it
as a dividend. This is a sharp
contrast to the U.S. transfer pric-
ing practice.
INTERNATIONAL TAxJouRNAL
Repatriation
A foreign affiliate can repatriate
to its Japanese related company
an overpaid amount through
transfer pricing without causing
the Japanese corporation tax li-
ability on the amount received
by it by filing a prior notification
if the repatriation is made within
a reasonable period.
Additions to Tax
When a transfer pricing adjust-
ment is made, the penalty for
understatement and the delinquent
tax will be imposed in addition to
the principal corporation tax. The
penalty for understatement is 10
percent or 15 percent of the cor-
poration tax newly imposed. The
delinquent tax is currently 4.75
percent p.a. There is no heavier
penalty tax specifically designed
for transfer pricing taxation.
The Statute
of Limitations
The statute of limitations is six
years for a transfer pricing adjust-
ment unless a fraud is involved in
which event the statute of limita-
tions is seven years. The statuite of
limitations will start to run from
the deadline for filing the final tax
return for the tax year in question.
The tax return is required to be
filed within two months (or three
months if the one-month extension
is permitted) from the last day of
the tax year.
Transfer
Pricing Audit
The transfer pricing assessment is
made by issuing a correction dis-
position in the name of the District
Tax Office having jurisdiction over
July-August 2008
the taxpayer but the transfer pric-
ing audit isconducted by the staff
of the Regional Taxation Bureaus
above the District Tax Office. A
transfer pricing audit usually takes
one year or so. Since Japanese tax
law does not have the system of
waiver of the statute of limitations,
the period covered by a transfer
pricing adjustment at one time is
usually five tax years at most.
It is always a hot issue what the
salient comparables are at transfer
pricing audits.
It is common for the Japanese
tax authorities to use secret com-
parables. It is the Japanese tax
authorities' position that they can
use secret comparables if a tax-
payer does not comply with their
request for financial data located
outside Japan (STML art. 66-4(7)).
It isproblematic that such secret
comparables sometimes contain
related parties' transactions.
Disputes
A taxpayer who isdissatisfied with
a transfer pricing adjustment may
lodge administrative appeals. The
request for reinvestigation with
the Regional Taxation Bureau
may be filed within two months
after the date on which the cor-
rection disposition is received. If
the request for reinvestigation is
dismissed, the taxpayer may file
the request for reconsideration
with the National TaxTribunal (the
"NTT"), which is apart of the NTA
within one month (currently) of
the reinvestigation decision of the
Regional Taxation Bureau.
A taxpayer corporation that files
blue tax returns may skip the re-
quest for reinvestigation and may
file the request for reconsideration
directly with the NTT.
After the above administrative
appeals, a taxpayer may institute an

action at a District Court to rescind
a correction disposition in question
within six months from the date
the taxpayer learns of the NTT's
decision.The District Courts and the
High Courts review fact findings. The
procedure at a District Court usually
takes a couple of years, and that at a
High Court usually one year, unless
a complex case is involved.
Applications for mutual agree-
ment procedure under applicable
tax treaties are popular means to
resolve double taxation caused by
transfer pricing adjustments.
Suspension of Tax
Payments
In 2007, Japan created the system
of suspending tax payments due as
a result of transfer pricing adjust-
ment for the period of the mutual
agreement procedure invoked by
the taxpayer and exempting the De-
linquent Tax during that period.
In 2008, this system isextended to
the local income taxes (the inhabit-
ant tax and the enterprise tax).
Advance Prior
Agreement
Japan was the first country to intro-
duce the advance prior agreement
(APA) by the NTA's circular in
1987 (then commonly called as
"pre-confirmation system") before
the IRS introduced it by Rev. Proc.
91-22 in 1991. The APA procedure
is currently provided for in the TP
Guidelines.
The APA is considered to be the
surest way to eliminate the risk of the
transfer pricing taxation. It is often
employed after a taxpayer suffers a
transfer pricing adjustment, although
it is also used by corporations that
have not experienced a transfer pric-
ing adjustment. Especially, bilateral
APAs using the mutual agreement
procedure under applicable tax
52
treaties are much more popular
than unilateral APAs. The Reference
Case Studies provide that a transfer
pricing examination should not be
conducted while the APA procedure
ispursued. (Reference Case Studies,
Case 25 pp. 77-78.)
During the one-year period from
July 1,2006 through June 30, 2007,
105 bilateral APAs were applied for
and 84 bilateral APA cases were
agreed on. Among the 84 agreed-
on cases, the TPMs used were (1)
the RP 25 cases, (2)the TNMM 25
cases, (3) the CP 22 cases, (4)the
CUP 13 cases, and (5)the PSM 7
cases (Plural TPMs used in a case
are counted separately, thus the to-
tal number of theTPMs (92) islarger
than the number of the cases (84))
(NTA's APA Report for 2006 Office
Year dated October 3, 2007).
CB 744.
10 Code Sec. 6048. Unless otherwise stated, all
references herein to "Section" or "Sections"
are to the Internal Revenue Code of 1986, as
amended.
1 Code Sec. 6677.
11 Notice 2003-57, Section 2, IRB 2003-34.
13 Id.
14 Notice 2003-75, Section 2, IRB 2003-50.
15 Notice 2003-75, Section 3, IRB 2003-50. This
change came in the wake of lobbying by various
groups, including the American Institute of Certi-
fied Public Accountants. SeeAICPA Comments
on Foreign Trust Information Return Form, 2003
TAx NOTESToDAY 124-55 (June 19, 2003).
16 Code Sec. 6048(d)(4).
17 Notice 2003-75, Section 3.
18 Instructions to Form 8891 (Rev. Dec. 2006).
19 Instructions to Form TD F 90-22.1 (Rev.
July 2000); 31 U.S.C. § 5314(a); 31 C.F.R.
§103.24.
20 Instructions to Form TD F 90-22.1 (Rev. July
2000).
21 Instructions to FormTD F90-22.1 (Rev. July
2000).
22 For a complete discussion of issues related to
the FBAR, see Hale E. Sheppard, Evolution
of the FBAR: Where We Were, Where We
Are, and Why It Matters, 7(1) UNIVERSITY OF
HOUSTON BUSINESS & TAX LAw J. 1-41 (2006).
23 See, e.g., Vernon K. Jacobs, Reporting and
Disclosing Foreign FinancialAccounts, 36(6)
TAX ADVISER (2005).
24 Code Sec. 6662; Code Sec. 6651 (a)(2).
25 Code Sec. 6677.
26 31 U.S.C. § 5321 (a)(5)(B)(i) (as in effect after
Oct. 22, 2004).
27 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii) (as in
effect after Oct. 22, 2004).
28 Code Sec. 6072(a).
29 Code Sec. 6151 (a).
30 Code Sec. 6601 (a).
31 Code Sec. 6622(a).
32 IR-2006-121, IRS, Canada Revenue Agency
Unravel Cross-Border Tax Scheme (Aug. 3,
2006).
33 Id.
34 The following scenario is a compilation of
the fact patterns contained in 20 private letter
rulings regarding Canadian RRSPs and RRIFs
spanningfrom 1992 to 2006. See, LTR 9215045
(Jan. 14,1992), LTR 9311016 (Dec. 17,1992),
LTR 9507021 (Nov. 17, 1994), LTR 9517017
(Jan. 26, 1995), LTR 9517044 (Jan. 31, 1995),
LTR 9519055 (Feb. 16, 1995), LTR 9522020
(Mar. 1, 1995), LTR 9522047 (Mar. 7, 1995),
LTR 9621021 (Feb. 21, 1996), LTR 9833014
(May 18, 1998), LTR 199949029 (Sept. 14,
1999), LTR 200019040 (Feb. 17, 2000), LTR
200152038 (Oct. 2, 2001), LTR 200329038
(Apr. 15, 2003), LTR 200435013 (May 5,
2004), LTR 200437005 (May 11, 2004), LTR
200519036 (Feb.l, 2005), LTR 200552006
(Sept. 29, 2005), LTR 200604027 (Oct. 20,
2005), and LTR 200607014 (Nov. 3, 2005).
31 Several tax practitioners have suggested that it
is also necessary to file a Form 8833 (Treaty-
Based Return Position Disclosure Under
Section 6114 or 7701(b)), but the IRS has not
appeared to enforce this requirement, if it even
exists. See Renea M. Glendinning, Reporting
Requirements for Canadian Registered Retire-
ment Savings Plans and Registered Retirement
Income Funds, FLORIDA CPA TODAY, July-Aug.
2004, at 48-51.
36 Code Sec. 6501 (a).
31 Code Sec. 6501 (c)(1).
38 V Allen, 128TC 37, Dec. 56,851 (2007).
39 Code Sec. 6501 (c)(8).
48 31 U.S.C. § 5321(b)(1).
41 This could also include Form 8833, if such
information return is required. See note 35,
supra.
42 The onerous requirements for filing a PLR
request are published in the first revenue
procedure of each year. See, e.g., Rev. Proc.
2007-1.
43 Reg. §301.9100-1 (c).
44 Reg. §301.9100-1 (b).
45 Reg. §301.9100-3(a).
46 Reg. §301.9100-3(b)(1).
47 Reg. §301.9100-3(b)(3).
48 Reg. §301.9100-3(b)(3).
49 Reg. §301.9100-3(c)(1 )(i).
10 Reg. §301.91 00-3(c)(1 )(ii).
81 Reg. §301.9100-3(a).
52 Reg. §1.6662-1, Code Sec. 6664(c)(1), Reg.
§1.6664-4(a).
53 IRM §20.1.1.3.1.2.1 (Aug. 20, 1998).
54 Reg. §1.6664-4(c).