Tax Treaty Case Law around the Globe 2017

S. 99United States: Narrow ALS Analysis

Yariv Brauner

1. S. 100Introduction

This case is the first post-BEPS transfer pricing loss for the IRS in court, continuing an unflattering streak for the government, and demonstrating that the pre-BEPS adherence of US courts to the literal application of the arm’s length standard has not changed. Moreover, this is another US case where a tax treaty applies, yet the discussion completely avoids treaty law, including the OECD TPG and other sources related to article 9 of the OECD Model. The case is perhaps the best demonstration to date of the inability of the court to tackle complex arm’s length analysis, and its inevitable resort to simplistic solutions that effectively contradict the purpose of transfer pricing rules, supporting rather than curtailing aggressive tax planning. In addition, the case effectively reads out of the Code the “commensurate with income” dictate. It does so, however, with no detailed explanation, and with no reference to treaty law.

2. Facts of the Case

The detailed facts of the case are quite complex, yet, to understand the decision it would suffice to set out briefly the basic tax planning structure of the Medtronic group. Medtron...