In this episode of the “GILTI Conscience” podcast, Bram Isgur, principal at Keystone Strategy, joins our hosts Nate Carden and David Farhat to talk about transfer pricing on an ex ante and ex post basis. They discuss the use cases for each method, how these methods differ across industries and why it’s important to think about the bigger picture in preparing for unimaginable events and changes. 

So, should you take an ex ante approach, where you look forward and try to figure out your pricing for events that have not yet occurred? Or do you take an ex post approach, where you wait to see what happens and work your way backward? Because there are pros and cons to each, it’s difficult to give a definitive answer. However, Bram has some advice for companies grappling with these choices. 

For example, many companies in the tech space either boom or bust, which often leads to tax controversy years later. On the ex ante front, when you’re undertaking a transaction that involves risk, you have to write down what the risks entail — you can't rely solely on the statements put together by people who believed the company would succeed. In particular, you should have someone from the business side and someone from the tax side looking at your documentation. The ex ante approach allows you to talk through your strategy before risks come to pass. 

On the ex post side, it’s helpful to take a look at businesses that already failed. Instead of wondering if your company’s success was inevitable, take a look at other companies that existed around the same time and would have been viewed as competitors. Examine their model and look at what happened to them. The ex post approach is often more convenient and accurate in certain cases.

No matter which approach you take, it’s vital to assess your situation, determine what’s best for your business and stick to a plan of action. There are no perfect solutions, but consistency gives you a better position to deal with possible tax controversy down the road.

💡 Featured Guest 💡

Name: Bram Isgur

What he does: Bram is a Principal at Keystone Strategy, an economics consulting firm for Fortune Global 500 companies, top law firms, and government agencies. An economist, Bram advises law firms, multinational companies, and banks on diverse issues, including tax and regulatory compliance, transfer pricing controversy, antitrust, and securities law. 

Bram’s specialty areas include negotiation of multilateral Advance Pricing Agreements with the IRS and other tax authorities, transfer pricing relating to financial transactions, risk, banking and global dealing, and economic analysis to support Regulation W compliance. 

Organization: Keystone Strategy

Words of wisdom: “Instead of thinking about this particular time in this particular instance, [you] should think more about long term industry trends. It's absolutely true that like there's going to be another black swan event and I don't know what it will be and nobody else knows what it will be either.”

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GILTI Conscience is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. Skadden’s tax team is recognized globally for providing clients with creative and innovative solutions to their most pressing transactional, planning, and controversy challenges. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.

This is GILTI Conscience, casual discussions on transfer pricing, tax treaties, and related topics. A podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts, and tax administration trends. We also dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now, your hosts, Skadden partners David Farhat and Nate Carden.

Hi, everybody. Once again, Nate Carden, David Farhat, and Stefane Victor. You're listening to GILTI Conscience. Our fourth person, Eman Cuyler, is out on leave. Instead, we're joined by a guest host, Mithuna Sivaraman.

Mithuna, I'm going to give you a chance to introduce yourself. Welcome.

Thank you so much, Nate, and thank you all of you for having me. As Nate have mentioned, my name is Mithuna Sivaraman. I am a new addition to the Skadden team. I joined Skadden at the end of November, 2021. Before that, I was at EY where I've worked very closely with David Farhat. I mean, basically anything that I know about controversy, he has taught me. Let's put it that way. I'm really happy to be here. Thank you so much.

Well, what about tax?

Exactly. That way, we know she knows very little about controversy, and she is here to continue to make me look good if there are any questions.

And tax and transfer pricing.

Well, notwithstanding the obvious untruth that you're learning everything that you know from David, we're thrilled to have you, and I think you're going to be a great addition to the podcast. Thanks so much for agreeing to join us.

Today, we're going to talk about a topic that is both a theoretical and a practical one. It's the question of whether to do transfer pricing on an ex-ante basis or an ex-post basis. By which we mean, do you look forward and try to figure out what your pricing should be for things that have not yet happened, or do you wait and see what happens and look backward?

It's a tough problem because, conceptually, the rules and the theory of transfer pricing tend to be done on an ex-ante basis. You allocate risk beforehand and you wait and see what happens, but, of course, on audits, when these things get examined, oftentimes those happen years after transactions are done, and so, even though you are trying to price things on an ex-ante basis, you already know what happened in real life, and so there's a tendency to do things on an ex-post basis.

Further, we see both in the OECD guidelines and in US transfer pricing rules a mix of ex-ante and ex-post contexts. We are joined today by a returning guest, Bram Isgur, who is going to talk to us about these topics from both a theoretical and practical perspective.

Bram, welcome back. What do you think?

Thank you, Nate. Glad to be back here and glad to be hanging out with the gang and Mithuna again. I think that this is a really apt topic because, in a certain sense, this is one of the most fundamental problems of transfer pricing. It's one that there is no good solution to. Anything you do is necessarily going to be imperfect in some way. I mean, it's one of the tax authorities and policy-makers have been grappling with for years. In a certain sense, you could even see it as part of the inspiration behind GILTI, which gave us our name. It's one that the taxpayers have been wrestling with for years. It's also, in some sense or another, behind almost all of the big transfer pricing controversy cases both in the US and worldwide, but something that often flies under the radar a little bit that you have a lot of cases that seem to be about benchmarking or functions and, when you look at it, a lot of it really has to do with what was going through somebody's head in 2005.

One of the things... And, David, having spent some time in a tax authority, I'll throw to you... That people sometimes say about this, is that tax authorities want to use ex-ante and ex-post in a heads I win, tails you lose, way. Taking transactions that were done on a fair ex-ante basis, but looking after the fact and saying, no, we're going to reprice it. Do you think that criticism is fair?

It can be fair, like I all things, in that we don't talk in absolutes especially in transfer pricing. I think you have governments that can play gotcha at times, but putting my IRS or government hat back on, it is a bit difficult. The governments are coming at transactions where they have less information than taxpayers. They have less information than advisors. They're looking at something 5, 10, how many every years down the road, so there's limited information and limited things they can look at. Looking at things from an ex-post perspective is a little bit more convenient at times and, sometimes, it's a little bit more accurate because you can look at what happened to determine what they should have been thinking in the past.

Another thing I want to bring in, the ex-post, ex-ante isn't just a government concept. This is something taxpayers can benefit from or taxpayers can try to play with as well. If we think about the downturn in 2010 and what that did to transfer pricing analysis and what that did to expectations about risk and what that did to jurisdictions that were risk bearers, you had taxpayers coming in and saying, yes, we did our transfer pricing ex-ante this way, but who could have seen this catastrophe?

We should go back and reallocate risk. We should go back and say, "What would third parties do as a result of this catastrophic happening?" I think we're in that environment now. Who could have predicted COVID? Does our ex-ante analysis stand up in the face of COVID? I think that's a challenge for not just taxpayers, but, if you put yourself then in the government shoes, it makes a lot of sense that they would want to look at things ex-post because they can get a better understanding or they can get more information when they're dealing with that lack of information.

While, yes, you're right, Nate, if I'm an examiner and I'm going in and I need to make an adjustment and my goal is to make an adjustment, I could play that game about, "Okay, which, which works better?" But I don't think it's always a fair criticism.

In the aftermath of these catastrophes, are governments looking through the losers and saying, "Let's adjust this," or are they only going after the winners?

It depends. The last time Bram was here, he said something I think that was very insightful. Governments like to see money coming in and not going out. Looking at a winner and loser depends on the context. Let's use 2010, for instance. Take financial services in the banking world. Folks didn't believe capital was taking that kind of massive risk, so the return to capital wasn't substantial. It was, "Yeah, you're a market maker. You're not necessarily doing proprietary training... trading." Sorry, not training. "Capital shouldn't be getting a lot of return."

Also, there was a concern about capital sitting on a sunny island somewhere in the low tax jurisdiction getting all the profit, but then, all of a sudden, you have this massive issue in 2010 with the downturn, and it's like, "Wait, hold on, you didn't pay us to hold this kind of risk. You didn't compensate us enough to bear this kind of massive loss. We need to step back and rethink about what would be proper compensation for this kind of risk because, now, we know this kind of risk is real."

To your question about looking at winners and losers, it really depends on the context because I could be trying to push losses out or I could be saying, "You have outsides gain somewhere else and you should be bringing it in." Or, if I'm a jurisdiction, I could be saying, "Listen, I should have been de-risked. I shouldn't be bearing any of this risk. Even if it's catastrophic, the capital provider, the risk-taker, the folks that have been getting the larger profit should have been getting it. I should get my cost plus no matter what happens." There is some flexibility there as to how a tax authority may look at it and, again, you can flip that with the taxpayer and see how they might want to look at it, and they might want to argue about their transfer pricing or how they might want to adjust things now that you've had these massive issues.

I think that's a great point. I think that we can also see a more recent example in the Singtel case where the Australian tax authority was grappling with this exact issue not even in a crisis mode, but more in a more day-to-day how to an intercompany, I guess, affiliated parties loan money to each other.

Yeah, that one, it's an interesting callback to the last time I was on here because it was about a loan and that parties agreed to amend a loan after it had been made, and it was about, in that case, among other things, switching between a floating and a fixed rate. A floating rate is when it's based on something like US dollar or AUD, LIBOR, so it resets periodically. Fixed rate just means you fix it up front.

Logically, you can see there's no good reason why you would generally prefer one over the other. You're going to pick whichever works better for you based on your specific circumstances. In this case, for a variety of reasons, the clerk concluded that they should not have done that amendment. They went back and second guessed that, and that's the thing that can, from a taxpayer perspective, be really troubling, the idea that I'm going to make this decision in good faith today and then, five years later, a tax authority is going to come back and say, "Well, you wouldn't really have done that if you were dealing with independent parties at arm's length. You would've done something else now that I know what the outcome is going to be." I think that's what lends itself a lot to, as you were saying, the perception of bad faith.

How do you think... And whether it's in Singtel or elsewhere... How do tax authorities reviewing courts, whatever, reach that conclusion? In my life, I've had fixed rate mortgages and floating rate mortgages, and I can't tell you that there was any particular reason why I picked one versus the other. How do they go back in time and pretend to know something that seems unknowable?

Well, that's a good question because it's really hard to do. I think that there's a theoretical answer as to how should do it, and I think, by and large, they're trying to do the right thing and they're trying to do it this way, but, fundamentally, it's not an easy exercise for the human mind.

What you should be doing in theory is you should actually be going back and looking at what were independent companies in the same situation doing? That's how the US commensurate-with-income rules work is that they say, "Well, if you have a licensing agreement and the situation changes, you need to figure out whether independent parties who are signing the same licensing agreement would necessarily have or necessarily have not agreed to an adjustment clause, and we infer that your contract works the same way."

This lends itself to some problems, one of which is that, in most situations, the answer is sometimes. It can be really hard to pick apart "why" and "when" and "what we're people thinking" because, of course, even if you can find comparable uncontrolled transactions, you don't really know why people agree to particular terms. You're an outsider looking in often 10, 15 years after the fact.

Bram, if I could jump in a little bit, another thing to that point is when we're dealing in transfer pricing, and this goes back to something else we talked about. Whether you're talking about arms-length pricing or arms-length behavior. We've all seen transactions that we price that would not occur in the wild. How do you deal with something like that? You just can't go back and say, "Well, find your cuts," and say, "Third parties would've done it this way," because it may not exist. Yeah, I just wanted to throw that in there.

Yeah. That's another good point is that, just because a third party hasn't done it, doesn't mean that you shouldn't be able to price it. Of course, a lot of the time, the type of transaction we're talking about is one that doesn't exist in the wild at all. How can I tell you what a third party would've agreed to about something as specific as an adjustment clause? If I can't even find a perfectly comparable transaction anyways, and I'm having to use something like a profit split method or some sort of profit based transfer pricing, rather than looking at actual transactions anyways.

How do you measure this stuff? if you're trying to do a, I'll call it hypothetical allocation of an uncertain outcome or a hypothetical allocation of risk, can you talk a little bit about some of the methods that you use in your practice to help people figure that out?

Sure. So, and I think this kind of get, actually this gets a little bit more practical than some of the more philosophical discussions we've been having, which is a lot of time when people are setting up their transfer pricing on an ex sane basis. You have to look at projections, that's what you've got. Usually you'll look at sort of the last best projections available to you, and you'll use that to make your decisions. You'll say, "Well, this is the profit I project from this intangible, I'm going to price it based on my valuation of these cash flows." A lot of the tool is to think about, "Well, what are the alternative things that could happen if my projection is wrong? What are the consequences of that going to be, and in particular, which tax authority is going to come knocking on my door if I was off by a factor, a five one way or the other, and what am I going to do about it?"

Depending on your situation, this can kind of lend you to different methods. So for example, you can look at the way that insurance companies price risk, or more actuarial view. You can also, in some cases, look at derivatives. For example, if you're sort of setting up front of fixed to float interest rate swap. Those are traded in the market and you can look at how they're priced. And in that case, you can see, "Well, people do this all the time. It must be sort of arms length behavior as well." But this also goes for other sorts of risks. I think a lot of it is really to take the time to look at the distribution of what could happen rather than just sort of the most likely thing that you think is going to happen and to model out sort of how much should you be paying for the option to adjust or the option to not adjust in order to leave you with a fair price

Something, a bit more practical brand going with whatever method you pick. I think it's essential to stick to it. Because putting my IRS hat back on one of the easiest ways to do an analysis is you look at someone's transfer pricing, you look at their documentation, they've said they're going to do X and they've done Y. You just adjust them to X. I think consistency again is a theme in this and sticking to what you're doing gives you a better position when you're dealing with kind of this debate.

I think that's absolutely true. I think we've all seen a lot of controversy where there is a transaction that leaves one party bearing a bunch of risk, and that risk never actually materialized the tax authority comes in and says, what are you paying this guy for? Taxpayer says, "Well, they're bearing all of the risk." Tax authority says, "Well, what risk? They haven't ever taken into losses. This has been a profitable business." If you've been sticking to the same policy for a long time, that can actually be one way of kind of making it more fair as to if you can actually point point back and say, "Well, I've been sticking to the same policy for 20 years, and yeah, there have been times when this entity takes a loss."

So if a jurisdiction is looking, is looking backward, are they looking for the right answer, the right transfer price? Or are they looking for an abusive discretion?

I think they can be looking for, for both one view that some policy makers and some tax authorities have is that taxpayers are kind of using private information to decide transfer prices that. That's what the heart to value intangible's project was all about, "How much is this nascent technology that has no existing market worth?" Nobody really knows, except maybe the people who built it. They are the only people who can really say what it's worth at that time. They transfer it to some low tax jurisdiction at a low price and say, "Well, we don't know what this is worth." Then low and behold, 10 years later, it's worth a huge amount of money. They get audited and tax with her will come in and say, "Well, you knew all along that it was going to be worth this much. Yeah. I can't find a cut or something like that, but you had to have known it's inevitable."

Of course that's made even harder by the fact that the nine other companies that did that and who failed, disappear from the radar and nobody's ever heard of them.

This doesn't even really require that anyone be acting in bad faith or assuming bad faith. There's a really strong human tendency to have hindsight bias. You can kind of observe this just from looking at like what people have said about COVID or what people said about the financial crisis. There were a lot of people who, right after they happened, said, "Well, this was inevitable. We all saw this coming. We knew that it was going to happen like this." A few of those people had their money where their mouth is during the financial crisis. I believe that they do it, but a lot of people didn't, a lot of people really got caught. Actually, when I was kind of preparing for this podcast, I found some really interesting articles studying this. Including one by Anderson et al., Was studying something very similar. They actually got a bunch of judges and they had them look at a case of accounting statements where it was... Did the accounting firm make the company put up a reserve for a risk and are they liable for not having done so?

Split the judges up. These were actual real judges who really oversaw cases like this to three groups and one group, they just told the ex-ante facts. Then the other two groups, they told the same ex-ante facts. And they told them there was either a good outcome or a bad outcome. Of course these are jus who are trained and were supposed to be able to distinguish, but in reality, it had a huge impact on what they concluded about the liability of the accounting firm, which should have been ex. And it's really similar to the sort of cases that we're dealing with here. It's human nature. It's very hard to think about what was known and what someone reasonably would've expected at the time when you already know what the answer is.

Could you say that over time, it seems like this has turned from more of like a substantive, "You should be looking at the functions, assets and risks, and hopefully planning is what's consistent over time due. Here's our evidentiary presumption. If we see a discrepancy, we're going to think you're doing it wrong. And it's on you taxpayer to show us that no, actually we could, we couldn't have predicted this. Actually there was no provision to take care of this. We actually did it right?"

I don't know if it's that clean up a break... And Bram, apologies. I'll let you... I don't know if it's that clean of a break, but I think folks have to think about what you just laid out when you're doing your transfer pricing. Kind of going back to Stefane's question of, "Are the governments playing gotcha?" I think what Bram laid out is a good argument that the governments aren't typically doing that. It's human nature. There's bias. That's the position they're going to be in. Typically, the government is looking at things after the fact. So we have to take that into our calculation when we're doing our planning, when we're doing our controversy planning and when we're doing our transfer pricing and documentation. But sorry, Bram, I jumped in. Go ahead.

No, actually I was going to say something very similar, which is that, is that the rule? I'm not sure, but that is what it would be advisable for a taxpayer to assume that this sort of standard of proof is going to be that they need to be able to show it. I think that's also something that people can be doing upfront that's more practical, less philosophical is if you look into a lot of transfer pricing, fundamentally, a lot of it is saying something about risk. But at the same time, if you look at like the contracts that are actually underlying the transfer pricing, and then you look at the transfer pricing documentation, and then you look at what's actually happening in practice in the accounting system. They don't always so cleanly line up with what's happening with risks.

They don't always necessarily have thought about, "Well, what happens if this business suddenly takes a 20% loss, who's going to eat that?" If you're thinking about what your transfer pricing risks are and what you can do to mitigate them, I think that this is one of those things you can take a look at, "What am I going to do if my profit margin for one of my major businesses goes either way up or way down suddenly?" In fact, a lot of people just got an example of what that will do and they now know the answer.

Yeah. Graham, you've brought up a little bit ago, insurance. How does conversation change when we look at various industries against one, one another?

Well, I think insurance is a particularly apt example because insurance is by definition, the ex-anti transfer of risks. One of the points is kind of, if your solution is just, "Well, maybe we shouldn't bother with ex-ante stuff." Anyways, transfer pricing is tough. Let's just do everything expo. That's going to make it really hard to do transfer pricing for an insurance business because insurance companies can't really operate if they're not allowed to transfer risk between related parties. Even if you decide that's sort of that's okay for tax purposes, your insurance regulator, won't let you just move risk around Willy nilly, save for banking. Of course.

Do tax authorities then look at insurance as a little bit more suspect? Because if you look at captive insurance and reinsurance, by definition, you are shifting the projected risk from one related party to one another.

I think that's true, actually. If you look at like the OECD financial transactions guidance, there was a lot in there about captive insurance. Which reading between the lines you can see that there, there is concern from tax authorities about those kind of arrangements. I think a lot of it does kind of stem from this type of ex-post versus ex-ante bias that you're always doing transfer pricing for how you allocate profits and often not thinking about, "Well, how does transfer pricing allocate losses?" In that sense captive insurance, when things are operating normally will always shift profit from the profitable company to the captive insurance company, because that's how insurance works when times are good. The insurance company is making money. But I'd also say that just sort of in general, this is something that varies by industry.

For example, in tech, this is really important. Like as NA alluded to a lot of tech companies go bust, other tech companies suddenly become one of the most important companies in the world. Everyone forgets about the runners up. And in this case, it's sort of, it's your whole business either going boom or bust. Then you get a lot of tax controversy years later about how, "Well, it was inevitable that this company would become the number one in whatever sector didn't actually exist back when I was in college."

Then for people that are out there listening in industries, other than financial services, other than insurance, other than in banking... What are some of the ways that you would recommend that they document on an ex-ante basis, the real risks that exist in their industry? I've never seen a company that has projections that suggest that, "Hey, this thing could really go down the tubes." Nobody imagines that their RND is going to be NPV negative, because if you did, you wouldn't do it. Now, David was talking about winners and losers I'll work with losers. But if I did, I would be trying to document that there are the real investment risks in these industries. I'm curious as to how you, in your day to day practice, help people that are not in industries where the allocation of risk is sort of obvious on its face, actually do this work.

Sure. I think there's, and actually there's a little bit of an ex-ante answer and a little bit of an ex-post answer. The ex-ante answer, and this is again going off of my experience, working with a lot of companies like this, especially in terms of what happens when you don't prepare for it and you do get controversy down the road, is that when you go and you do a search for contemporaneous documents, because you're litigating with the IRS or a tax authority... What you'll dig up will often be presentations put together by people who thought the company was going to succeed. Believed in its mission and were enthusiastic first year MBAs, fresh out of school.

They don't keep around the people who think the company's going to fail?

Exactly. There will be lots of presentations about like glowing certainty of-

They're more curmudgeons.

Yeah. Rosy cash flows. In the companies that lasted long enough to get this type of audit, they were right. You know, those people's beliefs were true. I think the point here is number one especially when you're doing a transaction that has the potential for this sort of thing, like an IP transfer, a guarantee or anything that involves risk, or even setting up a principle structure. This is a lot of transactions in transfer pricing is to think about the fact that anyone who goes looking is going to find a bunch of those rosy presentations and really write down what the risks are. In particular, make sure that you have someone from the business side, as well as a tax side, looking at it that a lot of the time it will be your head of operations set all of this rosy stuff at an internal email, your tax documentation says all of this negative stuff.

Well, I don't believe you. The other part of the answer is an ex-post answer, which is, "What else can you do?" Actually, Nate, you kind of alluded to this earlier. Which is take a look at the losers. This is kind of one of the classic ways to prevent yourself from having survivor bias, is to instead of sort of thinking philosophically, "Was it inevitable that this company would succeed?" Try and take a look at other companies who existed around the same time and would, at that time have been viewed as competitors. Take a look at what happened to them.

Because half the time a bunch of them are out of business. This doesn't necessarily have to be in like a high tech industry. You can also look at it in terms of there's a lot of industries where there's like a one in a hundred event that keeps people up at night and gives them heartburn. If you look at your company or as an advisor, the company you're working for, they've never had it happen. But then if you look at "Well, what about your peers? Have they ever had it happen?" You can find an example. And we have a couple accounting firm refugees here. One of the examples is it used to be the big five accounting firms, and now it isn't. And that's why.

To that point, going back to Nate, your original question about financial services. I think one of the reasons financial services banking and insurance can do this is because they have the regulator forcing them to, right. And I think some of the companies can take a page out of their book, kind of look at how they do their transfer, pricing, what they think about. I think the point about people think about transfer pricing and dealing with profits and not dealing with losses. I think something that fundamental is important, kind of going in and looking at it and looking at my TPM and saying, how does this TPM work for losses? Is that articulated in my documentation?

I really can't emphasize enough how many times I've looked at the TPM documentation. I've looked at the contract, I've asked the tax director and nobody can tell me what happens if you lose money.

What about this Black Swan events? All of these make perfect sense in terms of known documentable risks that people can imagine. But on the other hand, if you think about 2010, or if you think about the COVID pandemic. Now you're talking about things that seem to be entirely outside of what people are able to imagine. Not to go Don Rumsfeld on the podcast. But where there is a failure of imagination, how do you help people think through... Because you're going to have to do it on an next post basis... What would have been the ex-ante allocation of risk for a risk that nobody ever imagined?

Well, again, that's a very hard problem.

That's why you're here.

Yep. So they, and of course the trick with Black Swan events is that once you've seen a Black Swan, it's obvious the black swans exist, or as one of my thesis advisors once told me everything is obvious once it's true. I think that the first thing is that... And this kind of goes more to sort of human tendencies, the way our brains operate. The more you try and break down future expectations into small buckets, the worse you tend to be. That if, if I try to estimate the chance of something going wrong with my business, and I try to assign discrete probabilities to each of the 50 things that could go wrong, even if I really do know what I'm talking about, I'm going to screw it up.

Often it's better to think a little bit more big picture in terms of, instead of saying, for example, "What were the odds that there was going to be a global pandemic that would shut down international trade?" I should be thinking about, "Well, what were the odds that something was going to go wrong?" Instead of thinking about like this particular time in this particular instance, I should think more about like long term industry trends. It's absolutely true that like there's going to be another Black Swan event and I don't know what it will be and nobody else knows what it will be either. But I think there will be one.

To that point, Bram as well, it, I think it's important thinking about it from the government side as was it really a Black Swan event? Was the swan just a little dirty? Is this risk you should have prepared for, and is it is this risk that was really extraordinary? I think that can be a debate with the governments as well as they look at kind of protecting their revenue.

I think another way that this can get really interesting in a controversy sense as well is a lot of the time transfer pricing is sort of based on functions, assets, risks, and there will be sometimes a distinction between who's doing the functions and who's doing the risks. Where this can get particularly sticky is, if it's a manifestation of a risk that nobody could predict and nobody had control over, then you would think it goes to the person who was bearing the risks. What if it wasn't? What if someone screwed up? That does happen sometimes. Am I really sure that I shouldn't be allocating any of that loss to the function that mess things up?

That's where you can get into these very sticky questions about both, what would independent parties have done. Because a lot of independent party contracts say, "But if it's because of a error on our part, we're a hundred percent liable for it, and we won't split the risk with you even when otherwise losses are split." Also because then you get into some very existential questions about, was this an error or was this unforeseen? Of course, nobody is going to want to tell you like, "Oh yeah, no, this was because we were incompetent?

One also imagines that mistakes, like all of the other kinds of events we're talking about are predictable. An individual mistake is not predictable, but the fact that somebody is going to make a mistake really is. You can think about it from that perspective as well. I am curious as to whether you think DEPI helps us deal with this?

I think it does in a sense in that DEPI to a certain extent is about separating functions away from risks and assets. That's why the OACD made it. They didn't want people to say that the only value from an intangible is the risk in the ownership. They want there to be a discreet return for risk adjusted return on capital, on an investment. For the people functions that are involved in the DEPI functions of the intangible and where I think this kind of overlaps with what we're talking about is that a lot of these problems happen when you have a disconnect between who's bearing the risk and who's bearing the other aspects of the business.

If I have sort of a thinking of a banking business, if I have a very pure split between one entity or one jurisdiction that has all the people functions and one entity or one jurisdiction that has all of the capital and risk, then I'm always going to have this problem. Anytime something goes wrong, the risk jurisdiction is going to be after me. Every time something goes right, the people jurisdiction is going to be after me.

"You made a bad trade." "No, I just took risk."

Exactly. Yep. Another way that you can think about setting things up is maybe I shouldn't have all of my risks sitting in one place. Maybe I should think about allocating my risk out across my organization. According to something like, for example, my DEPI functions, I might just decide, I'd rather use something like a profit split and share the risk around. Now, there are reasons why people don't want to do that. That are, are often entirely valid, but it is something that's worth thinking about, especially if you're more controversy averse, that it is often true, that the more you spread things around, the more you leave most governments in the same boat, especially with regard to sticky issues like this. There's less of a clear winner and a clear loser, that can insulate you from some of the worst risks of controversy here.

You said DEPI based profit split, so David's going to be super excited from a tax authority perspective. Do you think that works?

I'm hesitant to say, yes, it works. I think if you talk about it with tax authorities, in theory, they will all say, "Yeah, that makes sense. We should get our piece of the pie." But as you kind of walk through it and you get through the specifics and you say, "Who gets what, and who ends up holding the bag when?" I think then you might get some pushback. It doesn't mean that you shouldn't have the conversation with them because inevitably you will have to. Because if something goes wrong on the backend and you have an audit, you have to have that conversation. You've got to think about double tax. It may make some sense to have the conversation when you can all look at it from an X entity perspective, and you can talk about it before these risks come to pass.

That way if you do something like an APA and you get that blessed with the majority of your jurisdictions or your key jurisdictions, where you have material profit or may have material loss, you have a document. You have an agreement where folks have agreed to something so that when the black Swan happens or a regular mistake happens, or routine risk comes to pass, you already have this blessing. You may not have it in all of the jurisdictions, but you may be able to leverage that agreement in some other ones to say, "Look, this is not just our position. This is the position of country, A, B, and C. Country D, why do you disagree?"

It certainly comports with my general experience, talking to people about this. One of the challenges with ex-ante allocation of risk, particularly in things like quality is you go talk to the folks who work in a quality department in manufacturing, and you say, "Hey, are you responsible for trying to make sure that things don't go wrong in managing this risk?" They say, "Yes." Then you ask them, "Hey, can you give me some examples?" They look at you like you have three heads because of course their answer is if I knew what was going to happen, I'd make sure it didn't happen. It seems to me that actually doing this with an APA that is more functions driven, can also potentially align with the way a lot of companies operate on a practical basis. Especially with some of these operational or internal risks, as opposed to market based type risks. Is that fair?

That makes a lot of sense. it goes to Stefane's earlier question. It takes the government off the back foot. You are all kind of looking at the information at the same time. It gives them an opportunity to kind of look behind the curtain a little bit and get a bit more comfortable. I think in order to be a tax authority, part of the job requirement is to be suspicious. If you don't have a suspicious tax authority, I question whether you have a good one. Kind of taking some of that mystery away, decreasing the time period from when things happen to when they get to look at it makes sense. Then you don't have this issue that brand described where they have all these very flowery PowerPoints, and then they have disaster on their edge. Looks like we're coming close to time on this one. Any last comments Bram, before we wrap up?

I think my last comment would really be to just not underestimate the human potential to assume that things are going to, as we would say in econ, follow a normal distribution, or as normal people would say, stay the same as they've always been. This really is something as, as a company tax director that is worth thinking about is, "Do I actually know what's going to happen if the projections that I'm relying on for calculating all of this nice stuff about where I'm paying taxes, turn out to be way off because of some fundamental business change?"

If you have no idea it's worth taking a look at it. In particular, I think it's really worth thinking about, "What is my plan, if something like that happens? Do I know who's going to be mad at me, aside from my CEO? Am I positioned to be able to deal with it if it happens?" A lot of the times that doesn't get thought about, especially because a lot of the companies that have this happen are companies that are in a hurry early stage, "We've got all of this quickly growing IP, and we need to do all of this stuff." And you can really set yourself up for a lot of pain down the road by not preparing for that audit that happens five years later.

I feel like Monte Python put it best when they said nobody expects the Spanish inquisition.

Well method of thank you for getting that one in. Thank you all for joining us again. This has been GILTI conscious. Mithuna, thank you so much for sitting in for Eman. Of course, Bram, thank you for doing another session. Thanks all.

Yeah, absolutely.

Thank you for having me.

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