Brattle principal Bin Zhou recently co-authored an article published in Bloomberg BNA, “The Implications of Transfer Pricing in Bankruptcy,” in which the authors discuss the lessons learned from transfer pricing arrangements featured in the allocation of liquidation proceeds in Nortel’s bankruptcy trials.
Dr. Zhou and his co-author Dr. Steven Felgran, using examples from the Nortel transfer pricing disputes, point out that two key standard assumptions in the field should not be taken for granted when the multinational company is close to or in financial distress. These two assumptions are (1) “taxpayer is and will remain a going concern” and (2) “profit and loss (P&L) statement has a natural break point at the operating profit line and items listed below the line are not part of the transfer pricing analysis.”
The authors conclude that the prolonged allocation litigation in Nortel bankruptcy casts doubt on some standard transfer pricing practices, especially when there is a non-remote bankruptcy risk. Explicit considerations of these standard assumptions could enhance the reliability of transfer pricing results and mitigate the potential bankruptcy litigation costs.
Experts at The Brattle Group were closely involved in the Nortel bankruptcy case, with principal Coleman Bazelon providing expert testimony on the recommended pro rata allocation mechanism.
The BNA Bloomberg article is available below.