NEW YORK, NY — Bram Isgur, a Principal at Keystone Strategy, was recently featured on the seventh episode of Skadden’s podcast, GILTI Conscience. In the episode, “The Issue Behind ‘Almost All’ Transfer Pricing Cases: Ex Ante or Ex Post Basis,” Isgur joined hosts Nate Carden and David Farhat to discuss critical issues underlying most major transfer pricing cases. These questions include whether to look forward to see what pricing should be for events that have not yet happened or to wait and look back at what has already occurred.
With over 10 years of experience in tax and transfer pricing matters, Isgur shared his perspective on the difference between an ex ante and ex post lens. There is not one perfect solution to most transfer pricing cases, and sometimes professionals will come across a mix of both ex ante and ex post elements in regulations such as OECD guidelines or U.S. transfer pricing rules. The podcast discussion also addressed other key questions, such as how to deal with “black swan” events that upend transfer pricing models, such as the COVID-19 pandemic. Isgur stresses that such events reaffirm the importance of looking at the big picture to inform your transfer pricing model.
Key takeaway’s from the episode include:
- Ex ante versus ex post: Transfer pricing is typically done on an ex ante basis, where you look forward and try to figure out pricing for events that have yet to occur. However, transfer pricing can also be done on an ex post basis, where you wait to see what happens and look backward, as in auditing cases. According to Bram, either path you take will somehow be imperfect. Finding the best possible outcome through the ex ante or ex post method depends on your situation.
- How to figure out the hypothetical allocation of risk: There are different methods to help you determine the hypothetical allocation of risk. You can look at it through a more actuarial view, or, in some cases, you can look at derivatives. For example, if you’re setting up front a fixed-to-float interest-rate swap, which are traded in the market, you can look at how they’re priced. No matter what route you take, you have to look at the distribution of what could happen rather than just the single outcome you think most likely to happen. Then, you have to model how much you should be paying for the option to adjust or not adjust, in order to leave you with a fair price. And this practical advice is key: Whichever method you pick, it’s important to stick with it.
- Dealing with a ‘black swan’ event: As we’ve seen with COVID, there can be an unpredictable “black swan” event that throws a wrench in your transfer pricing model. Bram suggests that companies prepare for these unforeseeable events by looking at the big picture. Of course, it’s nearly impossible to predict the how or when of a black swan event, but it’s crucial to craft a plan in case some big change occurs. Ask yourself, “Am I in a position to deal with something like this if it happens?”
Listen to the podcast from Skadden below or on Apple Music, Spotify, or Google Podcasts: