Tripartite agreement reached between taxpayer and two tax authorities in transfer pricing case

Typically, a transfer pricing dispute is between the tax authority of a country, and an international company as a taxpayer. If the dispute results in additional tax assessment, the taxable income of another country will be affected, and with it the tax authority there.

Tempur Sealy International, the US-based supplier of mattresses and bedding products, has recently executed an agreement between the company, the U.S. Internal Revenue Service (IRS), and the Danish Authority (SKAT) with respect to income tax assessments from SKAT for the disputed tax years 2001 to 2011. The tax assessments related to the appropriate royalty rate to be paid to the Company’s Danish subsidiary (Dan-Foam ApS) for the right to utilize certain intangible assets related to original formulation and the tradename of the pressure-relieving TEMPUR^® material owned by the Danish subsidiary.

SKAT had based its additional income tax assessments on a combined royalty rate of approximately 20%, while the resolution reached in the agreement provided for a significantly lower amount.

This case could serve as a model for tripartite settlement agreements in transfer pricing, including the two tax authorities involved. Typically, disputes on appropriate transfer pricing involve the tax authority that believes is disadvantaged or negatively impacted, but not the other authority which would be – if true – privileged.