International Transfer Pricing: MNE Knowledge Dependency on External Tax Consultants

Martine CoolsKU Leuven

martine.cools@kuleuven.be

J. Christian Plesner Rossing(Corresponding author)

The University of Tampa

jrossing@ut.edu

Acknowledgements: We are grateful for the constructive comments provided by Editor, Sven

Modell and two anonymous reviewers. We also appreciate feedback from conference participants

at the AAA 2019 Management Accounting Section Midyear Meeting (Florida, USA), participants

at the EAA 2019 Annual Conference (Paphos, Cyprus), as well as discussant Ann Jorissen and

workshop participants at the 2019 Research Day in Accounting at UHasselt (Hasselt, Belgium).

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International Transfer Pricing:

MNE Knowledge Dependency on External Tax Consultants

Abstract

This paper studies international transfer pricing (ITP) executives’ dependency on the

knowledge offered by external tax consultants. Based on interviews with 13 ITP executives

working for multinational enterprises in the UK, we find that the dependency on external

consultants varies significantly across specific ITP tasks. Notably, this dependency is not rooted

in a lack of in-house technical ITP knowledge. Rather, consultants offer important industry and

process knowledge, often at the individual tax inspector level, that MNEs need for successful ITP

policy implementation as well as to guide negotiations with tax authorities. The recent OECD

project on Base Erosion and Profit Shifting (OECD, 2015) seems to have had a surprisingly limited

effect on the degree of MNE dependency on tax consultants, partially because the consultants seem

to be passively waiting on new ITP norms and principles to emerge post-BEPS. We conclude that

consultants’ profile as ‘knowledge experts’ strongly depends on what specific ITP task they are

applied to.

Keywords: International transfer pricing; tax consultants; multinational enterprises; knowledge

management

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1. INTRODUCTION

This paper studies international transfer pricing (ITP) executives’ dependency on the

knowledge offered by external tax consultants. In multinational enterprises (MNEs), ITP is

relevant both from a management control system (MCS) perspective and from an international

taxation perspective (Merchant and Van der Stede 2018; Datar and Rajan 2018). Transfer pricing

is at the core of management accounting, as it plays a pivotal role in both decision making and

control (Zimmerman 2019). In terms of international taxation, tax executives aim to ensure ITP

tax compliance in local tax jurisdictions. At the same time, tax planning allows them to minimize

their tax liabilities in order to create after-tax shareholder value (Mulligan and Oats 2016). A

number of analytical studies (Baldenius, Melumad and Reichelstein 2004; Hyde and Choe 2005;

Narayanan and Smith 2000) have investigated how MNEs can merge the management control and

tax objectives of ITP. Subsequent qualitative studies (Cools, Emmanuel and Jorissen 2008, Cools

and Slagmulder 2009, Plesner Rossing and Rohde 2010; Plesner Rossing 2013) have demonstrated

that the dynamic process of ensuring ITP tax compliance has a significant impact on MCS design

and a – more subtle – impact on MCS use. These studies indicate that tax executives, assisted

mainly by financial and control executives, internally take the lead in ITP decisions. Since ITP

tax-based decisions might influence the MCS and permeate all levels of the organization (Cools et

al. 2008; Cools and Slagmulder 2009; Plesner Rossing 2013), it is of utmost importance for

management accountants and controllers to gain a clear understanding of how ITP tax decisions

are made.

The tax practices of MNEs have been subject to unprecedented attention in recent years.

The OECD, which has a long tradition of providing ITP guidance, has recently taken the initiative

to launch the Base Erosion and Profit Shifting (BEPS) action plan (OECD 2013). In coordination

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with the G20, the OECD has developed 15 BEPS actions that tax jurisdictions have started to

incorporate in their domestic tax legislation. This means that in addition to these ambitious supra-

national efforts for curbing tax avoidance, domestic tax policy makers have increased their efforts

to stimulate MNE tax compliance and enhance transparency in the way MNE tax structures are

organized (Radcliffe, Spence, Stein and Wilkinson 2018). In a complex tax environment like this,

it is not surprising that many large MNEs react by expanding their in-house tax function and

involving external tax advisors (Armstrong, Blouin, and Larcker 2012; Mulligan and Oats 2016).

Even before BEPS, Armstrong et al. (2012, 393) noted that MNEs react to external tax pressures

by allocating 60 percent of the average tax department’s budget towards compensation and 20

percent toward outside consultants. The practice of involving external tax advisors has not

remained unquestioned in the public debate. Particularly in the UK, which recently initiated a

variety of tax political initiatives1 around MNE taxation, the role of large accounting firms

employing skilled tax knowledge workers to actively promote sophisticated tax schemes to their

MNE clients, has attracted great attention. For example, a 2015 Public Accounts Committee report

(House of Commons 2015, 3) on the role of accounting firms in MNE tax avoidance suggests that:

“Large accountancy firms advise multinational companies on complex strategies and contrived

structures which do not reflect the substance of their businesses and are instead designed to avoid

tax”.

Recently, a number of researchers have interacted with MNE tax directors, tax authorities

and tax consultants to produce a deeper understanding of the way MNEs and their stakeholders

interact and shape relationships to promote their respective agendas (e.g. Hasseldine, Holland, and

1 Among the most prominent are the 2012 UK Public Accounting Committee’s hearing of top MNE managers in

Starbucks, Amazon and Google, followed by the introduction of rules in 2016 requiring UK companies to disclose

tax strategy information.

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van der Rijt 2011; Mulligan and Oats 2009, 2016; Radcliffe, Spence, Stein, and Wilkinson 2018;

van der Rijt, Hasseldine, and Holland 2019). As part of this debate, there seems to be a common

recognition that the external MNE tax consultants take on an ‘expert role’, implying the existence

of some form of superior knowledge vis-à-vis the MNE tax executives. For example, Hasseldine

et al. found that “most corporate taxpayers hire accounting firms for specific, complex tasks”

(2011, 45-46), while van der Rijt et al. suggest that MNEs hire “external experts” (2019, 455)

who possess specialist tax knowledge to inform their tax decisions. Not surprisingly, the tax

consultants are eager to stress the urgency for MNEs to take action and buy their services

(Hasseldine et al. 2011).

However, current research on ‘tax knowledge’ and the role of ‘external tax experts’ studies

these concepts in a somewhat generic way, detached from specific tax decisions, actions and

responsibilities of MNE tax executives. Given the complex substance of these concepts, we argue

that ‘tax knowledge’ in the MNE-consultant dyad has more tangible meaning and structure in the

context of specific actions and tasks where particular knowledge and expertise is applied in the

(co)creation of outputs. Nikolova and Devinney (2012, 394) note that: “Several authors who study

knowledge transfer between individuals from different personal and cultural backgrounds

empirically suggest that the view of knowledge as contextually and situationally independent is

highly limited and problematic (e.g. Winter, 1987, Bechky, 2003). Thus, in order to understand

the process of knowledge creation and transfer, one needs to study knowledge in the context within

which it is created and applied (Tsoukas and Vladimirou 2001; Bechky, 2003)”.

Besides contextualizing the MNE-consultant dyad to investigate how ITP decisions are

taken, our guiding framework also focuses on Fincham’s (2012) concept of ‘dependency’ in client-

consultant relationships. Fincham (2012) argues that much of the existing literature

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overemphasizes the role of the consultants as supreme ‘knowledge brokers’ (Hasseldine et al.

2011). He points to the close interaction between consultants and clients, which “…raises

questions about the consultants’ expertise claims”. (Fincham 2012, 412). We concur with

Nikolova and Devinney (2012) and Fincham (2012), and argue that a more focused understanding

of the dependencies from potential knowledge asymmetries in the MNE-consultant dyad can

emerge if studied in the context of specific tax responsibilities facing in-house tax executives.

Given the current importance of ITP for MNEs (EY 2019), we focus on the major ITP tasks. We

are particularly concerned about the format of knowledge asymmetries that potentially exist in the

MNE client-consultant dyad, and to what degree these asymmetries are homogenous across

individual ITP tasks. To be sure, we recognize the basic premise in the current literature that tax

consultants represent a knowledge resource to MNEs. However, we question the exact way in

which this knowledge asymmetry between MNE clients and tax consultants unfolds, and to what

degree it creates specific MNE dependencies on consultants in ITP decision making. Our overall

research question is therefore: To what degree are MNE transfer pricing executives dependent on

external ITP consultants?

Based on interviews with 13 UK-based ITP executives, we find that MNEs are indeed

dependent on the knowledge offered by external consultants, but that the extent and configuration

of this dependency is significantly differentiated across ITP tasks. External tax consultants flow in

and out of different roles in regards to these ITP tasks. Sometimes they serve as true knowledge

experts, e.g. during APA and tax audit negotiations with local tax authorities using their

sophisticated process know-how and tax institutional knowledge, or for providing comparables for

ITP documentation. For other tasks, the knowledge asymmetry is either significantly reduced or

even configured in favor of the ITP executives, questioning the universal ‘expert’ notion of

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consultants. First off, the ITP executives master ITP tasks from a purely technical perspective, and

therefore do not need to engage consultants to explain ITP techniques. Second, we observe a

structural knowledge cap in consultants’ knowledge base that limits MNE dependency pre as well

as post-BEPS: consultants are found to lack the critical and highly tacit knowledge on complex

operational conditions of specific MNE value chains. In contrast, the in-house ITP executives are

directly exposed on a daily basis to the MNE’s commercial reality, allowing them to, over time,

generate the necessary tacit knowledge and absorptive capacity critical for ITP decision making.

Essentially, consultants’ profile as ’expert’ strongly depends on what specific parts of ITP tasks

for which they are hired. Hence, while BEPS was initially perceived as a potential gold mine for

ITP consultants (Radcliffe et al. 2018), the reality of this at the MNEs under study is quite different.

Our paper contributes to the knowledge creation literature in which consultants are

recognized as knowledge workers (Abrahamson 1996; Alvesson 1995; Fincham 2012) that aim to

bring best practices to their customers (Kieser 1997; Ernst and Kieser 2002). In contrast to general

management knowledge, tax knowledge is of a different nature because MNEs are obligated to

participate, and may pay high tax penalties in the event of errors. In this context, tax consultancy

services can be important, not only for providing technical knowledge, but also as an insurance

against uncertain tax audit outcomes (Hasseldine et al. 2011; Mulligan and Oats 2009). We

contribute to theories of client-management consulting relationships that challenge conventional

notions of consultants as universal ‘experts’ having a prominent, or even dominant role during

client interactions (e.g. Nikolova and Devinney 2012; Sturdy 2011; Fincham 2012). Within this

research stream, the idea of the passive client absorbing and implementing ideas and inputs from

the active and dominant consultant is downplayed for one where a more collaborative, co-

creational form of interaction is the norm (Sturdy and Wright 2011). We question whether MNE

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in-house tax professionals are in fact dependent (Fincham 2012) on the knowledge and skills

offered by consultants for the handling of specific ITP responsibilities.

The remainder of the paper is structured as follows: Section 2 reviews the current ITP

literature and presents the theoretical basis of our analysis. Section 3 outlines the research strategy

and design. The qualitative analysis is presented in Section 4 and discussed in Section 5. Section

6 concludes the paper.

2. LITERATURE REVIEW AND THEORETICAL GUIDANCE

International Transfer Pricing

Transfer pricing was originally considered a problem of optimizing resource allocation

between organizational entities seeking to establish effective quasi-markets within the firm

through differentiation, but with a simultaneous need for integration between diversified units

(Lawrence and Lorsh 1967; Colbert and Spicer 1995; Eccles 1985; Spicer 1988; Watson and

Baumler 1975). As globalization increased and vertical integration became a popular structural

business model for MNEs, the issue of tax avoidance began to receive major attention among

accounting and economic scholars (e.g. Clausing 2001, 2003; Harris 1993; Klassen, Lang and

Wolfson 1993). This research stream typically draws on data sets from financial databases to show

inconsistencies in intercompany pricing versus arm’s length pricing, or other recognized proxies

of tax avoidance (Hanlon and Heitzman 2010) to demonstrate aggressive tax management in

specific geographic and organizational structures. In these studies, ITP is frequently mentioned as

a convenient income shifting mechanism (e.g. De Simone 2016; De Simone, Klassen, and Seidman

2017; Hopland, Lisowsky, Mardan, and Schindler 2018).

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In contrast to previous quantitative contributions on ITP and tax avoidance, a recent interest

emerged in the way tax regulation impacts management accounting and control systems (Cools et

al. 2008; Cools and Slagmulder 2009; Plesner Rossing 2013). Cools et al. (2008) observed in their

case study that an emphasis on ITP tax compliance increases the degree of centralization in MCS,

with subsequent impact on the planning, evaluating and reward controls, and necessitates a more

coercive use of management controls to ensure rigorous application of arm’s length prices within

the MNE value chain. In a similar vein, Cools and Slagmulder (2009) show how the arm’s length

principle and its core premise of viewing entities as ‘stand-alone’ entities, de facto eliminate the

possibility to configure responsibility centers other than profit centers. Plesner Rossing (2013)

demonstrates the way control systems are used to ensure on-going refinement of a tax compliant

ITP strategy.

The academic literature and professional surveys suggest that the ITP system includes four

main aspects on which MNEs have to decide: the ITP strategy, policy design, documentation and

compliance outputs, and negotiations with tax authorities to process advance pricing agreements

(APAs) and tax audits (Cools et al. 2008; Plesner Rossing 2013; Van der Rijt et al. 2019). In order

to better grasp the extent of MNE dependencies on consultants, we questioned them about each of

these four important tasks.

Knowledge creation

The way organizations create knowledge to reach strategic objectives draws attention from

a variety of research disciplines. The knowledge creation literature is actually a sub-field of the

broader knowledge management theoretical agenda (Dalkir 2011). While knowledge management

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studies focus on the way existing knowledge is handled and organized to make it available for

organizational members, knowledge creation deals with the way organizations utilize different

channels and organize human resources to produce new knowledge. More fundamentally,

knowledge is needed as organizations seek to build and enhance their competitive advantages

(Krogh, Nonaka and Rechsteiner 2012; Nonaka 1994). The concept of ‘knowledge’ is subject to a

variety of interpretations in the literature. For example, Nonaka and Takeuchi (1995, 58) define

knowledge as a “justified belief” that creates a basis for organizational action, while Davenport

and Prusak (1998, 5) state that “knowledge is a fluid mix of framed experience, values, contextual

information, and expert insight that provides a framework for evaluating and incorporating new

experiences and information”.

The distinction between ‘tacit’ and ‘explicit’ knowledge has gained acceptance as a

fundamental classification of knowledge possessed by organizational members. Explicit

knowledge represents knowledge that can be disseminated, reproduced, organized, and systemized

(Dalkir 2011) and is possible to capture in drawing or writings (Nonaka and Krogh 2009) or

codified for direct application (Choo 2000). Conversely, tacit knowledge refers to ‘know-how’

skills created from experience that creates a basis for an individual to adapt and deal with new and

exceptional situations. Tacit knowledge is difficult to articulate, as it is acquired “only through

experience within the firm” (Cohen and Levinthal 1990, 135) and is based on extensive trial-and-

error from which a strong human intuition or ‘gut feelings’ emerge (Dalkir 2011; Nonaka and

Krogh 2009). Generally, an important attribute to the concept of tacit knowledge is that it is applied

in situations where context-dependent skills and insights are needed for problem solving and

decision making (Brix 2017). Cohen and Levinthal (1990) build on the tacit knowledge construct

as a basis for introducing the concept of ‘absorptive capacity’. Absorptive capacity refers to the

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potential of individuals and their organizations to more effectively absorb information to create

new knowledge. The absorptive capacity is enhanced over time as individuals and organizations

develop common expertise and knowledge, often highly tacit in nature, in order to enhance their

basis for decision making under uncertainty (Cohen and Levinthal 1990; Reagans and McEvily

2003; Van den Bosch, Volberda, and de Boer 2009; Zahra and George 2002). In assessing

organizations’ degree of absorptive capacity, recognizing the ability to know where to locate useful

knowledge is emphasized: “Critical knowledge does not simply include substantive, technical

knowledge; it also includes awareness of where useful complementary expertise resides within and

outside the organization. This sort of knowledge can be knowledge of who knows what, who can

help with what problem, or who can exploit new information” (Cohen and Levinthal 1990, 133).

Finally, organizational learning occurs over time (Argote and Miron-Spektor 2011) at

individual, group and organizational levels (Crossan, Lane and White 1999; Akinci and Sadler-

Smith 2012). Notably, such learning does not take place in organizational vacuums. Organizational

members are enrolled in complex network configurations beyond formal organizational

boundaries (Powell, Koput, and Smith-Doerr 1996) as increased specialization necessitates for

knowledge workers to interact with specialist peers to reduce uncertainty and innovate (Crossan

and Apaydin 2010; Mulligan and Oats 2016).

Management consulting

Within the broad literature of knowledge creation and organizational learning, a more

confined and distinct stream of research has explored the role of management consultants and the

way they assist organizations in facilitating their multifaceted objectives. Management consulting

research is subject to much controversy between two extremes (Nikolova and Devinney 2012).

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One portrays consultants as functional ‘experts’ who benefit from a significant knowledge

asymmetry vis-à-vis their clients. Consultants are viewed as “substantial contributors, in their

own right, to our collective store of management knowledge” (Suddaby and Greenwood 2001,

934). This view highlights that “consulting firms play an important economic role in helping

organizations trigger and deal with change” (Armbruster and Glucker 2007, 1873). Along this

‘expert’-driven view, the process by which consultants and clients engage is often characterized

by a uni-directional transmission of decontextualized knowledge from the consultant to the client.

In its extreme form, the client’s role is limited to transferring information based on the consultants’

demands, often with limited client understanding of the way such information is processed by

consultants to arrive at solutions to problems. Furthermore, whereas the client’s role is considered

relatively passive, the consultant takes on a more controlling, even dominant role (Nikolova and

Devinney 2012). Hence, it is the consultant who holds the power in the client-consultant dyad and

who benefits from significant knowledge asymmetries by maintaining and enhancing a long-

lasting client dependency (Fincham 2012).

In contrast to this expert-view, a ‘critical’ view (Nikolova and Devinney 2012) has

emerged, questioning the value of consultants (Ernst and Kieser 2002; Kieser 2002) and the notion

of ”managers as marionettes” (Kieser 2002), including the idea that consultants hold superior

knowledge to ensure a powerful and ongoing client demand. This more skeptical view argues that

consultants do not necessarily bring tangible knowledge to improve organizational functions and

reduce strategic uncertainties (Sturdy 2011). Rather, they seek to construct a reality where clients

are manipulated to think that they are buying valuable functional knowledge. From the client’s

perspective, however, the knowledge offered by consultants can be difficult to quantify or directly

apply to situations of organizational uncertainty. Some suggest that consultants travel across

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business industries to convey standardized solutions and management fads and fashions (Jackson,

2001; Kieser 1997; Ax and Greve 2017) to promote hype-driven tools without much empirical

justifications (Sorge and van Witteloostuijn 2004).

In between these extremes, scholars have offered a more balanced ‘social learning’ view

(Nikolova and Devinney 2012). It characterizes the client-consultant interaction by reciprocal

exploration and interpretation of past experiences (Nikolova, Reihlen, and Schlapner 2009) as well

as active client involvement in the creation of management knowledge (Sturdy and Wright 2011).

It means that the client-consultant dyad is not simplified to a scenario where consultants are the

universal experts possessing excess knowledge relative to their novice clients (Kitay and Wright

2003). Nor are the consultants considered manipulative conveyers of management fads with

limited functional value to their clients, as implied in the critical view. Instead, consultants are

viewed as knowledgeable professionals who can use their expertise and industry insights from a

broad range of client projects to assist individual clients (Richter and Niewiem 2009), who

themselves possess deep knowledge. This industry-knowledge possessed by consultants not only

assists the client in a functionalistic way (i.e. the handling of specific organizational tasks), but

also creates a path for clients to legitimize their decisions and get ‘second-opinions’ (Saint-Martin

2004) from independent knowledge resources, e.g. to ensure organizational stability (Furusten

2009). In some cases, consultants are used as convenient scapegoats for decisions subject to great

organizational and public visibility (McKenna 2006; Bergh and Gibbons 2011). Importantly, under

the social learning view, the simplified unidirectional knowledge flow from consultant to client,

as assumed under the expert view, is rejected. Instead, the client-consultant interaction builds on

the premise that both parties rely on each other’s knowledge and collaborative efforts in the dyad

(Armbruster and Kipping 2002). Hence, under this perspective, a mutual knowledge asymmetry is

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the norm (Nikolova and Devinney 2012), ultimately creating a bi-directional dependency

(Fincham 2012): the client is dependent on the consultant’s industry expertise offered by the

consultants; at the same time, the consultant’s knowledge is de facto useless if not contextualized

by the client within its complex organizational reality. One reason why this collaborative dyad

configuration is found to be effective is that clients often worked as consultants; hence a shared

‘language’ often exists (Sturdy, Handley, Clark, and Fincham 2009) to ease the dyad interaction,

as well as subsequent client implementation of the consultant inputs.

In line with Nikolova and Devinney’s (2012) social learning view, Fincham (1999, 2012)

argues in favor of placing the specific dyad relationship and its (co)dependencies on a continuum.

He recognizes that some parts of the dyad interactions are potentially subject to more evident

consultant dominance from deep external expertise, whereas others can be characterized by highly

active and powerful clients who leverage their own superior knowledge in dyad collaborations.

However, the typical premise is one of inter-dependency and mutual learning, as knowledge

synergies and quality project outputs emerge from intimate dyad interactions. We will use this

conceptualization of dependency to investigate the role of external consultants in MNE ITP

decisions.

External tax advice

Tax consulting has a different character than management consultancy in general: it seems

less voluntary than general management consulting due to the regulatory context in which it takes

place (Hasseldine et al. 2011). Various tax studies investigate the impact of external tax services,

including the use of auditor-provided tax services, and are able to demonstrate that services fees

are related to lower ETR (Armstrong et al. 2012; Huseynov and Klamm 2012; Wilde and Wilson

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2018). The importance of tax consulting in the context of tax risk management has been addressed

in various studies. Mulligan and Oats (2009) interviewed in-house tax experts in U.S. MNEs within

the IT sector and found a widespread conservative tax risk attitude driven not only by uncertainties

in the technical application of rules as such, but also by a strong fear of public media exposure.

Notably, they report that “companies employ a wide range of mechanisms and processes to

manage tax risk, including: seeking opinions from external advisors” (696) e.g. to ensure ‘back-

up’ on risky tax positions. They notice a shift in MNE risk appetite towards tax compliance instead

of tax minimization, as confirmed by Klassen, Lisowsky, and Mescall (2017) and various

professional surveys of MNEs in recent years.

A more recent stream of literature builds on Hasseldine et al.’s (2011) study on ‘The market

for corporate tax knowledge’, indicating how important it is for MNEs to effectively develop and

manage tax knowledge. Hasseldine et al (2011) describe how accounting and tax advisory firms

deliberately attempt to position themselves in between the tax authorities and MNEs, in a tax

knowledge ‘broker’ role, essentially serving as translators for MNE clients (the knowledge buyers)

in how to interpret and apply tax rules (with the tax authorities as the knowledge sellers). As stated

by Hasseldine et al. (2011, 46) “accounting firms are in the paradoxical position of presenting for

example, consultation activities over proposed tax legislation as being in the public interest…while

simultaneously promoting the benefits to their clients from their specialist knowledge”. They find

that companies hire consultants for “specific, complex tasks”, but also that MNEs are questioning

if knowledge flows in the MNE-consultant dyad are uni or bi-directional, as consultants seem to

be learning too. Van der Rijt et al. (2019) extend this work by surveying MNEs on the drivers of

knowledge sharing in the MNE-consultant dyad. They find that accessibility to advisors, and

positive past experiences enable tax knowledge sharing. Moreover, only when expecting specific

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tax benefits to occur from knowledge sharing, will MNEs be inclined to engage in knowledge

sharing with advisors. Conversely, whereas broader and more indirect benefits (e.g. reputational)

are still valued by MNEs, they do not drive knowledge sharing.

In this same stream of literature, Mulligan and Oats (2016) find that the increasing attention

to tax risk management from top managers turns in-house tax professionals into a powerful elite

in MNEs. They point out that MNE tax professionals are not simply absorbing regulatory demands

from tax policy makers. Rather, there is a bi-directional effect taking place as these in-house tax

professionals are able to influence the regulatory premises that they operate within through

utilization of complex institutional forces and application of professional pressures on policy

makers (Mulligan and Oats 2016). The authors conclude that the MNE tax department has

increasing organizational power at micro, meso, and macro levels (Mulligan and Oats 2016).

The BEPS action plan can be considered an external shock in the tax environment, worth

being studied more profoundly. To our knowledge, the only qualitative study of its potential

implications for in-house tax professionals is Radcliffe et al. (2018). Based on interviews and

participant observations between September 2013 and August 2015, they study the way in-house

tax executives attempt to navigate institutional change and variation in rules and morals, in context

of the BEPS Action Plan. As part of their study, they note that external advisors are “focused on

the need to help their clients meet the new requirements” (page 51), and that BEPS was perceived

to increase tax complexity once implemented, “thereby creating more opportunities for tax

professionals in public practice” (page 51). However, as their data collection ended just before the

OECD October 2015 release of the final BEPS reports (OECD, 2015), it remains unclear how the

MNE client-consultant dyad is in fact impacted from BEPS.

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Overall, these studies allocate an ‘expert role’ to the external tax advisors, originating from

their strong tax knowledge relative to the MNE tax professionals (Hasseldine et al. 2011; Radcliffe

et al. 2018; Van der Rijt et al. 2019). In context of the increased tax pressure resulting from the

OECD’s recent BEPS initiative (OECD 2015), the process by which in-house ITP executives make

decisions gains significant importance. Yet it remains somewhat paradoxical that while the

accounting literature offers a rich understanding of the effects of tax regulation on accounting and

control systems in MNEs, the process through which ITP decisions are developed in the first place

has received much less attention.

Guiding framework

Figure 1 presents the framework guiding our analysis. The ITP literature has recently

documented that the previous dominance of aggressive tax avoidance behavior in MNEs is

increasingly replaced by compliance-oriented ITP strategies (Cools et al. 2008; Mulligan and Oats

2009; Klassen et al. 2017). This observation reflects the growing attention ITP receives from tax

authorities and regulators, especially since the introduction of the BEPS action plan (Radcliffe et

al. 2018). In this complex and demanding tax environment, we investigate the degree to which

MNE ITP executives are dependent on external consultants for ITP decision making. While we

build on the work by Hasseldine et al. (2011), Mulligan and Oats (2009, 2016), Radcliffe et al.

(2018), Van der Rijt et al. (2019), we observe that they study ‘tax knowledge’ and the role of ‘tax

experts’ in a rather generic way, detached from specific tax decisions, actions and responsibilities2

of MNE tax executives (see Mulligan and Oats 2009, for an exception). Given the highly

2 E.g. international transfer pricing, value added tax, customs duties, mergers and acquisitions, payroll taxes, R&D

tax credits, tax governance, tax technology, and tax accounting.

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differentiated substance of these concepts, we argue that ‘tax knowledge’ in the MNE-consultant

dyad has more tangible meaning and structure in the context of specific actions and tasks where

particular knowledge and expertise is applied in the (co)creation of outputs (Nikolova and

Devinney 2012, 394).

Our guiding framework focuses on Fincham’s (2012) concept of ‘dependency’ in client-

consultant relationships as the main construct, and the MNE dependency on external tax

consultants given the specific knowledge asymmetries identified in our empirical analysis.

Fincham’s (2012) dependency focus ties to Nikolova and Devinney’s (2012) ‘expert’, ‘social

learning’, and ‘critical’ models, which we will use to discuss our empirical findings and reflect on

the relationship between MNEs and their ITP consultants from a generic, as well as post-BEPS

perspective. In order to be able to examine the client-consultant knowledge asymmetries in context

of specific activities where knowledge is exchanged and applied, we investigate the four main ITP

tasks that MNE ITP executives are responsible for: strategic development, policy design,

documentation, and APA and tax audit negotiations with the tax authorities.

[INSERT FIGURE 1 HERE]

3. RESEARCH STRATEGY AND DESIGN

Our qualitative research approach allowed us to cumulatively learn about this sensitive

topic over the course of the research project (Eisenhardt 1989; Silverman 2018; Yin 2003). We

draw mainly on Eisenhardt’s process-based framework for the development of theory from

qualitative research (Eisenhardt 1989). One of the researchers interviewed a total of 13 carefully

selected ITP executives working in the UK for different MNEs to gain insights into their

18

experience interacting with external consultants for the purpose of ITP decision making. On one

hand, we purposefully chose a diverse sample of MNEs characterized by different industries and

organizational structures. On the other hand, we selected interviewees working for MNEs of a

particular location, size and structure: the MNEs needed to be active in the UK (meaning either

UK-headquartered or having one or more UK-based subsidiaries of significant size) and be

characterized by high volumes of intercompany transactions with foreign affiliated entities. By

only interviewing ITP executives working at the MNE group’s UK office, we aimed to keep the

regulatory context and frame of reference as constant as possible, i.e. based on the HMRC’s

framework for ITP in accordance with the globally recognized OECD Guidelines. Furthermore,

we involved MNEs that are large enough to operate an active in-house tax function. Due to the

sensitivity of the research topic, the interviewees and their MNE affiliation are not disclosed in

this paper, as is common for studies analyzing sensitive data (cf. Cools, et al. 2008; Cools and

Slagmulder 2009; Plesner Rossing 2013). Details of the 13 men and women interviewed, all from

different MNEs, are presented in Table 1.

[INSERT TABLE 1 HERE]

We used a semi-structured interview guide based on our extensive literature review,

relevant professional surveys (e.g. EY 2016, 2017, 2019) and documents guiding ITP practice

(including the BEPS action plan, 2017 OECD Guidelines, UK tax regulations). Our interview

themes include the four ITP tasks under study: ITP strategy, ITP policy design, ITP documentation,

and APA and tax audit negotiations. In addition, we had ‘BEPS’ as an explicit theme to gain a

focused understanding of its impact on the use of external consultants. Finally, we used a theme

labelled ‘Other Issues’ to inquire about less task-specific items, e.g. MNE loyalty towards specific

19

Big 4 firms and motives for this. The interview themes and sample questions are included in the

appendix.

Getting familiar with the MNE’s website prior to each interview helped the interviewer to

focus immediately on the interviewee’s context during the conversation, and to have a vivid

conversation with the ITP executives about their perception of the MNE-consultant dyad. An

interesting point we noticed was that the interviewees spontaneously compared ITP practices at

their current employer with previous ITP experiences at former MNEs and anecdotes from

colleagues. We quickly learned that all of our interviewees had former consulting experience, with

all but one having worked for a Big 4 consulting firm.

The interview guide was gradually refined as the interview series progressed and we started

to understand the rather unexpected dynamic between the in-house ITP executives and external

consultants. In line with Yin (2003) and Eisenhardt (1989), we experienced theoretical saturation,

indicating that the theoretical development tends to decline and become marginal beyond a certain

point. We reached this point after 10 interviews. Additional interviews were undertaken to make

sure that no significant new observations were observed beyond this point. All interviews, with

the exception of two, were recorded with permission by the interviewees and fully transcribed for

the purpose of subsequent coding and analysis.3 Interviews lasted an average of 50 minutes, with

the shortest being 32 minutes and the longest 64 minutes in length. In order to increase the validity

of the study, we supplemented the interview transcripts with other publicly available information

about the MNEs involved. This included press articles and relevant MNE website information, for

example the formal tax strategies that MNEs active in the UK are now required to disclose.4

3 For the unrecorded interviews, the interviewer took notes during and immediately after the interviews.4 UK Finance Act 2016 (c. 24), Schedule 19: Large businesses: tax strategies and sanctions. Part 2, Section 17.

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Data Analysis

For the data analysis, we developed a detailed coding scheme, which included extending

the reference to the four ITP tasks presented in our guiding framework (Figure 1) with labels based

on the literature review. Our codes included references to all potential parties involved

(consultants, tax/finance executives, board of directors, legal actors, peer MNEs, etc.), to the role

of these parties in ITP decisions, their experience with ITP, experiences with the tax authorities

(in general versus particular contexts like APAs), and choice of specific consultants. We also

coded the type of knowledge shared (operational, industry, process, tacit, explicit), indications of

the MNE’s absorptive capacity, and MNE characteristics like tax risk appetite, strategic

orientation, organizational structure, etc. When relevant issues came up during the actual coding

process, we discussed how to incorporate them into the scheme. Both researchers started coding

independently (one in Nvivo, the other manually) in order to be able to compare our insights and

enhance the validity of our findings and conclusions. We reached a high degree of inter-coder

reliability.

Our conversations on the coding gradually evolved towards explanation building (Yin

2003), whereby we thoroughly discussed the insights for each particular MNE, as well as

compared the perceptions by different MNE ITP executives (cf. within-case and cross-case

analyses, Eisenhardt 1989). Along this process we drafted various thematic tables and figures that

helped us visualize our insights. We made sure to verify our initial conclusions by cross-validating

the different interviews with each other, as well as comparing them with the documents we had

available. By triangulating our insights in this way, we aimed to reach convincing findings (Yin

2003).

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In the same way, we analyzed the MNEs’ published tax strategies, using the same coding

scheme to triangulate with the interviewee transcripts where relevant. The tax strategies varied

significantly in length and details offered: some provided rather superficial information on the

required items per the UK Finance Act 2016, whereas others provided details about risk appetite,

tax governance, ITP practices, etc. In general, the tax strategies provided comfort to believe that

individual MNE interviewees’ feedback on issues such as tax risk appetite, ITP practices, tax

planning, interaction with tax consultants, communication with tax authorities, etc. could be

considered representative for the specific MNE in question. Notably, we used these tax strategies

beyond mere triangulation with interview feedback. For example, we analyzed the order in which

these tax strategies presented specific tax goals (e.g. reducing double taxation risks, management

of reputational risks). We also visited the MNE websites to explore in what context they presented

their tax strategies (investor relations section, CSR/Ethics section) to understand how they

attempted to ‘frame’ their tax strategies towards the public. Other analyses of the tax strategies

included various keyword-driven reviews e.g. ‘advisor’, ‘consultant’, ‘knowledge’, ‘BEPS’,

‘transfer pricing’, ‘tax haven’, ‘OECD’, etc. to generate an understanding of both the substance

and variance in the level of detail that was provided across the sample. We captured our discussion

of the emerging patterns on knowledge asymmetries and degrees of dependencies in the MNE-

consultant dyad by developing conceptual matrices (Miles, Huberman, and Saldaña 2013), which

will be used to summarize our analysis.

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4. ANALYSIS

ITP Strategy

We observe a tendency that MNE boards and C-suite managers have become increasingly

involved in making sure that ITP strategies are in accordance with regulatory requirements; at the

same time the role of consultants in this exercise has become more marginal. Our interviewees

mentioned how they recently felt a significant change in tax risk appetite among top managers and

boards, particularly as the BEPS Action Plan started progressing and receive public attention. They

also emphasized specific tax events and scandals, e.g. Panama Leaks, as drivers of more direct top

management involvement. Even for those MNEs who, historically, were in ‘compliance mode’,

the ITP executives now expressed an increased, and much more direct interaction with top

management who wanted to be more actively involved and informed about tax strategies in

general, and ITP strategies in particular. It appears that top managers are no longer satisfied with

a vague ‘check-the-box’ confirmation of ITP compliance from the tax function. Rather, they want

to be actively involved in shaping group-wide tax strategies and voice their opinion in the context

of tax risk appetites. The previous tendency that tax functions were working in a ‘silo’

environment, detached from organizational reality, was not at all apparent from neither the

interviews nor the published tax strategies: As stated by one interviewee who had previously been

involved with more aggressive ITP structures: “you probably have often heard the term: "tax

department sitting in their ivory tower", and that used to be the case…a little department sitting

off in the corner somewhere, not interacting with anybody.” (INT7). Conversely, we observed a

more open and transparent dialogue within MNEs, as a wider group of top managers and audit

committees are actively involving themselves in shaping ITP strategies. There seems to be a

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deliberate goal among top managers who are ultimately responsible for tax risks to move away

from the ‘silo’ management of ITP strategies, where ITP is fully decentralized, to the tax function:

“it [ITP] used to be far more the decision of the tax director. Maybe one person…now I see it

being a committee that decides…the internal tax team has an opinion, the CFO has an opinion,

the CEO probably has an opinion.” (INT8)

The analysis of publicized tax strategies from the MNEs added additional insights into the

formation of ITP strategies. From the tax strategies, we observed a wide-spread existence of

formalized tax governance structures where internal controls assist the in-house tax professionals

in implementing tax and ITP strategies. Notably, some MNEs in this study chose to be very

transparent and detailed in their public tax strategies, giving detailed insights on ITP strategies and

their tax effects, as well as the use of tax consultants. Others were much more superficial and

seemed to give - at best - a minimum level of detail5, not including information on how they use

consultants to define their overall tax practices. A general effect from this UK tax political

requirement to publicize tax strategies, in addition to supra-national initiatives (i.e. BEPS), is that

in-house ITP executives are now directly in the spotlight, answering questions within and outside

their organizations to tax stakeholders in order to justify ITP strategies and their effects on local

tax payments.

For all 13 MNEs, we observed a striking absence of consultants in the process of shaping

ITP strategies. One interviewee mentioned that consultants had envisioned playing a very active

role in MNEs formalizing their ITP strategies when the 2016 Finance Act requirements were

implemented. Instead, interviewees generally seemed confident that they possessed the necessary

5 The average and median length of tax strategies for the 13 MNEs represented in this study is 6.7 pages and 4

pages, respectively. The standard deviation was calculated at 6.17 which confirms the significant differences in tax

strategy details provided that was observed from qualitative analysis of these documents.

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knowledge for transforming the tax risk appetite, defined by top management, into more

operational actions for ITP: “In the UK, rules are published to require UK multinationals to

publish their tax strategies. And as part of that, of course, the Big 4 got very excited and thought

they'd be going into all the banks and developing these. But they soon found that banks were very

confident about developing those strategies without too much input from the Big 4.” (INT7)

Furthermore, interviewees appeared very reluctant towards aggressive ITP structures

proposed by consultants, and generally rejected the idea that consultants should play any role in

shaping tax risk appetites in the first place. Instead this was a task treated exclusively within the

MNE. It seemed that the recent compliance fixation meant that tax functions were not actively

looking for aggressive tax avoidance opportunities. Instead recent tax political events and ‘shocks’

like BEPS and Panama Papers had de facto transformed ITP strategic formulation into an exercise

of “mainstream compliance” (INT8). Some interviewees recognized how more aggressive ITP

strategies occurred in the past: “Let's be honest, it has been a massive planning tool” (INT8).

However, now compliance is perceived as the only real strategic option, making this task straight

forward and the consultants’ knowledge on aggressive ITP schemes de facto irrelevant.

An interesting observation emerged as the specific risks inherent in ITP were discussed

with interviewees. While ITP risks have traditionally been portrayed as a double taxation problem

where tax authorities engage in a zero-sum game to tax MNE group-wide income, this type of risk

was strikingly absent in both the interviews and the public tax strategies. Instead, the strategic

management of ITP risks seemed directly tied to public perception effects, with concepts such as

‘citizenship’ and ‘integrity’ being emphasized in addition to the importance of having ‘proactive’

relationships with tax authorities. Several tax strategies even mentioned that the MNE supported

the OECD BEPS initiative to increase MNE tax transparency and compliance. Another interesting

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and very common observation across the tax strategies was the urge to explicitly (and often

repeatedly) state that the MNE was not active in any tax havens and that tax havens were

considered ‘immoral’. We also observed some of the MNEs engaging in a form of tax payment

competition by stressing in the report their ‘ranking’ in terms of UK tax payments in a given

income year, in what seemed to be a ‘more is better’ type logic. It is noted that while the 2016

Finance Act requires that MNEs make their tax strategies freely and publicly available on their

websites, MNEs can essentially decide in what context these are presented. Yet, almost half (6 of

13) of the MNEs have chosen to present their tax strategies in context of a CSR or ‘social

contribution’ environment on their websites. For all 13 MNEs, their tax strategies are explicitly

founded in compliance objectives, business ethics principles and the need for making social

contributions through “fair” and “responsible” tax payments, where strategic principles are

founded on “doing the right thing”. In contrast, double taxation risks in ITP were strikingly absent

from the publicized strategies and interviews, or only mentioned in a more secondary context.

While the published tax strategies can be perceived as window-dressing, looking at the interviews

and published tax strategies in combination reinforced the impression that ITP strategies appear

deeply rooted in a ‘social contract’ between MNEs and their commercial stakeholders. Here, the

consultants de facto have no role to play; they do not possess any real superior knowledge relative

to the MNE clients that they can leverage from. One interviewee noted how the management of

reputational ITP risks is not simply a ‘marketing’ exercise – it actually reinforces the management

of double taxation risks: “Actually reputational risk usually leads you to not having double

taxation because in no one country are you trying to be ultra-aggressive. So you are more likely

to balance where your profits send off, whereas if you're being aggressive there's probably a short

list, maybe even one very low tax jurisdiction that's gonna get the lion’s share and everybody else

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just gets a smattering of profit. You're more likely to end up with double taxation in an aggressive

structure than you are in one that's already bound for reward in order to take into consideration

the reputation.” (INT8).

In sum, the interaction with consultants during ITP strategic development was essentially

a matter of sounding out the consultants i.e. as sounding boards to “keep it sensible” (INT2).

Overall the consultants played only a marginal, more validating role in defining the ITP strategic

direction: “They (consultants) are not going to do that thinking for you, and you wouldn't want

them to, I don’t think…” (INT7). When interaction in fact occurred, the in-house ITP teams were

found to play a very dominant, self-sufficient role, which included rejecting consultant inputs

poorly aligned with the ‘compliance above all’ cultures that were observed across all interviewees.

ITP Policy Design

We observe a widespread ability to handle the ITP policy design in-house. ITP executives

not only have extensive operational knowledge on how their respective MNE value chains are

organized. In fact, they also have a deep understanding of the OECD Guidelines’ fundamental

principles, including the way the pivotal functional analysis for ITP applies to different parts of

the MNE’s commercial activities. In terms of operational knowledge – often highly tacit in nature

– interviewees are found to benefit from being directly involved in shaping and analyzing their

organizational business structure. The increased importance of tax strategies by top management

has led to the tax function being more directly involved in business strategy development,

ultimately enhancing its understanding of the relationship between business strategy and ITP

policies. The in-house knowledge on OECD Guidelines that we observed seems to be driven by a

highly homogenous career path among respondents. We found a strong trend of MNE ITP

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executives having worked in Big 4 environments at the onset of their career before joining an in-

house tax function as ‘Transfer Pricing Manager’ or similar title with direct ITP responsibility.

While in Big 4, they are exposed to a wide range of MNE clients in different industries and receive

training on OECD principles for specific transactions (services, IP, etc.) in addition to more

sophisticated quantitative analysis e.g. benchmarking and valuation. Once in-house, this previous

training and experience seems to translate into confidence among interviewees that they, in terms

of technical ITP knowledge, can certainly match the consultants’ level of technical expertise:

“…we are a team which comprises of people who were senior managers in various Big 4s so it’s

not like we need a consultant to tell us what’s (technically) right and what’s not…we have that

knowledge, we have that ability in-house.” (INT1)

The in-house handling of ITP policy design builds on the ITP executives integrating their

technical knowledge of OECD principles obtained from their previous consulting careers, with the

operational knowledge built from them being directly exposed to the MNE business on a daily

basis. Hence, ITP policy design is not merely a matter of possessing strong technical knowledge

on OECD Guidelines. In fact, we observe an even greater emphasis from interviewees on the

importance of being able to integrate what apparently is perceived as rather straight-forward

technical OECD principles of ITP with specific, and often highly complex, operational knowledge.

This ability to combine technical and operational business knowledge was considered highly

problematic for consultants, as they are perceived to be too distant from the MNE business reality

to obtain the necessary tacit operational knowledge and develop sufficient absorptive capacities:

“[financial institution] are phenomenally and horribly complex organizations. You can work in-

house in a [financial institution] for three, or four, or five years and still not really understand all

the goings on in the organization. So, if you imagine that as an in-house person, what a nightmare

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it must be for an external person (consultant) to develop that.” (INT7). Interviewees recognized

how their on-going involvement with operational colleagues within the MNE value chain was

crucial for them in generating an ability to formulate or refine the ITP policy. Moreover, some

interviewees emphasized the point that: “A successful tax department nowadays, actually has

fewer technical people in it, and much more commercially-minded people.” (INT7). In contrast,

consultants’ short-term involvement in designated ITP projects apparently does not allow them to

generate the detailed know-how to truly play a more prominent role during the ITP policy design:

“I've been working at [name of MNE] for almost two years. And every day, I know something new

about the company. It took me like two years. If you're a consultant and you have this [ITP] project

for six months, you are not going to know the whole picture.” (INT6). In some cases, we observed

rather critical opinions on the consultants’ lack of ability to provide inputs for the ITP policy

design. One interviewee commented on a previous experience where consultants had been asked

to provide fundamental ideas to the ITP policy design but where the MNE ITP executive eventually

concluded: “…It was really me who came up with a perspective to the best way which we could

do it, which at the time was probably the best way. So consultants in that respect didn't really I

guess understand our business that well…” (INT4).

What appears to create an additional challenge for consultants is that MNEs are regularly

restructuring parts of their value chains in order to remain competitive, which has direct

implications for ITP policy designs: “[company name] is a business which constantly keeps on

changing. So the [company name] I joined two years ago is not the [company name] today in

which I live…it has undergone enough change to make it feel like it is a different company.”

(INT1). Here, the in-house ITP executives have an advantage over the consultants, as they typically

have been directly involved in the decision making process, by providing top management insights

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to the tax implications of business-driven reorganizations. Conversely, consultants are more

distanced from the ongoing discussions between the ITP executives and the business decisions

makers with regards to the commercial arguments for restructurings. Ultimately this creates a

constant commercial ‘knowledge deficit’ with the consultants: “there is a limit to how much

intuitive, implicit knowledge people (consultants) can have.” (INT7).

While the in-house professionals generally do play a very dominant role, consultants were

not entirely excluded from the ITP policy design phase. In fact, interviewees report that consultants

play a crucial role in providing fresh market intelligence from peer MNE clients’ ITP practices

and experiences with tax authorities in specific jurisdictions: “What I really want from them is

insights: What are the tax authorities doing and thinking, what are competitors doing and

thinking?” (INT7). These particular knowledge asymmetries create a strong MNE demand for

consulting services, as MNEs are looking to engage in various isomorphic activities. For example,

while MNEs express strong confidence in their ITP policy designs they still seek out consultants

for validating that their policies do not generate tax results significantly different from local

competitors which could trigger tax audits: “we are operating alongside a similar structure from

[competitor names]…we might have a little look at intelligence on if they've got a similar

structure…and what margins are they delivering…just so that we're not seen as an outlier that

could be picked up for risk assessment.” (INT12). Other interviewees discussed the importance of

consultants – preferably from Big 4 firms - to ensure not only personal comfort and protection, but

also to provide certainty for top managers (e.g. CFOs) assuming ultimate responsibility that ITP

policies have been properly validated prior to implementation. In contrast, the knowledge and

opinions formed solely from interactions among in-house ITP executives, or through more

30

informal communications within MNE peer networks6, seemed insufficient to comfort top

management: “I think also what the external support does provide is a level of assurance to the

senior management or senior finance guys that, "Yeah, this is okay." It's all well and good for me,

in-house boys saying that, "Yeah, I think this is fine." But to have, I guess, the stamp of approval -

as reluctant as I am to say this - but maybe the stamp of approval of [Big 4 name] or [Big 4 name]

carries more weight to senior management than it does if I send an email saying, "This is fine."

You know what I mean?” (INT11).

While interviewees generally talked about ‘Big 4’ as the source of external validation of ITP

policy design, we observed cases where interviewees were focused more on the individual

consultant’s technical and even personal skills, while the specific Big 4 brand name plays a less

prominent role. To be sure, interviewees were still found to gravitate heavily towards the Big 4

firms whereas boutique type advisory firms are used less often, e.g. in rare cases that call for highly

specialized legal advice. This is not just due to ‘brand-name effects’ but also because Big 4 firms

are part of a global network that boutique size advisory firms usually cannot match when

interacting with multiple tax authorities simultaneously. However, some in-house ITP executives

are certainly not indifferent towards the choice of consultants for more complex ITP decisions,

e.g. where valuable intangible property is involved. For example, one interviewee emphasized

specific individual consultants who were associated with outstanding skills in specific areas of

ITP: “it is on a person by person basis…there is a partner in Belgium who is very good at IP

(intellectual property) planning.” (INT1). Generally, it appears that personal relationships develop

over time between these in-house ITP executives and specific Big 4 consultants as “…the services

which a tax consultant gives are personal services.” (INT1). In fact, these personal relationships

6 See Mulligan and Oats (2016) for insights to the way MNE tax knowledge workers shape external networks to

form powerful communities that can influence the tax and regulatory environments within which they operate.

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observed between the in-house ITP professionals and consultants can be so powerful that the in-

house MNEs would consider following the consultant to another consulting firm, provided that the

consultant remains within the Big 4 domain in order for the MNE client to ensure continuous

access to a global service provider network. One interviewee provided an example: “if we were to

look at the intangible sitting in the (consulting) service, that intangible comes from the person and

the network. Let’s say a person moves from [Big 4 name] to [Big 4 name], the personal expertise

has moved to [Big 4 name]…now I actually have an incentive to move to [Big 4 name].” (INT1).

Finally, in context of BEPS, we did not observe a significant effect on the degree to which

interviewees use consultants for ITP policy design. Two main reasons were provided for this. First,

interviewees generally believed that the main effect from BEPS on ITP policy design related to

Action 8-10.7 Given the importance of operational knowledge on the MNE value chain for

implementing Action 8-10, interviewees believed that they hold the necessary expertise – not the

consultants. In some cases, interviewees concluded that existing ITP policies were so well-aligned

with BEPS that no real material changes to existing ITP policies were needed: “I guess if you take

[Action] eight to ten, I think limited impact for our organization.” (INT12). Second, our

interviewees found the consultants to be rather passive in the wake of BEPS, seemingly unable to

provide direct and rigorous advice on how MNEs should implement the revisions to OECD

Guidelines. Hence, it appeared that it was not only MNEs who were involved in isomorphic

activities, as consultants also seemed to be waiting for new norms and practices to emerge post

BEPS before they would provide specific advice to clients: “They (consultants) say, "Okay. We

need some time to just establish what we want to do because we are in the same situation”...in

these new laws - Action 8 to 10. So basically, everything is new for them too… Yesterday I was in

7 Actions 8-10 of the BEPS action plan focus on the application of the arm’s length principle and address the

appropriate pricing of hard-to-value-intangibles within the arm’s length principle.

32

this meeting and they were talking about Action 4 and said, "We read the whole 400 pages…we

have so many questions for the HRMC, what we should be doing with this situation, with this

situation. ...They don't want to give the full advice because they don't have a response from

HMRC…We don't have anything about what to do with this new requirement.” (INT6).

Documentation

We observed a greater dependency on consultants for the documentation task relative to the

ITP strategy and policy design tasks. Our interviewees indicated that they engage consultants for

specific documentation activities (functional analyses, benchmarking, report writing, etc.) to

different degrees and based on a range of motives and arguments. We observe basically two types

of approaches: some interviewees reported taking significant in-house ownership towards the

development of documentation files and the individual sub-activities for producing documentation

files. This included developing documentation templates in-house that could be applied to the vast

majority of the group subsidiaries. Other interviewees engaged consultants from the onset of the

documentation process by establishing a more frequent, interactive processes of co-creation,

whereby both the MNE and the consultants played an active and collaborative role in developing

the documentation files. A common approach observed in all cases was the use of consultants in

jurisdictions subject to regulatory uncertainties. Here, our interviewees considered the knowledge

of the consultants as critical in ensuring that documentation files were adapted to local formatting

requirements, as well as to less-formalized technical preferences among local tax authorities that

are not always disclosed in formal compliance regulations.8

8 For example some tax authorities prefer domestic over regional comparables and removal of loss-making

comparables from a benchmark study data sample.

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Interviewees generally agreed that they understood the operational context of the ITP policy

design better than consultants, and hence should be directly involved in conveying this in the

documentation files. That said, some interviewees still believed that consultants had a better

understanding of how to use ‘OECD language’ and ITP jargon when communicating ITP policies

to tax authorities in the documentation files: “They (consultants) are much better reporters than I

am. I am incredibly good at reviewing and editing reports in order [to ensure] that they represent

the commercial artifacts but the Big 4…they are far better, far better, than I am at writing a report

in a way that captures that story in a way that will be sent (to tax authorities). It's about skillsets,

optimizing skillsets [...] I wouldn’t use consultants to create the technical defense but I would use

the consultants to write it.” (INT8). Moreover, interviewees also relied on consultants for non-ITP

related skills, e.g. in jurisdictions where language barriers existed due to the requirement for

documentation to be drafted in a local non-English language. In addition, where the country-

specific ITP rules required the documentation to be developed by an independent service provider,

the MNE dependency on consultants was not driven by a knowledge asymmetry argument – rather

it is simply established by law: “South America, in general, requires Spanish language and often

has specific requirements. Australia seems to change its transfer pricing documentation

requirements every year and make them more and more difficult. So we outsource Australia. India

has to be outsourced because it has to be prepared independently by an external consultant. So

there are certain countries that we would outsource, but the majority of countries we would do in-

house.” (INT9).

For the purpose of documenting comparability, typically by using benchmark studies9, the

majority of interviewees relied heavily on the consultants’ expertise. For some interviewees, the

9 Due to the use of more indirect OECD methods for ITP, e.g. transactional net margin method and Resale price

method, MNEs typically have to rely on benchmark studies to support the pricing of intra-group transactions.

34

reason is technical: “I always use them for benchmarking, because to me the actual art of

benchmarking, the real precision of benchmarking, is people who do it over and over and over

again and really know how to weed the sample.” (INT8). Other interviewees, however, do not

consider consultants to hold superior technical benchmarking skills, but buy their services because

of a cost-benefit argument in favor of outsourcing the comparables search: “it's quite expensive to

get access to these databases like Bureau van Dijk and other external providers... we thought that

just to have three or four benchmarking studies a year it was not worth it.” (INT5). A few ITP

executives stressed that they find it important to create more independence from consultants on

the benchmarking process. One issue that was brought up was the lack of data control in case of

tax audits, whereby MNEs often need to engage the consultant to provide additional details on the

benchmarking process or to re-create the quantitative outputs based on modified financial data

search strategies. One MNE who had decided to handle the benchmarking in-house noted:

“…where the difficulties have been in the past is where we might got [Big-4 name] to run our

benchmarking, we then have a tax audit four years down the line…they own the data, all we’ve

got is a PDF document with the results. Whereas if we are subscribed into the database and are

running it ourselves, we own the data. We're much more flexible to tax audits…It's just a much

more comfortable process to be in where we've got ultimate control of the process.” (INT12).

Furthermore, in the context of recent tax information exchange initiatives amongst tax

authorities, most interviewees indicated that they find it increasingly important for MNEs to ensure

global consistency in their ITP set-up. This includes making sure that earnings margins and the

regional benchmarking search procedures applied, follow a consistent approach. Some

interviewees find that such consistency can more easily be achieved if they insource the

benchmarking and consequently rely less on the consultants: “It allows us to be much more

35

consistent across all markets as well. So if we're running a global search and then cutting it by

region, we don't end up in a situation where we maybe have gone with one advisor for the Asia

Pacific region and maybe a different advisor for the European region. And one of the advisors

might have one comparable in their set but not in the other, and they (tax authorities) are rejecting

it for different reasons. If we do one centralized search ourselves internally, we've got much more

consistency over the comparability profile of what we’re looking at, or accepting, or rejecting

companies on the same basis.” (INT12).

In context of BEPS, it was evident across our interviewees that the revision to OECD

Guidelines10 created a significant burden on the in-house ITP executives: “…in terms of

documentation – so since Action 13, documentation just has become a huge thing, and like all

companies, we have limited resources.” (INT9). Several interviewees reported involving

consultants more post-BEPS in order for them: “to assist compiling the master file and also the

key local files around the globe.” (INT4). Notably, we observed that most interviewees decided to

involve the consultants more extensively in the documentation task post-BEPS, not just because

they lack the in-house labor, but also because they perceive documentation as a dull routine task,

lacking the ‘excitement factor’ to catch interest among ITP executives: “we prefer to use

consultants for the boring work.” (INT3).

Finally, the country-by-country reporting introduced as part of the 2017 revision to OECD

Guidelines was handled in-house with little to no involvement of consultants. Most MNEs

reallocated the data collection for the country-by-country reports from the tax team to an in-house

finance/accounting service team, thereby not further involving the ITP executives. Various

interviewees experienced some disappointment among consultants who were eager to assist their

10 Chapter V of the OECD Guidelines on transfer pricing documentation was revised as a result of BEPS Action 13.

36

MNE clients, because of the general tendency to keep large portions of the documentation exercise

in-house or using a co-creation format with significant in-house involvement: “it's very much clear

on advisor's frustrations sometimes…all the stuff that they'd like to get involved in for us and we

pretty much have to tell them, we can do that ourselves.” (INT12).

APA and Tax Audits

We observed extensive collaboration based on mutual knowledge asymmetries between

the in-house ITP professionals and consultants as they cooperated to handle tax audits and APAs.

Interviewees expressed that for both confrontational audit negotiations, as well as more

collaborative APA interactions with tax authorities, they rely heavily on the expertise of

consultants. Notably, it is not technical or operational expertise that they need. Rather, it is the in-

depth process knowledge that consultants have developed over time from their extensive

interactions with local tax authorities: “You need somebody who understands the flow of the APA

process in whichever countries you're talking to, because in some countries an APA will stop an

audit and in other countries an audit can always trump an APA discussion. So you need to know

what your tactics are. You need to know somebody who understands how all the different teams

and the tax authority work together.” (INT8). Again, the technical ITP arguments driving both

audits and APA negotiations come from the in-house ITP executives who perceive themselves as

having superior knowledge regarding why certain ITP policies are aligned to commercial and

operational realities of transactions challenged by tax authorities. Notably, while our interviewees

seem to play a very dominant role during these interactions with tax authorities, they keep their

distance from the direct interaction. The typical approach is to engage the consultants and tap into

their process knowledge of how local tax authorities think and the important ‘trigger points’ that

37

can make the audit/negotiation move in a beneficial direction from the perspective of the MNE.

To be clear, the MNEs are not allocating decision making power to the consultants in terms of

what technical arguments to apply, as these are established by the in-house ITP executives. Hence,

the consultants essentially serve as agents conveying these technical points to tax authorities: “We

(in-house) are very much positioned in that (audit) process and do have recent experience to assess

when an advisor says we should do this, and can say “no, this is our position”. This is what we're

comfortable with technically, this is what we’re going to push as our case and you need to

represent us locally in pushing that case (with tax authorities)…Ultimately we are the decision

making authority on that. We are not outsourcing the (technical) judgment. We're outsourcing the

process and the local experience essentially and we're comfortable with our own judgment making

capacity based on our technical and practical experience.” (INT12).

Interviewees put great emphasis on the point that the engagement of local consultants for

APA and audit negotiations is not a simple matter of getting some Big 4 firm involved to benefit

from their general ‘Big 4 firm-level’ knowledge. Instead, interviewees carry out very detailed ‘due

diligences’ on local individual consultants and often reach out to their peer MNE networks to get

intelligence on who the local ‘star consultant’ is when negotiating specific matters with tax

authorities. In some cases, interviewees describe the relationship as one where consultants are

carefully interviewed before deciding on who to engage, in order for the in-house ITP executives

to determine who has the most convincing profile in terms of superior process knowledge, not only

at the tax authority (institutional) level, but at a more personal level: “I want somebody who knows

the individual (tax inspector). So not only knows the authority - knows a particular person in office

that you need to go and talk to whether it's as part of an audit negotiation or a ruling discussion.

Whatever it is, I want to know whether the consultant knows the person and the person that's in

38

the authority knows the consultant. Do they have an established relationship? Do they respect

each other? Do they know each other's strengths? Do they know where the discussion is likely to

go?” (INT8). The underlying motivation is for the MNEs to leverage these personal relationships

and individual insights to increase the likelihood of beneficial APA/audit outcomes. Many

consultants apparently have tax institutional knowledge, or even more direct personal ties and

insights to tax inspectors from previous professional engagements, e.g. as tax authority colleagues.

MNEs perceive these historical, highly personal relationships as being important in leveraging

their technical arguments and steering the negotiation towards a favorable outcome: “in some of

our tax audits, some of our APAs, there is that where either the partner (consultant) or whoever is

involved may have had some prior career experience with or have crossed paths with whoever is

acting on behalf of the competent authority or the tax authority. And they may just use that

relationship again to try and guide the process.” (INT12). This even goes as far as the consultant

being able to provide direct instructions to MNE clients on what a particular tax inspector will

look for if provided the inspector’s name: “even if all your transfer pricing documentation is 100%

bullet proof, they (tax authorities) are always going to find something. And in that something, you

go to the consultant, you tell them the name of the tax inspector. They say, "Okay. This person is

going to look for this, this, this, this. Prepare this information.” (INT6). The consultants are

certainly not oblivious to the way this relational dynamic and individual-level knowledge can be

used to promote their services. In fact, we observed that some consultants will explicitly promote

these relationships to potential MNE clients, stressing that they now employ previous tax

inspectors or senior personnel who used to serve in a tax inspector role, and the way MNE clients

can benefit from their personal knowledge and institutional insights: “it's one of the arguments

that they (Big 4) will bring back when you try to do any kind of audit and it's like "We've got so-

39

and-so who used to lead up the audits department for HMRC”, and that point there is quite a big

selling point…those relationships are important.” (INT2).

As was noted for the ITP documentation task, we observed the way consultants possessed

critical linguistic skills and insights to local tax institutional cultures and customs that the ITP

executives in the UK are too distanced from to really grasp. As the consultants apply their deep

process knowledge on local tax cultures with the ability to communicate directly with local tax

inspectors in local languages, it seems that the confrontational premise of these negotiations is

replaced by more efficient discussions: “Sometimes the culture too…in France, the culture is

different, so they (consultants) know how to deal with the whole environment. And yes, I think that

adds a lot of value because it's better they are speaking French directly. Because they make the

conversation faster and fluent…I have friends that had to deal with the German tax authorities,

and they say that they (German tax authorities) speak really good English, but when they speak

with the consultant in German, they agree really fast, make the conversation really fluent and easy

to follow…I think that that's where all the value is being created.” (INT6).

While the ITP executives in the UK played a key role during tax audit and APA

negotiations, the local finance managers of subsidiaries under audit were de facto removed from

influence. They are generally not perceived to add much value to the discussion, primarily because

they do not have technical ITP knowledge, or ability to speak the ITP jargon based on OECD

Guidelines. This lack of subsidiary-level technical knowledge actually creates risks during local

audits and negotiations, as the local subsidiary managers are seldom comfortable with the global

ITP policy design model that the centralized UK tax function is trying to defend. “We have a very

centralized model, we are always actively involved. There is a risk if you go local…there isn't a

full understanding of the policy (at the subsidiary), or why the policy is in place” (INT9). As tax

40

authorities are generally trying to maximize their local profits and optimizing their local tax base,

the interviewees try to front the discussion with consistent augmentation across their global

markets, using the consultants as agents to enforce specific technical arguments while leaving out

the subsidiary managers entirely from the discussion: “In a multinational group, you want to

defend one model in multiple places. Tax authorities think that you will always negotiate with them

on an audit. Well not if it's gonna break your model in all the other countries.” (INT8).

BEPS was not found to change the way in-house ITP executives used consultants in context

of APAs and tax audits. Understanding the specific knowledge asymmetries our interviewees

communicated, this is not surprising: post-BEPS, the MNEs continued to possess the operational

and commercial knowledge needed to promote specific ITP policies and technical positions when

trying to reach agreement with the tax authorities. On the other hand, consultants continued to

benefit from holding critical process knowledge that MNEs are dependent on during interactions

with local tax authorities. Hence, a strong co-dependency continues to exist post-BEPS as MNE

ITP executives and tax consultants collaborate using distinct knowledge and skillsets to ensure

satisfactory negotiation outcomes with local tax authorities.

Table 2 summarizes our empirical findings.

[INSERT TABLE 2 HERE]

5. DISCUSSION

Based on our empirical observations, as summarized in Table 2, this section discusses the

degree to which MNEs are dependent on external tax consultants for ITP decision making, and

how BEPS has impacted the mutual knowledge asymmetries observed in the MNE-consultant

dyad. Based on the work by Nikolova and Devinney (2012) and Fincham (2012), we realized there

41

was a need to examine the specific context of ITP in order to gain a more profound understanding

of the knowledge dependencies in the MNE-consultant dyad. Nikolova and Devinney (2012)

emphasize that when investigations of knowledge creation and transfer remain contextually and

situationally independent, they can only provide limited insights. Furthermore, Fincham (2012)

places the knowledge dependency on a continuum, whereby the actual context determines whether

the client company is more or less dependent on consultant expertise. In order to make a relevant

contribution to ITP literature, we identified the main ITP tasks from existing literature (Cools et

al. 2008; Cools and Slagmulder 2009, Plesner Rossing 2013; Van der Rijt et al. 2019), and

structured our analysis accordingly.

We observed that MNEs are clearly dependent on consultants for ITP knowledge creation,

but that the degree and format of these dependencies are highly task-specific. Consultants are

essentially absent from ITP strategic decision making, as the large MNEs under study determine

their tax risk appetite without the need for external advice. With respect to ITP policy design

decisions, consultants are involved, though mostly in a validating role. To our surprise, all the ITP

executives interviewed mastered ITP from a technical perspective. Specifically, they were well-

educated on the OECD Guidelines and the arm’s length principle, including its technical

application. This knowledge base originated from their previous consulting careers, and is further

enhanced from on-going interaction with in-house ITP colleagues, peer MNEs’ ITP executives

(i.e. external network relations), as well as operational experts within the MNE value chain.

Ultimately, this reduces the dependency on technical inputs from the consultants. In addition, one

key observation is that the short-term nature of consulting projects inhibits external tax consultants

from getting familiar with all operational and structural aspects of the MNE value chain. In other

words, the external consultants are not able to generate the necessary tacit knowledge (Dalkir 2011;

42

Nonaka and Krogh 2009) to independently design the ITP policy, as they are not ‘living’ the

MNEs’ commercial reality on a day-to-day basis. In fact, we found that it was often the in-house

ITP executives training the consultants – not the other way around.11 This knowledge asymmetry

in favor of ITP executives was also prevalent for ITP documentation, as well as for negotiating

with tax authorities (e.g. in the context of APA and tax audits), as these tasks involved the ability

to understand and convey to tax authorities the way certain ITP practices aligned to specific

operational circumstances within the MNE value chain. These observations are in line with

Fincham’s (1999) general work on management consultancy, describing the consultants as not

being able to accomplish a project without counting on in-house specialists to provide operational

and commercial knowledge.

That said, MNEs are still found to be highly dependent on external consultants. This

knowledge dependency, however, is much less grounded in technical expertise than we expected

based on the literature (e.g. van Rijt et al. 2019). First, MNEs’ demand for consulting services is

driven by the need to deal with local regulatory uncertainties where consultants have more insights

into specific documentation and compliance requirements. Second, and more importantly, the

major MNE dependency on consultants stems from their industry and process knowledge. This

observation is in line with Fincham (1999) noticing for management consultancy in general that

the consultants bring in their proprietary knowledge, including fresh market intelligence.

Specifically, dependency on tax consultants for industry knowledge is due to MNEs’ desire to

engage in isomorphic activities in the attempt to avoid being an ‘industry outlier’ and attracting

attention from local tax authorities. Given that consultants are directly involved with industry peers

and tax authorities on an on-going basis, MNEs request their expertise on the emerging technical

11 We thank an anonymous reviewer for bringing this observation to our attention.

43

norms and practices in particular tax jurisdictions. The process knowledge asymmetry identified

is particularly related to ITP tasks subject to direct interaction with tax authorities. While MNEs

themselves develop the technical inputs to APAs and tax audit negotiations, consultants are found

to hold a superior process knowledge on how to engage the local tax authorities. Notably, this

process knowledge is often at a very personal level as consultants draw on intimate insights and

relationships with specific tax inspectors. While previous literature has portrayed consultants as

knowledge brokers at the Big 4 level of analysis (Hasseldine et al. 2011), we argue that MNEs

perceive consultants at a more individualistic level. Specifically, MNEs are not simply dependent

of the Big 4s and the legitimation effect offered from their powerful brands. Instead, the in-house

ITP executives are dependent on those specific local tax consultants who are seen as ‘elite

consultants’ given their deep knowledge of local tax authorities and the ‘trigger points’ of

individual inspectors involved in specific APA and tax audit inquires.

In context of Nikolova and Devinney’s (2012) ‘expert’, ‘social learning’ and ‘critical’

models of consultants, we argue that consultants and MNEs engage in very strong, co-creational

interactions. Here, ITP executives and consultants merge their individual expertise to ensure

quality ITP outputs. In other words, the dyad relationship is not characterized by one party

dominating the other by using exclusive expertise. Instead, from the MNEs’ perspective, it is

characterized by a mutual respect and recognition of the individual knowledge skills each party in

the dyad possesses, and the way these can be combined in a collaborative way.

Although previous work projected that consultants would play a prominent role post-BEPS

(Radcliffe et al. 2018), we observe a remarkably limited effect in terms of the MNE dependency

on consultants. The interviewees did express an impact from BEPS related to the documentation

task, where consultants offered a convenient relief from ‘boring’ routine work in context of the

44

massive additional information required under the revised OECD Guidelines. However, aside from

documentation tasks, a striking lack of effect on other ITP tasks was observed. First, the in-house

ITP executives continue to believe that they hold superior operational knowledge via-a-vis the

consultants. It is important to note here that interviewees - besides the increased documentation

requirements - perceive BEPS as mainly impacting the analysis and valuation of intangibles. As

this ties directly to the commercial understanding, including the way intangibles are developed

and used to support the MNE value chain, the interviewees reported little effect on the consultant

dependency from BEPS. Second, while previous work (e.g. Mulligan and Oats 2016) has pointed

to the isomorphic activities within MNEs that were also observed in our study, we additionally

contribute by observing that these are not strictly taking place within MNEs. In fact, consultants

themselves are participating in isomorphic behaviors, in this case by rather passively, waiting for

new norms and practices to emerge in the wake of BEPS before providing direct advice to MNE

clients. Specifically, for those MNEs who do choose to ask for external advice post-BEPS, the

consultants are perceived as being of little help because they appear to be waiting for a legal

precedent to establish itself. This leaves the MNEs in an uncomfortable vacuum and a state of

uncertainty. Perhaps more controversial, it questions consultants’ own perception of themselves

as ‘experts’ (Hasseldine et al. 2011), as they appear unable to provide technical advice without

having obtained pre-approval from tax authorities.

In a broader sense, our findings refine the contributions from Mulligan and Oats (2009,

2016). We fully agree that in-house tax executives form an elite group of knowledge workers.

However, we do not find that these in-house tax/ITP experts are ‘working in the shadows’ anymore

(Mulligan and Oats 2016, 9). In fact, given the recent attention to MNE tax practices, both at a

supra-national (e.g. OECD) and domestic level (UK Finance Act 2016), these tax knowledge

45

workers are now living directly in the spotlight, receiving massive attention from tax stakeholders

within and outside organizational boundaries. This increased demand for transparency into the

actions and plans of in-house knowledge workers seems to have generated an unprecedented

compliance obsession among MNEs, with a direct impact on the way consultants are used to

facilitate this extremely risk adverse tax agenda.

6. CONCLUSION

This paper investigates the knowledge dependencies of large MNEs on external tax

consultants in the context of specific ITP tasks. In today’s era of increased pressure from tax

authorities worldwide, it is common practice for MNEs to buy consulting services for tax decision

making purposes (Armstrong et al. 2012; Mulligan and Oats 2016; van der Rijt 2019). The impact

of external tax advice on MNEs’ tax structures even catches the attention of politicians, who call

for a more restricted and critical view of such consulting services (House of Commons 2015). This

study focuses on ITP, which is receiving ever-increasing attention in MNEs, especially in the wake

of BEPS. As a consequence, tax consultants themselves emphasize the urgency for MNEs to take

action and buy their knowledge, stressing that ITP is currently the most prominent tax risk to

manage (EY, 2016, 2017, 2019). However, in line with Fincham’s perception on general

management consultancy (Fincham 2012), we question the degree of actual MNE dependency on

external consultants. More specifically, we challenge the perception of consultants as ‘supreme

knowledge brokers’ in the context of specific ITP tasks. Instead, we observe that MNEs are either

highly self-sufficient for certain ITP tasks, or, alternatively, choose to involve consultants in a co-

creational format based on mutual knowledge asymmetries (Nikolova and Devinney 2012), with

the MNE playing an active, often dominant role in creating the necessary ITP outputs.

46

Our main contribution consists of illustrating the variation in degree of MNE dependency

on ITP consultants, caused by specific knowledge asymmetries and the way these knowledge

configurations unfold in context of specific ITP tasks. Specifically, MNEs are found to possess

extensive technical ITP skills, as well as operational knowledge, resulting in consultants playing a

role of validation for ITP strategy and policy designs by contributing industry knowledge.

Furthermore, consultants provide important process knowledge to guide negotiations with tax

authorities during APAs and tax audits. In contrast to existing literature (Hasseldine et al. 2011),

we found this process knowledge dependency to be situated at the level of individual ‘elite’ tax

consultants, not at the consulting firm level (i.e. Big 4). Furthermore, the data collected for our

study afforded us the opportunity to provide an additional, important contribution to the current

body of literature on tax knowledge and decision making by MNE tax executives. Specifically, we

collected data during the summer of 2018, shortly after one of the most significant tax political

events that ever occurred at a supra-national level: the OECD BEPS Final Reports (OECD 2015)

and subsequent revisions to OECD Guidelines (OECD, 2017). This allowed us to add onto current

studies involving MNE tax executives (Mulligan and Oats 2009, 2016; Hasseldine et al. 2011; van

der Rijt et al. 2019) by examining whether the knowledge asymmetries in the MNE-consultants

dyad are impacted by such ‘exogenous shocks’, as anticipated by Radcliffe et al. (2018). We

observed a strikingly limited effect because of two main conditions: First, MNEs remain self-

sufficient in context of BEPS Action 8-10, as the technical and operational knowledge for

application of these OECD items is perceived to exist in-house. Second, the consultants are found

to be passively waiting on new ITP norms and principles to emerge post-BEPS, which questions

the ‘expert’ notion of consultants promoted in recent work (e.g. van der Rijt et al. 2019).

47

This study has important implications. As Radcliffe et al. (2018) emphasize, the extensive

pressure on corporate taxation in the wake of BEPS has increased the priority of tax risks in the

risk management hierarchy of MNEs. We noticed this trend explicitly during our interviews, and

thus emphasize the continued importance of corporate taxation research, both for practice and

academia. As confirmed in this study, prior studies linking ITP tax compliance and management

control consequences (Cools et al. 2008; Cools and Slagmulder 2009; Plesner Rossing 2013)

indicate that in-house ITP and tax knowledge workers need knowledge inputs from other sources

to fulfill the ITP tax compliance requirements. Specifically, they share knowledge with peer tax

professionals in other MNEs (Mulligan and Oats 2016), but also rely heavily on controllers and

operational managers within the MNE value chain in order to design rigorous ITP policy in

accordance with OECD Guidelines. Several of these qualitative studies demonstrate that MNEs’

intense focus on tax compliance might come at the expense of subsidiary flexibility, introduce

more bureaucracy, and limit the possibilities for effective responsibility accounting. Given that

these pressures and potential inefficiencies have increased under BEPS, MNEs need to ensure that

the goal of tax compliance does not compromise commercial flexibility and the ability to achieve

commercial objectives (Glaister and Hudges 2008; Van der Rijt et al. 2019). Hence, going forward,

the importance of collaboration between management accountants and the increasingly powerful

in-house tax knowledge experts is evident. This includes the necessity for management

accountants to understand the way tax regulatory principles influence non-tax driven accounting

for decision making and control (Zimmerman 2019).

Many promising avenues for future research exist. Obviously our study is limited as it

studies only one side of the MNE client-consultant dyad. Future work should investigate the

perception of the MNE consultant-dyad from the viewpoint of ITP consultants. Additionally, a

48

striking lack of insights exist regarding the way tax authorities perceive their role post-BEPS. This

research would add significantly to our understanding of the post-BEPS dynamics within the

MNE-consultant-tax authority triangle. Finally, it would be interesting to see if BEPS has any

material effect on MNEs’ commercial structures. This includes examining the degree to which

country-by-country disclosure requirements lead to MNEs restructuring their value chains in order

to ensure a more even global distribution of pre-tax profits and reduce the risk of public criticism.

49

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APPENDIX

Interview themes and sample questions

ITP Strategy

- Who is involved within the MNE?

- Are consultants involved? In what role?

- How is risk appetite determined?

- What interaction occurs between the MNE and consultant?

ITP Policy Design

- How are technical ITP policy decisions made?

- How deep is the technical knowledge in-house?

- Are consultants involved? In what role?

- What is the role of subsidiary-level people in this process?

ITP Documentation

- Is documentation produced in-house or by consultants?

- Under what specific circumstances is this task outsourced?

- Is benchmarking done in-house or externally (i.e. by consultants), and why?

APAs and Tax Audits

- What role do consultants play in the negotiation with tax authorities?

- What is the role of the MNE?

- To what degree are subsidiary level managers involved in the handling of tax audit

inquiries from local tax authorities?

BEPS

- Are consultants used differently post-BEPS?

- If used differently post-BEPS, for which specific ITP tasks?

- Is the Country-by-Country template processed in-house or externally, and why?

Other Issues

- How loyal are MNEs to specific consulting firms?

- What would drive a shift from the current consulting firm used by the MNE?

- Do their previous consulting employments create a bias towards using certain consulting

firms?

- Is there a ‘Big 4 effect’, e.g. is Big 4 used to legitimize ITP outputs?

56

ExternalTax Consultants

MNEITP Executives

Knowledge dependencies

BEPS effects

ITP tasks o ITP strategy

o ITP policy design

o ITP documentation

o Tax audits & APA negotiations

Figure 1. Guiding Framework

57

Table 1: MNE Interviewee Characteristics

Interviewee

code

Characteristics of current employer Prior ITP consulting

experience

Industry Headquarters location

INT1 Manufacturing Europe Big 4

INT2 Manufacturing Europe Big 4

INT3 Manufacturing North America Big 4

INT4 Software Development North America Big 4

INT5 Creative Media

ServicesEurope Big 4

INT6 Information

TechnologyAsia Big 4

INT7 Financial Services Europe Big 4

INT8 Manufacturing Asia Big 4

INT9 Financial Services Europe Big 4

INT10 Manufacturing Europe Big 4

INT11 Financial Services North America Big 4

INT12 Manufacturing Asia Big 4

INT13 Financial Services North America Mid-tier

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Table 2. Knowledge Asymmetries in MNE-Consultant Dyad

ITP STRATEGY ITP POLICY DESIGN DOCUMENTATION APA & TAX AUDITS

Consultants not involved in

determining ITP strategy.

MNEs develop ITP strategy

in-house based on tax risk

appetite set out by top

management.

Consultants are used but in

a more validating role

(‘sounding boards’).

MNEs confident in designing

ITP policies in-house.

Consultants are used but in a

more validating role (‘sounding

boards’).

In-house ITP executives have

deep operational knowledge

(often tacit) from direct

ongoing exposure, as well as

technical knowledge from

previous careers in Big 4

consulting.

Consultants are perceived to

lack the critical operational

knowledge (often tacit),

reducing MNE demand for their

services.

Consultants endorsed by in-

house ITP executives for their

critical industry and process

knowledge, including fresh

market intelligence from MNE

peer clients and tax authorities.

MNEs need access to industry

knowledge in order to engage

in isomorphic activities, i.e. to

reduce risk of being an ‘outlier’

attracting attention from tax

authorities.

Consultants more directly

involved than for Strategy

and Policy design.

Consultants provide process

knowledge in complex tax

jurisdictions, e.g. compliance

uncertainties and language

barriers.

In-house ITP executives

possess detailed operational

knowledge that is shared

with consultants as a basis

for co-creation of

documentation files.

Consultants respected for

their technical expertise in

benchmarking and report

writing.

When consultants are

involved, extensive co-

creational processes take

place. ITP executives,

especially active in the initial

phase, convey operational

knowledge to consultants to

ensure final documentation

files fits the commercial

reality.

Consultants directly involved in

negotiations with tax

authorities.

MNEs guide the technical ITP

inputs based on their extensive

operational knowledge.

Consultants operate as

important agents who convey

the technical/commercial

arguments, developed in-house,

to tax authorities using process

knowledge and deep

understanding of tax authority

preferences and cultures.

MNEs do not perceive this

process knowledge to be a

generic Big 4 skill; instead, it is

held by local ‘elite’ consultants.

These elite consultants draw on

intimate insights and

relationships with specific tax

inspectors to facilitate

efficiency in MNE-tax

authority negotiations.

Effect from BEPS

No significant effect

identified.

MNEs have become even

more compliance focused

post-BEPS. Hence, the ITP

strategic objective of

compliance is given.

Consultant knowledge on

aggressive ITP schemes is

perceived irrelevant to MNEs

post-BEPS.

Effect from BEPS

No significant effect identified.

MNEs generally confident in

their knowledge base for

implementing BEPS, due to the

focus on MNE value chain

analysis in Action 8-10.

In cases where MNEs do seek

external advice, consultants are

perceived to have limited

specific technical knowledge

for direct application by MNEs.

Consultants are perceived to

passively await for new OECD-

based norms and practices to

emerge.

Essentially, the mutual

knowledge asymmetries

identified are unchanged post-

BEPS.

Effect from BEPS

Significant increase in the

use of consultants.

This increase is not grounded

in changes to mutual

knowledge asymmetries.

Instead, it is more on the

basis of limited in-house

resources to process ‘boring’

compliance tasks

(performing functional

analyses, writing

comprehensive master/local

files, etc.).

Country-by-Country

reporting performed in-house

and considered a routine task

lacking the excitement

factor; handled by in-house

finance/accounting functions.

Effect from BEPS

Mutual knowledge asymmetries

maintained post-BEPS.

MNEs continue to hold the

operational knowledge for

generating technical arguments

during negotiations.

Consultants continue to hold

critical process knowledge

needed by MNEs.

A strong co-creational

relationship is maintained post-

BEPS: In-house ITP executives

and consultants collaborate,

using their exclusive

knowledge and skillsets to

ensure satisfactory negotiation

outcomes with local tax

authorities.

59