Major law firms have long competed with their Big Four accounting rivals to offer tax services to multinational corporations. Now, several are enhancing their capabilities in the area of transfer pricing, aiming to increase market share and take advantage of growing opportunities.

So far in 2019, Hogan Lovells has relocated global head of transfer pricing Fabrizio Lolliri from London to New York, while DLA Piper hired principal economist Barbara Mace away from EY, where she launched the firm's U.S. transfer pricing group, in order to extend its reach in financial services.

“I think it's an important practice area for law firms that are aspiring to be global and looking to grow,” said Sang Kim, the co-chair of DLA Piper's global tax practice. 

Transfer pricing, a term describing how multinational corporations allocate income and expenses among worldwide affiliates for tax purposes, itself is nothing new. The practice, long-accepted under the U.S. tax code, has been used by companies for all types of goods and services for years, and more than 60 countries have adopted rules governing transfer pricing transactions.

Advisers, both in law firms and accounting firms, work to arrange transactions between subsidiary companies to take advantage of the idiosyncrasies of varied national tax codes and to avoid running afoul of them.

But recent tax reforms, both in the U.S. and across the Organisation for Economic Co-operation and Development group of countries, have altered the calculations.

“The incentives have changed,” Kim said, noting how the U.S. corporate tax rate dropped from 30% to 21%, with an effective tax on exports at 13%. “Companies are reexamining their opportunities, reexamining their supply chain, and at the heart of it is transfer pricing.”

Lolliri, who trained as a scientist and engineer, joined Hogan Lovells in London six years ago, when the firm was looking to launch new ventures beyond traditional legal services. At the time, he was the firm's first expert in the transfer pricing area, and he's since grown a team of five there. His move to New York is part of an effort to expand the firm's capabilities for clients in the Americas. The firm also has a transfer pricing specialist in D.C., and it is still hiring.  

“For me it was an experiment, as it was for the firm, obviously, to have a nonlawyer as part of a law firm, but I've always felt that you really need the combination of legal and economics in your strategy,” Lolliri said. “Clients want a one-stop shop.”

The benefits of integrating formal transfer pricing expertise with lawyers' traditional responsibilities in avoiding legal pitfalls and cleaning up messes are obvious, he argued. Medtronic lost a $1.4 billion appeal in a transfer pricing dispute with the IRS in 2018, and companies like Facebook, Apple and Coca-Cola have been wrapped up in similar controversies.

“I often say that transfer pricing has made it to the boardroom,” Lolliri said. ”When you look at what happened to some of the large groups, shareholders see that transfer pricing can trigger major risks. It's not just about paying an adjustment, its also about potential damage to reputation and damage to brands.”

The Big Four firms have been adding lawyers to complement their accounting capabilities, and within the U.S., they have a significant number attorneys working within their tax practices. Kim himself joined DLA Piper from KPMG with the goal of combining the best aspects of legal practice with the best aspects of the Big Four. But one thing the accounting firms can't yet do is fight tax battles in U.S. courts, like Medtronic was forced to do.

And then there are adjacent areas in where law firms have established strengths, like IP work, regulatory capabilities and industry expertise—in the life sciences and pharmaceuticals fields, for example.

“We can do a lot of the related quantitative analysis modeling because we have economists and transfer pricing expertise, but we can layer on legal,” Kim said. 

He acknowledged that DLA Piper's biggest rivals in the wider tax arena, and also the transfer pricing segment, are the Big Four, as well as Baker McKenzie, which did not make a representative available for comment for this article. But the playing field will likely get even more crowded.

“This is an area where especially more global law firms are going to start exploring,” Kim said.  “But its an area where building a global integrated team takes a lot of effort.”