Transfer Pricing Remains Key Corporate Challenge

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James Spader

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The overriding observation from the 2010 Global Transfer Pricing Survey of tax directors and international tax practitioners, produced by Ernst and Young (E&Y), is that transfer pricing remains a key tax challenge for the world’s leading companies.

E&Y notes that, with a slowly recovering global economy and record deficits, governments are increasingly focused on raising revenues through taxation, and, as a result, more and more jurisdictions are increasing their enforcement efforts - not only in developed nations but also in many emerging markets, such as China, India, Russia and Brazil.

At the same time, it says, the Organization for Economic Co-operation and Development (OECD) continues to refine and update its transfer pricing guidelines. In 2010, among other initiatives, the OECD issued an update of its guidance on comparability and profit methods, while, for 2011, the OECD is shifting its transfer pricing focus to better defining the issues surrounding intangibles such as trademarks, patents and even business models.

The report notes that the publication of the OECD’s new chapter on business restructurings and its new report on the attribution of profits to permanent establishments is also important, given that most global businesses, in the face of mounting pressure to improve profitability, have been undertaking some form of cost reduction or business change programme that all have transfer pricing implications.

It is concluded that tax considerations relating to business restructuring are therefore expected to become more important in the coming years.

The survey also stresses that the importance of transfer pricing is currently of more importance as a key tax issue than it was two years ago. It points out that transfer pricing audits are “increasing in significance, intrusiveness and scope.” However, while litigation is infrequent but increasing, enforcement actions are placing greater emphasis on intercompany financing transactions and service transactions.

The recommendations, arising out of the survey, include the need for multinationals to “tailor their global transfer pricing platform to local requirements in higher-risk, more complex countries,” and that, “with audits up and material penalties significantly increased, avoiding disputes will be tougher. Multinationals should consider a more proactive approach to controversy management, including appropriately targeted advance pricing agreements.”

It is also said that services, intangibles and financing transactions "are increasingly in the sights of tax authorities."

"Our experience is that documentation of these categories of transactions often lags behind documentation for tangible goods transactions. Multinationals should develop or enhance their documentation for these transactions,” the report states.

Finally, it emphasizes that “OECD developments are pushing profit-based methods to the forefront while multinationals continue to rely on transactional methods to determine and document their intercompany pricing policies. Multinationals should consider profit-based methods as corroborating or primary methods.”