The era of new transfer pricing battlefields
With greater scrutiny on the transactional substance of related party dealings and with many tax authorities seeking to maximise the profit attributable to its jurisdiction, transfer pricing and supply chain planning remain at the forefront of opportunity and controversy for multinationals. However, with the effects of the OECD’s BEPS initiative becoming ever clearer, and implementation steps coming as soon as a few months from now with tax years beginning on/after 1 January 2016, transfer pricing is likely to continue to be a key area of attention and contention for many years to come. This was a topic of considerable discussion and debate today at the Taxand Global Conference in Milan.
Centralised business models with one-sided transfer pricing methods are sources of increasing risk and uncertainty as a result of ever greater scrutiny by tax authorities. Multinationals need to take the correct steps when performing feasibility analysis for tax or transfer pricing planning purposes to ensure robust and consistent documentation is in place to avoid further scrutiny. This was exemplified in Taxand’s recent global survey, where more than 75% of respondents indicated that reputational risk is a major concern in tax planning, and nearly 30% of respondents stated transfer pricing as the most challenging tax area to address.
The new “battlefields” for transfer pricing dispute are emerging. With a myriad of analytical factors currently used around the world, multinationals are navigating their way through a complex minefield to suit the criteria of the local tax authority. This is particularly evident when it comes to application of the Comparable Pricing Method (CPM) or Transactional Net Margin Method (TNMM) and the selection of comparable companies on which to base reporting requirements. Despite a plethora of databases holding vast amounts of company information, much evidence shows that the exercise is flawed as no two companies or transactions are so alike that they can be directly compared.
The implementation of BEPS and in particular, Country-by-Country reporting, puts existing planning techniques under the spotlight. Across the world, countries are at different stages of development; the UK and Spain are driving implementation, whereas South Africa, for example, currently has no legal requirement for TP documentation, so are somewhat behind the curve.
Multinationals that fail to prepare and adjust their businesses accordingly, face the potential for increased disputes post-BEPS implementation. 57% of respondents to Taxand’s survey were in favour of Country-by-Country reporting, a seemingly high proportion of responses, which could be a sign of that multinationals are now accepting of this requirement and are seeking clarity on what their reporting requirements are, so they can strike a careful balance between efficient tax administration and overly burdensome compliance reporting. This is evidenced by the 83% of respondents who believe enhancing global tax transparency will increase the cost of compliance.
Other questions also remain, particularly around the use of data exchanged by countries in a more transparent environment. There are also concerns over the process of information exchange between tax authorities and whether this will work effectively, although the OECD has tried to alleviate concerns on access to commercially sensitive information.
A year ago, the path to change was unclear and the application of BEPS questioned. Now it’s clear that BEPS is real and it’s coming fast.
Your media contact for further queries is:
Barnaby Fry, MHP
T. +44 (0)203 128 8215
Quality tax advice, globally
Multinationals should consider the following:
- Transfer pricing planning is still viable but additional care is needed to structure the business around ‘real’ substance
- The regional differences of BEPS have not yet be addressed, allowing for a potential uptick in controversy
- You can no longer rely on ‘traditional’ process. Companies and advisors need to adjust accordingly
- Globally there’s an evolution towards Country-by-Country reporting. It’s better to prepare than to fight it.
Taxand's Take Author
Register to receive Taxand’s latest opinion on topical tax news