Transfer Pricing Growing Concern for Multinationals
Strategic dispute resolution has become critical for companies to sustain their global transfer pricing strategies. Now, PricewaterhouseCoopers (PwC) announced its International Transfer Pricing 2009 book which predicts an increase in disputes around the world as more and more tax authorities aggressively attempt to enforce their transfer pricing rules. “In 2009 we expect that several major territories will adopt new or revised requirements for transfer pricing and the impact of the OECD’s discussion draft on business restructurings will be evaluated,” said Garry Stone, a Partner with PricewaterhouseCoopers LLP.
Transfer pricing remains a critical issue for corporations operating globally, according to executive search firm, A.E. Feldman. The firm is currently working with the investment advisory community on transfer pricing and anticipates continued demand for talent with expertise in complex transfer pricing matters.
Transfer pricing assigns a value to goods, services, credit or intellectual property transferred between divisions of the same company or between affiliated firms. Money does not need to be exchanged within the same company for these goods and services, but they must be valued for tax purposes when traded across different tax jurisdictions.
Multinational corporations (MNEs) use transfer pricing methods to reduce the taxes they owe by keeping their profits offshore in low-tax or no-tax havens.
Over the past 12 months, several new countries have implemented either formal or informal transfer pricing documentation requirements, according to PwC. The firm adds that a growing problem facing multinational corporations is the preparation of documentation to demonstrate compliance with transfer pricing rules across multiple jurisdictions.
“More and more tax authorities have established documentation rules that require companies to state clearly and with supporting evidence why their transfer pricing policies comply with the arm’s length standard. Many jurisdictions have also implemented strict penalty regimes to encourage taxpayers’ compliance with these new procedures. These conflicting pressures need to be reviewed and managed, both to meet the burden of compliance and to avoid costly penalties,” notes PwC.
Already there has been a substantial increase in transfer pricing tax audits and willingness by tax authorities to impose adjustments and penalties, according to the findings of Ernst & Young’s Global Transfer Pricing Survey. Additionally, according to a 2008 KPMG report, the number of countries that have imposed transfer pricing regulations has approximately quadrupled from 1995 to 2007.
Specifically, governments in Asia are increasing their scrutiny on corporate taxes, particularly in transfer pricing, according to Channel NewsAsia. The report quotes Timothy Loh, Tax Manager, BDO Raffles (Singapore), as saying, “The tax authorities, the inland revenue board, have actually increasingly conducted tax audits on various taxpayers - especially multi-national companies - with a view to conduct checks to see whether the transactions with their related parties are conducted at arms length.”
ChannelNewsAsia adds that research shows countries like China have increased transfer pricing audits in recent years. According to BDO, transfer pricing-related income adjustments in China jumped from 5.9 billion renminbi in 2006 to 15.5 billion renminbi last year. That resulted in some 1.24 billion renminbi in additional taxes collected by Chinese authorities. The report concludes that experts believe tax planning is now even more important for firms to gain tax efficiencies when repatriating profits.
Here in the U.S., congressional scrutiny of transfer pricing schemes has also ramped up in recent years. IRS Commissioner, Doug Shulman, has repeatedly warned that the agency is ramping up efforts to police the U.S. international tax system. Shulman has also voiced plans to require more enforcement of information-reporting requirements to catch tax evaders.
“Transfer pricing is a matter of fundamental importance to multinational enterprises. Today, a properly coordinated defense strategy is a basic necessity rather than an expensive luxury,” says Nick Raby, a Partner with PricewaterhouseCoopers LLP (US) Transfer Pricing Practice.
From supply chain restructuring, to transfer pricing planning and compliance with documentation requirements, A.E. Feldman says that international tax jobs are opening up. The firm adds that multinational corporations must have the talent in place to better navigate the changing climate in which they are operating.
Are you an accountant or transfer pricing specialist? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
