Companies Gearing Up for More Transfer Pricing Penalties and Disputes
Although transfer pricing (TP) has emerged as an effective way for multinational enterprises (MNEs) to manage international tax liabilities, tax authorities around the world are taking a harder line on the issue. Audits are more sophisticated and penalties are rising. That’s among the conclusions of a recent Ernst & Young study. The research shows that there has been a ‘dramatic’ increase in the documentation demanded by governments and a greater willingness to impose high penalties more often when companies get their transfer pricing calculations wrong.
Today, a full understanding of transfer pricing, strategies and international tax laws and documentation is more important than ever. As a result, from supply chain restructuring, to transfer pricing planning and compliance with documentation requirements, executive search firm, A.E. Feldman says that international tax jobs are opening up. A.E. Feldman President, Mitch Feldman, also notes that talent with expertise in complex transfer pricing matters, particularly international transfer pricing controversy and Advanced Pricing Agreements (APA) among the most sought after candidates.
Sharpening the Focus on TP
Transfer pricing relates to calculating the tax due when goods or assets, including raw materials, products, and payments such as management fees and intellectual property royalties, are transferred between subsidiaries of multinational corporations. The controversy surrounding transfer pricing stems from the fact that tax authorities fear companies under price these assets to reduce their tax liabilities.
Looking ahead, Ernst & Young (E&Y) research predicts a surge in litigation as tax authorities hone in on transfer pricing in an attempt to more aggressively pursue tax revenues.
“Amid the challenges of a global economic downturn, many governments are sharpening their focus on compliance, enforcement and legislative approaches. While TP regulations were once confined to a handful of industrialized countries, they have since spread rapidly. As governments search for tax revenues to offset growing budget deficits, multinationals will have to be prepared for more TP investigations,” said John Hobster, Global Accounts Leader for Transfer Pricing at Ernst & Young.
The E&Y study reveals that the number of countries introducing both transfer pricing documentation requirements and penalty rules is rising. In fact, more than ten additional jurisdictions have introduced requirements for taxpayers to create and maintain contemporaneous documentation demonstrating the arm’s-length nature of their transfer pricing arrangements. E&Y also found that many jurisdictions have introduced increasingly hard-hitting penalties in the event of a transfer pricing adjustment, or for failure to have documentation.
Increasing Scrutiny
Budget deficits, stimulus packages and bailouts, all have significant costs. Raising revenues to cover these costs is now critical. “Raising additional revenue through taxing MNEs’ profits rather than letting someone else tax them must be an attractive thought in such times,” E&Y asserts.
Tax administrations are adapting their audit strategies and policies and developing better tools, processes and capabilities, according to the study. They are also sharing more information and adopting leading practices, sharpening their enforcement focus and carrying out more sophisticated audits. E&Y adds, “In no area of taxation is this trend more prevalent than in transfer pricing.”
Among the other key trends revealed by E&Y:
• Tax authorities are increasing their dedicated transfer pricing resources and improving their specialist capabilities.
• Jurisdictions seem to be gearing up not simply for more audits, but also for more transfer pricing penalties and for more disputes.
• Many companies have suffered a reduction in profits or undergone business restructuring as a result of the recession, which are cited as the two most common audit triggers.
• The industries that have been most affected by the downturn are the ones most actively targeted by many jurisdictions for transfer pricing audit.
• Transactions with ‘tax haven’ jurisdictions and/or major investor jurisdictions are increasingly likely to be scrutinized and formal ‘watch lists’ are becoming more common.
Managing TP More Challenging for MNEs
Meanwhile, facing greater scrutiny MNEs are forced to meet their tax obligations, often with reduced budgets and fewer resources.
As a result, the diversity of transfer pricing issues MNEs now face render traditional approaches to transfer pricing “at best difficult, and at worst impossible, to apply,” according to E&Y. “The credit crunch, a worldwide recession, and turmoil in the financial markets have brought serious, and often unforeseen, challenges to MNEs in managing their transfer pricing,” the report states.
Facing this increased scrutiny and mounting pressure, E&Y says the “effective management of transfer pricing issues around the world is more important - but more challenging - than ever before.”
Are you an international tax 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.
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