Navigating the Growing Forest of Transfer Pricing Regulations
Tax authorities in developed economies around the world are embracing the recommendations set forth by the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project. The BEPS project, which has captured the attention of the international tax community over the past three years, is drawing to a close and the recommendations set forth by the project are spurring radical changes to local country transfer pricing rules that underpin the tax environment facing all multinationals.
In this time of significant changes to local country transfer pricing rules and heightened focus by tax authorities on transfer pricing issues, it is critical that taxpayers confirm that their existing transfer pricing policies remain reasonable and cover all transfers of value between entities of a controlled group.
Paramount to these changes is the ways in which the OECD is recommending that transfer pricing rules be evolved to avoid situations where taxpayers utilize international tax planning to report profits in jurisdictions where income tax rates are nil or negligible.
Below are five key questions that CFOs and tax professionals in every multinational should be considering:
Does the company tell a consistent story in support of transfer pricing positions in each and every country where there are operations?
In addition to addressing the manner in which multinationals and tax authorities should evaluate and price controlled transactions for tax purposes, the BEPS project will result in increased local reporting and disclosure requirements.
In a similar vein, tax authorities globally are entering into tax information exchange agreements that enable tax authorities to share information with relative ease.
It should come as no surprise that the heightened interest in international tax issues has led tax authorities in nearly all major economies to add significant resources to transfer pricing enforcement. From a taxpayer’s perspective, the end result of these three interrelated developments is that taxpayers must commit to a single narrative to explain the rationale for their transfer pricing.
Is there ongoing, effective communication between operational teams and the personnel in charge of tax matters with respect to initiatives involving offshore operations?
It is not uncommon for operational teams to enter into new markets without consulting their colleagues responsible for managing the tax implications of such actions. Has your organization entered new markets or changed the way it does business in such markets? Or, has your organization been involved with any mergers or acquisitions that create a tax presence in new jurisdictions or change the character of the tax presence in other jurisdictions? It is upon you as financial stewards of your organization to inquire into such developments, identify potential tax consequences and identify solutions to manage such implications.
Do legal entities located in OECD member countries enter into material transactions with legal entities domiciled in tax jurisdictions regarded as tax havens?
The OECD’s BEPS project targets eliminating perceived taxpayer practices whereby clever strategies are implemented to shift profits to countries with significantly reduced tax rates. As such, it is safe to say that taxpayer audits by tax authorities in OECD member nations will apply extreme scrutiny to intercompany transactions involving tax havens. With this in mind, it is important to confirm intercompany transactions involving tax havens are supportable and well documented. Well-reasoned, thoughtful and complete transfer pricing documentation is your first line of defense for supporting transfer pricing positions in a tax audit.
Does the company’s transfer pricing system take a comprehensive view of intellectual property?
It is easy to underestimate the extent that intellectual property impacts your business. Brands and technology are very mobile and can help exploit opportunities in new markets, and established protocols, processes, operational manuals, etc. afford group members essential, unique knowledge. Many companies are not aware compensation should be for transfers of intellectual property, let alone have processes in place for raising appropriate (i.e., arm’s length) intercompany charges for such transfers.
Does the company have documented transfer pricing policies and, if so, is there a process to internally audit adherence to the policy by entities within the multinational group?
A transfer pricing policy document generally includes an overview of the material controlled transactions within the group, the method to follow when computing the transfer prices for the identified transactions, the rational for such pricing methods, the processes that will be followed to maintain the integrity of such policies on an ongoing basis, and procedures to follow in the event of an inquiry by a tax authority.
Establishing formal transfer pricing policies, documenting the policies, and requiring all entities in a group to adhere to the policies set forth is an important step to ensuring that intercompany transactions among entities in a given group are priced consistently in a manner that adhere to local transfer pricing rules and regulations in all jurisdictions where the multinational operates. It also equips a taxpayer with a fully vetted, comprehensive summary to provide to tax authorities who may inquire about global transfer pricing policies.
Benjamin Miller, Ph.D. leads the transfer pricing practice at Bennett Thrasher where he works with manufacturers across a wide range of industries to design and implement transfer pricing policies. He may be reached at firstname.lastname@example.org or 770-396-2200.