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Rising transfer pricing scrutiny dials up risk 

Rising transfer-pricing scrutiny dials up risk 

By Sabine Vollmer 
September 03 2013

Multinational companies are increasingly concerned about transfer-pricing matters, research by EY suggests. Growing scrutiny of transfer-pricing practices, particularly in emerging economies such as Brazil, Russia, India, China and South Africa, also known as the BRICS, and upcoming changes to existing transfer-pricing frameworks drive the concerns.

Two-thirds of respondents, which included more than 600 senior executives at parent companies in 26 countries, identified risk management as their top transfer-pricing priority. That was up from 50% in 2010 and 2007.

Respondents reported that in the past year examinations by revenue authorities have expanded in scope and complexity and the number of cases where adjustments resulted in penalties increased to 24%, from 19% in 2010 and 15% in 2007. Documentation requirements became stricter, and the number of unresolved reviews and audits were up.

Tax authorities started tightening the reins to counter multinational companies’ efforts to reduce tax costs. Regulators in emerging markets such as China and India have stepped up scrutiny and enforcement of transfer-pricing regulations in the past five years. 

The Organisation for Economic Co-operation and Development, an international body of 34 mostly wealthy countries, also is paying special attention to transfer pricing. The OECD this year issued an action plan on base erosion and profit shifting that calls for rules that enhance transparency of tax administration.

The results of EY’s 2013 global transfer-pricing survey showed:

Brazil. Sixty per cent of executives at Brazilian parent companies reported that their transfer-pricing policy has been examined by a tax authority since 2009. That was up from 36% in 2010. Fifty-six per cent identified tax risk management as having the highest priority in devising transfer-pricing strategy, up from 40% in 2010.

Russia. One-third of executives at Russian parent companies reported that their transfer-pricing policy has been examined by a tax authority since 2009. And one-third said tax risk management had the highest priority in devising transfer-pricing strategy. EY did not include Russia in its earlier surveys.

India. Ninety-three per cent of executives at Indian parent companies reported that their transfer-pricing policy has been examined by a tax authority since 2009. That’s up from 45% in 2010. Sixty per cent identified tax risk management as having the highest priority in devising transfer-pricing strategy, up from 45% in 2010.

China. Forty per cent of executives at Chinese parent companies reported that their transfer-pricing policy has been examined by a tax authority since 2009. That’s up from 20% in 2010. Eighty per cent identified tax risk management as having the highest priority in devising transfer-pricing strategy, up from 60% in 2010.

South Africa. Half of the executives at South African parent companies reported that their transfer-pricing policy has been examined by a tax authority since 2009 and 80% identified tax risk management as having the highest priority in devising transfer-pricing strategy. EY did not include South Africa in earlier surveys.

Global. Eighty-two per cent of executives at all parent companies reported that their transfer-pricing policy has been examined by a tax authority since 2009, up from 68% in 2010. Two-thirds identified tax risk management as having the highest priority in devising transfer-pricing strategy, up from 50% in 2010.

To prepare for tax authorities’ increased scrutiny and enforcement, EY suggests that companies:

  • Review and reassess inter-company profit allocations resulting from their business’s transfer-pricing policies in light of new OECD guidelines.
  • Make sure their transfer-pricing practices take into account indirect tax implications.
  • Perform an inventory of where local markets have developed or contributed to the development of intangible property, particularly in rapid-growth economies.
  • Make sure they have the systems and people in place to undertake frequent reviews and adjustments to transfer-pricing processes.
  • Update risk assessments to take into consideration stricter and more detailed documentation requirements, particularly in the BRICS.
  • With mutual agreement procedures increasingly under strain, be prepared to rely on other channels of dispute resolution, such as arbitration.
  • Engage with internal and external stakeholders to minimise reputational risk.

Related CGMA Magazine content:

Global Consultants Identify Top Tax Challenges for Multinationals and Offer Advice”: More scrutiny during audits, transfer-pricing issues and rapid changes in international tax legislation top the list of global tax challenges in a survey of multinational companies. A global consortium of consultants takes a look at the tax issues and offers advice.

Corporate Tax Burden Shifting to Indirect Taxes”: Corporate tax rates have decreased worldwide in the past six years to help countries attract investment, but indirect taxes are on the rise. So are tax audits and penalties as a source of revenue. Find out the six tax trends companies are likely to encounter worldwide.

The Countries With the Most Business-Friendly Taxes”: In the past eight years, paying taxes has become easier and the tax burden lighter for many small and mid-size companies around the world, according to research by the World Bank and PwC. Find out which countries have the lowest tax rates and the fewest compliance hassles.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.



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