Transfer pricing outcomes of multinationals under greater scrutiny as tax authorities increase enforcement efforts
Tuesday, 25 January 2011
- Two-thirds of global companies, or their subsidiaries, have undergone transfer pricing examination in the previous 4 years
- A new raft of countries, including emerging markets, are gearing up their transfer pricing enforcement
- Tax authorities are requesting interviews of operational personnel, reviews of inter-company agreements and management accounts
- Tax authorities and multinationals are turning to advance pricing arrangements to address transfer pricing issues
A new survey has revealed that transfer pricing remains the number one tax challenge for many multi-national companies.
The EY 2010 Global transfer pricing survey (pdf, 4.9mb), which surveys 877 multinationals from 25 countries, found that 68% of Australian tax directors consider transfer pricing to be “absolutely critical” or “very important” for their group in the next two years.
Multinationals are reporting increased internal transfer pricing headcount as well as an increase in the use of external consultants.
EY Transfer Pricing Leader Paul Balkus says even as economies continue to mend globally, cash-strapped governments are focused on raising revenues through taxation, with transfer pricing singled out as a key target.
“The focus on transfer pricing is another by-product of the global financial crisis. Companies need to mobilise their resources and take a more coordinated and globalised approach to their transfer pricing documentation,” says Mr Balkus.
Since the previous survey conducted in 2007, revenue authorities across several jurisdictions including Australia, have significantly increased their enforcement activities around transfer pricing. For example, 68% of Australian and other global respondents have had their transfer pricing outcomes reviewed by authorities since 2006. Further, the global survey shows one in five audit adjustments triggered a material penalty, compared with 1 in 25 in 2005.
Mr Balkus said the Australian Tax Office (ATO) had clearly signalled it would continue to target transfer pricing compliance in 2011, with a particular focus on cross border funding arrangements and business restructures, with more than 50% of Australian respondents reporting tax authority reviews of their intercompany financing transactions. In this regard, the ATO has recently released its controversial Taxation Ruling TR2010/7 Income tax: the interaction of the thin capitalisation and transfer pricing provisions on 27 October 2010.
“The ATO has significantly boosted numbers in its transfer pricing team over the past two years, recruiting more than 60 personnel to date with scope to employ up to 100. It is also forging stronger relationships with other international revenue authorities to exchange information and consider auditing taxpayers concurrently,” says Mr Balkus.
“There’s no doubt the ATO is sending a clear message to taxpayers to expect more reviews and audits of their transfer pricing arrangements” Mr Balkus says.
Attacked from all sides?
Mr Balkus said that multinationals must take a more proactive and global approach to transfer pricing to address the co-ordinated and increasingly sophisticated approach of revenue authorities.
“The transaction types companies have to cover are increasing in number as well as complexity. Tax controversies are on the rise as increasingly well-staffed revenue authorities apply more sophisticated and sweeping transfer pricing tools. And all of this is occurring in an ever increasing number of geographies.
“At the same time, fortunately, a wider range of dispute resolution options such as advance pricing arrangements, that can address increasingly complex international related party dealings, are encouraged by the ATO,” Mr Balkus said.
Consensus Research International, commissioned by EY, conducted a series of independent interviews of 877 companies across 25 countries to investigate the transfer pricing practice and strategy among multinationals. In effect, there are two surveys, one of parent companies interviewed from the MNE headquarters perspective, and one of inbound subsidiaries, interviewed from the local operating company perspective. The 2010 Survey encompassed the same 24 markets researched in 2007 plus South Africa. All interviews were conducted by telephone.
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