Notable changes for tax and transfer pricing

Navigating the choppy waters of international tax

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Transfer pricing continues to be a significant source of controversy between the world’s tax authorities and multinational enterprises (MNEs). Since our last transfer pricing survey, the pace of globalization has increased, and businesses have been working hard to adapt by better managing their cross-border activities.

They’re struggling to comply with unfamiliar and frequently changing tax and statutory requirements in new markets, examining the tax efficiency of supply chains and administering a vast array of indirect taxes – including value added taxes (VATs), customs duties and goods and services taxes (GSTs).

Nearly half (47%) of parent companies reported experiencing double taxation as a result of a transfer pricing audit.

At the same time, tax authorities worldwide have stepped up their enforcement, and they are paying special attention to transfer pricing. Transfer pricing has also taken on a bigger profile with non-tax stakeholders, who are acutely aware that according to the OECD, “around 60% of world trade actually takes place within multinational enterprises.”1

Many companies are facing increasing exposure to new transfer pricing inquiries on a much broader scale. Our survey of international tax practitioners and C-suite executives in 26 countries confirms that controversy and double taxation are on the rise. It also confirms that companies around the world are reacting to the new pressures.

Most notably, 66% of companies identified “risk management” as their highest priority for transfer pricing, a 32% increase over surveys conducted in 2007 and 2010. Correspondingly, the percentage of companies identifying cash tax or effective tax rate optimization as their highest priority fell by nearly one-third — to 17% — from just three years ago.

Tax risk management increases as a priority

EY-Tax risk management increases as a priority

Supranationals foster the debate

This growing focus on transfer pricing is driving an increasing amount of work by supranational organizations. This is evidenced by the current OECD project on BEPS that has intensified the activity of tax authorities to harmonize their approach to eliminate what they perceive as inappropriate tax avoidance.

The first BEPS report chronicles changes in how companies do business in the global economy and states that tax systems may not have kept pace. It also acknowledges the importance of tax sovereignty and recognizes that governments continue to offer incentives as part of an effort to build a competitive business environment that attracts investment. The recently issued BEPS Action Plan details where the OECD intends to focus its energies on cross-border taxation issues in the near term.

Three of the fifteen action areas apply specifically to transfer pricing: intangibles, risk and overcapitalization. Several of the other action areas also have implications for transfer pricing.

1 “OECD Insights,” OECDInsights, http://oecdinsights.org/2012/03/26/pricefixing/,18 April 2013 Debate the Issues

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