Understand and mitigate your risks
Navigating the choppy waters of international tax
To understand and mitigate your risks, consider taking the following steps:
Take a view of your intercompany transactions in their totality
Recent OECD developments, such as the BEPS report and the OECD Intangibles Discussion Draft, indicate tax authorities will increasingly wish to review your transfer pricing based on the totality of intercompany transactions. As a result, it will soon no longer be good enough to simply make sure your individual intercompany transactions satisfy a checklist of technical requirements.
Tax authorities are signaling that they will be taking a holistic view of taxpayers’ intercompany transactions to assess the total profit shifted from their jurisdictions, without specific regard to the individual transactions that shifted it.
Tax authorities are also using non-transfer pricing provisions, such as permanent establishment and general anti-avoidance rules, to supplement their transfer pricing review powers.
Taxpayers are increasingly focused on risk rather than opportunity.
Ensure your systems are capable of handling your transfer pricing processes
Year-end or post-year-end adjustments continue to create indirect tax exposures. These challenges can be particularly severe if you operate in an industry where tangible goods are a significant portion of the value chain.
But as attention begins to shift to how taxpayers implement and adjust prices, taxpayers in all industries should make sure that they have the people and systems in place to undertake frequent reviews and adjustments to transfer prices in order to eliminate uncertainty of outcomes.
The inability to evaluate the system profit on a product-byproduct or intangible-by-intangible basis may limit your ability to assess how profits are currently allocated across your business and leave you open to tax authority challenge.
Consider the perspectives of the rapid-growth markets
In the past, your chief intangibles considerations may have started out from the value given to the intangibles from the developed markets’ position. That issue is in sharper focus than ever, but tax authorities in developing countries may also conclude that intangibles have been developed locally that you haven’t acknowledged, much less compensated.
Only a rigorous and current analysis of functions, risks and intangibles across your organization can assist in uncovering where your risks may lie. Similarly, if you have related-party service providers in an emerging market, be aware that an unenhanced cost-plus markup to those affiliates may not reflect what local tax authorities consider sufficient compensation for what the market offers.
Your risk assessment may need updating
If, like most taxpayers surveyed, you use a risk-based assessment to determine your documentation and planning needs, it may be time to update it. Documentation requirements are in place in markets that may never have been on your radar screen in the past. And the requirements in those jurisdictions may be more onerous and individualistic than what you are accustomed to in mature markets.
Remember that the risk you face may not be just the risk of additional tax, penalties and interest, but real damage to your company’s reputation.
Our survey leaves little doubt that companies are struggling to meet their heightened obligations in a rapidly changing world. We have every reason to believe the current environment will remain difficult for the next several years, and companies should take some steps to prepare.