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2010 Global Transfer Pricing Survey - Ernst & Young - Global

2010 Global Transfer Pricing Survey: Top six trends in transfer pricing

Four things multinational enterprises should do differently

As in other years, our 2010 survey shows that companies should:

  • Adopt efficient global documentation strategies
  • Devise dispute resolution plans, both preventative and remedial
  • Embed tax considerations in business change

This year, the survey re-emphasizes those points, but with some subtle differences:

  1. Audit trends reveal the need for “glocal” documentation.

    Multinational companies should tailor their global transfer pricing platform to local requirements in higher-risk, more complex countries.
     
  2. With audits up and material penalties significantly increased, avoiding disputes will be tougher.

    Multinational companies should consider a more proactive approach to controversy management, including appropriately targeted APAs.
     
  3. Service, intangibles and financing transactions are increasingly in the sights of tax authorities. Our experience is that documentation of these categories of transactions often lags behind documentation for tangible goods transactions.

    Multinational companies should develop or enhance their documentation for these transactions.
     
  4. OECD developments are pushing profit-based methods to the forefront while MNEs continue to rely on transactional methods to determine and document their intercompany pricing policies.

    Multinational companies should consider profit-based methods as corroborating or primary methods.
     

Taxpayers find themselves in the challenging position of documenting and defending their transfer pricing in more countries.

Summary: Tax authorities are upgrading and increasing their staffing while placing greater demands on corporations in areas such as documentation. Meanwhile, the OECD is revising and updating key provisions of its transfer pricing guidance. As a result, companies must work harder in defending their transfer pricing policies and practices.

Snapshot of the current transfer pricing landscape

  • Governments are increasingly focused on raising revenues through taxation. As a result, more jurisdictions are ramping up their enforcement efforts — not only in developed nations but also in many emerging markets such as China, India, Russia and Brazil.

    In the United States, the Internal Revenue Service (IRS) added 1,200 employees in 2009 to deal with international issues, with another 800 added through the end of 2010.

  • Update on the Organisation for Economic Co-operation and Development
    The Organisation for Economic Co-operation and Development (OECD), whose work largely defines the transfer pricing rules adopted by member nations, continues to refine and update its transfer pricing guidelines.

    In 2010 the OECD issued an update of its guidance on comparability and profit methods.

    For 2011, the OECD is shifting its focus to better defining the issues surrounding intangibles such as trademarks, patents and even business models.

    The OECD will be issuing guidance, hopefully within the next few months, that will form the basis of many governments' attitudes in dealing with these difficult subjects.

    2010 also saw the publication of the OECD's new chapter on business restructurings and its new report on the attribution of profits to permanent establishments.
     
  • Global businesses face mounting pressure to improve profitability
    Most global businesses are undertaking some form of cost reduction or business change program. This process includes substantial changes to everything from strategic planning to supply chain. Every business change brings transfer pricing implications.
     
  • New disclosure requirements, new dispute resolution channels
    Taxpayers find themselves in the challenging position of documenting and defending their transfer pricing in more countries. The transaction types they have to cover are increasing, and the emphasis is changing. Controversy is on the rise as increasingly well-staffed tax authorities apply more sophisticated and sweeping transfer pricing tools.

    At the same time, fortunately, a wider array of dispute resolution channels is available and being used. More countries, more issues, more tax authority aggression and more disputes — that's why transfer pricing is a leading international tax issue for respondents.
     

Survey parameters

Since 1995, Ernst & Young has surveyed multinational enterprises (MNEs) on international tax matters with special emphasis on what continues to be a leading international tax issue — transfer pricing. The ever-increasing scope of our transfer pricing research reflects the growing number of countries that devote attention to transfer pricing.

This is noted through increased enforcement and regulatory activity, as well as the increasing variety of transfer pricing issues facing MNEs.

In this report, we take a closer look at the top 6 trends in transfer pricing, according to our survey results:

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