Media Release - 1 February 2011
Senior Communications Manager
Ernst & Young
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Multinationals under scrutiny as tax authorities increase enforcement efforts
1 February 2011
- Two-thirds of global companies, or their subsidiaries, have undergone transfer pricing audits
- Multinationals are devoting more time to compliance
Even with an improving global economy, governments facing daunting deficits remain focused on raising revenues through taxation with transfer pricing singled out as a key target.
As a result, the world’s leading companies expect to devote far more resources to transfer pricing compliance: 31% report an increase in internal head count. 62% note an increase in the use of external consultants and 23% report an increase in the use of software or similar tools. This is according to the Ernst & Young Global Transfer Pricing Survey, a survey of 877 multinationals from 25 countries.
“For multinational enterprises operating in New Zealand the survey puts into context the proposition that transfer pricing remains the most important international tax issue for multinational enterprises operating in New Zealand,” says Mark Loveday, Transfer Pricing Partner, Ernst & Young New Zealand.
"The material increase in transfer pricing investigation by the Inland Revenue in New Zealand in recent years is mirrored by the results of the Global Survey" says Loveday. “ That’s a trend that is likely to continue in 2011 with emphasis on issues from transactions arising in the economic downturn. Inland Revenue will continue to take a keen interest in poor performing companies, interest rates, business restructures, and intangible property and that interest is likely to intensify,” says Loveday.
Heavier regulatory hand
Since the 2007 survey, revenue authorities in several jurisdictions have significantly increased their transfer pricing staffing, adopted more centralized approaches to managing inquiries and established a more strategic, risk-based approach to prioritizing transfer pricing reviews. In the US, for example, the Internal Revenue Service (IRS) added 1,200 employees in 2009 to deal with international issues, with another 800 expected to be added by the end of 2010. In the UK, Her Majesty’s Revenue and Customs (HMRC) issued guidance to its field teams in late 2010 on more extensive use of penalties in transfer pricing cases. In China, the State Administration of Taxation (SAT) has adopted a targeted approach, designating 30% of Chinese taxpayers as key audit targets based on selected criteria.
“It’s clear that the regulatory environment has gotten much tougher, and companies will need to adjust accordingly,” says Loveday. “They will need to devote resources to understand, catalogue, and document thoroughly their TP policies in an ever increasing number of countries”.
Thirty-two percent of tax directors identify transfer pricing as the most important tax challenge their organization faces, and three-quarters of tax directors believe that transfer pricing will be “absolutely critical” or “very important” to their organization over the next two years. This feeling was strongest in Europe, followed closely by the US and Asia. There were also differences by sector, with pharmaceutical and biotech companies far more concerned about transfer pricing than telecoms or financial services companies.
“Tax authorities typically target industries with high-value, portable intellectual property, and those that generate high margins,” says Loveday. “This might explain why pharmaceuticals top the ranking. Multinationals need to self assesses their TP profile and manage the risk of aggressive audits and potential double taxation.”
Two-thirds of the respondents in the 2010 survey say they have undergone a transfer pricing audit, compared with 52% in the 2007 survey. Further, 1 in 5 audit adjustments triggered a material penalty, compared with 1 in 25 in 2005.
Loveday says: “We are seeing increased audit activity and evidence of increased penalties, with a particularly marked increase in audits in emerging markets such as China and India.”
The survey reveals that authorities are placing greater emphasis on intercompany financing transactions and service transactions, along with an ongoing interest in transactions relating to intellectual property. Reviews of intercompany financing transactions increased dramatically to 42% in 2010 from 7% in 2007, and respondents indicating that service transactions had undergone review increased to 66% in 2010 from 55% in 2007.
Attacked from all sides?
Loveday concludes that multinationals must take a more proactive approach to transfer pricing as the risk of challenge by the authorities continues to increase.
Loveday says. “The transaction types companies have to cover are increasing, and the emphasis is changing. 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 a wider range of geographies. At the same time, fortunately, a wider range of dispute resolution options, such as (advance pricing agreements or other suitable example), are now available and actively being used.”
Ernst and Young’s New Zealand Transfer Pricing team was recently named New Zealand Transfer Pricing Firm of the Year 2010 by International Tax Review.
For more information contact Clare Farrant. Communications Manager. Ernst & Young NZ. 027 4899 700 +64 9 300 7065
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