Increased focus on risk management and improving transfer pricing skills in emerging markets are top priorities, new report indicates
According to EY’s 2013 global transfer pricing survey, Navigating the choppy waters of international tax (pdf, 2.1mb), 66% of companies identified risk management as their highest priority for transfer pricing, up 32% from the same survey conducted in 2010.
The report was compiled based on interviews with transfer pricing and tax professionals at 878 corporations in 26 countries, including 637 parent companies.
The report also finds that companies are experiencing a significant increase in unresolved transfer pricing examinations and facing increased penalties and interest when tax authorities formulate assessments. Managing transfer pricing in emerging markets is a rising priority for multinational companies, even though 74% of those surveyed said they have no full-time transfer pricing personnel in those countries.
“Our survey indicates a clear shift towards prioritising risk management in transfer pricing, which is hardly surprising given the current environment around tax controversy,” says John Hobster, EY’s Global Head of Accounts for Transfer Pricing. “We believe the environment will remain difficult for the next several years, and companies should prepare by making sure they have the right people and the right systems in the right places to properly manage the new sources of risk.”
Controversy on the rise
Nearly half of the survey respondents (47%) reported experiencing double taxation as a result of a transfer pricing audit. Twenty-four percent of parent companies reported being subject to tax penalties in the past three years, in comparison with 19% in the 2010 survey and 15% in a 2007 edition of the survey. Sixty percent of parent companies are also paying interest charges as a result of transfer pricing adjustments.
More than one in four (28%) said they had sought assistance from their own government to mitigate a dispute with another country’s tax authority, which is double the amount when compared to the 2010 survey. The survey found evidence that companies are struggling to align their resources with sources of controversy, particularly in emerging markets. Companies are also reporting a 15% increase in litigation, up from just 4% in 2007.
Comments Karen Miller, Transfer Pricing Director: Africa at EY, “In Africa we see transfer pricing controversy definitely on the rise. This coupled with limited resources and inexperience at both sides – tax authorities and local taxpayers - make managing this risk a challenge and obtaining resolution problematic.”
Limited skills in emerging markets
Among companies with operations in Brazil, Russia, India, China or countries in Africa, 30% identified those areas as their number one or number two priorities in terms of managing transfer pricing matters. At the same time, 74% of respondents surveyed said they had no full-time transfer pricing personnel in those countries.
Miller says, “Revenue authorities in these regions also struggle with limited capacity and we see an increasing amount of support for the developing countries from the more developed regions. For instance the Australian Tax Office and Norwegian Tax authorities join initiatives of bodies such as the OECD in assisting transfer pricing capabilities across Africa.”
Efforts to comply on the rise
At the same time, companies say they are strengthening efforts to comply. Of all respondents surveyed, 70% indicated that they are fully compliant with transfer pricing requirements and regulations. Yet, fewer than 20% of companies say they monitor their financial results for compliance with their transfer pricing policies in real time or on a monthly basis, which is optimal. Few others have computer software in place to simplify and automate their compliance activities. These operational deficiencies have been identified as areas of risk by Revenue authorities such as the South African Revenue Service, who seem to be looking closely at the lack of alignment between stated and written policies and the operations.
The report makes several recommendations to companies seeking to better manage risk and the compressed transfer pricing life cycle. They include developing high-standard documentation in a wider range of countries, considering how other tax enforcement mechanisms may affect transfer pricing, and better aligning resources to better respond to increased transfer pricing documentation requirements and controversy in rapid-growth markets.
Miller further says, “The need for documentation in countries were previously this was less of an issue is clear. In Africa there is an increasing trend to have to prepare and lodge supporting documentation to evidence the arm’s length nature of transfer pricing policies in addition to a transfer pricing documentation. This is coupled with a heightened awareness of transfer pricing as a concern for Revenue authorities across the African continent.”
Thomas Borstell, EY’s Global Director of Transfer Pricing Services, concludes: “The survey clearly shows companies are struggling to comply with the vast and ever-changing array of transfer pricing rules so they aren’t doubly taxed. To succeed, they will need to take proactive steps to enhance their documentation, monitor changes around the world, and upgrade their technology to expedite analysis of financial results.”
About the Transfer Pricing Survey
EY’s biennial transfer pricing survey has been an industry benchmark chronicling taxpayers’ views on this essential function of cross-border commerce for nearly 20 years. Transfer pricing refers to rates charged by entities within the same multinational corporation and can affect where profit is taxed.
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