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2012 global transfer pricing tax authority survey - EY - Global

2012 global transfer pricing tax authority survey

Perspectives, interpretations and regulatory change

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In regards to the arm’s-length principle, the question the survey seeks to address is: in the eyes of the tax authorities, whose arm are we evaluating, and how long is it?

We are pleased to introduce our 2012 global transfer pricing tax authority survey, providing the insights of tax authorities in 48 transfer pricing jurisdictions.

Since the first edition of this survey in 1995, we have seen a remarkable increase in the number of countries introducing transfer pricing requirements. We have also seen the spread of transfer pricing rules from the developed markets in North America, Western Europe and Australia to the developing markets in Africa, Asia and Eastern Europe.

The Organisation for Economic Co-Operation and Development (OECD) Transfer Pricing Guidelines have also been revised since the last survey. These changes have increased the burden on taxpayers by introducing new concepts, such as “options realistically available,” to evaluate intercompany transactions, as well as proposing a more complex and rigorous approach to benchmarking transactions.

The United Nations also issued a draft of its Practical Manual on Transfer Pricing for Developing Countries, and the African Tax Administration Forum (ATAF) held its conference on transfer pricing in October 2010. Surprisingly to some, the United Nations manual and the ATAF conference have served to reaffirm the arm’s-length principle in preference to other transfer pricing methods, such as formulary apportionment.

The resilience of the arm’s-length principle is broadly affirmed in our survey, with all countries except Brazil indicating the application of arm’s-length approaches.

Against that backdrop, our survey revealed the following trends:

Tax authorities continue to increase their transfer pricing staffing

Despite governmental budget constraints in many countries, nearly all countries have increased their transfer pricing staffing, with plans for further increases. Taxpayers should not be complacent about their transfer pricing risk.

The documentation burden is growing, but the arm’s-length principle continues to hold sway

While the documentation burden is growing, taxpayers can take heart in the fact that a broad consensus exists with respect to the arm’s-length principle and its application, even down to years of testing and statistical measures employed. Method selection has become more flexible, with an almost universal acceptance of net profit-based methods.

The increasing geographic scope of documentation requirements imposes increasing benchmarking burdens

The viral spread of transfer pricing requirements poses a new challenge when taxpayers are called upon to perform benchmarking studies for countries where public reporting of company financial data is limited or non-existent. Nonetheless, tax authorities at least claim to be pragmatic with respect to the acceptance of comparables from other markets.

Still little coordination of transfer pricing and indirect tax standards

Few tax authorities coordinate the enforcement of transfer pricing standards with the enforcement of indirect tax standards. The key exceptions are Estonia, Peru, Portugal and Venezuela.

Transfer pricing scrutiny is not limited to perceived high-risk transactions

Just because taxpayers do not engage in perceived high-risk transactions, such as restructurings or cost-sharing arrangements, they cannot afford to ignore the need to put transfer pricing on a firm footing. Tangible goods transactions are still ranked as one of the primary target transactions by many tax authorities.

Transfer pricing reviews target high-profit industries and major trading partners, rather than tax havens specifically

Tax authorities continue to target sectors that typically report high margins and rely on significant intangible assets, such as the pharmaceutical industry, or that rely on significant international content in their production, such as the automotive industry.

Penalties have become more frequent and more onerous

The particular danger areas are Argentina, Brazil, China, Colombia, Ecuador, Finland, Hungary, Indonesia, Italy, Kazakhstan, Malaysia, Mexico and Venezuela, either because of their high penalty rates, willingness to impose penalties or both.

Even when penalties are not imposed, the risk of double taxation makes proper transfer pricing documentation important

Mutual agreement procedure (MAP) remains the predominant means of resolving transfer pricing disputes, and nearly all jurisdictions report that MAP claims are ultimately resolved without double taxation.

The availability of advance pricing agreements (APAs) continues to expand

APAs provide a potentially effective means to manage transfer pricing risk. Many countries have committed to the swift resolution of transfer pricing issues, but processing times remain long, particularly for two significant trading partners, the United States and Canada.

Our recommendations

  • Taxpayers should recognize that they need more resources with increased geographic reach and some non-traditional skills. For example, experience with bargaining theory would help to deal with what the OECD calls “options realistically available.”
  • Companies should pursue tax certainty and evaluate APAs and rulings more than ever to better manage the growing geographic footprint of transfer pricing requirements, as well as the additional risk of adjustments and penalties.
  • Companies should continue to adopt new approaches to consistent global documentation and benchmarking to remain efficient and cost-effective when preparing transfer pricing documentation.

View our full survey report for more information and help dealing with your organization’s transfer pricing issues in 48 countries in the Americas, Asia-Pacific, Europe, the Middle East and Africa.


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  • Thomas Borstell
    Global Transfer Pricing
    +49 211 9352 10601
  • John Hobster
    Head of Global Accounts,
    Transfer Pricing

    +44 20 7951 6438
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