7 minute read 30 Sep 2019
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Five strategies for responding to change in global transfer pricing

By Peter Griffin

Principal, Transfer Pricing, Ernst & Young LLP

Transfer Pricing Principal. PhD economist by training. Loves all sports. Father of two.

7 minute read 30 Sep 2019

Transfer pricing survey respondents say global tax risk is on the rise – but some opportunities exist.

This article is part of our Transfer Pricing and International Tax Survey 2019. Since 1995, we have taken the pulse of global transfer pricing every two to three years by collecting and analyzing details on attitudes and experiences across a wide spectrum of taxpayers.

Pressure on budgets, the rise of the digital economy and initiatives such as the US Tax Cuts and Job Act (TCJA) are all driving global tax reform – and creating significant concern. In fact, eight out of 10 executives (79%) in our new transfer pricing and international tax survey described today’s international tax environment as “uncertain,” 40% very much or extremely so.

Uncertainty prevails

If anything, according to EY transfer pricing-focused executives, the environment is even riskier than the survey data suggests. “Significant episodes of tax reform are taking place worldwide,” says Ronald van den Brekel, EY EMEIA Transfer Pricing Leader. “BEPS and the follow-on OECD project have driven and continue to drive significant changes in strategies and services.” 

Van den Brekel says that even though what the OECD intended with BEPS was to facilitate greater consistency across taxing jurisdictions, there are many examples of national authorities taking a unilateral approach or interpreting BEPS in a unique way.

Luis Coronado, the EY Asia-Pacific Transfer Pricing Leader, agrees. “People are already experiencing considerable changes in areas such as increased transparency within BEPS,” says Coronado. But now, the OECD is advancing the discussion further. “New proposals seek to update tax policies for the digital age, exploring ideas for reallocating profits by new yet undetermined means, such as on a revenue basis.”

In addition, “there are new proposals to reduce the advantages created by locating in low-tax jurisdictions through the creation of a global minimum tax — following the lead of the US, whose TCJA introduced this concept within international taxation.” Overall, says Coronado, “this is a fluid global transfer pricing tax environment, one where many traditional principles are being re-evaluated, and it demands that companies become more engaged.”

Transfer pricing: the focus is risk  

Shifting global tax rates and rules, and the need to adjust to heightened transparency are all contributing to increased tax risk. Indeed, tax risk is by far the most critical issue driving respondents’ transfer pricing strategies. This is the case for 64% of respondents overall, but with a distinct variance by geography.

Behind risk avoidance, 23% of respondents say the need for alignment with management or operational objectives also plays a role in transfer pricing decisions.

In terms of specific forms of tax risk, the survey asked respondents to rank those most influential in forming their tax policies and strategies. Applying weighted scoring for their first, second and third choices results in an overall ranking of:

  • First: Information sharing among tax authorities
  • Second: Information being made public and reputational risk
  • Third: Lack of control to respond to tax authorities

Beyond these top three rankings, significant numbers of executives also pointed out:

  • Fourth: Lack of technological readiness
  • Fifth: Stricter enforcement
  • Sixth: Lack of execution over transfer pricing policy

This overall ranking demonstrates several key elements of today’s transfer pricing decisions. “For one, it shows that companies today are well aware that with more information sharing, they have to realize they are operating in an era of unprecedented transparency and that their transfer pricing approaches have to reflect this,” says van den Brekel. Hand in hand with this realization, “more companies are now focused more than ever on avoiding risk by assuring they are in compliance with an array of rapidly changing rules and regulations.”

Van den Brekel also notes that companies are realizing that their local tax teams are not always well equipped to respond to inquiries or audits. “The local focus tends to be on basic compliance,” says van den Brekel. For this reason, he explains, “We feel more companies have to make certain they have controversy-ready documentation in place so that they can respond promptly when any questions arise. This is becoming even more critical in today’s transfer pricing environment.”

Issues influencing transfer pricing approach vary by region

Forging a response

The degree of change is profound — meaning businesses must respond. Some of the key opportunities indicated by the survey results and accompanying interviews include:

Opportunity number one: become more engaged

As if BEPS isn’t ushering in enough change, businesses today must also contend with the more fundamental changes now being developed in the OECD’s subsequent wave of global tax reforms as well. Coronado observes that where BEPS was the handiwork of members primarily from the G-20 and OECD, “there are at least 130 jurisdictions participating in” the new discussions.

Consequently, says Coronado, businesses cannot afford to sit idle. Those with the most complex or highly digital business models with significant intellectual property “need to get engaged and make sure they review, carry out calculations on the options presented and are commenting on the reports and drafts as they come available — i.e., they must provide feedback and become intimately involved.”

At the very least, continues Coronado, companies need to begin modeling how new concepts and rules might affect their business arrangements and tax results. Businesses, says Coronado, “may not have complete information as of now, but they have enough to evaluate what they would need to do under option A versus B versus C.”

Opportunity number two: elevate the activity

Survey respondents recognize that their transfer pricing documentation is due for an overhaul. In fact, only 11% indicate solid satisfaction with their current global transfer pricing documentation process.

One of the reasons for this lack of satisfaction could be that too many businesses are approaching transfer pricing from a compliance perspective rather than taking a holistic approach. When asked about where the purpose for their documentation falls within the scale from wholly compliance-focused to wholly strategic, only one in five (22%) rated theirs as an opportunity to clearly articulate their transfer pricing policy. Nearly identical numbers, 21%, line up at the opposite or compliance-focused end of the scale, rating themselves a 1 (11%) or 2 (10%). The remaining 58% all line up in the middle, creating a classic bell curve.

Van den Brekel maintains that companies whose transfer pricing focus leans toward mere compliance are missing out on a strategic opportunity. Amid so much change, “a strategic review of worldwide transfer pricing policies can lead to enormous benefits,” he continues. Working hand in hand with finance, operations and other executives, “companies will be able to better understand their situation and create a more optimized and consistent approach.”

Moreover, says van den Brekel, “companies will then have a very clear and well-documented explanation to share with global tax authorities. And so, they will be able to improve the quality of their transfer pricing policies, while reducing their tax risks.”

Opportunity number three: expand documentation efforts

Companies doing business across borders recognize that contemporaneous documentation of a well-conceptualized and consistent across-the-globe transfer pricing structure is essential to reducing tax risk. “By having your ‘documents’ ready, you can respond more rapidly and competently,” says Coronado. “This signals to authorities that you’ve put your time in on the issues and have used a consistent framework.”

Tax officials, seeing such a speedy, confident and well-documented response, “are more likely to accept a company’s circumstances and explanations and, therefore, be less likely to enact adjustments or pursue any deeper dives,” says Coronado.

Nonetheless, only one-third of executives say their companies stand ready with fully compliant transfer pricing documentation in every country in which they operate — a figure consistent across geographies. The figure is similarly consistent across industries, though it is rising to 43% in financial services; falling to 21% for diversified industrial products; and, again, rising to 52% among companies with more than 10 full-time equivalents (FTEs) in transfer pricing.

Instead, it is significantly more common for businesses to place a particular focus on ensuring their transfer pricing practices are well documented  in those countries viewed as having higher tax risk — an approach used by 45% of executives. The figure is consistent across geographies and industries, except for automotive and transportation, where it climbs to 55%.

The remaining 22% of executives say they do not proactively document, but instead adapt a master file as necessary (16%) or develop documentation upon audit request only (5%) or “other” (1%).

Such a risk-focused approach “is understandable in many cases,” says EY Global International Tax and Transaction Services Policy Leader Marlies de Ruiter. “It makes sense that companies would want to focus their resources on the areas of greatest risk.” However, de Ruiter continues, “with the overall levels of transfer pricing-based tax risk on such a steep rise, it’s most definitely the right time to revisit those thresholds. Tax risk is increasing almost across the board. Certainly, companies should right now be taking steps to ensure they have their documentation ‘ready to go’ across a much wider swath of their global footprint.” 

Companies should be taking steps to ensure they have their documentation ready to go across a much wider swath of their global footprint.
Marlies de Ruiter
EY Global International Tax and Transaction Services Policy Leader
Opportunity number four: embrace technology

Technology presents another opportunity for improving transfer pricing policy and execution. Today, says Tracee Fultz, EY Americas Transfer Pricing Leader, “most companies use text documents and spreadsheets as their primary tools.” Only about a quarter of the businesses have more integrated technologies at their disposal for purposes of transfer pricing documentation. 

Tax departments have yet to embrace technology

A wide array of companies today are working toward digitalization of their core businesses and support functions such as finance and taxation. Meanwhile, tax authorities themselves are becoming more automated — with a fast-growing number of jurisdictions moving toward digital, real-time filing of basic value-added tax (VAT) or good and services tax (GST) transactions will eventually shift toward e-filing and e-audits.

Tax departments themselves, says Fultz, “will find it worthwhile” to embrace new technologies. Software today, she explains, “can be used for purposes such as monitoring transfer pricing margins or keeping track of services charges.” Tools, such as robotic process automation (RPA), can be employed to lighten workloads, reduce errors and free greater resources for more value-added pursuits. Armed with more digital tools, “tax departments will be in a much better position for managing and documenting their transfer pricing.”

The adoption of a more centralized, shared services approach to global tax management goes hand in glove with technology. The model to embrace, says Fultz, “is one that is standardized to the full extent possible — where expertise is concentrated, and there is a data lake and the data is captured for a single-time use where and when needed.” Local finance and tax teams can of course respond to local needs and nuance, but adjustments and changes to processes and reports take place only where necessary.

Opportunity number five: obtain more help

Both van den Brekel and Coronado say that given the degree of change in today’s transfer pricing and general tax environment, businesses need to take a close look at tax department resources. “Do all you can with automation, with RPA and the like,” says van den Brekel. “But ultimately, your tax function is likely under-resourced; there is simply too much change and too many growing demands. Companies always want to do more with less, but here, the risks are growing.”

One means to address any resource gap is to pursue greater outsourcing or co-sourcing. Consistently, about half of all companies, regardless of geography, outsource significant portions of their transfer pricing documentation activities to outside providers. Meanwhile, 27% of European companies say they prefer keeping things in-house, which is twice the figure for Asia-Pacific (13%) and three times that of the US (8%). A final note: US firms are significantly more likely than others to pursue a co-sourced model.

US businesses more likely to co-source transfer pricing documentation
  • Survey methodology

    The 2019 survey was conducted between March 2019 and June 2019. The survey was distributed via email and conducted using an online tool in English, Spanish, Portuguese, Chinese and Japanese; 87% of respondents chose to complete the survey in English. Routine reminders were sent out to respondents who had not completed the survey.
    Once an adequate number of responses had been recorded, the survey was closed. Any survey with completed responses past the sixth of ten sections of the survey was considered complete for analysis purposes.
    The respondents included 717 tax and finance executives representing more than 20 industry sectors in 43 jurisdictions within the Americas, Europe and Asia-Pacific.
    Figures contained in the report may not add to 100% due to rounding. The report also excludes “don’t know” responses and questions for which no response was given. Questions with fewer than five respondents are not reported in the interest of data confidentiality.


Executives are recognizing they need to begin taking a more fundamental and strategic approach to transfer pricing. Key steps include elevating the role of the function as well as working with business units to refine core transfer pricing strategy and develop compelling contemporaneous documentation.

About this article

By Peter Griffin

Principal, Transfer Pricing, Ernst & Young LLP

Transfer Pricing Principal. PhD economist by training. Loves all sports. Father of two.