9 minute read 29 Sep 2019
businessman looking out sunny office window

How a global tax reform ‘revolution’ will affect transfer pricing

By Peter Griffin

Principal, Transfer Pricing, Ernst & Young LLP

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

9 minute read 29 Sep 2019

Sweeping tax reform is a global phenomenon — profound changes are occurring not only in tax rates, but at even more fundamental levels.

This article is part of our Transfer Pricing and International Tax Survey report 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.

This installment of the 2019 Transfer Pricing and International Tax Survey: how profound change, transparency and controversy are reshaping a critical business function, zeroes in on the challenges presented by global tax reform, including not only the US Tax Cuts and Job Act (TCJA) but also initiatives such as BEPS and subsequent OECD activity.

“In the past,” says Jeff Michalak, EY Global ITTS Leader, “the way most international tax teams approached their reporting was to release the least amount of information possible, only that information that could support their case. Today, thanks to BEPS, the current OECD project and a climate of global tax reform, the paradigm has shifted. Now it’s the tax authorities who have vastly greater control of the dialogue, companies must adjust.”

Sweeping tax reform is now a worldwide phenomenon — profound changes are taking place not only in tax rates, but at even more fundamental levels impacting definitions of what can be taxed jurisdiction by jurisdiction.

Overall, says Michalak, “host nations will be extending their claims on income for tax purposes in ways that will guarantee more controversy and double taxation.” The pace and degree of change, he says, “makes it vital that businesses take a comprehensive look at the whole of their tax and transfer pricing strategies.”

Paradigm shifts

The net impact of these ongoing fundamental tax reforms results in nothing less than a handful of what Michalak calls “novel concepts” resulting in “paradigm shifts.” Some of the most significant areas include:

  • Transparency: The most profound set of changes, says Michalak, are measures driving dramatically greater tax transparency. In general, “what BEPS has done is introduce vastly greater disclosure, meaning tax authorities now have far more data than ever before.”

This is significant, he continues, “because in the past, the way most international tax teams approached their reporting on an audit was to try and direct the conversation by releasing the least amount of information possible — only that information that could support their case.”

But in the age of BEPS, says Michalak, “now it’s the tax authorities who have vastly greater control of the dialogue. They have country-by-country reports, including not only your information but also information from dozens of companies in the industry in which you operate.” Plus, he explains, “they’re sharing a great deal more information with other tax administrations where the company in question conducts its business.”

  • Income allocation: Nations are also passing legislation broadening their ability to claim broader swaths of income for taxation within their jurisdictions. “Nations are saying that owing to the digital economy, it’s now too easy to do business in ‘my’ country without a physical presence.” So, in response, says Michalak, “countries are changing the rules.”

For example, in 2016, the UK introduced its Diverted Profits Tax (DPT) and Australia, its Multinational Anti-Avoidance Law (MAAL). At their core, these are a means to expand jurisdiction with respect to transfer pricing with related parties in other nations. Companies faced with DPT or MAAL audits, says Michalak, “may see these countries impute profits for domestic taxation — which could be across multiple tax years.”

  • New focus on intangibles: Countries in general are renewing their focus on intangibles and, in particular, seeking ways to increase their share of taxable income by reducing the ability to deduct royalties. A good example is the FDII tax, a component of the US TCJA reform. FDII incentivizes companies to maintain intellectual property (IP) in the US by offering an incentive rate of only 13.125% on intangibles-based income earned overseas.

  • Global minimum tax: Yet another novel concept, again a key feature within the TCJA, is the introduction of an intangibles-focused global minimum tax. Known as Global Intangible Low Tax Income (GILTI), its purpose is to discourage companies from placing their IP in non-US, low tax jurisdictions, thus generating significant streams of low tax income. GILTI is also seen as a means of encouraging US-based and other companies to develop and maintain their IP in the US.

Closely related is the Base Erosion and Anti-abuse Tax (BEAT). BEAT targets both non-US and US companies whose revenue stems from services. That is, companies whose activities are deemed to drive reasonable profit from the US by use of interest, rents or services fees may be subject to BEAT.

Other nations may soon implement similar minimum tax provisions for intangibles. Meanwhile, the UK has already enacted something similar of its own. Known as Offshore Receipts in Respect of Intangible Property (ORIP), “this allows the HMRC [Her Majesty's Revenue and Customs] to tax a greater share of intangible income, such as royalties, where the sales take place in the UK,” says Michalak.

  • The end of arm’s length?  In a final example of the paradigm shift, “tax authorities, in general, are moving away from the time-honored arm’s length standard,” says Michalak. “This has been the ‘old economy’ standard for many decades,” say Michalak. But today, “within BEPS the cracks were forming — arm’s length had survived, but its role was downgraded and there was the introduction of additional methodologies.” With the current OECD project, says Michalak, “what we’re seeing is that the OECD and others are looking for completely new ways of determining what fair means in transfer pricing.” Consequently, says Michalak, “reliance on the arm’s length standard may be ending and during the transition to whatever comes next, all the new formulas that will arise, there are likely to be a lot more disagreements and challenges.” 

Where executives are focusing

Much of the above-noted change is only coming into focus now. Still, the survey sheds light on where executives are noticing significant change to-date.

  • Fundamental transfer pricing: Overall, respondents say the greatest impacts of global tax reform will be felt in fundamental transfer pricing rules. Asked to rank the top three greatest impacts, this was the top (59%) or second (28%) choice among 87% of executives overall — albeit 94% for Asia-Pacific (64% first and 30% second).

The definition of PE was a first choice for 13% overall, or a first or second choice for 42% overall. Finally, thin capitalization rules and harmful tax practices or loss of local incentives were a first-plus-second choice at 27% and 26%, respectively.

  • Impact on supply chain, IP and treasury: The most frequently-cited business component impacted by global tax reform is supply chain (41%). Treasury operations and IP strategy tie for second place, both at 29%.

Note, however, there is significant variance by geography. For US companies, IP is the area of greatest impact (37%) with treasury and supply chain close behind (at 32% and 31%, respectively). In contrast, only one in five from Asia-Pacific (21%) rank IP as their top concern.

  • Impact of the US TCJA: Aside from global tax reform, the survey took a deeper dive into the impacts of the TCJA. Here the statistics indicate, at least so far, that even among US companies, the TCJA is doing relatively little in terms of influencing executives to reallocate assets or functional locations. For example, most expectations for changes to functions, assets or risk management as a result of US rate reductions register only single digits. Vast majorities, in other words, plan no changes.

Finally, few companies, regardless of geography, are reporting significant changes in their activities as a result of the US FDII regulations.

And while overall, only 16% say the TCJA is significantly impacting their tax planning and strategies, the figure climbs to 35% for US companies.

tcja is having little impact on existing location
tcja is affecting US corporate tax planning

Forging a response

What it all means, says Michalak, “is that companies need to take inventory of all that’s happening and then do a fundamental reassessment of their transfer pricing strategies.”

In particular, he suggests, “businesses need to put a lot of thinking into how they create value and why the business is structured the way it is, then create TP documentation to support those hows and whys. You’ve got to be very clear, careful and strategic in this exercise, and then make certain your reporting and documentation is globally consistent.”

You have to be very certain and clear about your story — it must be defensible in light of all the new rules and trends taking place.
Jeffrey M. Michalak
EY Global International Tax and Transaction Services Leader

Moreover, says Michalak, “you’ve got to begin erring on the side of sharing more, not less, about your transfer pricing.”

Unfortunately, the survey shows that only a minority of companies are taking significant steps in addressing so much global change. For example, only 12% have combed through all of the changes and conducted sufficient modeling to the point where they are able to begin making decisions and business changes. At the other end of the spectrum, 38% are still in the education phase (29%) or have just completed a review and are now just beginning to build models (9%).

Beyond adopting a more strategic and comprehensive approach to the whole of transfer pricing, Michalak insists companies must have their documentation ready for presentation to tax authorities at a moment’s notice. “The more comprehensive the disclosure, the more thorough and consistent the discussion; and the faster this information is presented in response to an audit or query, the better are your chances the authorities will accept your side of the story. Thorough documentation is your best, if not your one and only, opportunity to lead the narrative.” 

In addition to keeping one’s own transfer pricing house in order, Michalak recommends that more businesses get more involved in influencing national tax policies. “In the past, it’s really been only the largest companies who get involved in discussions and lobbying.” But the degree and pace of change today “is so sweeping, that it becomes really critical that even mid-sized taxpayers should be keeping up and voicing their thoughts and influencing outcomes. Find out what is important to you and then educate officials so that when the rules are written, you’re not impacted unfairly.” Overall, Michalak says “companies of all sizes need to get more involved because this is no evolution, this is revolution.”

  • 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.


Pressure on budgets, the rise of the digital economy and initiatives such as the US Tax Cuts and Job Act are all driving global tax reform. Key features being introduced or expanded include shifts to greater transparency, greater latitude for taxing digital transactions and a heightened focus on intangibles. Global tax reforms provide companies with incentive to inventory their global operations in a new context – potentially rethinking the entirety of their transfer pricing strategies and practices.

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.