6 minute read 30 Sep 2019
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Why changing transfer pricing practices requires a proactive approach

By Peter Griffin

EY Global Transfer Pricing Leader

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

6 minute read 30 Sep 2019

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  • How profound change transparency and controversy are reshaping a critical business function (pdf)

Exponential change in transfer pricing means businesses must devise new ways of working.

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.

For 2019, our survey includes over 700 responses from senior tax and transfer pricing executives representing the Americas, Europe and Asia-Pacific.

Past surveys have been highly effective in identifying key trends along with their associated risks and opportunities. In the 2016 edition, for example, we explored how developments, such as the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, were forcing global businesses to come to terms with unprecedented levels of transparency about their operations.

Exponential change

For 2019, the survey results show degrees of change and transparency, already at high levels, are accelerating almost exponentially. As a result, executives are indicating that since the pace of change is so rapid and the degree of expanded transparency is now so pronounced, a wave of tax controversy is imminent.

The first round of BEPS was a key catalyst, sparking new legislation all over the world. And while many of those legislative changes seek to mirror the spirit of BEPS, a number of new laws inspired by BEPS deviate enough from the original recommendations that inconsistencies and uncertainties are growing. This is happening even as executives scramble to keep themselves up-to-date.

But if BEPS was the catalyst, then the follow-on global project facilitated by the OECD on changing the division of taxing rights that is triggered by the digitalization of the economy is the accelerant. With the ink still drying on many legislative changes prompted by BEPS, an even more fundamental revisit of the international tax norms is underway. While the core focus of BEPS was to strengthen the existing division of taxing rights by introducing, among other things, more transparency to standardize global transfer pricing practice, the new project is more fundamental.

In general, the current OECD project seeks to transition transfer pricing from its location-dependent origins to a more fluid digital model. Accomplishing this begins by acknowledging the existence of income allocation, in particular, enabling host taxing authorities to tax digital cash flows. The project also includes development of new global minimum tax rules, although in this case, tax reforms in the US, UK, France and Australia are already enacting them. And where BEPS arguably chipped away the time-honored use of the arm’s-length standard for establishing transfer pricing, the follow-on project appears to be taking a significant swing.

The implications reach far beyond just sectors that identify as “digital” to include nearly every kind of cross-border enterprise.

Executives should also be paying close attention to the expansion of cooperation between global tax authorities. In the transfer pricing space, adjustments made by one tax authority are increasingly likely to be replicated by others due to joint enforcement efforts and exchange of information. In general, the tax world is moving to an era of multilateral policy and administration, which is causing important shifts in the practice of transfer pricing.

Forging a response

This leads to what executives believe will be an upswell in the depth, breadth and frequency of challenges to transfer pricing (Five strategies for responding to change in global transfer pricing) and controversy (How to prepare for a rise in tax controversy related to transfer pricing).  Specifically, executives anticipate significantly more instances of audits, fines and assessments, and recognize the need to respond.

But what can companies do in this environment of heightened change, transparency, controversy and, in general, skyrocketing tax risk?

  • Alert the C-suite: Perhaps most importantly, executives need to better prepare their C-suite and boards for the degree of change, transparency and, ultimately, controversy that is about to reach a crescendo. Make certain also that such executives recognize the changes will impact not only transfer pricing, but also the fundamentals, such as permanent establishment (PE), withholding rates, controlled foreign corporations (CFCs) and treaties, and even new rules for taxation of short- to medium-term business travellers.
  • Get connected: In general, companies need to do more to ensure they are up-to-speed in relevant jurisdictions. That means understanding the existing changes in rules and practices as well as what’s likely coming soon. Companies also need to do more in terms of being ready with contemporaneous documentation of their transfer pricing. Being ready, companies can respond more quickly and confidently to audit requests and, in this way, generally reduce the risks of assessments or worse.
  • Participate in the shaping of legislation: In addition, more companies need to step up and play a more active role in the development of tax policy. The pace of change is increasing tax risks. As such, more companies, once they take a closer look, might find that their levels of risk and cost are now beyond any threshold where they can afford to simply sit back and wait for rules to take effect.
  • Use Advance Pricing Agreements (APAs) to reduce uncertainty: More businesses should also be considering the use of bilateral (and increasingly multilateral) APAs. One of the most frequently cited reasons for not doing so in the past has been the perception of extensive disclosure requirements and, with that, high cost. But demand for APAs is growing. Many say that with the BEPS-driven expansion of transparency, the required disclosures for an APA are not all that much greater than what is already being required in a basic return. Indeed, the survey shows a significant uptick in expectations for the use of APAs.
  • Revisit global models and strategies: The degree of change is so significant that companies need to take a fresh look at the entirety of their operating model and strategies. Sweeping changes, like what the United States undertook in enacting the US Tax Cuts and Jobs Act (TCJA), will become even more commonplace. Momentum for the changes being developed through the current OECD project is building. Bottom line: more nations will be embracing new principles, such as a global minimum tax or new rules for the taxation of intellectual property. Even though much is still unknown, businesses need to get moving now to understand how such fundamental changes will impact their operations.
  • Adopt a strategic approach: Once informed of this heightened risk, more companies will be willing to take a greater strategic approach to transfer pricing. That is, they can step back, look at the whole of their global footprint to assess how and where value is being created. From there, rather than using transfer pricing to deal with outcomes, businesses themselves can be restructured to create a sustainable state of affairs. Transfer pricing that is rooted in operational reality and globally consistent will prove to be defensible to tax authorities and in that way, even amid an era of heightened controversy, represent the absolute lowest levels of tax risk.

With this edition, we expanded the scope to include a broader array of questions about international taxes, including a section exploring taxpayer attitudes about the Mutual Agreement Procedure (MAP) program. That’s because the business of transfer pricing and international tax more broadly are increasingly interdisciplinary and so should be examined through that lens. I hope you agree this broadened scope has helped us deliver more insights to this survey report.

  • 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.


Transfer pricing the world over is experiencing profound upheaval. Global tax reform, OECD initiatives and fast-evolving new rules for the digital economy together add complexity to compliance – raising tax risk for all.

About this article

By Peter Griffin

EY Global Transfer Pricing Leader

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