5 minute read 25 Feb 2022
Transfer pricing documentations

How is technology transforming transfer pricing benefits documentation

By Ashwin Vishwanathan

EY India International Tax & Transaction Services- Transfer Pricing, Partner

Experienced transfer pricing professional advising companies on intercompany pricing and working with tax administration on tax policy issues.

5 minute read 25 Feb 2022

Higher level of enforcement is expected in transfer pricing in the next three years.

In brief

  • Benefits documentation is a critical element of a company’s global transfer pricing policy. Emerging jurisprudence lays great weight on the quality of documentation presented during an audit. While this is not a new problem, it does require a new approach.
  • EY transfer pricing and tax professionals create an index of evidence, categorize and share an evidence dossier which may be utilized for transfer pricing compliance, audits, appeals and advance pricing agreements. 

EY’s Tax Risk and Controversy Survey, Feb 2021 (The Tax Leader Imperative: How do you adapt to the changing tax risk landscape? | EY - Global) identified transfer pricing as a key risk. 53% of survey respondents expect greater enforcement in the next three years. Business models are constantly evolving. The pandemic has only accentuated the need for new structures like the distributed hub and work from anywhere executive presence. We, therefore, expect the web of intra-group services and intangible flows to grow more complex as profits are aligned to value creating locations.

Tax administrations across the world are becoming more sophisticated. They are rapidly digitizing and enhancing channels of cross-border collaboration and information exchange. Political and social factors have spotlighted taxes and the hunt for a ‘fair share’ of it is likely to culminate in more focused audits and potential controversy. BEPS 1.0 issues may continue to dominate mind space even as new disputes emerge on BEPS 2.0

Issue and challenges

Intragroup service payments (i.e., management charges, head quarter/regional allocations etc.) and royalties (collectively IGS for this article) are viewed as base eroding payments and often soft targets in audits. They are challenged in the recipient jurisdiction as being duplicative, devoid of benefits, stewardship or non-value adding. Many taxpayers fail to support these charges with appropriate benefits documentation. In attempting to gather this data during an audit down the road, taxpayers often run into practical challenges such as:

  • Organization structures have changed
  • Legacy systems are no longer available
  • People have left the company
  • Historical data is difficult to source
  • Disconnect between business and tax team
  • Low priority of this activity for the business team
  • Quality of documentation

Benefits documentation is a critical element of a company’s global transfer pricing policy. Emerging jurisprudence lays great weight on the quality of documentation presented during an audit. While this is not a new problem, it does require a new approach. Taxpayers must focus on gathering information contemporaneously rather than waiting for an audit to strike. Close coordination between the business teams and the tax or finance teams can help craft a coherent narrative around the commercial rationale for services or support, how it is practically provided and what type of documentation would accurately reflect the benefits and their data source. A purely manual exercise may prove to be onerous and time consuming. Hence, use of technology becomes essential.

EY Solution

The way day to day business decisions are taken, actions are performed, directions are given, reporting, review and updates are conducted is largely reflected in e-mail correspondence, meeting minutes, presentations, documented conversations and organizational policies and guidelines. A comprehensive data collation strategy covering timing, methodology, tools, review, and monitoring becomes a vital cog in a company’s audit defense framework.

EY’s DigiRev™ solution is a technology-based solution that makes benefits documentation exercise more effective, timely and efficient. It is powered by the latest data mining technology with the capability to sort through terabytes of data in a short span of time based on a user defined keyword matrix. Once filtered, using the tool’s intuitive review window, EY transfer pricing and tax professionals create an index of evidence, categorize and share an evidence dossier which may be utilized for transfer pricing compliance, audits, appeals and advance pricing agreements.

Case study

Amit Dhadphale, Associate Partner, EY International Tax & Transaction Services explains that the tax authorities during transfer pricing assessments request evidence to demonstrate receipt of services or other support and invariably compute the arm’s length price as nil because taxpayers are unable to submit information commensurate with the quantum of payment. He goes on to say that, in the case of one company, “the taxpayer was facing this challenge on a repetitive basis and had a history of litigation. The tax team used to be under pressure to gather and submit an evidence while the business teams receiving the services, could not provide sufficient documents under short timelines. In many cases, the relevant business heads had left, and historical information was lost. The company decided to deploy EY India’s DigiRevTM on a pilot basis for one of the assessment years. With minimal involvement of business teams (not more than 1.5 hours per person), the EY solution sifted through approximately 2.4 million e-mails (180GB of data) to gather qualitative around 1,000 e-mails. The tax authorities accepted the report containing these e-mails and the detailed explanation of the benefits and passed a no-adjustment order”.

Chetan Rajput, Partner, EY International Tax & Transaction Services adds, “Encouraged by this success, the client is now deploying DigiRevTM automation every year on a proactive basis to compile benefits documentation and has decided to use it at a regional headquarter level to mitigate risk of litigation in other countries that the group operates in.”

Conclusion

The need to deploy technology in the tax function is no longer a question of ‘whether’ but ‘when’. To keep pace with an increasingly digital tax administration, taxpayers must adapt quickly. What is stopping your enterprise?

(Arpit Lodha, Senior Manager, EY India also contributed to this article.) 

Summary

Timely and high-quality data and documentation collected through wise use of technology such as automation can save an organization’s valuable time and resources while ensuring a strong defense.

About this article

By Ashwin Vishwanathan

EY India International Tax & Transaction Services- Transfer Pricing, Partner

Experienced transfer pricing professional advising companies on intercompany pricing and working with tax administration on tax policy issues.