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.