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.
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.