Calls for unprecedented transparency
The fact that transfer pricing has become one of the most visible and controversial topics in the global tax avoidance debate has contributed to the new risk aversion. In recent years, transfer pricing has attracted the attention of the news media, politicians and social justice groups that suspect multinational corporations use transfer pricing to pay less than a “fair share” of tax.
Largely as a product of this heightened visibility, tax authorities are under pressure to implement greater and unprecedented demands for transparency about multinationals’ operations, tax profiles and effective tax rates, and show tangible outcomes from this.
This includes the transformational wave that is BEPS. Governments around the world are moving at different speeds to implement the recommendations, often with different legislative interpretations. They are also striking different enforcement postures, which is contributing to a riskier environment for tax in general and transfer pricing in particular.
“There was a lot of anxiety about what a post-BEPS world would look like a couple of years ago,” says Peter Griffin, EY Global Transfer Pricing Leader. “Now that anxiety has been replaced by uncertainty about what to do next. The survey shows that transfer pricing professionals are scrambling to meet new standards and bracing for more conflict, particularly in areas like permanent establishments and the transfer pricing around intangibles.”
Dealing with BEPS and its impacts
The survey results revealed BEPS-related areas where companies should act quickly.
- Catch up in creating BEPS-mandated documentation. BEPS Action 13 requires that companies stand ready to provide host governments with contemporaneous documentation of their transfer pricing policies in a format that is quite different and in greater depth in certain areas relative to prior OECD and local country guidance. This includes details of companies’ global operations and taxation.
- Do more to embrace BEPS principles. Not only are a substantial majority of companies failing to maintain contemporaneous documentation for all transactions, most documentation is not yet aligned with BEPS principles. Specifically, only 17% of executives say their documentation is BEPS-aligned. The rest (83%) say such record-keeping is either not at all BEPS-aligned (16%) or is BEPS-aligned only in the case of key transactions or key territories (67%).
- Be prepared for full implementation of country-by-country reporting. As for Action 13’s mandated country-by-country reporting, two-thirds of companies are either still in the initial modeling phase (45%) or, worse, have made no steps at all (22%). Only one-third of companies say they have key transition actions underway. This could have negative consequences.
- Prepare for more BEPS-related controversy, in particular in the areas of PEs and intangibles. BEPS-driven consequences and pressures are also winding their way through the tax controversy landscape. Indeed, amid so much change and with so much more information in the hands of tax authorities, survey respondents are poised for an era of heightened controversy across multiple defined areas, especially in emerging markets where they haven’t encountered it previously.
- Increase awareness of PE-related impacts. The largest increase in transfer pricing related controversy is expected relating to issues of permanent establishment (PE), the key focus of BEPS Action 7. Essentially, Action 7 substantially lowers the threshold under which a host nation can declare a corporate presence as a PE and therefore subject to income tax. Three years prior, only 27% cited PE as a significant driver of controversy. Looking at the next two years, the figure climbs to 44%.
- Intangibles deserve closer focus. A key focus of BEPS Action 8 is to require greater substance behind the cross-border charges of royalties and for other intangibles. In this area, while 32% of executives said that transfer pricing of intangible property had been a source of significant concern over the past three years, the percentage surges to 49% going forward.
In today’s global economy, any company that uses pins and thread to visually depict its transfer pricing operations would end up with a colorful picture. But the craft is under increasing pressure — it is important to check the connections to be sure the thread is not fraying. In string art terms, BEPS has pulled threads tighter than ever. Companies must take action to shore up their designs.
Summary
Transfer pricing has entered an era of heightened tax risk and controversy, driven by increases in demand for tax-related transparency.
