In essence, transfer pricing is like string art, where colored thread pulled taut connects pins to form geometric shapes. Each connection is critical to crafting the final image. Over time, these patterns can become more elaborate and complicated, but in the end, should form a working system. The network depends ultimately on the integrity of the string remaining taut. Snip anywhere, and the entire picture can unravel.
Of course, art, like transfer pricing, can be a matter of interpretation. Where one person sees beauty, another feels indifference or, worse, takes offense. Our 2016 Transfer Pricing Survey (pdf) indicates that transfer pricing has entered an era of heightened tax risk and controversy, driven by an exponential increase in the demand for tax-related transparency.
In response to heightened calls from activists and collection agencies, tax rules are being designed and implemented in a more comprehensive manner the world over – a shift in which the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) initiative plays an integral role. The shift is forcing companies to share significantly more details regarding their operating data and tax strategies, both publicly and in materials available to tax authorities.
The more companies have to disclose, the more they will find themselves examined, and possibly misunderstood, by both tax activist pressures and tax collectors using deeper insight to demand more income. The questions become:
- What changes are taking place in the tax risk landscape, and where are the instances of controversy becoming more prominent?
- What rules are being written to alter the mix in transparency and compliance, and how are they being interpreted?
- What proactive operational steps are needed for companies to comply with BEPS and stay ahead of today’s transfer pricing realities?