How anti-BEPS policies are changing transfer pricing
The first report in our series, In the spotlight: a new era of transparency and risk, used string art as an analogy to explore how an era of heightened transparency is putting new pressure on transfer pricing policies.
This second report make clear that companies need to be certain their tax strategies and transfer pricing policies are well-documented, globally consistent and ready for levels of unprecedented scrutiny by tax authorities in almost every country of both significant and insignificant operation.
To continue the string art analogy, they need to make sure no threads are fraying and all are securely fastened to connecting pins.
BEPS: replacing a creaking infrastructure
BEPS is a transformational wave that is only now breaking across the community of global corporate taxpayers. As such, this year’s survey offers a unique and early glimpse into the reactions and relative preparedness of the global tax paying community.
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 “Now that anxiety has been replaced by uncertainty about what to do next.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.”
In this report, we highlight our key BEPS-related insights based on the survey and recommend actions for companies to take.
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 their global operations and taxation.
Companies should make every effort to meet the new transparency demands
Not only are a substantial majority of companies currently guilty of 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%).
As for Action 13’s mandated country-by-country reporting (CbCR), again, most companies appear to have made far less progress than might be prudent. Here, two-thirds 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.
BEPS: impacts on 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.
The largest increase in transfer pricing related controversy is expected relating to issues of 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. But going forward over the next two years, the figure climbs to 44%.
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.
BEPS: there’s work to be done
BEPS has already imposed heightened transparency, updated or altered definitions and characterizations, and introduced imminent mandates and deadlines on transfer pricing professionals. In string art terms, the threads have been pulled tighter than ever. Companies must take action to shore up their designs.
“It may take several years or more before the full impact of BEPS becomes clear. This will no doubt drive profound change in practices amid not only the G20 but also developing market tax authorities — and in fact already is.” Nonetheless, says Griffin, companies cannot afford to wait much longer. “For global businesses, the time to respond to BEPS — to evaluate, address, align and adjust — is now.”